Reviewer for Law In Corporation Mark-up

Accountancy (BSA)

1 0
 TITLE 1. GENERAL PROVISIONS DEFINITIONS AND CLASSIFICATION
Sec. 1 Title of the Code

“Revised Corporation Code of the Philippines”, it took effect on February 23, 2019

Sec. 2 Corporation Defined

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its existence.

It is a juridical entity vested with a legal personality separate and distinct from those acting for and its behalf and, in general,
from the people comprising it.
It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers or members
who compose it. Not every stockholder or officer can bind the corporation considering the existence of a corporate entity
separate from those who compose it

Characteristics of a corporation
1. It is an artificial-being
2. Created by operation of law
3. It has the right of succession
4. It has the powers, attributes and properties expressly authorize by law or incidental to its existence

Government-owned or controlled corporation

➢ Agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either
wholly, or, where applicable as in the case of stock corporations, to the extent of at least 51% of its capital stock.
➢ Requisites to be classified as stock corporation
a. It has capital stock divided into shares
b. It is authorized to distribute dividends and allotments of surplus and profits to its stockholders
“Piercing the Veil of Corporation Fiction” or “Instrumentality” or “Alter Ego” Doctrine

➢ It is basic in corporation law that a corporation is juridical entity vested with a legal personality separate and distinct
from those acting for and in its behalf, and in general, from the people comprising it. The corporate veil should not and
cannot be pierced unless it is clearly established that the separate and distinct personality of the corporation was used to
justify a wrong, protect fraud, or perpetrate a deception
➢ Factors for the application of the doctrine of piercing the corporate veil
a. Stock ownership by one or common ownership of both corporation
b. Identity of directors and officers
c. The manner of keeping corporate books and records
d. Methods of conducting the business
➢ Elements of piercing the veil of a corporate fiction
a. Control – not a mere stock control, but complete domination – not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had
at the time no separate min, will or existence of its own
b. Such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a
statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff’s egal right
c. The said control and breach of duty must have proximately caused the injury or unjust loss complained of

Succession
➢ The continuation of a corporation’s legal status despite changes in ownership or management

Powers of a corporation
➢ It has no power except those expressly conferred on it by the Corporation Code (or special laws) and those that are
implied or incidental to its existence

Right of a corporation to own property

1 0
➢ Property acquired by a corporation is the property of a corporation and not the property of stockholders or members

Sec. 3. Classes of a corporation

1. Stock Corporation – corporations which have capital stock dividend into shares and are authorized to distribute to the
holders of such share dividends or allotments of the surplus profits on the basis of the shares held

1 0
 2. Non-stock corporations – one where no part of its income is distributable as dividends to its members, trustees, or
officers. Provided, that any profit which a non-stock corporation may obtain as an incidental to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose for which the corporation was organized
3. Other classes
a. As to purpose
i. Public corporation – a corporation organized for the government of a portion of the Stat for the general good and
welfare
ii. Private Corporation – a corporation formed for some private purpose, benefit, or end
iii. Government-owned or controlled corporation – corporation owned by the Government directly or through its
instrumentalities wither wholly, or, where applicable as in the case of stock corporations, to the extent of at least
51% of its capital stock
iv. Quasi-public corporation – a private corporation which has accepted from the State the grant of franchise or
contract involving the performance of public duties, but which is organized for profit
b. As to legal right to corporation existence
i. De jure corporation – a corporation created in strict or substantial conformity with the mandatory statutory
requirements for incorporation and the right of which to exist as a corporation cannot be successfully attacked or
questioned by any party even in a direct proceeding for that purpose by the State
ii. De facto corporation – the due incorporation of any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers shall not be inquired into collaterally in any private suit to
which such corporation may be a party
iii. Corporation by estoppel – all persons who assume to act as a corporation knowing it to be without authority to do
so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof
iv. Corporation by prescription – one which has exercised corporate powers for an indefinite period without
interference on the part of the government
c. As to laws of incorporation
i. Domestic corporation – a corporation incorporated under the laws of the Philippines
ii. Foreign corporation – a corporation formed, organized, or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State
d. As to whether they are open to the public or not
i. Open corporation – a corporation which is open to any person who may wish to become a stockholder or member
thereto
ii. Close corporation – one whose articles of incorporation provide that: (1) all the corporation’s issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more than a a specified number of persons, not
exceeding 20; (2) all the issued stock of all classes shall be subject to one or more specified restrictions on
transfer; and (3) the corporation shall not list in any stock exchange or make any public offering of any of its
stock of any class
e. As to relationship of management and control
i. Parent or holding corporation – a corporation that hold stocks in another corporation for the purpose of control
ii. Subsidiary corporation – a corporation more than 50% of the voting stock of which is controlled directly or
indirectly by another corporation, which thereby becomes its parent corporation
f. As to the number of persons who compose them
i. Corporation aggregate – a corporation consisting of more than one member
ii. Corporation sole – a corporation consisting of only one member for the purpose of administering and managing,
as trustee, the affairs, property and temporalities of any religious denomination, sect, or church
g. As to whether they are for religious purposes or not
i. Ecclesiastical corporation – a corporation organized for religious purposes
ii. Lay corporation – a corporation organized for purpose other than for religion
h. As to whether they are for charitable purpose or not
i. Eleemosynary corporation – a corporation organized for charitable purposes
ii. Civil corporation – a corporation organized for business or profit

Sec. 4. Corporations created by Special Laws or Charters

General law vs. Special law

A corporation is created by operation of law and it acquires a judicial personality either by special law or a general law.
a. General law – under which a private corporation1may be formed
0 or organized is the Corporation Code, the requirement
of which must be complied.
b. Special law – example is government corporation, referred to as a charter.

Sec. 5. Corporators and Incorporators

Sec. 5. Corporators and Incorporators
Components of a corporation

1 0
 1. Corporators – those who compose a corporation, whether as stockholders or as members
2. Incorporators – the stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.
3. Stockholders – owners of shares of stock in a stock corporation
4. Members – corporators of a non-stock corporation
5. Board of Directors or Board of Trustees – the board of directors is the governing body in a stock corporation, while the
Board of Trustees is the governing body in a non-stock corporation
6. Corporate officers –
7. Subscribers – persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be
formed
8. Underwriter – a person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale
of securities of any kind by another company
9. Promoter – a person who brings about or cause to bring about the formation and organization of a corporation by:
a. Bringing together the incorporators or the persons interested in the enterprise
b. Procuring subscriptions or capital for the corporation
c. Setting in motion the machinery which leads to the incorporation of the corporation itself

Sec. 6. Classification of Shares

Doctrine of equality of shares – each share shall be equal in all respects to every other share except as otherwise provided in the
articles of incorporation and stated in the certificated of stock

Who may classify shares?

1. Incorporators – by stating it in their articles of incorporation
2. Board of directors and stockholders – they can amend the articles of incorporation by a majority vote of the board of
directors or written assent of stockholder representing at least 2/3 of the outstanding capital stock

Voting shares

- shares with a right to vote

The right to vote in Stock Corporation

- it is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted or
considered in determining whether a quorum is present in a stockholders’ meeting
- only stock actually issued and outstanding may be voted

The right to vote in a Non-stock Corporation

- the voting rights attach to membership. Members vote as persons, in accordance with the law and the by-laws of the
corporation

Non-voting shares

- shares without a right to vote; the law provides that share classified and issued as preferred or redeemable shares may be
deprived of voting right
- Instances when holders of non-voting shares are allowed to vote:
a. Amendment of the articles of incorporation
b. Adoption and amendment of by-laws
c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property
d. Incurring, creating, or increasing bonded indebtedness
e. Increase or decrease of authorized capital stock
f. Merger or consolidation of the corporation with another corporation or other corporation
g. Investment of corporate funds in another corporation or business in accordance with this Code
h. Dissolution of the corporation

Common stock – a class of stock entitling the holder to vote on corporate matters, to receive dividends after other claims and
dividends have been paid, and to share in assets upon liquidation; often called as a capital stock if it is the corporation’s only
class of stocks outstanding; also termed ordinary shares.

Preferred stock – one which entitles the holder thereof to certain preferences over the holders of common stock; designed to
1 common0 forms are:
induce persons to subscribe for shares of a corporation; most
1. Preferred shares as to assets – gives the holder thereof preference in the distribution of the assets of the corporation in
case of liquidation
2. Preferred shares as to dividends – the holder of which is entitled to receive dividends on said share to the extent agreed
upon before any dividends at all are paid to the holders of common stock

1 0
Redeemable shares – may be issued by the corporation when expressly so provided in the articles of incorporation; may be
purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation.

Par value shares – shares with a value fixed in the articles of incorporation and the certificate of stock

No par value shares – shares with no par value

o Limitations on no par value shares

a. It cannot have an issued rice of less than P5.00
b. It is deemed fully paid and non-assemble
c. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividend
d. It cannot be issued as preferred shares
e. It cannot be issued by banks, trust, insurance\ , and preneed companies, public utilities, building and loan associations,
and other corporations authorized to obtain or access funds from the public whether publicly listed or not
f. The articles of incorporation must state the fact that it is issued no par value shares as well as the number of said shares

Promotional share – a share issued to promoters or those in some way interested in the company, for incorporating the company,
or for services rendered in launching or promoting the welfare of the company

Share in escrow – a share subject to an agreement by virtue of which the share is deposited by the grantor or his agent with a
third person to be kept by the depository until the performance of certain condition or the happening of a certain event contained
in the agreement
Fraction share – a share that is less than one full share

Over-issued stock – a stock issued in excess of the authorized capital stock, however, such issuance is null and void

Convertible share – a share that is convertible by the stockholder from one class to another class at a certain price with a certain
period

Sec. 7. Founders’ shares

Founders’ share

- shares classified as such in the articles of incorporation which may be given certain rights and privileges not enjoyed by
the owners of other stocks
- limitation on founders’ share
o the exclusive right to vote and be voted for in the election of directors, if granted, it must be for a limited period
not to exceed 5 year from the date of incorporation

Sec. 8. Redeemable shares

Redeemable shares
➢ shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing
corporation, or the stockholder, or both at a certain redemption price ; once redeemed is retires unless reissuance is
expressly allowed in the articles of incorporation
➢ The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the
corporation
➢ May not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature
➢ Limitations on redeemable shares
a. It must be expressly provided in the articles of incorporation
b. The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the
certificate of stock
c. It may be deprived of voting rights in the articles of incorporation
d. Redemption cannot be made if it will cause insolvency of the corporation
➢ Kinds of redeemable shares
a. Compulsory – corporation is required to redeem the shares
b. Optional – corporation is not required to redeem the shares

Retained earnings 1 0
- a corporation’s accumulated income after dividends have been distributed; also termed as earned surplus or undistributed
profit
Trust fund doctrine

1 0
 - provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look
for the satisfaction of their claims
- the underlying principle I the procedure for the distribution of capital assets, embodied in the Corporation Code, which
allows the distribution of corporate capital only in three instances:
1. amendment of the Articles of Incorporation to reduce the authorized capital stock
2. purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings
3. dissolution and eventual liquidation of the corporation

Sec. 9. Treasury Shares

Treasury Shares – shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful means

Rights that are denied to the treasury shares

1. Voting rights
2. Right to dividends

Watered Stocks – stocks issued for a consideration less than the par or issued price thereof or in any other form other than cash
valued in excess of its fair value

1 0
1 0
 TITLE II. INCORPORATION AND ORGANIZATION OF PRIVATE COMPANIES
Sec. 10. Number and Qualifications of Incorporators

- Any person, partnership, association, or corporation, singly or jointly with others but not more than 15 in number, may
organize a corporation for any lawful purpose/s; who must be of legal age

One person corporation – a corporation with a single stockholder; only a natural person, trust, or an estate may form

Incorporator
Those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the
corporation and who are signatories thereof.
A signatory of the articles of incorporation
Does not cease to be an incorporator upon sale of his shares
Not more than 15 persons
Steps in the creation of a corporation
Corporator
Those who compose a corporation, whether as stockholders
or as members
May or may not be a signatory of the articles of incorporation
Ceases to be a corporator by sale of his shares in case of a
stock corporation. Incase of a non-stock corporation, when
the corporator ceases to be a member
There is no restriction as to number except for a close
corporation

1. Promotion – includes activities done by promoter for the founding and organizing of the business or enterprise of the
issuer
2. Incorporation
a. Execution of the articles of incorporation by the incorporators and other documents required for registration of the
corporation
b. Filing of the articles of incorporation with the SEC together with the treasurer’s affidavit
3. Formal Organization and commencement of business transactions

Section 11. Corporate Term

General Rule: A corporation shall have perpetual existence

Exception: if the articles of incorporation provides otherwise or if it provides for a specific period

EXTENDING OR SHORTENING THE SPECIFIC PERIOD

• No extension must be made earlier than three years prior to the original or subsequent expiry dates unless there are
justifiable reasons for an earlier extension as may be determined by the Commission
• Extension of the corporate term shall take effect only on the day following the original or subsequent expiry dates

Revival of corporate existence

General rule: Upon approval by the Commission, the corporation shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual existence
Exception: If its application for revival provides otherwise or provides for a specific period

Corporations may be required the favorable recommendation of the appropriate government agency before the SEC will approve
the application for revival of certificate of incorporation
1. Banks
2. Banking and quasi-banking institutions
3. Preneed
4. Insurance and trust companies
5. Nonstock savings and loan associations
6. Pawnshops
7. Corporation engaged in money service business
8. Other financial intermediaries

Sec. 12 Minimum Capital Stock Not Required of Stock Corporations

General Rule: There is no minimum authorized capital stock

1 0
Exception: if provided by special law

Sec. 13. Contents of the Articles of Incorporation

1. Name of the corporation

1 0
 2. Specific purpose/s for which the corporation is being formed. Where a corporation has more than one state purpose, the
articles of incorporation shall indicate the primary purpose and the secondary purpose/s
3. Place where the principal office of the corporation is to be located, which must be within the Philippines
4. Term for which the corporation is to exist, if the corporation has not elected perpetual existence
5. Names, nationalities, and residence addresses of the incorporators
6. Number of directors, which shall not be more than 15 or he number of trustees which may be more than 15
7. Names, nationalities, and residence addresses of person who shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in accordance with this Code
8. If it be a nonstock corporation, the amount of its capital, the names, nationalities, and residence addresses of the
contributors, and amount contributed by each
9. Such other matters consistent with law and which the incorporators may deem necessary and convenient

Sec. 14 Form of Articles of Incorporation

Subscription – a written contract to purchase newly issued shares of stock or bonds; also termed stock subscription

Paid-up capital – portion of the authorized capital stock which has been both subscribed and paid.

Articles of Incorporation – defined the charter of the corporation and the contractual relationships between the State and the
corporation, the stockholder, and the State, and between the corporation and its stockholders

Three-fold nature of the articles of incorporation

1. A contract between the State and the corporation

2. A contract between the corporation and its stockholders
3. A contract between the stockholders inter se

Name of the corporation

- One of its attributes, an element of its existence, and essential to its identity
- General rule – each corporation must have a name by which it is to sue and be sued and do all legal acts
- Limitations on the use of corporate name – must not be identical; deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or patently deceptive
- Must contain “Inc., Corporation, or OPC”
- Can be changed by amending its articles of incorporation

Purpose clause – this will confer, as well as limits the powers which a corporation may exercise.

Ultra vires acts – any act beyond its powers

• If a corporation has more than one purpose, the articles of incorporation shall state which Is the primary purpose and
which are the secondary purpose/s to determine which investment of corporate funds require the authority of both the
Board and Stockholders

Principal office of the corporation (purpose)

1. To fix the residence of the corporation in a definite place
2. To determine the venue of court cases involving corporation
3. For purposes of stockholders or members meeting
4. To determine the place where the books and records of the corporation are ordinarily kept

Term of existence – a corporation shall have perpetual existence unless its articles of incorporation provides otherwise

Number of board of directors or trustees

• Directors – shall not be more than 15

• Trustees – may be more than 15

Authorized capital stock – maximum amount fixed in the articles of incorporation that ma be subscribed and paid by the
stockholders of the corporation

Sec. 15 Amendment of Articles of Incorporation

Limitations in the amendment of the articles of incorporation

1 0
1. The amendment must be for legitimate purposes and must not be contrary to the Corporation Code and special laws
2. The amendment must be approved by a majority of the board of directors or board of trustees
3. The amendment requires the vote or written asset of stockholders’ representing 2/3 of the outstanding capital stock or
2/3 member if it be a non-stock corporation

1 0
 4. The original and amended articles together shall contain all provisions required by law to be set out in the articles of
incorporation. Such articles, as amended, shall be indicated by underscoring the changes made
5. Certification under oath by the corporate secretary and a majority of the board od directors or board of truteed stating the
fact that said amendments have been duly approved by the required vote of the stockholders or members, shall be
submitted to the SEC
6. The amendment must be accompanied by a favorable recommendation of the appropriate government agency in cases
of:
a. Banks
b. Banking and quasi-banking institutions
c. Preneed
d. Insurance and trust companies
e. Nonstock savings and loan associations
f. Pawnshops
g. Other financial intermediaries

Sec. 16. Grounds when articles of incorporation or amendment may be disapproved

1. The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed
herein
2. The purpose/s of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and
regulations
3. The certification concerning the amount of capital stock subscribed and/or paid is false
4. The required percentage if Filipino ownership of the capital stock under existing laws or the Constitution has not been
complied with

Sec. 17. Corporate Name

• The name shall be reserved if:

1. Name is distinguishable from a name already reserved or registered for the use of another corporation
2. Name is not protected by law
3. Name is not contrary to law, rules, and regulations

Sec. 18. Registration, Incorporation and Commencement of Corporate Existence

• It is the certificate of incorporation that gives juridical personality to a corporation and places it under the jurisdiction of
the SEC
• A corporation commences its corporate existence and juridical personality and is deemed incorporated from the date the
SEC issues certificate of incorporation under its official seal

Sec. 19. De facto Corporation

Requirements before one can qualify as a de facto corporation

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

2. An attempt in good faith to incorporate
3. Assumption of corporate powers
Two conflicting public interest under de facto doctrine

1. The one opposed to an unauthorized assumption of corporate privileges

2. The other in favor of doing justice to the parties and of establishing a general assurance of security in business dealing
with corporations

Sec. 20. Corporation by Estoppel

Doctrine of Estoppel – predicated on, and has its origin in, equity which broadly defined, is justice according to law and right. It
is a principle intended to avoid a clear case of injustice

Corporation by Estoppel – founded on principles of equity and is designed to prevent injustice and unfairness. T

 There is corporation by estoppel- persons assume to form a corporation and exercise corporate functions and enter into
business relations with third persons.
 1 is no third0person involved and the conflict arises only among those
There is no corporation by estoppel - Where there
assuming the form of a corporation, who therefore know that it has not been registered

Sec. 21. Effects of Non-Use of Corporate Charter and Continuous Inoperation

I. Failure to formally organize and commence its business within 5 years from the date of its incorporation

1 0
- The certificate shall be deemed revoked as of the day following the end of the 5-year period
II. Continuous inoperation for at least 5 consecutive years
- The SEC may after due notice and hearing, place the corporation under delinquent status

1 0
1 0
 TITLE III. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
Correlation of board of directors/trustees, officers, and stockholders
• Board of directors
- Elected periodically by stockholders or members
- Periodically elects officers to carry out management functions on a day- to-day basis
• Stockholders or members
- Charged with the management of the corporation
Acts of management – board of directors
Acts of ownership – stockholder or members
Important rights of a qualified shareholder or member is the right to vote for the directors or trusteed who are to manage corporate
affairs
What is business judgment rule?
Contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless
such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority

Sec. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term

Unless otherwise provided, the board of directors or trustees shall exercise the corporate powers, conduct all business, and control
all properties of the corporation.
• Directors – shall be elected for a term of one year from the holders of stocks registered in the corporations’ books
• Trustees – shall be elected for a term not exceeding three years from among the members of the corporation
Governing body of the corporation
- Board of directors
Each director and trustee shall hold office until the successor is elected and qualified

A director who ceases to own at least one share of stock or a trustee who ceases to be a member of the corporation shall cease to
be such.
At least 20% of board of directors shall have independent directors of the following corporations:
a. Corporations covered by Section 17.2 of RA No. 8799, otherwise known as “The Securities Regulation Code”, or
corporations listed with an exchange or with assets of at least fifty million and having two hundred or more holders of
shares, each holding at least one hundred shares of a class of its equity shares
b. Banks and quasi-banks, nonstock savings and loan associations, pawnshops, corporations engaged in money service
business, preneed, trust and insurance companies and other financial intermediaries
c. Other corporations engaged in businesses vested with public interest similar to a and b, as may be determined by the
Commission

Independent director
- person who, apart from shareholdings and fees received from the corporation, is independent of management and free
from any business or other relationship which could reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director
- must be elected by the shareholders present or entitled to vote in absentia during the election of directors
- shall be subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of
term and term limit, maximum number of board memberships and other requirements that the Commission will prescribe
to strengthen their independence and align with international best practices
Governing body of a corporation is the board of directors. Concentration in the board of the powers of control of corporate business
and of appointment of corporate officers and managers is necessary for efficiency in any large organization

The board shall exercise good faith -- where corporate directors are guilty of a breach of trust, a stockholder may institute a suit
on behalf of himself and other stockholders and for the benefit of the corporation
Derivative suit- The common law that gradually recognize the right of a stockholder to sue on behalf of a corporation.

Authority of the board of director or trustees- they have the sole authority to determine policies, enter into contracts, and
conduct the ordinary business of the corporation within the scope of its charter
1 0
Raison d’etre - Behind the conferment of corporate powers on the board of directors is not lost on the court.

Corporation exercise its powers through its board of directors

1. Exercises all powers provided for under the Corporation Code
Emergency BOD- the vacancy may be temporarily filled from among the officers of the corporation.

Sec. 29. Compensation of Directors/Trustees

General rule: Directors or Trustees shall not receive any compensation, as such directors or trustees, except for reason
diems.
Exceptions:
✓ When it is fixed by the corporation’s by-laws
✓ When the stockholders, representing at least a majority of the outstanding capital stock, or majority of the members
grant the same.
Limitation on compensation- In no case shall the total yearly compensation of directors, as such directors, exceed 10% o
income before income tax of the corporation during the preceding year.

Sec. 30. Liability of Directors, Trustees or Officers

Doctrine of corporate opportunity
✓ Bad Faith- breach of faith and willful failure to respond to plain and well understood obligation.
✓ Gross Negligence- is the want of even slight care, acting or omitting to act in a situation where there is duty to
inadvertently but willfully and intentionally.
Error in Business Judgment- If the cause of the losses is merely error in business judgement, not amounting to bad
negligence, directors/officers are not liable.

Sec. 31. Dealing of Directors, Trustees, or Officers with the Corporation

A contract of the corporation with one or more of its directors or trustees, officers, or their spouses and relatives within the
degree of consanguinity or affinity.
General Rule: A contract of the corporation with one or more of its directors or trustees, officers or their spouses and r
within the 4th civil degree of consanguinity or affinity is voidable, at the option of such corporation.
Exceptions: 1 0
1. That the presence of such director or trustees in the board meeting in which the contract was approved was not ne
to constitute a quorum for such meeting.
 2. That the vote of such director or trustee was not necessary for the approval of the contract
3. That the contract is fair and reasonable under the circumstance.
4. In case of corporations vested with public interest, material contracts re approved by at least 2/3 of the entire mem
of the board, with at least a majority of the independent directors voting to approve the material contract.
5. That in case of an officer, the contract has been previously authorized by the board of directors.
Ratification by stockholder on self-dealing directors, or trustees
1. Any of the 1st 3 condition set forth in the first paragraph of the above section is absent
2. Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting
3. That the contract is fair and reasonable under the circumstances.

Sec. 32. Contracts Between Corporations with Interlocking Directors

Interlocking Directors- These are the members of the board of directors in a certain corporation who are also directors on
corporation.
General Rule: A contract between two or more corporations having interlocking directors shall not be invalidated on that
alone.
Requisites
1. The contract is not fraudulent
2. The contract is fair and reasonable under the circumstances.
Exception: If the interest of the interlocking director in one corporation is substantial and his interest in the other corpor
merely nominal, he shall be subject to the provisions of section 31 insofar as the latter corporation or corporations are con

Sec. 33. Disloyalty of a Director

Doctrine of Corporate Opportunity- A director, by virtue of his office, acquires for himself a business opportunity which
belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for
profits by refunding the same.

Sec. 34. Executive, Management, and Other Special Committees

Executive Committee- It is a body of created by the by-laws and composed of not less than 3 members of the board which
to the statutory limitations, has all the authority of the board of directors to the extent provided in the by-laws.
Limitations on the powers of the executive committee
1. Approval of any action for which shareholders’ approval is also required
2. Filling of vacancies in the board

1 0
 3. Amendment or repeal of by-laws or the adoption of new by-laws
4. Amendment or repeal of any resolution of the board which by its express terms is not amendable or repealable.
5. Distribution of cash dividends to shareholders.
Quorum required of the executive committee- Majority vote of all its members.

1 0
 TITLE IV. POWERS OF CORPORATIONS
A corporation exercise it powers through it board of directors and/or its duly authorized officers and agents, except in inst
where the Corporation Code required stockholders’ approval for certain specific acts.
1 0
It has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to
existence.
Sec. 35. Corporate Powers and Capacity

General powers and capacity of a corporation

a. To sue and be sued in its corporate name

b. To have perpetual existence unless the certificate of incorporation provides otherwise
c. To adopt and use a corporate seal
d. To amend its articles of incorporation in accordance with the provisions of this Code
e. To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the same in accordance wit
Code
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks to subscribers and to
treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a
nonstock corporation
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge mortgage, and otherwise deal with such real
personal property, including securities and bonds of other corporations, as the transactions of the lawful business
corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the constitut
h. To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural
juridical persons
i. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientifi
civic, or similar purposes: Provided, that no foreign corporation shall give donations in aid of any political party o
candidate or for purposes of partisan political activity
j. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees
k. To exercise such other powers as may be essential or necessary to carry out its purpose/s as stated in the articles o
incorporation

Derivative suits – action brought by a stockholder on behalf of the corporation to enforce corporate rights against the
corporation’s directors, officer or other insiders

Sec. 36. Power to extend or shorten corporate term

Requirements to extend or shorten corporate term

a. Approval by a majority vote of the board of directors or trustees

b. Ratification by the stockholders represent representing at least 2/3 of the outstanding capital stock or by at least 2
the members in case of non-stock corporations

Appraisal right – a stockholder who dissented and voted against the proposed corporate action, may choose to get out of t
corporation by demanding payment of the fair market value of his shares

Sec. 37. Power to increase or decrease capital stock; incur, create or increase bonded investments

Three instances of distribution of corporate capital

1. Amendment of the Articles of Incorporation to reduce the authorized capital stock

2. Purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings
3. Dissolutions and eventual liquidation of the corporation

Requirements for increase or decrease of authorized capital stock

1. Written notice of the proposed increase or diminution of the capital stock and of the time and place of the stockho
meeting at which the proposed increase or diminution of the capital stock is to be considered, must be addressed t
stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee by m
served personally, or through electronic means recognized in the corporation’s bylaws and/or the Commission’s r
a valid mode for service of notices
2. No decrease of the capital stock shall be approved if its effect shall prejudice the rights of corporate creditors
3. Approval by a majority vote of the board of directors
4. Ratification by the stockholders holding at least
1
2/3 of0 the outstanding capital stock
5. A certificate must be signed by a majority of the directors of the corporation and countersigned by the chairperso
secretary of the stockholders’ meeting
 6. Approval thereof by the SEC

7. Treasurer’s affidavit showing that at least 25% of such increased capital stock has been subscribed and that at lea
of the amount subscribed has been paid

Bonded indebtedness – a long-term indebtedness secured usually by real property

Sec. 38. Power to deny preemptive right

Pre-emptive right

- Preferential right of all stockholders of a stock corporation to subscribe to all issued or disposition of share of any
in proportion to their respective shareholdings
- (Purpose) to enable the shareholder to retain his proportionate control in the corporation
- Not available when:
1. Share to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the pub
2. Shares to be issued in good faith with the approval of the outstanding capital stock, in exchange for property
for corporate purposed or in payment of a previously contracted debt

Sec. 39. Sale or other disposition of assets

Sale or disposition – shall be deemed to cover substantially all the corporate property and assets if thereby the corporation
be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated

Ratification not required

1 0
1. If the same is necessary in the usual and regular course of business of said corporation
2. If the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its
 remaining business

Requirement of sale or other disposition of assets (approval of SEC is not required)

1. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockho
member at his place of residence as shown on the books of the corporation and deposited to the addressee in the p
office with postage prepaid, or served personally, or when allowed by the bylaws or dine with the consent of the
stockholder, sent electronically
2. Approval by a majority vote of the board of directors
3. Ratification by the vote of the stockholders representing at least 2/3 of the outstanding capital stock, or in case of
stock corporation, by the vote of at least to 2/3 of the members
4. Any dissenting stockholder may exercise his appraisal right

Sec. 40. Power to acquire own shares

Instances when a corporation may acquire its own shares

1. To eliminate fractional shares arising out of stock dividends

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency
and to purchase delinquent shares sold during said sale
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Co
4. To acquire treasury shares
5. Redeemable shares regardless of existence of retained earnings
6. To effect a decrease of capital stock
7. In close corporations, when there is a deadlock in the management of the business, the SEC may order the purcha
their fair value of the shares of any stockholder by a corporation regardless of the availability of unrestricted earn
its books, or by the other stockholders

General rule: the corporation may only acquire its own stocks in the presence of unrestricted retained earnings

Exceptions:

1. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the insolvency o
Corporation
2. In a close corporation

Basis of unrestricted retained earnings

- Trust fund doctrine, reason is that creditors of a corporation are preferred over the stockholders in the distribution
corporate assets

Sec. 41. Power to invest corporate funds in another corporation or business or for any other purpose

Requisites to invest corporate funs in another corporation or business or for any other purpose

1 0
 1. To accomplish its primary purpose
a. Approval of the majority of the board of directors or trustees
b. The approval of the stockholders or members shall not be necessary
2. To accomplish a purpose other than the primary purpose
a. Approval of the majority of the board of directors or trustees
b. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock, or by at least 2/
members in the case of non-stock corporations, at a stockholders’ or members’ meeting duly called for th
purpose
c. Written notice of the proposed investment and the time and place of the meeting shall be addressed to eac
stockholder or member by mail or served personally, or sent electronically in accordance with the rules a
regulations of the Commission on the use of electronic data message, when allowed by the bylaws or don
the consent of the stockholders
d. Any dissenting stockholder shall have appraisal rights
e. The ratification must be made at a stockholders’ or members’ meeting duly called for the purpose

Sec. 42. Power to declare dividends

Requirement for the declaration of dividends

1. Existence of unrestricted retained earnings

2. Resolution of the board of directors
3. For stock dividend, the additional requirements are:
a. A vote representing not less than 2/3 of outstanding capital
b. A corporation must have also a sufficient number of authorized unissued shares for distribution to stockh
Payment of dividends to a stockholder is not a matter of right but a matter of consensus

Limitation on dividends

1. The right to dividend is base on duly recorded stockholdings

2. Dividends among stockholders of the same class must always be pro rata equal and without discrimination and
regardless of the time when the shares were reacquired. The right of the stockholder to be paid dividends accrues
as the declaration is made
3. The right to dividend accrues even if there is no SEC approval
4. Declaration of dividends is discretionary upon the board of directors
5. Dividends cannot be declared out of paid-in surplus and revaluation surplus
6. Treasury shares cannot be declared as stock or cash dividends

General rule: stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital sto
1 0
Exceptions:

1. When justified by definite corporate expansion projects or programs approved by the board of directors
 2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether lo
foreign, from declaring dividends without its/his consent, and such consent has not yet been secured
3. When it can be clearly shown that such retention is necessary under special circumstances obtaining n the corpor
such as when there is need for special reserve for probable contingencies

Sec. 43. Power to enter into management contract

Management contract – agreement whereby a corporation delegates the management of its affairs to another corporation
certain period of time, no management contract shall be entered into for a period longer than five years for any one term

Requirements:
1. Approval by the majority of the quorum, of the board of directors
2. Ratification by the stockholders owning at least the majority of the outstanding capital stock, or by at least a majo
the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a mee
duly called for the purpose
3. Approval by the stockholders of the managed corporation owning at least 2/3 of the total outstanding capital stoc
entitled to vote, or by at least 2/3 of the members in the case of a non-stock corporation, in case of:
a. Interlocking stockholder – where a stockholder/s representing the same interest of both the managing and
managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote
managing corporation
b. Interlocking directors – where a majority of the members of the board of directors of the managing corpo
also constitute a majority of the members of the board of directors of the managed corporation
4. No management contract shall be entered into for a period longer than five years for any one term

1 0
Exception:

Service contracts or operating agreement which relate to the exploration, development, exploitation or utilization of natur
resources may be entered into for such periods as may be provided by the pertinent laws or regulations

Sec. 44. Ultra vires acts of corporations

Ultra vires act

- refers to an act outside or beyond corporate powers, including those that may ostensibly be within such powers bu
by general or special laws, prohibited or declared illegal
- (Corporation code) act outside the powers conferred by the Code or by the Articles of Incorporation, or beyond w
necessary or incidental to the exercise of the powers so conferred

1 0
 TITLE V. BYLAWS
Bylaws – signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its
actions, affairs and concerns and its stockholders or members and directors or officers with relation thereto and among
themselves in their relation to it

- Relatively permanent and continuing rules of action adopted by the corporation for its own government and that o
individuals composing it having the direction, management, and control of its affairs, in whole or in part, in the
management and control of its affairs and activities

Purpose of a bylaw
- To regulate the conduct and define the duties of the members towards the corporation and among themselves
- Self-imposed and, although adopted pursuant to statutory authority, have no status as public law

Sec. 45. Adoption of Bylaws 1 0

Bylaws are indispensable to corporations

 - Means that they may not be essential to corporate birth but certainly, these are required by law for an orderly gov
and management of corporation

Adoption of bylaws

I. Before incorporation (Pre-incorporation)

o They bylaws must be singed and approved by all the incorporators and filed with the SEC together with t
articles of incorporation
II. After incorporation (Post-incorporation)
o The affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, o
least a majority of the members shall be necessary. The bylaws shall be signed by the stockholders or me
voting for them

Effectivity of by-laws

- Upon the issuance by the SEC of a certification that the by-laws are in accordance with the Revised Corporation

Effect of substantial compliance with by-laws

- Adoption and filing of by-laws is also a condition subsequent that will suffice to perfect corporate personality. Ex
are organization and commencement of transaction of corporate business.

Sec. 46. Content of bylaws

Contents of bylaws

1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees
2. The time and manner of calling and conducting regular or special meetings and mode of notifying the stockholde
members thereof
3. The required quorum in meetings of stockholders or members and the manner of voting therein
4. The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes
5. The form for proxies of stockholders and members and the manner of voting them
6. The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation o
directors or trustees and officers, and the maximum number of other board representations that an independent di
or trustee may have which shall, in no case, be more than the number prescribed by the Commission
7. The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof
8. The manner of election or appointment and the term of office of all officers other than directors or trustees
9. The penalties for violation of the bylaws
10. In the case of stock corporations, the manner of issuing stock certificates
11. Such other matters as may be necessary for the proper or convenient transaction of its corporate affairs for the pro
of good governance and anti-graft and corruption measures

Sec. 47. Amendment of bylaws

Amendment of bylaws

General rule: The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting
called for the purpose, may amend or repeal any bylaws or adopt new by laws

Exceptions:

1 0
 The owners of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation may delegate
board of directors or trustees the power to amend or repeal any bylaws or adopt new bylaws

Binding effects of the bylaws

1. As to directors or trustees, officers, and stockholder or members – they are bound and must comply because they
presumed to know the provisions of the bylaws
2. As to third persons – they are not bound unless they have knowledge of the bylaws

1 0
1 0
 TITLE VI.

Sec. 48. Kinds of Meetings

Kinds of meeting of stockholders or members

1. Regular meeting
a. When
▪ annually on a date fixed in the bylaws, or if not fixed, on any date after April 15 of every year as
determined by the board of directors or trustees
b. Where
▪ In the principal office of the corporation as set for the in the articles of incorporation, or, if not
practicable, in the city or municipality where the principal office of the corporation is located.
c. Notice
▪ Written notice of regular meeting must be given to stockholders or members of record at least 21
prior to the meeting unless otherwise provided in the bylaws, law, or regulations
2. Special meeting
a. When
▪ At any time deemed necessary or as provided in the bylaws
b. Where
▪ In the principal office of the corporation as set for the in the articles of incorporation, or, if not
practicable, in the city or municipality where the principal office of the corporation
c. Notice
▪ At least 1 week written notice shall be sent to all stockholders or members, unless a different peri
provided in the bylaws, law or regulations

Sec. 49. Regular and special meetings of stockholders or members

At each regular meeting, board of directors or trustees shall present to stockholder or members the following:

A. The minutes of the most recent regular meeting which shall include, among others:
a. A description of the voting and vote tabulation procedures used in the previous meeting;
b. A description of the opportunity given to stockholders or members to ask questions and a record of the questions a
and answers given;
c. The matters discussed and resolutions reached;
d. A record of the voting results for each agenda item;
e. A list of the directors or trustees, officers and stockholders or members who attended the meeting; and
f. Such other items that the Commission may require in the interest of goods corporate governance and the protection
minority stockholders
B. A members’ list for nonstock corporations and, for stock corporations, material information on the current stockh
and their voting rights
C. A detailed, descriptive, balanced and comprehensible assessment of the corporation’s performance, which shall in
information on any material change in the corporation’s business, strategy, and other affairs;
D. A financial report for the preceding year, which shall include financial statements duly signed and certified in
accordance with this Code and the rules the Commission may prescribe, a statement on the adequacy of the
corporation’s internal controls or risk management systems, and a statement of all external audit and non-audit fe
E. An explanation of the dividend policy and the fact of payment of dividends or the reasons for nonpayment thereo
F. Director or trustee profiles which shall include, among others, their qualifications and relevant experience, length
1 0
service in the corporation, trainings and continuing education attended, and their board representations in other
corporations;
 G. A director or trustee attendance report, indicating the attendance of each director or trustee at each of the meeting
board and its committees and in regular or special stockholder meetings;
H. Appraisals and performance reports for the board and the criteria and procedure for assessment;
I. A director or trustee compensation report prepared in accordance with this Code and the rules the Commission m
prescribe;
J. Director disclosures on self-dealings and related party transactions; and/or
K. The profiles of directors nominated or seeking election or reelection.

Requirements for stockholders’ or members’ meetings

1. It must be held at the proper place;

2. It must be held at the stated date and at the appointed time;
3. It must be called by the proper person;
4. The person/s designated in the by-laws have the authority to call stockholders’ or members’ meeting;

5. In the absence of such provision in the by-laws, it may be called by a director or trustee or by an officer entrusted
the management of the corporation
6. A petitioning stockholder or member may make the call on order of the SEC whenever for any cause, there is no
authorized to call a meeting or the person authorized unjustly refuses to call a meeting
7. There must be a previous notice
8. There must be a quorum

Sec. 50. Place and time of meetings of stockholders 1or members

0

Notice shall be accompanied by the following:

 a. The agenda for the meeting
b. A proxy form which shall be submitted to the corporate secretary within a reasonable time prior to the meeting
c. When attendance, participation, and voting are allowed by remote communication or in absentia, the requirements
procedures to be followed when a stockholder or member elects either option
d. When the meeting is for the election of directors or trustees, the requirement and procedure for nomination and ele

Sec. 51. Quorum in Meetings

Quorum in meetings of stockholders or members

• Stock corporations – based on the number of outstanding voting stocks

• Nonstock corporations – only those who are actual, living members with voting rights shall be counted in determin
existence of a quorum during members’ meetings; dead members shall not be counted

Sec. 52. Regular and special meetings of directors or trustees; quorum.

Quorum at a regular or special meeting of directors or trustees

General rule: Majority of the number of directors or trustees as state in the articles of incorporation

Exception: If the Articles of Incorporation or the by-laws provide for a greater majority

Valid corporate act

General rule: Ever decision reached by at least a majority of the directors or trustees constituting a quorum shall be valid
corporate act

Exception: The election of officers shall require the vote of a majority of all of the members of the board

Quorum at the meeting of directors or trustees

- A majority of the directors or trustees, as fixed in the articles of incorporation, shall constitute a quorum for the
transaction of a corporate business. Majority mean fifty percent plus one.

General rule: A majority of the number of directors or trustees, as fixed in the articles of incorporation, shall constitue a
quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees pres
meeting at which there is quorum shall be valid as a corporate act, except for the election of officers which shall require t
of a majority of all the members of the board

Exception: If the articles of incorporation or the bylaws provide for a greater majority

Sec. 53. Who shall preside at meetings

General rule: the chairman or, in his absence, the president shall preside at all meetings of the directors or trustees as well
the stockholders or members.

Exceptions: Unless the bylaws provide otherwise.

Sec. 54. Right to vote of secured creditors and administrators

Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in be
the stockholders or members without need of any written proxy.

Sec. 55. Voting in case of joint ownership of stock

Voting in case of joint ownership of stock

General rule: In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of al
owners shall be necessary

Exceptions:
1 0
 1. There is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vot
share/s
2. The shares are owned in and “and/or” capacity by the holders thereof, any one of the joint owners can vote said s
appoint a proxy therefor

Sec. 56. Voting right for treasury shares

Treasury share shall have no voting rights as long as such shares remain in the Treasury

Sec. 57. Manner of voting; proxies

Requirements for validity of a proxy

1. It shall be in writing, in any form authorized in the bylaws

2. It shall be signed by the stockholder or members
3. It shall be filed before the scheduled meeting with the corporate secretary
4. Unless otherwise provided in the proxy, it shall be valid only for the meeting which it is intended
5. No proxy shall be valid and effective for a period longer than 5 years at any one time

Purposes of proxies

1. For convenience
2. It assures the presence of quorum
3. It enables those who do not wish to attend the meeting to protect their interest
4. It secures voting control

The right to vote by proxy may be exercised in any 1of the following
0 instances

1. Election of the board of directors or board of trustees

 2. Voting in case of joint ownership of stock
3. Voting by trustee under voting trust agreement
4. Voting by members in non-stock corporation
5. In case of pledge or mortgage of shares
6. In all meetings of stockholders or members
7. In all other matters as may be provided in the by-laws

Revocation proxies may be made through:

1. Formal notice
2. Verbal communication
3. Conduct

Voting trust agreement Proxy

Governed by the law on trust Governed by the law on agency
Trustee acquires legal title to the shares of the transferring Proxy has no legal title to the shares of the principal
stockholder; only beneficial title remains with the stockholder
The trustee votes as owner The proxy votes as agent
The agreement must be notarized Proxy need not be notarized
The trustee may vote in person or by proxy The proxy must vote in person
The trustee is not limited to act at any particular meeting The proxy can only act at a specified stockholders’ mee
A trustee can vote even when the stockholder is present A proxy can only vote in the absence of the owners of th
stock
An agreement must not exceed 5 years at any one time except A proxy is usually of shorter duration although the
when the same is made a condition of a loan corporation law provides that it cannot exceed 5 years a
one time
As a rule, a voting trust agreement is intended to be As a rule, a proxy is revocable
irrevocable for a definite and limited period of time
A trustee has the right to inspect corporate books A proxy does not have a right of inspection of corporate
books
The stock certificate shall be cancelled and a new one in the There is no cancellation of the stock corporation
name of the trustee shall be issued stating that they are issued
pursuant to a voting trust agreement

Sec. 58. Voting trust

Voting trust

1 0
 - A trust created by an agreement between a group of the stockholders of a corporation and the trustee or by a grou
identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term
years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock
by such stockholders, either for certain purposes or for all purposes, is to be lodged in the trustee, either with or w
a reservation to the owners, or persons designated by them, of the power to direct how such control shall be used.

Nature of voting trust agreement

- Results in the separation of the voting rights of a stockholder from his other rights such as the right to receive div
the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation a
other rights to which a stockholder may be entitled until the liquidation of the corporation

Three test of voting trust agreement

1. That the voting rights of the stock are separated from the other attributes
2. That the voting rights granted are intended to be irrevocable for a definite period of time
3. That the principal purpose of the grant of voting rights is to acquire voting control of the corporation

Requirements and limitations imposed on voting trust agreement

1. The agreement must be in writing and notarized and specify the terms and conditions thereof
2. A certified copy of such agreement shall be filed with the corporation and with the SEC; otherwise, said agreeme
ineffective and unenforceable
3. The certificate/s of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in
name of the trustee or trustees stating that they are issued pursuant to said agreements
4. The books of the corporation shall that the transfer in the name of the trustee/s is made pursuant to said voting tru
agreement
5. The trustee/s shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the
manner and with the same effect as certificates of stock
6. A voting trust agreement shall be entered into for a period not exceeding 5 years at any time. However, in the cas
voting trust may be for required as a condition in a loan agreement, said voting trust may be for a period exceedin
years but shall automatically expire upon full payment of the loan
7. No voting trust agreement shall be entered into for purposes of circumventing the laws against anti-competitive th
against anti-competitive mergers and acquisitions, violation of nationality and capital requirements, or for the
perpetuation of fraud

1 0
 1
TITLE VII. STOCKS0 AND STOCKHOLDERS
Shareholders, both common and preferred – considered risk taken who invest in the business and who can look only to wh
after corporate debts and liabilities are fully paid
Derivative suit
- An action brought by minority shareholders in the name of the corporation to redress wrongs committed, for wh
directors refuse to sue
- Requisites for a derivative suit:
a. The party bringing suit should be a shareholder as of time of the act of transaction complained of his shares no
material
b. He has tried to exhaust intra-corporate remedies
c. The cause of action actually devolved on the corporation, the wrongdoing or harm having been, or being cause
corporation and not to the particular stockholder bringing the suit
Requirements of derivative suit
- The minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the
forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders s
situated who wish to join.
Derivative vs. Individual vs. Class/Representative Suits
a. Derivative suit – where the acts complained of constitute a wrong to the corporation itself, the cause of action belong
corporation itself
b. Individual Suit – where a stockholder or member is denied the right of inspection
c. Class/Representative Suit – where the wrong is done to a group of stockholders

Sec. 59. Subscription Contract

Subscription contract
-any contract for the acquisition of unissued stock shall be deemed a subscription notwithstanding the fact that the parties
it as a purchase or some other contract
Nature of subscription contract – it is a consensual contract and an indivisible contract

Sec. 60. Pre-incorporation Subscription

Kinds of incorporation
A. Pre-incorporation subscription – a subscription for shares of stock of a corporation still to be formed
Rules:
1. A pre-incorporation subscription is irrevocable for a period of at least 6 months from the date of subscription
Exception:
a. All of the other subscribers consent to the revocation
b. The corporation fails to incorporate within the same period or within a longer period stipulated in the con
subscription
2. No pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC
B. Post-incorporation subscription – a subscription entered into after the incorporation for the acquisition of unissued sto

Sec. 61. Consideration for stocks

Consideration for the issuance of stock may be:
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
purposes
3. Labor or services
4. Indebtedness of the corporation
5. Amounts transferred from unrestricted retained earnings to stated capital
6. Conversion
7. Shares of stock in another corporation
8. Others
Services actually rendered to the corporation
- The transaction must be in good faith and no fraud is perpetuated upon other stockholders and creditors
Shares of stock
- Unit of interest in a corporation 1 0
- Intangible personal property
- May be issued by the corporation even if the subscription is not fully paid
Sec. 62. Certificate of stock and transfer of shares
Certificate of stock
- Evidence of the holder’s ownership of the stock and of his right as a shareholder

- Tangible personal property

- May be issued only if the subscription is fully paid
Unpaid claim
- Refers to “any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stoc
may owe the corporation arising from any other transaction
Mode of transfer of stocks as provided by law
a. There must be delivery of the stock certificate
b. The certificate must be endorsed by the owner of his attorney-in-fact or other persons legally authorized to make the
c. To be valid against third parties, the transfer must be recorded in the books of the corporation
Transfer of shares by means of succession
- It does not bind the corporation and third parties.
- For it to be valid, transfer must be registered in the books of the corporation to make the transferee-heir a stoc
entitled to recognition as such both by the corporation and by third parties
Requirement for a valid transfer of stocks
a. There must be delivery of the stock certificate
b. The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the
c. To be valid against third parties, the transfer must 1be recorded
0 in the books of the corporation

Sec. 63. Issuance of stock certificates

Certificate of stock
- continuing affirmation or representation that the stock described therein is valid and genuine and is at least prim
evidence that it was legally issued in the absence of evidence to the contrary
- it shall be issued until the full amount of of the subscription together with the interest and expenses, if any is due, h
paid

Sec. 64. Liability of directors for watered stocks

General rule – obligations incurred by the corporation, acting through its directors, officers and employees, are its sole lia
and vice versa.
Exception:
1. when directors and trustees or, in appropriate case, the officers of a corporation:
a. vote for or assent to patently unlawful acts of the corporation
b. act in bad faith or with gross negligence in directing the corporate affairs
c. are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other pe
2. when a directors or officer has consented to the issuance of watered down stocks or who, having knowledge ther
not forthwith file with the corporate secretary his written objection thereto
3. when a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liab
the corporation
4. when a directors, trustee or officer is made, by specific provision of law, personally liable for his corporate action
The basis of the solidary liability of directors is the fiduciary character of their position

Sec. 65. Interest on unpaid subscriptions

Interest on unpaid subscriptions
1. rate of interest fixed in the subscription contract
2. if above is not presented, prevailing legal rate shall apply

Sec. 66. Payment of balance of subscription

Payment of unpaid subscription
I. Voluntary payment – payment shall be made on the date specified in the contract of subscription or on the date state
call made by the board
II. Involuntary payment
1. Extra-judicial
a. Delinquency sale – the board of directors may, by resolution, order the sale of delinquent stock
b. Application of dividends – the cash dividends due on delinquent stock shall first be applied to the unpaid bala
the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockhold
his unpaid subscription is fully paid
2. Judicial action
o The corporation can collect by action in a court of proper jurisdiction the amount due on any unpaid subsc
with accrued interest, costs and expenses

1 0
Sec. 68. When sale may be questioned
No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in he notice of sale, o
sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party hold
stock
Sec. 69. Court action to recover unpaid subscription
- Nothing

Sec. 70. Effect of delinquency stock

Effect of delinquency stock
- Shall not be voted for
- Not entitled to cote
- Not entitled to be represented at any stockholders’ meeting
- Holder is not entitled to any of the rights of a stockholder except the right to dividends
Sec. 71. Rights of unpaid shares, non-delinquent
- all the rights of a stockholder
Sec. 72. Lost or destroyed certificates
Procedure:
1. file an affidavit in triplicate setting forth
2. after the affidavit, the corporation shall publish a notice in a newspaper of general circulation

Rights of holders of subscribed shares not fully paid

I. Management rights
a. To attend and vote in person or by proxy at a stockholders’ meetings
b. To elect and remove directors
c. To approve certain corporate acts
d. To adopt and amend or repeal the by-laws or adopt new by-laws
e. To compel the calling of the meetings
f. To enter into a voting trust agreement
g. To have the corporation voluntarily dissolved
II. Proprietary rights
a. To transfer stock in the corporate book
b. To receive dividends when declared
c. To issuance of certificate of stock 1 0
d. To participate in the distribution of corporate asset upon dissolution
e. To pre-emption in the issue of shares