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UNIVERSITY OF SAN CARLOS SEC. 14. FORM OF ARTICLES OF INCORPORATION .... 27

SCHOOL OF LAW & GOVERNANCE
SEC. 15. AMENDMENT OF THE ARTICLES..................... 28
Business Organization 2 SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR
Revised Corporation Code AMENDMENTS .................................................................. 29
Reviewer
SEC. 17. CORPORATION NAME ...................................... 29
Atty. Eugenio Espedido SEC. 18. REGISTRATION, INCORPORATION AND
COMMENCEMENT OF CORPORATION EXISTENCE ..... 30
EH403 SY 2019-2020 SEC. 19. DE FACTO CORPORATION .............................. 31
CORPO COMMITTEE:
Gaviola, Keeshia Earl T. SEC. 20. CORPORATION BY ESTOPPEL ........................ 31
Li, Jinnelyn O. SEC. 21. EFFECT OF NON-USE OF CORPORATE
Tagaloguin, Elmar M. CHARTER AND CONTINUOUS INOPERATION ............... 34
Torres, Chezka Bianca P.
TITLE III. BOARD OF DIRECTORS/TRUSTEES AND
SOURCES OFFICERS ............................................................................. 34
Discussion of Atty. Espedido & Atty. Gaviola (2018-2019) | SEC. 22. QUALIFICATIONS OF THE BOD/BOT ............... 35
Herbosa | Prior Year Notes: Gaviola, Tanya & Beer Notes | UP
Law Notes 2019 | San Beda MemAid 2019 SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES .... 37
SEC. 24. CORPORATE OFFICERS .................................. 39
Disclaimer: This material is not for sale. The authors do not
guarantee the absolute correctness, completeness or accuracy SEC. 25. REPORTORIAL REQUIREMENTS ..................... 41
of this reviewer. This is intended to be used as a supplement to SEC. 26. DISQUALIFICATION OF DIRECTORS,
your personal readings. Please be vigilant in cross-referring with TRUSTEES, OR OFFICERS .............................................. 42
your own notes. We have arranged Atty. E.’s discussion to align
with the codal provisions, and thus this reviewer does not SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES ........... 42
completely follow the flow of his class discussions. SEC. 28. VACANCIES in the board.................................... 42
 Kindly note that the portions of these reviewers marked with SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES
double asterisks (**) were not discussed by Atty. E., but for ........................................................................................... 44
purposes of the mock bar and/or better understanding, the SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR
authors thought to include such notes in this material. OFFICERS ......................................................................... 44
 Tip: To easily reach a specific section or title in this
SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR
document, simply press CTRL + <click the section you want
OFFICERS ......................................................................... 45
to go to>.
SEC. 32 INTERLOCKING DIRECTORS ............................ 46
TABLE OF CONTENTS SEC. 33. DISLOYALTY OF A DIRECTOR ......................... 47
TITLE I. GENERAL PROVISIONS, DEFINITIONS AND SEC. 34. EXECUTIVE COMMITTEE ................................. 48
CLASSIFICATIONS .................................................................2 TITLE IV. POWERS OF THE CORPORATION ..................... 48
SEC. 1. TITLE OF THE CODE .............................................2 SEC. 35. CORPORATE POWERS AND CAPACITY ......... 48
SEC. 2. CORPORATION DEFINED .....................................4 SEC. 36. POWER TO EXTEND OR SHORTEN
SEC. 3. CLASSES OF CORPORATIONS .......................... 11 CORPORATE TERM .......................................................... 50
SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL
OR CHARTERS .................................................................. 14 STOCK ............................................................................... 50
SEC. 5. CORPORATORS AND INCORPORATORS, SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT ........ 51
STOCKHOLDERS AND MEMBERS................................... 14 SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS .. 52
SEC. 6. CLASSIFICATION OF SHARES ........................... 15 SEC. 40. POWER TO ACQUIRE OWN SHARES .............. 52
SEC. 7. FOUNDERS’ SHARES .......................................... 16 SEC. 41. POWER TO INVEST CORPORATE FUNDS IN
SEC. 8. REDEEMABLE SHARES ...................................... 16 OTHER CORPORATIONS/BUSINESSES ......................... 53
SEC. 9. TREASURY SHARES ........................................... 16 SEC. 42. POWER TO DECLARE DIVIDENDS .................. 54
TITLE II. INCORPORATION AND ORGANIZATION OF SEC. 43. POWER TO ENTER INTO MANAGEMENT
PRIVATE CORPORATIONS .................................................. 22 CONTRACT........................................................................ 59
SEC. 10. NUMBER AND QUALIFICATIONS OF SEC. 44. ULTRA VIRES ACTS .......................................... 59
INCORPORATORS ............................................................ 22 TITLE V. BYLAWS ................................................................ 60
SEC. 11. CORPORATE TERM ........................................... 23 SEC. 45. ADOPTION OF BY LAWS ................................... 60
SEC. 12. CAPITAL STOCKS .............................................. 23 SEC. 46. CONTENTS OF BYLAWS ................................... 61
SEC. 13. CONTENTS OF THE ARTICLES OF SEC. 47. AMENDMENT TO BYLAWS ............................... 61
INCORPORATION.............................................................. 23
TITLE VI. MEETINGS ............................................................ 62
Page 1 of 88 | EH403 2019-2020 Corporation Law

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SEC. 48. KINDS OF MEETINGS ........................................ 62 R.A. No. 11232

An Act Providing for the Revised Corporation Code of the
SEC. 49. REGULAR & SPECIAL MEETINGS OF
Philippines
STOCKHOLDERS OR MEMBERS ..................................... 62
SEC. 50. PLACE & TIME OF MEETINGS OF TITLE I. GENERAL PROVISIONS, DEFINITIONS AND
STOCKHOLDERS OR MEMBERS ..................................... 65 CLASSIFICATIONS
SEC. 51. QUORUM IN MEETINGS .................................... 65
SEC. 1. TITLE OF THE CODE
SEC. 52. REGULAR & SPECIAL MEETINGS OF
DIRECTORS/TRUSTEES; QUORUM ................................ 65 Section 1. Title of the Code. This Code shall be known as the
SEC. 53. WHO SHALL PRESIDE AT MEETINGS ............. 66 “Revised Corporation Code of the Philippines”.
SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS & INTRODUCTION

ADMINISTRATORS ............................................................ 66
SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP OF The Revised Corporation Code of the Philippines (RCC) was
STOCK ............................................................................... 66 signed into law by Pres. Rodrigo Duterte on 20 February 2019,
and became effective on 23 February 2019, following its
SEC. 56. VOTING RIGHT FOR TREASURY SHARES ...... 67 publication in 2 newspapers of general circulation.
SEC. 57. MANNER OF VOTING; PROXIES ...................... 67
In its repealing clause, the Revised Corporation Code
SEC. 58. VOTING TRUSTS ............................................... 68
expressly repealed the 1980 Corporation Code, which had no
TITLE VII. STOCKS AND STOCKHOLDERS ....................... 70 amendments for almost 39 years.
SEC. 59. SUBSCRIPTION CONTRACT ............................. 70
Notes:
SEC. 60. PRE-INCORPORATION SUBSCRIPTION .......... 70 From 149 sections, the RCC now has 188 sections.
Being a special law, it is a combination of substantive
SEC. 61. CONSIDERATION FOR STOCKS ...................... 71
and procedural law.
SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF The most important innovation is the introduction of the
SHARES ............................................................................. 72 OPC, or one-person corporation. This is a very new
concept. We have abandoned the old concept of at
SEC. 63. ISSUANCE OF STOCK CERTIFICATES ............ 73
least 5 incorporators being required to make a
SEC. 64. LIABILITY OF DIRECTORS FOR WATERED corporation.
STOCKS ............................................................................. 75 o There is a new concept because many
SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS ........ 77 investors refrain from investing much into
businesses, because when they invest into
SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION .. 77 sole proprietorships, their liability is unlimited.
SEC. 67. DELINQUENCY SALE ........................................ 78 o However, forming a corporation under the old
law required 5 incorporators, and
SEC. 68. WHEN SALE MAY BE QUESTIONED ................ 79 businessmen may not be comfortable with
SEC. 69. COURT ACTION TO RECOVER UNPAID doing business with five other persons. So
SUBSCRIPTION ................................................................. 79 what they did before was they incorporated a
corporation together with family members.
SEC. 70. EFFECT OF DELINQUENCY .............................. 79 Sometimes, they did it with their drivers,
SEC. 71. RIGHTS OF UNPAID SHARES, NONDELINQUENT gardeners and laundrywomen, etc. The SEC
............................................................................................ 79 realized that we are just fooling ourselves,
that incorporators can sometimes be had in
SEC. 72. LOST OR DESTROYED CERTIFICATES ........... 80 circumvention of the law. That is why they
TITLE VIII. CORPORATE BOOKS AND RECORDS ............ 82 now allow the OPC.
However, note that 80-90% of the Code remains the
SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER AGENT same with the Old Code.
............................................................................................ 82
SEC. 74. RIGHT TO FINANCIAL STATEMENTS ............... 86 TYPES OF BUSINESS ORGANIZATIONS
APPENDIX ............................................................................. 87 (1) Sole Proprietorships
P.D. 902-A .......................................................................... 87 A form of business organization with only one proprietary
owner. It is when a person personally or a single individual
NATIONALIZED ACTIVITIES (SEC. 8, RA 7042) ............... 87 conducts business under his own name or under a business
SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042) ........... 88 name.
(2) Partnerships
By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form a
partnership for the exercise of a profession.

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(3) Corporation Transferrable Needs Does not

An artificial being created by operation of law, having the through asset consent of need prior
right of succession and the powers, attributes and Transfer- sale all partners consent of
properties expressly authorized by law or incident to its ability of (based on the stock-
existence. Interest delectus holders
personae)
SOLE No right of succession There is

PART CORPO Right of right of
PROPRIETOR
-NERSHIP -RATION Succession succession
-SHIP
Starts upon Created by Created by

What is the basic distinction between the three?
selling mere operation of
Commence agree- law A: The veil of corporation fiction only exists in a corporation, and
-ment ment of not in a sole proprietorship or a partnership.
the parties
Atty. Espedido.: A Corporation, such as a One Person
Corporation (OPC) enjoys the veil of corporate fiction and a
Sole At least 2 New Law:
limited liability whereas a Sole Proprietorship’s liability may not
proprietor persons One Person
be limited at all.
Corporation
is allowed
No. of One of the requirements of an OPC to exist is to declare how
Incorpo- much capital he intends so that his liability will be based on that
Old Law: At
rators capital. He must prove that he has separated that capital from
least 5
his personal funds. The amount declared as capital for the
incorpora-
Corporation has been separated from the personal funds.
tors
Unless he can do that, he might be liable as a Sole Proprietor.
No juridical Execution From the
ADVANTAGES OF A CORPORATION
personality of the date of
contract issuance of
Commence (1) More capitalization
the
-ment of (2) Limited liability – veil of corporate fiction applies
Certificate of
Juridical (3) Right of succession – upon the death of a stockholder,
Incorpora-
Personality the heir becomes the new stockholder which provides
tion by the
stability for the business to continue
SEC
(4) Transferability of interest – does not require the
consent of other stockholders
Liable up to Liable Stockholder (5) Easier management – management is centralized in
the extent of personally s are liable the Board of Directors
personal and subsi- only to the
properties diarily for extent of DISADVANTAGES OF A CORPORATION
partnershi their
p debts to investments (1) Higher Income Tax Liability (May be taxed twice)
3rd as Corporate Income Tax and Income Tax to
persons represented Stockholders
by the
shares Illustration. When the corporation acquires income, it
Liability subscribed will be subject to corporate income tax. When it is
by them distributed to the shareholder as cash dividends, it will
also be an income of the shareholder and such are
Important: taxable income of the shareholder.
Veil of
Corporate (2) Less Participation in the Management. Participation of
Fiction stockholders in a corporation is indirect.
applies
only to a Indirect – means the management of the corporation is
Corpo- entrusted to the Board of Directors. The only
ration participation of stockholders in the management is in
Managed by Absence Power to do the election of the Board of Directors.
the sole of any business is
proprietor agree- vested in the (3) No delectus personae – investing with people you do
ment, Board of not know; there is no personal touch; no delectus
Manage- every Directors personae
ment partner is (BOT) or
an agent Board of (4) Dissolution – dissolution is granted by the State, unlike
of the Trustees in a Partnership which can be dissolved anytime.
partner- Dissolution of a Corporation requires consent of the
ship State because it is imbued with public interest.

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(5) Greater degree of government control and supervision TYPES OF CORPORATIONS
(6) Difficulty in meeting requirements – high cost of 1. Public corporations

formation and operations Created to govern a portion of the State. Its purpose is
for the general good and welfare (Sec. 3, Act 1456).
SEC. 2. CORPORATION DEFINED
2. Private corporations
Section 2. Corporation Defined. A corporation is an artificial Created for some private purpose, benefit, aim or end.
being created by operation of law, having the right of It may either be stock nor non-stock, government-
succession, and the powers, attributes, and properties expressly owned or controlled, or quasi-public.
authorized by law or incidental to its existence.
3. Publicly-listed corporations
This course is actually called Business Organizations II. Private corporations whose stocks are listed in the PSE
But what will we be studying in this course? (Philippine Stock Exchange).
A: We will be studying about private corporations, as
distinguished from public corporations. Examples:
(1) San Miguel Corporation
Private corporations are different from public corporations in that (2) Philippine Long Distance Telephone Company
the latter are created and governed by special charters. (3) SM Prime Holdings, Inc.
What is a public corporation? 4. Quasi-public corporations

A: It is one created by the State either by general or special act Private corporations performing public functions.
for purposes of administration of local government or rendering (Example: VECO)
services in the public interest.
5. Government-Owned and Controlled Corporations
PRIVATE CORPORATION VS. PUBLIC CORPORATION Private corporations created by the Congress through
a special charter and the majority of its shareholdings
PRIVATE CORPORATION PUBLIC CORPORATION are owned by the government.
Formed for a private Formed or organized to
purpose, benefit or end. govern a portion of the A GOCC has a personality of its own, separate and
State. distinct from that of the government.
Examples: Examples:
1. Municipalities (1) Development Bank of the Philippines
2. Provinces (2) Philippine Ports Authority
3. Autonomous Regions (3) Philippine Amusement and Gaming
such as the ARMM and Corporation
the CAR (4) Land Bank of the Philippines
(5) Manila International Airport Authority
What about Region 7?
A: It is not a public corporation because its purpose is for **NOTES:
1. The test to determine whether a GOCC or private
geographical determination and there is no election of Regional
corporation: if a corporation is created by its own
Representatives. Its only purpose is for the clustering of the
provinces forming part of that region. charter for the exercise of a public function, then
GOCC; if by incorporation under the general
corporation law, then private corporation (Baluyot vs.
How about ARMM and CAR?
Holganza, 2000)
A: These are autonomous regions that have their own
governors and boards. These are public corporations.
What about the Department of Education?
A: It is not a public corporation. It is an instrumentality of the
How do we define private corporations?
government under the Executive Branch.
A: They are corporations that are established for a private
purpose or benefit.
What is a government instrumentality?
A: It is not a private or a public corporation, but an
What do you think about PAGCOR?
instrumentality of the government performing functions of a
A: It is an artificial being.
particular branch of the government.
Does it have the right of succession?
If the employees of a GOCC are illegally dismissed, where
A: It has.
do they go?
The Philippine Airlines before was a private corporation. A: It depends on what is written on their special charter. They
And it was government-owned. Now, it has been privatized. are not covered under the Revised Corporation Code, and they
are also not covered in the Labor Code. Moreover, many of them
Meaning, the shares of stock of the government were sold
are covered by the Civil Service Rules even if they are private
to private persons. PAGCOR is a private corporation.
corporations.
Therefore, we have demonstrated the fact that private
corporations may be?
A: They can be private or government-controlled.

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CONSEQUENCES OF BEING A CORPORATION XPNs:
What are the consequences of a corporation existing as an (1) When the crime is punishable by a special law;
artificial being? Atty. Espedido: The special law must specify that it
A: imposes penalties on the officers of the corporation. To
(1) It has a separate and distinct personality from its be able to punish the officers, the law should
members or shareholders, thus incurs separate liability specifically provide that in case the corporation
(2) It enjoys rights separate from the stockholders becomes liable, the officers shall be directly punishable
(3) Properties of the corporation are separate from the for the commission of the act or violation, and that they
properties of the stockholders. will suffer the penalty of imprisonment. Otherwise, they
cannot be held liable.
RIGHTS OF A CORPORATION
(2) When the penalty imposed is a fine;
What rights does a corporation have? A corporation can be made criminally liable by being
A: made to pay a fine. Fines are not civil obligations, but
(1) Constitutional rights are penalties.
(2) Civil rights
(3) Economic rights (3) When the corporation violates the Anti-Money
Laundering Act (AMLA)
Note: A corporation does not have political rights.
Penalties in the AMLA include:
Civil and Economic Rights: a. Suspension
(1) Right to sue or be sued b. Revocation of license
(2) Right to own and dispose of properties c. Fine
(3) Right to enter into contracts
(4) Right to non-impairment of contracts PRINCIPLE OF LIBERALITY OF CONTRACTS
Constitutional Rights: Rule: Anyone can stipulate any provision in a contract as long
(1) Right to due process and equal protection of the law as such provision is not contrary to law, morals, public policy,
and public order. This right is enjoyed by both natural and
Section I, Article III of the Constitution juridical persons.
“No person shall be deprived of life, liberty or property
without due process of law, nor shall any person be Note: A corporation also enjoys the right to liberality of
denied the equal protection of the law.” contracts. However, there is an additional condition: a
corporation is not only bound by the limitations imposed under
(2) Right against unreasonable searches and seizure the principle of liberality of contracts, but is also bound by the
(3) Right against non-impairment of contracts provisions in the Articles of Incorporation.
(4) Right against self-incrimination
Thus, a corporation’s existence must be within the
Note: An artificial being has a separate set of rights from boundaries of the Revised Corporation Code and its
that of natural persons. Artificial persons enjoy certain rights Articles of Incorporation.
that persons also enjoy, but not all rights.
Atty. Espedido: In other words, you cannot just say that you can
What rights can a corporation not exercise? enter into any contract under the principle of liberality of
A: contracts but the contract must also be confined within the
(1) Political rights – for example, the right to vote and be privilege granted by the State.
voted for
(2) Right to life – granted only personality in accordance to Important: Although you can enter into any contract, your
law authority or power to enter into a contract must be confined
(3) Right to liberty – a corporation is not a corporal being within the authority granted to you by the State.
(it has no physical existence) which can be detained
unlike a natural person. A corporation cannot move, LIABILITY OF CORPORATIONS IN CASE OF DEBT
and therefore it is impractical to send the corporation
to jail. Consequence of having a separate juridical personality: The
debts of the corporation cannot be demanded by the creditors
CRIMINAL LIABILITY OF A CORPORATION against the stockholders.
GEN: A corporation cannot be held criminally liable under the Stockholders cannot be held personally liable because their
Revised Penal Code. liability is limited to the extent of their investments. It is unlike a
Partnership where the partners can be held personally liable.
Rationale: Crimes under the RPC have the element of intent
which corporations are not capable of, as it has no mind of its Reason: In a corporation, there is a veil of corporate fiction. The
own. As a creature of the law, its intention cannot be determined. main difference between the two is that, while both partnership
It can also not be sent to jail because it has no corporal or and corporation are juridical persons, the veil of corporate entity
physical existence. applies only to corporations.

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Illustration. Do you think that the sheriff can go after Corporation B?

A corporation incurred debts and its assets are not A: Normally, the sheriff might be hesitant. The sheriff will not
sufficient to pay its debts. Can the creditors demand want to violate the rights of Corporation B.
payment from its stockholders?
A: Generally, no. If the assets are not enough, it will be Atty. Espedido: But lawyers have a way of pursuing Corporation
considered as losses on the part of the creditor. B. They can proceed to Corporation B by proving that the assets
were actually owned by Corporation A through establishing that
Atty. Espedido: In case the corporation incurs debts and their the stockholders of Corporation A are the same stockholders of
assets are no longer sufficient, the creditors may organize Corporation B.
themselves and discuss the matter with the corporation. To aid
the creditors for whatever is due to them, they could agree to Show that the assets were only transferred to defraud the
pursue rehabilitation. creditors. So this is an instance when the corporate veil may be
lifted.
In a rehabilitation, the assets of the corporation will be gathered.
It will not be enough so the court will apply a receiver who will RELATIONSHIPS OF A CORPORATION
determine how the creditors will be paid.
When we organize or form a corporation, we will establish
The receiver’s job is to settles as much as possible – keep the various relationships. Relationships are necessary.
business of the Corporation going, such as appoint some
managers, so that the business will continue, earn income, and Relationships formed by a corporation
such profits will be now distributed to the creditors. However,
this may not be a one-time payment. They will now program the (1) Relationship between Corporation and the
payment. In this manner, the creditors will be protected. Shareholders
Which is why it is necessary to execute the Articles of
VEIL OF CORPORATE FICTION Incorporation. It manages the relationship between the
corporation and the shareholders.
A corporation has a separate and distinct personality from its
shareholders, officers, and directors. Once said corporate fiction (2) Relationship among Shareholders themselves
is created, the veil hides the stockholders such that when a The articles and the law provide the regulation and
corporation incurs liability, the stockholders are shielded from monitors this relationship
liability. In so far as the law is concerned, we are only dealing
with the corporation. (3) Relationship between the Corporation and the
State
Otherwise, without the veil, would you still like to be a A corporation is created by the State. It is the state that
stockholder? granted the privilege; thus, it can also be withdrawn by
Atty. Espedido: There is no point. In other words, that veil is the the state. Therefore, you must be compliant with the
protection of the stockholders. provisions of the law. Any violation will cause the
suspension or eventual revocation.
Can the veil of corporate fiction be enjoyed by a
partnership? (4) Relationship between the Corporation and the
A: No. While a corporation and a partnership are both juridical Public
persons, the veil of corporate fiction only applies to corporations. The public here includes the clients.
PIERCING THE VEIL OF CORPORATE FICTION In forming a corporation, your objective is to gather friends and
people in order to get funds or ask for investments.
When can there be piercing of the veil of corporate fiction?
A: When the corporate veil: (Memory Aid: PDFJ) Atty. Espedido: In forming a corporation, the main purpose is
1. Defeats public convenience; fundraising. Because when you do not have money or
2. Is used to perpetuate fraud; investments, it will be difficult to run a business.
3. Is used to defend a crime;
4. Is used to justify a wrong. The easiest option is to borrow. But if you do not have financial
assets, do you think the bank will lend to you? What will the bank
Illustration. require? Financial statements. The FS however will show that
Corporation A defrauds its creditors by transferring its you have zero assets. No bank will lend to you. Because if the
assets to Corporation B manager lends to you without collateral, he will lose his job. If
you do not pay your debt, you might even be sent to jail because
Corporation A has five (5) stockholders. Corporation A incurred you defrauded the bank.
debts and has already received a demand letter. Corporation A On the other hand, if you form a corporation, even if you do not
is now anticipating that the creditor might proceed against their earn profits, can the investors demand payment from you? Are
assets. you obliged to return their money?
Corporation A now created Corporation B and made it appear A: No. By contributing money, they have exposed themselves
that the assets of Corporation A were already sold to to risk. In business, you do not guarantee profits.
Corporation B.
On the other hand, if you borrowed money from the bank and
When the sheriff came to attach the property of Corporation A, you cannot return it, there will be interest to be paid,
the sheriff was shown a document that the assets are sold to compounded interest, and the bank may foreclose your
Corporation B. property.

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DIFFERENCE BETWEEN A LENDER & AN INVESTOR RELATIONSHIP BETWEEN THE CORPORATION AND
STATE
LENDER INVESTOR
No risk presumed Takes the risk because A corporation is a creation of the law. In other words, it is a
there is no guarantee of privilege granted by the State. The term extended or granted by
success or profits in the state is subject to the condition that the corporation will
business. comply with the reportorial requirements and behave within the
bounds of the law. Otherwise, the State may revoke or cancel
Note: When you invest, you share opportunities. You share risks the license. It may also suspend and/or charge a fine.
as well.
What is the difference between an investor and a lender? PARTNERSHIP VS CORPORATION
A: The investor takes a risk.
PARTNERSHIP CORPORATION
Atty. Espedido: Nobody can guarantee success. But more or Manner of Created by mere Created by law or
less, if there is hard work and perseverance, success follows. Creation agreement of the by operation of law
parties
RELATIONSHIP BETWEEN A CORPORATION & THE
SHAREHOLDERS No. of At least 2 One Person
Incorporators persons Corporation
The relationship between the corporation and the stockholders Old law: at least 5
is well established in the Articles of Incorporation (AOI). The AOI incorporators
is considered as the contract or agreement of the Corporation
and the Stockholders. Since this is their agreement, the AOI Commencement Moment of From the date of
binds their relationship and regulates their relationship. of Juridical execution of the the issuance of the
Personality contract Certificate of
Illustration. Incorporation by
A funeral parlor is turned into a hospital the SEC
The primary purpose of the corporation is to maintain, Powers May exercise Exercise power
operate, run and manage a funeral parlor. May the power authorized only expressly
corporation maintain, operate and manage a hospital by the partners granted by law or
instead? implied from those
A: It cannot, because their agreement is to engage in a funeral granted or incident
business. to its existence
What can the stockholder do? Management Absence of any Power to do
A: Even if the Board of Directors (BOD) want to have a hospital, agreement, every business is vested
they cannot immediately do so if the Articles of Incorporation is partner is an in the Board of
not amended. The stockholders must ratify it, and there should agent of the Directors or Board
be an amendment of the Articles of Incorporation partnership of Trustees
The moment the corporation intends to pursue another
Effect of Partner can sue a Suit against the
business, the stockholder may ask for an amendment of the Mismanagement co-partner member of the
Articles of Incorporation to reflect such changes. Otherwise, the BOD or BOT must
contract will be violated.
be in the name of
the corporation
Note: Amending the Articles of Incorporation is basically
amending the contract between the shareholders and the
Rights of No right of Has right of
corporation.
Succession succession succession
RELATIONSHIP AMONG SHAREHOLDERS THEMSELVES
Extent of Liable personally Stockholders are
Liability to 3rd and subsidiarily liable only to the
This is still an agreement among themselves. This can be found
Persons for partnership extent of their
in their by-laws.
debts to 3rd investments as
persons represented by the
Content of the By-Laws of the Corporation
shares subscribed
(1) How many boards and officers will be elected
by them
(2) Term of office
(3) Functions and Powers
(4) Manner of election Transferability Needs consent of Without prior
(5) When will the stockholders and/or board meet of Interest all partners consent of other
(6) Definition of various types of shares (based on stockholders
(7) Etc. delectus
personarum)
Term of Any period of Perpetual

Existence time

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Old law: 50 years cash dividends, it will also be an income of the

and extendible for shareholder and such are taxable income of the
another 50 years shareholder.
Firm Name For limited May adopt any (2) Less participation in the management of the business
partnership, name as long as it Shareholders only have an indirect participation in
requires LTD in is not the same or the management of the corporation
its name similar to other o “Indirect” – means that the management of
registered firm the corporation is entrusted to the Board of
name Directors. The only participation of the
stockholders in the management is the
Dissolution May be dissolved Dissolved only with election of the Board of Directors.
anytime by the consent of the
will of any or all State (3) No delectus personae
partners A shareholder will be investing in the business with
people he doesn’t know; there is no personal
Governing Laws Civil Code Governed by a touch; there is delectus personae.
general law which
is the Revised (4) Dissolution
Corporation Code Dissolution is granted by the State, unlike in a
or a special charter partnership which can be dissolved anytime. The
dissolution of a corporation requires the consent of
Why is management in a corporation better? the State because it is embued with public interest.
A:
1. There are fewer members, and as a result, it is easier (5) Greater degree of government control and supervision
to convene and communicate, while in a partnership,
“everyone talks”. (6) Difficulty of organization
2. Management is vested on persons with expertise. Organizing a corporation requires a high cost of
formation and operations
Basic Distinction
The veil of corporate fiction only applies to corporations, and is Summary of Differences between a Partnership and
not to sole proprietorships or partnerships. Corporation (Note: Only these were highlighted during
recitation)
Atty. Espedido: A corporation, such as a One Person
Corporation (OPC) enjoys the veil of corporate fiction and a PARTNERSHIP CORPORATION
limited liability, whereas a sole proprietorship’s liability may not Manner of Created by mere Created by law or
be limited at all. Creation agreement of the by operation of law
parties
One of the requirements for an OPC to exist is to declare how
much capital he intends so that his liability will be based on that Commencement Moment of From the date of
capital. He must prove that he has separated that capital from of Juridical execution of the the issuance of the
his personal funds, that the amount declared as capital for the Personality contract Certificate of
corporation has been separated from the personal funds. Unless Incorporation by
he can do that, he will be liable as a sole proprietor. the SEC
ADVANTAGES OF A CORPORATION Management Absence of any Power to do

agreement, every business is vested
(1) More capitalization partner is an in the Board of
(2) Limited liability (the veil of corporate fiction applies to agent of the Directors or Board
corporations) partnership of Trustees
(3) Right of succession (upon the death of a stockholder,
the heir becomes the new stockholder which provides Rights of No right of Has right of
stability for the business to continue) Succession succession succession
(4) Transferability of interest – does not require the
consent of the other stockholders Extent of Liable personally Stockholders are
(5) Easier management – management is centralized in Liability to 3rd and subsidiarily liable only to the
the Board of Directors Persons for partnership extent of their
debts to 3rd investments as
DISADVANTAGES OF A CORPORATION persons represented by the
shares subscribed
(1) Higher income tax liability by them
The profits of the corporation is taxed twice:
corporate income tax and income tax on the Transferability Needs consent of Without prior
stockholders for the dividends of Interest all partners consent of other
(based on stockholders
Illustration. When the corporation acquires delectus
income, it will be subjected to corporate income personarum)
tax. When it is distributed to the shareholder as

lOMoARcPSD|9536011
Atty. Espedido: The life of the corporation begins in the issuance When will the balance be due?
of the Certificate of Incorporation issued by the SEC. A: It depends on the Board. The Board may indicate the date
when the balance will be due or will simply announce or make a
CONTENTS OF THE call on the balance.
ARTICLES OF INCORPORATION
How is it paid?
(1) Name of the Corporation A: The paid-up capital may either be done in cash or property
(2) Purpose equivalent to the amount you intend to pay.
(a) Primary Purpose – main business
Example: Operate and establish the best funeral If payment is through property, how will the equivalent of
parlor of all time and name it “Libing Things” the property be determined?
(b) Secondary purpose – may refer to incidental or A:
related products or activities (1) The value will be determined through an appraisal.
(3) Nature of the business (a) The SEC will send an appraiser OR
(4) Term – perpetual term; you could exist for as long as (b) You will be required to submit an appraisal report of
you wish. If you want to stop, just dissolve it along the your property done by a duly accredited appraiser,
way together with the Articles of Incorporation, to the SEC.
(5) Address – Purpose: In order that the SEC will know
where to send notices or serve you summons (2) The SEC personnel will verify WON the paid-up capital has
(6) Names of the Stockholders been deposited to the bank in addition to the certified bank
(7) Names of the Incorporators deposit, which shall accompany the Articles of
Note: Incorporators may now be juridical persons so Incorporation.
long as they present appropriate authority. (Old law:
only natural persons) (3) The treasurer’s affidavit will indicate that at least 25% of the
(8) Capital Structure of the Corporation subscribed capital has been paid, OR under the present
code, there will be now a verification. (Does not necessarily
CAPITAL STRUCTURE by the treasurer but some other officers of the corporation,
indicating among others that at least 25% of the
Three levels of capital structure: subscriptions have been paid and that it was made with
cash or properties.
(1) Authorized Capital Stock (ACS) – the maximum amount
that a corporation intends to invest on a business APPLICATION WITH THE SEC
(2) Subscribed Capital Stock (SCS) – the number of shares Atty. Espedido: More or less these are the contents of an Article
a stockholder intends to invest in the corporation which he of Incorporation. You may submit this to the SEC.
commits himself to pay – it is the committed investment
of the stockholder (1) Verification – The SEC will go over your Article of
Incorporation and verify the name. Before you submit your
(3) Paid-Up Capital – stock actually paid for by the Articles of Incorporation, you have to confirm or verify the
stockholders; it is the initial amount that the stockholders name that you intend to use.
are obliged to pay. This is the initial amount that shall be
used in starting the corporation. Otherwise if the SEC discovers that somebody is already
using the same name, SEC might deny or return to you
If you are a new corporation, how much should be your papers and come up with another name.
subscribed?
A: The Revised Corporation Code does not require a To save time, they require you to give 3 alternative names.
minimum subscribed capital stock. SEC is free to choose from those 3 alternative names.
Reason: To attract the formation of more business (2) Issuance of the Certificate of Incorporation – If all the
organizations. requisites are in order, the SEC will issue the Certificate of
Incorporation.
XPN: However, the the 25% subscribed capital stock is
compulsory when there is an increase in the capital stock. That is the official document that will give the birth of your
Thus, it requires that at least 25% must be subscribed, and corporation. Once you receive this, all the stockholders will
25% must be paid-up. be convened and we will have the first stockholders
meeting.
A/N: Under the Old Corporation Code, newly formed
corporations were required to have 25% of their ACS STEPS AFTER THE BIRTH OF THE CORPORATION
subscribed, of this subscribed capital stock, 25% must be
paid-up (paid-up capital stock). However, this requirement (1) Organization meeting of the stockholders
has now been removed under the Revised Corporation The main agenda is the election of the Board.
Code.
(2) Meeting of the Board of Directors, Election of Officers
Note: You do not have to pay the subscription immediately. Once the Board of Directors are elected, they could adjourn
The balance or may be due or payable later. the stockholders meeting and the directors themselves will
now hold its first Board Meeting.

lOMoARcPSD|9536011
In that meeting, they will elect the officers based on the Illustration 3.
ballots (President, Chairman, Vice President, Secretary, USC + Dance lessons after class
Treasurer). If they may want to, they will select the COO
(child of the owner). After class hours, the entire school will be vacated. The
best way to succeed is to maximize the use of assets. Thus,
RIGHT OF SUCCESSION the priests hired dancing instructors and offered dancing
lessons to interested matrons and engaged the services of
If a stockholder or a member dies, withdraws, is insolvent, or macho dancing instructors. At least they can earn some
suffers incapacity, the corporation will still continue and not be more for two (2) hours.
dissolved.
Can they engage in maintaining and operating a dancing
When all the stockholders die, the heirs will become school?
stockholders. The rights, as well as the interests of the deceased A: No, because this is not incidental. Offering academic courses
stockholders will now be transferred to the heirs at the moment is the principal purpose of USC. Thus, the dancing school is
of death because succession starts at the moment of the death beyond its purpose.
of the deceased person.
Illustration 4.
POWERS, ATTRIBUTES, PROPERTIES Mining Company + Postal Service
These rights may be determined in the Articles of Incorporation, There was a mining company in the mountain and to travel
the Corporation Code, and the By-Laws. These are the sources from the mining site from the big city was very difficult. So
of rights and obligations of the stockholders. the EEs communicated with their families through mail (no
cellphones at this time). The mails were carried by the
Illustration 1. company facilities and delivered to the city. The EEs
Transportation Company + Big building for Garage requested that their mails could be coursed through the
company parcels.
If you are a transportation company, you are managing,
operating, and maintaining a fleet of buses. What do you The company agreed for it is for the benefit of the EEs
think your powers could be? provided that the EEs will make payment – a subsidized
A: Demand fare. You have the power to pursue and engage in mailing payment.
the business of transportation
LBC complained because the mining company is now
Your neighbors are complaining because your business is engaged in delivering parcels and mails. There is now a
transportation, but you also own a big building. Do you competition between the company engaged in mining and
think you can maintain a big building as a garage? the company carrying parcels.
A: Yes, it is allowed. Maintaining a big building is incidental to
the business. What do you think?
A: SC said that it is still incidental because at that time,
Illustration 2. transportation was very difficult, no more cellphones or any
Cement Factory + Electricity other mode of communication.
You are operating a cement factory. It requires a big volume Illustration 5.

of power, so much that the services of VECO may not be Railroad Company + Buying Tracts of Land
enough, prompting you now to maintain your own power
plant. A railroad company was buying tracts of land where they
could install their railings.
You now have your own power plant within the cement
factory. You have officers and employees residing within Somebody complained that they cannot expropriate since
your cement factory. Because you have extra power for the company’s power is merely to engage in railroad
your cement factory, you started selling this extra power to business. They argued that the company cannot compel
your EEs inside the compound. owners to sell their land to the company because only the
government has the power to do so.
If you are VECO, do you have a reason to complain?
A: The best approach would be to ask the EEs who they would SC Ruling: The buying of the lands is for the furtherance of the
want to provide electricity for them. They will definitely side with business of the railroad. It is incidental to being a railroad
the cement factory because the rates are subsidized. company.
The corporation may argue that it is not doing business per se Atty. Espedido: These are some of the several illustrations of
but only providing assistance to their EEs – extending facilities primary powers and incidental powers.
to their EEs.
Important: So long as you can justify that the act is incidental to

the main purpose, you are allowed to execute such power.

lOMoARcPSD|9536011
EFFECT OF INCOMPLETE (I) As to its nationality**

INCORPORATION PAPERS 1. Philippine national
2. Foreign corporation
Rule: Failure to acquire or comply with the requirements for an
issuance of a Certificate of Incorporation does not justify (A) AS TO PURPOSE
making it into a partnership.
(1) Public Corporation
Atty: Espedido: If the papers are not in order, the SEC will not created to govern a portion of a State
issue a Certificate of Incorporation. The incorporators will have
to make the necessary corrections. (2) Private Corporation – created for private ends
(a) Publicly listed – private corporations that are publicly
If the incorporators will not comply, the SEC will have to deny listed in the Philippine Stock Exchange which means
the issuance of a Certificate of Incorporation. their shares can be bought and sold on the PSE
Examples: San Miguel Corporation,
The incorporators cannot engage in business as a corporation. Ayala Land Corporation
They also cannot argue that they are now a partnership because
the intention is not to pursue a partnership but to organize a (b) Quasi-Public Corporations – private corporations
corporation. performing public functions
Example: VECO providing electricity
SEC. 3. CLASSES OF CORPORATIONS
(c) Government Owned and Controlled Corporations
Section 3. Classes of Corporations. Corporations formed or (GOCC) – created by Congress through a special
organized under this Code may be stock or nonstock charter for which the government is the majority
corporations. Stock corporations are those which have capital stockholder
stock divided into shares and are authorized to distribute to the Examples: PAGCOR, Landbank of the
holders of such shares, dividends, or allotments of the surplus Philippines, SSS, GSIS
profits on the basis of the shares held. All other corporations are
nonstock corporations. (B) UNDER THE REVISED CORPORATION CODE
VARIOUS TYPES OF CORPORATIONS (Outline) (1) Stock Corporation

Those which have capital stock divided into shares and
(A) As to purpose are authorized to distribute to the holders of such
1. Public Corporation shares, dividends, or allotments of the surplus profits
2. Private Corporation on the basis of the shares held.
(a) Publicly Listed It has capital stocks divided into shares and distributed
(b) Quasi-Public to the holders.
(c) Government Owned and Controlled A stock corporation is also considered as a
Corporation (GOCC) corporation for profit.
Purpose of dividing shares: Determine the share in
(B) Under the Revised Corporation Code the profits.
1. Stock Corporation
2. Non-Stock Corporation (2) Non-Stock Corporation
All other corporations; they do not issue shares and
(C) As to number of corporators do not distribute profits to its members.
1. Corporation Sole However, they still own profits for expenditures and to
2. One Person Corporation improve their facilities. They cannot distribute the
3. Corporation Aggregate profits to its members. They have to plough this back
to the corporation for the benefit of the members in
(D) Whether it is Open or Close terms of improvement of facilities.
1. Open Corporation
2. Close Corporation (C) AS TO NUMBER OF CORPORATORS
(E) As to Legal or Corporate Existence (1) Corporation Sole – one member or corporator; for purely
1. De jure corporation religious purposes
2. De facto corporation
(2) One Person Corporation – one member or corporator
(F) Whether it is for a religions purpose or not also but not limited to purely religious purposes
1. Ecclesiastical Corporation
2. Lay Corporation (3) Corporation Aggregate – consisting of more than one
corporator or member
(G) As to Formation
1. Domestic Corporation Basis why the State is liberal in the establishment of
2. Foreign Corporation religious corporations as a corporation sole: Constitutional
right to Freedom of Religion and Separation of Powers
(H) As to their relation to another corporation between the Church and the State.
1. Holding or Parent Corporation
2. Subsidiary Corporation Atty. Espedido: Any attempt of preventing anyone from
3. Affiliated Corporation exercising his religion, from establishing his own church, can be

lOMoARcPSD|9536011
considered as a violation to his freedom of religion. Thus, the (F) WHETHER IT IS FOR A RELIGIONS PURPOSE OR NOT
State would just want to know where you are located and the
funds that the church has earned. (1) Ecclesiastical Corporation
for religious purposes
Notes:
Corporation sole – one formed for the purpose of (2) Lay Corporation
administering and managing, as trustee, the affairs, purpose other than religion
property and temporalities of any religions
denomination, sect, or church, by the chief archbishop, **Other types of religious/charitable corporations:
bishop, priest, rabbi, or other presiding elder of such
religious denomination, sect or church. (3) Corporation Sole
incorporated by one person
(D) AS TO WHETHER IT IS OPEN OR CLOSE a corporation formed for the purpose of administering
and managing, as trustee, the affairs, properties and
(1) Open Corporation temporalities of any religious denomination, sect or
open to any person who may wish to become church, by the chief archbishop, bishop, priest, rabbi or
shareholders. Most of these are publicly listed. other presiding elder of such religious denomination,
sect or church.
(2) Close Corporation A corporation sole has no nationality but for the
limited to selected persons or members of a family. purpose of applying nationalization laws, nationality is
This qualification is contained in the Articles of determined not by the nationality of its presiding elder,
Incorporation (AOI) and the Stock Certificate. The stock but by the nationality of the its members constituting
certificate indicates that these holders shall not be allowed the sect in the Philippines.
to dispose the shares UNLESS he offers it to the existing o Thus, the Roman Catholic Church can
holders first. acquire lands in the Philippines even if it is
IOW, it cannot be an absolute prohibition. Otherwise, it headed by the Pope (Roman Catholic
will violate the right of an owner which includes the right to Apostolic, et. al. vs. Register of Deeds of
own, right to possess, and right to dispose. Davao City, G.R. No. L-8451)
Relative Prohibition – you are required to offer this to (4) Corporation Aggregate (Religious Society)
existing stockholders. Only when there are no A religious organization incorporated by more than one
existing stockholders that would buy that you can person
sell it to others.
(5) Eleemosynary Corporation
Atty. Espedido: Disqualifications on the sale of shares of a close One organized for a charitable purpose
corporation can be found in the articles of incorporation, or in the
certificates of stock. (G) AS TO FORMATION
For example, in the Stock Certificate, you may place a (1) Domestic Corporation
qualification that “The holder of these shares cannot sell these a corporation formed, organized or existing under the
shares UNLESS the existing holders exercise their right of first laws of the Philippines.
refusal xxx”
(2) Foreign Corporation
Note: formed under any laws other than those of the
Close corporation – one whose articles of Philippines
incorporation provide that:
1. All issued stock, exclusive of treasury shares, shall (H) AS TO THEIR RELATION TO ANOTHER
be held by persons not exceeding 20; CORPORATION
2. All issued stock shall be subject to one or more
specified restrictions on transfer; and (1) Parent Corporation
3. The corporation shall not list in any stock corporation which holds ownership of various
exchange or make any public offering of its stock corporations, thereby having control over such
of any class. corporations. It has the capacity to elect or control other
corporations.
Notwithstanding the foregoing, a corporation shall not ** A holding company is a parent corporation which has
be deemed a close corporation when at least 2/3 of its no other business aside from the holding of the shares
voting stock or voting rights is owned or controlled by of its subsidiaries, which it controls
another corporation which is not a close corporation.
(2) Subsidiary Corporation
(E) AS TO LEGAL OR CORPORATE EXISTENCE owned and controlled by the holding or parent
corporation. The holding corporation elects the Board
(1) De jure corporation of Directors (BOD) for the subsidiary.
corporation existing in fact or in law
(3) Affiliated Corporation
(2) De facto corporation those related to the parent corporation or subsidiary
existing in fact but not in law corporation

lOMoARcPSD|9536011
**NOTES: **(I) AS TO NATIONALITY
What is the difference between an affiliate and a PLACE OF INCORPORATION TEST:

subsidiary? Where the corporation was created:
A: The difference lies in the level of ownership of the parent
company in a certain corporation. (1) Domestic Corporation
(2) Foreign Corporation
The terms “affiliate” and “associate” corporation are used
synonymously to describe a company whose parent only CITIZENSHIP OF STOCKHOLDERS
possesses a minority stake in the ownership of the
company. (1) Philippine National
100% owned by the Filipino citizens, even if
On the other hand, a subsidiary is a business whose parent incorporated abroad.
holds a majority stake or is a majority shareholder of 50% Sec. 3, Foreign Investment Act of 1991 (R.A.
or more of all shares. Some subsidiaries are even wholly 7042):
owned, meaning the parent corporation owns 100% of the
subsidiary. Definition:
The term "Philippine national" shall mean a citizen
(4) Sister Company of the Philippines or a domestic partnership or
fellow subsidiary with respect to another subsidiary; association wholly owned by citizens of the
both owned by the parent corporation Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty
Although performing other activities, these activities are percent (60%) of the capital stock outstanding and
very much related or part of the other companies (e.g. entitled to vote is owned and held by citizens of the
they are part of the supply chain perhaps). Thus, if the Philippines; or a trustee of funds for pension or
owner of the company creates another corporation related other employee retirement or separation benefits,
to the other corporation, then it can be considered sister where the trustee is a Philippine national and at
companies. least sixty (60%) of the fund will accrue to the
benefit of the Philippine nationals: Provided, That
Illustration. where a corporation and its non-Filipino
stockholders own stocks in a Securities and
Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the
capital stocks outstanding and entitled to vote of
both corporations must be owned and held by
citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of
Directors of both corporations must be citizens of
the Philippines, in order that the corporations shall
be considered a Philippine national.
A trucking company is engaged in hauling products. The owner (2) Foreign-owned corporation
noted that the products are brought to various warehouses that Majority of the stockholdings are owned by
are owned by other people. Thus, the owner of the logistics foreigners, even if incorporated in the Philippines.
company decided to construct a warehouse.
TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDERS
The owner of the trucking company also convinced the producer (Applies when the corporation is not 100% owned by Filipino citizens)
and the manufacturer that he can assign someone to monitor
the products. Thus, a third business was made – Warehouse A. Control Test
Management. The owner also created another one as a At least 60% of the outstanding capital stock which
marketing arm, thus a Sales Force company. are entitled to vote are owned by Filipino citizens
Summary: So the Trucking Company here is the parent B. Grandfather Rule

corporation, and it owns the subsidiaries: (1) Warehouse If the percentage of Filipino ownership is less than
Company for leasing, a (2) Warehouse Management and a (3) 60%, then only the number of shares
Sales Force Company. These various businesses, in relation to corresponding to such percentage shall be
each other, are called sister companies and would constitute a counted as Philippine nationality.
complete chain – they are related to each other.
Narra Nickel vs. Redmont
Another example: Aboitiz Company as the owner of Union Bank, The control test is still the prevailing mode of determining
VECO, real estate, and many other activities. So these are the whether or not a corporation is a Filipino corporation, within the
subsidiaries of Aboitiz – the more generic term would be ambit of Sec. 2, Art. II of the 1987 Constitution. When in the mind
affiliates. of the Court there is doubt, based on the attendant facts and
circumstances of the case or in the 60-40 Filipino equity
ownership, then it may apply the Grandfather Rule.

lOMoARcPSD|9536011
What do you mean by “doubt”? This is not a circumvention of the law. It is a valid structure
A: “Doubt” is any circumstance which renders the beneficial UNLESS it is established that it is used to truly circumvent the
ownership and control of the corporation outside of Filipino law or the Constitution.
ownership. It is not when a corporation’s Filipino ownership falls
below 60%. Basis: The Foreign Investment Act, where it only requires that
60% of the investee corporation and investor corporation’s
Where does the 60% requirement apply to, the voting outstanding capital stock entitled to vote be owned by Filipino
shares or the outstanding shares? citizens, and that at least 60% of their Board of Directors should
Atty. Gaviola: The interpretation wherein the SC said that the be composed of Filipino citizens.
restriction must apply to each type of share (Gamboa vs. Teves,
G.R. 176579) is the correct interpretation. This is because when SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS
you say outstanding capital stock entitled to vote, that is very OR CHARTERS
general.
Section 4. Corporations Created by Special Laws or
You cannot say that preferred stocks are not entitled to vote in Charters. – Corporations created by special laws or charters
the election of directors. Only when they are deemed non-voting shall be governed primarily by the provisions of the special law
expressly can they be deprived of their right to vote, but only in or charter creating or applicable to them, supplemented by the
the election of directors. For all the other items enumerated in provisions of this Code, insofar as they are applicable.
the RCC, they are required to vote.
SEC. 5. CORPORATORS AND INCORPORATORS,
A/N: This was lifted from the IBL class of Atty. Gaviola. STOCKHOLDERS AND MEMBERS
**NOTES
Section 5. Corporators and Incorporators, Stockholders
and Members. – Corporators are those who compose a
NATIONALIZED ACTIVITY corporation, whether as stockholders or shareholders in a stock
corporation or as members in a nonstock corporation.
This is determined by looking at the Foreign Investment
Incorporators are those stockholders or members mentioned in
Negative List (FINL), which enumerates activities which are the articles of incorporation as originally forming and composing
limited to or reserved for Filipinos. It is a list of economic the corporation and who are signatories thereof.
activities whose foreign ownership is limited to a maximum of
40% of the equity capital. Of the enterprise engaged therein.
PARTIES INVOLVED IN THE ORGANIZATION OF A
If the activity is listed, then that activity can be performed even CORPORATION
by a corporation which is 100% foreign-owned, even if such
corporation was incorporated in the Philippines. Who are the persons involved in the organization of a
corporation?
Sec. 8 of RA 7042 (Foreign Investments Act of 1991) A: They are:
enumerates the activities that are limited to Filipinos. (1) Incorporators (4) Promoters
(2) Corporators (5) Underwriters
These activities include, but are not limited to: (3) Board of Directors/ (6) Founders
1. Natural resources exploration, development and use; Trustees
2. Public utility corporations;
3. Land ownership; INCORPORATORS
4. Educational institutions; and
5. Advertising companies. Incorporators are the organizers of the corporation upon its
inception. They are mentioned in the AOI as originally forming
Atty. Gaviola: It is an erroneous belief among foreigners and and composing the corporation, and who are signatories
their attorneys that they need Filipino stockholders in order to thereof.
incorporate in the Philippines.
Under the New Code, juridical persons can now be
Get rid of the notion that you need to have citizenship in order incorporators.
to incorporate because to be an incorporator, all that is required
is to be a resident. In fact, only a majority need to be residents. Under the Old Code, only natural persons can be incorporators.
Take note that a domestic corporation can be foreign-owned. CORPORATORS

This happens when a corporation incorporated in the Philippines
is composed of foreigners. In the same way, a foreign Corporators are those who fund the corporation. These refer to
corporation can be considered a Philippine national when 100% the stockholders, investors, and incorporators themselves. They
of its capital stock or its stockholders are Filipino citizens. are people who have interest over the corporation.
CORPORATE LAYERING Stockholders – in a stock corporation

Members – in a non-stock corporation
This is a type of arrangement whereby a corporation has for its
stockholder another corporation. (i.e. Corporation B is the BOARD OF DIRECTORS OR TRUSTEES
stockholder of Corporation A).
The Board of Directors or Board of Trustees are the group of
people who manage the corporation.

lOMoARcPSD|9536011
PROMOTERS **NOTES:
An underwriter is any party that evaluates and
The promoters promote the corporation itself. They convince the assumes another party’s risk for a fee. The fee is often
people to invest. They tell the people that they are organizing a commission, premium, spread, or interest.
such corporation. However, they are not committed to buy the Underwriting services are provided by some large
shares, and are purely salesmen. financial institutions, such as banks, or insurance or
investment houses, whereby they guarantee payment
**NOTES: in case of damage or financial loss and accept the
financial risk for liability arising from such guarantee.
Promoters are persons who, acting alone, or with others, take An underwriting arrangement may be created in a
initiative in founding and organizing the business or enterprise number of situations including insurance, issues of
of the issuer and received consideration thereof (Sec. 3.10, RA security in a public offering, and bank lending, among
8799, The Securities Regulation Code) others.
LIABILITY OF THE PROMOTER FOUNDERS
GEN: The promoter binds himself personally and assumes the The founders are those who came about the idea – they are the
responsibility of looking to the proposed corporation for think tanks of the corporation.
reimbursement.
As a matter of fact, they are given privilege. They are entitled to
XPNs: an exclusive right to vote and be voted for, but limited for 5 years
1. Express or implied agreement to the contrary only from date of inception of the Corporation.
2. Novation, not merely adoption or ratification, of the
contract What is the purpose of having the exclusive right to vote
and be voted for?
LIABILITY OF THE CORPORATION FOR THE PROMOTER’S A: To ensure that the corporation will eventually succeed
ACTS because they are the ones who envisioned the Corporation.
They have the idea of how the business shall proceed.
GEN: A corporation is not bound by the contract. A corporation,
until organized, has no life and no legal existence. It could not Thus, the laws provide that for a period of 5 years or less –
have had an agent (the promoter) who could legally bind it. they have the right to vote and be voted upon. NO ONE ELSE
have the right to nominate and elect. This is used to guide the
XPNs: A corporation may be bound by the contract if it makes infant corporation.
the contract its own by:
The certificate of the founders’ shares defines the privilege that
1. Adoption or ratification of the entire contract after the holders of this share shall have.
corporation
2. Acceptance of the benefits under the contract with **Notes on Founders’ Shares
knowledge of the terms thereof
3. Performance of its obligation under the contract Changes in founder’s share expressly provided that the
exclusive right to vote and be voted on founders share in the
Note: The contract must of course be one which is within the election of directors should not violate the Anti-Dummy Law and
powers of the corporation to enter. the Foreign Investments Act.
UNDERWRITERS Anti-Dummy Law

Persons not allowed to have an interest in nationalized
Underwriters are mostly banking companies. corporations often just nominate Filipino citizens to be legal
stockholders when in reality, it is the prohibited persons who are
As distinguished from promoters who have no commitment actually controlling the corporation. This is a violation of the Anti-
since they simply promote, underwriters have commitment such Dummy Law, and is a criminal offense.
that they guarantee the sale of stocks and if these were not sold,
they will be the ones who will buy the shares. The underwriters SEC. 6. CLASSIFICATION OF SHARES
therefore assume liability.
Section 6. Classification of Shares. – The classification of
Example: The underwriters commit that 60% of the stocks will shares, their corresponding privileges, or restrictions, and their
be bought. If they cannot sell such committed shares, they will stated par value, if any, must be indicated in the articles of
guarantee that they will buy such stocks themselves. incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of
What are roadshows? incorporation and in the certificate of stock.
A: Roadshows are usually done by big corporations. If you want
to promote the formation of a corporation, you may conduct a The shares in stock corporations may divided into classes or
roadshow. You go around the country or the world and do a series of shares, or both. No share may be deprived of voting
roadshow. rights except those classified and issued as “preferred” or
“redeemable” shares, unless otherwise provided in this Code:
You tell them about the corporation and the business, and Provided, That there shall always be a class or series of shares
convince them to join – usually accompanied by the with complete voting rights.
underwriters who help convince.

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Holders of nonvoting shares shall nevertheless be entitled to SEC. 8. REDEEMABLE SHARES

vote on the following matters:
Section 8. Redeemable Shares. - Redeemable shares may be
(a) Amendment of the articles of incorporation; issued by the corporation when expressly provided in the
(b) Adoption and amendment of bylaws; articles of incorporation. They are shares which may be
(c) Sale, lease, exchange, mortgage, pledge, or other purchased by the corporation. They are shares which may be
disposition of all or substantially all of the corporate purchased by the corporation from the holders of such shares
property; upon the expiration of a fixed period, regardless of the existence
(d) Incurring, creating, or increasing bonded indebtedness; of unrestricted retained earnings in the books of the corporation,
(e) Increase or decrease of authorized capital stock; and upon such other terms and conditions stated in the articles
(f) Merger or consolidation of the corporation with another of incorporation and the certificate of stock representing the
corporation or other corporations; shares, subject to rules and regulations issued by the
(g) Investment of corporate funds in another corporation or Commission.
business in accordance with this Code; and
(h) Dissolution of the corporation. SEC. 9. TREASURY SHARES
Except as provided in the immediately preceding paragraph, the
Section 9. Treasury Shares. - Treasury shares are shares of
vote required under this Code to approve a particular corporate
stock which have been issued and fully paid for, but
act shall be deemed to refer only to stocks with voting rights.
subsequently reacquired by the issuing corporation through
purchase, redemption, donation, or some other lawful means.
The shares or series of shares may or may not have a par value: Such shares may again be disposed of for a reasonable price
Provided, That banks, trust, insurance, and preneed companies,
fixed by the board of directors.
public utilities, building and loan associations, and other
corporations authorized to obtain or access funds from the
public whether publicly listed or not, shall not be permitted to What are “shares”?
issue no-par value shares of stock. A: Shares represent the interest or the investment of a
stockholder in a corporation.
Preferred shares of stock issued by a corporation may be given
preference in the distribution of dividends and in the distribution **NOTES:
of corporate assets in case of liquidation, or such other The terms “share” or “stock” may be used
preferences: Provided, That preferred shares of stock may be interchangeably to refer to shares of stock in a
issued only with a stated par value. The board of directors, corporation.
where authorized in the articles of incorporation, may fix the A share of stock is a unit of division of the capital stock
terms and conditions of preferred shares of stock or any series of a corporation. The stock represents:
thereof: Provided, further, That such terms and conditions shall 1. The right interest or right of the stockholder in the
be effective upon filing of a certificate thereof with the Securities management of the corporation through the
and Exchange Commission, hereinafter referred to as the exercise of his voting rights;
"Commission". 2. The interest or right of the stockholder in the
earnings of the corporation in the form of the
Shares of capital stock issued without par value shall be deemed dividends to be distributed (for a discussion on
fully paid and nonassessable and the holder of such shares shall dividends, see Sec. 42); and
not be liable to the corporation or to its creditors in respect 3. The interest or right of the stockholder in the
thereto: Provided, That no-par value shares must be issued for residual assets of the corporation upon its
a consideration of at least Five pesos (₱5.00) per share: dissolution.
Provided, further, That the entire consideration received by the A stockholder may own a share even if he is not holding
corporation for its no-par value shares shall be treated as capital a certificate of stock
and shall not be available for distribution as dividends.
How do we classify shares?
A corporation may further classify its shares for the purpose of A: Shares are classified as:
ensuring compliance with constitutional or legal requirements. (1) Common shares
(2) Preferred shares
(3) Par value shares
SEC. 7. FOUNDERS’ SHARES (4) No-par value shares
(5) Founder’s shares
Section 7. Founders’ Shares. – Founders’ shares may be (6) Redeemable shares
given certain rights and privileges not enjoyed by the owners of (7) Treasury shares
other stock. Where the exclusive right to vote and be voted for (8) Convertible shares
in the election of directors is granted, it must be for a limited (9) Voting shares
period not to exceed five (5) years from the date of incorporation: (10) Non-voting shares
Provided, That such exclusive right shall not be allowed if its (11) Shares in escrow
exercise will violate Commonwealth Act No. 108, otherwise
known as the "Anti-Dummy Law"; Republic Act No. 7042, DOCTRINE OF EQUALITY OF SHARES
otherwise known as the "Foreign Investments Act of 1991"; and
otherwise known as "Foreign Investments Act of 1991"; and Each share shall be equal in all respects to every other share,
other pertinent laws. except as otherwise provided in the AOI and stated in the
certificate of stock.

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**OTHER IMPORTANT PRINCIPLES TO REMEMBER **NOTES:

Stocks which are given preference by the issuing
(1) Authorized Capital Stock corporation in:
Refers to the amount of capital stock as specified in the (1) Distribution of dividends;
AOI. Additional shares may not be issued unless the AOI is (2) Distribution of the assets of the corporation in
amended by the vote of the stockholders. However, case of liquidation; or
unissued authorized shares may be issued at a later date (3) Such other preferences as may be stated in
without amendment of the AOI or approval of the the AOI which do not violate the Code.
shareholders. Unless the right to vote is clearly withheld, a preferred
stockholder would have such right as it is incident to
(2) Subscribed Capital Stock stock ownership.
It is the amount of capital stock subscribed (purchased), Limitations:
whether fully paid or not. It connotes an original subscription 1. Preferred shares can only be issued with par value
contract for the acquisition by a subscriber of unissued 2. Preferred shares must be stated in the AOI and in
shares in a corporation and would, therefore, preclude the the COS.
acquisition of shares by reason of subsequent transfer from 3. The BOD may fix the terms and conditions only
a stockholder or resale of treasury shares. when so authorized by the AOI, and such terms
and conditions shall be effective upon the filing of
(3) Outstanding Capital Stock a certificate with the SEC.
It is the portion of the capital stock which is issued and held
by persons other than the corporation itself. **PREFERENCE AS TO DIVIDENDS
(4) Paid-up Capital Stock Participating vs. Non-participating

The portion of the subscribed/outstanding capital stock that Those which, after getting their fixed
has been fully paid. dividend preference, share with the
Participating
common stocks with the rest of the
(5) Unissued Capital Stock dividends.
That portion of the capital stock that is not issued or Those which, after getting their fixed
subscribed. It cannot vote, and draws no dividends. Non- dividend preference, have no more
participating right to share in the remaining
(6) Legal Capital dividends with the common stocks.
It is the amount equal to the aggregate part value and/or Unless otherwise provided, preferred shares are deemed
issued value of the outstanding capital stock. When par non-participating.
value shares are issued above par, the share premium or
excess is not considered as a part of the legal capital. Cumulative vs. Non-cumulative
Regardless of lack of profits in any
In the case of no-par value shares, the entire consideration given year, and lack of declaration of
received forms part of the legal capital, and shall not be dividends, the arrears (amount of
available for distribution as dividends. dividends undeclared or unpaid) have
Cumulative
to be paid to the preferred stocks in a
(7) Shareholder’s Equity (Subscribed Capital) subsequent year (once profits are
That portion of the capital of the corporation that is made), before any dividends can be
composed of all the investments that the subscribers put in paid to the common stocks.
(meaning, for stock corporations issuing par value shares Entitlement to receipt of dividends
at a price above par, the share premium is included). It is Non-cumulative essentially depends on the declaration
also known as the subscribed capital of the corporation. of said dividends.
Unless otherwise stipulated, preferred stocks are deemed
COMMON VS. PREFERRED SHARES
cumulative.
COMMON SHARES
KINDS OF PREFERRED SHARES AS TO DIVIDENDS
Entitle the holders to a pro rata share in the profits of
(a) Preferred participating shares
the corporation without preference over the other
(b) Preferred cumulative shares
stockholders.
They are given voting rights
PREFERRED PARTICIPATING SHARES
**The most common type of shares, which enjoy no
preference, but the owners thereof are entitled to
Preferred shareholders already earned premium for their
management of the corporation (via the exclusive right
preferred shares and they still participate in the distribution of
to vote), and to equal pro-rata division of profits after
the common shares. They take both – they have preference and
preference. It represents a residual ownership interest
they also participate.
in the corporation.
Who can issue preferred shares?
PREFERRED SHARES
A: Every corporation can issue preferred shares.
Shares having certain rights and privileges not
CUMULATIVE PREFERRED SHARES
available to holders of common shares.
Shares which entitle the holder not only to the payment of
current dividends but also to dividends in arrears.

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Illustration. The entire consideration received by the corporation

Corporation has cumulative preferred shares. shall be treated as capital, and shall not be available
for distribution as dividends.
Year 1 – the corporation has not declared dividends The AOI must state the fact that the corporation issues
Year 2 – the corporation decided to declare dividends no-par value shares and the number of such shares
No-par shares cannot be issued as preferred stocks
In this case, if the stipulated dividend is not paid in Year 1, it
shall be added to the dividend which shall be due in Year 2 and Who cannot issue no-par value shares?
the accumulated dividends must be paid to the holder of said A: Corporations who have access to public funds, such as:
preferred share before any dividend may be paid to the holders (1) Banks;
of common stock. (2) Trusts;
(3) Insurance and pre-need companies;
Even if the Corporation has profits, is it obliged to give (4) Public utilities;
dividends? (5) Building and loan associations; and
A: No. (6) Other corporations authorized to obtain funds from the
public (whether publicly-listed or not)
If the Corporation does not declare dividends for a long
time, what does the BIR assess? **Note: Building and loan associations are organizations with
A: The BIR will assess the corporation for Improperly the object of accumulating money from their members. The
Accumulated Earnings Tax (IAET). money is then collected in periodical payments into the treasury
thereof, to be invested, from time to time, in loans to the
PAR VALUE VS. NON-PAR VALUE SHARES members upon real estate for home purposes.
PAR VALUE SHARES DISTINCTION BETWEEN PAR-VALUE AND NO-PAR VALUE

SHARES
Par value is the minimum issue price of a share of stock which
must be stated in the AOI and in the Certificate of Stock (COS). If the assets of the corporation have all been exhausted and
If the incorporators agreed to the price, that is the price at which there are still creditors, can the creditors go after the
the shares will be sold to the public. shareholders?
Who can issue par value shares? Non-Par Value Par-Value

A: Any stock corporation is free to issue par value shares as No – the creditors cannot go Yes – the creditors can go
indicated in its AOI. after such holders. The non- after the shareholders.
par value shares are
**NOTES: deemed fully paid. The subscribers are liable
These are shares with a stated value set out in the AOI. to corporate creditors for
This remains the same regardless of the profitability of their unpaid subscriptions
the corporation (in comparison, the market or fair value
of a share of stock fluctuates depending on the
company’s profitability). This gives rise to financial Can a corporation lower the par value of shares?
stability and is the reason why banks, trust A: No. This is because the value of the par value is stated in the
corporations, insurance companies and building and AOI, and changing it will mislead the public.
loan associations must always be organized with par
value shares. The practice of selling shares for a price lower than its par value
is called watering down of stocks, and these shares are known
NO-PAR VALUE SHARES as “watered stocks”.
These are shares without a stated value. WATERED STOCKS
You still have to pay for these shares, but its value is not stated These are stocks sold or issued at a price less than the stocks’
in the AOI and in the COS. There is no fixed value stated in the par value. The value of these shares is diluted, in that the public
Articles of Incorporation but issued for a consideration not less is not apprised of the real value of the corporation.
than five (5) pesos per share.
Illustration.
**NOTES:
A no-par share does not purport to represent any A corporation has 100Mn authorized capital shares, each with a
stated proportionate interest in the capital stock par value of P1.00.
measured by value, but only an aliquot part of the
whole number of such shares of the issuing corporation Normally, the public would expect that the corporation has
(Agbayani) authorized capital in the amount of P100,000,000 (100Mn
No-par value shares cannot have an issue price of less shares x P1.00 par value).
than P5.00 per share
Once issued, they shall be deemed fully paid and non- Now let’s say that the corporation initially issued 99.5Mn shares
assessable, and the holders of such shares shall not for P1.00, and issued the remaining 500k shares for P0.50 only.
be liable to the corporation or to its creditors in respect
thereto. How much is now the authorized capital of the corporation?
A: Still P100,000,000.

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But how much capital actually came in? What happens after the five-year limit is over?
A: Only P99,750,000. Founders shall have equal rights with the holders of common
shares.
Computation:
99,500,000 shares X P1.00 = P99,500,000 REDEEMABLE SHARES
500,000 shares X P0.50 = + 250,000
Total P99,750,000 These are shares which permit the issuing corporation to
redeem or purchase its shares.
What is the effect?
A: The corporation is misleading the public. It is not fair to the Redeemable shares are redeemable at a fixed date or at
public, and does not anymore reflect the actual capital structure the option of either the issuing corporation or the
of the corporation stockholder or both at a certain redemption price.
FOUNDER’S SHARES These shares may be issued by the corporation when

expressly provided in the articles of incorporation.
**These are shares, classified as such in the AOI, which are
given certain rights and privileges not enjoyed by the owners of They are shares which may be purchased by the
other stocks. corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of
Where exclusive right to vote and be voted for in the election of unrestricted retained earnings in the books of the
directors is granted, such right must be for a limited period not corporation, and upon such other terms and conditions
to exceed 5 years subject to the approval of the SEC. The 5- stated in the articles of incorporation and the certificate of
year period shall commence from the date of approval by the stock representing the shares, subject to rules and
SEC. regulations issued by the Commission.
What is the purpose for granting founders the exclusive What is the purpose of redeemable shares?
right to vote and be voted for? A: They are issued for the purpose of attracting capital.
A: To ensure that the corporation will eventually succeed
because they are the ones who envisioned the Corporation. **LIMITATIONS:
They have the idea of how the business shall proceed.
(1) Redeemable shares may be issued only when
Thus, the laws provide that for a period of 5 years or less – they expressly provided for in the AOI.
have the right to vote and be voted upon. NO ONE ELSE have (2) The terms and conditions affecting said shares must
the right to nominate and elect. This is used to guide the infant be stated both in the AOI and in the COS.
corporation. (3) Redeemable shares may be deprived of voting rights
in the AOI.
The certificate of the founders’ shares defines the privilege that (4) The corporation is required to maintain a sinking fund
the holders of this share shall have. to answer for redemption price if the corporation is
required to redeem.
What is the rule regarding founders’ rights and privileges? (5) The redeemable shares are deemed retired upon
A: They must be clearly expressed in the corporate charter, to redemption unless otherwise provided in the AOI.
provide adequate information to third parties dealing with the (6) Unrestricted RE is not necessary before shares can be
corporation. redeemed, but there must be sufficient assets to pay
the creditors and to answer for operations (Republic
What are some examples of special rights or privileges that Planters Banks vs. Agana, G.R. No. 51765, 1997)
may be given to founder’s shares that are not given to (7) Redemption cannot be made if such redemption will
common shares? result in insolvency or inability of the corporation to
A: These include: meet its obligations.
1) Preference in the payment of dividends and/or
distribution of assets in case of liquidation Atty. E.; instead of borrowing from banks, the corporation is
2) Right to convert the shares into other shares borrowing money from the public.
3) Right to cumulative dividends
There are many ways of acquiring funds from the corporation:
What is the purpose of the founder’s shares? 1. Borrow from the banks
A: It may be given to encourage organizers and promoters to 2. Borrow from the public
make large investments in the proposed corporation.
You have heard that bonds are floated, this is just the
Exclusive right to vote to be voted for corporation issuing bonds to the public, telling the public that if
Note: If the exclusive right to vote and be voted for in the you buy these bonds, we will buy this back from you in 5 years
election of directors is granted, such right must be limited for a with interest or premium. Or, redeemable shares, this is an
period not exceeding five (5) years. option to raise more money with the public.
The limit is non-extendible.
The limitation is designed to prevent possible abuse of the We distinguish redeemable shares from the bank, in that banks
Board. A lifetime term of the Board absolutely deprives are lenders and redeemable shareholders are investors.
other stockholders/members of the opportunity to
participate in the management of the corporation.

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What is the difference? So-called treasury shares, because they are now in the
A: Redeemable shareholders assume a risk, particularly that the custody of the treasurer. So what happens to these shares?
corporation will become insolvent before the expiration of the A: They become part of the capital.
redemption period.
And therefore, while before they were outstanding, are they
IOW, as far as the lender is concerned, the moment, the loan still so?
is due, he may collect. If the corporation has no cash, what A: Not anymore. They have been reunited with its parents, it’s
will the banks do? now back home, it’s no longer outstanding.
A: (1) Demand payment, or (2) Foreclose on the collateral.
However, may it still be entitled to dividends?
Can the corporations say: please do not get our capital? A: No. Because if they are allowed to be entitled to dividends, it
A: They cannot. would create a situation where the corporation would be paying
itself.
Bank says not our problem, our problem is to collect, if we
cannot collect, we get properties. However, because these are issued shares, would it have
the right to vote?
On the other hand, when we talk about redeemable shares? A: No, because otherwise, the current board would just use
A: If the corporation is insolvent, the shareholder cannot these to vote for themselves, because the board acts on behalf
demand redemption. of the corporation – manage the properties of the corporation,
since these are properties, they will use these properties to cast
So we can only demand when? votes in their favor pertaining to these shares. So this will allow
A: When we have profits, then we pay. incumbent directors to perpetuate themselves in office.
Can it be obliged to pay? BORROWING REDEEMABLE

A: Yes. That was your promise. To buy back the shares with a FROM A BANK SHARE
premium of course. Dealing with Dealing with investors
Party
lenders/creditors
So here’s the investor, here’s the lender. So that if the involved
investor now demands for the reacquisition of his shares Compel payment Demand payment on
because the due date has arrived, can the corporation say upon maturity the date of
that they will use their profits for another purpose? date without any redemption
A: No. conditions.
Condition: The
This is what the law calls what? In so far as the investor can compel
A: Unrestricted retained earnings. creditor is to redeem only when
concerned, once it there are profits. The
Can the corporation even refuse by saying we do not have is due and corporation is obliged
unrestricted RE? demandable, the to buy back the
A: No. creditor will compel shares with a
When
the corporation to premium.
Atty. Espedido: Restricted or not, if you have surplus, pay. The demandable
pay.
corporation has to pay, so long as there is surplus, unrestricted NOTE: Regardless
or not. whether it is restricted
or not, as long as
The only situation where the corporation can refuse to pay is there is surplus, it is
when the corporation is insolvent, otherwise, the corporation will obliged to pay.
be touching their capital and will be violating the trust fund
doctrine. Exception:
Corporation is
IOW, clearly, what is the difference between the investor insolvent
and the lender?
A: The investor takes a risk. No assumption of The investor takes the
risks; risk because the
What is that risk? corporation may or
A: The corporation will not redeem the shares if the corporation Assumption Lender can collect may not have retained
becomes insolvent. of Risk upon arrival of the earnings
due date without
However, since he is an investor, does he enjoy anything? any conditions
A: Rights to dividends during the period while he is still the
holder (before the redemption period comes), if dividends are Not entitled to During the period
declared. dividends; only while he is still the
paid for the holder (before the
On the other hand, if there are such dividends declared, can balance + interest period comes), he is
the lender also collect on such dividends? Distribution
an investor. Thus,
A: No, he cannot. of dividends
when dividends are
declared, he is
So, once reacquired, what happens? entitled to such.
A: The redeemable shares become treasury shares.

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TREASURY SHARES Reason: It is issued to gain more capital and the

public is aware that these are just redeemable
What are treasury shares? shares.
A: These are stocks and were fully paid, but were reacquired by
the corporation through: (6) It can be resold by the corporation
1) Purchase,
2) Donation, (7) It is not considered as outstanding shares because it
3) Sale, and is back to the corporation – it is in already
4) Other lawful means.
**NOTES:
Nature of Treasury Shares
Treasury shares are part of capital. When these shares were Such shares may be disposed of again for a reasonable
bought or reacquired, surplus money will be used and not capital price fixed by the BOD.
money. Otherwise, we will be violating the Trust Fund Doctrine. Treasury shares have no voting right as long as such
shares remain in the Treasury.
Being part of capital, the treasury shares can be sold again. As Pre-emptive right of stockholders in close corporations shall
to how much, it is the Board that will decide. extend to reissuance of treasury shares unless otherwise
provided in the AOI.
Special Features of Treasury Shares
Generally, is the corporation authorized to buy back all of
(1) Once reacquired, it shall form part of its capital as a its shares?
corporate asset. A: No.
(2) They can only be reacquired if there are unrestricted Why not?
retained earnings. A: It would violate the trust fund doctrine. Such that when you
keep expending funds to buy back all the shares, it would
(3) It is not entitled to dividends because in effect, the disadvantage creditors, because it will reach a point where the
corporation is paying itself, which is absurd. Otherwise, capital will used up.
it will involve double sale for the same shares.
THE TRUST FUND DOCTRINE
(4) It is not entitled to the right to vote because the The Trust Fund Doctrine means that the capital stock, properties
corporation is not a stockholder. If allowed and the and other assets of a corporation are regarded as equity in trust
BOD exercises such right as representative of the for the payment of corporate creditors.
corporation, it can be subject to abuses.
Stated simply, the trust fund doctrine states that all funds
If they are were voting shares when issued, now received by the corporation in payment of the shares of stock
that they are back, who may vote? shall be held in trust for the corporate creditors and other
Answer: NO ONE. Treasury shares have no voting stockholders of the corporation. Under such doctrine, no fund
rights. shall be used to buy back the issued shares of the stock except
only in instances specifically allowed by the Code. (Boman
If the law were to give them voting rights, since these Environmental Development Corporation vs. CA, G.R. No.
treasury shares are owned by the corporation, the BOD 77860, 1988)
necessarily will act on behalf of the corporation. If they
were given voting rights, the BOD will definitely vote for By way of exception, however?
them all the time. A: If it is specifically provided for in the AOI, such as redeemable
shares.
(5) They can only be reacquired if there are unrestricted
retained earnings. CONVERTIBLE SHARES
Unrestricted retained earnings – assets A type of preferred stock that the holder can exchange for a
less liabilities; not allocated for anything; predetermined number of common shares at a specified time.
absolutely free; no restrictions or
appropriations. VOTING VS. NON-VOTING SHARES
GEN: When it comes to treasury shares, the GEN: No share may be deprived of voting rights.
corporation is not always free to buy back the XPNs:
shares. It requires that there should be 1. Preferred non-voting shares;
unrestricted retained earnings, otherwise, the 2. Redeemable shares;
corporation will violate the Trust Fund Doctrine 3. Shares as provided by the Code (treasury shares)
because if they were to buy it back without
unrestricted retained earnings, the creditors There shall always be a class/series of shares which have
cannot go after the corporation to satisfy unpaid complete voting rights.
debts because there is no more capital to speak
of.
XPN: Redeemable Shares – which can be issued

regardless of WON there are unrestricted retained
earnings

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VOTING SHARES SHARES IN ESCROW
Shares that are provided with voting rights on any issue on the Issued or committed to a particular shareholder, but deposited
corporation. The voter can participate in any meeting and on any with a 3rd person or a deposit account pending the fulfilment by
issue that may be raised during the meeting. that 3rd person for which it was reserved of the conditions
expressly provided in the certificate of stocks
Reason: A shareholder is a part-owner of the corporation. Since
the shareholder cannot interfere with the management, he can Share is subject to an agreement; share is deposited with a 3rd
only exercise his ownership by voting on certain issues. As part- person to be kept by the depositary until the performance of a
owner, he has the right to protect his ownership. Hence, entitles certain condition.
him to vote.
TITLE II. INCORPORATION AND ORGANIZATION OF
NON-VOTING SHARES PRIVATE CORPORATIONS
Shares that are not provided with voting rights but subject to SEC. 10. NUMBER AND QUALIFICATIONS OF
exceptions. INCORPORATORS
Exceptions: Holders of non-voting shares shall nevertheless be Section 10. Number and Qualifications of Incorporators. –
entitled to vote on the following matters: Any person, partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in number, may
(1) Amendment of the articles of incorporation organize a corporation for any lawful purpose or purposes:
(2) Adoption and amendment of the bylaws Provided, That natural persons who are licensed to practice a
(3) Sale, lease, exchange, mortgage, pledge, or other profession, and partnerships or associations organized for the
disposition of all or substantially all of the corporate purpose of practicing a profession, shall not be allowed to
property organize as a corporation unless otherwise provided under
special laws. Incorporators who are natural persons must be of
Note: In determining whether there is a disposition of legal age.
all or substantially all of the corporate property, the
guide is when such sale already affects the operations Each incorporator of a stock corporation must own or be a
of the corporation. When the corporation could no subscriber to at least one (1) share of the capital stock.
longer carry out its business, then that will be the point
when it will have to be open for voting, including non- A corporation with a single stockholder is considered a One
voting shares. Person Corporation as described in Title XIII, Chapter III of this
Code.
SC ruled that 80% is considered “substantially all”.
Who are incorporators?
(4) Incurring, creating, or increasing bonded indebtedness A: They are the individuals who form the corporation. They are
(5) Increase or decrease of authorized capital stock typically nominated directors or members, who will initially
(6) Merger or consolidation of the corporation with another manage the corporation.
corporation or other corporations
(7) Investment of corporate funds in another corporation or Under the old law, there was a minimum requirement of 5
business in accordance with this Code; and incorporators, but under the new law, a single person may form
(8) Dissolution of the corporation a corporation.
Reason why a stockholder with non-voting shares is still However, for purposes of practicality and convenience, there
entitled to vote on these issues: remains the limit of not more than 15 incorporators in a stock
Because the fundamental contract of these parties is the Articles corporation. However, the number of trustees may be more than
of Incorporation. 15.
In obligations and contracts, we have learned that if we change Who can be incorporators?
the terms and conditions of the contract, we can novate the A: Natural and juridical persons.
contract. What is necessary in novation is the consent of both
parties. If you need to change anything in the AOI, you need For natural persons:
consent. All parties must be able to participate WON they agree 1) Must be of legal age
on the change of the agreement. 2) Must have capacity to contract
RIGHT OF APPRAISAL Note: The law does not prescribe a residency requirement.
Unlike the old code, majority of the incorporators need not
For those who dissent the proposed agreement, they could be residents of the Philippines.
exercise their right of appraisal. Such right can be exercised by
a stockholder who disagrees with the decision of the Board of What is the requirement for incorporators?
Directors to amend the Articles of Incorporation. The dissenting A: Whether natural or juridical, they must be subscribers and
stockholder can demand the corporation to buy back his shares have financial interest in the corporation.
at their fair market value.

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SEC. 11. CORPORATE TERM SEC. 12. CAPITAL STOCKS
Section 11. Corporate Term. – A corporation shall have Section 12. Minimum Capital Stock Not Required of Stock
perpetual existence unless its articles of incorporation provides Corporations. —Stock corporations shall not be required to
otherwise. have a minimum capital stock, except as otherwise specifically
provided by special law.
Corporations with certificates of incorporation issued prior to the
effectivity of this Code and which continue to exist shall have Authorized Capital Stock
perpetual existence, unless the corporation, upon a vote of its Refers to the maximum amount of capital which the corporation
stockholders representing a majority of its articles of will receive when it issues all its shares.
incorporation: Provided, That any change in the corporate right
of dissenting stockholders in accordance with the provisions of Subscribed Capital Stock
this Code. Refers to the committed amount of capital which the corporation
will receive from its existing subscribers
A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation: Provided, Paid-Up Capital
That no extension may be made earlier than three (3) years prior Refers to the amount of capital which the corporation already
to the original or subsequent expiry date(s) unless there are received from its subscribers. This represents the paid portion
justifiable reasons for an earlier extension as may be of the subscribed capital.
determined by the Commission: Provided, further, That such
extension of the corporate term shall take effect only on the day If you are a new corporation, how much should be
following the original or subsequent expiry date(s). subscribed?
A: The Revised Corporation Code does not require a minimum
A corporation whose term has expired may apply for revival of subscribed capital stock.
its corporate existence, together with all the rights and privileges
under its certificate of incorporation and subject to all of its Reason: To attract the formation of more business
duties, debts and liabilities existing prior to its revival. Upon organizations.
approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall Exception: However, the 25% subscribed capital stock is
be issued, giving it perpetual existence, unless its application for compulsory when there is an increase in the capital stock. Thus,
revival provides otherwise. it requires that at least 25% must be subscribed, and 25% must
be paid-up.
No application for revival of certificate of incorporation of banks,
banking and quasi-banking institutions, preneed, insurance and SEC. 13. CONTENTS OF THE ARTICLES OF
trust companies, non-stock savings and loan associations INCORPORATION
(NSSLAs), pawnshops, corporations engaged in money service
business, and other financial intermediaries shall be approved Section 13. Contents of the Articles of Incorporation. - All
by the Commission unless accompanied by a favorable corporations shall file with the Commission articles of
recommendation of the appropriate government agency. incorporation in any of the official languages, duly signed and
acknowledged or authenticated, in such form and manner as
GEN: A corporation shall have a perpetual existence. may be allowed by the Commission, containing substantially the
XPN: When the AOI provides otherwise. following matters, except as otherwise prescribed by this Code
or by special law:
When the Corporation was
Effect
Formed (a) The name of corporation;
The corporation shall have a
After 3 February 2019 perpetual existence, unless (b) The specific purpose or purposes for which the corporation
its AOI provides otherwise. is being formed. Where a corporation has more than one stated
The corporation shall be purpose, the articles of incorporation shall indicate the primary
deemed to have a perpetual purpose and the secondary purpose or purposes: Provided,
existence, unless the That a nonstock corporation may not include a purpose which
corporation, upon a vote of would change or contradict its nature as such;
its stockholders representing
Before 3 February 2019
a majority of its outstanding (c) The place where the principal office of the corporation is to
capital stock, notifies the be located, which must be within the Philippines;
SEC that they intend to retain
its original term pursuant to (d) The term for which the corporation is to exist, if the
the corporation’s AOI. corporation has not elected perpetual existence;
REVIVAL OF A CORPORATION (e) The names, nationalities, and residence addresses of the
incorporators;
Rule: A corporation whose term has expired may apply for a
revival of its corporate existence to the Commission. Upon the (f) The number of directors, which shall not be more than fifteen
approval by the Commission, the corporation shall be deemed (15) or the number of trustees which may be more than fifteen
revived and a certificate of revival of corporate existence shall (15);
be issued.
(g) The names, nationalities, and residence addresses of
persons who shall act as directors or trustees until the first

lOMoARcPSD|9536011
regular directors or trustees are duly elected and qualified in i. If it be a nonstock corporation
accordance with this Code; 1. the amount of its capital
2. the names, nationalities, and residential
(h) If it be a stock corporation, the amount of its authorized addresses of the contributors, and
capital stock, number of shares into which it is divided, the par 3. amount contributed by each
value of each, names, nationalities, and subscribers, amount
subscribed and paid by each on the subscription, and a j. Such other matters consistent with law and which the
statement that some or all of the shares are without par value, if incorporators may deem necessary and convenient.
applicable;
NAME OF THE CORPORATION (See also Sec. 17)
(i) If it be a nonstock corporation, the amount of its capital, the
names, nationalities, and residence addresses of the Essential to the existence of the corporation since it is through it
contributors, and amount contributed by each; and that the corporation can sue and be sued, and perform all legal
acts.
(j) Such other matters consistent with law and which the
incorporators may deem necessary and convenient. Importance: For identification purposes; the name is important
in order to distinguish it from other organizations.
An arbitration agreement may be provided in the articles of
incorporation pursuant to Section 181 of this Code.1âwphi1 A corporate name shall be disallowed by the SEC if the
proposed name is either:
The Articles of incorporation and applications for amendments 1. Identical or deceptively or confusingly similar to that of
thereto may be filed with the Commission in the form of an any existing corporation or to any other name already
electronic document, in accordance with the Commission's rule protected by law; or
and regulations on electronic filing. 2. Patently deceptive, confusing, or contrary to existing
laws
CONTENTS OF THE ARTICLES OF INCORPORATION
What are the limitations on the name of the corporation?
a. The name of the corporation; A: A corporation cannot use a name:
(1) That is already reserved or registered for the use of
b. The specific purpose or purposes for which the corporation another corporation;
is being formed. Where a corporation has more than one (2) That is protected by law;
stated purpose, the articles of incorporation shall indicate (3) That is contrary to law, rules and regulations;
the primary purpose and the secondary purpose or (4) That is identical or confusingly similar with other
purposes: Provided, That a nonstock corporation may not corporations’ names.
include a purpose which would change or contradict its
nature as such; Illustration 1.
Haplos-Haplos Corporation vs. Hapyod-Hapyod
c. The place where the principal office of the corporation is to Corporation
be located, which must be within the Philippines;
If the business of the corporation was to provide most
d. The term for which the corporation is to exist, if the effective and comfortable massage in the city, that’s the
corporation has not elected perpetual existence; principal business, what do you want to call your
corporation? Remember, it has to be descriptive of the
e. The names, nationalities, and residential addresses of the corporation.
incorporators; A: Haplos-Haplos Corporation.
f. The number of directors, which shall not be more than So that, if one corporation is already registered as Haplos-
fifteen (15) or the number of trustees which may be more Haplos Corporation, do you think the SEC will allow you
than fifteen (15); register as Hapyod-Hapyod Corporation?
A: No, because if it confuses the public, then the SEC will now
g. The names, nationalities, and residential addresses of allow it.
persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified Illustration 2.
in accordance with this Code; Planter’s Peanuts vs. Grower’s Peanuts
h. If it be a stock corporation: What about Planter’s Peanuts and Grower’s Peanuts?

1. the amount of its authorized capital stock Atty. Espedido: It violates!
2. number of shares into which it is divided
3. the par value of each, Illustration 3.
4. names, nationalities, and residence addresses of Efficascent Oil
the original subscribers
5. amount subscribed and paid by each on the One corporation came out with “Efficient Oil Corporation”,
subscription, and do you think somebody will complain?
6. a statement that some or all of the shares are A: Yes! The Efficascent Oil will complain. Especially if you follow
without par value, if applicable; the color scheme, samot na!

lOMoARcPSD|9536011
Illustration 4. franchise – which is intended for the carrying out of a specific

United Nations Food Corporation business.
United Nations Food Corporation, what do you think? The fact that you are given a primary franchise is not a
A: No. It would fall under limitation #2. guarantee that you can immediately pursue any business that
you want, especially if the business that you are trying to pursue
If you are a fan of food, what will go into your mind if you would involve public interest or public utilities.
see that name?
A: This must be run by the United Nations. Purpose?
A: It’s important to state this in the AOI, because it would serve
So if the SEC will have to examine that, it might be as the guideline within which the corporation can operate.
disapproved. This is misleading. The public might believe
this is operated, maintained and run by the United Nations. Otherwise?
The best chefs in the world, if you were the SEC, what would A: It could mislead the public.
be a good name? So that if you perform something not within the purpose?
A: International Food Corporation. A: It would consist an ultra vires act.
Atty. Espedido: In practice, SEC will ask you to submit three Ultra vires acts?
corporation names to save time. So that, if one name is not A: These acts will be deemed as void acts, and not binding on
allowed or accepted by SEC, then they will just pick from the the corporation. It’s beyond your powers as a corporation.
remaining names submitted.
So all these must be indicated in the AOI. Could you change
**NOTES: any one of these?
A: It’s possible.
Right to a Corporate Name – A corporation’s right to use
its corporate and trade name is a property right, a right in How?
rem, which it may assert or protect against the whole world A: Majority of the BOD + 2/3 of the OCS or the members.
in the same manner as it may protect its tangible property
against trespass or conversion. What happens to the 1/3 shares?
A: They may exercise their right of appraisal. (Purchase shares
Statutory Limitations on the Form and Use of Corporate at fair market value).
Name:
1) In respect to a corporate name already registered or Atty. Espedido: As a creation of law, the corporation have to
otherwise protected by law, the proposed name must work within the boundaries of the privilege extended by the
not be: State.
a. Identical
b. Deceptively or confusingly similar; It will serve as a guide in determining WON the corporation is
2) Patently deceptive, confusing or contrary to law; acting within its authority or powers as indicated in the Articles
3) Must contain either: of Incorporation.
a. “Incorporated” or “Inc.”, or
b. “Corporation” or “Corp.”; If it is beyond the powers prescribed by law – it becomes an ultra
4) Must not consist solely of generic, geographical and/or vires act which is deemed void, meaning it is not binding.
descriptive terms and names; and
5) Must comply with other policies provided by SEC **NOTES:
Memorandum No. 14, Series of 2000 A corporation can only have one (1) primary purpose.
However, it can have several secondary purposes.
Doctrine of Secondary Meaning as Applied to Corporation A corporation has only such powers are as expressly
Names – The doctrine of secondary meaning originated in the granted to it by law and by its AOI, those which may be
field of trademark law. Its application has, however, been incidental to such conferred powers, those reasonably
extended to corporate names since the right to use a corporate necessary to accomplish its purposes, and those which
name to the exclusion of others is based upon the same may be incident to its existence.
principle which underlies the right to use a particular trademark A corporation may not be formed for the purpose of
or tradename (Lyceum of the Philippines vs. CA, G.R. No. practicing a profession like law, medicine or
101897, 1993) accountancy.
PURPOSE CLAUSE Limitations on the Purpose of a Corporation

(1) A non-stock corporation may not include a purpose
(1) Primary Franchise – right to exist as a corporation which would change or contradict its nature as such.
(2) Secondary Franchise – intended for the carrying out (2) The SEC shall reject the AOI or disapprove any
of a specific business amendment when the stated purpose/s of the
corporation are patently unconstitutional, illegal,
Atty. Espedido: Once you are issued a certificate of immoral, or contrary to government rules or
incorporation, this is called primary franchise – this means you regulations.
have the right to exist as a corporation.
Stretching the Purpose Clause
If you are dealing or engaged in the jeepney business, you will It is legal to stretch the meaning of the purpose clause to cover
also be given another franchise by the LTFRB – a secondary new and unexpected situations. There is no need to amend the

lOMoARcPSD|9536011
AOI to accommodate new situations. (SEC Opinion No. 08-24, allowed since the corporation ceases to exist
October 22, 2008) already, and there is nothing to extend.
PRINCIPAL OFFICE INCORPORATORS
Importance: For the SEC to be able to locate and identify where (See Sec. 5 for a discussion on incorporators).
the corporation is and to know where to serve summons and
notices. (See Sec. 10 for the number & qualifications of incorporators.)
Address? Why, what’s important about it? DIRECTORS/TRUSTEES

A: Because this address is where summons and notices will be
sent by the court/s or SEC or other government agencies. If you are a stockholder, can you be a director?
A: Yes, to be a director, it is a requirement that such is at least
So that you would know where to serve. Alright. a holder of one (1) share.
So that if the address is “somewhere in the hinterlands of Requirements for a President and Vice President
Mindanao”? President – must be a director, thus, a holder of 1 share
A: This would not be in compliance with the requirement Vice President – does not require to be a holder of 1
because it would be impossible to identify the exact location, share but once he assumes presidency, he is required
because it’s not specific. to be a holder of at least 1 share
**NOTES: **NOTES:
Salient Points: Qualifications for Directorship/Trusteeship Under Other

1. Must be located in the Philippines; Sections of the RCC
2. Must specify the city or province;
3. The street/number is not necessary; Trustees of educational
4. Important in determining venue in an action by or institutions organized as
against the corporation, or on determining the province Board of Trustees of nonstock corporations shall
where a chattel mortgage of shares should be Educational Institutions not be less than 5 nor more
registered. (Sec. 106) than 15, provided that the
number of trustees shall be
Principal Office Address in multiples of 5.
The AOI must state the place where the principal office of the All stockholders are
corporation is to be located, which must be within the considered members of the
Philippines. Close Corporations board of directors, thus
allowing 20 members in the
Purposes of Fixing the Principal Office Address board
1. To fix the residence of the corporation in a definite A corporation sole may be
place, instead of allowing it to be ambulatory; formed by the chief
2. For purposes of the stockholders’ or members’ archbishop, bishop, priest,
meeting; Corporation Sole
minister, rabbi, or other
3. To determine the place where the books and records (Sec. 108)
presiding elder of such
of the corporation are ordinarily kept. religious denomination, sect
or church
TERM OF EXISTENCE The single stockholder shall
One Man Corporation
be the sole director and
(See Sec. 11.) (Sec. 121)
president of the OPC
**NOTES: The RCC provides for the minimum qualifications and

The corporate term is necessary in determining at disqualifications of the directors/trustees which the
what point in time the corporation will cease to corporation may not do away with. However, the by-laws
exist or have lost its juridical personality. may provide for additional qualifications and
Sec. 139 of the Code provides that a corporation disqualifications.
shall nevertheless be continued as a body (See Sec. 46. Contents of Bylaws) – A private corporation
corporate for three (3) years after the effective may provide the following in its by-laws:
date of dissolution, for the purpose of: (f) The directors’ or trustees’ qualifications, duties and
1. Prosecuting and defending suits by or responsibilities
against it; For further discussion:
2. Enabling it to settle and close its affairs; o See Sec. 22 for Qualifications of Directors
3. Dispose of and convey its property; and o See Sec. 26 for Disqualifications of Directors
4. Distribute its assets.
Extension of corporate term prior or earlier than 3
years is allowed only if there is justifiable reason.
On the day of the expiration of the corporate term,
extension is still allowed. However, after the
expiration of its term, extension is no longer

lOMoARcPSD|9536011
SEC. 14. FORM OF ARTICLES OF INCORPORATION Eight: That the number of shares of the authorized capital stock-
stated has been subscribed as follows:
Section 14. Form of Articles of Incorporation. - Unless
otherwise prescribed by special law, the articles of incorporation Name of
No. of
Amount Amount
of all domestic corporations shall comply substantially with the Nationality Shares
Subscriber Subscribed Paid
following form: Subscribed
Articles of Incorporation
of
_____________________
(Name of Corporation)
The undersigned incorporators, all of legal age, have voluntarily (Modify No. 8 if shares are with no-par value. In case the
agreed to form a (stock) (nonstock) corporation under the laws corporation is nonstock, Nos. 7 and 8 of the above articles may
of the Republic of the Philippines and certify the following: be modified accordingly, and it is sufficient if the articles may be
modified accordingly, and it is sufficient if the articles state the
First: That the name of said corporation shall be amount of capital or money contributed or donated by specified
"_________________", Inc. Corporation or OPC"; persons, stating the names, nationalities, and residence
addresses of the contributors or donors and the respective
Second: That the purpose or purposes for which such amount given by each.)
corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes); Ninth: That _______________________ has been elected by
the subscribers as Treasurer of the Corporation to act as such
Third: That the principal office of the corporation is located in the until after the successor is duly elected and qualified in
City/Municipality of _______________, Province of accordance with the bylaws, that as Treasurer, authority has
______________________, Philippines; been given to receive in the name and for the benefit of the
corporation, all subscriptions, contributions or donations paid or
Fourth: That the corporation shall have perpetual existence or a given by the subscribers or members, who certifies the
term of ___________ years from the date of issuance of the information set forth in the seventh and eighth clauses above,
certificate of incorporation; and that the paid-up portion of the subscription in cash and/or
property for the benefit and credit of the corporation has been
Fifth: That the names, nationalities, and residence addresses of duly received.
the incorporators of the corporation are as follows:
Tenth: That the incorporators undertake to change the name of
Name Nationality Residence the corporation immediately upon receipt of notice from the
Commission that another corporation, partnership or person has
acquired a prior right to the use of such name, that the name
has been declared not distinguishable from a corporation, or that
it is contrary to law, public morals, good customs or public policy.
Eleventh: (Corporations which will engage in any business or

Sixth: That the number of directors or trustees of the corporation activity reserved for Filipino citizens shall provide the following):
shall be ___________________; and the names, nationalities,
and residence addresses of the first directors or trustees of the "No transfer of stock or interest which shall reduce the
corporation are as follows: ownership of Filipino citizens to less than the required
percentage of capital stock as provided by existing laws shall be
Name Nationality Residence allowed or permitted to be recorder in the proper books of the
corporation, and this restriction shall be indicated in all stock
certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these

Articles of Incorporation, this ______ day of _____, 20___ in the
City/Municipality of _________________, Province of
________________, Republic of the Philippines.
Seventh: That the authorized capital stock of the corporation is
____________________ PESOS (₱______), divided into ____
shares with the par value of ___________________ PESOS
(₱_____________) per share. (In case all the shares are without
par value): That the capital stock of the corporation is
__________________ shares without par value.
(In case some shares have par value and some are without par
value): That the capital stock of said corporation consists of (Names and signatures of the incorporators)
________________________________ shares, of which
_______________________ shares have a par value of ____________________________
___________________________PESOS (₱_______) each, (Name and signature of Treasurer)
and of which ____________________ shares are without par
value.

lOMoARcPSD|9536011
**CERTIFICATE OF INCORPORATION What are unrestricted retained earnings?

A: The surplus profits of the corporation which are not allocated
The SEC has the ministerial duty to approve an application for for anything.
registration and issue the Certificate of Incorporation provided
all the requirements of law with respect to the AOI are complied IMPROPERLY ACCUMULATED EARNINGS
with. The corporation to avoid double taxation may not declare
dividends.
A corporation commences to have corporate existence and
juridical personality and is deemed incorporated only from the Illustration.
moment the SEC issues to the incorporators a Certificate of Travelling to Europe as an incentive instead of declaring
Incorporation under its official seal. dividends
SEC. 15. AMENDMENT OF THE ARTICLES Instead of declaring dividends, they will not declare dividends
and tell all the stockholders “we will go to Europe as your
Section 15. Amendment of Articles of Incorporation. - incentive, and undergo training and observe the latest trends.
Unless otherwise prescribed by this Code or by special law, and You can bring your family.”
for legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote of Everybody travelled to Europe. They were given pocket
the board of directors or trustees and the vote or written assent money and per diem. Did they distribute dividends?
of the stockholders representing at least two-thirds (2/3) of the A: No dividends distributed, yet the stockholder enjoyed the part
outstanding capital stock, without prejudice to the appraisal right from the corporation.
of dissenting stockholders in accordance with the provisions of
this Code. The articles of incorporation of a nonstock Will they be taxed?
corporation may be amended by the vote or written assent of A: If the government is aware that this is being done, the
majority of the trustees and at least two-thirds (2/3) of the government can charge them for IAET (Improperly Accumulated
members. Earnings Tax).
The original and amended articles together shall contain all They must declare the dividends, otherwise, they will be
provisions required by law to be set out in the articles of penalized by the BIR.
incorporation. Amendments to the articles shall be indicated by
underscoring the change or changes made, and a copy thereof What do they do now?
duly certified under oath by the corporate secretary and a A: They can present expansion plans. This is a restriction of
majority of the directors or trustees, with a statement that the their earnings. IOW, they can say that they do not have
amendments have been duly approved by the required vote of unrestricted earnings because these are earmarked already for
the stockholders or members, shall be submitted to the future expansions.
Commission.
Another Exception: Loan condition – borrowing huge amounts
The amendments shall take effect upon their approval by the of money from the bank. When you loan from the bank, the bank
Commission or from the date of filing with the said Commission imposes a lot of conditions. Usually, one of the conditions
if not acted upon within six (6) months from the date of filing for imposed is that the corporation cannot declare dividends without
a cause not attributable to the corporation. the consent of the bank. The bank wants to be sure that it can
collect its credit.
How do we amend the Articles of Incorporation?
A: Initiated by the Board itself. WHEN AMENDMENT TAKES EFFECT
What are the requirements for amending the AOI? What happens after the amendment?
A: A: It requires the approval by the SEC to take effect.
(1) By a majority vote of the Board of Directors or Board of
Trustees When will it take effect?
(2) Vote or the written assent of the stockholders of at least A:
2/3 representing the outstanding capital stocks (1) From date of approval by the SEC
(2) From of filing when there is inaction by the SEC
What is the option of the 1/3 of the OCS or members that within 6 months from filing
dissented?
A: Dissenting stockholders may exercise their APPRAISAL **NOTES
RIGHT.
Limitations
APPRAISAL RIGHT 1. Requirements imposed by the Code or by special laws
Right of the dissenting stockholder to leave the 2. Must be for a legitimate purpose
corporation by determining the value of his shares, and 3. Must be approved by the directors/trustees, and the
demand the corporation to buy back his shares at their stockholders/members through the vote requirement
fair market value (FMV) 4. Appraisal right
Another instance where the corporation can buy back 5. Both the original and the amended articles together
the shares must contain all the provisions required by law to be set
Note: But unlike redeemable shares, in this case, the out in the articles
dissenting stockholder can be paid only if there are 6. Will take effect only:
unrestricted retained earnings.

lOMoARcPSD|9536011
a. Upon their approval by the SEC by the 4. Percentage of Filipino ownership of capital stock under
issuance of a certificate of amended articles; existing laws or the Constitution is not complied with.
or
b. From the date of filing with the SEC, if the **INDUSTRIES REQUIRING PRIOR AUTHORITY BEFORE
SEC did not act upon it within 6 months from INCORPORATION (REGULATED CORPORATIONS)
the date of filing for a cause not attributable to
the corporation. 1. Banks
2. Banking and quasi-banking institutions
Procedure 3. Pre-need, insurance and trust companies
1. The original and amended articles together shall 4. Non-stock savings and loan associations (NSSLAs)
contain all provisions required by law to be set out in 5. Pawnshops
the AOI 6. Other financial intermediaries
2. The articles, as amended, shall be indicated by
underscoring the change/s made Note: These industries cannot incorporate or apply for
3. A copy shall be submitted to the SEC: amendment without the prior authority of the government
a. Duly certified under oath by the corporate agencies governing or controlling them. (Ex. Certificate to
secretary and a majority of the directors or Incorporate from the BSP before incorporating a bank)
trustees
b. Stating the fact that the amendment/s have The Certificate of Incorporation is to be attached to the Articles
been duly approved by the required vote of of Incorporation.
the stockholders or members
**NOTES
SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR
AMENDMENTS Only substantial and not strict compliance is required.
The above grounds are not exclusive. Example of another
Section 16. Grounds When Articles of Incorporation or ground is the capital requirement.
Amendment May be Disapproved. The Commission may If there is no valid ground for disapproval, the SEC is duty-
disapprove the articles of incorporation or any amendment bound to approve the same, it being the SEC’s ministerial
thereto if the same is not compliant with the requirements of this duty given the right to association.
Code: Provided, That the Commission shall give the
incorporators, directors, trustees, or officers as reasonable time **DUE PROCESS IN THE REJECTION OF THE AOI
from receipt of the disapproval within which to modify the
objectionable portions of the articles or amendment. The Before rejecting the AOI, the SEC should give the incorporators
following are ground for such disapproval: reasonable time within which to correct or modify the
objectionable portions of the articles or amendments.
(a) The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein; Any decision of the Commission rejecting the AOI or
disapproving any amendment thereto is appealable by Petition
(b) The purpose or purposes of the corporation are patently for Review to the CA in accordance with the pertinent provisions
unconstitutional, illegal, immoral or contrary to government rules of the Rules of Court.
and regulations;
SEC. 17. CORPORATION NAME
(c) The certification concerning the amount of capital stock
subscribed and/or paid is false; and Section 17. Corporation Name. - No corporate name shall be
allowed by the Commission if it is not distinguishable from that
(d) The required percentage of Filipino ownership of the capital already reserved or registered for the use if another corporation,
stock under existing laws or the Constitution has not been or if such name is already protected by law, rules and
complied with. regulations.
No articles of incorporation or amendment to articles of A name is not distinguishable even if it contains one or more of
incorporation of banks, banking and quasi-banking institutions, the following:
preneed, insurance and trust companies, NSSLAs, pawnshops
and other financial intermediaries shall be approved by the (a) The word "corporation", "company", incorporated", "limited",
Commission unless accompanied by a favorable "limited liability", or an abbreviation of one of such words; and
recommendation of the appropriate government agency to the
effect that such articles or amendment is in accordance with law. (b) Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or number
**GROUNDS TO DISAPPROVE INITIAL APPLICATION FOR of the same word or phrase.
INCORPORATION AND AMENDMENT OF ARTICLES
The Commission upon determination that the corporate name
1. Articles or amendment is not substantially in accordance is: (1) not distinguishable from a name already reserved or
with the form prescribed by law; registered for the use of another corporation; (2) already
2. The purpose/s of the corporation is patently protected by law; or (3) contrary to law, rules and regulations,
unconstitutional, illegal, immoral, or contrary to government may summarily order the corporation to immediately cease and
rules and regulations. desist from using such name and require the corporation to
3. Certification concerning the amount of capital stock register a new one. The Commission shall also cause the
subscribed and/or paid is false. removal of all visible signages, marks, advertisements, labels
prints and other effects bearing such corporate name. Upon the

lOMoARcPSD|9536011
approval of the new corporate name, the Commission shall Illustration:

issue a certificate of incorporation under the amended name. Trade Name: Penshoppe
Corporate Name: Golden ABC
If the corporation fails to comply with the Commission's order,
the Commission may hold the corporation and its responsible **GROUNDS TO QUESTION CORPORATE NAME
directors or officers in contempt and/or hold them
administratively, civilly and/or criminally liable under this Code (1) Complainant corporation has acquired prior right over the
and other applicable laws and/or revoke the registration of the use of such corporate name; and
corporation. (2) Proposed name is either:
a. Identical;’ or
**REQUIREMENTS FOR A VALID CORPORATE NAME b. Deceptively or confusingly similar to that of any
existing corporation or to any other name already
(1) Distinguishable from a name already reserved or registered protected by law; or
for the use of another corporation. c. Patently deceptive, confusing or contrary to
existing laws.
T/N: A name is not distinguishable even if it contains one or
more of the following: **TEST IN DETERMINING IDENTITY/SIMILARITY
(a) The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”, or an If it has the tendency to mislead a person using ordinary care
abbreviation of one of such words; and and discrimination.
(b) Punctations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, What if the corporation desires to incorporate a subsidiary?
spacing, or number of the same word or phrase. Atty. Gaviola: Usually you will have the same name. The SEC
allows it, provided that the corporation which had a priority right
(2) One that is not yet protected by law; will send you a letter of consent. In this case, you cannot reserve
your name online. You will have to write a letter to the SEC main
(3) Not contrary to law, rules, and regulations. office in Manila to basically grant permission for the subsidiary
to use the name of the parent. So, just because it’s similar, it’s
Atty. Gavi: Upon determination by the Commission that the automatically not allowed. So, if the corporation with the prior
corporate name violates either of the three requirements, it may right consents, then, it will be allowed. But it has to be proven
summarily order the corporation to immediately cease and that there is a parent-subsidiary/affiliate.
desist from using such name, and to register a new one. It shall
also cause the removal of visible signages, marks, ads, etc. See also discussion of Corporate Name under Sec. 13.
bearing such corporate name.
SEC. 18. REGISTRATION, INCORPORATION AND
Upon approval of the new corporate name, the Commission COMMENCEMENT OF CORPORATION EXISTENCE
shall issue a certificate of incorporation under the amended
name. Section 18. Registration, Incorporation and
Commencement of Corporation Existence. - A person or
**EFFECT OF FAILURE TO COMPLY WITH SEC ORDER (in group of persons desiring to incorporate shall submit the
the last paragraph) intended corporate name to the Commission for verification. If
the Commission finds that the name is distinguishable from a
The corporation and its responsible directors or officers may be name already reserved or registered for the use of another
held: corporation, not protected by law and is not contrary to law, rules
1. In contempt, and/or and regulation, the name shall be reserved in favor of the
2. Be administratively, civilly and/or criminally liable incorporators. The incorporators shall then submit their articles
under the Code and other applicable laws, and/or of incorporation and bylaws to the Commission.
3. May result in the revocation of the corporation’s
registration If the Commission finds that the submitted documents and
information are fully compliant with the requirements of this
Atty. Gaviola: Late December 2017, SEC came out with a new Code, other relevant laws, rules and regulations, the
regulation concerning corporate names. Under the Intellectual Commission shall issue the certificate of incorporation.
Property Code, the moment you create a trade name and start
using a trade name, it is already protected even if it is not yet A private corporation organized under this Code commences its
registered under the Intellectual Property Code. But under this corporate existence and juridical personality from the date the
new regulation, if the corporation is doing business under a trade Commission issues the certificate of incorporation under its
name different from its corporate name, the trade name should official seal thereupon the incorporators, stockholders/members
be included in its AOI. In that regard, the protection granted by and their successors shall constitute a body corporate under the
Sec. 17 of the RCC is extended to that trade name. name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the
What is the effect if the trade name is not included in the corporation is sooner dissolved in accordance with law.
AOI?
A: SEC Rules provide that such trade name can be used by After the requirements are complied with, the SEC shall now
some other corporations subject to the consent of the owner of issue the Certificate of Incorporation.
the trade name.
Note: The trade name and corporate name need not be the
same.

lOMoARcPSD|9536011
What would the issuance of the Certificate of Incorporation with the requirements to organize a corporation as provided by
mean? law.
A: It is considered the birth of the corporation and the
corporation commences its juridical personality. If someone really wants to question the existence of this
corporation, it should only be the Solicitor General representing
Importance: The COI is the best evidence of the corporation’s the government, who is supposed to extend the privilege. Only
existence. the Solicitor General can question the existence of the
corporation through a quo warranto.
We can now classify ourselves as what kind of corporation?
A: It will now become a de jure corporation – which is a Rule: The State must bring a direct proceeding to question the
corporation in fact and in law. validity of its corporate existence through the Solicitor General
by filing a quo warranto proceeding. Its existence as a
SEC. 19. DE FACTO CORPORATION corporation cannot be collaterally attacked either by the State or
by private individuals.
Section 19. De Facto Corporations. - The due incorporation of
any corporation claiming in good faith to be a corporation under SEC. 20. CORPORATION BY ESTOPPEL
this Code, and its right to exercise corporate powers, shall not
be required into collaterally in any private suit to which such Section 20. Corporation by Estoppel. - All persons who
corporation may be a party. Such inquiry may be made by the assume to act as a corporation knowing it to be without the
Solicitor General in a quo warranto proceeding. authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof:
What is a de jure corporation? Provided, however, That when any such ostensible corporation
A: it is one created with substantial conformity to the mandatory is sued on any transaction entered by its as a corporation or on
statutory requirements in the Corporation Code of the any tort committed by it as such, it shall not be allowed to use
Philippines. on any its lack of corporate personality as a defense. Anyone
who assumes an obligation to an ostensible corporation as such
What is a de facto corporation? cannot resist performance thereof on the ground that there was
A: An association of persons existing under a valid law under in fact no corporation.
which it may be incorporated after having attempted in good faith
to incorporate, and assuming corporate powers (Seventh Day What is a corporation by estoppel?
Adventist Conference Church of Southern Phils. Vs. A: A group of persons who assume to act as a corporation
Northeastern Mindanao Mission of Seventh Day Adventists, knowing it to be without authority to do so, who shall be liable as
Inc., GR. No. 150416, 1950) general partners for debts, liabilities and damages incurred or
arising as a result thereof.
What are the requisites to be considered a de facto
corporation? **NOTES:
A: A group of persons which holds itself out as a corporation and
(1) There is a valid law that deems to establish a enters into a contract with a third person on the strength of such
corporation; appearance cannot be permitted to deny its existence in an
(2) Substantial compliance with the requirements or a action under said contract.
colorable attempt to organize a corporation under such
law; “One who assumes an obligation to an ostensible corporation as
(3) Good faith on the part of the corporation in exercising such, cannot resist performance thereof on the ground thereof
corporate powers. that there was in fact no corporation.”
Illustration. These are corporations who have exercised rights as a

Group exercised good faith in substantially complying corporation and has undertaken obligations as a corporation,
with the requirements – De Facto Corporation even without validly incorporating. In which case, the persons
who made up the corporation are estopped from claiming that
A group of five (5), after signing their Articles of Incorporation they are not. But they cannot, because there is no real
and having it notarized, told someone else to file it at the SEC corporation, they will not be liable as a corporation. They will be
and did not bother to follow up. It did not even tell anyone to liable as partners. They will be solidarily liable in their personal
check on the papers. Nevertheless, it went to say that it is now capacity.
a corporation since they have executed the articles. They
assumed credit with a supplied, and the supplier failed to deliver, Lack of corporate personality is not a defense that it can avail.
despite the transaction.
Requirements of a Corporation by Estoppel:
They secured everything and applied with all the requirements.
They were able to receive the certificate of incorporation. They (1) Representation by a group to the public;
entered into the same transaction above. The supplier argued (2) Knowing that they do not have the authority to act as a
that the corporation cannot sue them because the suppliers corporation; and
went to SEC and discovered that the AOI did not contain any (3) Third parties contracting with them are induced to
information on its capitalization (which is a fatal defect). believe that they have the authority to act as a
corporation.
Can the suppliers file a motion to dismiss?
A: No. In this case, the corporation is considered a de facto **NOTE:
corporation because of its good faith in substantially complying Estoppel is a defense available only to third persons against the
ostensible corporation. When there is no third person involved,

lOMoARcPSD|9536011
and the conflict arises only among those assuming the form of a Illustration 1.
corporation, who therefore know that it has not been registered, No papers were submitted to SEC
there is no corporation by estoppel. (Lozano vs. De Los Santos,
G.R. No. 125221, 1997) There were 5 individuals who did not submit anything to SEC
and entered into a transaction with someone else.
Illustration.
Group merely executed the articles and later transacted Can they be considered as a corporation?
with a supplier – Corporation by Estoppel A: No. There is no corporation at all.
A group of five (5), after signing their Articles of Incorporation Illustration 2.

and having it notarized, told someone else to file it at the SEC Five people misrepresented themselves as a corporation
and did not bother to follow up. It did not even tell anyone to and borrowed money from a bank
check on the papers. Nevertheless, it went to say that it is now
a corporation since they have executed the articles. They If the five of them went to the bank and told the bank that we
assumed credit with a supplied, and the supplier failed to deliver, they are a corporation – they called themselves the “Omnibus
despite the transaction. Corporation”. The bank lent them money. However, they failed
to pay the bank and sued them as the Omnibus Corporation.
Can they sue the supplier? The lawyer of the Omnibus Corporation filed a motion to dismiss
A: Yes, they can sue the supplier as a CORPORATION BY arguing that it has no juridical personality.
ESTOPPEL, but not as a corporation de facto. ICAB, there is no
substantial attempt at organizing a corporation – merely Can the bank sue them as a corporation?
executing the articles is not an attempt. A: Yes, they are deemed a corporation by estoppel.
CORPORATION DE FACTO VS. What happens to the Motion to Dismiss?

CORPORATION BY ESTOPPEL A: It shall not be granted on the ground that they are considered
as a corporation by estoppel
Corporation de Corporation by
Facto Estoppel Who will pay the amount?
A corporation that A group of persons A: They will be treated as general partners – they will be
exists in fact, but not who assume to act solidarily liable.
in law. as a corporation
knowing it to be So what is the point of complying with all of these
without authority to requirement when they will be only treated on as a
do so, who shall be corporation?
Definition A: The law treats them as a corporation by reasons of equity. It
liable as general
partners for debts, is not for purposes of giving them the privilege under the
liabilities and Revised Corporation Code but only for establishing their liability.
damages incurred or IOW if they are not treated as corporation, the loan will not be
arising as a result paid.
thereof.
1. There is a valid 1. Representation Illustration 3.
law that deems by a group to the The Corporation by Estoppel lends money to someone;
to establish a public; debtor fails to pay
corporation;
2. Knowing that Let’s reverse the situation. Somebody borrowed from the five
2. Substantial they do not have people because they misrepresented themselves as a
compliance the authority to corporation. The debtors did not pay. So the Omnibus
with the act as a Corporation are now demanding payment from the debtor. The
requirements or corporation; and debtor filed a motion to dismiss arguing that they
a bona fide misrepresented themselves as a corporation.
attempt to 3. Third parties
Requisites Will the motion to dismiss be entertained?
organize a contracting with
corporation them are A: No. The debtor likewise cannot free itself from his liability of
under such law; induced to the unpaid debts by invoking that he transacted with a
and believe that they corporation by estoppel.
have the
3. Good faith on authority to act Atty. Espedido: Bottom line: Once you have enjoyed certain
the part of the as a corporation. advantages, you cannot now question the existence of that
corporation in corporation by estoppel. You cannot now say “I will not pay you
exercising because you are not a corporation”.
corporate
powers. This is taken in a sense that a 3rd party cannot take advantage
of the fact that the lender is not a corporation. In the same
manner that the corporation by estoppel itself cannot pursue any
transaction because it does not have any juridical personality.

lOMoARcPSD|9536011
But if that relationship ripens into a transaction, by rule of equity, transaction and only insofar as the parties are
that relationship may be recognized and the parties may be concerned.
afforded a protection of the law. (2) Outside of that, it does not enjoy any privilege of a
corporation at all.
IOW, a corporation by estoppel is established only between the
parties. It does not have a juridical personality. The relationship QUESTIONING THE VALIDITY OF CORPORATE
only exists between the parties. We are not saying that they EXISTENCE
gained juridical personality. Only that the law gives protection.
RULE ON EQUITY requires that the rights of the parties Rule: Assuming that a de facto corporation actually exists, its
must be protected. existence as a corporation cannot be collaterally attacked either
by the State or by private individuals.
Illustration 4.
No substantial compliance of the requirements The State must bring a direct proceeding to question the validity
of its corporate existence through the Solicitor General by filing
There is another group that has signed and executed their AOI a quo warranto proceeding.
and notarized it. After being authorized, they now entered into a
transaction. Why the State?
Can they be considered as a corporation? A: A corporation is a creation by law. It is a privilege granted by
A: We have to qualify. If it is shown that they have substantially the State so that it is only the State that can take it away. It is
complied with the requirements in good faith, they will be the state that issues the Certificate of Incorporation. If it does not
considered as a de facto corporation. issue, only the State can say that you do not exist as a
corporation. For all intents and purposes, the de facto
However, in the facts at hand, it was not mentioned that they corporation is considered as existing insofar as the public is
substantially complied with the requirements. They did not even concerned, except the State.
file the requirements. There act only ended upon the
notarization. ICAB, there was no honest intention. **NOTES
Illustration 5. GOOD FAITH

Substantial compliance of the requirements and good faith
of the corporation are both present The issuance of the COI is essential to the claim of good
faith. An association of persons to claiming to exercise the
The group failed to indicate the capital of the corporation. powers of a corporation knowing that no COI had yet been
However, for reasons we do not know, the examiners of the SEC issued to them cannot claim to be exercising such powers
issued them an Articles of Incorporation. in good faith. (Hall vs. Piccio, G.R. No. L-2598, 1950)
Believing now that they received the juridical personality, is If after incorporation, the incorporators discovered that they
it now a corporation? have not complied substantially with the law and still
A: It could now be considered as a de facto corporation because continued transacting business as a corporation, without
there was substantial compliance and good faith on the part of doing anything to correct the defect, the privilege of a de
the corporation. facto existence can no longer be invoked in good faith.
HOWEVER, if they were subsequently notified of the defects of PURPOSES OF THE DE FACTO DOCTRINE
the requirements they have submitted and they still failed to
comply with the requirements. They will not be considered as a 1. To promote the security of business transactions and
corporation de facto because it lacks the element of good faith to eliminate quibbling over irregularities.
2. A third person dealing with a corporation will rarely be
BUT PRIOR to that notification from the SEC, believing that it prejudiced if the company is recognized as a
fulfilled the requirements and it proceeded into entering the corporation in spite of minor defects in formation.
transactions – they are considered a corporation de facto. 3. Seldom would it be just to allow a wrongdoer to quibble
over such objections to escape liability or wrongdoing.
What do you think is the justification of the law for treating 4. It would be unjust to allow a claimant against a
them as a corporation de facto? supposed company to assert the individual liability of
A: For stability of business transactions – this is to promote innocent passive investors on the ground of flaws in the
security of business transaction and to eliminate quibbling over formal steps of incorporation, when they have
irregularities. It is also for the protection of the 3rd persons and attempted in good faith to comply with the statutory
consideration of equity. requirements and the objecting party is not prejudiced.
(Villanueva, Corporate Law)
REASONS FOR TREATING A CORPORATION BY
ESTOPPEL AS A CORPORATION WHEN DE FACTO DOCTRINE DOES NOT APPLY
(1) Principle of Equity 1. A corporation whose purpose is prohibited by law or is

(2) Unjust Enrichment – “No one shall unjustly enrich himself contrary to public policy;
at the expense of another.” 2. A corporation created for the practice of learned
profession in the absence of a law expressly permitting
LIMITATIONS the organization of such corporations. (Note: The
(1) The law only recognizes the transaction and the business organization for the practice of profession
rights of the parties in relation to that particular shall be by particular partnership.)

lOMoARcPSD|9536011
INSTANCES WHEN THERE IS A DE FACTO CORPORATION EFFECT OF FAILURE TO ORGANIZE AND COMMENCE
1. Failure to give the notice required by the statue for the Rule: When the corporation does not formally organize and
meeting for its organization; commence its business within five (5) years FROM the date of
2. Failure to fix and limit the amount of capital stock of the its incorporation – the Certificate of Incorporation (COI) will be
company at the first meeting; deemed revoked or cancelled on the day following the end of
3. Failure to issue stocks; the five-year period
4. Informalities in the proceedings of corporate meetings;
5. Lack of Certificate of Organization filed or executed; EFFECT OF FAILURE TO OPERATE
6. Lack of elected BOD;
7. Irregularities with respect to the number, term, place of Rule: If the corporation becomes subsequently inoperative for at
residence, and of meeting of the Board of Directors; least five (5) consecutive years – AFTER due notice and
8. Some of the persons elected as directors are hearing, the Commission will place the Corporation under
disqualified; and delinquent status
9. In general, when there is a defect in the organization of
the corporation and not on its creation (Chung Ka Bio NOTE: There is no automatic revocation. The SEC will place the
vs. IAC, G.R. No. 71837, 1988) corporation under a delinquent status and the delinquent
corporation shall be given a period of two (2) years to resume
CONSEQUENCE OF DE FACTO STATUS the operations and comply with the prescribed requirements of
the Commission.
For all intents and purposes, a de facto corporation has all the
same rights, powers, obligations, and liabilities as a de jure Once complied – the delinquent status is lifted and the
corporation. The only difference is that the due incorporation of corporation will have de jure status
a de facto corporation may be directly inquired into by the
Solicitor General in a quo warranto proceeding. Failure to comply – cause the revocation of the Corporation’s
Certificate of Incorporation
Conversely, in contrast to a de facto corporation, a de jure
corporation can successfully resist a suit brought by the State GROUNDS FOR SUSPENSION
challenging its existence.
(a) The articles of incorporation or any amendment thereto is
SEC. 21. EFFECT OF NON-USE OF CORPORATE not substantially in accordance with the form prescribed
CHARTER AND CONTINUOUS INOPERATION herein;
(b) The purpose or purposes of the corporation are patently
Section 21. Effects of Non-Use of Corporate Charter and unconstitutional, illegal, immoral or contrary to government
Continuous Inoperation. - If a corporation does not formally rules and regulations;
organize and commence its business within five (5) year from (c) The certification concerning the amount of capital stock
the date of its incorporation, its certificate of incorporation shall subscribed and/or paid is false; and
be deemed revoked as of the day following the end of the five (D) The required percentage of Filipino ownership of the capital
(5)-year period. stock under existing laws or the Constitution has not been
complied with.
However, if a corporation has commenced its business but (E)
subsequently becomes inoperative for a period of at least five TITLE III. BOARD OF DIRECTORS/TRUSTEES AND
(5) consecutive years, the Commission may, after due notice OFFICERS
and hearing, place the corporation under delinquent status.
The law makes a distinction between ownership and
A delinquent corporation shall have a period of two (2) years to management. The board (management) controls, operates
resume operations and comply with all requirements that the and exercises the powers of the corporation, while the
Commission shall prescribed. Upon the compliance by the owners periodically elect, or when demanded by the
corporation, the Commission shall issue an order lifting the circumstances replace the board.
delinquent status. Failure to comply with the requirements and
resume operations within the period given by the Commission The Corporation Code follows the stakeholder-centered
shall cause the revocation of the corporation's certificate of rather than the shareholder-centered model. Under this
incorporation. model, owners are only one of the many corporate
stockholders, who have diverse and varied interests. The
The Commission shall give reasonable notice to, and coordinate corporation, through its board, must take into account and
with the appropriate regulatory agency prior to the suspension rank such interests in its actions.
or revocation of the certificate of incorporation of companies
under their special regulatory jurisdiction. Who are the corporation’s stakeholders?
A: They include but are not limited to:
After the Issuance of the Certificate of Incorporation (1) Creditors
(1) The stockholders will convene to elect the Board of (2) Employees
Directors. (3) Customers
(2) Once the BOD is elected, they will convene to have set (4) Suppliers
of officers. (5) Government
(6) Community where the corporation operates
Whom do we elect?
A: President, Secretary, Treasurer, all officers listed in the by-
laws of the corporation.

lOMoARcPSD|9536011
Note: Stakeholders are different from shareholders. from among the members of the corporation. Each director and
trustee shall hold office until the successor is elected and
Shareholders are those individuals or entities who own the qualified. A director who ceases to own at least one (1) share of
corporation by holding the corporation’s share of stocks. On the stock or a trustee who ceases to be a member of the corporation
other hand, stakeholders are those who have an interest in the shall cease to be such.
operations of the corporation, an interest which is not
necessarily pecuniary or financial. While a shareholder is always The board of the following corporations vested with public
a stakeholder, a stakeholder is not always a shareholder. interest shall have independent directors constituting at least
twenty percent (20%) of such board:
**DOCTRINE OF CENTRALIZED MANAGEMENT
(a) Corporations covered by Section 17.2 of Republic Act No.
All business of the corporation shall be conducted and all its 8799, otherwise known as "The Securities Regulation Code",
properties shall be controlled and held by the Board of Directors namely those whose securities are registered with the
or Trustees. A corporation can act only through its directors and Commission, corporations listed with an exchange or with
officers. Acts of management pertain to the board and those of assets of at least Fifty million pesos (50,000,000.00) and having
ownership to the stockholders. (PSE vs. Litonjua, G.R. No. two hundred (200) or more holders of shares, each holding at
204014, 2016) least one hundred (100) shares of a class of its equity shares;
While stockholders and members are entitled to receive profits, (b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
the management and the direction of the corporation are lodged engaged in money service business, preneed, trust and
with their representatives and agents – the board of insurance companies and other financial intermediaries; and
directors/trustees. Acts of management pertain to the board;
and those of ownership to the stockholders/members. (Tan vs. (c) Other corporations engaged in businesses vested with public
Sycip, G.R. No. 153468, 2006) interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which are
The concentration in the board of the powers of control of germane to the objective and purpose of requiring the election
corporate business and of appointment of corporate officers and of an independent director, such as the extent of minority
managers is necessary for efficiency in any large organization. ownership, type of financial products or securities issued or
Stockholders are too numerous, too scattered, and unfamiliar offered to investors, public interest involved in the nature of
with the business of a corporation to conduct its business business operations, and other analogous factors.
directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and An independent director is a person who apart from
supervise the conduct of corporate business. (Filipinas Port vs. shareholdings and fees received from any business or other
Go, G.R. No. 161886, 2007) relationship which could, or could reasonable be received to
materially interfere with the exercise of independent judgment in
The power to purchase real property is vested in the Board of carrying out the responsibilities as a director.
Directors or Trustees. While a corporation may appoint agents
to negotiate for the purchase of real property needed by the Independent directors must be elected by the shareholders
corporation, the final say will have to be with the Board, whose present or entitled to vote in absentia during the election of
approval will finalize the transaction. A corporation can only directors. Independent directors shall be subject to rules and
exercise its powers and transact its business through its Board regulations governing their qualifications, disqualifications,
of Directors, and through its officers and agents when voting requirements, duration of term and term limit, maximum
authorized by a board resolution or by its by-laws. (Sps. Firme number of board membership and other requirements that the
vs. Ukal Enterprises and Development Corp., G.R. No. 146608, Commission will prescribed to strengthen their independence
2003) and align with international best practices.
WHEN DOCTRINE OF CENTRALIZED MANAGEMENT NOT **QUALIFICATIONS FOR A DIRECTOR

APPLICABLE
(1) Must own at least 1 share of stock.
1. In the case of an Executive Committee duly authorized in By ownership, what is required is legal ownership
the by-laws; which is determined through the stocks and
2. Where a corporate officer acts within the scope of his transfer book reflecting one’s name as the owner
authority under the by-laws or board resolution; or holder thereof. Beneficial ownership is not
3. In case of close corporations, the stockholders may necessary.
directly manage the business of the corporation instead, if
the AOI so provides. (2) Must not possess any of the disqualifications (See Sec.
26.).
SEC. 22. QUALIFICATIONS OF THE BOD/BOT
Note: Majority of the directors must be residents of the
Section 22. The Board of Directors or Trustees of a Philippines. Majority, not all. There is no citizenship requirement,
Corporation; Qualification and Term. - Unless otherwise except for nationalized industries. Even foreigners can be voted
provided in this Code, the board of directors or trustees shall as directors.
exercise the corporate powers, conduct all business, and control
all properties of the corporation.
Directors shall be elected for a term of one (1) year from among
the holders of stocks registered in the corporation's book while
trustees shall be elected for a term not exceeding three (3) years

lOMoARcPSD|9536011
INDEPENDENT DIRECTOR The wisdom of their decision, whether bad or good, cannot be
reversed by the stockholders. Otherwise, it is useless to put
Who are independent directors? them there only to be reversed by the stockholders. However, it
A: They are persons believed to be of independent mind. No does not mean that they can decide on certain business
relationship at all with the corporation except for some token judgments by disregarding all existing limitations.
shareholdings.
**NOTES:
Instances when an Independent Director is required:
(1) Corporations vested with public interest such as GEN: Directors cannot be held liable for mistakes or errors in
financial institutions or corporations that have access the exercise of their business judgment as long as they acted in
to public funds, borrow from the public, or corporations good faith, with due care and prudence. Contracts entered into
that issue or float bonds – they solicit capital from the by the BOD are binding upon the corporation and courts will not
public interfere.
(2) Corporations covered under the Securities Regulation XPNs:

Code, namely: (1) If the contracts are so unconscionable and
(b) Securities registered with the Commission oppressive as to amount to a wanton destruction
(c) Corporations listed with an exchange of the rights of the minority. (Ingersoll vs. Malabon
(d) Corporations with assets of at least 50M Sugar, G.R. No. L-27770, 1927)
pesos, and having 200 or more holders of (2) If they violate their duties under Sec. 30 (director
shares, each holding at least 100 shares of a willfully and knowingly assents to patently unlawful
class of its equity shares acts of the corporation, or are guilty of gross
negligence or bad faith); and
(3) Banks, quasi-banks, NSSLAs, pawnshops, (3) If they violate Sec. 33 (disloyalty of a director who
corporations engaged in money service business, acquires for himself a business opportunity that
preneed, trust and insurance companies, and other should have belonged to the corporation, unless
financial intermediaries his act is ratified by a 2/3 vote of the stockholders).
Note: Independent Directors shall make up at least 20% of the CONSEQUENCES OF THE BUSINESS JUDGMENT RULE
board such that when there are 10 members of the BOD, it
requires at least two independent directors. 1. The resolution, contracts and transactions of the board
cannot be overturned or set aside by the stockholders or
COMPLIANCE OFFICER members, and not even the courts under the principle that
the business of the corporation has been left to the hands
Rule: Other than the President, Treasurer, and Secretary, a of the Board.
compliance officer is also appointed in corporations vested with 2. Directors and duly authorized officers cannot be held
public interest. personally liable for acts or contracts done with the exercise
of their business judgment.
ELECTION CONTESTS
XPNs:
- Must follow the prescribed procedure in the by-laws, a. When the Code expressly provides otherwise;
including the period of instituting the same. b. When the directors or officers acted with fraud,
- The matter should be referred to arbitration, if provided for gross negligence or bad faith;
in the by-laws or the charter. c. When the directors or officers act against the
- In the absence of such procedure and/or period in the by- corporation in conflict of interest situations.
laws, the election contest must be filed within 15 days from
the date of election. REMEDIES IN CASE OF MISMANAGEMENT
POWERS OF THE BOARD a. Removal of directors pursuant to Sec. 27.

b. Derivative suit or complaint filed with the RTC.
3-Fold Powers or Authority of the Board c. Receivership.
(1) Corporate powers d. Injunction if the act has not yet been done.
(2) Conduct all business e. Dissolution if abuse amounts to a ground for quo
(3) Control or administer all properties of the corporation warranto but the SolGen refuses to act.
Nature of the Powers of the Board: Generally, the powers of Note: Dean Villanueva opined that a derivative suit may be an
the BOD cannot be delegated. exception to such Rule: this occurs when it is apparent that the
Board is not in a position to validly exercise its business
Exception: Ministerial functions judgment for the protection of the corporation, e.g.:
a. When the Board itself has committed an act
PRINCIPLE OF BUSINESS JUDGMENT RULE causing damage to the corporation, or
b. When the Board is placed in a conflict of interests
Under this principle, the stockholders cannot review the scenario whereby it is unlikely that it would use
decisions of the Board. If they do not want the decision of the such business discretion to file such suit for the
Board, they cannot go to court and change the decision. best interest of the corporation.
Atty: Espedido: The BOD can tell the stockholders that they
have no authority to question or change their decision.

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LIMITATIONS OF THE POWERS OF THE BOARD

If no election is held, or the owners of majority of the outstanding
It is subject to limitations imposed by: capital stock or majority of the members entitled to vote are not
(1) Constitution present in person, by proxy, or through remote communication
(2) Laws or not voting in absentia at the meeting, such meeting may be
(3) By-laws adjourned and the corporation shall proceed in accordance with
(4) Articles of Incorporation Section 25 of this Code.
NATURE OF THE BOARD OF DIRECTOR’S POWER The directors or trustees elected shall perform their duties as
prescribed by law, rules of good corporate governance, and
Their power is original – it comes from the law or the State. It is bylaws of the corporation.
the law which defines the Board’s powers. So long as the power
is exercised within the law, nobody can question this. HOW ELECTIONS ARE CONDUCTED
However, if the Board’s decision is illegal, the Business Normally, how do we replace officers?
Judgment Rule does not mean that they could do anything even A: Through an election.
if it is illegal. Business judgment rule is confined to the decision
of the board purely on business, and within the boundaries of Who calls the meeting?
the law, within the boundaries of the AOI. A:
(1) It is called by the secretary
SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES a. On the order of the President
b. By a written demand of the stockholders
Section 23. Election of Directors or Trustees. - Except when representing at least a majority of the
the exclusive right is reserved for holders of founders' shares outstanding capital stock, or a majority of
under Section 7 of this Code, each stockholder or member shall the members entitled to vote
have the right to nominate any director or trustee who possesses
all of the qualifications and none of the disqualifications and (2) Called by any stockholder or member of the
none of the disqualifications set forth in this Code. corporation signing the demand by directly
addressing the stockholders or members – if there
At all elections of directors or trustees, there must be present, is no secretary, or the secretary despite demand,
either in person or through a representative authorized to act by refuses or fails to call the meeting
written proxy, the owners of majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members **When are the elections held?
entitled to vote. When so authorized in the bylaws or by a A: Elections must be held once every year. The Code does not
majority of the board of directors, the stockholders or members provide when the first election of directors or trustees shall be
may also vote through remote communication or in absentia: held. It authorizes the corporation to provide in the by-laws the
Provided, That the right to vote through such modes may be time for the holding of the annual election of directors or
exercised in corporations vested with public interest, trustees.
notwithstanding the absence of a provision in the bylaws of such
corporations. Who can elect?
A: Majority of the stockholders
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for Rule: At all elections of directors or trustees, there must be
purposes of quorum. present, either in person or through a representative authorized
to act by written proxy, the owners of majority of the outstanding
The election must be by ballot if requested by any voting capital stock, or if there be no capital stock, a majority of the
stockholder or member. members entitled to vote. When so authorized in the bylaws or
by a majority of the board of directors, the stockholders or
In stock corporations, stockholders entitled to vote shall have members may also vote through remote communication or in
the right to vote the number of shares of stock standing in their absentia. [Section 23, paragraph 2]
own names in the stock books of the corporation at the time fixed
in the bylaws or where the bylaws are silent at the time of the Shareholders or members must be present either:
election. The said stockholder may: (a) vote such number of (a) In person;
shares for as many persons as there are directors to be elected; (b) Through a representative authorized to act by written
(b) cumulate said shares and give one (1) candidate as many proxy;
votes as the number of directors to be elected multiplied by the (c) Remote communication or
number of shares owned; or (c) distribute them on the same (d) In absentia
principle among as many candidates as may be seen fit:
Provided, That the total number of votes cast shall not exceed What happens if only a few stockholders appear and there
the number of shares owned by the stockholders as shown in is no quorum?
the books of the corporation multiplied by the whole number of A: A meeting cannot be validly held because as we said a
directors to be elected: Provided, however, That no delinquent quorum refers to the number of people required to validly hold a
stock shall be voted. Unless otherwise provided in the articles of meeting. To constitute a valid meeting, the majority of the
incorporation or in the bylaws, members of nonstock stockholders must be present.
corporations may cast as many votes as there are trustees to be
elected by may not cast more than one (1) vote for one (1)
candidate. Nominees for directors or trustees receiving the
highest number of votes shall be declared elected.

lOMoARcPSD|9536011
What happens if the stockholders present for the holding of PROXY

such election are/is less than the majority? What happens?
A: In this case, plurality vote sets in, which means that the A proxy is a written document which contains the authority given
nominee receiving the highest number of votes shall be declared to someone to represent the stockholder and cast his vote
elected, even if the majority requirement was not reached. during the meeting.
Atty. Espedido: Generally, a meeting cannot be validly held. IOW, these documents are what we might consider as
However, under the circumstances in our illustration, the law Management Control Devices which are tools that the
provides that “notwithstanding any provision of the articles of management uses to control the decisions.
incorporation or bylaws to the contrary, the shares of stock or
membership represented at such meeting and entitled to vote Atty. Espedido: If you are part of management, and you want to
shall constitute a quorum for purposes of conducting an election secure the issues you want to be approved in a meeting or the
under this section. [Section 25 paragraph 4] persons you want to be elected in the election, you try to gather
as many proxies as you can, and cast the vote in behalf of the
How do we proceed with the elections? stockholders. You will cast the vote yourself because you are
A: the duly authorized representative.
(1) Presiding officer will call for nominations.
Everyone who has at least 1 share of stock is If you notice you have some PLDT subscriptions, you are a
entitled to be nominated. stockholder of PLDT. And from time to time, you will receive
(2) Presiding officer will determine if the nominees notices from the PLDT. If management or the board would want
have all of the qualifications and none of the to approve something during the meeting, they would advise you
disqualifications to send proxies as well.
(3) Other nominees will be tabulated **NOTES:
Proxies shall be in writing, signed by the stockholder or
QUORUM member and filed before the scheduled meeting with
the corporate secretary. Unless otherwise provided by
Rule: In the meeting of the stockholders, at least majority of the the proxy, it shall be valid only for the meeting for which
owners of the outstanding capital stock should be present. it was intended. No proxy shall be valid and effective
Otherwise, we do not have a quorum. for a period longer than 5 years at any one time. (See
Sec. 57.)
What is a quorum?
A: It is the number of stockholders or members sufficient to VOTING TRUST AGREEMENT (See Sec. 58.)
conduct a valid meeting.
A Voting Trust Agreement is a document similar to a proxy but
In a meeting of the board of directors, the majority usually longer in application or existence. It contemplates a situation
constitutes a quorum, but the by-laws can provide for another. wherein the group of stockholders agree among themselves that
in cases of issues to be presented for approval, they will bot as
Kinds of Quorum one (block vote), and cast the vote as one.
(1) Simple majority How many directors do we elect?

- The traditional kind. 50% + 1 A: It depends on the by-laws of the corporation.
(2) Qualified majority **NOTES

- The number stated in the by-laws. It can be more
than a simple majority, but it can never be lower Election of Directors
than the simple majority (1) Done at any meeting called for the election of BOD and
- Any number higher than 50% + 1 as provided for voted for by the stockholders. At all elections, owners
in the articles of incorporation (e.g. 2/3 or 3/4) of the majority of the outstanding capital stocks must
be presented either:
Note: Corporations can determine by themselves what a. In person;
would constitute a quorum. There can be instances b. Through a representative authorized to act by
when the quorum set by the corporation is less than the written proxy (in absentia), e.g. proxy or trust;
majority. Do not confuse quorum for majority. c. If allowed by the by-laws or majority of the
BOD, through remote communication (e.g.
**NOTES: telephone conference or video conference)
1. In absence of the required majority, there will be failure
of election. Note: Such modes of attending the meeting and voting
2. The law follows plurality voting, wherein the nominee may be utilized by corporations vested with public
with the highest number of votes shall be elects as a interest although not provided in their by-laws.
director.
3. The election is generally done through straight voting (2) The election must be by ballot if requested by any
4. Cumulative voting is generally not permitted in a non- voting stockholder. Hence, voting by viva voces or roll
stock corporation, where each member may not cast call (raising hands) is valid except when there is a
more than 1 vote for 1 candidate. request that it be by ballot.
(3) Stockholders shall have the right to vote the number of

shares of stock standing in their own names (1 share =
1 vote) as long as the total number of votes cast shall

lOMoARcPSD|9536011
not exceed the number of shares owned by the In this case, A B C D E will win in the elections, but
stockholders as shown in the books of the corporation not F. This scenario illustrates the cumulative
multiplied by the whole number of directors to be voting.
elected.
What is the purpose of cumulative voting?
Formula: A: The intention of such mode of voting is to
No. of votes = No. of shares x No. of vacant seats protect the interest of the minority shareholder and
ensure that the minority has representation in the
Methods of voting: Board of Directors.
a. Straight voting c. Cumulative voting by distribution

Vote such number of shares for as many persons Distribute them on the same principle as many
as there are directors to be elected. candidates as may be seen fit.
Example. A owns 100 shares. If there are 5 Note: Comparison with non-stock corporations:
directors to be elected, A is entitled to 500 votes Members may cast as many votes as there are
multiplying 100 by 5. He may give to the 5 trustees to be elected, but may not cast more than
candidates 100 votes each. 1 vote for 1 candidate, unless otherwise provided
in the AOI or in the by-laws. They cannot
b. Cumulative voting (for 1 candidate) cumulate.
Cumulate said shares and give 1 candidate as Illustration.
many votes as the number of directors to be B, C, D, E and F agreed among themselves that
elected multiplied by the number of shares owned. they will be the directors with the exclusion of A.
Each will have 50 votes. In order for them to be
The privilege of cumulative voting is permitted for elected, they should use cumulative voting. They
the purpose of giving minority stockholders cannot prevent A from being elected, if they don’t
representation in the BOD. Stockholders shall want him to be a member of the board. Their plan
have the right to vote the number of shares of however will not work because the law says,
stock standing in their own names. “protect the minority”. That’s the intention of the
law in cumulative voting.
A director elected because of the vote of the
minority stockholders who untied in cumulative (4) No delinquent stock shall be voted.
voting cannot be removed without cause.
Delinquent stocks – declared by the Board as
Illustration. delinquent because of their subscribers’ failure to pay
There are 6 nominees for the 5 slots as a director, the balance after the same was due or after the Board
nominees A B C D E have 20 shares each. called for payment
However, B C D E agreed to gang up against A,
so the four (4) of them agreed to give F one share (5) Nominees for directors or trustees receiving the
each so that F will now be qualified to be highest number of votes shall be declared elected.
nominated since he will be holding four shares.
(6) If no election is held, or the owners of the majority of
How much shares do they have now? the OCS or majority of the members entitled to vote are
A: not present in person, by proxy or through remote
A 20 shares communication or not voting in absentia at the meeting,
B 19 shares such meeting may be adjourned, and the corporation
C 19 shares shall follow the procedures laid out in Sec. 25.
D 19 shares
E 19 shares SEC. 24. CORPORATE OFFICERS
F 4 shares
Section 24. Corporate Officers. - Immediately after their
Do you think they can ease out A? election, the directors of a corporation must formally organize an
A: No, they cannot ease A out because in this elect: (a) a president, who must be a director; (b) a treasurer,
case, A can cumulate all his shares to vote for who must be a resident of the Philippines; and (d) such other
himself. Thus: officers as may be provided in the bylaws. If the corporation is
vested with public interest, the board shall also elect compliance
Votes officer. The same person may hold two (2) or more positions
Shares (Shares X No. of concurrently, except that no one shall act as president and
Directors) secretary or as president and treasurer at the same time, unless
A 20 100 (20 x 5) otherwise allowed in this Code.
B 19 95 (19 x 5)
C 19 95 (19 x 5) The officers shall manage the corporation and perform such
D 19 95 (19 x 5) duties as may be provided in the bylaws and/or as resolved by
the board of directors.
E 19 95 (19 x 5)
F 4 20 (4 x 5)

lOMoARcPSD|9536011
REQUIREMENTS TO BECOME PRESIDENT TREASURER
President – must be a director, who is a holder of at least 1 The treasurer must be a resident of the Philippines. The law
share considers his immediate availability being the primary
custodian of the corporate funds, which is needed in the
Vice President – not required to be a holder of at least 1 share, running of corporate affairs and implementation of the
but by the time he succeeds as President, the VP is required to board decision.
have at least one share by then Has control over the funds and/or other assets of the
corporation
**BASIC CORPORATE OFFICERS Has authority to receive in the name and for the benefit of
the corporation, all subscriptions, contributions or donations
(1) The president (must be a director) paid or given by the subscribers or members
(2) The treasurer (must be a resident of the Philippines) Certifies the information set forth in 7th and 8th clauses of
(3) The corporate secretary (must be a citizen and resident of the AOI, and that the paid-up portion of the subscription for
the Philippines) the benefit or credit of the corporation has been received
(4) In the case of public interest company, the compliance He is one of the main signatories of financial statements
officer
(5) Other officers as provided for in the by-laws CORPORATE SECRETARY
**RULE ON DUAL POSITIONS Tasked to maintain corporate records, including the stock
and transfer book
GEN: Any director may hold 2 or more positions concurrently. Upon order of the President, he sends notices and takes
XPN: (1) President & secretary minutes of meetings
(3) President & treasurer Logically, he is the corporate officer with whom a dissenting
XPN2: (1) Unless otherwise allowed by the RCC director must register his objection to a particular corporate
(2) In an OPC, the president can be a treasurer resolution, such as the issuance of a watered stock
Primary officer tasked to make reports to the SEC
Rationale: To ensure faithful performance to their functions. Primary officer tasked to attest to corporate resolutions
He should thus ensure that none of the information or
CHAIRMAN statements in a report or certification required by the code
is: (1) incomplete, (2) inaccurate, (3) false or (4) misleading.
Not a statutory corporate officer Otherwise, he may be liable for willfully certifying a report
When his appointment is provided for in the by-laws, he Together with the President, he is authorized to use stock
generally sets the meeting and its agenda, and is the default certificates
officer to preside the same Restrictions:
He may be an independent director, provided he must not a. Should be a different person from the compliance
hold an executive position and should not be involved in the officer
corporation’s day-to-day operations b. Should not be a member of the BOD
He may be a non-Philippine national, even in corporations
requiring Filipino ownership, provided he limits his role to COMPLIANCE OFFICER
that of a presiding officer during meetings Required only in corporations that are vested with public interest
PRESIDENT Ensures that the members of the board and corporate

officers comply with law, the corporate charter and by-laws
The president must be a director Should not be a member of the board
Primary officer tasked to implement the decision of the
board OTHER CORPORATE OFFICERS
Regarded as the principal agent of the corporation
He shall manage the corporation and perform such duties By-laws may sanction the appointment of other corporate
as may be provided in the by-laws and/or resolved by the officers, who have special roles in running the affairs of the
board of directors corporation
He is primarily authorized to initiate meetings, and in the Normally, they assist the president in managing the
absence of a Chairman, to preside them corporation
He is the main signatory of the stock certificates, and in They are agents of the corporation relative to their authority
exceptional cases, the financial statements stipulated in the by-laws
VICE PRESIDENT What is the significance of distinguishing between a

corporate and non-corporate officer?
The law does not require the board to elect a vice president A: Only corporate officers may bind the corporation, provided he
He/She ensures succession to the presidency acts within the scope of his authority. He may be terminated at
It is not provided by law that a vice-president should own at will, whereas a non-corporate officer may only be terminated for
least one share of stock. However, for him to succeed the just or authorized causes.
president, he must own 1 share of stock at the time of
ascending into the office of the president. Further, dispute over the separation from office of a corporate
officer is considered an intra-corporate dispute, which falls
under the jurisdiction of the regular courts.

lOMoARcPSD|9536011
**TERM OF CORPORATE OFFICERS ▪ The report shall specify the new date for the election, which
shall not be later than 60 days from the scheduled date.
(1) BOD – 1 year
(2) Officers – generally coterminous with the Board, (C) NO QUORUM ON SECOND DATE
but the by-laws may provide that they have a ▪ The Commission shall have the power to issue a summary
longer term. order that an election be held. The SEC shall have to power
such orders as may be appropriate, including orders
Note: Unlike regular employees or subordinate officers who directing the issuance of a notice stating the time and place
enjoy security of tenure, purely corporate officers and/or of the election, designated presiding officer, and the record
executive directors enjoy protection from their respective date or dates for the determination of stockholders or
contracts with the corporation members entitled to vote.
**VACANCIES IN THE POSITION OF THE OFFICERS Reason for SEC calling the election:
Atty. Espedido: There are new relationships created. While in
They are filled a vote of majority of the board of directors, and the Old Code, the objective of the SEC was more focused on
the elected replacement officer has a term of only the unexpired stockholders. In the New Code, it does not only focus on
portion of his predecessor. stockholders but to stakeholders as well.
SEC. 25. REPORTORIAL REQUIREMENTS The stakeholders include creditors, customers, clients,
employees. These are now relationships that the corporation will
Section 25. Report of Election of Directors, Trustees and have to establish. It is no longer focused within the corporation.
Officers, Non-holding of Election and Cessation from The law now seems to protect all the stakeholders. They are
Office. - Within thirty (30) days after the election of the directors, involved insofar as the existence of the corporation is
trustees and officers of the corporation, the secretary, or any concerned, and the manner in which the corporation is being
other officer of the corporation, the secretary, or any other officer managed and operated.
of the corporation, shall submit to the Commission, the names,
nationalities, shareholdings, and residence addresses of the If there seems to be a problem, the SEC seems to assume.
directors, trustees and officers elected.
Who calls the meeting?
The non-holding of elections and the reasons therefor shall be A: The President orders the Secretary to send notices to the
reported to the Commission within thirty (30) days from the date stockholder.
of the scheduled election. The report shall specify a new date
for the election, which shall not be later than sixty (60) days from However, if one of the agenda is the removal of the
the scheduled date. president, is the corporation and stakeholders helpless?
A: No, not anymore. Under the Old Code, there was what is
If no new date has been designated, or if the rescheduled called HOLDOVER CAPACITY. The old provision says, “until
election is likewise not held, the Commission may, upon the the successor is elected and assumed office.”
application of a stockholder, member, director or trustee, and
after verification of the unjustifiable non-holding of the election, In the New Code, however, it cannot be done. Now, how could
summarily order that an election be held. The Commission shall they be elected if there is no election? So now, the law now has
have the power to issue such orders as may be appropriate, a compulsory intervention by the SEC.
including other directing the issuance of a notice stating the time
and place of the election, designated presiding officer, and the HOLDOVER CAPACITY
record date or dates for the determination of stockholders or
members entitled to vote. Illustration 1.
Notwithstanding any provision of the articles of incorporation or In a situation where there is no President, the Vice President
by laws to the contrary, the shares of stock or membership succeeds. However, if the VP cannot succeed, a special
represented at such meeting and entitled to vote shall constitute election will be called.
a quorum for purposes of conducting an election under this
section. Illustration 2.
President refuses to call a meeting for his removal
Should a director, trustee or officer die, resign or in any manner
case to hold office, the secretary or the director, trustee or officer A meeting is scheduled for the removal of the President.
of the corporation, shall, within seven (7) days form knowledge However, the president himself will not call the meeting.
thereof, report in writing such fact to the Commission.
In such a case, the usual provision in any organization in case
(A) AFTER ELECTION an election of new officers cannot be held is that the old set of
▪ After the election of the Members of the Board, the officers will continue – there will be a hold-over. The hold-over
corporate secretary shall submit a report to the SEC for the capacity is the abuse that the law wants to resolve.
results of the election within 30 days after the election of
directors, trustees, and officers of the corporation. In order to resolve such scenario, the New Code now provides
that the SEC will summarily order an election to be held.
(B) IF NO ELECTION
▪ The secretary shall still submit a report and reasons therefor
to the SEC within 30 days from the date of the scheduled
election.

lOMoARcPSD|9536011
SEC. 26. DISQUALIFICATION OF DIRECTORS, TRUSTEES, meeting of the stockholders or members for the purpose of
OR OFFICERS removing any director or trustee must be called by the secretary
on order of the president, or upon written demand of
Section 26. Disqualification of Directors, Trustees or stockholders representing or holding at least a majority of the
Officers. - A person shall be disqualified from being a director, outstanding capital stock, or a majority of the members entitled
trustee or officer of any corporation if, within five (5) years prior to vote. If there is no secretary, or the secretary, despite
to the election or appointment as such, the person was: demand, fails or refuses to call the special meeting or to give
notice thereof, the stockholder or member of the corporation
(a) Convicted by final judgment: signing the demand may call the special meeting or to give
notice thereof, the stockholder or member of the corporation
(1) Of an offense punishable by imprisonment for a period signing the demand may call for the meeting by directly
exceeding six (6) years; addressing the stockholders or members. Notice of the time and
place of such meeting, as well as of the intention to propose
(2) For violating this Code; and such removal, must be given by publication or by written notice
prescribed in this Code. Removal may be with or without cause:
(3) For violating Republic Act No. 8799, otherwise known as Provided, That removal without cause may not be used to
"The Securities Regulation Code"; deprive minority stockholders or members of the right
representation to which they may be entitled under Section 23
(b) Found administratively liable for any offense involving of this Code.
fraudulent acts; and
The Commission shall, motu propio or upon verified complaint,
(c) By a foreign court or equivalent foreign regulatory and after due notice and hearing, order the removal of a director
authority for acts, violations or misconduct similar to those or trustee elected despite the disqualification, or whose
enumerated in paragraphs (a) and (b) above. disqualification arose or is discovered subsequent to an
election. The removal of a disqualified director shall be without
The foregoing is without prejudice to qualifications or other prejudice to other sanctions that the Commission may impose
disqualifications, which the Commission, the primary regulatory on the board of directors or trustees who, with knowledge of the
agency, or Philippine Competition Commission may impose in disqualification, failed to remove such director or trustee.
its promotion of good corporate governance or as a sanction in
its administrative proceedings. SEC. 28. VACANCIES IN THE BOARD
GROUNDS FOR DISQUALIFICATION Section 28. Vacancies in the Office of Director or Trustee;
Emergency Board. - Any vacancy occurring in the board of
If within five (5) years PRIOR to the election or appointment as directors or trustees other that by removal or expiration of term
such, the person was: may be filled by the vote of at least a majority of the remaining
(3) Convicted by final judgment: directors or trustees, if still constituting a quorum; otherwise,
a. Of an offense punishable by imprisonment for a said vacancies must be filled by the stockholders or members in
period exceeding six (6) years; a regular or special meeting called for that purpose.
b. For violating this Code; and
c. For violating Republic Act No. 8799, otherwise When the vacancy is due to term expiration, the election shall
known as "The Securities Regulation Code"; be held no later than the day of such expiration at a meeting
(4) Found administratively liable for any offense involving called for that purpose. When the vacancy arises as a result of
fraudulent acts; and removal by the stockholders or members, the election may be
(5) By a foreign court or equivalent foreign regulatory held on the same day of the meeting authorizing the removal
authority for acts, violations or misconduct similar to and this fact must be so stated in the agenda and notice of said
those enumerated in paragraphs (a) and (b) above. meeting. In all other cases, the election must be held no later
than forty-five (45) days from the time the vacancy arose. A
Atty. Espedido: The SRC simply controls, manages, and director or trustee elected to fill vacancy shall be referred to as
monitors the activities of the stock market. The stock market is replacement director or trustee elected to fill a vacancy shall be
a market where only shares of stocks are being sold. If you want referred to as replacement director or trustee and shall serve
to share your shares of stock, all you have to do is register with only for the unexpired term of the predecessor in office.
the stock market. Before you could register, you would have to
undergo the process of registering as an IPO. Once you comply However, when the vacancy prevents the remaining directors
with all the requisites, then you could already sell your shares to from constituting a quorum and emergency action is required to
the public. prevent grave, substantial, and irreparable loss or damage to
the corporation, the vacancy may be temporarily filled from
SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES among the officers of the corporation by unanimous vote of the
remaining directors or trustees. The action by the designated
Section 27. Removal of Director or Trustees. - Any director director or trustee shall be limited to the emergency action
or trustee of a corporation may be removed from office by vote necessary, and the term shall cease within a reasonable time
of the stockholders holding or representing at least two-thirds form the termination of the emergency or upon election of the
(2/3) of the outstanding capital stock, or in a nonstock replacement director or trustee, whichever comes earlier. The
corporation, by a vote of at least two-thirds (2/3) of the member corporation must notify the Commission within three (3) days
entitled to vote: Provided, That such removal shall take place from the creation of the emergency board, stating therein the
either at a regular meeting of the corporation or at a special reason for its creation.
meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the Any directorship or trusteeship to be filled by a reason of an
intention to propose such removal at the meeting. A special increase in the number of directors or trustees shall be filled only

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by an election at a regular or at a special meeting of EMERGENCY BOARD

stockholders or members duly called for the purpose, or in the
same meeting authorizing the increase of directors or trustees if Rule: When the vacancy prevents the remaining directors from
so stated in the notice of the meeting. constituting a quorum and emergency action is required to
prevent grave, substantial, and irreparable loss or damage to
In all elections to fill vacancies under this section, the procedure the corporation, the vacancy may be temporarily filled from
set forth in Section 23 and 25 of this Code shall apply. among the officers of the corporation by unanimous vote of the
remaining directors or trustees.
Cause of Vacancies: DARI-DREI
(1) Death Illustration.
(2) Abandonment
(3) Resignation If there were 5 members of the board and we have removed
(4) Incapacity 3, how do we fill this up?
(5) Disqualification A: Since there are only 2 members of the board left, the vacancy
(6) Removal may be temporarily filled from among the officers of the
(7) Expiration of Term corporation by unanimous vote of the remaining directors or
(8) Increase in the number of Directors/Trustees trustees.
RULES IN FILLING UP VACANCIES The emergency board can now proceed to act on the
emergency. The action by the designated director or trustee
(A) For Removal shall be limited to the emergency action necessary.
Filled up by the stockholders or members in a regular or
special meeting called for that purpose So if the emergency is to borrow 10M, the Emergency Board
When – same day of the meeting authorizing the removal has the power and authority to borrow 10M. After such, the term
shall cease within a reasonable time from the termination of the
(B) For Expiration of Term emergency or upon election of the replacement director or
Filled up by the stockholders or members in a regular or trustee, whichever comes earlier.
special meeting called for that purpose
When – not later than the day of such expiration at a We still have a vacancy again. What do we do now?
meeting called for that purpose either through a special or A: We now go to the regular route – calling for a regular
regular meeting stockholder’s meeting.
(C) For Increase in the Number of Directors or Trustees **REMOVAL

Filled up by the stockholders or members in a
(a) regular or special meeting called for that purpose or in WHO MAY REMOVE
the same meeting
(b) When – in the same meeting authorizing the increase (1) Stock corporation
of directors or trustees if so stated in the notice of the Vote of the stockholders holding or representing at
meeting least 2/3 of the outstanding capital stock
(D) For other causes (DARID; death, abandonment, (2) Non-stock corporation
resignation, incapacity, disqualification) Vote of at least 2/3 of the members entitled to vote
Filled up by at least the majority of the remaining
directors or trustees if still constituting a quorum – HOW REMOVAL IS DONE
existing board will fill the vacancy
When – not later than 45 days from the time the By the stockholders through a regular or special meeting.
vacancy arose If in a special meeting, the special meeting shall be called
for the purpose of removing the director.
Term expiration ➢ Meeting should be called no later o It must be called by the secretary on order of the
than the day of expiration at a president, or upon written demand of the
meeting called for that purpose stockholders representing or holding at least a
Removal by ➢ Meeting may be held on the same majority of the outstanding capital stock, or a
stockholders or day as the meeting authorizing the majority of the members entitled to vote.
members removal, provided it must be stated If there is no secretary, or if the secretary, despite demand,
in the agenda and notice of the fails or refuses to call the special meeting or to give notice
meeting thereof, the stockholder or member of the corporation
Increase in the (1) At a regular or at a special meeting signing the demand may call for the meeting by directly
number of of stockholders/members duly addressing the stockholders or members.
directors or called for such purpose, or Notice of the time and place of such meeting, as well as the
trustees (2) in the same meeting authorizing information to propose such removal, must be given by
the increase of directors or publication or by written notice prescribed in this Code by
trustees if so stated in the notice of SEC
the meeting. Upon verified complaint, and after due notice and hearing,
All other reasons ➢ Meeting must be held no later than order the removal of a director or trustee elected despite the
45 days from the time the vacancy disqualification, or whose disqualification arose or is
arose discovered subsequent to an election.

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Atty. Gaviola: If there is an emergency situation, in order to (3) Voted upon by the stockholders representing the
prevent grave, substantial or irreparable loss or damage to the majority of the outstanding capital stocks
corporation, the vacancy must be temporarily filled from the
officers of the corporation. Temporary only. After the XPN to XPN: A vote of at least of the majority of the outstanding
emergency, the Stockholders would have to fill in the vacancy, capital stock or majority of the members entitled to vote grants
because the Board does not form a quorum anymore. the directors compensation in a meeting specifically called for
that purpose.
Note that in emergency situations, the Board, even if they do not
constitute a quorum, may temporarily fill-in the vacancy from the If they are given compensation, is there a limit?
officers of the corporation. A: Yes. They should not receive more than 10% of the net
income before tax of the preceding year.
Rationale: The reason why the law allows the directors to fill-in
the vacancies is for convenience because it’s very hard to call a Why are they not paid?
stockholder’s meeting, especially if you have a lot of A: Being shareholders, they also receive a share in the
stockholders. It will be difficult to get quorum, and it’s also the dividends.
directors who manage the corporation. So, if the BOD cannot
act because they’re missing a member, then that is not good for Herbosa: Appointment to the board is a consequence of
the corporation. corporate ownership. An owner or member is ordinarily
So, the law allows the directors to fill in a vacancy. But only in expected to assume the post of director or trustee, and manage
certain instances. However, if the stockholders really insist on the corporation for his ultimate benefit. Thus, the law does not
holding a meeting to fill a vacancy, then that is their prerogative. generally authorize the payment of compensation to a
Because the power of the Board to fill in a vacancy is merely a shareholder/member as a director or trustee.
delegated power coming from the stockholders. It’s inherent in
the stockholders to fill in or elect members of the Board. (Valle Illustration.
Verde Country Club, Inc. vs. Africa, G.R. No. 151969, 4
September 2009) Director A owns 75% of the shares. It is not mentioned in the
bylaws that the directors shall receive compensation. Thus, the
EXPIRATION other directors move that they be given compensation per
month. All of the stockholders (including A) agreed that they
How should this be filled up? shall be compensated for 30K per month.
A: Filled up by the majority of the stockholders representing 2/3
of the outstanding capital stock in a regular or special meeting Is it valid?
called for that purpose A: It is an invalid approval because the director cannot vote on
the same meeting. As provided by law, the directors cannot
When shall it be filled up? participate in the determination of their own per diems or
A: Not later than the day of such expiration at a meeting called compensation.
for that purpose.
Absurdity of the provision (as observed by Atty. Espedido):
SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES
(a) If the remaining directors vote (excluding Director A
Section 29. Compensation of Directors or Trustees. - In the who owns 75%) – the remaining directors cannot approve
absence of any provision in the bylaws fixing their because the law requires a vote of at least a majority of the
compensation, the directors or trustees shall not receive any outstanding capital stock
compensation in their capacity as such, except for reasonable
per diems: Provided, however, That the stockholders (b) If Director A participates – it cannot be approved because
representing at least a majority of the outstanding capital stock the law also prohibits his participation
or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or Atty. Espedido: This provision is probably intended for publicly
special meeting. listed corporations where rarely someone owns a share that is
50% or more. That might be the intention there.
In no case shall the total yearly compensation of directors
exceed ten percent (10%) of the net income before income tax SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR
of the corporation during the preceding year. OFFICERS
Directors or trustees shall not participate in the determination of Section 30. Liability of Directors, Trustees or Officers. -
their own per diems or compensation. Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are
Corporations vested with public interest shall submit to their guilty of gross negligence or bad faith in directing the affairs of
shareholders and the Commission, an annual report of the total the corporation or acquire any personal or pecuniary interest in
compensation of each of their directors or trustees. conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered
GEN: The directors or trustees shall not receive any by the corporation, its stockholders or members and other
compensation in their capacity as such. persons.
XPN: A director, trustee or officer shall not attempt to acquire, or any

(1) Reasonable per diems interest adverse to the corporation in respect of any matter
(2) As stipulated in their by-laws fixing their which has been reposed in them in confidence, and upon which,
compensation equity imposes a disability upon themselves to deal in their own

lOMoARcPSD|9536011
behalf; otherwise, the said director, trustee or officer shall be What is important is that after weighing the pros and cons, the
liable as a trustee for the corporation and must account for the benefit of the corporation outweighs the negative, as a BOD, opt
profits which otherwise would have accrued to the corporation. for what is more beneficial to the corporation, in this case the
patently unlawful act. In short, the Business Judgment Rule
LIABILITY OF DIRECTORS prevails.
The directors/trustees are liable to the corporation for the Business Judgment Rule vs. Gross Negligence
commission of the following:
SUMMARY: Based on the BJR, the acts of the BOD bind the
(1) Knowingly and willfully vote or assent to patently unlawful corporation. As such, it cannot be questioned or reviewed by the
acts stockholders or the courts.
(2) Guilty of gross negligence or bad faith
(3) Acquire any personal or pecuniary interest in conflict of duty Insofar as the BOD exercises their powers under the BJR, the
in conducting the affairs of the corporation contract is valid but due to gross negligence they can be held
liable.
NATURE OF LIABILITY
Following the BJR, when the Board enters into transactions with
As such, directors or trustees shall be liable solidarily for all the third parties, the sale is perfectly valid. However, because of
damages suffered by the corporation, the stockholders, or their negligence, then the BOD can be held liable for damages
members and other persons. the corporation suffered.
In the case of acquiring conflict of interest – the director, trustee Personal and Pecuniary Interest
or officer shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to SUMMARY: A certain type of trust is expected of a director of a
the corporation. corporation similar to that of the degree of trust among partners
in a partnership. A director needs to fully disclose whatever
Illustration 1. benefits he may have received by virtue of his position as a
Corporation’s property was sold for 5Mn while an adjacent director in the corporation and he will have to remit such benefits
property was sold for 15Mn to the corporation.
The Board in a meeting decided to sell one of the corporation’s While there is no fiduciary trust among stockholders, there lies
properties for 5M. All of the Board except one approved the sale. a certain degree of trust to be had among the board and the
corporation.
The following day, a property owned by somebody else which is
adjacent to the property recently sold by the Corporation was SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR
able to sell it for 15M. OFFICERS
The director who did not approve the earlier sale now Section 31. Dealings of Directors, Trustees or Officers with
questioned the sale approved by the Board. The Board argued the Corporation. - A contract of the corporation with one (1) or
that the said sale was fair and reasonable. more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity
That director was mad because he was the lone dissenter and is voidable, at the option of such corporation, unless all the
now he wants to vindicate himself. following conditions are present:
What could happen? If you were the one who approved, (a) The presence of such director or trustee in the board meeting
how would you answer the dissenting stockholder? in which the contract was approved was not necessary to
A: Generally, the stockholders cannot question the decision of constitute a quorum for such meeting;
the board because of the principle of the Best Judgment Rule.
In this case, the Board may invoke the Best Judgment Rule and (b) The vote of such director or trustee was not necessary for
argue that said sale was fair and reasonable. Provided that there the approval of the contract;
is no defect in the contract of sale, it is perfectly valid.
(c) The contract is fair and reasonable under the circumstances;
HOWEVER, in situations wherein the corporation suffers great
loss due to their gross negligence, we can say that although the (d) In case of corporations vested with public interest, material
sale is valid, the BOD may still be held liable provided that they contracts are approved by at least a majority of the independent
were grossly negligent. directors voting to approved the material contract; and
In our illustration, what is their liability? (e) In case of an officer, the contract has been previously
A: They are solidarily liable for all damages suffered by the authorized by the board of directors.
corporation and must account for the 10M difference of the price
– they have to pay for whatever losses the Corporation may Where any of the first three (3) conditions set forth in the
have realized because of the transaction. preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of
Business Judgment Rule vs. Patently Unlawful Acts the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
SUMMARY: Directors who assented to the patently unlawful act members in a meeting called for the purpose: Provided, That full
cannot be liable if such act is drawn from a justifiable reason disclosure of the adverse interest of the directors or trustees
such as the business judgment rule.

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involved is made at such meeting and the contract is fair and In the absence of the conditions, what could happen to the
reasonable under the circumstances. contract of lechon. Do you think you can be paid?
A: Yes, provided that it is ratified by a vote of 2/3 of stockholders
Summary: In the case of self-dealing directors, it is not representing the outstanding capital stock (OCS)
considered wrong in itself. However, if any of the conditions
under the law is lacking, the contract entered into can be voided Illustration 2.
at the option of the corporation. Quorum attained even without the presence of the Self-
Dealing Director
GEN: A contract of the Corporation with 1 or more of its
directors, trustees, officers, or their spouses and relatives within Let us assume that all of the 5 Directors are present to approve
the 4th civil degree of consanguinity or affinity is VOIDABLE, at the contract.
the option of the corporation
Do you think there is a problem?
XPN: The contract is held valid provided that the following A: There is no problem. Even if the self-dealing director is
conditions are present: present, his presence will not be necessary to constitute a
(1) Presence of the director or trustee in the BOD quorum.
meeting in which contract is approved was not Illustration 3.
necessary to constitute a quorum for such Quorum cannot be attained without the presence of the
meeting; Self-Dealing Director
(2) Vote of such director or trustee was not necessary
for the approval of the contract Only 3 of the Directors appeared, including the self-dealing
(3) The contract is fair and reasonable under the director. Do we have a problem?
circumstances A: Yes. Because without the presence of the self-dealing
(4) In case of corporations vested with public interest, director, there would be no quorum and the votes to be cast in
material contracts are approved by at least two- approving the contract cannot take place. In this case, the vote
thirds (2/3) of the entire membership of the board, of the self-dealing director is necessary to approve the contract.
with at least a majority of the independent
directors voting to approve the material contract; The contract may be voided at the option of the corporation.
and HOWEVER, although it is voidable, it can be ratified by a vote
(5) In case of an officer, the contract has been of 2/3 of the stockholders representing the outstanding capital
previously authorized by the board of directors. stock.
Note: Only conditions 1-3 were mentioned during the recits If you were the holder of 75% of the shares, do we have a
problem?
RATIFICATION BY A VOTE OF 2/3 A: No problem, provided that it is fair and reasonable.
Although the contract is VOIDABLE, the contract may be ratified Nevertheless if it is not fair and reasonable, how can it be
by the vote of the stockholders representing at least 2/3 of the cured?
outstanding capital stock. Provided, that full disclosure of the A: It can be cured through ratification by a vote of 2/3 of the
director or trustee’s adverse interest is made at such meeting stockholders representing the outstanding capital stock.
and the contract is fair and reasonable.
SEC. 32 INTERLOCKING DIRECTORS
Illustration 1.
Self-Dealing Director owns a business of selling lechon Section 32. Contracts Between Corporations with
and contracts with the corporation Interlocking Directors. - Except in cases of fraud, and provided
the contract is fair and reasonable under the circumstances a
You are Director of a corporation and the corporation planned to contract between two (2) or more corporations having
hold a big party. At the same time, you have your own business interlocking directors shall not be invalidated on that ground
of selling lechon. alone: Provided, That if the interest of the interlocking director in
one (1) corporation is substantial and the interest in the other
Can you deal with your corporation? corporation or corporations is merely nominal, the contract shall
A: Yes. be subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.
Is there a problem?
A: There is no problem for as long as the conditions for a Stockholding exceeding twenty percent (20%) of the
contract with a self-dealing director are complied with, namely: outstanding capital stock shall be considered substantial for
(1) That the presence of the director is not necessary to purposes of interlocking directors.
constitute a quorum for such meeting,
(2) The vote of the director is not necessary to approve the INTERLOCKING DIRECTOR
contract
(3) Contract is fair and reasonable Interlocking director refers to a director of two corporations
having a transaction with each other
Otherwise, absence of any of the conditions, the contract may
be deemed VOIDABLE, at the option of the corporation. GEN: A contract between two (2) or more corporations having
interlocking directors shall not be invalidated on that ground
alone.

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XPN: Illustration 3
(1) Cases of fraud; and The Interlocking Director argues that the remedy is
(2) Contract is not fair and reasonable discriminatory on his part
Note: In the case of an interlocking director who has a The director argues that this is discriminatory on his part and he
substantial interest in one corporation and a nominal interest in will be deprived of his right to exercise his right to vote and be
another corporation, the provisions of the Self-Dealing Directors voted upon.
shall apply. The following requisites must be present, namely:
(1) Presence of the director is not necessary to constitute How do you think would the SC will resolve that?
a quorum A: SC will rule in favor of the stakeholders because it will be a
(2) Vote is not necessary to approve the contract disaster if we allow this type of directorship to continue.
(3) Contract is fair and reasonable
Atty. Espedido: To allow him – there will be a conflict of interest.
Atty. Espedido: IOW, the interlocking directorship is perfectly If we were to tolerate these things, the other corporation will be
valid UNLESS it involves a substantial interest in one destroyed. And if the other corporation is destroyed, it will be the
corporation and a nominal interest in the other, in which case, bigger corporation that will alone survive. So there is no more
the requirements under the Self-Dealing Director should be competition and so it gets all the market. That will be a disaster!
complied with in order for it to be considered valid. Otherwise, So the Court shall allow the amendment of the By-Laws for the
the status of the contract is deemed VOIDABLE. protection and preservation of the other corporation.
Competition must be promoted.
Note: Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial for SEC. 33. DISLOYALTY OF A DIRECTOR
purposes of interlocking directors.
Section 33. Disloyalty of a Director. - Where a director, by
Is there something wrong of being an interlocking director? virtue of such office, acquires a business opportunity which
A: Generally, nothing is wrong. should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must account for and
DISADVANTAGE OF HAVING AN INTERLOCKING refund to the latter all such profits, unless the act has been
DIRECTOR ratified by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This
Atty. Espedido: However, even if it is valid, the law recognizes provision shall be applicable, notwithstanding the fact that the
the disadvantages of an interlocking directorship – it is prone to director risked one's own funds in the venture.
DANGER.
DISLOYAL DIRECTOR
Illustration 1.
Getting the list of the Top 20 Customers GEN: A director, by virtue of such office, ACQUIRES A
BUSINESS OPPORTUNITY belonging to the corporation, (that
In a case where the director owns 90% of a beer company and should have benefitted the corporation itself), thereby obtaining
10% in another company – there is NOTHING WRONG but the profits to the prejudice of the corporation, must ACCOUNT FOR
law recognizes some evils. AND REFUND the corporation for ALL PROFITS.
For example, while in the meeting, the Director starts XPN: Ratification by the stockholders owning at least 2/3 of the
questioning why the sales were going down. He asked the Sales outstanding capital stock .
Manager about it and asked for the list of the Top 20 Customers
of the Corporation. He took photos of the list and later went to DISTINCTION
these big customers and convinced them to buy instead in the
other corporation. THUS, although it may be said that there is Liabilities Disloyalty
nothing wrong, there is DANGER. This is the evil contemplated (1) Willfully and By virtue of his office,
by the law. knowingly assent ACQUISITION OF A
or vote to patently BUSINESS
Illustration 2. unlawful acts OPPORTUNITY
Merger of two Corporations – No more competition (2) Gross negligence belonging to the
or bad faith in corporation and
Currently, the biggest telephone companies right now are PLDT directing the OBTAINING
and Globe. If one is a Director in both corporations, he could just Grounds affairs of the PROFITS to the
propose that the companies should merge and become one. corporation; or prejudice of the
Thus, only one corporation will remain which could result in a (3) Acquiring any corporation
monopoly and there will be no more competition in the business. personal or
They could either eliminate the competition or come out with a pecuniary interest
disastrous competition. in conflict with
their duty as a
In that illustration, how do you think will they prevent? director or trustee
A: A remedy is to amend the bylaws and have a stipulation that
Liable as a trustee and ACCOUNT for and
if there is a director with substantial interest in a company similar
must account for the REFUND to the
to their business, he should be disqualified. IOW, that person profits which corporation ALL
who owns the 90% will be disqualified. Liability
otherwise would have PROFITS
accrued to the
corporation

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prerogatives in managing the corporation’s business

Solidarily liable affairs.
Liable for ALL ACTUAL DAMAGES
Damages damages resulting suffered (unrealized TITLE IV. POWERS OF THE CORPORATION
therefrom profit)
SEC. 35. CORPORATE POWERS AND CAPACITY
SEC. 34. EXECUTIVE COMMITTEE
Section 35. Corporate Powers and Capacity. - Every
Section 34. Executive Management, and Other Special corporation incorporated under this Code has the power and
Committees. - If the bylaws so provide, the board may create capacity:
an executive committee composed of at least three (3) directors.
Said committee may act, by majority of vote of all its members, (a) To sue and be sued in its corporate name;
on such specific matters within the competence of the board, as
may be delegated to it in the bylaws or by majority vote of the (b) To have perpetual existence unless the certificate of
board, except with respect to the: (a) approval of any action for incorporation provides otherwise;
which shareholders' approval is also required; (b) filing of
vacancies in the board; (c) amendment or repeal of bylaws or (c) To adopt and use a corporate seal;
the adoption of new bylaws; (d) amendment or term is not
amendable or repealable; and (e) distribution of cash dividends (d) To amend its articles of incorporation in accordance with the
to the shareholders. provisions of this Code;
The board of directors may create special committees of (e) To adopt bylaws, not contrary to law, morals or public policy,
temporary or permanent nature and determine the members' and to amend or repeal the same in accordance with this Code;
term, composition, compensation, powers, and responsibilities.
(f) In case of stock corporations, to issue or sell stocks to
EXECUTIVE COMMITTEE subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation
A smaller committee given delegated powers by the board. It is if it be a nonstock corporation;
composed of not less than three (3) members, who are to be
appointed by the board. (g) To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage, and otherwise deal with such real and
T/N: The board can delegate, except matters which are personal property, including securities and bonds of other
discretionary. However, the intention of creating the committee corporations, as the transaction of the lawful business of the
is for purposes of expediency so that the board doesn’t have to corporation may reasonably and necessarily require, subject to
meet at all times to ake a decision, because it can be difficult to the limitations prescribed by law and the constitution;
convent the board sometimes.
(h) To enter into a partnership, joint venture, merger,
Matters which cannot be delegated to the Executive consolidation, or any other commercial agreement with natural
Committee (SVB – EC) and juridical persons;
(1) Approval of any action for which shareholders’
approval is also required; (i) To make reasonable donations, including those for the public
(2) Filling of vacancies within the board; welfare or for hospital, charitable, cultural, scientific, civic, or
(3) Amendment or repeal of bylaws, or adoption of new similar purposes: Provided, That no foreign corporation shall
bylaws; give donations in aid of any political party or candidate or for
(4) The amendment or repeal of any resolution of the purpose s of partisan political activity;
board which by its express terms is not so amendable
or repealable; (j) To establish pension, retirement, and other plans for the
(5) A distribution of cash dividends to the shareholders. benefit of its directors, trustees, officers, and employees; and
**NOTES (k) To exercise such other powers as may be essential or

necessary to carry out its purpose or purposes as stated in the
Executive Committee articles of incorporation.
Committee which exercises powers within the
competence of the Board that requires authority under SPECIFIC POWERS OF A CORPORATION
the by-laws. The Board cannot just create their own
executive committee if such committee will be (1) To sue and be sued in its corporate name
exercising the powers of the Board. (2) To have perpetual existence unless the certificate of
incorporation provides otherwise
Special Committee (3) Adopt and use a corporeal seal
Can be created by the Board even without the authority (4) Amend its Articles of Incorporation
under the by-laws. (5) Adopt, amend, or repeal bylaws
Any other committee exercising a mere (6) Stock corporations – issue or sell stocks to subscribers
recommendatory power whose actions require and sell treasury stocks
ratification and confirmation by the board. It cannot a. Nonstock corporation – admit members to the
approve resolutions on its own. The reason here is that corporation
the Board is the corporation’s governing body, clearly (7) Deal with real and personal property, including
upholding the power to exercise the corporation’s securities and bonds of other corporations

lOMoARcPSD|9536011
(8) Enter into commercial agreeements with natural and They need not be expressly laid out in the AOI, but exist by
juridical persons virtue of the express powers.
(9) Make reasonable donations
(10) Establish pension, retirement, and other plans for the Examples:
benefit of its directors, trustees, officers, and a. Acts in the usual course of business
employees b. Acts to protect debts owing to a corporation
(11) Other powers essential or necessary to carry out its c. Embarking on a different business
purpose d. Acts in part or wholly to protect or aid employees
e. Acts to increase business
Illustration.
Stockholders winning the lotto and engaging in the buy (3) Incidental/Inherent powers
and sell of second-hand cars - Powers that are necessary to the existence and
operation of the corporation;
There are 5 stockholders of XYZ Corporation. After receiving - **Powers which a corporation can exercise by the mere
their dividend, they decided to use their dividend and use it to fact of it being a corporation; or
buy lotto – thereafter, they won. - This refers to powers which are necessary to the
corporate existence and are, therefore, impliedly
When they won the lotto, they put up a business of their own. granted. Being powers inherent in the corporation as a
They will deal in the buying and selling of second hand cars. In legal entity, these powers exist independently of the
one instance, the second hand car that they sold did not function express powers.
well. The buyer sued XYZ Corporation.
Atty. Gaviola: These are the powers which are there by
What would happen? Will the case prosper? virtue of your being a corporation, so your ability to sue and
A: No, XYZ Corporation has a separate personality of its own, be sued, to buy and sell properties, everything that is
so it cannot be sued by the acts of the stockholders doing enumerated under Sec. 35 basically. Regardless of the
personal acts. [primary] purpose [of the corporation], incidental powers
exist.
Although they are stockholders, the money they used were not
the funds of the corporation. Moreover, the business that the There was a problem before on the secondary purpose
stockholders were engaged in was not the business of the [clause of the AOI] because people just enumerated the
corporation. secondary purpose[s], and among the secondary [purposes
they listed was subparagraph (g), which is] to sell or lease
**NOTES property. A few years back, BIR came up with a rule which
they strictly enforced, which is that if a property was
KINDS OF POWERS OF THE CORPORATION classified as an ordinary asset, then VAT and income tax
will be imposed on it, but if it was classified as capital asset,
(1) Express powers then it will be meted with capital gains tax.
- Those expressly stipulated in the AOI and in the
by-laws Ordinarily, you can say that a certain item or property is an
- **This refers to the power expressly conferred ordinary asset of the corporation if it is related to the
upon the corporation by law. These powers can be corporation’s primary purpose. Thus, real estate is
ascertained from the special law creating the considered an ordinary asset if the corporation owning it is
corporation, or from the general incorporation law engaged in the real estate business. [On the other hand], if
under which it was created, the general laws of the the corporation is engaged in retail, then a parcel of land it
land applicable to the corporation (i.e. the Revised owns will be considered a capital asset unless it is used for
Corporation Code), and its AOI. business.
Atty. Gaviola: Ordinarily, the express powers are provided The problem with the BIR is that, if they see “to purchase,
in the primary purpose clause of the AOI. In the primary receive, take or grant real and personal property” [under a
purpose clause of the AOI, the powers contained in Sec. 35 corporation’s secondary purposes, then they will consider
are not actually enumerated there. If you think about it, the the corporation to be a real estate company].
powers under Sec. 35 are incidental powers – they exist by
virtue of the juridical personality of the corporation. Thus, there is a disconnect between the SEC and BIR.
Corporations who copied the incidental powers in their
To be strict about it, express powers will only exist if they secondary purposes clause [will be assessed with VAT plus
are expressly provided in the primary purpose in the AOI. the 30% income tax as against the 6% capital gains tax
whenever it sells land, even though it is actually not a real
(2) Implied powers estate company].
- Powers that are necessary to carry out the
express powers POWER TO SUE AND BE SUED IN ITS CORPORATE NAME
- **Those powers which are reasonably necessary
to exercise the express powers and to As a juridical entity, the corporation can directly pursue all
accomplish/carry out the purposes for which the actions to enforce its rights. It does not have to go through its
corporation was formed. stockholders in order to bring a suit. At the same time, a
corporation can directly be held liable for its obligations. The
Atty. Gaviola: The implied power of the corporation is one creditor does not have to go through the stockholders.
which is related or exist by virtue of the express power of
the corporation, even if they are not expressly provided.

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SEC. 36. POWER TO EXTEND OR SHORTEN CORPORATE (b) The amount of the increase or decrease of the capital stock;
TERM
(c) In case of an increase of the capital stock, the amount of
Section 36. Power to Extend or Shorten Corporate Term. — capital stock or number of shares of no-par stock thereof actually
A private corporation may extend or shorten its term as stated subscribed, the names, nationalities and addresses of the
in the articles of incorporation when approved by a majority vote persons subscribing, the amount of capital stock or number of
of the board of directors or trustees, and ratified at a meeting by no-par stock subscribed by each, and the amount paid by each
the stockholders or members representing at least two-thirds on the subscription in cash or property, or the amount of capital
(2/3) of the outstanding capital stock or of its members. Written stock or number of shares of no-par stock allotted to each
notice of the proposed action and the time and place of the stockholder if such increase is for the purpose of making
meeting shall be sent to stockholders or members at their effective stock dividend therefor authorized;
respective place of residence as shown in the books of the
corporation, and must be deposited to the addressee in the post (d) Any bonded indebtedness to be incurred, created or
office with postage prepaid, served personally, or when allowed increased;
in the bylaws or done with the consent of the stockholder, sent
electronically in accordance with the rules and regulations of the (e) The amount of stock represented at the meeting; and
Commission on the use of electronic data messages. In case of
extension of corporate term, a dissenting stockholder may (f) The vote authorizing the increase or decrease of the capital
exercise the right of appraisal under the conditions provided in stock, or the incurring, creating or increasing of any bonded
this Code. indebtedness.
POWER TO EXTEND OR SHORTEN CORPORATE LIFE Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
How do we extend or shorten the corporate life? prior approval of the Commission, and where appropriate, of the
A: The law now presupposes that their term will be perpetual. Philippine Competition Commission. The application with the
However, there is still use of this provision because the Commission shall be made within six (6) months from the date
corporation has the option to avail of corporate existence or not. of approval of the board of directors and stockholders, which
It may choose to shorten the term. period may be extended for justifiable reasons.
Rules: Copies of the certificate shall be kept on file in the office of the
1. If issued prior to the effectivity of the New Code – corporation and led with the Commission and attached to the
deemed perpetual UNLESS elects to retain original original articles of incorporation. After approval by the
corporate term Commission and the issuance by the Commission of its
2. If issued under the New Code – perpetual existence certificate of filing, the capital stock shall be deemed increased
UNLESS otherwise specified in the Articles of or decreased and the incurring, creating or increasing of any
Incorporation bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Commission shall not accept for
RIGHT TO SUCCESSION filing any certificate of increase of capital stock unless
accompanied by a sworn statement of the treasurer of the
Do we still have the right to succession? Is there a need to corporation lawfully holding office at the time of the filing of the
have right of succession? certificate, showing that at least twenty-five percent (25%) of the
A: Yes. Because there is a difference between succession and increase in capital stock has been subscribed and that at least
perpetual existence. twenty-five percent (25%) of the amount subscribed has been
paid in actual cash to the corporation or that property, the
SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL valuation of which is equal to twenty-five percent (25%) of the
STOCK subscription, has been transferred to the corporation: Provided,
further, That no decrease in capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate
Section 37. Power to Increase or Decrease Capital Stock;
Incur, Create or Increase Bonded Indebtedness. — No creditors.
corporation shall increase or decrease its capital stock or incur,
Nonstock corporations may incur, create or increase bonded
create or increase any bonded indebtedness unless approved
indebtedness when approved by a majority of the board of
by a majority vote of the board of directors and by two-thirds
(2/3) of the outstanding capital stock at a stockholders' meeting trustees and of at least two-thirds (2/3) of the members in a
duly called for the purpose. Written notice of the time and place meeting duly called for the purpose.
of the stockholders' meeting and the purpose for said meeting
Bonds issued by a corporation shall be registered with the
must be sent to the stockholders at their places of residence as
shown in the books of the corporation and served on the Commission, which shall have the authority to determine the
stockholders personally, or through electronic means sufficiency of the terms thereof.
recognized in the corporation's bylaws and/or the Commission's
rules as a valid mode for service of notices. REQUISITES FOR AN INCREASE OR DECREASE OF
CAPITAL STOCK:
A certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary 1. Done in a stockholder’s meeting duly called for the purpose
of the stockholders' meeting, setting forth: 2. There must be a written notice of the proposed increase or
diminution of the capital stock
(a) That the requirements of this section have been complied 3. Majority vote of the board of directors.
with; 4. 2/3 vote of the stockholders representing the outstanding
capital stock

lOMoARcPSD|9536011
5. A certificate signed by a majority of the directors and XPN: Stockholders are denied their pre-emptive right in the
countersigned by the chairman and the secretary of the following instances:
stockholders’ meeting
6. Accompanied by the sworn statement of the treasurer (1) When it is expressly prohibited under the Articles
showing that at least 25% of such increased capital stock of Incorporation
has been subscribed and that at least 25% of the amount
subscribed has been paid (2) Shares issued in compliance with the laws
7. Submitted to and approved by the SEC. requiring stock offerings or minimum ownership by
8. Approval by the Philippine Competition Commission the public
a. When the corporation decides to go
LIMITATION IN THE DECREASE OF CAPITAL STOCK public, the SEC requires the corporation
to earmark some shares for the
Up to what extent do you think can you increase or employees (salary deduction, easy
decrease capital stock? instalment payment)
A: b. Under existing laws – earmark existing
(a) For the increase – no problem, as long as they follow shares to the public
the subscribed capital stock, and the paid-up capital
stock Atty. Espedido: At least 20% must be
sold to the public
(b) For the decrease – to the extent that it will not prejudice
creditors (3) Shares to be issued in exchange of properties to
retire existing debts
What could be the problem if we decrease the capital stock?
A: Subscribed capital stock is already part of capital. Thus, if we Illustration 1.
decrease the capital, we are trying to return some part of the Corporation sells the unsubscribed 20M shares to a
capital – thus in effect, violating the Trust Fund Doctrine. It will stranger
prejudice the rights of the corporate creditors.
Corporation has 100M ACS and 100M shares. There are 5
**NOTES stockholders.
INCREASE IN BONDED INDEBTEDNESS One of them, Mr. A, takes 60% or 60 million. The other four
subscribed 5M each. There is a total of 80M subscribed capital
Bonded indebtedness is an indebtedness that is evidenced by stocks with a remaining 20 million unsubscribed.
a bond. It is a debt instrument that is long-term in nature which
is issued by a corporation. The board then decided to sell the remaining 20 million because
somebody else was interested to buy. The board said, “Let’s sell
It is different from a promissory note. A promissory note is more it to Mr. Stranger.”
of a short or medium-term, and it is normally issued to a
particular person (payee) which is not the case in a bond. A who subscribed for 60M opposed and argued that he has a
pre-emptive right over the 20M.
SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT
The board countered that A was already given hischance to
Section 38. Power to Deny Preemptive Right. - All subscribe, yet he did not. Thus, they are selling it to others.
stockholders of a stock corporation shall enjoy preemptive right
to subscribe to all issues or disposition of shares of any class, in Is stockholder A entitled to use his preemptive right?
proportion to their respective shareholdings, unless such right is A: Yes. The purpose of this right is for the stockholder to
denied by the articles of incorporation or an amendment thereto: maintain its power or influence. Moreover, the language of the
Provided, That such preemptive right shall not extend to shares law is not limited to issuances, it includes disposition as well.
issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares issued in Illustration 2.
good faith with the approval of the stockholders representing Corporation decided to increase its authorized capital
two-thirds (2/3) of the outstanding capital stock in exchange for stock
property needed for corporate purposes or in payment of
previously contracted debt. If you were Mr. A who owned 60 million, and the corporation
decided to increase its authorized stock for another 100 million
POWER TO DENY PRE-EMTPIVE RIGHT because many are interested.
GEN: Pre-emptive right is a preferential right granted to the How much will you be able to subscribe for the second 100
existing stockholders to subscribe to the newly issued stocks million?
before it is being offered to the public. A: Another 60 million.
Reason: In order for the existing stockholders to Can the corporation say, “Somebody is already going to
protect their interest in the corporation and the shares subscribed 80 million shares. You can subscribe 20
that they hold representing their ownership. million.” Is this allowed?
A: No, because this will reduce Mr. A’s influence or dilute his
It is to allow the stockholders to retain the extent of their share – instead of 60% influence, he will only have 40%
power. influence.

lOMoARcPSD|9536011
Can the subscriber say, “I will subscribe shares (pay the such property and assets shall be appropriated for the conduct
delinquent shares), but I will pay them when I have my share of its remaining business.
of the profit.”?
A: It depends. We have to distinguish if the cash dividends are GEN: A corporation can dispose its assets by a majority vote of
already due and demandable or not. its board of directors or trustees.
If the cash dividends are due and demandable, then XPN: If the disposition of all or substantially all assets of the
compensation is allowed. But if the dividends are not due and corporation, the following requisites must be present:
demandable, compensation is not allowed. (1) Vote of the majority of the board
(2) Authorized by the stockholders representing 2/3 of the
SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS outstanding capital stock
 XPN to the ratification of the stockholders:
Section 39. Sale or Other Disposition of Assets. - Subject to a. Necessary in the usual and regular
the provisions of Republic Act No. 10667, otherwise known as course of business of the corporation; or
the "Philippine Competition Act", and other related laws a b. Proceeds of the sale or other disposition
corporation may, by a majority vote of its board of directors or of property and assets shall be
trustees, sell, lease, exchange, mortgage, pledge, or otherwise appropriated for the conduct of its
dispose of its property and assets, upon such terms and remaining business.
conditions and for such consideration, which may be money,
stock, bonds, or other instruments for the payment of money or TEST FOR DETERMINING WON 2/3 VOTES IS REQUIRED:
other property or consideration, as its board of directors or
trustees may deem expedient. If it will render the corporation incapable of continuing its
business – based on jurisprudence, this refers to disposition of
A sale of all or substantially all of the corporation's properties at least 80% of its assets.
and assets, including its goodwill, must be authorized by the Illustration.
vote of stockholders representing at least two-thirds (2/3) of the Transportation company sells 20 buses out of 100 buses
outstanding capital stock, or at least two-thirds (2/3) of the
members, meeting duly called for the purpose. A transportation company operating 100 passenger buses
decides to sell only 20 buses.
In nonstock corporations where there are no members with
voting rights, the vote of at least a majority of the trustees in What vote is required?
office will be sufficient authorization for the corporation to enter A: It only needs to be approved by a majority vote of the Board
into any transaction authorized by this section. of Directors. Selling 20 out of 100 buses cannot be considered
substantial to make the company incapable of continuing the
The determination of whether or not the sale involves all or business or incapable of performing its stated purpose.
substantially all of the corporation's properties and assets must
be computed based on its net asset value, as shown in its latest If it sells 80 buses out of 100?
financial statemments. A sale or other disposition shall be A: It needs the approval of the stockholders representing 2/3 of
deemed to cover substantially all the corporate property and the outstanding capital stock as it can already be considered as
assets if thereby the corporation would be rendered incapable all or substantially all of the corporate property and assets.
of continuing the business or accomplishing the purpose of
which it was incorporated. Illustrations on the exceptions to ratification:
Exception 1 – necessary in the usual course of business
Written notice of the proposed action and of the time and place of the corporation
for the meeting shall be addressed to stockholders or members
at their places of residence as shown in the books of the The corporation is selling subdivision lots.
corporation and deposited to the addressee in the post office
with postage prepaid, served personally, or when allowed by the Do you think every time they sell 80% of the subdivision lots
bylaws or done with the consent of the stockholder, sent available for sale, they have to secure the ratification of the
electronically: Provided, That any dissenting stockholder may shareholders?
exercise the right of appraisal under the conditions provided in A: No, because this is in the usual course of business of the
this Code. corporation.
After such authorization or approval by the stockholders or Exception 2 – if the proceeds of the sale would be plowed
members, the board of directors or trustees may, nevertheless, back to the business of the corporation
in its discretion, abandon such sale, lease, exchange, mortgage,
pledge, or other disposition of property and assets, subject to There is no need of approval. Whatever proceeds, the
the rights of third parties under any contract relating thereto, corporation can use it back.
without further action or approval by the stockholders or
members. SEC. 40. POWER TO ACQUIRE OWN SHARES
Nothing in this section is intended to restrict the power of any Section 40. Power to Acquire Own Shares. - Provided, That
corporation, without the authorization by the stockholders or the corporation has unrestricted retained earnings in its books
members, to sell, lease, exchange, mortgage, pledge, or to cover the shares to be purchased or acquired, a stock
otherwise dispose of any of its property and assets if the same corporation shall have the power to purchased or acquired, a
is necessary in the usual and regular course of business of the stock corporation shall have the power to purchase or acquire
corporation or if the proceeds of the sale or other disposition of its own shares for a legitimate corporate purpose or purposes,
including the following cases:

lOMoARcPSD|9536011
(a) To eliminate fractional shares arising out of stock dividends; SEC. 41. POWER TO INVEST CORPORATE FUNDS IN
OTHER CORPORATIONS/BUSINESSES
(b) To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a delinquency Section 41. Power to Invest Corporate Funds in Another
sale, and to purchase delinquent shares sold during said sale; Corporation or Business or for Any Other Purpose. - Subject
and to the provisions of this Code, a private corporation may invest
its funds in any other corporation, business, or for any purpose
(c) To pay dissenting or withdrawing stockholders entitled to other than the primary purpose for which it was organized, when
payment for their shares under the provisions of this Code. approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3)
GEN: A corporation is not allowed to acquire its shares. of the outstanding capital stock, or by at least two-thirds (2/3) of
the outstanding capital stock, or by at least two-thirds (2/3) of
Reason: Because it is in effect liquidating, to the the members in the case of nonstock corporations at a meeting
damage and prejudice of its creditors. If the corporation duly called for the purpose. Notice of the proposed investment
buy out the shares of the stockholders, we are trying to and the time place of residence as shown in the books of the
liquidate which is a violation of the Trust Fund Doctrine. corporation and deposited to the addressee in the post office
Sooner or later, there will be no more stockholders with the postage prepaid. Served personally, or sent
since the corporation is buying out the shares. If all the electronically in accordance with the rules and regulations of the
stockholders get back all their investment – there will Commission on the use of electronic data message, when
no longer be any investments for the corporation to allowed by the bylaws or done with the consent of the
continue to operate. stockholders: Provided, That any dissenting stockholder shall
have appraisal right as provided in this Code: Provided,
XPN: however, That where the investment by the corporation is
(1) Prevent fractional shares arising from stock dividends reasonably necessary to accomplish its primary purpose as
 In distributing stock dividends based on the stated in the articles of incorporation, the approval of the
amount, there will be an instance where 1/2 or 1/4 stockholders or members shall not be necessary.
share is given. Instead of giving fractional shares,
the corporation will just buy it back. Requisites:
(2) Satisfy delinquent shares (1) Vote of the majority of the Board of Directors
(3) Pay dissenting stockholders – in the exercise of their (2) Vote of the stockholders representing 2/3 of the
appraisal right, which means that when the stockholder outstanding capital stock
does not agree with the decision of the board, it may
exercise such right and the corporation shall be Illustration.
compelled to buy-back the shares Airline Corporation buys 60% of a Shipping Company
Condition for the exceptions to apply: There must be A corporation is engaged in an airline business – operating
unrestricted retained earnings. aircrafts. Since it has a lot of aircrafts, they noticed that their idle
funds in the bank are not earning much.
Why would these exceptions not violate the trust fund
doctrine? The corporation decided to buy 60% of a shipping company.
A: Because it can only be exercised when it has unrestricted
retained earnings which simply means that such retained If the corporation buys 60% of the shipping company, what
earnings are not earmarked for any purpose – SURPLUS OF would be required?
PROFITS. A: A vote of the majority of the Board of Directors and a vote of
the stockholders representing 2/3 of the outstanding capital
HOWEVER, if there are no surplus profits or URE – this will stock
already affect the creditors. The Trust Fund Doctrine will be
violated. Can the corporation say that there is no need of the
ratification since the shipping company is still a
ADVANTAGES AND DISADVANTAGES transportation company?
A: No. It is already a deviation of its principal purpose.
If the corporation reacquires the shares and you are one of
the remaining stockholders whose shares were not What if we have 10 stockholders. How many stockholders
reacquired, will you be happy? will have to approve the decision of the board?
A: It depends. A: It depends on the stockholders representing 2/3 of the
outstanding capital stock. It may even be just one stockholder
Advantageous because the Code talks about 2/3 of the outstanding shares. It
If the company is expected to earn profits, then they would have is not on the number of directors but on the number of shares.
bigger dividends because of the fewer stockholders who will be
dividing the profits. Atty. Espedido: Our TEST is the PRINCIPAL PURPOSE. A
company may invest so long as it is within the bounds of the
Disadvantageous primary purpose. Otherwise, it requires a vote of the MAJORITY
If the company expecting losses, then only a few stockholders OF THE BOARD AND 2/3 vote of the stockholders representing
will be sharing the losses, which is prejudicial on their part. the OUTSTANDING CAPITAL STOCK.
Also, if shares were bought back using other shares, then the
shares used as payment could have been used as stock
dividends.

lOMoARcPSD|9536011
Note: Other than the primary purpose, THERE IS NO NEED without their consent, and such consent has not yet
FOR RATIFICATION IF THE NEW BUSINESS WILL BE: been secured
(1) Necessary accomplish its primary purpose (3) When it can be clearly shown that such retention is
(2) It falls under the express, implied, inherent, and necessary under special circumstances obtaining in
apparent powers of the corporation the corporation, such as when there is need for special
(3) There is a logical relationship to the primary business reserve for probable contingencies.
or if it is in furtherance of the business
How are dividends payable?
Atty. Espedido: This is the test in determining WON it A: It depends. There are several ways that dividends can be
is express, implied, inherent, or an incidental power. paid: whether in cash, property, stock or a combination of any of
the three.
Otherwise, without the ratification of the stockholders,
it becomes an ultra vires act which is an unenforceable Can the stockholders demand for the declaration of
act. dividends?
A: No. The decision to declare dividends lies with the Board.
SEC. 42. POWER TO DECLARE DIVIDENDS The Board has the power to manage the corporation. Hence,
when the corporation has profits, it is the Board who decides
Section 42. Power to Declare Dividends. - The board of what to do with it. The Board, using its discretion, may not
directors of a stock corporation may declare dividends out of the declare dividends but rather use it for business expansion
unrestricted retained earnings which shall be payable in cash, projects.
property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash Exception: When there is improper accumulation of profits. This
dividends due on delinquent stock shall be first be applied to the happens when the corporation retains surplus profits in excess
unpaid balance on the subscription plus costs and expenses, of 100% of its paid-in capital stock. In such case, the
while stock holders until their unpaid subscription is fully paid: shareholders may demand for the declaration of dividends.
Provided, further, That no stock dividend shall be issued without
the approval of stockholders representing at least two-thirds Illustration. You are a shareholder, and in April of a taxable
(2/3)of the outstanding capital stock at a regular or special year, you heard that the BOD intends to declare dividends.
meeting duly called for the purpose. Per your computation, your tax for the year would be high,
not yet including the taxes you will incur upon receiving the
Stock corporations are prohibited from restraining surplus profits dividends. Would you be happy that the BOD will declare
in excess of one hundred percent (100%} of their paid-in capital dividends?
stock, except: (a) when justified by the definite corporate A: No. You would tell the BOD not to declare dividends because
expansion projects or programs approved by the board of of the additional taxes you will incur from it.
directors; or (b) when the corporation is prohibited under any
loan agreement with financial institutions or creditors, whether Can you however compel the corporation to declare
local or foreign, from declaring dividends without their consent, dividends if the retained earnings has not reached more
and such consent has not yet been secured; or (c) when it can than 100% of the paid-in capital?
be clearly shown that such retention is necessary under special A: No.
circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies. CORPORATE PRACTICE OF ACCUMULATING EARNINGS
DIVIDENDS When the corporation acquires income, it will be subject to the

corporate income tax. Then, when it distributes cash dividends
What are dividends? to the shareholders, such dividends will become the income of
A: These are part of the PROFITS distributed as shares to the said shareholders, and thus will be subject to individual income
stockholders. If there are no profits, there are no dividends. tax. In effect, there is double taxation. This makes the BOD
hesitant to declare dividends, and so even though the
GEN: The Board has the sole authority to declared dividends. corporation has cash, it will find ways to make it appear that the
The declaration of dividends is the sole prerogative of the board. “dividends” of the corporation were “expenses” to avoid paying
taxes on them.
XPN: The Board may be compelled to issue dividends when the
retained earnings of the corporation EXCEED 100% of their Illustration. The shareholders will attend a seminar abroad to
paid-in capital stock. observe the latest trends of the business, and all expenses will
be paid by the corporation.
Note: If they still do not declared dividends, they will be charged
with Improperly Accumulated Earnings Tax (IAET) – in which The amount to be spent is equal to what should have been the
case the corporation is prone to penalties under the NIRC for dividends to the shareholders, but instead of declaring said
undue accumulation. amount as dividends, the amount will now be made to appear
as an expense of the company to finance the shareholders’
XPN to XPN: A corporation may not be compelled to declare seminar abroad. It will not be considered as income on the part
dividends even if the profits exceed 100% of the paid-in capital of the shareholder, and thus will not be subjected to income tax.
in the following instances:
(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 financial institutions or creditors,
whether local or foreign, from declaring dividends

lOMoARcPSD|9536011
IMPROPERLY ACCUMULATED EARNINGS TAX Atty. Espedido: As much as possible, corporations do not
declare cash dividends because it is taxable twice: (1) when
However, the BIR discovered this scheme. They came up with declared as income by the corporation and (2) when declared
an amendment to the NIRC to impose improperly income by the stockholders upon distribution.
accumulated earnings tax (IAET) as a penalty for erring
corporations. (B) STOCK DIVIDENDS
GEN: The corporation will be liable for IAET when its Rule: It shall be withheld from the delinquent stockholders
undistributed profits exceed 100% of the paid-up capital. UNTIL their unpaid subscription is fully paid.
XPN: When accumulated earnings are allowed, such as when: Offsetting in cash dividends does not apply in stock dividends.
1. When justified by definite corporate expansion projects You cannot issue any stock dividends UNTIL the unpaid stock
or programs; are fully paid.
2. When the corporation is prohibited under any loan
agreement with any financial institution or creditor from Note: Issuing stock dividends requires a majority vote of the
declaring cash dividends without securing its/his/her BOD and a ratification of 2/3 vote of the stockholders
consent; or representing the outstanding capital stock
3. When it can be clearly shown that such retention is
necessary under special circumstances, such as when Illustration. If your subscription has not yet been paid and
there is a need for special reserves for possible declared due by the Board, can you say “just charge my
contingencies (e.g. typhoons). unpaid subscription to future dividends”? Can a
shareholder refuse to pay by saying that?
When will dividends be taxed on the side of the A: No, because there is no assurance whether indeed dividends
shareholder? will be declared in the future, or how soon. If the subscription
A: It depends on the type of dividend that will be received: becomes due, it has to be paid. Otherwise, the subscriber will
be declared as a delinquent shareholder.
1. Cash dividend → the stockholder is liable for tax since
it is income already. However, if dividends were declared, and the shareholder
2. Stock dividend → it is not yet taxable, even though still has unpaid subscriptions?
they already have value. It is not considered income A: The dividend will first have to be applied to the unpaid
because there is no transfer of cash. subscription.
Important: Until the shareholder is able to encash stock EFFECT OF DELINQUENCY ON

dividends, the shareholder is not considered to have earned THE RIGHT TO DIVIDENDS
an income. Stock dividends are not subject to income tax
because it is not yet cash. This is so because the value of What are delinquent stocks?
the shares of stock may fluctuate depending on the market A: These are unpaid subscriptions that have become due and
value, book value or par value of said share. Because their demandable, and yet no payment is made.
value fluctuates, they are not taxable because still being
unrealized gain, the shareholder would not know their When do unpaid subscriptions become due and
actual value. demandable?
A:
Recall: 1. Upon the arrival of the specified date or period for
payment; or
1. Book value → Net assets ÷ no. of outstanding shares 2. Upon the call of board (considered as a demand to
2. Market value → The value that buyers in the market pay).
are willing to buy and the value that shareholders are
willing to sell. It generally increases if the business of RULES ON DELINQUENT STOCKS
the corporation is doing well, and decreases if the
business is doing bad. It may be higher or lower than When cash dividends are declared, and there is still an
the par value. unpaid subscription, will the shareholder still receive his or
3. Par value → A pre-determined value her dividends? If yes, how?
A: Cash dividends due on delinquent stock shall first be applied
TYPES OF DIVIDENDS to the unpaid balance of the subscription. If there is an excess
(1) Cash dividends amount, then it will go to the shareholder.
(2) Property dividends
(3) Stock dividends Atty. Espedido: Apply first the receivable declared cash
(4) Combination of the different kinds of dividends dividends to the unpaid subscription of the stockholder, then the
excess will be given to him. Offsetting will apply.
(A) CASH DIVIDENDS
Here, there is a debtor-creditor relationship between the
Rule: If there are delinquent shares, the cash dividends shall be corporation and the stockholder.
applied to the unpaid subscription which is due and demandable
of the shareholder – OFFSET. On one hand, the corporation is a creditor with regards to the
unpaid subscription, but a debtor with regards to the declared
Note: Issuing cash dividends requires a vote of majority of the cash dividends.
Board of Directors without need of ratification from the
stockholders

lOMoARcPSD|9536011
On the other hand, the stockholder is a creditor with regards to Illustration. If the original authorized capital stock (ACS) of the
the declared cash dividends, but a debtor with regards to the corporation is 1Mn, and is fully subscribed, and they increased
unpaid subscription. it by another 1Mn, the SCS should be 250k of the increased
ACS, and the paid-up capital should be 62.5k (remember,
When stock dividends are declared and there is still an increase in paid-up capital has a 25%-25% requirement: 25% of
unpaid subscription, would the shareholder still receive the increase must be subscribed, and 25% of such subscription
dividends? If yes, how? must be paid up).
A: Stock dividends will be withheld from the delinquent
shareholder until his unpaid subscription is fully paid. However, there are Unrestrained Retained Earnings of the
corporation which the corporation wanted to declare as
Atty. Espedido: We are assuming that the unpaid subscriptions dividends, just enough to pay the minimum requirement for
are now delinquent because they are due and demandable for subscriptions.
payment.
Therefore, there is enough money from the corporation. The
If it is not yet due, no offsetting/withholding will apply. Even if money, if declared as cash dividends, may be used by the
there are unpaid subscriptions, and there are cash dividends shareholders to pay for their new subscriptions. However, once
declared and to be distributed, if these unpaid subscriptions are declared as dividends, the corporation cannot be sure whether
not yet due and demandable, no offsetting or withholding will or not the SH will really invest in the new stocks, since the
occur. The corporation cannot compel the shareholder to first shareholders cannot be compelled to invest back.
pay the unpaid subscriptions. There can be offsetting only when
both debts are due and demandable. KTG (medyo libog, so here is an attempt to clarify the
illustration): If a corporation increases its ACS, it is required to
CONVERSION OF EARNINGS INTO CAPITAL THROUGH fulfill two requirements:
DECLARATION OF STOCK DIVIDENDS 1. 25% must be subscribed; and
2. Of the subscriptions, 25% must be paid up.
Important: The law permits the corporation to convert its
earnings into capital, through the declaration of stock dividends. In this case, the corporation needs to put up 25% x 25% x P1Mn
(which is equals to 62.5k). The corporation has such money in
In this manner, the board may use such earnings for the general the form of its unrestricted retained earnings (URE). However,
or specific corporate purpose. It becomes part of the corporate the corporation wants to declare the URE as dividends.
trust fund and may no longer be used for dividend distribution.
This is an effective way to retain earnings without having to So the corporation now has a problem: should it use the amount
explain to SEC/BIR. of URE as the paid-up capital, or should it declare the same as
dividends?
INCREASING THE AUTHORIZED CAPITAL STOCK
If the corporation declares it as cash dividends, it gives the
If there are no more stocks, can we still distribute stock existing stockholders enough money to possibly purchase or
dividends? pay-up the new ACS (remember, existing stockholders have a
A: Yes. We can increase the authorized capital stock which is pre-emptive right to shares). However, the corporation is not
done by amending the Articles of Incorporation. This is done assured if the existing shareholders will really buy the new ACS,
through the following processes: since they cannot be compelled to invest in the corporation.
1. A stockholder’s meeting duly called for the purpose
2. A written notice of the proposed increase or diminution To make sure that the money will remain with the
of the capital stock corporation, what kind of dividends should the corporation
3. Majority vote of the Board of Directors declare instead?
4. A vote of 2/3 of the stockholders representing the A: The corporation should declare stock dividends by
outstanding capital stock transferring the URE to capital asset.
5. A certificate signed by a majority of the directors and
countersigned by the chairman and the secretary of the In effect, the capital stock is increased without any
stockholder’s meeting corresponding increase in the corporate assets.
6. Accompanied by the sworn statement of the treasurer
showing that at least 25% of such increased capital De Leon: If the actual capital is increased by accumulated profits
stock has been subscribed and that at least 25% of the and such profits are distributed to the stockholders in the form
amount subscribed has been paid of stock dividends, the capital stock is increased, for the profits
7. Submitted to and approved by the SEC are reinvested in the corporation by transferring the same from
8. Approval by the Philippine Competition Commission surplus account to a capital account. The amount corresponding
to the stock dividends declared may be used to cover the
Note: In this case, we are now increasing the capital stock and required 25% subscription to increase the authorized capital
the it is the corporation who will pay because instead of paying stock and, if sufficient, will obviate the necessity of taking in new
cash, the shareholders will no longer need to pay since the subscription.
corporation will use the profits that they already have.
NON-TAXABILITY OF STOCK DIVIDENDS
**Tanya Notes
Stock dividends are NOT TAXABLE because these are not
Atty. Espedido: If the authorized capital stock of the corporation realized income but are considered investments.
has all been subscribed, and additional capital is needed, the
corporation has the option to increase the authorized capital
stock.

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STOCK SPLITS REVERSE STOCK SPLIT
Stock Split Decreases the number of shares held by each stockholder.

This is an increase in the number of shares, but no increase in However, it will still retain the same capital value.
the capital value of such shares.
Illustration. There are occasions where the par value of the **Illustration:
share appears to be expensive, and fractional shares
cannot be issued, so to attract investors, what must the ABC Corporation currently has 300,000 outstanding shares of
corporation do? For example, the value of each share was stock with a par value of P1. It issues a 1-for-5 stock split as
10, 000 and somebody was willing to invest only 5, 000. dividends.
Since the corporation cannot issue only one half, what must
they do instead? Before reverse stock split:
A: Do a stock split since issuance of fractional shares is neither
allowed nor encouraged. In fact, the corporation should Value per
No. of Shares Capital
eliminate the fractional shares by buying them. So, instead of Share
selling it a share at a value of 10, 000 per share, if only to attract A 100,000 P200,000 P2.00
more investors, the corporation may split said share. We now B 100,000 P200,000 P2.00
have 2 shares with 5, 000 per share. C 50,000 P100,000 P2.00
D 25,000 P50,000 P2.00
**Illustration. E 12,500 P25,000 P2.00
ABC Corporation currently has 300,000 outstanding shares of F 12,500 P25,000 P2.00
stock with a par value of P1. It issues a 2-for-1 stock split as After reverse stock split:
dividends.
Value per
The effect will be as follows: No. of Shares Capital
Share
A 20,000 P200,000 P10.00
Before stock split:
B 20,000 P200,000 P10.00
C 10,000 P100,000 P10.00
Value per
No. of Shares Capital D 5,000 P50,000 P10.00
Share
A 100,000 P200,000 P2.00 E 2,500 P25,000 P10.00
B 100,000 P200,000 P2.00 F 2,500 P25,000 P10.00
C 50,000 P100,000 P2.00
A/N:
D 25,000 P50,000 P2.00
1. A reverse stock split reduces the number of shares
E 12,500 P25,000 P2.00
held by each shareholder but with proportionally more
F 12,500 P25,000 P2.00 valuable shares.
2. A reverse stock split does not directly impact a
After stock split: company's value.
3. A reverse stock split, however, often signals a
In a 2-for-1 stock split, each stockholder will receive an company in distress since it raises the value of
additional share of stock for each share he/she holds. otherwise low-priced shares.
4. The desire to increase share prices to remain relevant
Value per and to avoid being delisted are the most common
No. of Shares Capital
Share reasons for corporations to pursue this strategy.
A 200,000 P200,000 P1.00
B 200,000 P200,000 P1.00 CONFLICTING VIEWS ON ISSUANCE OF CASH
C 100,000 P100,000 P1.00 DIVIDENDS WHEN THERE ARE NO PROFITS
D 50,000 P50,000 P1.00 (UNLAWFUL DECLARATION OF DIVIDENDS)
E 25,000 P25,000 P1.00
F 25,000 P25,000 P1.00 If it was discovered later that there were no profits at all but
the Board has already declared and distributed cash
A/N: dividends and somebody complained, should we now
(3) A stock split is a corporate action in which a company require the stockholders to return?
divides its existing shares into multiple shares to boost A: There are conflicting views among authorities:
the liquidity of the shares.
(4) The primary motive is to make shares seem more (1) If solvent corporation:
affordable to small investors even though the
underlying value of the company has not changed. View 1 – No need to return since creditors are still
(5) The most common split ratios are 2-for-1 or 3-for-1, protected. They will not be prejudiced since the
which means that the stockholder will have two or three corporation still has capital
shares, respectively, for every share held earlier.
(6) Reverse stock splits are the opposite transaction, View 2 – Must still be returned as it violates the
where a company divides, instead of multiplies, the Trust Fund Doctrine
number of shares that stockholders own, raising the
market price accordingly. (2) If insolvent corporation – it needs to be returned

lOMoARcPSD|9536011
Atty. E’s opinion: If the corporation is still solvent, the Trust Fund DECLARING DIVIDENDS FROM THE CAPITAL: PAID-UP
Doctrine is not violated since capital remains intact. Thus, there CAPITAL
is no need to return.
GEN: Dividends cannot be distributed out of the capital. It
**NOTES violates the trust fund doctrine. Under such doctrine, the
corporation cannot return capital to the stockholders unless all
RETAINED EARNINGS the creditors have been paid first.
XPN (exclusive exceptions):
Accumulated profits of a corporation in its previous operations.
It includes all income accumulated throughout the years during 1. If the dividend is a liquidating dividend – dividends
which the corporation was operating. that are distributed during the liquidation of a
corporation.
So, if the corporation has been experiencing losses, there will Here, the trust fund doctrine no longer applies because
be no retained earnings. Rather, there will be deficits. Retained the corporation is already being liquidated. This means
earnings can only exist if the corporation has been operating at that before the corporation can even distribute the
a profit. liquidating dividends, it has to pay its creditors. The
remainder is what will be distributed as liquidating
TYPES OF RETAINED EARNINGS dividends.
(1) Restricted Retained Earnings 2. When the corporation is a wasting asset corporation.
- In general, retained earnings are restricted if they
are not available for dividend declaration Wasting Asset Corporation
A type of corporation which has a limited life because
(2) Unrestricted Retained Earnings its assets are consumed during its operations and
- If available for dividend declaration. cannot be replenished.
Example:
RESTRICTING RETAINED EARNINGS - Mining – If a corporation is created to mine only a
certain area, then once the minerals in that area
1. Appropriated by the Board of Directors for corporate has been fully depleted, the corporation’s purpose
expansion projects or programs. ceases to exist. So slowly, as the area’s minerals
are consumed, the assets of the corporation are
Example: If the Board of Directors say that out of the also slowly being depleted.
P50Mn retained earnings, they are going to allocate
P15Mn for a future expansion, then that P15Mn will be In that sense, the corporation is allowed to return
considered restricted retained earnings. Therefore, out capital to its stockholder because the idea is that
of the P50Mn, P15Mn cannot be declared as the corporation will exist only for a limited period –
dividends. the period that its assets still exists. Once the
assets are depleted, then the corporation can
2. Covered by a restriction for dividend declaration under return its capital to its stockholders.
a loan agreement.
RELEVANT DATES IN DIVIDEND DECLARATION
Contractual Covenants
If, for example, there is a loan agreement, and the (1) Declaration Date
creditor expressly provides that the corporation cannot - Before the declaration date, the dividends are not a
declare dividends out of a certain amount of its retained liability of the corporation. In fact, the corporation is not
earnings. That portion that is restricted under the obliged to declare dividends even if it has unrestricted
covenant becomes restricted retained earnings. retained earnings. The BOD cannot be compelled to
declare dividends. Dividends only become a liability of
3. Required to be retained under special circumstances the corporation once they are declared. The moment of
obtaining in the corporation, such as when there is a declaration is the time the corporation recognizes such
need for special reserves for probably contingencies. liability.
Example: When a corporation acquires treasury (2) Record Date

shares, it is required to restrict a portion of its retained - This refers to the date when the corporation
earnings in the same amount as the treasury shares determines who among its stockholders are entitled to
that they acquired. That portion becomes restricted receive dividends. The stockholders on record in the
retained earnings, and cannot be available for dividend stock and transfer book as of the record date are the
declaration. stockholders who will receive dividends.
- Before the record date, the stocks are considered sold
If the corporation has been experiencing losses, such dividends on. This means that before the record date,
that it has zero or negative retained earnings, then it stocks are sold with the right to receive dividends on it.
cannot declare dividends at all. So there has to be In effect, it means that there is actually a premium on
unrestricted retained earnings for a corporation to the price of those shares because they carry the right
declare dividends. to receive dividends.
- When stocks are sold after the record date, the stocks
are commonly referred to as being sold dividends off,
because even if they are sold or transferred, the one

lOMoARcPSD|9536011
who will be receiving dividends on them is the person MANAGEMENT CONTRACT

who was the owner of such as of the record date.
An agreement under which a corporation delegates the
Illustration. management of its affairs to another corporation for a certain
period. Two corporations are involved: (1) the managing
Declaration Date March 10 corporation and the (2) managed corporation
Record Date March 30
GEN: Management contract is entered into by a MAJORITY
A is the holder of the share on declaration date. On March vote of the Board of Directors and stockholders of both the
15, A sells the shares to B. Those shares are considered managing and managed corporation
sold dividends on.
XPN: Approved by the stockholders of the managed corporation
If B sells the shares to C on March 25, those shares are still owning at least 2/3 of the outstanding capital stock or of
considered sold dividends on. members in two instances:
On March 30, or the record date, if C is still the owner of (1) The stockholder representing the same interest of both
those stocks, then C is the one entitled to receive dividends managing and managed corporation owns or control
on the shares. MORE THAN 1/3 of the outstanding capital stock
entitled to vote of the managing corporation; and
If on April 5, C sells the shares to D, then it is still C who is (2) Majority of the members of the BOD of the managing
entitled to receive dividends on them. On this date, the corporation also constitutes majority of the members of
shares are considered sold dividends off. the BOD of the managed corporation .
(3) Payment Date STATUS OF THE BOD OF

- Date when the dividends are actually paid by the THE MANAGED CORPORATION
corporation. When a corporation declares dividends, it
will normally say when the record and the payment What could this mean, what happens to the Board of the
dates are. managed corporation, do they still function as a board?
- If the corporation’s resolution for the declaration of A: Yes, this is not an abandonment. The BOD of the managed
dividends is silent as to the record date, then the record corporation still retains the control of how the corporation should
date is considered the same as the declaration date. exist.
SEC. 43. POWER TO ENTER INTO MANAGEMENT The only thing is that, on the operational side of the managed
CONTRACT corporation is now given to the managing corporation. There are
companies whose business is just to manage certain portions or
Section 43. Power to Enter into Management Contract. - No operations of other corporations. The board of the managed
corporation shall conclude a management contract with another corporation still functions as to the remaining operations.
corporation unless such contract is approved by the board of
directors and by the stockholders owning at least the majority of Examples: ship management corporation, audit managers
the outstanding capital stock, or by at least a majority of the
members in the case of a nonstock corporation, or both the SEC. 44. ULTRA VIRES ACTS
managing and the managed corporation, at a meeting duly
called for the purpose: Provided, That (a) where a stockholder Section 44. Ultra Vires Acts of the Corporations. - No
or stockholders representing the same interest of both the corporation shall possess or exercise corporate powers other
managing and the managed corporations own or control more than those conferred by this Code or by its articles of
than one-third (1/3) of the total outstanding capital stock entitled incorporation and except as necessary or incidental to the
to vote of the managing corporation; or (b) where a majority if exercise of the powers conferred.
the members of the board of directors of the managing
corporation also constitute a majority of the members of the What is the effect of an ultra vires act?
board of directors of the managed corporation, then the A: An ultra vires act is an unenforceable act. Since it is not
management contract must be approved by the stockholders of enforceable, the contract is not binding to the corporation.
the managed corporation owning at least two-thirds (2/3) of the
total outstanding capital stock entitled to vote, or by at least two- The State looks ultra vires acts with disfavor. It will create more
thirds (2/3) of the members in the case of a nonstock problems than solutions. If we strictly enforce the concept of
corporation. ultra vires act, the entire business community will be affected.
These shall apply to any contract whereby a corporation Atty. Espedido: Imagine the inconvenience and discomfort of
undertakes to manage or operate all or substantially all of the trying to review AOI of every stockholder for every transaction
called services contracts, operating agreements or otherwise: that we do. Trying to analyze: “Is this inherent, apparent,
Provided, however, That such service contracts or operating necessary?” If we do this, we would lose a lot of time before we
agreements which relate to the exploration, development could enter into business transactions.
exploitation or utilization of natural resources may entered into
such periods as may be provided by the pertinent laws or So, the authorities came out with solutions on how this could be
regulations. resolved.
No management contracts shall be entered into for period longer

that five (5) years for any one term.

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RESOLVING ULTRA VIRES ACTS Notwithstanding the provisions of the preceding paragraph,
bylaws maybe adopted and filed prior to incorporation; in such
How do we resolve ultra vires acts? case, such bylaws shall be approved and signed by all
incorporators and submitted to the Commission, together with
GEN: It is not binding. the articles of incorporation.
XPN: In all cases, bylaws shall be effective only upon the issuance by
the Commission of a certification that the bylaws are in
INSTANCE SOLUTION accordance with this Code.
i. Contract is completely Leave them as they are – we
performed or fulfilled by do not have to dig up what The Commission shall not accept for filing the bylaws or any
both parties (parties are happened amendment thereto of any bank, banking institution, building
estopped) and loan association, trust company, insurance company, public
ii. Only one party has been Return what has been utility, educational institution, or any other corporations
benefited (one of the received governed by special laws, unless accompanied by a certificate
parties already executed of the appropriate government agency to the effect that such by
the contract; partial laws or amendments are in accordance with law.
fulfillment)
iii. Contract is not yet acted Do not perform or proceed What are bylaws?
upon A: They are the internal rules and regulations of a corporation.
TRUE OR FALSE When should a corporation file its bylaws?

A:
1. All illegal acts are ultra vires acts – TRUE 1. Within one (1) month after the receipt of the official
notice of the issuance of its certificate of incorporation
2. All ultra vires acts are illegal acts – FALSE, because from the SEC, or
they may also be unauthorized acts. 2. They may be adopted and filed prior to incorporation,
together with the AOI.
RATIFICATION OF ULTRA VIRES ACTS
Note: You can already submit your by-laws even if you have
RULES: not yet been given the authority to exist.
(A) Illegal ultra vires acts – cannot be ratified What are the requisites for the adoption of by-laws?
1. Vote of the stockholders representing at least a
(B) Unauthorized ultra vires act – can be cured through a majority of the OCS in case of stock corporations or
ratification by a vote of 2/3 of the stockholders members in case of non-stock corporations;
representing the outstanding capital stock so long as it 2. Approved and signed by all incorporators; and
DOES NOT AFFECT THIRD PARTIES. 3. Submitted to the SEC.
**NOTES What is the binding effect of bylaws to the public?

GEN: It does not bind the public.
Ultra Vires Act XPN: A third person may be bound by the bylaws where has
One not within the express, implied and incidental powers of the knowledge about it, either actual or constructive.
corporation, conferred by the RCC or the AOI.
**NOTES
Consequence of an Ultra Vires Act
Merely voidable, which may be enforced by performance, TIME AND PROCEDURE FOR THE ADOPTION OF BYLAWS
ratification, or estoppel. (De Leon)
1) PRE-INCORPORATION
Note: According to Atty. E, an ultra vires act is unenforceable Submitted or filed before the SEC together with the AOI.
rather than voidable. (This is the one now required in practice; you cannot
incorporate without it.)
TITLE V. BYLAWS
Requirements:
SEC. 45. ADOPTION OF BY LAWS 1. Approved and signed by all incorporators; and
2. Submitted to the SEC together with the AOI.
Section 45. Adoption of Bylaws. - For the adoption of bylaws
by the corporation, the affirmative vote of the stockholders Additional requirements for banks and other special
representing at least a majority of the outstanding capital stock, corporations:
or of at least a majority of the members in case on nonstock Accompanied by a certificate of the appropriate
corporations, shall be necessary. The bylaws shall be signed by government agency to the effect that such bylaws or
the stockholders or members voting for them and shall be kept amendments are in accordance with law.
in the principal office of the corporation, subject to the inspection
of the stockholders or members during office hours. A copy 2) POST-INCORPORATION
thereof, duly certified by a majority of the directors or trustees Basically, everything that you need to do post-incorporation
and countersigned by the secretary of the corporation, shall be in order to commence the transacting of business.
filed with the Commission and attached to the original articles of
incorporation.

lOMoARcPSD|9536011
Requirements: (c) The required quorum in meetings of stockholders or

1. Affirmative vote and signature of stockholders members and the manner of voting therein;
representing the majority of the OCS or members (d) The modes by which a stockholder, member, director, or
in case of nonstock corporation; trustee may attend meetings and cast their votes;
2. Duly certified by the majority of the BOD/BOT; and (e) The form for proxies of stockholders and members and the
3. Filed with SEC, to be attached to the original AOI. manner of voting them;
(f) The directors’ or trustees’ qualifications, duties and
CONSEQUENCES OF FAILURE TO ADOPT BYLAWS responsibilities, the guidelines for setting the compensation
of directors or trustees and officers, and the maximum
Note: This may not be applicable to the Revised Corporation number of other board representations that an independent
Code. But this was not discussed by Atty. [Gaviola] after the director or trustee may have which shall, in no case, be
revision. more than the number prescribed by the Commission;
(g) The time for holding the annual election of directors or
Non-filing of the bylaws on time will not result in the automatic trustees and the mode or manner of giving notice thereof;
dissolution of the corporation. Such consequence is not (h) The manner of election or appointment and the term of
provided under the Corporation Code. office of all officers other than directors or trustees;
(i) The penalties for violation of the bylaws;
However, pursuant to Sec. 6 (i) (5) of P.D. No. 902-A (see Sec. (j) In the case of stock corporations, the manner of issuing
19), the failure to file the bylaws within one (1) month from the stock certificates; and
date of incorporation with the SEC shall render the corporation (k) Such other matters as may be necessary for the proper
liable to the revocation of its registration, to wit: or convenient transaction of its corporate affairs for the
promotion of good governance and anti-graft and corruption
Section 6. In order to effectively exercise such measures.
jurisdiction, the Commission shall possess
the following powers: An arbitration agreement may be provided in the bylaws
pursuant to Sec. 181 of this Code.
xxx
SEC. 47. AMENDMENT TO BYLAWS
i) To suspend, or revoke, after proper notice
and hearing, the franchise or certificate of Section 47. Amendment to Bylaws. – A majority of the board
registration of corporations, partnerships or of directors or trustees, and the owners of at least a majority of
associations, upon any of the grounds the outstanding capital stock, or at least a majority of the
provided by law, including the following: members of a nonstock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal the
xxx bylaws or adopt new bylaws. The owners of two-thirds (2/3) of
the outstanding capital stock or two-thirds (2/3) of the members
5. Failure to file by-laws within the required in a nonstock corporation may delegate to the board of directors
period; or trustees the power to amend or repeal the bylaws or adopt
There must, first of all, be a hearing to determine the existence new bylaws: Provided, That any power delegated to the board
of the ground, and assuming such finding, the penalty is not of directors or trustees to amend or repeal the bylaws or adopt
necessarily dissolution, but may only be revocation. new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the
Under the rules and regulations of the Commission, the failure outstanding capital stock or majority of the members shall so
may merely by the imposition of a fine. vote at a regular or special meeting.
PERSONS BOUND & NOT BOUND BY THE BYLAWS Whenever the bylaws are amended or new bylaws are adopted,
the corporation shall file with the Commission such amended or
1. Persons bound by the bylaws: new bylaws and, if applicable, the stockholders’ or members’
a. Corporation resolution authorizing the delegation of the power to amend
b. Directors or trustees and/or adopt new bylaws, duly certified under oath by the
c. Stockholders corporate secretary and a majority of the directors or trustees.
2. Persons not bound by the bylaws: The amended or new bylaws shall only be effective upon the
a. Any person who has no actual knowledge of issuance by the Commission of a certification that the same is
the bylaws of the corporation; in accordance with this Code and other relevant laws.
b. Employees of the corporation
PROCESS OF ADOPTION, AMENDMENT OR
SEC. 46. CONTENTS OF BYLAWS REPEALING OF BYLAWS
Section 46. Contents of Bylaws. – A private corporation may 1. Required votes are met:
provide the following in its bylaws: a. Approved by a majority of the BOD/BOT; and
b. Approved by a majority of the OCS in case of
(a) The time, place and manner of calling and conducting stock corporations, or a majority of the
regular or special meetings of the directors or trustees; members in the case of nonstock
(b) The time and manner of calling and conducting regular or corporations.
special meetings and mode of notifying the stockholders 2. File with SEC for approval.
or members thereof; 3. SEC issues Certificate of Approval.

lOMoARcPSD|9536011
T/N: Once approved (as evidenced by the certification TITLE VI. MEETINGS
from SEC), the amended by-laws become the new by-
laws of the corporation. SEC. 48. KINDS OF MEETINGS
A/N: The power to adopt, amend or repeal bylaws can be Section 48. Kinds of Meetings. – Meetings of directors,
delegated by 2/3 of the OCS or members to the BOD or BOT. trustees, stockholders, or members may be regular or special.
However, this delegated power is immediately revoked
whenever majority of the OCS or members vote at a special or How many types of meetings do we have?
regular meeting for the adoption, amendment or repealing of A: There are 4 kinds of meetings, namely:
bylaws. 1. Meetings of Directors
2. Meetings of Trustees
What must be done if new bylaws are amended or adopted? 3. Meetings of Stockholders
1. File with SEC the new bylaws or amended bylaws; 4. Meetings of Members
2. If applicable, the stockholders’ resolution authorizing
the delegation of the power to amend and/or adopt new Which may either be:
bylaws, which must be duly certified under oath by the 1. Regular, or
corporate secretary + majority of the BOD/BOT. 2. Special
Illustration. SEC. 49. REGULAR & SPECIAL MEETINGS OF
Gokongwei Case STOCKHOLDERS OR MEMBERS
A director and owner of a beer company A, was also a SH
Section 49. Regular and Special Meetings of Stockholders
of another beer company B. He wanted to become a director
or Members. – Regular meetings of stockholders or members
of the beer company B so he bought more shares so that shall be held annually on a date fixed in the bylaws, or if not so
he can be elected for the board next year. So Beer Company fixed, on any date after April 15 of every year as determined by
B amended there by laws stating that “no person holding at
the board of directors or trustees: Provided, That written notice
least 10% of shares in another competing company shall be
of regular meetings shall be sent to all stockholders or members
allowed to be elected for the board.” Was this amendment of record at least twenty-one (21) days prior to the meeting,
discriminatory? Can the director complain? unless a different period is required in the bylaws, law, or
regulation: Provided, further, That written notice of regular
A: No, he cannot complain. The amendment disqualifying a
meetings may be sent to all stockholders or members of record
director in a corporation whose business is in competition with through electronic mail or such other manner as the Commission
or is antagonistic to another corporation from election to the shall allow under its guidelines.
board of directors of the latter corporation is valid.
At each regular meeting of stockholders or members, the board
Secondly, it is not discriminatory as the terms of the amended
of directors or trustees shall endeavor to present to stockholders
by-laws provides that, “No person shall be allowed to be elected or members the following:
who is also a director of another corporation who is in
competition or antagonistic to thereto.” This provision is general
a) The minutes of the most recent regular meeting which shall
in nature it does not single out a particular individual such as the
include, among others:
party involved herein.
(1) A description of the voting and vote tabulation
Third, it does not also run counter to the prospective application
procedures used in the previous meeting;
of the amendment as the party involved has yet to be elected.
(2) A description of the opportunity given to
Atty. Espedido: This is a case involving Gokongwei and San stockholders or members to ask questions and a record of the
Miguel. The lawyers of Gokongwei said it is discriminatory
questions asked and answers given;
because no one else in the Philippines owns so much in Asia
Brewery and at the same time own stocks in San Miguel; thus, (3) The matters discussed and resolutions reached;
it should be an invalid amendment and should not be approved.
(4) A record of the voting results for each agenda item;
But the keyword here is ANTAGONISTIC. In other words, the
Supreme Court did not only look at the prospective or retroactive (5) A list of the directors or trustees, officers and
effect but more on its being antagonistic, fierce competition, or stockholders or members who attended the meeting; and
direct clash between two corporations involved in the same
market. The SC is just trying to prevent a situation whereby one
(6) Such other items that the Commission may require
could take advantage over the other. in the interest of good corporate governance and the protection
of minority stockholders.
Because imagine if Gokongwei in one meeting of San Miguel
says “I understand that the sales of our corporation are going
b) A members’ list for nonstock corporations and, for stock
down, maybe there is problem with the formula, it no longer corporations, material information on the current
tastes the way it should taste.” Most probably, the brew master stockholders, and their voting rights;
might be compelled to present themselves to the board and
explain what happened, and be required to present the formula.
c) A detailed, descriptive, balanced and comprehensible
Once he gets his own copy of the formula, he will give it to the assessment of the corporation’s performance, which shall
rival company. We have copied the bottle; we will now copy the include information on any material change in the
formula.SC said we do not want that situation.
corporation’s business, strategy, and other affairs;

lOMoARcPSD|9536011
d) A financial report for the preceding year, which shall include Unless the bylaws provide for a longer period, the stock and
financial statements duly signed and certified in accordance transfer book or membership book shall be closed at least
with this Code and the rules the Commission may prescribe, twenty (20) days for regular meetings and seven (7) days for
a statement on the adequacy of the corporation’s internal special meetings before the scheduled date of the meeting.
controls or risk management systems, and a statement of
all external audit and non-audit fees; In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall be
e) An explanation of the dividend policy and the fact of sent to all stockholders or members of record at least two (2)
payment of dividends or the reasons for nonpayment weeks prior to the date of the meeting, unless a different period
thereof; is required under the bylaws, law or regulation.
f) Director or trustee profiles which shall include, among The right to vote of stockholders or members may be exercised
others, their qualifications and relevant experience, length in person, through a proxy, or when so authorized in the bylaws,
of service in the corporation, trainings and continuing through remote communication or in absentia. The Commission
education attended, and their board representations in shall issue the rules and regulations governing participation and
other corporations; voting through remote communication or in absentia, taking into
account the company’s scale, number of shareholders or
g) A director or trustee attendance report, indicating the members, structure, and other factors consistent with the
attendance of each director or trustee at each of the protection and promotion of shareholders’ or member’s
meetings of the board and its committees and in regular or meetings.
special stockholder meetings;
WHEN MEETINGS ARE CONDUCTED
h) Appraisals and performance reports for the board and the
criteria and procedure for assessment; REGULAR MEETING SPECIAL MEETING
(1) Held annually on a date At any time deemed
i) A director or trustee compensation report prepared in fixed in the bylaws; or necessary by the BOD/BOT
accordance with this Code and the rules the Commission (2) On any date after April or as provided for in the
may prescribe; 15 of every year, as bylaws.
determined by the
j) Director disclosures on self-dealings and related party BOD/BOT.
transactions; and/or
Why are regular meetings held only after April 15?
k) The profiles of directors nominated or seeking election or A: For purposes of filing income tax return. By that time, the
reelection. financial statements are already done. All the data, information,
figures are already available.
A director, trustee, stockholder, or member may propose any
other matter for inclusion in the agenda at any regular meeting NOTICE OF MEETING
of stockholders or members.
WHEN GIVEN
Special meetings of stockholders or members shall be held at
any time deemed necessary or as provided in the bylaws: REGULAR MEETING SPECIAL MEETING
Provided, however, That at least one (1) week written notice Sent to all stockholders of At least one week prior to the
shall be sent to all stockholders or members, unless a different record at least 21 days prior meeting, a written notice
period is provided in the bylaws, law or regulation. to the meeting unless a shall be sent to all
different period is required in stockholders, unless a
A stockholder or member may propose the holding of a special the bylaws, law or regulation. different period is provided
meeting and items to be included in the agenda. for in the bylaws, law or
regulation.
Notice of any meeting may be waived, expressly or impliedly, by
any stockholder or member: Provided, That general waivers of CONTENTS OF A NOTICE OF MEETING
notice in the articles of incorporation or the bylaws shall not be
allowed: Provided, further, That attendance at a meeting shall
In order to be a proper notice of meeting, the following must be
constitute a waiver of notice of such meeting, except when the contained:
person attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not
1. Shall state the time and place of the meeting;
lawfully called or convened.
2. The agenda for the meeting;
3. A proxy form which shall be submitted to the corporate
Whenever for any cause, there is no person authorized or the secretary within a reasonable time prior to the meeting;
person authorized unjustly refuses to call a meeting, the
4. When attendance, participation, and voting are allowed
Commission, upon petition of a stockholder or member on a
by remote communication or in absentia, the
showing of good cause therefor, may issue an order directing requirements and procedures to be followed when a
the petitioning stockholder or member to call a meeting of the stockholder or member elects either option; and
corporation by giving proper notice required by this Code or the
5. When the meeting is for the election of directors or
bylaws. The petitioning stockholder or member shall preside
trustees, the requirements and procedure for
thereat until at least a majority of the stockholders or members nomination and election.
present have chosen from among themselves, a presiding 6. The minutes of the most recent regular meeting which
officer.
shall include, among others:

lOMoARcPSD|9536011
(a) A description of the voting and vote tabulation Appeals1, the Court ruled that it is the Corporate Secretary who
procedures used in the previous meeting; is responsible to serve as custodian of all the records of the
(b) A description of the opportunity given to corporation, to keep the stock and transfer books, and the only
stockholders or members to ask questions person authorized to make the entries therein.
and a record of the questions asked and
answers given; Illustration. An individual purchased shares of stock on
(c) The matters discussed and resolutions March 10 and there is a meeting on March 15. Could he
reached; already vote?
(d) A record of the voting results for each agenda A: No, he is still not qualified to vote because there is a
item; requirement under the law that for regular meetings, the transfer
(e) A list of the directors or trustees, officers and of book shall be closed for at least 20 days PRIOR to the
stockholders or members who attended the scheduled meeting.
meeting; and
(f) Such other items that the Commission may On the other hand, for special meetings, the transfer books shall
require in the interest of good corporate be closed for at least 7 days PRIOR to the scheduled date of
governance and the protection of minority meeting. The notice shall include this information on the closing
stockholders; of the transfer book.
Reason for including the minutes of the previous meeting: POSTPONEMENT OF REGULAR MEETINGS
The minutes of the previous meeting must be attached and must
be accompanied by the notices because these will require the GEN: Written notice and reason thereof shall be sent to ALL
approval. stockholders at least 2 weeks prior to the date of meeting.
Atty. Espedido: If there is any dissenting stockholder who XPN: A different period is required under the bylaws, law, or
objects, then it could be discussed again in the new meeting. regulation.
This is important because should there be conflict in the future, UNJUST REFUSAL TO CALL A MEETING
they could always refer back to the minutes. These will be in the
custody of the secretary. The secretary among others shall take HOWEVER, when there is unjust refusal to call a meeting, a
hold of the AOI, bylaws, all resolutions approved, minutes of the stockholder can petition the Commission to order the conduct of
meeting approved. a meeting.
HOW NOTICE OF MEETINGS ARE SENT • The petitioning stockholder shall preside thereat UNTIL
at least a majority of the stockholders or members
Notice of meetings shall be sent through the means of present have chosen from among themselves, a
communication provided in the bylaws. It can be through: presiding officer.
(1) Electronic Mail • In case where the Commission will order the conduct
(2) Other means allowed by the Commission of the meeting, ANY NUMBER OF THE
STOCKHOLDERS PRESENT shall already be
Atty. Espedido: Because of the E-Commerce Act, the electronic considered as a quorum. Such that, when out of the
records can now be presented in court. 100 stockholders, 5 only came, it shall be constitute a
quorum.
CLOSING OF STOCK OR TRANSFER BOOK
**NOTES
Important: Unless the bylaws provide for a longer period, the
stock and transfer book or membership book shall be closed at IMPROPERLY CALLED MEETINGS
least twenty (20) days for regular meetings and seven (7)
days for special meetings BEFORE the scheduled date of the Improperly called meetings can be considered valid, provided:
meeting. 3. All the stockholders attend or are duly represented
during the meetings;
REGULAR MEETING SPECIAL MEETING 4. Not one of those stockholders attended just for the
Closed at least 20 days Closed at least 7 days before purpose of objecting to the calling or holding of such
before the schedule date of the schedule date of the meeting.
the meeting. meeting.
T/N: Even if the meeting is improperly held or improperly called,
**Stock and transfer book all transactions or resolutions approved during the said meeting
A stock and transfer book (STB) contains the records of all can still be considered valid provided that ALL the stockholders
stocks in the names of the stockholders alphabetically arranged; attend or are duly represented in that meeting.
the installment paid and unpaid on all stock for which
subscription has been made, and the date of payment of any The new amendment added a new caveat: “Provided, that not
installment; a statement of every alienation, sale or transfer of anyone of those stockholders attended just for the purpose of
stock made, the date thereof, and by and to whom made; and objecting to the calling or holding of the meeting.”
such other entries as the by-laws may prescribe.
So even if the stockholders are duly represented or are present,
The STB shall be kept in the principal office of the corporation but one of them was there just to object the calling or holding of
or in the office of its stock transfer agent and shall be open for such meeting, then you cannot apply the exception that the
inspection by any director or stockholder of the corporation at meeting is valid even if it’s improperly called or held.
reasonable hours on business days. In Torres Jr. vs. Court of

lOMoARcPSD|9536011
SEC. 50. PLACE & TIME OF MEETINGS OF Illustration

STOCKHOLDERS OR MEMBERS Quorum in a non-stock corporation
Section 50. Place and Time of Meetings of Stockholders or 10 members in a non-stock corporation in order to hold a
Members. – Stockholders’ or members’ meetings, whether meeting. Before the meeting, 3 already died. What will be
regular or special, shall be held in the principal office of the our quorum?
corporation as set forth in the articles of incorporation, or, if not A: The quorum is 4 because the remaining members are only 7.
practicable, in the city or municipality where the principal office In a non-stock corporation, the dead members cannot be
of the corporation is located: Provided, That any city or represented.
municipality in Metro Manila, Metro Cebu, Metro Davao, and
other Metropolitan areas shall, for purposes of this section, be Note: In so far as non-stock corporation is concerned, quorum
considered a city or municipality. is based on the majority of the living members.
Notice of meetings shall be sent through the means of SEC. 52. REGULAR & SPECIAL MEETINGS OF
communication provided in the bylaws, which notice shall state DIRECTORS/TRUSTEES; QUORUM
the time, place and purpose of the meetings.
Section 52. Regular and Special Meetings of Directors or
Each notice of meeting shall further be accompanied by the Trustees; Quorum. – Unless the articles of incorporation or the
following: bylaws provides for a greater majority, a majority of the directors
or trustees as stated in the articles of incorporation shall
(a) The agenda for the meeting; constitute a quorum to transact corporate business, and every
decision reached by at least a majority of the directors or
(b) A proxy form which shall be submitted to the corporate trustees constituting a quorum, except for the election of officers
secretary within a reasonable time prior to the meeting; which shall require the vote of a majority of all the members of
the board, shall be valid as a corporate act.
(c) When attendance, participation, and voting are allowed by
remote communication or in absentia, the requirements and Regular meetings of the board of directors or trustees of every
procedures to be followed when a stockholder or member elects corporation shall be held monthly, unless the bylaws provide
either option; and otherwise.
(d) When the meeting is for the election of directors or trustees, Special meetings of the board of directors or trustees may be
the requirements and procedure for nomination and election. held at any time upon the call of the president or as provided in
the bylaws.
All proceedings and any business transacted at a meeting of the
stockholders or members, if within the powers or authority of the Meetings of directors or trustees of corporations may be held
corporation, shall be valid even if the meeting is improperly held anywhere in or outside of the Philippines, unless the bylaws
or called: Provided, That all the stockholders or members of the provide otherwise. Notice of regular or special meetings stating
corporation are present or duly represented at the meeting and the date, time and place of the meeting must be sent to every
not one of them expressly states at the beginning of the meeting director or trustee at least two (2) days prior to the scheduled
that the purpose of their attendance is to object to the meeting, unless a longer time is provided in the bylaws. A
transaction of any business because the meeting is not lawfully director or trustee may waive this requirement, either expressly
called or convened. or impliedly.
SEC. 51. QUORUM IN MEETINGS Directors or trustees who cannot physically attend or vote at
board meetings can participate and vote through remote
Section 51. Quorum in Meetings. – Unless otherwise provided communication such as videoconferencing, teleconferencing, or
in this Code or in the bylaws, a quorum shall consist of the other alternative modes of communication that allow them
stockholders representing a majority of the outstanding capital reasonable opportunities to participate. Directors or trustees
stock or a majority of the members in the case of nonstock cannot attend or vote by proxy at board meetings.
corporations.
A director or trustee who has a potential interest in any related
Quorum is the number of shareholders needed in order to validly party transaction must recuse from voting on the approval of the
related party transaction without prejudice to compliance with
conduct a meeting.
the requirements of Section 31 of this Code.
2 KINDS OF QUORUM
(1) Simple quorum – 50% + 1 Regular Meeting Special Meeting
(2) Qualified Quorum – any number greater than the Held monthly unless Held anytime upon:
simple quorum the bylaws provide (a) The call of the
When otherwise. president; or
(b) As provided for in
the bylaws.
GEN: Notice of regular or special meetings
stating the date, time and place of the meeting
must be sent to every director or trustee at
Notice of
least two (2) days prior to the scheduled
Meeting
meeting
XPN: A longer time is provided in the bylaws.


lOMoARcPSD|9536011
May be done electronically or other means as RIGHT TO VOTE OF SECURED CREDITORS

allowed by the Commission.
How
GEN: In case a stockholder grants security interest in his or her
conducted
T/N: Teleconferencing is now very common shares in stock corporations, the stockholder-grantor shall have
and is now the standard way. the right to attend and vote at meetings of stockholders.
Reasons why SEC allows teleconferencing: XPN: UNLESS the secured creditor is expressly given by the
1. In order to take advantage of the advances of stockholder-grantor such right in writing which is recorded in
technology; the appropriate corporate books.
2. To save time of the busy members of the board. As
long as the minutes will reflect the true and accurate Atty. Espedido: It is still the pledgor who has the right to
information, the BOD or BOT don’t have to conduct a participate. Even if the pledgee has the possession of the
physical meeting. certificate, there is no ownership that is being transferred,
UNLESS the pledgor grants the pledgee the right to vote.
NO REPRESENTATION ALLOWED
IN A BOARD MEETING In which case, the pledgee may demand from the pledgor the
right to vote to be contained in a PROXY.
Directors or trustees cannot attend or vote by proxy at board (1) Demand right to vote
meetings. This is because a director’s presence is personal due (2) Demand for a proxy
to his qualification and expertise.
WHEN STOCKHOLDER IS DEAD
SEC. 53. WHO SHALL PRESIDE AT MEETINGS
Note: Executors, administrators, receivers, and other legal
Section 53. Who Shall Preside at Meetings. – The chairman representatives duly appointed by the court may attend and vote
or, in his absence, the president shall preside at all meetings of in behalf of the stockholders or members WITHOUT NEED OF
the directors or trustees as well as of the stockholders or ANY WRITTEN PROXY.
members, unless the bylaws provide otherwise.
SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP OF
SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS & STOCK
ADMINISTRATORS
Section 55. Voting in Case of Joint Ownership of Stock. –
Section 54. Right to Vote of Secured Creditors and The consent of all the co-owners shall be necessary in voting
Administrators. – In case a stockholder grants security interest shares of stock owned jointly by two (2) or more persons, unless
in his or her shares in stock corporations, the stockholder- there is a written proxy, signed by all the co-owners, authorizing
grantor shall have the right to attend and vote at meetings of one (1) or some of them or any other person to vote such share
stockholders, unless the secured creditor is expressly given by or shares: Provided, That when the shares are owned in an
the stockholder-grantor such right in writing which is recorded in “and/or” capacity by the holders thereof, any one of the joint
the appropriate corporate books. owners can vote said shares or appoint a proxy therefor.
Executors, administrators, receivers, and other legal GEN: The consent of all the co-owners shall be necessary in
representatives duly appointed by the court may attend and vote voting shares of stock owned jointly by two (2) or more persons.
in behalf of the stockholders or members without need of any
written proxy. When the shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can vote said shares
Certificate of Stock or appoint a proxy therefor
The best evidence of ownership of shares of stocks.
XPN: Unless there is a written proxy, signed by all the co-
IMPORTANT: Shares are personal properties. Being personal owners, authorizing one (1) or some of them or any other person
properties, the certificate of stock can be offered as security for to vote such share or shares.
any liability or loan to guarantee payments of obligations like in
pledge and mortgage. SUMMARY:
(A) If there are 2 of them – BOTH of them should consent
Who takes possession of the certificate of stock in a pledge to the vote UNLESS one or more of them will authorize
or mortgage? the other to represent them and cast their vote in behalf
A: of the other.
PLEDGE MORTGAGE
(B) Owned in an “AND/OR” capacity – EITHER of the
Pledgee takes possession of The mortgagee does not
co-owners could vote
the certificate take possession of the
certificate
Example: A and/or B – either A or B could vote
There is a transfer of There is no transfer of
possession BUT no transfer possession and ownership
of ownership

lOMoARcPSD|9536011
Illustration. PROXIES
Two owners with contradicting vote
An instrument that refers to the authority given by the
There are 2 owners. Both of them were together taking stockholder to another to represent the former during meeting
lunch and there was an issued that required a vote of WON
there must be an increase of capital stock. How will we Rule: Proxies shall be in writing, signed, and filed by the
qualify the vote? stockholder in any form authorized in the bylaws.
A: If there are 2 stockholders with contradicting votes – NO
VOTE; ZERO VOTE. The best solution: Both should AGREE. (A/N: See discussion on proxies under Sec. 23.)
SEC. 56. VOTING RIGHT FOR TREASURY SHARES VALIDITY AND EFFECTIVITY OF A PROXY
Section 56. Voting Right for Treasury Shares. – Treasury It shall be valid only for the meeting for which it is intended
shares shall have no voting right as long as such shares remain UNLESS otherwise provided in the proxy form. However, no
in the Treasury. proxy shall be valid and effective for a period longer than 5
years.
Rule: Treasury shares shall have no voting rights.
Illustration. If you have a proxy for the year 2020, you cannot
Reason: If they were given voting powers, the directors would use it for 2021 because it is only intended for that particular
vote for themselves, thereby perpetuating their position in the meeting unless it is extended but in no case shall it be longer
board. than 5 years.
A/N: See Sec. 9. A PROXY CANNOT BE SUBSTITUTED
SEC. 57. MANNER OF VOTING; PROXIES A proxy cannot be substituted by reason of the trust and
confidence reposed upon the person given the authority to
represent the other. The authority cannot be delegated.
Section 57. Manner of Voting; Proxies. – Stockholders and
members may vote in person or by proxy in all meetings of
stockholders or members. Illustration 1. Jin is given a proxy for a particular meeting.
It was scheduled on the same day that she has a date and
she preferred to go on that date instead.
When so authorized in the bylaws or by a majority of the board
of directors, the stockholders or members of corporations may She cannot delegate her authority to attend said meeting to her
also vote through remote communication or in absentia: sister. Her sister cannot attend the meeting because a proxy
cannot be substituted or delegated.
Provided, That the votes are received before the corporation
finishes the tally of votes.
Illustration 2. On the other hand, Jin is given a proxy all
A stockholder or member who participates through remote compliant with the requirements. However, at the meeting,
communication or in absentia, shall be deemed present for she was told that she cannot participate for no reason. Can
it be done?
purposes of quorum.
A: No, it cannot be done because she has a vested right as an
The corporation shall establish the appropriate requirements owner.
and procedures for voting through remote communication and
PROXY GIVEN TO TWO OR MORE PERSONS
in absentia, taking into account the company’s scale, number of
shareholders or members, structure and other factors consistent
with the basic right of corporate suffrage. (A) IF TWO PROXY HOLDERS
If two persons were given a proxy by the same person, both
of them cannot vote at the same time in the meeting.
Proxies shall be in writing, signed and filed, by the stockholder
or member, in any form authorized in the bylaws and received
by the corporate secretary within a reasonable time before the Between two proxy holders, who is entitled to vote?
scheduled meeting. Unless otherwise provided in the proxy A: RULES:
1. Proxy whose proxy instrument bears the latest
form, it shall be valid only for the meeting for which it is intended.
date
No proxy shall be valid and effective for a period longer than five
(5) years at any one time. 2. If same date – Proxy holder whose proxy
instrument bear the later time
3. If same time – proxy holder who presents it first
MANNER OF VOTING 4. All things being equal (same date, same time, and
present at the same time) – proxy committee
Rule: Stockholder or members in all meetings of stockholders decides
or members may vote:
(B) IF THREE PROXY HOLDERS
(1) In person Where a proxy is given to three persons in one instrument,
(2) By proxy the three of them must agree upon the vote and in case of
(3) Through remote communication or in absentia when conflict, the rule of the majority of the three governs. [See
authorized: De Leon, Page 512]
(a) in the bylaws or
(b) by a majority vote of the BOD Atty. Espedido: The most practical approach is to AGREE
upon the vote and majority shall prevail.

lOMoARcPSD|9536011
REVOCATION OF PROXY MANAGEMENT CONTROL DEVICES
Illustration. A proxy was declared and recognized as the Management Control Devices
appropriate proxy holder. However, when he went to the These are devices that are used to attain the particular result
meeting, the stockholder who gave him the proxy was also that the management wants. They will be able to control the
there. Who is entitled to vote? results or predetermine the outcome of their acts. They will
A: The Stockholder votes. It would constitute a revocation of guarantee the accomplishment of the objective of the
proxy because the rule says that proxies are generally revocable management.
– expressly or impliedly.
Kinds:
Important: The presence of the stockholder in the meeting is an 1. Management Contract
implied revocation. 2. Proxy
3. Voting Trust Agreement
SEC. 58. VOTING TRUSTS 4. Trust Agreement
Section 58. Voting Trusts. – One or more stockholders of a VOTING TRUST AGREEMENT
stock corporation may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote and other It is an agreement in writing whereby one or more stockholders
rights pertaining to the shares for a period not exceeding five (5) of a stock corporation transfer his or their shares upon a trustee
years at any time: Provided, That in the case of a voting trust or trustees for the purpose of conferring to the latter the right to
specifically required as a condition in a loan agreement, said vote and other rights pertaining to the shares for a period not
voting trust may be for a period exceeding five (5) years but shall exceeding five years at any time.
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify Management may influence a group of stockholders, telling
the terms and conditions thereof. A certified copy of such them that “this is how you should vote”. In order to ensure that
agreement shall be filed with the corporation and with the they will abide by the agreement on how to vote, they may
Commission; otherwise, the agreement is ineffective and execute a voting agreement. They could designate any or some
unenforceable. The certificate or certificates of stock covered by to cast their vote in behalf of all the other signatories to that
the voting trust agreement shall be cancelled and new ones shall voting agreement.
be issued in the name of the trustee or trustees, stating that they
are issued pursuant to said agreement. The books of the If the management could have this, more or less they can
corporation shall state that the transfer in the name of the trustee predetermine the outcome of the results/vote. This is a way of
or trustees is made pursuant to the voting trust agreement. PREDICTING the outcome of the results of any issue that may
require approval during a stockholders meeting.
The trustee or trustees shall execute and deliver to the
transferors, voting trust certificates, which shall be transferable What happens to these voting rights?
in the same manner and with the same effect as certificates of A: The stockholder transfers his voting rights to another
stock. (trustee).
The voting trust agreement filed with the corporation shall be Illustration. Charles was designated as proxy of a certain
subject to examination by any stockholder of the corporation in stockholder. He was already recognized as proxy in the
the same manner as any other corporate book or record: meeting. However, while socializing with the other stockholders,
Provided, That both the trustor and the trustee or trustees may he met someone holding a Voting Trust Agreement bearing the
exercise the right of inspection of all corporate books and name of the same stockholder who granted him the proxy. In
records in accordance with the provisions of this Code. effect, the person holding the VTA and Charles will be voting in
behalf of the same stockholder.
Any other stockholder may transfer the shares to the same
trustee or trustees upon the terms and conditions stated in the The VTA was executed in February 1, 2017 while the proxy
voting trust agreement, and thereupon shall be bound by all the was executed in February 5, 2017. Who is now entitled to
provisions of said agreement. vote in the stockholder’s meeting?
A: The Voting Trust Agreement prevails. It is the voting trustee
No voting trust agreement shall be entered into for purposes of who will be entitled to vote because the voting trustee has the
circumventing the laws against anti-competitive agreements, legal title and the Voting Trust Agreement is irrevocable despite
abuse of dominant position, anti-competitive mergers and the subsequent execution of proxy.
acquisitions, violation of nationality and capital requirements, or
for the perpetuation of fraud. What if the proxy was executed in February 1, 2017 while
the VTA was executed in February 5, 2017. Who is now
Unless expressly renewed, all rights granted in a voting trust entitled to vote in the stockholder’s meeting?
agreement shall automatically expire at the end of the agreed A: The voting trustee, because the Voting Trust Agreement
period. The voting trust certificates as well as the certificates of operates to revoke the proxy.
stock in the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall be RIGHTS OF A TRUSTEE IN A VOTING TRUST AGREEMENT
reissued in the name of the trustors.
(1) The right to vote
The voting trustee or trustees may vote by proxy or in any (2) The right to be voted upon
manner authorized under the bylaws unless the agreement (3) The right to be represented
provides otherwise. (4) Right of inspection of all corporation books and
records

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Important: Basically, all the rights of the stockholders because Illustration 1.

he has the legal title except the right to dividends because the Stockholder attends the meeting – proxy is revoked
beneficial ownership is retained by the trustor.
You were given the proxy and attended the meeting.
In contrast, the proxy holder has limited rights in attending the However, in the meeting, you saw the stockholder who you
meeting (e.g. right to vote) because the proxy holder has no are representing. When an issue was about to be resolved,
legal title of the shares of stock. the SH voted. What do you think will happen?
A: The stockholder’s vote prevails because the presence of the
TERM OF VTA stockholder revokes the proxy.
Voting Trust Agreement is valid for a period not exceeding five Illustration 2.
(5) years at any one time. Once expired, everything will be Trustor attends the meeting – trustee’s vote prevails; no
returned to the real and lawful stockholder (trustor). revocation of VTA
VOTING TRUST AGREEMENT VS. On the other hand, a voting trustee attended the meeting
VOTING AGREEMENT and the trustor also appeared. Which vote should prevail?
A: The trustee’s vote shall prevail.
Voting Trust Agreement Voting Agreement
An agreement in writing A written agreement among Illustration 3.
whereby one or more a group of shareholders, not Trustee delegates authority to a proxy
stockholders of a stock a joint ownership, wherein
corporation transfers their they agree among The trustee authorized somebody else to appear in the meeting
shares to any person/s or to themselves on how they will because he had something else to do. He told his son to
a corporation having vote when a certain issue represent him (trustee) in the meeting. When the son went there,
authority to act as trustee for arises. the stockholder was also there.
the purpose of vesting in
such person/s or corporation Whose vote will prevail? Can the trustee transfer this right
(as trustee/s) voting or other to someone else? Is this the intention of the law?
rights pertaining to the A: The proxy’s right will prevail. Section 58, last paragraph
shares for a certain period provides: “The voting trustee or trustees may vote by proxy or in
not exceeding the term fixed any manner authorized under the bylaws unless the agreement
by the Code and upon the provides otherwise.”
terms and conditions stated
in the agreement. Atty Espedido: That is a very dangerous provision. It is basic that
delegated power cannot be further delegated. But it is the law.
PROXY vs VOTING TRUST AGREEMENT
The stockholder precisely executed the trust agreement and
Proxy Voting Trust Agreement even transferred title to the trustee basically because of trust.
No legal title to the shares of Acquires legal title to the The proxy of the trustee might not be trusted by the stockholder.
the stockholder shares of the stockholder It will be very dangerous if we allow the proxy to represent.
Revocable at any time Irrevocable for a definite and A delegated power cannot be delegated. BUT it is the law. It is
unless coupled with interest limited period of time provided by law.
Can only act at the specified Not limited to any particular **PROHIBITION AGAINST THE USE OF MANAGEMENT
SH’s meeting meeting DEVICES
Votes only in the absence of Can vote and exercise all the Nationalized Corporations
the owner of stock rights of the transferring SH These are corporations which must be either be:
even when the SH is present (a) Wholly owned by Filipinos
(b) 60% is owned by Filipinos, 40% is of foreign ownership
Shorter duration Longer duration
Purpose of 60% requirement
To make sure that the control shall be in the hands of the Filipino
Need not be notarized nor a Notarized and filed with SEC
stockholders, so that our natural resources will not be exploited
copy be filed with the SEC
by foreigners.
No right of inspection of Has such right
Illustration. Koreans gave bonuses to the Filipino Shareholders,
corporate books
in exchange, they asked that the shareholders execute proxies
in their favor. Thus, 60% of the Filipinos executed the proxy in
favor of the Koreans. As a result, anything that will be decided
in the Stockholders’ meeting will be controlled by the Koreans.
Is there a problem with this?

A: Yes. This violates the nationalization law. Although they were
not forced to sign the proxy, the execution of the proxy is
considered invalid on the ground of being against public policy.

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TN: Although in the books, there are 60% Filipino to stock option because here, person A can already purchase
stockholders/owners, but they have surrendered the power the stock at P10 instead of P15.
which accompanies ownership. The intention of the law, to
maintain the exclusive control with the Filipinos to certain Atty. Espedido: Do not underestimate when you are given an
industries as enshrined in the Constitution, is violated. option. The moment the price will increase, you can sell it to
someone interested to buy it even at a higher price. You may
Important: These management control devices cannot be used make profit out of the option.
to circumvent or violate existing laws against monopoly, restraint
of trade, and other similar laws. PRE-EMPTIVE RIGHT
TITLE VII. STOCKS AND STOCKHOLDERS It is not a privilege but a right of existing stockholders to
subscribe to new unissued shares of the corporation in
SEC. 59. SUBSCRIPTION CONTRACT proportion to their existing shareholdings, so that they can
maintain their “hold” or existing % of holdings in the corporation.
Section 59. Subscription Contract. – Any contract for the
acquisition of unissued stock in an existing corporation or a STOCK OPTION PRE-EMPTIVE RIGHT
corporation still to be formed shall be deemed a subscription Privilege given by the A right given to stockholders
within the meaning of this Title, notwithstanding the fact that the corporation by law
parties refer to it as a purchase or some other contract. Can be given to 3rd parties Only given to existing
stockholders
Subscription Contract No maximum amount. The stockholder has the right
The agreement entered into when subscribing for shares. Depends on the agreement to buy newly-issued shares
between the corporation and in an amount in proportion to
Important: Like any other contract, it must have the elements the person given the him
of a contract, namely: options.
1. Consent – consent of the parties (meeting of the SEC. 60. PRE-INCORPORATION SUBSCRIPTION
minds)
2. Object or subject matter – in the subscription Section 60. Pre-incorporation Subscription. – A subscription
contract, it pertains to the newly-issued stocks of shares in a corporation still to be formed shall be irrevocable
3. Consideration – in the subscription contract, it shall for a period of at least six (6) months from the date of
not be less than the par value or issue value of the subscription, unless all of the other subscribers consent to the
shares. It can be paid through the following means: revocation, or the corporation fails to incorporate within the
a. Cash same period or within a longer period stipulated in the contract
b. Property of subscription. No pre-incorporation subscription may be
c. Labor or services actually rendered revoked after the articles of incorporation is submitted to the
d. Amount transferred from URE to capital Commission.
e. Shares which are reclassified
PRE-INCORPORATION SUBSCRIPTION
How can you become a stockholder?
A: GEN: The individual agrees to subscribe prior to incorporation
(1) Subscription of an unissued shares of the corporation and said contract is IRREVOCABLE for at least 6 months
(2) Direct purchase of existing shares from another
stockholder XPN: Revocable in the following instances:
(3) Purchases stock from publicly listed corporations (1) ALL of the other subscribers consent to the
(4) By exercising stock option revocation;
(2) The Corporation fails to incorporate within the
When would you subscribe? same period or
(a) Pre-incorporation subscription – before incorporation (3) Within a longer period stipulated in the contract of
(b) Post-incorporation subscription – after subscription subscription.
STOCK OPTIONS **XPN to XPN: Irrevocable after the AOI have been submitted
to the Commission (post-incorporation subscription).
Stock Options
It is a privilege given by a corporation to persons not necessarily What is the purpose of the irrevocability?
stockholders, giving them a period within which to decide A: To ensure the creation of the corporation. It gives the
whether or not to buy shares in a company at a specified price. organizers the chance to organize.
Do stock options have value? Atty. Espedido: If revocation is allowed within the 6 months, the
A: Yes. They are valuable because they give a person the right organization of the corporation will be highly jeopardized, and
to buy shares of stock at a specific price. (A/N: Remember, stock nobody might be able to start at all if the subscribers keep on
prices fluctuate, so you may have an opportunity to buy shares withdrawing. The timetable and the filing of the articles might be
of stock at a lower price). unduly affected.
Illustration. Stock option gives person A, the right to buy shares **RULE ON POST-INCORPORATION SUBSCRIPTION
of stock of Corp. ABC for a price of P10. Later on, because of
the good performance of the corporation, the stocks of the Under post-incorporation, the law is silent as to the revocability
corporation from P10 already increased to P15. There is value or irrevocability of the subscription, but actually it is irrevocable.

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The moment a subscriber subscribes after the incorporation of Where the consideration is other than actual cash, or consists
a company, he becomes a stockholder and cannot anymore of intangible property such as patents or copyrights, the
revoke his subscription. valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval of
And since he is already a stockholder, he can now enjoy the the Commission.
rights of a stockholder. The basis for this is Sec. 71 of this Code.
Shares of stock shall not be issued in exchange for promissory
Rights of stockholder: notes or future service. The same considerations provided in
1. He may check the corporate books; this section, insofar as applicable, may be used for the issuance
2. He has the right to vote on shares if he has a of bonds by the corporation.
voting share;
3. He has the right to dividends when the corporation The issued price of no-par value shares may be fixed in the
declares said dividends. articles of incorporation or by the board of directors pursuant to
authority conferred by the articles of incorporation or the bylaws,
Atty. Gaviola: There is a rule in Oblicon that generally, a contract or if not so fixed, by the stockholders representing at least a
is revocable when it is not consummated. We apply the same majority of the outstanding capital stock at a meeting duly called
logic here in the sense that when a subscriber pays for his for the purpose.
subscription pre-incorporation, [the shares are issued] with the
condition that [the proceeds coming from them] will be used for How do you pay for subscriptions?
the formation of the corporation. A:
(1) Actual cash paid to the corporation;
The failure of such event to happen would allow the subscriber (2) Property, tangible or intangible, actually received by
to revoke his subscription as provided in Sec. 60, which states the corporation and necessary or convenient for its use
that the corporation has 6 months to comply with said obligation. and lawful purposes
➢ at a fair valuation equal to the par or issued value
However, once the corporation files its AOI, then it is as if the of the stock issued;
corporation has already complied with its obligation, thus (3) Labor performed for or services actually rendered to
making the subscription irrevocable (the contract is already the corporation;
consummated). (4) Previously incurred indebtedness of the corporation;
(5) Amounts transferred from unrestricted retained
Meanwhile, for post-incorporation subscription, it is akin to a earnings to stated capital;
valid and binding contract that is already perfected (6) Outstanding shares exchanged for stocks in the event
(consummated), hence, it is irrevocable. The subscription now of reclassification or conversion;
becomes part of the capital stock of the corporation. Hence, the (7) Shares of stock in another corporation; and/or
corporation cannot allow the subscriptions to be revoked without (8) Other generally accepted form of consideration
prejudicing its interests and that of its stockholders. The
corporation must now comply with its obligations to its ACTUAL CASH
stockholders, like the distribution of dividends and allowing them
to exercise their rights as stockholders. GEN: Shares of stock shall not be issued in exchanged for
promissory notes.
SEC. 61. CONSIDERATION FOR STOCKS
XPN: Except if the corporation is the one indebted to the person.
Section 61. Consideration for Stocks. – Stocks shall not be If the corporation has debts against the person, then the
issued for a consideration less than the par or issued price corporation may allow this by issuing shares of stocks.
thereof. Consideration for the issuance of stock may be:
PROPERTY (TANGIBLE/INTANGIBLE)
(a) Actual cash paid to the corporation;
When property is used for the payment of subscription, the
(b) Property, tangible or intangible, actually received by property value must be equal to the amount subscribed.
the corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or issued This is measured through the fair market value of the property.
value of the stock issued; And to be sure that the property has been evaluated properly, or
assigned with the proper valuation, the SEC will examine the
(c) Labor performed for or services actually rendered to property.
the corporation;
LABOR OR SERVICES ACTUALLY RENDERED
(d) Previously incurred indebtedness of the corporation;
Rule: Services here do not refer to future services but pertains
(e) Amounts transferred from unrestricted retained to ACTUAL services rendered.
earnings to stated capital;
Illustration. The person planned to join the corporation as a
(f) Outstanding shares exchanged for stocks in the event Vice President. Later on, he was eventually appointed as
of reclassification or conversion; VP. Can he be given shares of stocks by telling the
corporation, “I am paying my shares of stock out of my
(g) Shares of stock in another corporation; and/or salary for the first month.” Is that allowed?
A: No, that is not allowed because services here do not refer to
(h) Other generally accepted form of consideration. future services.

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Why are future services not allowed? OPTIONS IN APPLICATION OF PAYMENT

A: Because of the uncertainty of future services.
In the absence of provisions in the by-laws to the contrary, a
AMOUNTS TRANSFERRED FROM THE UNRESTRICTED corporation may apply payments made by subscribers either:
RETAINED EARNINGS TO CAPITAL
(1) Payment pro rata to each and all the entire number of
Illustration. The authorized capital stock (ACS) was shares subscribed for;
increased from 1m to 2m. Five (5) stockholders owned 20%
each of the original 1m ACS. They then wanted to subscribe Example. Apply the 50,000 to all the 100 subscribed
another 20% each of the 1M increase but they don’t have shares. In effect, there is no single share fully paid
cash. However, there are unrestricted retained earnings.
What could be done? Note: If it is a proportional payment or pro rata – the
A: The 5 stockholders may subscribe, and their subscription will stockholder cannot be issued a Stock Certificate.
be paid out of the unrestricted retained earnings which should
just be transferred to the capital. Hence, instead of issuing cash (2) Full payment for corresponding number of shares –
dividends, the corporation will issue stock dividends to them. apply payment to as many shares as may be covered
by that payment.
Atty. Espedido: A good justification by the corporation in doing
this is that such will increase the capital of the corporation Example: Apply it to the 50 shares. Therefore the 50
considering that the unrestricted retained earnings are ploughed shares are fully paid.
back to the corporation. In the same way, the investments of the
stockholders are also increased. Note: The corporation may issue to the stockholder a
Stock Certificate on the appropriate number of shares
WAIVER OF RIGHT TO UNPAID SUBSCRIPTION covered.
Illustration. The Corporation wanted to grant bonuses but GOODWILL

has no cash. Hence, it instead declared that all unpaid
subscriptions are deemed fully paid. Is it valid? Rule: Goodwill may be used to pay subscription because this is
A: No, it is not allowed because this will violate the trust fund considered property. To determine the value of a good will, it
doctrine since there will be no more capital coming in the shall be appraised by the SEC.
corporation. In the books, it is supposed to show that certain
stocks are still unpaid and therefore, it must be paid. **What is goodwill?
A: Goodwill is an intangible asset that is associated with the
Atty. Espedido: Waiving the unpaid subscriptions is no different purchase of one company by another. Specifically, goodwill is
from just returning to the stockholders their investment. If the the portion of the purchase price that is higher than the sum of
return of stocks is not allowed, then it should not be allowed to the net fair value of all of the assets purchased in the acquisition
waive the payment of unpaid subscriptions. and the liabilities assumed in the process. The value of a
company’s brand name, solid customer base, good customer
If you declare all unpaid subscriptions as fully paid, you are relations, good employee relations, and proprietary technology
making it appear to the public and to creditors that the capital is represent some reasons why goodwill exists.
inside already when in fact, no money came in. You are
therefore misleading the public. ISSUED PRICE OF NON-PAR VALUE
If unpaid subscriptions are not paid when the date for payment (A) It may be fixed in the:
arrives or when the Board makes the call for payment, they 1. Articles of Incorporation; or
become delinquent shares which means that they are due and 2. By the BOD pursuant to authority conferred
demandable and can be sold in a delinquent sale. by the AOI or the bylaws
MANNER OF PAYMENT (B) If not fixed by the abovementioned – fixed by the

stockholders representing at least a majority of the
Are you supposed to pay in full? OCS at a meeting duly called for the purpose
A: The stockholder may either pay in full but this is not required.
Important: Once the stockholder fully pays, he is given a
When is balance payable? Certificate of Stock.
A: The balance shall be paid on:
(a) The date indicated in the subscription SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF
contract; or SHARES
(b) When the BOD calls for payment.
Section 62. Certificate of Stock and Transfer of Shares. –
**Atty. Gaviola: The call is only required when there is no date The capital stock of corporations shall be divided into shares for
fixed for the payment of the shares. It is the BOD who will make which certificates signed by the president or vice president,
the call by resolutions of the BOD in a meeting where there is a countersigned by the secretary or assistant secretary, and
quorum, approved by majority of the directors present in the sealed with the seal of the corporation shall be issued in
meeting. accordance with the bylaws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner, his attorney- in-
fact, or any other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the

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parties, until the transfer is recorded in the books of the 1 CERTIFICATE OF STOCK CAN BE OFFERED AS
corporation showing the names of the parties to the transaction, COLLATERAL
the date of the transfer, the number of the certificate or
certificates, and the number of shares transferred. The Note: Shares of stock so issued are personal property.
Commission may require corporations whose securities are
traded in trading markets and which can reasonably Once a certificate of stock is given, the stockholder may offer it
demonstrate their capability to do so to issue their securities or as collateral to the bank or he can exercise his right as an owner
shares of stocks in uncertificated or scripless form in accordance to dispose or sell it.
with the rules of the Commission.
2 CERTIFICATE OF STOCK IS TRANSFERRABLE
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the It is transferred through indorsement + delivery.
corporation.
3 A CERTIFICATE OF STOCK IS NOT A NEGOTIABLE
SEC. 63. ISSUANCE OF STOCK CERTIFICATES INSTRUMENT
Section 63. Issuance of Stock Certificates. – No certificate of Distinction between non-negotiability and transferability:
stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of NOT NEGOTIABLE TRANSFERRABLE
delinquent shares), if any is due, has been paid. It is not negotiable because Stock certificate can be
it does not contain a transferred from one
**Certificate of Stock promise or order to pay a person to another so as to
(As defined in the case of Anna Teng vs. SEC) sum certain in money constitute the transferee
as the lawful owner
A certificate of stock is a written instrument signed by the proper thereof.
officer of a corporation stating or acknowledging that the person
named in the document is the owner of a designated number of Note: Here, it is not negotiable because it does not contain a
shares of its stocks. It is prima facie evidence that the holder is promise or order to pay a sum certain in money. Although it may
a shareholder of a corporation. contain an order to deliver a certain number of stocks.
A certificate, however, is merely a tangible evidence of Atty. Espedido: Negotiability presupposes various or many
ownership of shares of stock. It is not a stock in the corporation, transfers or subsequent transfers. To constitute the transferee
and merely expresses the contract between the corporation and as the lawful holder of the instrument. There are defenses
the stockholder. available, and he could avail of these defenses. But when we
say transferability, it is more on possession.
The shares of stock evidenced by said certificates, meanwhile,
are regarded as property and the owner of such shares may, as REQUISITES OF A NEGOTIABLE INSTRUMENT
a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do is Section 1. Form of Negotiable Instruments. – An instrument to
properly restricted, or the owner’s privilege of disposing of his be negotiable must conform to the following requirements:
shares has been hampered by his own action. WUPOD
(a) It must be in writing and signed by the maker or drawer
What are requirements for a certificate of stock? (b) Must contain an unconditional promise or order to pay
A: a sum certain in money
1. It has to be signed by the president or the VP, (c) Must be payable on demand, or at a fixed or
countersigned by the corporate secretary or assistant determinable future time
secretary, and sealed with the corporate seal. (d) Must be payable to order or to bearer
2. It has to state the par value of the share. (e) Where the instrument is addressed to a drawee, he
3. The name of the shareholder must be indicated. must be named or other indicated therein with
4. The number of shares must be indicated. reasonable certainty.
5. The stock number must be indicated.
MANNER OF TRANSFERRING
SIGNATURES REQUIRED IN A CERTIFICATE OF STOCK
NEGOTIABLE
STOCK CERTIFICATE
(1) Signed by the president or vice-president INSTRUMENT
(2) Countersigned by the secretary or assistant secretary (1) Payable to order
indorsement + delivery
NATURE OF CERTIFICATE OF STOCKS indorsement + delivery
(2) Payable to bearer –
(1) It is a personal property delivery
(2) It is transferrable
(3) It is NOT a negotiable instrument
Note: A Certificate of Stock may be transferred through
indorsement + delivery.
Atty. Espedido: At the back portion of that certificate is an

indorsement portion – it simply states that this certificate
covering a no. of shares is being transferred to xxx. The date

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and place are indicated, and then sign. So, whoever becomes a EFFECT
transferee becomes the shareholder.
It merely transfers the ownership of the shares to the transferee
PROCEDURE or assignee, the latter now being the owner of the shares. There
is already a valid transfer of ownership. However, it does not
(1) Indorsement + Delivery make the transferee/assignee a stock holder just yet.
(2) Transferee presents it to the corporation
(3) It is shown to the Secretary So how can the transferee or assignee become the
(4) The Secretary records it in the stock and transfer book stockholder?
of the corporation. On the other page, it will indicate the A: The registration of the transfer in the stock and transfer book
name of the transferee. makes one a stockholder, regardless of the issuance or non-
(5) Once the transferee is recorded, the name of the new issuance of a new certificate of stock.
stockholder will now be recorded in the stock and
transfer book SCRIPLESS TRADING
EFFECT IF NOT RECORDED IN THE STOCK AND “The Commission may require corporations
TRANSFER BOOK whose securities are traded in trading
markets and which can reasonably
Rule: No transfer, however, shall be valid, except as between demonstrate their capability to do so to issue
the parties, until the transfer is recorded in the books of the their securities or shares of stocks in
corporation uncertificated or scripless form in
accordance with the rules of the
Thus, if it is not recorded in the stock and transfer book, the Commission.”
transfer will only be binding upon the parties.
What is a “scrip”?
Atty. Espedido: You should call the corporate secretary and A: A scrip is a duly signed certificate of stock.
warn him not to issue it to anyone.
KTG: A scrip is a certificate or receipt that represents
If it is not in the books, it will not affect third parties. Thus, the something of value, but has no intrinsic value in itself. What’s
stockholder can sell it again. essential is that the issuer and the recipient must agree on the
value that the scrip represents. In other words, it is a substitute
Summary of effect if not recorded in the stock and transfer or alternative to legal tender that entitles the bearer to receive
book: something in return.
• Valid and binding as to the parties (corporation and
subscriber) Applying this to the provision above, a corporation may be
• Not binding to 3rd parties required to issue its shares in the form of scrips. In this case,
the scrip will represent each share of stock the shareholder
PURPOSE OF INDORSEMENT owns. On or before a specific date, the shareholder could
combine the scrips he has, and convert the value they
The purpose of indorsement is in order to bind third parties. represent into actual shares.
Because of this indorsement, any third party can go to the
secretary and have his name registered in the stock and transfer What happens in scripless trading?
book. A: There is transfer of ownership of shares without actually
delivering the stock certificates. Instead, the transfer of
Atty. Espedido: But this usually doesn’t happen since the holder ownership is done through book entries.
thereof will just call the secretary and warn the secretary as to
the fact of the loss of the certificate. Atty. Gaviola: This kind of trading is usually done when the
stocks are listed in the stock exchange.
REMEDY FOR REFUSAL TO RECORD TRANSFER OF
STOCK IN YOUR NAME What is the rationale for this provision on scripless trading?
A: For convenience in the buying and selling of securities. If we
What if the secretary refuses to record or transfer the stock strictly follow the traditional way of transferring shares (which
in your name? involves delivery of actual certificates), the stock market will not
A: You have the right to go to court and FILE A MANDAMUS survive because the transactions will take days to months.
case. You have the right to be recognized – have that right to
register the transfer in your name How is scripless trading done?
A: A corporation that intends to trade shares in the stock
Note: The secretary only has a ministerial duty to comply with exchange must:
the indorsement.
1. Deliver all their securities or their shares to the
**NOTES Philippine Depository and Trust Corporation (PDTC);
TWO WAYS TO TRANSFER SHARES 2. The shares in the books of the PDTC will now be
assigned or given to the brokers who purchased the
1. Deliver the stock certificate with an intention to transfer shares;
ownership duly indorsed; or
2. Execute a Deed of Assignment for the shares.

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3. The corporation’s stock and transfer agent records in water and then placed inside the freezer so the water becomes
the stocks in the Stock and Transfer Book, and issues ice. When placed in the weighing scale, the chicken now weighs
the certificates of stock of the corporation. heavier. So when the chicken’s weight was already 1.2kg, all the
water was gone. This is why they call it the watered chicken.
T/N: The entity recorded in the Stock and Transfer
Book will be the PDTC, the holder of the shares. WATERED STOCKS
Stocks which are sold at less than the par value. You pay less
4. In turn, the PDTC will make entries in their own records for more stocks. If you were able to subscribe to a water stock,
(book entries). the value paid will not reflect the actual value of the shares.
Uplifting of Shares How could water stocks exist?

If the shares are desired to be kept for a long time without 1. When the value of the thing that you used in paying the
intention to trade them, the shares can be uplifted by: stocks is lower than the par value of the share–
discounted stocks
1. Requesting the PDTC to take out the shares from their 2. Did not pay anything at all – bonus stocks
custody, and record them in the Stock and Transfer 3. Consideration is valued in excess of its fair value
Book under the name of a specific purchaser (who
could be the corporation or an actual shareholder). What is the effect of watered shares?
2. The Stock and Transfer Agent will then issue the A: Watered stocks are not merely ultra vires, but they are illegal
certificates of stock to the purchaser. per se, and they cannot be ratified by any vote of the
shareholders, or by resolution of the BOD. However, if they are
If later on, the purchaser/shareholder decides to sell the shares, sold to a third party, then it should be honored by the corporation
the stock certificates he or she has must be returned to the Stock as a valued stock if the third parties acquired it in good faith.
and Transfer Agent, which will take time.
** Why would the law allow a stock certificate which has not
Atty. Gaviola: Note, this is the delay and complication that been fully paid to be transferred?
scripless trading avoids. A: To maintain economic relations among corporations and the
public. If we do not allow that, every time a person buys shares
Key Points on Scripless Trading: of stocks, the buyer will always ask if it was sold with proper
1. There is only one owner, the PDTC, who is listed as consideration and it will lead to the suffering of the economy.
the stockholder in the books of the corporation. That is why certificates are made transferrable even if it is not
2. The PDTC will have its own list of brokers who hold the fully paid.
shares for their clients.
3. Brokers will have their own list of clients as well. The transferability of the certificates would not mean anything if
we have to examine them every time we buy a share of stock
Who has ownership of the shares of stock in scripless because it would cause great inconvenience.
trading then?
A: The legal owner is the PDTC, but the beneficial owner/s are T/N: We could no longer trust in the certificate and therefore it
the client/s of the brokers. loses its credibility. And if no one will trust in them, its
transferability is rendered useless.
If that is the case, then who can vote on such shares during
elections? And so here comes now the transferee, he did not know this
A: The beneficial owner should ask for a certification from the was a watered stock. He went to the corporation and
broker that he is the owner of the specific number of shares that presented the said stock, duly endorsed. Is the corporation
he bought. That certification, which is not a stock certificate, obliged to recognize that he is now the stockholder of the
should be brought by the beneficial owner to the election. It is certificate?
akin to a proxy allowing the holder to vote on shares. A: The corporation must honor because there is nothing wrong
with the certificate. The mistake or deficiency was in the
SEC. 64. LIABILITY OF DIRECTORS FOR WATERED consideration. So, so long as the certificate is legitimate then the
STOCKS corporation is obliged to honor/acknowledge and effect the
transfer.
Section 64. Liability of Directors for Watered Stocks. – A
director or officer of a corporation who: (a) consents to the PARTIES LIABLE
issuance of stocks for a consideration less than its par or issued
value; (b) consents to the issuance of stocks for a consideration (1) The directors who consented to the sale of the share
other than cash, valued in excess of its fair value; or (c) having at less than par value
knowledge of the insufficient consideration, does not file a (2) Shareholder who bought the watered stock
written objection with the corporate secretary, shall be liable to
the corporation or its creditors, solidarily with the stockholder Note: Issuance of watered stock is a valid stock. The issuance
concerned for the difference between the value received at the is valid BUT the purchase is ILLEGAL.
time of issuance of the stock and the par or issued value of the
same. Illustration. Such that when the investor subscribed, he can say
that you cannot get back his shares. He is correct because the
STORY OF THE WATERED CHICKEN issuance is valid BUT he can be compelled to pay the difference.
You go to the market and buy a chicken. When weighed, the
chicken’s weight is 1.5 kg and then you bought it. However, Atty. Espedido: What is not valid is the consideration. The
when you went home and checked the weight of the chicken, it issuance is valid.
is already 1.2kg. This is because the chicken was injected with

lOMoARcPSD|9536011
Who was at a loss? Important: If they are given the option to return, the stocks
A: The corporation because the capital indicated and being transferrable, it could have already been transferred to
determined through the par value no longer reflect the true another person already.
capital based on par value.
If the issuance will not be considered valid, the transferee might
Illustration. 100 shares issued at 1 peso par value = Php 100 be holding something which is not valid even if he has already
capital; 1 share was sold at 50% = Php 99.50 capital paid fully. The transferee may even have paid more because at
the time the shares were transferred, the value might have
If a share for example was sold at a discounted 50%, and 100 already increased.
shares were all issued at a par value of PHP1/share – the capital
should be Php 100. So that, on watered stocks, what is the prayer in the
derivative suit?
But since one share was sold at 50% discount, then the capital A: The difference between the actual price paid and the par
is PHP99.50 when it should have been PHP100 if there was no value of the shares against the directors or officers who
watered stock. consented to/did not object against the issuance of watered
shares.
Because of that watered stock, our capital is now less than what
it should be. ** Can a creditor file a derivative suit?
A: No, only the stockholders that are stockholders at the time of
Who are the parties responsible? the suit can file the derivative suit.
A: The directors who agreed that the sale will be sold at that
discounted price. So we are ready for the derivative suit. Here are stockholder
now who’s filing against the directors because the directors
How do we compel the directors if they do not pay? refuse the file necessary case, so in the end what would the
A: We have to go to court. result of the derivative suit?
A: The BOD will liable for the issuance of the watered stock and
Who could authorize the filing of the case in a corporation? the non-issuance of the certificate of stock, in that manner the
A: Normally, it is the directors. But because the directors directors shall be solidarily liable.
themselves is responsible for the watered stock, they will never
authorize the filing of the case. The remedy is to file a derivative In the prayer of the derivative suit to be filed by the
suit. petitioning stockholders prayed that they be awarded with
damages and they suffered sleepless nights because
DERIVATIVE SUIT watered are issued, why the directors did it to them, do you
think they can recover damages from that?
What is a derivative suit? A: NO. They can’t recover the damages because the purpose of
A: A derivative suit is filed by a stockholder in behalf of a the derivative it should be in favor of the corporation, and in the
corporation. instant case it was not for the benefit of the corporation. Such
that the cause of action should belong to the corporation.
Note: The cause of action belongs to the corporation, but the
stockholder files the action on behalf of the corporation. Instead On the other hand, they had not decided to file derivative
of the directors filing the suit, it would now be the stockholders. suit, but a case on their behalf, an individual case, they
Is it the same as a representative suit? trying to recover the unpaid portion belongs to the
A: No. corporation, that should be given to them, then the court
should give to them the unpaid balance, do you think they
A derivative suit is not a representative suit because a can do that?
representative suit is a class suit – a person files in behalf of a A: No. The balance there is considered as a legal capital of the
class who have a common interest or are similarly situated. corporation, such that it is the corporation has the right to
recover the balance, moreover if they are allowed to recover the
On the other hand, a derivative suit is filed on behalf of a unpaid balance and be given to them the it would violate the
corporation, not on behalf of a person similarly situated to the trust fund doctrine, because these are part of the capital of the
corporation. It is the corporation that is injured, not the corporation, and if they allowed to recover the balance then that
stockholder. would tantamount to liquidation because it is part of the capital.
And it is the corporation is supposed to recover it.
This is allowed by law because the person who is required to act
(BOD) refuses to act. REQUISITES FOR A DERIVATIVE SUIT TO PROSPER
1. Injury to the corporation
DERIVATIVE SUIT REPRESENTATIVE SUIT 2. The person suing must be a stockholder at the time of
Filed on behalf of a A class suit where a person the injury
corporation files in behalf of a class who 3. Suing on behalf of the corporation.
have common interest or are
similarly situated OTHER INSTANCES IN WHICH A DERIVATIVE SUIT MAY
PROSPER
Note: It cannot compel to return the issued stocks because as 1. Disloyalty of directors (See Sec. 33)
far as the issuance is concerned, it is VALID. However, it is the 2. Self-dealing directors (See Sec. 31)
deficient consideration that is ILLEGAL. 3. Interlocking directors (See Sec. 32)

lOMoARcPSD|9536011
RR’s answers: REQUISITES FOR DERIVATIVE ACTIONS

1. Directors assent to acts that are patently illegal
2. Grossly negligent 1. That the person instituting the action be a stockholder
3. Conflict of interest or member at the time the act/s or transaction/s
4. Disloyalty subject of the action occurred and at the time the action
was filed;
WATERED STOCKS IS APPLICABLE ONLY TO NEWLY 2. That the stockholder/member exerted all reasonable
ISSUED SHARES (VIRGIN SHARES) efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the
Illustration. Treasury shares with a par value of Php10/share Articles of Incorporation, bylaws, laws or rules
were sold at Php5/share – not a water stock governing the corporation to obtain the relief he desires
There are treasury shares. The BOD needed cash, and they 3. That there is no appraisal right available for the act/s
decided to sell these treasury shares. The par value is at complained of;
PHP10/share. The board decided to sell it at PHP5/share. 4. That the suit is not a nuisance or harassment suit;
5. That the suit is brought in the name of the
Is this a watered stock? corporation.
A: No, because watered stocks only applies to freshly issued
shares. Important:
In derivative suits, the corporation is an unwilling co-
There were watered stocks issued. Fortunately, the plaintiff; the suing stockholder/member is only a
corporation was about to be disowned. The existing assets nominal party.
were not enough to pay all the creditors. Would the The number of shares owned by the suing stockholder
creditors, in the presence of watered stocks, would it be is not material.
able to pursue some more other than the existing assets? The wrong contemplated in a derivative suit is one
A: Yes. This is supposed to be part of the asset. which injures the corporation directly. But, the personal
injury suffered by the stockholder cannot disqualify him
Can the transferee be compelled to pay the unpaid portion? from filing said derivative suit.
A: No. The stocks are not anymore “virgin” stocks when the
transferee bought it since it has been previously issued by the SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS
Corporation to the subscriber. Watered stock only applies to
“virgin” shares. If we allow the transferee to pay, it defeats the Section 65. Interest on Unpaid Subscriptions. – Subscribers
transferability. to stocks shall be liable to the corporation for interest on all
unpaid subscriptions from the date of subscription, if so required
Atty. Espedido: We will have to keep asking if it is a watered by and at the rate of interest fixed in the subscription contract. If
stock or not. Thus, insofar as issuance is concerned, it is valid. no rate of interest is fixed in the subscription contract, the
What is not valid is with regard to the deficient consideration – prevailing legal rate shall apply.
wherein you paid less for more.
SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION
**NOTES
Section 66. Payment of Balance of Subscription. – Subject
KINDS OF SUITS to the provisions of the subscription contract, the board of
directors may, at any time, declare due and payable to the
1. Individual Suit – a suit brought by the shareholder in
corporation unpaid subscriptions and may collect the same or
his own name against the corporation when a wrong is
such percentage thereof, in either case, with accrued interest, if
directly inflicted against him. any, as it may deem necessary.
2. Representative Suit – a suit brought by the
Payment of unpaid subscription or any percentage thereof,
stockholder in behalf of himself and all the other
together with any interest accrued shall be made on the date
stockholders similarly situated when a wrong is specified in the subscription contract or on the date stated in the
committed against a group of stockholders. call made by the board. Failure to pay on such date shall render
the entire balance due and payable and shall make the
3. Derivative Suit – a suit brought by a stockholder for
stockholder liable for interest at the legal rate on such balance,
wrongful acts committed by directors/trustees of a unless a different interest rate is provided in the subscription
corporation, when the shareholder finds that he has no contract. The interest shall be computed from the date specified,
redress because the directors/trustees are the ones
until full payment of the subscription. If no payment is made
vested by law to decide whether or not to sue.
within thirty (30) days from the said date, all stocks covered by
the subscription shall thereupon become delinquent and shall
DERIVATIVE SUITS be subject to sale as hereinafter provided, unless the board of
directors orders otherwise.
It is a suit by a shareholder to enforce a corporate cause of
action. It is a condition sine qua non that the corporation be
impleaded as a party because not only is the corporation an **NOTES
indispensable party, but it is also the present rule that it must be
served with process. How does the BOD call for the payment of the balance of
the subscription?
The judgment must be made binding upon the corporation in A: A call is made by a resolution of the BOD in a meeting where
order that the corporation may get the benefit of the suit against there is a quorum, and approved by majority of the directors
the same defendants for the same cause of action. present in said meeting.

lOMoARcPSD|9536011
What is the effect of the failure to pay after a call, or upon (3) Publication of Notice of Sale
the lapse of the date specified in the subscription contract? (a) once a week for two (2) consecutive weeks
A: The BOD may issue another board resolution declaring said (b) in a newspaper of general circulation in the
subscriptions delinquent. province or city where the principal office of the
corporation is located
SEC. 67. DELINQUENCY SALE
(4) Sale at a public auction to the bidder who shall offer to
Section 67. Delinquency Sale. – The board of directors may, pay the full amount of the balance on the subscription
by resolution, order the sale of delinquent stock and shall together with accrued interest, costs of advertisements and
specifically state the amount due on each subscription plus all expenses of sale for the smallest number of shares or
accrued interest, and the date, time and place of the sale which fraction of a share.
shall not be less than thirty (30) days nor more than sixty (60)
days from the date the stocks become delinquent. Who is the “highest bidder”?
A: He is the bidder who offers to pay the highest amount for the
Notice of the sale, with a copy of the resolution, shall be sent to least number of shares.
every delinquent stockholder either personally, by registered
mail, or through other means provided in the bylaws. The same Illustration:
shall be published once a week for two (2) consecutive weeks
in a newspaper of general circulation in the province or city Their Offer Value per Share
where the principal office of the corporation is located. Bidder 1 10k shares for P100k P10/share
Bidder 2 5k shares for P75k P15/share
Unless the delinquent stockholder pays to the corporation, on or
before the date specified for the sale of the delinquent stock, the Who is the highest bidder in this case?
balance due on the former’s subscription, plus accrued interest, A: Bidder 2 is the best bidder. This is because the 2nd bidder
costs of advertisement and expenses of sale, or unless the bought the least number of shares at the highest price. So if the
board of directors otherwise orders, said delinquent stock shall corporation goes with the best bidder, they can still sell 5k
be sold at a public auction to such bidder who shall offer to pay shares to someone else at a good price. The law says best
the full amount of the balance on the subscription together with bidder, not highest bidder.
accrued interest, costs of advertisement and expenses of sale,
for the smallest number of shares or fraction of a share. The DATE OF SALE AT PUBLIC AUCTION
stock so purchased shall be transferred to such purchaser in the
books of the corporation and a certificate for such stock shall be The sale must be held not less than 30 days nor more than 60
issued in the purchaser’s favor. The remaining shares, if any, days FROM the date the stocks become delinquent.
shall be credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock EFFECT OF PAYMENT BY THE SUBSCRIBER BEFORE THE
covering such shares. PERIOD OF SALE (before 30 days)
Should there be no bidder at the public auction who offers to pay When the delinquent stockholder pays to the corporation on or
the full amount of the balance on the subscription together with before the date specified for the sale of the delinquent stock the
accrued interest, costs of advertisement, and expenses of sale, balance due on the stockholder’s subscription, the stocks shall
for the smallest number of shares or fraction of a share, the be RETAINED by the stockholder. In which case, he may be
corporation may, subject to the provisions of this Code, bid for issued the certificate of stock in his favor.
the same, and the total amount due shall be credited as fully
paid in the books of the corporation. Title to all the shares of **NOTES
stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said Illustration 1
corporation in accordance with the provisions of this Code. Delinquent Stock
PROCEDURE FOR DELINQUENCY SALE Total subscription - 20,000 shares valued at P1Mn
Total paid subs. - 10,000 shares valued at P500k
(1) Resolution by the BOD for the order of sale of delinquent Total unpaid subs. - 10,000 shares valued at P500k
stocks, specifying the following:
(a) Amount due on each subscription In this case, the entire subscription of 20,000 shares is
(b) Accrued interest considered delinquent stock. This is because of the Principle of
(c) Date, time, and place of sale which shall not be Indivisibility of Subscription. Thus, a delinquent stock shall
less than 30 days nor more than 60 days from the refer not only to the unpaid subscription, but includes the paid
date the stocks become delinquent subscription.
The winning bidder will be determined by who is willing to pay
(2) Notice of Sale with a copy of the Resolution shall be sent the for the most for the least/smallest number of stocks.
to every delinquent stockholder either:
(a) Personally
(b) By registered mail, or
(c) Through other means provided in the bylaws

lOMoARcPSD|9536011
Illustration 2
Delinquent Stock SEC. 69. COURT ACTION TO RECOVER UNPAID
SUBSCRIPTION
Bidder Bid Value/Sh
Bidder A - 2,000 shares valued at P10k P5.00/share Section 69. Court Action to Recover Unpaid Subscription. –
Bidder B - 1,500 shares valued at P10k P6.67/share Nothing in this Code shall prevent the corporation from
Bidder C - 1,000 shares valued at P10k P10.00/share collecting through court action, the amount due on any unpaid
subscription, with accrued interest, costs and expenses.
In this case, Bidder C should be declared the highest bidder
because he is the bidder who is willing to pay the highest amount SEC. 70. EFFECT OF DELINQUENCY
for the smallest number of shares or fraction of the share. This
means that the highest bidder must be the bidder who is willing Section 70. Effect of Delinquency. – No delinquent stock shall
to pay the highest amount per share. be voted for, be entitled to vote, or be represented at any
stockholder’s meeting, nor shall the holder thereof be entitled to
Upon payment of the highest bidder, the stock purchased shall
any of the rights of a stockholder except the right to dividends in
be transferred to such purchaser in the Stock and Transfer Book accordance with the provisions of this Code, until and unless
of the corporation, and certificate/s for such stock shall be issued payment is made by the holder of such delinquent stock for the
in the purchaser’s favor.
amount due on the subscription with accrued interest, and the
costs and expenses of advertisement, if any.
The remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares. SEC. 71. RIGHTS OF UNPAID SHARES, NONDELINQUENT
Illustration 3 Section 71. Rights of Unpaid Shares, Nondelinquent. –

Excess Shares & No Bidder Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
Excess shares
EFFECTS OF DELINQUENCY
Based on the illustration above, 1,000 shares out of the 10,000
shares shall be given to Bidder C. The remaining 9,000 shares As to the stockholder, he will no longer enjoy the following rights:
shall be given to the delinquent shareholder. (1) Right to vote
(2) Right to be voted for;
No bidder (3) Right of representation at any stockholder's meeting;
(4) Not entitled to any of the rights of a stockholder
If there is no bidder, the corporation is authorized to purchase  EXCEPT the right to dividends in accordance
the shares and the same shall form part of the treasury shares. with the provisions of this Code
(5) Stocks will be considered delinquent and shall be
Effect subject to delinquency sale
If the bidder is the corporation, there will be no shares given to UPON DECLARATION OF DELINQUENCY, A
the delinquent shareholder. Applying the illustration above, all STOCKHOLDER CANNOT RETURN SHARES ALREADY
10,000 shares will pertain to the shareholder. They will form part BOUGHT
of the treasury shares.
Note: After being declared delinquent, the stockholder cannot
The corporation may go after the delinquent shareholder in return the shares already bought.
accordance with Sec. 69 of this Code.
Reason: He cannot return the shares already bought because
Note (Atty. Espedido): The Board may decline any bidder. as between the corporation and the subscriber, there is a debtor-
creditor relationship. Thus, the stockholder is obliged to pay the
SEC. 68. WHEN SALE MAY BE QUESTIONED balance. He cannot just simply return the shares he bought.
Section 68. When Sale May be Questioned. – No action to SUBSCRIBER CANNOT USE FUTURE DIVIDENDS AS
recover delinquent stock sold can be sustained upon the ground PAYMENT FOR THE BALANCE
of irregularity or defect in the notice of sale, or in the sale itself
of the delinquent stock, unless the party seeking to maintain Illustration.
such action first pays or tenders to the party holding the stock This coming December, the stockholder is sure that there will be
the sum for which the same was sold, with interest from the date cash dividends. So, the stockholder says: “By the time the cash
of sale at the legal rate. No such action shall be maintained dividends are issued on December, these dividends will be used
unless a complaint is filed within six (6) months from the date of to pay the unpaid subscribed shares.”
sale.
He further says, “I am already sure that the corporation will issue
QUESTIONING OF AUCTION SALE the dividends since the profits have increased beyond 100% of
the paid-in capital and it is still March. Thus, by December, I am
If there is irregularity in the conduct of the sale, the same may sure that the corporation is required to declare dividends.”
be questioned.
Is that allowed?
When can you question the conduct of the auction sale? A: No, it is not allowed.
A: Within 6 months from the date of sale.

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Three Justifications [Summary of Answers] SEC. 72. LOST OR DESTROYED CERTIFICATES

Note: This is based on the answers during the recitation
(1) Declaration of dividends when profits exceed the 100% Section 72. Lost or Destroyed Certificates. – The following
paid-in capital is subject to exceptions procedure shall be followed by a corporation in issuing new
(2) Corporation may still incur losses in the future – no certificates of stock in lieu of those which have been lost, stolen
assurance that dividends will be declared or destroyed:
(3) Corporation NEVER PROMISES that a stockholder will (a) The registered owner of a certificate of stock in a
be given dividends and only the Board can determine corporation or such person’s legal representative shall file
as to what type of dividend will be issued (not always with the corporation an affidavit in triplicate setting forth, if
cash dividends) possible, the circumstances as to how the certificate was
lost, stolen or destroyed, the number of shares represented
Elaboration: by such certificate, the serial number of the certificate and
Since it is still not certain that there will be cash dividends that the name of the corporation which issued the same. The
will be declared since it is subject to exceptions, namely: owner of such certificate of stock shall also submit such
(1) Expansion projects other information and evidence as may be deemed
(2) Loan agreement that contains a condition that the necessary; and
corporation cannot declare dividends UNLESS there is
consent by the creditor (b) After verifying the affidavit and other information and
(3) Emergency purposes evidence with the books of the corporation, the corporation
shall publish a notice in a newspaper of general circulation
Assuming that none of the 3 exceptions are present, the future in the place where the corporation has its principal office,
cash dividends (dividends on December) still cannot be used as once a week for three (3) consecutive weeks at the expense
payment for the shares because the corporation may still incur of the registered owner of the certificate of stock which has
losses in the future. There is still no assurance that dividends been lost, stolen or destroyed. The notice shall state the
will be declared. name of the corporation, the name of the registered owner,
the serial number of the certificate, the number of shares
Moreover, assuming that it does not fall under the exceptions represented by such certificate, and shall state that after the
and sure that there are no losses to be incurred, it is still not expiration of one (1) year from the date of the last
allowed because when you subscribe, you become a debtor to publication, if no contest has been presented to the
the corporation because you paid partially. However, for the corporation regarding the certificate of stock, the right to
balance, you are a debtor to the corporation because you make such contest shall be barred and the corporation shall
undertook to pay when it is due and demandable. cancel the lost, destroyed or stolen certificate of stock in its
books. In lieu thereof, the corporation shall issue a new
On the other hand, the Corporation never promises that a certificate of stock, unless the registered owner files a bond
stockholder will be given dividends. What was agreed upon is or other security as may be required, effective for a period
that the subscriber will invest, and in the meantime, he shall wait of one (1) year, for such amount and in such form and with
WON the Board will distribute dividends. such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued
Even if the corporation has already reached the 100% of its paid- even before the expiration of the one (1) year period
in capital, assuming it is not falling under the exception and sure provided herein. If a contest has been presented to the
that no loss shall be incurred, the subscriber is not sure if he will corporation or if an action is pending in court regarding the
be given cash since the Corporation can either declare cash, ownership of the certificate of stock which has been lost,
stock, or property dividends. Not even the Internal Revenue stolen or destroyed, the issuance of the new certificate of
Code can dictate declaration of cash dividends. Only the Board stock in lieu thereof shall be suspended until the court
can determine this. renders a final decision regarding the ownership of the
certificate of stock which has been lost, stolen or destroyed.
The Internal Revenue Code may only dictate to declare
dividends but not as to what kind of dividends to be issued Except in case of fraud, bad faith, or negligence on the part of
since this is the SOLE prerogative of the Board. the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of
**NOTES stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described.
EFFECTS OF DELINQUENCY
LOST CERTIFICATE
The stockholder will remain a stockholder, but the exercise of
the any of the stockholder’s rights is suspended except the right Being transferrable, is there any danger or risk of loss?
to dividends. A: Yes. Since it is transferrable, the finder might just try to copy
the signature and might be able to transfer it to someone. The
The distribution of shares in the dividends by a delinquent transferee, once he goes to the Corporate Secretary might
stockholder will be applied in the following manner: recognize that it was a fraudulent signature and may decline –
IOW, the buyer is prejudiced.
1. If cash or property dividend – the corporation will
offset the payment of the unpaid subscription from the Remedy: File an Affidavit of Loss to the corporation
stockholder’s share in the dividend.
2. If stock dividend – the stockholder’s share in the
dividends is withheld by the corporation until the
subscription is fully paid.

lOMoARcPSD|9536011
Illustration The notice shall state:

Stockholder mistakenly used the Certificate of Stock after a. the name of said corporation,
a “toilet situation” :) b. the name of the registered owner and
c. the serial number of said certificate, and the
The stockholder rushed to the nearest toilet. However, after that, d. number of shares represented by such certificate,
he was looking for a tissue paper but there was none. So he
pulled out a white paper from his wallet and used it to clean T/N: If no contest, general rule is after the expiration of one (1)
himself. year from the date of the last publication, the right to make such
contest shall be barred and said corporation shall cancel in its
When he went home, he discovered that he wrongfully used the books the certificate of stock which has been lost, stolen or
Certificate of Stock and hurriedly went back to the toilet. destroyed and issue in lieu thereof new certificate of stock.
However, it was already closed. When he went back the next
morning, the trashcan was already empty. The stockholder The exception is: Unless the registered owner files a bond or
exerted many efforts to find the janitor, only to discover that the other security in lieu thereof as may be required, effective for a
janitor has already resigned. period of one (1) year, for such amount and in such form and
with such sureties as may be satisfactory to the board of
He engaged the services of the NBI to locate the janitor but his directors, in which case a new certificate may be issued even
address was unknown. He made efforts to retrieve it but became before the expiration of the one (1) year period provided herein.
futile.
If a contest has been presented to said corporation or if an
Thus, he executed an Affidavit of loss detailing the action is pending in court regarding the ownership of said
circumstances as to how the certificate was lost. It was signed certificate of stock which has been lost, stolen or destroyed, the
and notarized. issuance of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court regarding the
**Illustration ownership of said certificate of stock which has been lost, stolen
Taxi or destroyed.
So if you happen to find a certificate of stocks in a taxi worth Summary:

10 million pesos, what will you do? Can you sell it?
A: Yes Sir I can sell it because certificate of stocks is General Rule: No action may be brought against any corporation
transferrable. which shall have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure above-described.
So you find a buyer and tell him “you see the par value of Except In case of fraud, bad faith, or negligence on the part of
this, this worth 10 million pesos and I will sell it to you for the corporation and its officers.
only 2 million pesos” will you buy it? Of course it’s way
more than profitable, someone will take them. Alright, if we do not want to wait for 1 year just put up a bond,
and that bond will answer to any other party who present himself
It’s important for the corporation not to just issue new COS as the owner who brought the certificate with him and prove that
because they want to be sure. For all you know you have it was not lost and in fact it was legally transferred to him. That’s
endorsed it to someone else and that someone will come in how important it is because it is transferrable. You should
the corporation and claim also. So what does the law execute an affidavit of loss stating the circumstances of loss “ I
require? Mr J.R.C., and the true and lawful owner stocks certificate
A; The following procedure shall be followed for the issuance by number 0-10-0-10, while one evening I was in karaoke I drink
a corporation of new certificates of stock in lieu of those which too much and I left my stocks certificates beside a lady” you
have been lost, stolen or destroyed: should recite the circumstances leading to the loss.
(1) Affidavit. The registered owner of a certificate of stock PROCEDURE IN ISSUING NEW CERTIFICATES
in a corporation or his legal representative shall file with OF STOCK IN LIEU OF THOSE STOLEN, LOST OR
the corporation an affidavit in triplicate setting forth, if DESTROYED
possible, the circumstances as to:
a. how the certificate was lost, stolen or (1) Filing of an Affidavit of Loss to the corporation
destroyed.
b. the number of shares represented by such CONTENTS:
certificate, 1. Circumstances as to how the certificate was lost,
c. the serial number of the certificate and stolen, or destroyed
d. the name of the corporation which issued the 2. Number of shares represented by such certificate
same. 3. Serial number of the certificate
4. Name of the corporation which issued the same
He shall also submit such other information and 5. Other information and evidence as may be
evidence which he may deem necessary; deemed necessary
(2) Publication by the corporation. Corporation shall (2) Submission of a Verified Affidavit and other
publish a notice in a newspaper of general circulation information and evidence with the books of the
published in the place where the corporation has its corporation
principal office, once a week for three (3) consecutive
weeks at the expense of the registered owner of the (3) Publication of a Notice by the corporation in a
certificate of stock which has been lost, stolen or newspaper of general circulation in the place where the
destroyed. corporation has its principal office, once a week for 3

lOMoARcPSD|9536011
consecutive weeks at the expense of the registered T/N:

owner of the certificate of stock which has been lost, If the transaction is not recorded, then the transaction
stolen, or destroyed is binding merely between the parties to the deed, and
not against the corporation and third persons.
CONTENTS: The mere execution of the deed of assignment does
1. Name of the corporation not make one a stockholder. Rather, it is the recording
2. Name of the registered owner in the Stock and Transfer Book that does.
3. Serial number of the certificate
4. Number of shares represented by such certificate ASSIGNMENT OF SUBSCRIPTION RIGHTS
5. State that AFTER the expiration of 1 year from the
date of the last publication, if no contest has been 1. Although generally, the law says you cannot transfer
presented to the corporation regarding the shares where there is an unpaid subscription, in
certificate of stock, the right to make such contest practice you can transfer shares by deed of
shall be barred and the corporation shall: assignment of subscription rights. What happens is
(a) Cancel the lost, destroyed or stolen COS in its that you assign your rights to the subscription. You
books. don’t assign the shares because you are not allowed.
(b) In lieu thereof, the corporation shall issue a
new certificate of stock 2. The Principle of Indivisibility still exists when you
assign your rights to subscription. Meaning, you assign
WHEN A NEW CERTIFICATE OF STOCK IS ISSUED the subscription as a whole.
(A) AFTER expiration of 1 year from the date of the last TITLE VIII. CORPORATE BOOKS AND RECORDS
publication – if no contest has been presented to the
corporation regarding the certificate of stock SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER AGENT
(B) BEFORE the 1-year period provided – if the Section 73. Books to be Kept; Stock Transfer Agent. – Every
registered owner files a bond or other security as may corporation shall keep and carefully preserve at its principal
be required, effective for a period of 1 year, for such office all information relating to the corporation including, but not
amount and in such form and with such sureties as may limited to:
be satisfactory to the BOD
(a) The articles of incorporation and bylaws of the corporation
**NOTES and all their amendments;
ISSUANCE OF NEW STOCK CERTIFICATE (b) The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
GEN: There is a 1-year waiting period before the issuance of group structures, intra-group relations, ownership data, and
a new certificate of stock. This would give the beneficial ownership;
transferee/assignee the chance to object to the declaration of
lost or destroyed certificates. (c) The names and addresses of all the members of the board
of directors or trustees and the executive officers;
If they do not object, the certificate will be issued after 1 year.
(d) A record of all business transactions;
XPN: If the owner gives a bond or security which will be valid for
1 year. That will now allow the issuance of the new certificate/s (e) A record of the resolutions of the board of directors or
of stock even before the lapse of 1 year. trustees and of the stockholders or members;
Should a legitimate claimant turn out to have been (f) Copies of the latest reportorial requirements submitted to
jeopardized by the affidavit of loss, what should the the Commission; and
claimant do?
A: The claimant will have the rights over the bond posted. (g) The minutes of all meetings of stockholders or members, or
of the board of directors or trustees. Such minutes shall set
DEED OF ASSIGNMENT OF SHARES (TRANSFER W/O forth in detail, among others: the time and place of the
STOCK CERTIFICATE) meeting held, how it was authorized, the notice given, the
agenda therefor, whether the meeting was regular or
If there is a certificate of stock, transfer will be done by delivery special, its object if special, those present and absent, and
and endorsement, and then you record in the stock and transfer every act done or ordered done at the meeting. Upon the
book. demand of a director, trustee, stockholder or member, the
time when any director, trustee, stockholder or member
If there is no certificate of stock, transfer can be still done by entered or left the meeting must be noted in the minutes;
deed of assignment of shares. and on a similar demand, the yeas and nays must be taken
on any motion or proposition, and a record thereof carefully
How is it done? made. The protest of a director, trustee, stockholder or
A: It is basically just like a deed of sale. member on any action or proposed action must be recorded
1. Execute the deed of assignment. in full upon their demand.
2. Have it recorded in the Stock and Transfer Book.
Corporate records, regardless of the form in which they are
stored, shall be open to inspection by any director, trustee,
stockholder or member of the corporation in person or by a

lOMoARcPSD|9536011
representative at reasonable hours on business days, and a fixed by the Commission, which shall be renewable annually:
demand in writing may be made by such director, trustee or Provided, That a stock corporation is not precluded from
stockholder at their expense, for copies of such records or performing or making transfers of its own stocks, in which case
excerpts from said records. The inspecting or reproducing party all the rules and regulations imposed on stock transfer agents,
shall remain bound by confidentiality rules under prevailing laws, except the payment of a license fee herein provided, shall be
such as the rules on trade secrets or processes under Republic applicable: Provided, further, That the Commission may require
Act No. 8293, otherwise known as the “Intellectual Property stock corporations which transfer and/or trade stocks in
Code of the Philippines”, as amended, Republic Act No. 10173, secondary markets to have an independent transfer agent.
otherwise known as the “Data Privacy Act of 2012”, Republic Act
No. 8799, otherwise known as “The Securities Regulation REASON FOR THE CORPORATION TO KEEP THE BOOKS
Code”, and the Rules of Court. AND RECORDS
A requesting party who is not a stockholder or member of record, It is the best evidence used in cases where conflicts need to be
or is a competitor, director, officer, controlling stockholder or resolved in a corporation. It is a proof of the corporation’s
otherwise represents the interests of a competitor shall have no transactions. Also, it is considered as a prima facie official
right to inspect or demand reproduction of corporate records. evidence of the corporation.
Any stockholder who shall abuse the rights granted under this BOOKS TO BE KEPT
section shall be penalized under Section 158 of this Code,
without prejudice to the provisions of Republic Act No. 8293, What are these books and records?
otherwise known as the “Intellectual Property Code of the A: Every corporation shall keep and carefully preserve at its
Philippines”, as amended, and Republic Act No. 10173, principal office all information relating to the corporation
otherwise known as the “Data Privacy Act of 2012”. including, but not limited to:
Any officer or agent of the corporation who shall refuse to allow (a) The articles of incorporation and bylaws of the
the inspection and/or reproduction of records in accordance with corporation and all their amendments;
the provisions of this Code shall be liable to such director, (b) The current ownership structure and voting rights of the
trustee, stockholder or member for damages, and in addition, corporation, including:
shall be guilty of an offense which shall be punishable under i. lists of stockholders or members
Section 161 of this Code: Provided, That if such refusal is made ii. group structures
pursuant to a resolution or order of the board of directors or iii. intra-group relations
trustees, the liability under this section for such action shall be iv. ownership data, and
imposed upon the directors or trustees who voted for such v. beneficial ownership;
refusal: Provided, further, That it shall be a defense to any action (c) The names and addresses of all the members of the
under this section that the person demanding to examine and board of directors or trustees and the executive
copy excerpts from the corporation’s records and minutes has officers;
improperly used any information secured through any prior (d) A record of all business transactions;
examination of the records or minutes of such corporation or of (e) A record of the resolutions of the board of directors or
any other corporation, or was not acting in good faith or for a trustees and of the stockholders or members;
legitimate purpose in making the demand to examine or (f) Copies of the latest reportorial requirements submitted
reproduce corporate records, or is a competitor, director, officer, to the Commission; and
controlling stockholder or otherwise represents the interests of (g) The minutes of all meetings of stockholders or
a competitor. members, or of the board of directors or trustees.
If the corporation denies or does not act on a demand for Contents of the Minutes of the Meeting
inspection and/or reproduction, the aggrieved party may report Such minutes shall set forth in detail, among others:
such to the Commission. Within five (5) days from receipt of 1. time and place of the meeting held
such report, the Commission shall conduct a summary 2. how it was authorized
investigation and issue an order directing the inspection or 3. the notice given
reproduction of the requested records. 4. the agenda therefor, whether the meeting was
regular or special, its object if special
Stock corporations must also keep a stock and transfer book, 5. those present and absent, and every act done or
which shall contain a record of all stocks in the names of the ordered done at the meeting
stockholders alphabetically arranged; the installments paid and
unpaid on all stocks for which subscription has been made, and Atty. Espedido: You also have the record of the STOCK
the date of payment of any installment; a statement of every CERTIFICATES. SEC will mark it as received.
alienation, sale or transfer of stock made, the date thereof, by
and to whom made; and such other entries as the bylaws may You will also show your stock certificates – there is a book where
prescribe. The stock and transfer book shall be kept in the there is a perforated portion. Once you issue this certificate,
principal office of the corporation or in the office of its stock secretary removes this perforated portion, but there’s a
transfer agent and shall be open for inspection by any director remaining portion.
or stockholder of the corporation at reasonable hours on
business days. Summary
A stock transfer agent or one engaged principally in the business What are the books to be kept?
of registering transfers of stocks in behalf of a stock corporation 1. Articles of Incorporation
shall be allowed to operate in the Philippines upon securing a 2. By-laws
license from the Commission and the payment of a fee to be 3. Stock and transfer books

lOMoARcPSD|9536011
4. Stock certificates the corporation. It is a way to check whether the corporation is

5. Minutes of the stockholders meeting operating according to the purpose of the corporation.
6. Minutes of the board meeting
7. Records of all business transactions of the corporation The purpose why the corporation should keep these corporate
(journals, ledgers, financial statements) books and records is because these are the best evidences that
may be used in order to resolve in case there are conflicts. If
STOCK TRANSFER AGENT these books and records are not kept, the conflicting litigants
may just present any records and that will result to chaos.
Atty. Espedido: If there are hundreds and thousands of
shareholders, you will need a STOCK TRANSFER AGENT to One fundamental rule in business is full transparency so that
record all the transactions and transfers of the corporation. everything must be transparent. It is the right of every
• Stock transfer agents are duly licenses and are stockholder to protect his investment and the only way to do this
supposed to register with the SEC. is to know everything.
• The stock transfer agent does nothing except record all
transactions and transfers. Most of these stock transfer Can the stockholder authorize his boyfriend to inspect the
agents are banks. corporate books?
A: Yes. There is no prohibition. There is nothing wrong with it as
Note: A stock transfer agent or one engaged principally in the long as the boyfriend is duly authorized
business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines upon **NOTES
securing a license from the Commission and the payment of a
fee to be fixed by the Commission, which shall be renewable CORPORATE BOOKS
annually. 1. Records of all business transactions (i.e. accounting
books, ledgers, journals)
REQUISITES TO BE ALLOWED TO OPERATE AS A STOCK 2. Minutes Book for Stockholders – minutes of meetings
TRANSFER AGENT of stockholders
(1) Secures a license from the Commission (which is 3. Minutes Books for Directors or Trustees – minutes of
renewable annually) meetings of the BOD or BOT
(2) Payment of a fee to be fixed by the Commission 4. Stock and Transfer Book
Atty. Espedido: It is good now because we now have computers. CORPORATE RECORDS
Before, it is done manually. 1. Charter documents:
a. AOI
Other than these books, we have the: b. Bylaws
(1) The minutes of the stockholders’ meeting and c. Amendments, if any
(2) The minutes of the board’s meeting 2. Reports filed with the SEC:
a. General Information Sheets (GIS), and
CONFIDENTIAL MATTERS ARE NOT INCLUDED IN THE b. All other reports required under the Securities
MINUTES Regulation Code (SRC)
There are reports in the meeting that are confidential that you
do not have to include in the minutes. There are confidential MINUTES BOOK, CONTENTS:
matters that you need not have to record – but you must make 1. Date and time of meeting
a reference: meaning, you report it to the account (which is not 2. Place of holding meeting
part of the minutes). 3. How the meeting was authorized
4. The fact that notice was given
RIGHT TO INSPECT BOOKS AND RECORDS 5. Whether the meeting was regular or special
6. If the meeting was special, the object of the meeting
What are your rights as a stockholder? 7. Those present or absent in the meeting
A: A stockholder has the right to inspect such books and records 8. Every act done or ordered at the meeting
at reasonable hours on business days. 9. Upon demand of a director, trustee, stockholder or
member:
Can you also just request to have a copy? a. The time when any director/trustee or
A: Yes, but the stockholder shoulders the expenses. stockholder/member entered or left the
meeting must be noted in the minutes;
Important: The right as provided in the Code refers only to the b. A carefully-made record of the yeas and nays
right to inspect but not the right to copy. If you want to have a must be taken on any motion or proposition;
copy, you have to pay for the copy. c. The protest on any action or proposed action.
Otherwise, can you ask to just bring it to your house? STOCK AND TRANSFER BOOK, CONTENTS:
A: No. This cannot be done and is also dangerous because 1. All stocks in the name of the stockholders,
there may be delicate matters contained in the books or records. alphabetically arranged;
2. Installments paid and unpaid on all stocks for which
Take note: The right to inspect does not include the right to take subscription has been made, and the date of any
it out even for a few hours. installment;
3. Statement of every alienation, sale or transfer of stock
Atty. Espedido: The stockholders have the right to inspect these made, the date thereof, by and to whom made; and
books and records at are reasonable time during business days. 4. Such other entries as the bylaws may prescribe.
The purpose of which is for them to be informed of the status of

lOMoARcPSD|9536011
Note: corporate records, to comply with Sections 45, 73, 92,

The Stock and Transfer Book shall be kept in the 128, 177 and other pertinent rules and provisions of
principal office of the corporation, or in the office of its this Code on inspection and reproduction of records
stock and transfer agent. shall be punished with a fine ranging from Ten
Only the Corporate Secretary is duly authorized to thousand pesos (P10,000.00) to Two hundred
make entries in the Stock and Transfer Book. Entries thousand pesos (P200,000.00), at the discretion of the
made by the President or the Chairman are invalid. court, taking into consideration the seriousness of the
The Stock and Transfer Book serves as the best violation and its implications. When the violation of this
evidence of the transactions that are entered or stated provision is injurious or detrimental to the public, the
therein. However, the entries are only considered as penalty is a fine ranging from Twenty thousand pesos
prima facie evidence, and may be subject to proof to (P20,000.00) to Four hundred thousand pesos
the contrary. (P400,000.00).
INSPECTION OF CORPORATE RECORDS The penalties imposed under this section shall be
without prejudice to the Commission’s exercise of its
The corporate records are open to inspection by any director, contempt powers under Section 157 hereof.
trustee, shareholder, or member of the corporation in person or
by representative at reasonable hours on business days, and a REMEDIES OF A STOCKHOLDER REFUSED INSPECTION
demand in writing may be made by such director, trustee,
shareholder or member at their expense, for copies of such If the corporation or its officers refuse to allow a
records or excerpts from said records. stockholder to inspect, is the filing of a case the only option
of a stockholder?
There are matters that are not covered by the right to inspect A: No. An aggrieved party may report such denial or inaction to
however. For instance, a corporation engaged in the the Commission.
manufacturing of goods can keep the formula of its goods
secret. Sec. 73 of the RCC after all provides:
“If the corporation denies or does not act on a demand
Reasonable Hours on Business Days for inspection and/or reproduction, the aggrieved party
(Throwback to Nego) may report such to the Commission. Within five (5)
days from receipt of such report, the Commission shall
When is a day considered a business day considering that conduct a summary investigation and issue an order
we have call centers now? directing the inspection or reproduction of the
Atty. Amago: Follow government service hours. M-F, 8AM- requested records.”
5PM.
Within 5 days from the receipt of such report, the SEC shall
REQUISITES FOR THE EXERCISE OF THE RIGHT TO conduct a summary investigation, and issue an order directing
INSPECT the inspection/reproduction of the requested records.
1. It must be exercised at reasonable hours on business VALID DEFENSES FOR REFUSAL

days.
2. The stockholder must not have improperly used any 1. The person demanding to examine and copy excerpts
information he secured through any previous from the corporation’s records and minutes has
examination. improperly used any information secured through any
3. The demand is made in good faith or for a legitimate prior examination of the records or minutes of such
purpose. corporation or any other corporation;
2. The person demanding to examine was not acting in
WHO CANNOT INSPECT good faith or for a legitimate purpose in making the
demand;
A requesting party who is not a stockholder or member of record, 3. The person demanding is a competitor, or a director,
or is a competitor, director, officer, controlling stockholder or officer, controlling stockholder or representative of the
otherwise represents the interest of a competitor. interests of a competitor.
LIABILITY FOR REFUSAL TO ALLOW INSPECTION OR JURISPRUDENTIAL PRINCIPLES

PRODUCTION OF RECORDS
JUSTIFIED PURPOSE/S FOR INSPECTION (Terelay vs. Yulo
Who can be liable? citing Ballantine)
A: 1. To ascertain the financial condition of the company or
1. Any officer or agent of the corporation who shall refuse the propriety of dividends;
to allow the inspection or production of records shall be 2. The value of the shares of stock for sale or investment;
liable; 3. Whether there has been mismanagement;
2. Any director who allows or approves the refusal shall 4. In anticipation of shareholders’ meetings to obtain a
also be guilty of an offense punishable under Sec. 161 mailing list of shareholders to solicit proxies or
of the Revised Corporation Code. influence voting;
5. To obtain information in aid of litigation with the
SEC. 161. Violation of Duty to Maintain Records, to corporation or its officers as to corporate transactions.
Allow their Inspection or Reproduction; Penalties.
– The unjustified failure or refusal by the corporation,
or by those responsible for keeping and maintaining

lOMoARcPSD|9536011
UNJUSTIFIED PURPOSES PRESENTATION OF FINANCIAL REPORT

1. Obtaining information as to business secrets or to aid The BOD/BOT shall present to such stockholders or members a
a competitor; financial report of the operations of the corporation for the
2. To secure business “prospects” or investment or preceding year, which shall include:
advertising lists; 1. Financial statements, duly signed and certified in
3. To find technical defects in corporate transactions in accordance with this Code;
order to bring “strike suits” for purposes of blackmail or 2. Rules the Commission may prescribe.
transaction.
WHEN CERTIFIED UNDER OATH (Treasurer & President
STOCK & TRANSFER BOOK VS. GENERAL instead of CPA)
INFORMATIONS SHEET If the total assets or liabilities of the corporation are less than
P600,000, or such other amount as determined by the
The Stock and Transfer Book is still the primary source of Department of Finance.
determining whether a person is a stockholder or not. However,
the General Information Sheet can also serve as a secondary
source and other documents can still be shown that a person is SUBMISSION TO THE COMMISSION
a stockholder of a corporation.
SEC. 177. Reportorial Requirements of Corporations. –
GENERAL INFORMATION SHEET Except as otherwise provided in this Code or in the rules
SEC collects from incorporators, stockholders, directors, issued by the Commission, every corporation, domestic or
trustees, officers, beneficial owners, external auditor, notary foreign, doing business in the Philippines shall submit to the
public, personal information such as but not limited to full name, Commission:
signature, nationality, sex, address, accreditation number, roll of
attorney number and taxpayer information number. These are (a) Annual financial statements audited by an independent
contained within the General Information Sheet of a corporation. certified public accountant: Provided, That if the total
assets or total liabilities of the corporation are less than
SEC. 74. RIGHT TO FINANCIAL STATEMENTS Six hundred thousand pesos (P600,000.00), the
financial statements shall be certified under oath by the
Section 74. Right to Financial Statements. – A corporation corporation’s treasurer or chief financial officer; and
shall furnish a stockholder or member, within ten (10) days from
receipt of their written request, its most recent financial (b) A general information sheet.
statement, in the form and substance of the financial reporting
required by the Commission. Corporations vested with public interest must also
submit the following:
At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or (1) A director or trustee compensation report; and
members a financial report of the operations of the corporation
for the preceding year, which shall include financial statements, (2) A director or trustee appraisal or performance report
duly signed and certified in accordance with this Code, and the and the standards or criteria used to assess each
rules the Commission may prescribe. director or trustee.
However, if the total assets or total liabilities of the corporation The reportorial requirements shall be submitted annually
is less than Six hundred thousand pesos (P600,000.00), or such and within such period as may be prescribed by the
other amount as may be determined appropriate by the Commission.
Department of Finance, the financial statements may be
certified under oath by the treasurer and the president. The Commission may place the corporation under
delinquent status in case of failure to submit the reportorial
Should it be signed by a certified public accountant? requirements three (3) times, consecutively or
A: It depends, but generally, yes. But the law allows the financial intermittently, within a period of five (5) years. The
statement to be certified under oath by the treasurer and the Commission shall give reasonable notice to and coordinate
president if the total assets or total liabilities of the corporation with the appropriate regulatory agency prior to placing
is: under delinquent status companies under their special
(a) Less than 600k; or regulatory jurisdiction.
(b) Any other amount as may be determined appropriate
by the DOF Any person required to file a report with the Commission
may redact confidential information from such required
When will it be required to be signed by a certified public report: Provided, That such confidential information shall be
accountant (CPA)? filed in a supplemental report prominently labelled
A: When the total assets or liabilities of the corporation is 600K “confidential”, together with a request for confidential
or more. treatment of the report and the specific grounds for the grant
thereof.
**NOTES
LOSS OF STOCK AND TRANSFER BOOK
WHEN RECENT FINANCIAL STATEMENTS FURNISHED
Within ten (10) days from the receipt of a written request of a Secondary or extrinsic evidence may be introduced to
stockholder or member, in the form and substance of the reconstitute its contents. The new stock and transfer book
financial reporting required by the SEC. should be presented to the SEC for registration, accompanied

lOMoARcPSD|9536011
by a sworn statement executed by any responsible offer setting such activities with the view to promote, conserve or
forth the circumstances attending the loss. rationalize investment;
STOCK TRANSFER AGENT h) To pass upon, refuse or deny, after consultation with the
Board of Investments, Department of Industry, National
Engaged principally in the business of registering transfers of Economic and Development Authority or any other
stock in behalf of a stock corporation shall be allowed to operate appropriate government agency, the application for
in the Philippines upon securing a license from the Commission registration of any corporation, partnership or association or
and payment of a fee to be fixed by the Commission, which any form of organization falling within its jurisdiction, if their
should be renewed annually. establishment, organization or operation will not be
consistent with the declared national economic policies.
TRANSFER BY CORPORATION
i) To suspend, or revoke, after proper notice and hearing, the
A stock corporation is not precluded from performing or making franchise or certificate of registration of corporations,
transfers of its own stocks, in which case all the rules and partnerships or associations, upon any of the grounds
regulations imposed on stock transfer agents, except the provided by law, including the following:
payment of a license fee herein provided, shall be applicable.
1. Fraud in procuring its certificate of registration;
APPENDIX 2. Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of or damage
P.D. 902-A to the general public;
PRESIDENTIAL DECREE No. 902-A 3. Refusal to comply or defiance of any lawful order of the
March 11, 1976 Commission restraining commission of acts which
would amount to a grave violation of its franchise;
REORGANIZATION OF THE SECURITIES AND EXCHANGE
COMMISSION WITH ADDITIONAL POWER AND PLACING 4. Continuous in operation for a period of at least five (5)
THE SAID AGENCY UNDER THE ADMINISTRATIVE years;
SUPERVISION OF THE OFFICE OF THE PRESIDENT
5. Failure to file by-laws within the required period;
Section 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers: 6. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
a) To issue preliminary or permanent injunctions, whether period;
prohibitory or mandatory, in all cases in which it has
jurisdiction, and in which cases the pertinent provisions of j) To exercise such other powers as implied, necessary or
the Rules of Court shall apply; incidental to the carrying out the express powers granted to
the Commission or to achieve the objectives and purposes
b) To punish for contempt of the Commission, both direct and of this Decree.
indirect, in accordance with the pertinent provisions of, and
penalties prescribed by, the Rules of Court; NATIONALIZED ACTIVITIES (SEC. 8, RA 7042)
c) To compel the officers of any corporation or association SEC. 8. List of Investment Areas Reserved to Philippine
registered by it to call meetings of stockholders or members Nationals (Foreign Investment Negative List). – The Foreign
thereof under its supervision; Investment Negative List shall have two (2) components lists; A,
and B.
d) To pass upon the validity of the issuance and use of proxies
and voting trust agreements for absent stockholders or a) List A shall enumerate the areas of activities reserved
members; to Philippine nationals by mandate of the Constitution
and specific laws.
e) To issue subpoena duces tecum and summon witnesses to
appear in any proceedings of the Commission and in b) List B shall contain the areas of activities and
appropriate cases order search and seizure or cause the enterprises regulated pursuant to law:
search and seizure of all documents, papers, files and
records as well as books of accounts of any entity or person 1) Which are defense-related activities, requiring prior
under investigation as may be necessary for the proper clearance and authorization from Department of
disposition of the cases before it; National Defense (DND) to engage in such activity,
such as the manufacture, repair, storage and/or
f) To impose fines and/or penalties for violation of this Decree distribution of firearms, ammunition, lethal weapons,
or any other laws being implemented by the Commission, military ordinance, explosives, pyrotechnics and similar
the pertinent rules and regulations, its orders, decisions materials; unless such manufacturing or repair activity
and/or rulings; is specifically authorized, with a substantial export
component, to a non-Philippine national by the
g) To authorize the establishment and operation of stock Secretary of National Defense; or
exchanges, commodity exchanges and such other similar
organization and to supervise and regulate the same; 2) Which have implications on public health and morals,
including the authority to determine their number, size and such as the manufacture and distribution of dangerous
location, in the light of national or regional requirements for drugs; all forms of gambling; nightclubs, bars,

lOMoARcPSD|9536011
beerhouses, dance halls; sauna and steam forms of gambling, nightclubs, bars, beer houses, dance halls,
bathhouses and massage clinics. sauna and steam bathhouses and massage clinics.
“Small and medium-sized domestic market enterprises, with "Small and medium-sized domestic market enterprises with
paid-in equity capital less than the equivalent two hundred paid-in equity capital less than the equivalent of Two hundred
thousand US dollars (US$200,000) are reserved to Philippine thousand US dollars (US$200,000.00), are reserved to
nationals, Provided that if: (1) they involve advanced technology Philippine nationals: provided, that if (1) they involve advanced
as determined by the Department of Science and Technology or technology, or (2) they employ at least fifty (50) direct
(2) they employ at least fifty (50) direct employees, then a employees, then a minimum paid-in capital of One hundred
minimum paid-in capital of one hundred thousand US dollars thousand US dollars (US$100,000.00) shall be allowed to non-
(US$100,000.00) shall be allowed to non-Philippine nationals. Philippine nationals.
Amendments to List B may be made upon recommendation of "Amendments to List B may be made upon recommendation of
the Secretary of National Defense, or the Secretary of Health, or the Secretary of National Defense, or the Secretary of Health, or
the Secretary of Education, Culture and Sports, endorsed by the the Secretary of Education, Culture and Sports, indorsed by the
NEDA, approved by the President, and promulgated by a NEDA, or upon recommendation motu propio, of NEDA,
Presidential Proclamation. approved by the President, and promulgated by a Presidential
Proclamation.
“Transitory Foreign Investment Negative List” established in
Sec. 15 hereof shall be replaced at the end of the transitory "The Transitory Foreign Investment Negative List established in
period by the first Regular Negative List to be formulated and Section 15 hereof shall be replaced at the end of the transitory
recommended by NEDA, following the process and criteria period by the first Regular Negative List to be formulated and
provided in Sections 8 of this Act. The first Regular Negative List recommended by NEDA, following the process and criteria,
shall be published not later than sixty (60) days before the end provided in Sections 8 and 9 of this Act. The first Regular
of the transitory period provided in said section, and shall Negative Lists shall be published not later than sixty (60) days
become immediately effective at the end of the transitory period. before the end of the transitory period provided in said section
Subsequent Foreign Investment Negative Lists shall become and shall become immediately effective at the end of the
effective fifteen (15) days after publication in a newspaper of transitory period. Subsequent Foreign Investment Negative
general circulation in the Philippines: Provided, however, That Lists shall become effective fifteen (15) days after publication in
each Foreign Investment Negative List shall be prospective in a newspaper of general circulation in the Philippines: provided,
operation and shall in no way affect foreign investment existing however, that each Foreign Investment Negative List shall be
on the date of its publication. prospective in operation and shall in no way affect foreign
investment existing on the date of its publication.
“Amendments to List B after promulgation and publication of the
first Regular Foreign Investment Negative List at the end of the "Amendments to List B after promulgation and publication of the
transitory period shall not be made more often than once every first Regular Foreign Investment Negative List at the end of the
two (2) years”. (As amended by R.A. 8179) transitory period shall not be made more often than once every
two (2) years."
SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042)
END OF MIDTERM NOTES
Sec. 3. Sec. 8 of the Foreign Investments Act of 1991 is
hereby amended to read as follows:
"Sec. 8. List of Investment Areas Reserved to Philippine

Nationals (Foreign Investment Negative List). – The Foreign
Investment Negative List shall have two (2) component lists: A
and B:
"a) List A shall enumerate the areas of activities reserved to

Philippine nationals by mandate of the Constitution and specific
laws.
"b) List B shall contain the areas of activities and enterprises

regulated pursuant to law:
"1) which are defense-related activities, requiring prior clearance

and authorization from Department of National Defense (DND)
to engage in such activity, such as the manufacture, repair,
storage and/or distribution of firearms, ammunition, lethal
weapons, military ordinances, explosives, pyrotechnics and
similar materials, unless such manufacturing on repair activity is
specifically authorized, with a substantial export component, to
a non-Philippine national by the Secretary of National Defense;
or
"2) which have implications on public health and morals, such

as the manufacture and distribution of dangerous drugs, all

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Information Management (Northwest Samar State University)

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UNIVERSITY OF SAN CARLOS SEC. 14. FORM OF ARTICLES OF INCORPORATION .... 27

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SEC. 48. KINDS OF MEETINGS ........................................ 62 R.A. No. 11232

SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS & INTRODUCTION

Page 2 of 88 | EH403 2019-2020 Corporation Law

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(3) Corporation Transferrable Needs Does not

SOLE No right of succession There is

Starts upon Created by Created by

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(5) Greater degree of government control and supervision TYPES OF CORPORATIONS

(6) Difficulty in meeting requirements – high cost of 1. Public corporations

What is a public corporation? 4. Quasi-public corporations

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CONSEQUENCES OF BEING A CORPORATION XPNs:

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Illustration. Do you think that the sheriff can go after Corporation B?

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Term of Any period of Perpetual

Page 7 of 88 | EH403 2019-2020 Corporation Law

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Old law: 50 years cash dividends, it will also be an income of the

ADVANTAGES OF A CORPORATION Management Absence of any Power to do

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Page 9 of 88 | EH403 2019-2020 Corporation Law

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You are operating a cement factory. It requires a big volume Illustration 5.

Important: So long as you can justify that the act is incidental to

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EFFECT OF INCOMPLETE (I) As to its nationality**

VARIOUS TYPES OF CORPORATIONS (Outline) (1) Stock Corporation

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Page 12 of 88 | EH403 2019-2020 Corporation Law

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**NOTES: **(I) AS TO NATIONALITY

What is the difference between an affiliate and a PLACE OF INCORPORATION TEST:

Summary: So the Trucking Company here is the parent B. Grandfather Rule

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Take note that a domestic corporation can be foreign-owned. CORPORATORS

CORPORATE LAYERING Stockholders – in a stock corporation

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LIABILITY OF THE PROMOTER FOUNDERS

UNDERWRITERS Anti-Dummy Law

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Holders of nonvoting shares shall nevertheless be entitled to SEC. 8. REDEEMABLE SHARES

Page 16 of 88 | EH403 2019-2020 Corporation Law

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**OTHER IMPORTANT PRINCIPLES TO REMEMBER **NOTES:

(4) Paid-up Capital Stock Participating vs. Non-participating

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Illustration. The entire consideration received by the corporation

PAR VALUE SHARES DISTINCTION BETWEEN PAR-VALUE AND NO-PAR VALUE

Who can issue par value shares? Non-Par Value Par-Value

These are shares without a stated value. WATERED STOCKS

Page 18 of 88 | EH403 2019-2020 Corporation Law

NOTES: (I) AS TO NATIONALITY

OTHER IMPORTANT PRINCIPLES TO REMEMBER NOTES: