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limited partner or adding a limited or Art. 1866. A contributor, unless he is a
general partner shall be signed also by
the member to be substituted or
added, and when a limited partner is to
be substituted, the amendment shall
also be signed by the assigning limited
partner.
The writing to cancel a certificate shall be
signed by all members.
A person desiring the cancellation or
amendment of a certificate, if any person
designated in the first and second
paragraphs as a person who must execute
the writing refuses to do so, may petition
the court to order a cancellation or
amendment thereof.
If the court finds that the petitioner has a
right to have the writing executed by a
person who refuses to do so, it shall order
the Office of the Securities and Exchange
Commission where the certificate is
recorded, to record the cancellation or
amendment of the certificate; and when
the certificate is to be amended, the court
shall also cause to be filed for record in said
office a certified copy of its decree setting
forth the amendment.
A certificate is amended or cancelled when
there is filed for record in the Office of the
Securities and Exchange Commission, where
the certificate is recorded:
1. A writing in accordance with the
provisions of the first or second
paragraph.
2. A certified copy of the order of the
court in accordance with the provisions
of the fourth paragraph.
3. After the certificate is duly amended in
accordance with this article, the
amended certified shall thereafter be
for all purposes the certificate provided
for in this Chapter.
A certificate is considered cancelled or
amended when there is filed for record
1. A writing to amend the certificate; or
2. A certified copy of the order of the
court in the event of an unjustified
refusal of a partner to sign the writing.
general partner, is not a proper party to
proceedings by or against a partnership,
except where the object is to enforce a
limited partner's right against or liability to
the partnership.
Art. 1867. A limited partnership formed
under the law prior to the effectivity of this
Code, may become a limited partnership
under this Chapter by complying with the
provisions of article 1844, provided the
certificate sets forth:
1. The amount of the original contribution
of each limited partner, and the time
when the contribution was made.
2. That the property of the partnership
exceeds the amount sufficient to
discharge its liabilities to persons not
claiming as general or limited partners
by an amount greater than the sum of
the contributions of its limited partners.
A limited partnership formed under the law
prior to the effectivity of this Code, until or
unless it becomes a limited partnership
under this Chapter, shall continue to be
governed by the provisions of the old law.
CORPORATIONS
TITLE I - GENERAL PROVISIONS
DEFINITIONS AND CLASSIFICATIONS
Sec. 1. Title of the Code. – This Code shall
be known as “The Corporation Coder of the
Philippines”.
Sec. 2. Corporation defined. - A corporation
is an artificial being created by operation of
law having the right of succession and the
powers, attributes and properties expressly
authorized by law or incident to its
existence.
Definition
A corporation is an artificial being created
by operation of law having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence.
Attributes
1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession.
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4. It has only the powers, attributes and partnership.

properties expressly authorized by law Right of No right of Possesses
or incident to its existence. Succession succession right of
succession
Similarities between a partnership and a Extent of Partners Stockholders
Liability to (except are liable only
corporation
Third Persons limited to the extent
1. Juridical personality separate and
partners) of their
distinct from the individuals composing are liable investments
it. personally as
2. Act only through its agents. and represented
3. Composed of an aggregate of subsidiarily by the shares
individuals. for subscribed by
4. Distribute profits to those who partnership them.
contribute to capital. debts to
5. May be organized only when there is a third
persons.
law authorizing it.
Transferability A partner A stockholder
6. Subject to income tax.
of interest cannot has the right
transfer to transfer his
Distinctions between a partnership and a interest so shares
corporation as to make a without the
partner prior consent
Point of without the of the other
Partnership Corporation
Comparison consent of stockholders.
Manner of By mere By law or all other
Creation agreement operation of existing
of the law partners.
parties Term of May be May not be
Number of By a Requires at existence established formed for a
Parties minimum of least five (5) for any term in excess
two (2) incorporators period of of 50 years
persons time extendible to
Commence- Generally From the date stipulated not more than
ment of from the of the by the 50 years.
Juridical moment of issuance of partners.
Personality execution of the certificate Firm name A limited A corporation
the contract of partnership may adopt a
incorporation is required firm name
of the to add the provided it is
Securities and word ‘Ltd.’ not identical
Exchange to its name. or deceptively
Commission similar to any
(SEC) registered
Powers May Can exercise firm name or
exercise only the contrary to
powers powers existing laws.
authorized expressly Dissolution May be May only be
by partners granted by dissolved at dissolved with
provided the law or any time by the consent of
same are incident to its the will of the state.
not contrary existence. any or all
to law, partners.
morals, Governing Civil Code Corporation
good Laws Code
customs,
public policy Advantages of a corporate form of
or public business organizations
order. 1. The capacity to hold property, to
Management When it is It is vested in contract, to sue and be sued as a legal
not agreed the board of
unit or distinct entity.
upon, each directors or
partner is an trustees. 2. Exemption of shareholders from
agent of the individual liability.

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3. Continuity of existence in spite of death
or changes of members.
4. Transferability of shares.
5. Centralized management under a board
of directors.
6. Standardized methods of organization,
management and finance for the
protection of shareholders and
creditors under statutory regulations.
Disadvantages of a corporate form of
business organizations
1. The limited liability of the stockholders
serves to limit the credit available to
the corporation.
2. The transferability of shares permits the
uniting of incompatible and conflicting
interests in one enterprise.
3. The minority stockholders are usually
subservient to the wishes of the
majority.
4. In big corporations, the stockholders’
voting rights have become largely
theoretical because of widespread
ownership, lukewarmness and
disinterest in management, inertia, and
inaccessible meeting places.
5. In large corporations, management and
control has been separated from
ownership.
6. By and large corporations are subject to
governmental restrictions, controls, and
report requirements not imposed on
other forms of business organizations.
7. Corporate sphere of activity is limited in
the transaction of its business to the
state of the organization.
8. The corporate form involves “double
taxation” on corporation income.
Sec. 3. Classes of corporations. –
Corporations formed or organized under
this Code may be stock or non-stock
corporations. Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of
such shares dividends or allotments of the
surplus profits on the basis of shares held
are stock corporations. All other
corporations are non-stock corporations.
Other kinds of corporations
1. Quasi-corporations – from the word
“quasi”, meaning “as if”, are entities
that are not absolutely corporations but
are considered as if they were. Eg.
Public boards created by law
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2. Quasi-public – are entities engaged in
rendering basic services of such public
importance as to entitle them to certain
privileges like eminent domain or use of
public property. Eg. Electric, gas, water
and telephone companies.
3. Government-owned or controlled – are
entities organized by the government
or corporations of which the
government is a majority stockholder.
Eg. Philippine Air Lines
4. Domestic – one incorporated under
Philippine laws.
5. Foreign – one formed, organized, or
existing under any laws other than
those of the Philippines.
6. Corporation aggregate – one composed
of more than one member or
corporator.
7. Corporation sole – consists of one
member or corporator and his
successors.
8. Religious corporations, sole or
aggregate – organized, either as sole or
aggregate, to administer properties of
the church.
9. Ecclesiastical – organized for religious
purposes.
10. Lay – organized for a purpose other
than religious
11. Eleemosynary – organized for charitable
purposes.
12. Civil – are those than ecclesiastical and
eleemosynary, whether public or
private.
13. Close – one wherein all the outstanding
stock is owned by the persons who are
active in management and conduct of
the business.
14. Open – one in which all the members or
corporations have a vote in the election
of the directors and other officers.
15. Multi-national – one having been
created or organized in one state
conducts business or activities across
national boundaries and but subject to
the legal sanctions of the countries in
which they operate.
16. Non-profit – organized without
contemplation of gains, profits or
dividends to their members on invested
capital.
17. De Jure – one created in strict or
substantial conformity with the
statutory requirements for
incorporation and whose right to exist
as a corporation cannot be successfully
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attacked even in a direct proceeding for
that purpose by the State.
Sec. 4. Corporations created by special
laws or charters. – Corporations created by
special laws or charters shall be governed
primarily by the provisions of the special
law or charter creating them or applicable
to them, supplemented by the provisions of
this Code, insofar as they are applicable.
Sec. 5. Corporators and incorporators,
stockholders, and members. – Corporators
are those who compose a corporation,
whether as stockholders or members.
Incorporators are those stockholders or
members mentioned in the articles of
incorporation as originally forming and
composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are
called stock-holders or shareholders.
Corporators in a non-stock corporation are
called members.
Components of a Corporation
1. Corporators – are those who composed
a corporation, whether as stockholders
of members. The term includes
incorporators, stockholders or
members.
2. Incorporators – are those stockholders
or members mentioned in the articles
of incorporation as originally forming
and composing the corporation and
who are signatories thereof.
3. Stockholders or shareholders – are
those corporators in a stock
corporation.
4. Members – are those corporators in a
non-stock corporation.
5. Promoters – is a self-constituted
organizer who finds an enterprise or
venture and helps to attract investors,
form a corporation and launch it in
business, all with a view to promotion
profits.
Promotion – is the act of procuring the
initial finances and the making of all
preparations necessary to launch a
corporation.
Activities of a promoter
1. The discovery and investigation of a
promising business opportunity.
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2. The formulation of business and
financial plans.
3. Assembling the enterprise by
negotiations and obtaining some
control over the subject matter by
option or contracts made on behalf of
the proposed corporation or on his own
credit.
4. The making of arrangements for
financing the enterprise and the
floatation of securities.
5. Arrange tactful and painless methods
for getting his own reward for the task
of promotion out of the prospective
investors and for reimbursement for his
expenses, contracts, and services
without frightening away those who are
expected to provide the funds.
General rule: A corporation is not bound by
any agreement made by a promoter.
Exception to the rule: Unless and until the
corporation approves the agreement.
Sec. 6. Classification of shares. – The
shares of stock of stock corporations may
be divided into classes or series of shares,
or both, any of which classes or series of
shares may have such rights, privileges or
restrictions as may be stated in the articles
of incorporation: Provided, That no share
may be deprived of voting rights except
those classified and issued as “preferred” or
“redeemable” shares, unless otherwise
provided in this Code: Provided, further,
That there shall always be a class or series
of shares which have complete voting
rights. Any or all of the shares or series of
shares may have a par value or have no par
value as may be provided for in the articles
of incorporation: Provided, however, That
banks, trust companies, insurance
companies, public utilities, and building and
loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation
in case of liquidation and in the distribution
of dividends, or such other preferences as
may be stated in the articles of
incorporation which are not violative of the
provisions of this Code: Provided, That
preferred shares of stock may be issued
only with a stated par value. The board of
directors, where authorized in the articles
of incorporation, may fix the terms and
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conditions of preferred shares of stock or
any series thereof: Provided, That such
terms and conditions shall be effective
upon the filing of a certificate thereof with
the Securities and Exchange Commission.
Shares of capital stock issued without par
value shall be deemed fully paid and non-
assessable and the holder of such shares
shall not be liable to the corporation or to
its creditors in respect thereto: Provided;
That shares without par value may not be
issued for a consideration less than the
value of five (P5.00) pesos per share:
Provided, further, That the entire
consideration received by the corporation
for its no-par value shares shall be treated
as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring
compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles
of incorporation and stated in the
certificate of stock, each share shall be
equal in all respects to every other share.
Where the articles of incorporation provide
for non-voting shares in the cases allowed
by this Code, the holders of such shares
shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of
incorporation.
2. Adoption and amendment of by-laws.
3. Sale, lease, exchange, mortgage, pledge
or other disposition of all or
substantially all of the corporate
property.
4. Incurring, creating or increasing bonded
indebtedness.
5. Increase or decrease of capital stock.
6. Merger or consolidation of the
corporation with another corporation
or other corporations.
7. Investment of corporate funds in
another corporation or business in
accordance with this Code.
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8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to
approve a particular corporate act as
provided in this Code shall be deemed to
refer only to stocks with voting rights.
Definition
A “stock” or share of stock is one of the
units into which the capital stock has been
divided. It represents the interest or right
that the holder of the stock or stockholder
has in the corporation.
A stock certificate certifies that one is a
holder or owner of a certain number of
shares of stock in the corporation. It is a
mere documentary evidence of the holder’s
ownership of shares and a convenient
instrument for the transfer of title.
Classes or series of shares of stock subject
to restrictions
1. Shares shall not be deprived of voting
rights except preferred or redeemable
shares but non-voting shares must still
be entitles to vote on matters specified
in the last paragraph of Section 6 like
matters relating to amendment of the
articles of incorporation and dissolution
of the corporation.
2. Where non-voting shares are provided
for there must always be a class or
series of shares with complete voting
rights.
3. Banks, trust companies, insurance
companies, public utilities, and building
and loan associations shall not be
permitted to issue no-par value shares
of stock.
4. Preferred shares of stock which may be
given preference in the distribution of
assets in case of liquidation and
distribution of dividends or other
preferences may be issued only with
stated par value.
5. The terms and conditions of preferred
shares or series thereof may be fixed by
the board of directors only when
authorized by the articles of
incorporation the effectivity thereof
shall be reckoned from the filing of
certificate with the SEC.
6. Shares without par value may not be
issued for a consideration less than the
value of five (P5.00) pesos per share.
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7. Unless otherwise provided by law the
rights, privileges or restrictions on
classes or series of shares must be
stated in the articles of incorporation
and in the stock certificates.
Classes or series of shares
1. Voting and Non-Voting Shares;
General rule: Every member of a non-
stock corporation and every legal owner
of shares in a stock corporation, has a
right to be present and vote at all
corporate meetings.
Exception to the rule: Unless there is a
stipulation in contrary.
2. Par Value and No-Par Value Shares
Par value is the given fixed or definite
value of a share in the articles of
incorporation.
3. Common and Preferred Shares.
Preferred shares of stock may be: (a)
preferred as to assets; (b) preferred as
to dividends. Preferred as to dividends
may either be cumulative or non-
cumulative, or participating or non-
participating
4. Promotion Shares – are such stocks
issued to those who may originally own
the mining ground or valuable rights
connected therewith, in consideration
of their deeding the same to the mining
company when the company is
incorporated, or it may mean such stock
as is issued to promoters.
5. Shares of Escrow – are shares subject to
an escrow agreement, that is, an
agreement under which the shares are
deposited by the grantor or his agent
with a third person, to be delivered by
the depositary to the vendee or
subscriber only upon the happening of
certain conditions.
6. Founder’s Shares;
7. Redeemable “Callable” Shares;
8. Treasury Shares;
9. Other shares classified to comply with
constitutional or legal requirements.
Instances when non-voting shares may
vote
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge
or other disposition of all or
substantially all of the corporate
property;
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4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the
corporation with another corporation
or other corporations;
7. Investment of corporate funds in
another corporation of business in
accordance with the Corporation Code;
and
8. Dissolution of the corporation.
Sec. 7. Founders’ shares. – Founders' shares
classified as such in the articles of
incorporation may be given certain rights
and privileges not enjoyed by the owners of
other stocks, provided that where the
exclusive right to vote and be voted for in
the election of directors is granted, it must
be for a limited period not to exceed five (5)
years subject to the approval of the
Securities and Exchange Commission. The
five-year period shall commence from the
date of the aforesaid approval by the
Securities and Exchange Commission.
Definition
Founders’ shares, generally common stock,
are given to the founders or promoters of a
corporation in payment of money expended
or services rendered in the promotion of it.
Sec. 8. Redeemable shares. – Redeemable
shares may be issued by the corporation
when expressly so provided in the articles
of incorporation. They may be purchased or
taken up by the corporation upon the
expiration of a fixed period, regardless of
the existence of unrestricted retained
earnings in the books of the corporation,
and upon such other terms and conditions
as may be stated in the articles of
incorporation, which terms and conditions
must also be stated in the certificate of
stock representing said shares.
Definition
Redeemable (“Callable”) shares of stock
which are usually preferred are frequently
issued subject to redemption at the option
of either the corporation, the stockholder,
or both, at a definite price representing
premium above the amount originally paid.
Sinking fund refers to a fund set-up by the
corporation where cash is gradually set
aside in order to accumulate the amount
necessary to meet the redemption price of
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redeemable shares of specified dates in the
future.
Sec. 9. Treasury shares. - Treasury shares
are shares of stock which have been issued
and fully paid for, but subsequently
reacquired by the issuing corporation by
purchase, redemption, donation or through
some other lawful means. Such shares may
again be disposed of for a reasonable price
fixed by the board of directors. (n)
Definition
Treasury shares are owned by the
corporation having been reacquired by the
issuing corporation by “purchase,
redemption, donation or through some
other lawful means.” It has no voting rights
or rights as to dividends or distributions.
TITLE II - INCORPORATION AND
ORGANIZATION OF PRIVATE
CORPORATIONS
Definition
Incorporation is the act of creating a
corporation.
Sec. 10. Number and qualifications of
incorporators. – Any number of natural
persons not less than five (5) but not more
than fifteen (15), all of legal age and a
majority of whom are residents of the
Philippines, may form a private corporation
for any lawful purpose or purposes. Each of
the incorporators of s stock corporation
must own or be a subscriber to at least one
(1) share of the capital stock of the
corporation.
Qualifications of incorporators
1. Must be a natural person.
2. Must be of legal age.
Sec. 11. Corporate term. – A corporation
shall exist for a period not exceeding fifty
(50) years from the date of incorporation
unless sooner dissolved or unless said
period is extended. The corporate term as
originally stated in the articles of
incorporation may be extended for periods
not exceeding fifty (50) years in any single
instance by an amendment of the articles of
incorporation, in accordance with this Code;
Provided, That no extension can be made
earlier than five (5) years prior to the
original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier
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extension as may be determined by the
Securities and Exchange Commission.
Sec. 12. Minimum capital stock required of
stock corporations. – Stock corporations
incorporated under this Code shall not be
required to have any minimum authorized
capital stock except as otherwise
specifically provided for by special law, and
subject to the provisions of the following
section.
Sec.13. Amount of capital stock to be
subscribed and paid for purpose of
incorporation. – At least twenty-five
percent (25%) of the authorized capital
stock as stated in the articles of
incorporation must be subscribed at the
time of incorporation, and at least twenty-
five percent (25%) of the total subscription
must be paid upon subscription, the
balance to be payable on a date or dates
fixed in the contract of subscription without
need of call, or in the absence of fixed date
or dates, upon call for payment by the
board of directors: Provided, however, that
in no case shall the paid-up capital be less
than five thousand (P5,0000) pesos.
Amount to be subscribed and paid
Illustration:
If X, Inc. has authorized capital
stock of P100, 000 divided into 1,000 shares
with par value of P100.00 per share, it must
be shown that at least P25, 000 or 250
shares of the authorized capital stock must
be subscribed. Of the total subscription of
P25, 000, at least P6, 250.00 or 25% of total
subscription must be paid. It is not
necessary that each subscriber pay Twenty-
five percent (25%) on his subscription. On
the other hand, where the authorized
capital stock is stated at 2,000 no par value
shares , it must be shown that at least 500-
no par value share have been subscribed.
The basis of computation is on the number
of shares.
Securities and Exchange
Commission (SEC) may conduct compliance
with paid-up capital requirements because
it has come to the knowledge of the
Commission that some corporation have
been organized merely as fronts for some
hidden objectives with no real intention of
carrying out the purported purposes in their
articles of incorporation. If a bigger capital
45

stock is required, the abuse of the privileges
of a corporation would be minimized.
Capital stock requirements under the
special laws
1. In case of mining and agricultural
incorporation, or corporation organized
for the purpose of the disposition ,
exploitation, development or utilization
of natural resources of the Philippines,
as well as corporation organized for the
operations of public utilities, the
Constitution provides that at least 60 %
of the capital stock of such corporation
must be owned by citizens of the
Philippines.
2. The Insurance Code provide that “no
domestic insurance company shall, if a
stock corporation, engage in business in
the Philippines unless posses of a paid
up capital stock equal to at least two
million pesos”. Where the insurance
company is to engage in insurance
business it must have a “paid-up capital
stock of at least five million pesos” to
be invested in securities specified by
law, which securities are to be
deposited with the Insurance
Commissioner.
3. The Financing Company Act requires
that “at least sixty per centum of the
capital of financing companies must be
owned by citizens of the Philippines and
shall have a paid-up capital of not less
than five hundred thousand pesos”.
4. Commercial banks are required to have
a paid-up capital of 100 million pesos.
When a commercial bank having licence
to operate an expanded foreign
currency deposit system it must have a
paid-up capital of at least 150 million
pesos and when a commercial bank is
authorized to engage in universal
banking it must have a paid up capital
of at least 500 million pesos.
5. The New Constitution provides that:
“The ownership and management of
mass media shall be limited to citizens
of the Philippines or to corporations or
association wholly-owned and manage
by such citizen”.
6. Under the Retail Trade Nationalization
law “no person who is not a citizen of
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the Philippines, and no association,
partnership, or corporation the capital
of which is not wholly owned by citizens
of the Philippines, shall engage directly
or indirectly in the retail trade business.
7. Only vessels of domestic ownership are
authorized to engage in coastwise
shipping in the Philippines. Vessels are
considered of domestic ownership
when such ownership is vested in some
one or more of the following: (1)
Citizens of the Philippines; (2) any
corporation or any company composed
wholly of the citizens of the Philippines;
(3) any corporation or company created
under the laws of the Philippines,
provided at least 75% of the capital
stock thereof or of any interested in
said capital is wholly owned by the
citizens of the Philippines.
Sec.14. Contents of articles of the
incorporations. – All corporation organized
under this Code shall file with the Securities
and Exchange Commission articles of
incorporation in any of the official
languages, duly signed and acknowledged
by all of the incorporators containing
substantially the following matters, except
as otherwise prescribed by this Code or by
special laws:
1. The name of the corporation.
2. The specific purpose or purposes for
which the corporation is being
incorporated. Where the corporation
have more than one stated purpose,
the article of incorporation shall state
which the primary is and which is/are
the secondary purpose or purposes:
Provided, That a non-stock corporation
may not include a purpose which would
change or contradict its nature as such.
3. The place where the principal office of
the corporation is to be located, which
must be within the Philippines.
4. The term for which the corporation is to
exist.
5. The names, nationalities and residences
of the incorporators.
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6. The number of directors or trustees
which shall not be less than five (5) nor
more than fifteen (15).
7. The names, nationalities and residences
of the person who shall act as directors
or trustees until the first regular
directors or trustees are duly elected
and qualified accordance with this
Code.
8. If it be a stock corporation, the amount
of its authorized capital stock in lawful
money of the Philippines, the number
of shares which it is divided, and in case
the shares are par value shares, the par
value of each, the names, nationalities
and residences of the original
subscriber, and the amount subscribed
and paid by each on his subscription,
and if some or all of the shares are
without par value, such fact must be
stated.
9. If it be a non-stock corporation, the
amount of its capital, the names,
nationalities and residences of the
contributors and the amount,
contributed by each.
10. Such other matters are not inconsistent
with law and which the incorporators
may deem necessary and convenient.
The Securities and Exchange Commission
shall not accept the articles of incorporation
of any stock corporation unless
accompanied by a sworn statement of the
Treasurer elected by the subscriber
showing that at least 25% of the authorized
capital stock of the corporation has been
subscribed, and at least 25% of the total
subscription has been fully paid to him in
actual cash and/or in property the fair
valuation of which are equal to at least 25%
of the said subscription , such paid up
capital being not less than five-thousand
pesos (P5,000).
Sec.15. Forms of Articles of Incorporation.
– Unless otherwise prescribed by special
law, articles of incorporation of all domestic
corporations shall supply substantially the
following requirements in the form as
provided for by the SEC:
1. The name of the corporation.
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Incorporators may choose any name they
see fit , however strange, uneuphonious, or
unrhetorical it may be , provided it is one
not identical with or prejudicially similar to
a name which has previously been adopted
by and is being use by another corporation
as its corporate name
Change of Corporate name
The change of the corporate name
doesn’t mean a new corporation, nor the
successor of the original corporation. It is
the same corporation with a different name
having its character with no respect change.
The corporation continues, as before,
responsible in its new name for all debts or
other liabilities it had previously contracted
or incurred.
2. Specific purpose or purposes.
The statement of the purpose has its
principal function the affirmative
authorization of the management to enter
into those contracts and business
transactions which may be considered as
incidental to its attainment of the purposes.
It also imposes implied limitations of their
authority by the exclusion of lines of activity
which are not covered.
3. Principal office of the Corporation.
The principal office of the corporation must
be within the Philippines. It is where the
books of the corporation are kept and its
officers usually and ordinarily meet for the
purpose of managing the affairs and
transactions of the business of the
corporation.
4. Terms of Existence of the Corporation.
The corporation shall exist for a period not
exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or
unless said period is extended.
5. Names, Nationalities and residences of
incorporators.
The names, nationalities and residences of
the incorporators must be stated in the
articles of the corporation for the purpose
of complying with legal requirement that
majority of the incorporators must be
residents of the Philippines and complying
with the statutory requirement on share
ownership and in other instances where
Filipino Citizens are required.
6. Number of directors and trustees.
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The number of the director and trustees
must not be less than five (5) nor more than
fifteen (15).
7. Names, nationalities and residences of
directors.
A majority of the directors or trustees of all
corporation organized under this Code must
be a residents citizens of the Philippines.
8. Amount of authorized capital stock.
A stock corporation must state the “amount
of its authorized capital stock in lawful
money of the Philippines, the number of
shares into which it is divided, and in case
the shares are par value shares, the par
value of each, the names, nationalities, and
residences of the original subscribers, and
the amount subscribed and paid by each on
his subscription, and if some or all the
shares are without par value, such fact must
be stated”.
9. Non-stock Corporation.
The Corporation Code requires the articles
of the non-stock corporation to states: the
amount of its capital, the names,
nationalities and residences of its
contributors and the amount contributed
by each. A non-stock corporation may have
capital but it has no authorized capital
stock.
10. Inclusion of other matters.
The articles of incorporation “may include
other matters that is not inconsistent with
law and which the incorporators may deem
necessary and convenient”.
Sworn Statement of the Treasurer
The Securities and Exchange Commission
shall not accept the articles of incorporation
of any stock corporation unless
accompanied by a sworn statement of the
Treasurer elected by the subscribers
showing that at least:
1. 25% of the authorized capital stock has
been subscribed.
2. 25% of the subscription has been fully
paid in actual cash or property.
3. The paid-up capital being not less than
P5,000.00.
SEC Policy
Law on Business Organizations Reviewer
Property as subscription payment –
Generally, all forms of tangible properties
are acceptable for purposes of payment to
subscription provided that the three test of
paid-up capital determination are complied
with, i.e., ownership, existence and
valuable, subject to certain restrictions as
may be imposed by law.
SEC adopted the policy that
discourages the inclusion of intangible
assets as goodwill, lease-hold rights, or
timber concession rights, payment of such
properties Motor vehicle, real estate
properties and navigable vessels in payment
of pre-incorporation subscription, increases
of capital stock or in exchange for additional
issuance of shares are allowed only by the
SEC provided that:
1. There has been a proof of valid
transfer;
2. All taxes due from the properties
has been paid; and
3. Such properties have been
reasonably valued.
Papers to accompany articles with SEC
The SEC requires the following papers to be
submitted to it with the articles of
incorporation:
1. A verification slip executed by the
Chief of the Record Section states
that the proposed name of the
corporation has been verified and
found to be distinct/ not similar to
the names of already existing
corporation or those pending
registration.
2. Written undertaking to change
corporate name in case there is a
person, firm or entity with a prior
right to the use of said name or one
similar to it.
3. Sworn statement of assets and
liabilities, duly executed under oath
by the corporate treasurer together
with the amount P50.00 to defray
publication expenses.
4. Bank certificate of deposit, issued
under oath by the bank manager or
any authorized bank officer, that
there is a deposit of the stated
amount representing the paid-up
capital of the corporation either in
the name of the treasurer in trust
for the corporation or in the name
of the corporation itself.
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5. Written authority to verify bank
deposit signed by the corporate
treasurer empowering the SEC and
/or the Central bank to check and
inspect the existence of the bank
deposit of the corporate paid-up
capital.
6. Taxpayer account number of the
incorporators pursuant to Executive
order No. 213.
7. Registration Data Sheet, a
statement in statistical data form,
signed by an authorized
representative of the corporation
regarding important information
about the corporate seal,
corporate name, principal office,
capital structure, their subscription
and TAN (SEC Bulletin, Oct. 1982).
Sec. 16. Amendment of Articles of
Incorporation. – Unless otherwise
prescribed by this Code or by special law,
and for legitimate purposes, any provision
or matter stated in the articles of
incorporation may be amended by a
majority vote of the board of directors or
trustees and the vote or written assent of
the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal rights of
dissenting stockholders in accordance with
the provision of this Code, or the vote or
written assent of two-thirds (2/3) of the
members if it be a non-stock corporation.
The original and amended articles
altogether shall contain all provision
required by law to be set out in the articles
of incorporation. Such articles, as amended
shall be indicated by underscoring the
change or changes made, and the copy
thereof duly certified under oath by the
corporate secretary and the majority of the
directors or trustees stating the fact that
said amendments have been duly approved
by the required vote of the stockholders or
members, shall be submitted to the
Securities and Exchange Commission.
The amendment shall take effect upon its
approval by the Securities and Exchange
Commission or from the date of filing with
the said Commission if not acted upon
within six (6) months from the date of filing
for a cause not attributable to the
corporation.
Law on Business Organizations Reviewer
Law reserves the rights to modify the
charter
The constitution and the Corporation Code
reserved the right to amend the charter of a
private corporation. The constitution
provides that “no franchise or right be
granted except under the condition that it
shall be subject to amendment, alteration,
or repeal by the National Assembly when
public interest so requires.
Amendment of Articles of Incorporation
The articles of incorporation may be
amended for legitimate purposes that refer
to any matter stated in the articles of
incorporation. It may refer to:
1. Change of corporate name;
2. Extension of term of corporation;
3. Change in classes or series of shares;
4. Change in rights, privileges or
restrictions in share ownership;
5. Increase or decrease in the number of
directors; and
6. Change in purpose or purposes and
other necessary changes.
Vote or recent assent required in
amendment of the articles of incorporation
shall be as follows:
Stock Corporation – A majority vote of the
directors or trustees and the vote or written
assent of the stockholders representing at
least two- thirds (2/3) of the outstanding
capital stock. Under section 81 of the Code,
a dissenting stockholder may exercise his
appraisal right if he is against the
amendment to be made and demand
payment of the fair value of his shares.
Non-stock Corporation – A majority vote of
board of directors and the vote or written
assent of 2/3 of the members.
The amendments to the articles of
incorporation shall take effect upon its
approval by the Securities and Exchange
Commission or from the filing with the said
Commission if not acted upon within six
months from the date of filing for a cause
not attributable to the corporation.
Sec. 17. Grounds when articles of
incorporation or amendment may be
rejected or disapproved. – The Securities
and Exchange Commission may reject the
articles of incorporation or disapproved any
amendment thereto if the same is not in
compliance with the requirements of this
49

Code: Provided, That the Commission shall
give the incorporators a reasonable time
within which to correct or modify the
objectionable portions of the articles or
amendment. The following are grounds for
such amendment or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially
in accordance with the form prescribed
herein.
2. That the purpose or purposes of the
corporation are patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulation.
3. That the Treasurer’s Affidavit
concerning the amount of capital stock
subscribed and/or paid is false.
4. That the required percentage of
ownership of the capital stock to be
owned by citizens of the Philippines has
not been complied with as required by
existing laws of the constitution.
No articles of incorporation or amendment
to articles of incorporation of banks,
banking and quasi-banking institutions,
building and loan association, trust
companies, public utilities, educational
institution, and other corporations
governed by special laws shall be accepted
or approved by the Commission unless
accompanied by a favourable
recommendation of the appropriate
government agency to the effect that such
articles or amendment is in accordance with
law.
Sec. 18. Corporate name. – No corporate
name may be allowed by the Securities and
Exchange Commission if the proposed name
is identical or deceptively or confusingly
similar to that of any existing corporation or
to any other name already protected by law
or its patently deceptive, confusing or
contrary to existing laws. When the change
in a corporate name is approved, the
commission shall issue an amended
certificate of incorporation under the
amended name.
Necessity of Corporate name
It is necessary that a corporation should
have a name because that is the only way
Law on Business Organizations Reviewer
by which the corporation can be identified
and distinguished from other corporation,
firms or entities.
Change of corporate name
A corporation may change its name by
merely amending its charter in the manner
prescribed by law. The change of name of
the corporation does not result in
dissolution. The changing of the name of a
corporation is no more the creation of a
corporation than the changing of the name
of a natural person.
Restriction in use in certain names of
words
There are special laws prohibiting the use of
certain names and/or words. Thus, under
the General Banking Act, no person or
entity not conducting the business of
commercial banking shall use the words
“bank”, “banking”, “banker”, “building and
loan association”, “trust corporation”, etc.
or words of similar import. The word
“National” under Act 2612 may not be use
by those doing business as bankers,
brokers, or savings institutions. “United
Nations” both in its full and abbreviated
forms, for commercial and business
purposes. There are other names or words
which pursuant to other special laws may
not be used.
Sec. 19. Commencement of Corporate
Existence. – A private corporation formed
or organized under this Code commences to
have corporate existence and juridical
personality and is deemed incorporated
from the date the Securities and Exchange
Commission issues a certificate of
incorporation under its official seal; and
thereupon the incorporators,
stockholders/members, and their
successors shall constitute a body politic
and corporate under the name stated in the
articles of incorporation for the period of
time mentioned therein, unless said period
is extended or the corporation is sooner
dissolved in accordance with law.
Sec. 20. De Facto corporation. – The due
incorporation any corporation claiming in
good faith to be a corporation under this
Code, and its right to exercise corporate
powers, shall not be inquired into
collaterally in any private suit to which such
corporation may be a party. Such inquiry
50

may be made by the Solicitor General in a
quo warranto proceeding.
De facto corporation – generally refer to
organizations exercising corporate power
under colour of a more or less legally
constituted corporation.
Elements of De facto corporation
1. Existence of a valid law under which a
corporation can be organized.
2. An attempt in good faith to incorporate.
3. Actual exercise of incorporate powers.
Quo warranto – an inquiry made into the
right of a corporation to conduct business.
Illustration
Seven competent individual organized a
corporation by filing the articles of
incorporation and securing a certificate of
incorporation with the SEC. However, the
addresses of two of the original subscribers
were omitted in the articles of
incorporation. In suit filed by X, a creditor,
against the corporation he alleged that the
corporation has no valid existence and
sought to hold the seven incorporators (also
directors) liable personally on the
obligation. X’s allegation that the
corporation had no valid existence would
constitute a collateral (side) attack in a
private suit. Only the Solicitor General as
government lawyer may raise the question
by quo warranto proceeding. (Literally by
“what right”).
Sec. 21. Corporation by estoppel. – All
persons who assume to act as a corporation
knowing it to be without authority to do so
shall be liable as general partners for all
debts, liabilities and damages incurred or
arising as a result thereof: Provided,
however, That when any such ostensible
corporation is sued on any transaction
entered by it as a corporation or on any tort
committed by it as such, it shall not be
allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an
ostensible corporation as such cannot resist
performance thereof on the ground that
there was in fact no corporation.
Estoppel – It is preclusion, which prevent a
man from denying a fact in consequences of
his own previous act, allegations, or denial
Law on Business Organizations Reviewer
of a contrary tenor. The object of the
principle of estoppel is to prevent injustice
to an otherwise innocent person.
Sec. 22. Effect of non-use of corporate
charter and continuous in operation of a
corporation. – If a corporation does not
formally organize and commence the
transaction of its business or the
construction of its works within two (2)
years from the date of its incorporation, its
corporate powers cease and the
corporation shall be deemed dissolved.
However, if a corporation has commenced
the transaction of its business but
subsequently becomes continuously
inoperative for a period of at least five (5)
years, the same shall be ground for the
suspension or revocation of its corporate
franchise or certificate of incorporation.
This provision shall not apply if the failure
to organize, commence the transactions of
its businesses or the construction of its
works, or to continuously operate is due to
causes beyond the control of the
corporation as may be determined by the
Securities and Exchange Commission.
Organization
The idea of organization in reference to
corporations means executive structure,
election of officers, providing for
subscription and payment of capital,
adoption of by-laws, and other steps
necessary to endow the legal entity with
capacity to transact business for which it
was created.
The Grant of corporate existence, conferred
by the issuance of certificate of
incorporation, is subject to two subsequent
conditions, to wit:
1. The corporation must “formally
organize”.
2. The corporation must actually begin the
“transaction of its business”.
Failure to comply with either or both of
these conditions within two (2) years from
the date of its incorporation, its corporate
power cease and the corporation must be
deemed dissolved.
Sec. 23. The board of directors or trustees.
– Unless otherwise provided in this Code,
the corporate powers of all corporation
formed under this Code shall be exercised ,
51

all business conducted and all property of
such corporations controlled and held by
the board of directors or trustees to be
elected from among the holders of stock,
or where there is no stock, from among
the members of the corporation, who shall
hold office for one (1) year and until their
successors are elected and qualified.
Every director must own at least one (1)
share of the capital stock of the corporation
of which he is a director, which share shall
stand in his name on the books of the
corporation. Any director who ceases to be
the owner of at least one (1) share of the
capital stock of the corporation of which he
is the director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.
Qualifications of directors
1. He must own at least one (1) share of
the capital stock of the corporation in
his name.
2. Majority of the directors must be a
resident citizen of the Philippines.
3. A director must not have been
convicted by final judgement of an
offense punishable by imprisonment
exceeding six (6) years or a violation of
the provisions of the Corporation Code
committed within five (5) years prior to
the date of election or appointment.
The directors, once elected, become the
representatives of the corporation itself,
not its stockholders. The directors of a non-
stock corporation are required to be
members thereof and like stock
corporations “majority of the directors and
trustees of all corporations organized under
the Corporation Code must be residents
citizen of the Philippines”. There are some
special corporation not organized with the
Corporation Code where directors are
required to be citizens of the Philippines.
They are as follows:
1. Bank and banking institution, at least
2/3 of the members of the board of
directors shall be citizen of the
Philippines.
2. Rural banks, every member of the
board of directors shall be citizens of
the Philippines.
Law on Business Organizations Reviewer
3. Domestic air carrier, the directing head
or 2/3 of the board of directors and
other managing officers shall be citizens
of the Philippines.
4. Registered investments companies, the
directors thereof must be Filipino
citizen.
5. Private development banks, all the
members of the board of directors shall
be citizen of the Philippines.
6. In case of financing corporation, at least
2/3 of all members of the board of
directors shall be citizen of the
Philippines.
Sec. 24. Election of directors or trustees. –
At all elections of directors or trustees,
there must be present, either in person or
by representative authorized to act by
written proxy, the owners of the majority of
the outstanding capital stock, or if there be
no capital stock, a majority of the members
entitled to vote. The election must be by
ballot if requested by any voting
stockholder or member. In stock
corporations, every stockholder entitled to
vote shall have the right to vote in person
or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in
his own name on the stock books of the
corporation, or where the by-laws are
silent, at the time of the election; and said
shareholder may vote such number of
shares for as many persons as there are
directors to be elected or he may cumulate
said shares and give one candidate as many
votes as the number of directors to be
elected multiplied by the number of his
shares shall equal, or he may distribute
them on the same principle among as many
candidate as he shall see fit; Provided, That
the total number of votes cast by him shall
not exceed the numbers of shares owned
by him as shown in the books of the
corporation multiplied by the whole
number of directors to be elected: Provided,
however, that no delinquent stocks shall be
voted. Unless otherwise provided in the
articles of incorporation, or in the by- laws,
members of corporation which have no
capital stock may cast as many votes as
there are trustees to be elected but may
not cast more than one vote for one
candidate. Candidates receiving the highest
number of votes shall be declared elected.
Any meeting of the stockholders or
members called for an election may
adjourn from day to day or from time to
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time but not sine die or definitely if, for any
reason, no election is held, or if there are
not present or represented by proxy, at the
meeting, the owners of the majority of the
outstanding capital stock, or if there be no
capital stock, a majority of the members
entitled to vote.
Methods of voting
The voting methods which may be resorted
to by a voting stockholder are as follows:
1. Straight voting.
2. Cumulative voting for one candidate.
3. Cumulative voting by distribution.
Example of Straight Voting
A owns 100 shares of stock in X corporation.
During the meeting for the purpose of
electing five directors, he may cast his vote
by giving each of the five candidates 100
votes, hence, he distribute equally his vote
without preference or discrimination.
Example of Cumulative voting for one
candidate
In the preceding illustration, if A owns 100
voting shares and there are five directors to
be elected, A is entitled to 500 votes which
he may “cumulate” by giving it to candidate
Z alone.
Example of Cumulative voting by
distribution
As in the same example above, if A owns
100 voting shares, and there are five
directors to be elected, A is entitled to 500
votes which he may distribute to candidate
Y and Z giving the former 300 and the latter
200 provided that the total number of
votes cast by him does not exceed 500
votes.
Voting of sequestered shares of stock
It has been held that the “Presidential
Commission on Good Government may
properly exercise the prerogative to vote
sequestered stock of corporation, granted
to it by the President of the Philippines xxx
pending the outcome of proceeding to
determine the ownership of sequestered
shares of stock. xxx Substitution of
directors is not be done without reason or
rhyme, and undertaken only when essential
to prevent disappearance or wastage of
corporate property, and always under such
circumstance as assure that replacements
are truly processed of competence,
experience and probity.
Law on Business Organizations Reviewer
Sec. 25. Corporate officers, quorum. –
Immediately after their election, the
directors of a corporation must formally
organized by the election of a president,
who shall be a director, a treasurer who
may or may not be a director, a secretary
who shall be a resident citizen of the
Philippines, and such other officers as may
be provided for in the by-laws. Any two (2)
or more positions may be held concurrently
by the same person, except that no one
shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be
elected shall perform the duties enjoined
on them by law and by the by-laws of the
corporation. Unless the articles of
incorporation or the by-laws provide form a
greater majority, a majority of the number
of directors or trustees as fixed in the
articles of incorporation shall constitute a
quorum for the transaction of corporate
business, and every decision of at least a
majority of the directors or trustees present
at a meeting at which there is a quorum
shall be valid as a corporate act , except for
the election of the officers which shall
require the vote of a majority of all the
members of the board.
Qualification of corporate officer
1. President. He must be a director.
2. Treasurer. He may or may not be a
director.
3. Secretary. He must be a resident and
citizen of the Philippines
4. Other officers provided for in the by-
laws.
Three levels of corporate control
1. The board of director which is
responsible for the corporate policies
and the general management of the
business affairs of the corporation.
2. The officers, who in theory execute the
policies lay down by the board , but in
practice often have wide latitude in
determining the course of business
operations.
3. Stockholders who like amendments of
the articles of incorporation.
Teleconferencing of Board Members
In the Philippines, teleconferencing and
videoconferencing of members of board of
directors of private corporation is a reality,
in light of the Republic Act No. 8792.The
Securities and Exchange Commission issued
53

SEC Memorandum Circular No. 15, on
November 30, 2001, providing the
guidelines to be complied with related to
such conferences. Thus, the court agrees
with the RTC that persons in the Philippines
may have a teleconference with a group of
persons in South Korea relating to business
transactions or corporate governance.
Directors and officers distinguished
The officers of a corporation, unlike the
directors, are true agent of the corporation.
Each officer may bind the corporation by his
individual acts within the actual or apparent
scope of authority. On the other hand, a
director has no authority to act for the
corporation.
Authority of corporate officers
The corporation transact its business
through its officers or agents. An officer’s
power as an agent of the corporation must
be sought from the statute, charter, and the
by-laws or in a delegation of authority to
such officers, from the acts of board of
directors, formally expressed or implied
from a habit or custom of doing business.
Chairman of the Board
A chairman of the board of directors must
himself director be a director of the
corporation. His duty as presiding officer is
not an executive one. It has been suggested
that he well be given advisory duties in
determining executive salaries, bonus plans
and pensions, determining dividend policy,
selecting auditors, and dealing questions
with labor and company policy.
President
The president must be a director of the
corporation. The powers of the president of
a corporation are vested in him by law or
the by-laws; otherwise, he has no power
over the corporate property and business
than has any other director. However, he
may be given actual authority to make
particular contracts, or to execute
conveyances, borrow money, execute
mortgages, and do other acts, by the
charter, the by-laws, resolutions of
directors or their informal acquiescence.
Vice- President
In the absence of the president, or if the
office of the president becomes vacant, as a
rule, the vice president elected and
appointed by the shareholders or directors
Law on Business Organizations Reviewer
has authority to act in his stead, and to
perform the duties of the office.
Secretary
A secretary must be a resident citizen of the
Philippines. It is generally its duty to make
and keep corporate records; to make
proper entries of the votes, resolution and
proceedings of the shareholders and
directors in the management of the
corporation, and of all other matters
required to be entered in the records. The
secretary is the ministerial officer who
cannot bind the corporation unless he is
authorized to do so.
Treasurer
The treasurer of the corporation “may or
may not be a director”. He is the proper
officer and the only proper officer in the
absence of express provision to the
contrary, to receive and keep the money of
the corporation and to disburse them as he
may be authorized.
Other officers
The by-laws of the corporation may
provide for such other officers and agent as
may be necessary and convenient
considering the nature and needs of the
business. Their compensation is provided
for by the by-laws and the board of
directors in a suitable manner.
Quorum – signifies the number of persons
belonging to a corporation required to
transact business.
Section 25 of the Corporation Code
requires more people than a simple
majority to form a quorum. If no such
defining number is determined, a quorum is
a simple majority.
Directors cannot vote by proxy
The directors cannot vote by proxy but
must personally present, and act by
themselves.
Sec. 26. Report of election of directors,
trustees and officers. – Within thirty (30)
days after the election of the officers,
trustees and directors of the corporation,
the secretary, or any other officer of the
corporation shall submit to the Securities
and Exchange Commission, the names,
nationalities and residences of the
directors, trustees and officers elected.
54

Should a director, trustee or officer die,
resign or in any manner cease to hold
office, his heirs in case of his death, the
secretary or any other officer of the
corporation, or the director, trustee or
officer himself, shall immediately report
such fact to the Securities and Exchange
Commission.
Sec. 27. Disqualification of directors,
trustees or officers. – No person convicted
by final judgement of an offense punishable
by imprisonment for a period exceeding six
(6) years, or a violation of this Code,
committed within five (5) years prior to the
date of his election or appointment, shall
qualify as a director, trustee or officer of
any corporation.
Sec. 27 of the Corporation Code is an
additional safeguard that only upright and
honest individuals be entrusted with
management of the corporate affairs.
A director of a cooperative who is
subsequently elected as member of the
Sangguniang Panglungsod (City Council)
becomes automatically disqualified from
continuing as such director by virtue of the
clear mandate of PD No. 269 providing that
except for “barrio captains and councillors”
elective officials are ineligible to become
officers and/or directors of any cooperative.
The SEC ruled that firms engage in wholly or
partially nationalized activities, aliens are
banned from being appointed to
management position such as president,
vice-president, treasurer, auditor, secretary,
etc. of said companies. However, they can
be elected directors in preparation to their
allowable participation or share in the
capital of such activities, in accordance with
the Commonwealth Act No. 108, as
amended by PD 715, otherwise known as
the Anti- Dummy Law.
Sec. 28. Removal of director or trustees. –
Any director or trustee of the corporation
may be removed from office by a vote of
the stockholders holding or representing at
least two- thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-
stock corporation , by a vote of at least two-
thirds (2/3) of the members entitled to
vote: Provided, That such removal shall take
place either at a regular meeting of the
corporation or at the special meeting called
Law on Business Organizations Reviewer
for the purpose, and in either case, after
previous notice to stockholders or members
of the corporation of the intention to
propose such removal at the meeting. A
special meeting of the stockholders or
members of the corporation for the
purpose of removal of directors or trustees,
or any of them, must be called by the
secretary on order of the president or on
the written demand of the stockholders
representing or holding at least a majority
of the outstanding capital stock, or, if it be a
non-stock corporation, on the written
demand of a majority of the members
entitled to vote. Should the secretary failed
to refuse to call the special meeting upon
such demand, or fail or refuse to give the
notice, or if there is no secretary, the call
for the meeting may be addressed directly
to the stockholders or members of any by
any stockholder or member of the
corporation signing the demand. Notice of
the time and place of such meeting, as well
as the intention to propose such removal,
must be given by publication or by written
notice as prescribed in this Code. The
vacancy resulting from removal pursuant to
this section may be filled by election at the
same meeting without further notice, or at
any regular or at any special meeting called
for the purpose after giving notice as
prescribed in this Code. Removal may be
with or without cause: Provided, That
removal without cause may not be used to
deprived minority stockholders or members
of the right of representation to which they
may be entitled under Section 24 of this
Code.
Directors or trustee may be removed even
without cause
The legislative policy is that the
shareholders shall be the ultimate masters,
not the directors. The shareholders should
be clothed with the power of judging the
competency and fitness of the directors and
of choosing a board that will carry out of
their business policy.
Directors representing minority may not be
removed without cause. The power to
removed director or trustee even without
cause given to shareholders or members
may not be used to deprived minority
shareholders or members of the right of
representation to which they may be
entitled under Section 24 of the
Corporation Code. Cumulative voting of
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directors in a stock corporation is
mandatory and cannot be dispensed with in
the by-laws. Being a statutory right, the
stockholders cannot be deprived of the use
of cumulative voting.
May the result of the duly held election of
directors be altered by mere agreement of
the directors?
The Securities and Exchange Commission
ruled that: “An agreement by which
director is reposed in any body except
majority of stockholders is in violation of
‘public policy’ and ‘enforceable’ ”.
The Securities and Exchange Commission
has jurisdiction or authority to “hear and
decide cases” involving controversies in the
election or appointments of directors,
trustees, officers or managers of such
corporations, partnerships or associations.
Controversy concerning removal of
directors or trustees may also be heard by
the SEC.
Sec. 29. Vacancies in the office of director
or trustee. – Any vacancy occurring in the
board of directors or trustees other than by
removal by the stockholders or members or
by expiration of term, may be filled by the
vote of at least a majority of the remaining
directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or
special meeting called for that purpose. A
director or trustee so elected to fill the
vacancy shall be elected only for the
unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled
by reason of an increase in the number of
directors or trustees shall be filled only by
an election at a regular or at a special
meeting of stockholders or members duly
called for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in the
notice of the meeting.
Sec. 30. Compensation of directors. – In the
absence of any provision in the by-laws
fixing their compensation, the directors
shall not receive any compensation, as such
directors, except for reasonable per diems:
Provided, however, That any such
compensation (other than pier diems) may
be granted to directors by the vote of the
stockholders representing at least a
Law on Business Organizations Reviewer
majority of the outstanding capital stock at
a regular or special stockholders’ meeting.
In no case shall the total yearly
compensation of directors, as such
directors, exceed ten percent (10%) of the
net income before income tax of the
corporation during the preceding year.
Sec. 31. Liability of directors, trustees or
officers. – Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest
in conflict with their duty as such directors,
or trustees shall be liable jointly and
severally for all damages resulting
therefrom suffered by the corporation, its
stockholders or members and other
persons.
When a director, trustee or officer attempts
to acquire or acquires, in violation of his
duty, any interest adverse to the
corporation in respect of any matter which
has been reposed in him in confidence, as
to which equity imposes a disability upon
him to deal in his own behalf, he shall be
liable as a trustee for the corporation and
must account for the profits which
otherwise would have accrued to the
corporation.
Directors are trustees
It is well-stated rule in corporate law that
directors of corporations are trustees and
are required to act in the utmost good faith.
Liability of corporate directors and officers
for illegal dismissal of employees
In cases of illegal dismissal, corporate
directors and officers are solidarily liable
with the corporation, where terminations of
employment are done with malice or in bad
faith. (Acesite Corp. vs. NLRC, G.R. No.
152308, January 26, 2005, 449 SCRA 360)
Sec. 32. Dealings of directors, trustees or
officers with the corporation. – A contract
of the corporation with one or more of its
directors or trustees or officers is voidable,
at the option of such corporation, unless
all the conditions are present:
1. That the presence of such director or
trustee in the board meeting in which
the contract was approved was not
56

necessary to constitute a quorum for
such meeting.
2. That the vote of such director or
trustee was not necessary for the
approval of the contract.
3. That the contract is fair and reasonable
under the circumstances.
4. That in the case of an officer, the
contract with the officer has been
previously authorized by the Board of
Directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent,
in the case of a contract with a director or
trustee, such contract may be ratified by
the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding
capital stock or of two-thirds (2/3) of the
members in a meeting called for the
purpose: Provided, That full disclosure of
the adverse interest of the directors or
trustees involved is made at such meeting:
Provided, however, That the contract is fair
and reasonable under the circumstances.
Director disqualified to vote if he has
personal interest
A director is disqualified to vote at a
meeting of the board if he has any personal
interest in a matter before the board; in
such case, his vote cannot be counted in
making up a quorum.
Disclosure of adverse interest by director
It has been held that in dealing with their
corporation the directors must make full
disclosure of all relevant facts or the
transaction is voidable. The failure of a
director to inform his fellow directors of his
adverse bargaining position and other
material circumstances should be seriously
considered and inspected by the courts as
manner on the fairness and good faith of
the transaction and whether it is just and
reasonable as to the corporation.
Exceptions in Signing contract without
authority of Board of Directors is void
If a private corporation intentionally or
negligently clothed its officers or agents
with apparent power to perform acts of it,
the corporation will be estopped to deny
that such apparent authority is real, as to
innocent third persons dealing in good faith
Law on Business Organizations Reviewer
with such officers or agents. (Yao Ka Sin
Trading vs. Court of Appeals, G.R. No.
53820, June 15, 1992, citing Francisco vs.
GSIS, 7 SCRA 577)
Corporate president presumed to have
authority
As a strict rule, the corporate president has
no inherent power to act for the
corporation, slowly giving way to realization
that such officer has certain limited powers
in the transaction of the usual and ordinary
business of the corporation. In the absence
of agreement or by law provision to the
contrary, the president is presumed to have
the authority to act within the domain of
the general of his or her usual duties.
(People’s Aircargo, and Warehousing Co.,
Inc. vs. Court of Appeals, G.R. No. 117847,
Oct. 7, 1998)
Sec. 33. Contracts between corporations
with interlocking directors. – Except in
cases of fraud, and provided the contract is
fair and reasonable under the
circumstances, a contract between two or
more corporations having interlocking
directors shall not be invalidated on that
ground alone; Provided, That if the interest
of the interlocking director in one
corporation or corporations is merely
nominal, he shall be subject to the
provisions of the preceding section insofar
as the latter corporation or corporations are
concerned.
Stockholdings exceeding twenty
percent (20%) of the outstanding capital
stock shall be considered substantial for
purposes of interlocking directors.
Interlocking directors – Interlocking
directors are persons who serve as member
of the board of directors of two or more
competing corporations or corporations
engaged in practically the same kind of
business.
Effect of Corporate contracts with
interlocking directors
Interlocking directors of corporations does
not make a contract between or among the
corporations void and of no effect provided
there in no fraud and reasonable under the
circumstances.
Sec. 34. Disloyalty of a director. – Where a
director, by virtue of his office, acquires for
himself a business opportunity which
57

should belong to the corporation, thereby
obtaining profits to the prejudice of such
corporation, he must account to the latter
for all such profits by refunding the same,
unless his act has been ratified by a vote of
the stockholders owning or representing at
least two-thirds (2/3) of the outstanding
capital stock. This provision shall be
applicable notwithstanding the fact that the
director risked his own funds in the venture.
Duties of directors
Directors owe a three-fold duty to the
corporation. First, they must be obedient;
they owe a duty to keep within the powers
of the corporation as well as within those of
the board of directors. Second, they must
be diligent; they owe a duty to exercise
reasonable care and prudence. The third
duty owing by directors is that of individual
loyalty.
Concept of “corporate or business
opportunity.”
The doctrine of “corporate opportunity” is
but one phase of the cardinal rule of
undivided loyalty on the part of the
fiduciaries. If there is a presented to a
corporate officer or director a business
opportunity which the corporation is
financially able to undertake, is from its
nature, in the line of the corporation’s
business and is of practical advantage to it,
is one in which the corporation will be
brought into conflict with that of his
corporation, the law will not permit him to
seize the opportunity for himself.
Director is a fiduciary.
He who is in such fiduciary position cannot
serve himself first and his cestuis
(beneficiary) second. He cannot manipulate
the affairs of his corporation to their
disadvantage and in disregard of the
standards of common decency. He cannot
by the intervention of a corporate entity
violate the ancient principle against serving
two masters.
Sec. 35. Executive Committee. – The by-
laws of a corporation may create an
executive committee, composed of not less
than three members of the board, to be
appointed by the board. Said committee
may act, by majority vote of all its
members, on such specific matters within
the competence of the board, as may be
delegated to it in the by-laws or on a
Law on Business Organizations Reviewer
majority vote of the board, except with
respect to: (1) approval of any action for
which shareholders’ approval is also
required; (2) the filling of vacancies in the
board; (3) the amendment or repeal of by-
laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of
the board which by it express terms is not
so amenable or repealable; and (5) a
distribution of cash dividends to the
shareholders.
Sec. 36. Corporate powers and
capacity. – Every corporation incorporated
under this Code has the power and
capacity:
1. To sue and be sued in its corporation
name.
2. Of succession by its corporate name for
the period of time stated in the articles
of incorporation and the certificate of
incorporation.
3. To adopt and use a corporate seal.
4. To amend its articles of incorporation in
accordance with the provisions of this
code.
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend
or repeal the same in accordance with
this Code.
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this code; and to admit
members to the corporation if it be a
non-stock corporation.
7. To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such
real and personal property, including
securities and bonds of other
corporations, as the transaction of the
lawful business of the corporation may
be reasonably and necessarily require,
subject to the limitations prescribed by
law and the Constitution.
8. To enter into with other corporations
merger or consolidation as provided in
this code.
9. To make reasonable donations,
including those for the public welfare or
58

for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided, That no corporation, domestic
or foreign, shall give donations in aid of
any political party or candidate or for
purposes of partisan political activity.
10. To establish pension, retirement, and
other plans for the benefit of its
directors, trustees, officers and
employees.
11. To exercise such other powers as may
be essential or necessary to carry out its
purpose or purposes as stated in its
articles of incorporation.
Powers of a corporation
A corporation has such powers, and such
powers only, as are conferred upon it by
law or by its agreement. Powers may be
conferred upon a corporation:
1. Expressly.
2. Impliedly, because they are incidental
to corporate existence.
3. Impliedly, because they are necessary
or proper in order to exercise the
powers expressly conferred.
General express powers
Section 36 of the Corporation Code
enumerates the general and express
powers of corporations.
Other corporate powers
The Corporation Code enumerates other
express powers of corporations as follows:
1. Power to extend or shorten corporate
term (Sec. 37).
2. Power to increase or decrease capital
stock; incur, create or increase bonded
indebtedness (Sec. 38).
3. Power to deny pre-emptive right (Sec.
39).
4. Power to sell or dispose assets (Sec. 40).
5. Power to acquire own shares (Sec. 41).
6. Power to invest corporate funds in
another corporation or business or for
any other purpose (Sec. 42).
7. Power to declare dividends (Sec. 43).
8. Power to enter into management
contracts (Sec. 44).
Sec. 37. Power to extend or shorten
corporate term. – A private corporation
may extend or shorten its terms as stated in
the articles of incorporation when improved
by a majority vote of the board of directors
Law on Business Organizations Reviewer
or trustees and ratified at a meeting by the
stockholders representing at least two-
thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the
members in case of non-stock corporations.
Written notice of proposed action and of
the time and place of the meeting shall be
addressed to each stockholder or member
at his place of residence as shown on the
books of the corporation and deposited to
the addressee in the post office with
postage prepaid, or served personally:
Provided, That in case of extension of
corporate term, any dissenting stockholder
may exercise his appraisal right under the
conditions provided in this Code.
Extension of corporate term limited to 50
years
The corporate term may be extended for
periods not exceeding 50 years in any single
instance as provided by section 11 of the
Corporation Code. No extension can be
made earlier than 5 years prior to the
original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier
extension as determined by the SEC.
Corporation cannot extend expired term.
A corporation cannot extend its life by
amendment of its articles of incorporation
effected during the three-year statutory
period for liquidation when its original term
of existence had already expired.
Sec. 38. Power to increase or decrease
capital stock; incur, create or increase
bonded indebtedness. – No corporation
shall increase or decrease its capital stock
or incur, create or increase any bonded
indebtedness unless approved by a majority
vote of the board of directors and, at a
stockholders’ meeting duly called for the
purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the
increase or diminution of the capital stock,
or the incurring, creating or increasing of
and bonded indebtedness. Written notice
of the proposed increase or diminution of
the capital stock or of the incurring,
creating, or increasing of any bonded
indebtedness and of the time and place of
the stockholders’ meeting at which the
proposed increase or diminution of the
capital stock or the incurring or increasing
of any bonded indebtedness is to be
considered, must be addressed to each
stockholder at his place of residence as
59

shown on the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by
a majority of the directors of the
corporation and countersigned by the
chairman and secretary of the stockholders’
meeting, setting forth:
1. That the requirements of this section
have been complied with.
2. The amount of the increase or
diminution of the capital stock.
3. If an increase of the capital stock, the
amount of capital stock or number of
shares of no-par stock thereof actually
subscribed, the names, nationalities
and residences of the persons
subscribing, the amount of capital stock
or number of shares of no-par stock
subscribed by each, and the amount
paid by each on his subscription in cash
or property, or the amount of capital
stock or number of shares of no-par
stock allotted to each stockholder if
such increase is for the purpose of
making effective stock dividend
therefor authorized.
4. Any bonded indebtedness to be
incurred, created, or increased.
5. The actual indebtedness of the
corporation on the day of the meeting.
6. The amount of the stock represented at
the meeting.
7. The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the capital
stock or the incurring, creating or increasing
of any bonded indebtedness shall require
prior approval of the Securities and
Exchange Commission.
One of the duplicate certificate shall be
kept on file in the office of the corporation
and the other shall be filed with the
Securities and Exchange Commission and
attached to the original articles of
Law on Business Organizations Reviewer
incorporation. From and after approval by
the Securities and Exchange Commission
and the issuance by the Commission of its
certificate of filing, the capital stock shall
stand increased or decreased and the
incurring, creating or increasing of any
bonded indebtedness authorized, as the
certificate of filing may declare: Provided,
That the Securities and Exchange
Commission shall not accept for filing any
certificate of increase of capital stock unless
accompanied by the sworn statement of
the Treasurer of the corporation lawfully
holding office at the time of the filing of the
certificate, showing that at least twenty-five
percent (25%) of such increased capital
stock has been subscribed and that at least
twenty-five percent (25%) of the amount
subscribed has been paid either in actual
cash to the corporation or that there has
been transferred to the corporation
property the valuation of which is equal to
twenty-five percent (25%) of the
subscription: Provided, further, That no
decrease of the capital stock shall be
approved by the Commission, if its effect
shall prejudice the rise of corporate
creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the
same, with the approval by a majority vote
of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting
duly called for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and Exchange
Commission, which shall have the authority
to determine the sufficiency of the terms
thereof.
Bonds – Bonds are in form and effect similar
to promissory notes, secured by mortgage
or trust deed upon specified property of the
debtor corporation.
Properties to a bond
Every bond issue usually involve three
parties: (1) the debtor – corporation; (2) the
creditor – bondholder; and (3) the trustee.
Bonds classified
Bonds are classified into: coupon or
registered bonds, mortgage bonds,
debentures, convertible bonds,
participating bonds, collateral trust bands,
and guaranteed bonds.
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Coupon or registered bonds
Coupon bonds are payable to bearer or to
the order of a person, and have attached to
them coupon notes for each instalment of
interest as it falls due.
Mortgage bond
A mortgage bond is one secured by a
mortgage on corporate property.
Debenture bonds
Debenture bonds are not secured by
specific corporate property but rather solely
on the issuer’s ability to pay the
indebtedness.
Convertible bonds
Convertible bonds are those which includes
a provision which permits the holder of the
bond to convert the bond into a specified
number of shares of stock of the
corporation at his option within a period
fixed therein.
Participating bonds
The owners or holders of participating
bonds entitle them to participate in
earnings of the corporation above the
specified rates of interest fixed.
Collateral trust bonds
Collateral trust bonds are secured by a lien
on securities deposited with a named
trustee constituting the collateral.
Guaranteed bonds
Guaranteed bonds are guaranteed or
secured by another corporation other than
the issuing corporation.
Sec. 39. Power to deny pre-emptive right. –
All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class,
in proportion to their respective
shareholdings, unless such right is denied
by the articles of incorporation or an
amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing two-thirds (2/3)
of the outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously
contracted debt.
Law on Business Organizations Reviewer
Pre-emptive right – It means literally to
establish a prior right. A stockholder’s pre-
emptive right is his right to subscribe to
new shares of stock in proportion to his
existing stockholdings, before the new
shares are issued to others.
Sec. 40. Sale or other disposition of assets.
– Subject to the provisions of existing laws
on illegal combinations and monopolies, a
corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon such terms and conditions and for
such consideration, which may be money,
stocks, bonds or other instruments for the
payment of money or other property or
consideration, as its board of directors or
trustees may deem expedient, when
authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock; or in case of non-
stock corporation, by the vote of at least
two-thirds (2/3) of the members, in a
stockholders’ or members’ meeting duly
called for the purpose. Written notice of the
proposed action and of the time and place
of the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with the postage prepaid,
or served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be
deemed to cover substantially all the
corporate property and assets if thereby
the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
After such authorization or
approval by the stockholders or members,
the board of directors or trustees may,
nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage,
pledge or other disposition of property and
assets, subject to the rights of third parties
under any contract relating thereto,
without further action or approval by the
stockholders or members.
61

Nothing in this section is intended
to restrict the power of any corporation,
without the authorization by the
stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if
the same is necessary in the usual and
regular course of business of said
corporation or if the proceeds of the sale or
other disposition of such property and
assets be appropriated for the conduct of
its remaining business.
In non-stock corporations, where
there are no members with voting rights,
the vote of at least a majority of the
trustees in office will be sufficient
authorization for the corporation to enter
into any transaction authorized by this
section.
Sec. 41. Power to acquire own shares. – A
stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes,
including but not limited to the following
cases: Provided, That the corporation has
unrestricted retained earnings in its books
to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising
out of stock dividends.
2. To collect or compromise an
indebtedness to the corporation, arising
out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said sale.
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of this
Code.
Sec. 42. Power to invest corporate funds in
another corporation or business or for any
other purpose. – Subject to the provisions
of this code, a private corporation may
invest its funds in any other corporation or
business or for any purpose other than the
primary purpose for which it was organized
when approved by a majority of the board
of directors or trustees and ratified by the
stockholders representing at least two-
thirds (2/3) of the outstanding capital stock,
or by at least two-thirds (2/3) of the
Law on Business Organizations Reviewer
members in the case of non-stock
corporations, at a stockholders’ or
members’ meeting duly called for the
purpose. Written notice of the proposed
investment and the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally; Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That were the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in
the articles of incorporation, the approval
of the stockholders or members shall not be
necessary.
Sec. 43. Power to declare dividends. – The
board of directors of a stock corporation
may declare dividends out of the
unrestricted retained earnings which shall
be payable in cash, in property, or in stock
to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than
two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly
called for the purposes.
Stock corporation are prohibited from
retaining surplus profits in excess of one
hundred percent (100%) of their paid-in
capital stock, except: (1) when justified
approved by the Board of Directors; or (2)
when the corporation is prohibited under
any loan agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends without
its/his consent, and such consent has not
yet been secured; or (3) when it can be
clearly shown that such retention is
necessary under special circumstance
obtaining in the corporation, such as when
there is a need for special reserve for
probable contingencies.
Concept of dividends
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A dividend is a corporate profit set aside,
declared and ordered by the directors to be
paid to the stockholders on demand or at a
fixed time.
Dividends distinguished from profits
“Dividends” means the profits or that
portion of the profits of the corporation
which its board of directors, by proper
resolution, sets apart for rotable
distribution among the stockholders. It is
distinguished from “profits” for the profits
in the hands of a corporation do not
become dividends until they have been set
apart, or at least declared, as dividends and
transferred to the separate property of the
individual stockholders.
Surplus profits – Surplus or net profits of a
corporation is the difference between the
total present value of its assets, after
deducting losses and liabilities, and the
amount of its capital stock. (11 Fletcher,
Sec. 5335)
Basis of dividend declaration
The board of directors of a stock
corporation may declare dividends on the
basis of outstanding stock held by the
stockholders. The basis therefore is the
stockholder’s total subscription and not on
the amount paid by him on the
subscription. This is for the reason that his
entire subscription represents his holding in
the corporation for which he pays interests
on any unpaid portion. (SEC Opinion, Dec.
17, 1973)
Classes of dividends
Dividends which a corporation may declare
and distribute to its stockholders may be
classified into: cash dividend, stock
dividend, property dividend, scrip dividend,
and liquidating dividend.
Cash dividend
Cash dividend is one payable in money.
Stock dividend
Stock dividend is a dividend payable in stock
instead of cash or property.
Property dividend
The directors in their discretion may
authorize distributions in bonds or in
property, such as warehouse receipts for
whiskey or shares of stock of a subsidiary
corporation.
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Scrip dividend
Scrip dividend is a writing or a certificate
issued to a stockholder entitling him to the
payment of money or the like at some
future time inasmuch as the company, at
the time the scrip dividends are declared,
has profits not in cash.
Liquidating dividend
Liquidating dividend involves the
distribution of assets by a corporation to its
stockholders upon dissolution.
Sec. 44. Power to enter into a
management contract. – No corporation
shall conclude a management contract with
another corporation unless such contract
shall have been approved by the Board of
Directors and by stockholders owning at
least the majority of the outstanding capital
stock, or by at least majority of the
members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly
called for the purpose: Provided, That (a)
where a stockholder or stockholders
representing the same interest of both the
managing and the managed corporations
own and control more than one-third (1/3)
of the total outstanding capital stock
entitled to vote of the managing
corporation; or (b) where the majority of
the members of the Board of Directors of
the managing corporation also constitute a
majority of the members of the Board of
Directors of the managed corporation, then
the management contract must be
approved by the stockholders of the
managed corporation owning of at least
two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in case of a
non-stock corporation. No management
contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding
paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially all of
the business of the other corporation,
whether such contracts are called service
contracts, operating agreements or
otherwise: Provided, however, That such
service contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization of
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natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations.
Concept of management contract
A management contract is an agreement
under which the board of directors of a
corporation delegates the powers of
management to another person or
corporation for a period of time provided
for in the agreement.
Effects of Management contracts
Contracts by which the board of directors
delegates the power of supervision and
management to another person or
corporation for a specified period are
invalid if they involve a surrender by the
board of its power and duty of supervision
and control.
Management prerogatives
An owner of a business enterprise is given
considerable margin in managing his
business because it is deemed important to
society as a whole that he should succeed.
Sec. 45. Ultra vires acts of corporations. –
No corporation under this Code shall
possess or exercise any corporate powers
except those conferred by this Code or by
its articles of incorporation and except such
as are necessary or incidental to the
exercise of the powers so conferred.
Intra vires – The acts of a corporation within
its express or implied powers.
Ultra vires – The acts of a corporation
outside its express or implied powers.
It denotes some act or transaction on the
part of a corporation which, although not
unlawful or contrary to public policy of
executed by an individual, is yet beyond the
legitimate powers of the corporation as
they are defined by the statute under which
it is formed, or which are applicable to it, or
by its charter or incorporation papers.
Admittedly, if the contract is executed on
both sides neither party can maintain an
action to set aside the transaction or to
recover what has been parted with. The
courts will not interfere in such a case to
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deprive either the corporation or the other
part of money or property acquired under
the contract. On the other hand, the great
weight of authority is to consider executor
contracts as unenforceable.
Ultra vires contracts accepted doctrines
1. If the contract is fully executed on both
sides, the contract is effective and the
courts will not interfere to deprive
either part of what has been acquired
under it.
2. If the contract is executor on both sides,
as a rule either party can maintain an
action for its non-performance.
3. Where the contract is executor on side
only, and has been fully performed on
the other, the courts differ as whether
an action will lie on the contract against
the party who has received benefits of
performance under it. Majority of the
courts hold that the party who has
received benefits from the performance
is stopped” to set up that the contract
us ultra vires to defeat an action on the
contract. There is, however, a rule
which is widely recognized by the
courts that ultra vires. “Should not be
allowed to prevail, when involved for or
against the corporation, where it will
defeat the ends of justice or work a
legal wrong.
Acts which are ultra vires are voidable but
may be ratified. In order that such ultra
vires may be ratified it must be shown that
1. The act was consummated or executed.
2. No creditors are prejudiced or they
have given their consent thereto.
3. The right of the public or the state are
not involved.
4. All of the stockholders consent thereto.
A corporation, like an individual, may ratify
and thereby render binding upon it the
originally authorized acts of its officers or
other agents. This is true because the
questioned investment is neither contrary
to law, morals, public order or public policy.
It is a corporate transaction or contract
which is within the corporate powers but
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which is defective from a purported failure
to observe in its execution the requirement
of the law that the investment must be
authorized by the affirmative vote of the
stockholders holding 2/3 of the voting
power.
Sec. 46. by-laws Adoption. – Every
corporation formed under this code, must,
within one month after receipt of official
notice of the issuance of its certificate of
incorporation by the Securities and
Exchange Commission, adopt a new code of
by-laws for its government not inconsistent
with this code. For the adoption of by-laws
by the corporation the affirmative vote of
the stockholders representing at least a
majority of the outstanding capital stock, or
of at least a majority of the outstanding
capital stock, or of at least a majority of the
members, in the case of non-stick
corporations, shall be necessary. The by-
laws shall be signed by the stockholders or
members voting for them and shall be kept
in the principal office of the corporation,
subject to the inspection of the
stockholders or members during office
hours; and a copy thereof, duly certified to
by a majority of the directors or trustees
and countersigned by the secretary of the
corporation, shall be filed with the
Securities and Exchange Commission which
shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the
preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in
such case, such by-laws shall be approved
and signed by all the incorporators and
submitted to the Securities and Exchange
Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only
upon the issuance by the Securities and
Exchange Commission of a certification that
the by-laws are not inconsistent with the
Code.
The Securities and Exchange Commission
shall not accept for filing the by-laws or any
amendment thereto of any bank, banking
institution, building and loan association,
trust company, insurance company, public
utility, educational institution or other
special corporations governed by special
laws, unless accompanied by a certificate of
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the appropriate government agency to the
effect that such by-laws or amendments are
in accordance with law.
Necessity of by-laws
The corporation must adopt the code of by-
laws for its internal government.
Corporation has inherent power to adopt
by-laws
One of its legal incidents and is usually
expressly granted by law of the charter
subject to such limitations as may be
contained in the statute or the charter,
subject to such limitations as may be
contained in the statute or charter, and the
general requirements of validity. If a
corporation fails to file its by-laws within
the period required by law its certificate of
incorporation may be suspended or even
revoked.
Section 46 allows the adoption and filing of
the by-laws before incorporation provided
the same is approved by all the
incorporators and submitted to the
Securities and Exchange Commission
together with the articles of incorporation.
By-laws cannot provide for unreasonable
restriction
Restriction upon the traffic in stock must
have their source in legislative enactment,
as the corporation itself cannot create such
impediments. By-laws are created for
protection and not for restriction.
Elements of valid by-laws
1. Must not be inconsistent with the
general law and the Corporation Code.
2. Must not be inconsistent with public
policy.
3. Must be general in application and not
directed against particular individuals.
4. Must not be inconsistent with the
articles of incorporation.
5. Must not impair obligations and
contracts.
6. Must not be in restraint of trade.
7. Must not restrict religious freedom.
By-laws validity
As a rule, the by-laws of a corporation are
valid if they are reasonable and calculated
to carry into effect the objects of the
corporation, and are not contradictory to
the general policy of the laws of the land.
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Binding effect of by-laws
By-laws when valid, substantially the same
force and effect as laws of the corporation
as have the provisions of its charter in so far
as the corporation, the persons within it is
concerned. They are in effect written into
the charter and in this sense; they become
part of the fundamental law of the
corporation. And the corporation, and its
directors and officers are bound by and
must comply with them. Strangers,
however, are not bound to know by-laws
which are merely provisions for the
government of a corporation and notice of
them will not be presumed.
Sec 47. Contents of by-laws. – Subject to
the provisions of the Constitution, this
Code, other special laws, and the articles of
incorporation, a private corporation may
provide in its by-laws for:
1. The time, place and manner of calling
and conducting regular or special
meetings of the directors or trustees.
2. The time and manner of calling and
conducting regular or special meetings
of the stockholders or members.
3. The required quorum in meetings of
stockholders or members and the
manner of voting therein.
4. The form for proxies of stockholders
and members and the manner of voting
them.
5. The qualifications, duties and
compensation of directors or trustees,
officer and employees.
6. The time for holding the annual election
of directors or trustees and the mode or
manner of giving notice thereof.
7. The manner of election or appointment
and the term of office of all offices
other than directors or trustees.
8. The penalties for violation of the by-
laws.
9. In the case of stick corporations, the
manner of issuing stock certificates.
10. Such other matter as may be necessary
for the proper or convenient
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transaction of its corporate business
and affairs.
The enumerations of contents of by-laws
are not exclusive and neither does the
provision require all the matters mentioned
to appear in the by-laws.
The By-laws must not violate the
Constitution, the Corporation Code, other
special laws and the articles of
incorporation.
A corporation which has failed to file its by-
laws within the prescribed period does not
ipso facto lost its powers as such.
Sec. 48. Amendments to by-laws. – The
board of directors or trustees, by a majority
vote thereof, and the owners of at least a
majority of the outstanding capital stock, or
at least a majority of the members of a non-
stock corporation, at a regular or special
meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new
by-laws. The owners of 2/3 of the
outstanding capital stock or 2/3 of the
members in a non-stick corporation may
delegate to the repeal any by-laws or adopt
new by-laws: provided, that any power
delegated to the board of directors or
trustees shall be considered as revoked
whenever stockholders owning or
representing a majority of the outstanding
capital stock or a majority of the members
in non-stock corporations, shall so vote at a
regular or special meeting.
Whenever any amendment or new by-laws
are adopted, such amendment or new by-
laws shall be attached to the original by-
laws in the office of the corporation, and a
copy thereof, duly certified under oath by
the corporate secretary and a majority of
the directors or trustees, shall be filed with
the Securities and Exchange Commission,
the same to be attached to the original
articles of incorporation and original by-
laws.
Amender or new by-laws shall only be
effective upon the issuance by the SEC of a
certification that the same are not
inconsistent with this code.
The authority to make or adopt the original
by-laws of a corporation cannot be given to
the board of directors or trustees. The
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stockholders of a stock corporation or the
members of the non-stick corporation
adopt or make the original by-laws.
An amendment of by-law renders
stockholder ineligible as director
It is well-settled xxx that corporations have
the power to make by-laws declaring a
person employed in the service of a rival
company to be ineligible for the
corporation’s Board of Directors. An
amendment which renders ineligible, or if
elected, subjects to removal, a director if he
be also a director in a corporation whose
business is in competition with or is
antagonistic to the other corporation is
valid. This is based upon the principle that
where the director is so employed in the
service of a rival company, he cannot serve
both, but must betray one or the other.
Such an amendment advances the benefit
of the corporation and is good.
Meetings Necessity
A majority of the stockholders or members
can bind the corporation only at a meeting
regularly held and conducted. To constitute
a legal meeting, so as to render the acts and
vote of the majority binding the meeting
must be regularly called by one having
authority. In the absence of provision to the
contrary such authority exists in the
directors or managing agents.
Sec. 49. Kinds of Meeting. – Meetings of
directors, trustees, stockholders, or
members may be regular or special.
Sec. 50. Regular and special meetings of
stock holders or members. – Regular
meetings of stockholders or members shall
be held annually on a date fixed in the by-
laws, or if not so fixed, on any date in April
of every year as determined by the board of
directors or trustees: Provided, that written
notice of regular meetings shall be sent to
all stockholders or members of record at
least 2 weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or
members shall be held at any time deemed
necessary or as provided in the by-laws:
Provided, however, that at least 1 week
written notice shall be sent to all stock
holders or members, unless otherwise
provided in the by-laws.
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Notice of any meeting may be waived,
expressly or impliedly, by any stockholder
or member.
Whenever, for any cause, there is no person
authorized to call a meeting, the SEC, upon
petition of a stockholder or member, and
on the showing of good cause there for,
may issue an order to the petitioning
stockholder or member directing him to call
a meeting of the corporation by giving
proper notice required by this Code or by
the by-laws. The petitioning stockholder or
member shall preside thereat until at least
a majority of the stockholders or members
present have chosen one of their numbers
as presiding officer.
Corporate decisions; rationale of meetings
As a rule, a majority of the shareholders or
members have no power to vote or act for
the corporation as to matters on which
shareholders have authority, except at a
meeting called and conducted according to
law. Written or oral consent to a corporate
act by the shareholders or members
individually, even though a majority may
agree, is not binding on the corporation.
When there is no person authorized to call
a meeting
A stockholder or member may petition the
SEC upon showing of good cause, to call a
meeting and directing the petitioner
(stockholder or member) to give notice
required by the Code and the by-laws. The
petitioning stockholder or member shall
preside at such meeting until at least a
majority of the stockholders or members
present have chosen one of their numbers
as presiding officer.
Sec. 51. Place and time of meetings of
stockholders or members. – Stockholders’
or members’ meetings, whether regular or
special, shall be held in the city or
municipality where the principal office of
the corporation is located, and if practicable
in the principal office of the corporation:
Provided, that Metro Manila shall, for the
purposes of his section, be considered a city
or municipality
Notice of meetings shall be in writing, and
the time and place thereof stated therein.
All proceedings had and any business
transacted at any meeting of the
stockholders or members, if within the
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powers or authority of the corporation,
shall be valid even of the meeting be
improperly held or called, provided all the
stockholders or members of the
corporation are present or duly represented
at the meeting.
Place of meetings
(Regular or special) meetings shall be held
in the city or municipality where the
principal office of the corp. is located.
If the meeting be improperly held or called
(as when there was a defective notice) the
same shall still be valid provided that
1. The act done was within the powers of
the corporation.
2. All the stockholders or members were
present or duly represented.
Sec 52. Quorum in meetings. – Unless
otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of
the members in the case of non-stock
corporations.
Quorum – Signifies the number of persons
belonging to a corporation required to
transact business. Within the meaning of
section 52 above, a quorum shall consist of
the stockholders representing a majority of
the outstanding capital stock or a majority
of the members in the case of non-stock
corporations.
Sec. 53. Regular of special meetings of
directors or trustees. – The meetings shall
be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors
or trustees may be held at any time upon
the call of the president or as provided in
the by-laws
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-
laws provide otherwise. Notice of regular or
special meetings stating the date, time and
place of the meeting must be sent to every
director or trustee at least 1 day prior to the
scheduled meeting, unless otherwise
provided in the by-laws. A director or
trustee may waive this requirement, either
expressly or impliedly.
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Sec. 54. Who shall preside at meetings. –
The president shall preside at all meeting of
the directors or trustees as well as of the
stockholders or members, unless the by-
laws provide otherwise.
The meetings of directors or trustees may
be held anywhere in the by-laws. Notice of
regular or special meetings of directors or
trustees must be sent to them at least 1 day
prior to the scheduled meeting, unless the
by-laws provided otherwise.
Sec. 55. Right to vote of pledgors,
mortgagors and administrators. – In case
of pledged or mortgaged share in stock
corporations, the pledgor or mortgagor
shall have the right to attend and vote at
meetings of stockholders, unless the pledge
or mortgagee is expressly given such right in
writing which is recorded on the
appropriate corporate books by the pledgor
or mortgagor.
Executors, administrators, receivers and
other legal representatives duly appointed
by the court may attend and vote in behalf
of the stockholders or members without
need of any written proxy.
The pledgor or mortgagor of shatem in the
absence of agreement to the contrary, if
the shate remain in his name on the books
of the corporation has the right to attend
and vote at meetings of stockholders.
A person who appears on the books of a
corporation or otherwise as the absolute
owner of stock clearly has the right to
vote, although in face he may hold it as
trustee.
Executor and administrator has the right, to
vote shares belonging to the estate of his
decedent, and it can make no difference
that the share stand on the books of the
corporation in the name of the decedent.
Sec. 56. Voting in case of joint ownership
of stock. – In case of share of stock owned
jointly by 2 or more persons, in order to
vote the same, the consent of all the co-
owners shall be necessary, unless there is a
written proxy, signed by all the co-owners.
Authorizing one or some of them or any
other person to vote such share or shares:
provided, that when the shares are owned
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in an capacity by the holders therof, any
one of the joint owner can vote said shares
or appoint a proxy therfor.
If share are owned by 2 or more persons
jointly, the right to vote is in them jointly,
and , in order that the shares may be voted,
they must agree upon the vote. This rule of
joint action applies to shares held by several
executors or trustees, in the absence of
provision for a majority vote if the
fiduciaries disagree.
Sec. 57. Voting right for treasury share. –
Treasury shares shall have no voting right as
long as such stock remains in the treasury.
Treasury shares have no voting rights.
Sec. 58. Proxies. – Stockholders and
members may vote in person or by proxy in
all meetings of stock holders or members.
Proxies shall be in writing, signed by the
stock holder or member and filed before
the scheduled meeting with the corporate
secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be
valid and effective for a period longer than
five years at any one time.
Proxy – In corporate law, is a person who
votes for and this represents the
stockholders or members.
Voting by proxy
Ordinarily the right to vote shall be
exercised by the stockholders themselves or
by their duly authorized representatives.
Proxy to be valid must be:
1. In writing, signed by the stockholder or
member giving it.
2. Filed with the corporate secretary
before the scheduled meeting.
3. It is valid only for the meeting for which
it is intended unless otherwise
stipulated.
4. Even if the proxy is a continuing one it
shall not be longer than 5 year at any
one time.
Sec 59. Voting trusts. – One or more
stockholders of a stock corporation may be
create a voting trust for the purpose of
conferring upon a trustee or trustees the
right to vote and other rights pertaining to
the share for a period not exceeding 5 years
at any one time: Provided, that in the case
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of a voting trust specifically required as a
condition in a loan agreement, said voting
trust may be for a period exceeding 5 years
but shall automatically expire upon full
payment of the loan. A voting trust
agreement must be in writing and
notarized, and shall specify the terms and
conditions thereof. A certified copy of such
agreement shall be filed with the
corporation and with the SEC: otherwise,
said agreement is ineffective and
unenforceable. The certificate or of stock
covered by the voting trust agreement shall
be cancelled and new one shall be issued in
the name of the trustee or trustees stating
that they are issued pursuant to said
agreement. In the books of the corporation,
it shall be noted that the transfer in the
name of the trustee or trustees is made
pursuant to said voting trust agreement.
The Trustee or trustees shall be execute and
deliver to the transferors voting trust
certificates, which shall be transferable in
the same manner and with the same effect
as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination
by any stockholder of the corporation in the
same manner as any other corporate book
or record: Provided, That both the
transferor and the trustee or trustees may
exercise the right of inspection of all
corporate books and records in accordance
with the provisions of this code.
Any other stock holder may transfer his
shares to the same trustee or trustees upon
the terms and conditions stated in the
voting trust agreement, and there upon
shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered
into for the purpose of circumventing the
law against monopolies and illegal
combinations in restraint of trade or used
for purposes of fraud.
Unless expressly renewed, all rights granted
in a voting trust agreement shall
automatically expire at the end of the
agreed period, and the voting trust
certificates as well as the certificates of
stick in the name of the trustee or trustees
shall thereby be deemed cancelled and new
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certificates of stock shall be reissued in the
name of the transferors.
The voting trustee or trustees may vote by
proxy unless the agreement provides
otherswise.
Concept of voting trusts
A voting trust is an agreement by which
stockholders surrender their voting power
and place it irrevocably in the hands of
others for a definite period of time. In
exchange for the certificates of stock the
trustee delivers to the stockholder voting
trust certificates.
Limitations on voting trust agreement
1. It shall be for a period not exceeding 5
years but if required under a loan
agreement, the period may be for more
than 5 years but shall automatically
cease upon full payment of the loan.
2. It must be in writing and notarized.
3. It shall not be entered into to
circumvent laws on monopolies and
restraint of trade, nor shall it be
entered into purposes of fraud.
4. It shall be filed with the corporation and
with SEC otherwise it shall be
ineffective and unenforceable.
5. It shall be subject to examinations by
any stockholder in the same manner as
any other corporate book or record.
6. Parties to the voting trust agreement
shall be bound by all the provisions of
said agreement.
Sec. 60. Subscription contract. – Any
contract for the acquisition of unissued
stock in an existing corporation or a
corporation still to be formed shall be
deemed a subscription within the meaning
of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some
other contract.
How can a person become a shareholder in
a stock corporation?
1. By subscription contract with an
existing corporation for the acquisition
of unissued shares.
2. By purchase from the corporation of
treasury shares.
3. By transfer from a previous stockholder
of the outstanding shares or existing
subscription to shares.
Binding effect of subscription
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No person can become a stockholder in a
corporation by virtue of a subscription for
stock unless there is a valid contract
between him and the corporation. When a
contract of subscription for stock in a
corporation is binding it is a contract
between the subscriber or subscribers and
the corporation, and its formation and
validity are governed by the same principles
substantially as any other contract except in
so far as such principles may be rendered
inapplicable by particular charter or
statutory provisions. No express promise to
pay is necessary to make the subscriber
liable.
No form required of subscription contracts
Unless otherwise required by law. Thus, a
person who accepts a certificate of stock
from a corporation, or who acts as a
stockholder by participating in stockholders’
meeting, making payments, or otherwise,
thereby becomes a stockholder and liable
as such, not only to creditors, but also to
the corporation, although there may have
no express contract of subscription.
Sale of Shares of Stock Needs SEC Approval
The Securities Act requires that before a
corporation, except a public utility, bank,
corporation association and a few others,
sells, or offers for sale in the Philippines any
of its securities, like shares of stocks or
bonds, it must register the same and/or
secure a permit from the SEC for the
purpose. The authorization is in the form of
an exemption from the requirements of
registration and licensing, and is issued by
the way of resolution of the SEC.
Power to issue shares is lodged in the
board of directors and no stockholders’
meeting is necessary to consider it because
additional issuance of shares of stock does
not need approval of the stockholders. The
“Board of Trustees shall, in of stock of the
corporation and shall prescribe the form of
the certificate of stock of corporation.”
Kinds of Subscription:
1.1. Pre-incorporation – is one agreed upon
before the incorporation of the
proposed corporation.
1.2. Post-incorporation Subscription –
entered into after the incorporation or
formation of the corporation.
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2. Absolute Subscription – one not subject
to any condition or happening of
certain unknown events.
3. Conditional Subscription – its fulfillment
depends upon the happening of
uncertain events of contingencies. It
does not make the subscriber a
stockholder or render him liable to pay
the amount of the subscription, until
performance or fulfillment of the
condition.
4. Subscription upon special terms – where
“the corporation agreed, as an
independent element, to do a certain
thing or things, but not as condition to
the accrual of liability of the subscriber
or the acquisition of the rights of a
stockholder.
Sec. 61. Pre-incorporation subscription. – A
subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least six (6)
months from the date of subscription,
unless all of the other subscribers consent
to the revocation, or unless the
incorporation of said corporation fails to
materialize within said period or within a
longer period as may be stipulated in the
contract of subscription: Provided, That no
pre-incorporation subscription may be
revoked after the submission of the articles
of incorporation to the Securities and
Exchange Commission.
SEC. 61 Pre-incorporation subscription is
mandatory (Sec. 13 & 14) at least 25% of
the authorized capital stock has been
subscribed and at least 25% of the total
subscription has been fully paid.
Subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least 6 months
from the date of subscription, unless:
1. All subscribers consent to its
revocation.
2. The incorporation fails to materialize
within 6 months or a longer period as
agreed upon.
The irrevocability of pre-incorporation
prevents a subscriber from speculating on
the stocks of the proposed corporation and
protects the corporation from financially
irresponsible subscribers.
Law on Business Organizations Reviewer
Sec. 62. Considering for stocks. – Stocks
shall not be issued for a consideration less
than the par or issued price thereof.
Consideration for the issuance of stock may
be any or a combination of any two or more
of the following:
1. Actual cash paid to the corporation.
2. Property, tangible or intangible, actually
received by the corporation and
necessary or convenient for its use and
lawful purposes at a fair valuation equal
to the par or issued value of the stock
issued.
3. Labor performed for or services actually
rendered to the corporation.
4. Previously incurred indebtedness of the
corporation.
5. Amounts transferred from unrestricted
retained earnings to stated capital.
6. Outstanding shares exchanged for
stocks in the event of reclassification or
conversion.
Where the consideration is other than
actual cash, or consists of intangible
property such as patents of copyrights, the
valuation thereof shall initially be
determined by the incorporators or the
board of directors, subject to approval by
the Securities and Exchange Commission.
Shares of stock shall not be issued in
exchange for promissory notes or future
service. The same considerations provided
for in this section, insofar as they may be
applicable, may be used for the issuance of
bonds by the corporation. The issued price
of no-par value shares may be fixed in the
articles of incorporation or by the board of
directors pursuant to authority conferred
upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by
the stockholders representing at least a
majority of the outstanding capital stock at
a meeting duly called for the purpose.
Consideration for issuance of stock may be
any or any combination of any two or
more of the ff:
1. Cash
2. Property – tangible or intangible
3. Labor performed or services actually
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rendered
4. Previously incurred indebtedness by the
corporation
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares exchanged for stock
in the event of reclassification or
conversion
Sources of corporate capital
1. Funds furnished by shareholders
2. Borrowings
3. Profits and stock dividends
Different modes by which a corporation
may issue shares of stock
1. By subscription before and after
incorporation, to original, unissued
stocks.
2. By sale of treasury stock after
incorporation for money property, or
service.
3. By subscription to new stocks, when all
the original stocks have been issued and
the amount of the capital stock
increased.
4. By making a stock dividend.
Limitations in the issuance of stocks
1. Shall not be issued for a consideration
less than the par or issued price thereof
except treasury shares so long as the
price is reasonable.
2. Shall not be issued in exchange of
promissory notes or future services.
3. When the consideration is other than
actual cash or consists of intangible
property, the value thereof shall be
initially determined by the
incorporators or the board of directors,
subject to the approval of the SEC.
4. The issued price of no par value shares
must be fixed as provided in Sec. 62.
 issued price may vary from time to time
but value may not be less than P5.
Sec. 63. Certificate of stock and transfer of
shares. – The capital stock of stock
corporations shall be divided into shares for
which certificates signed by the president or
vice president, countersigned by the
secretary or assistant secretary, and sealed
with the seal of the corporation shall be
issued in accordance with the by-laws.
Shares of stock so issued are personal
property and may be transferred by
delivery of the certificate or certificates
endorsed by the owner or his attorney-in-
Law on Business Organizations Reviewer
fact or other person legally authorized to
make the transfer. No transfer, however,
shall be valid, except as between the
parties, until the transfer is recorded in the
books of the corporation showing the
names of the parties to the transaction, the
date of the transfer, the number of the
certificate or certificates and the number of
shares transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the
corporation.
SEC. 63 The capital stock of stock
corporation shall be divided into shares
Certificate of stock shall be issued for said
shares.
Nature of a certificate of stock
1. It is a written instrument signed by the
proper officer of a corporation stating
or acknowledging that the person
named therein is the owner of a
designated number of shares of stock.
2. It indicates the name of the holder, the
number, kind and class of shares
represented, and the date of issuance.
3. It i merely the evidence of the holder's
interest in the corporation, his
ownership of the share represented
thereby.
4. It is not essential to make one a
stockholder in a corporation.
 Every stockholder has a right to
have proper certificate issued to
him as soon as he has complied
with the conditions which entitle
him to one.
 A corporation cannot issue shares
in excess of the maximum
authorized in its AOI.
 An over issued stock is absolutely
void even if possessor is in good
faith.
 Shares can be transferred
represented by the certificate by its
endorsement by the owner or his
agent and delivery to the
transferee.
Restrictions on transfer of stock
1. A by-law prohibits a transfer of stock
without the consent or approval of all
stockholders or of the president or
board of directors is ILLEGAL.
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2. A provision in the certificate that is
transferable only to some person first
approved by the board of directors
unlawfully restricts the right of the
stockholder.
3. The condition “non-transferable”
appearing on certificates of stock is
VOID.
4. corporations which will engage in any
business reserved for Filipino citizens
are required to indicate in AOI and all
certificates.
Two requirements to effect transfer of
stocks
Endorsement and delivery of stock
certificate
-the usual practice is for the stockholder to
sign the form on the back of the stock
certificate.
-if the holder of the certificate desires to
assume the legal right of the stockholder he
fills up the blank in the form inserting his
name as transferee.
-then he delivers the certificate to the
secretary of the corporation so that the
transfer may be entered in the books.
Other modes of transfer
1. Assignment thru a separate instrument.
2. Judicial or extra-judicial settlement of
the estate.
Validity of stock transfer
1. As between parties
-merely the delivery of the certificate
indorsed by the owner or his attorney-
in-fact or other person legally
authorized to make the transfer.
2. As against third persons
-the transfer of shares must be entered
and noted upon the books of the
corporation
-only absolute transfer are recorded
Effects of unregistered shares
1. It is valid and binding as between
the transferor and transferee.
2. It is invalid insofar as the
corporation is concerned except
when notice is given to the
corporation for purposes of
registration.
a) the transferor has the right to
vote and to be voted for, and
has the right to participate in
any meeting
b) the transferor has the right to
Law on Business Organizations Reviewer
dividends as against the
corporation but the transferor,
as the nominal owner of the
share, is the trustee for the
benefit of the real owner.
3. It is invalid as against corporate
creditors, and the transferor is still
liable to the corporation. The
transfer of stock by a shareholder
does not relieve him from the
liability to creditors of the
corporation for unpaid subscription
until the transfer is consummated
by being registered in the books.
4. It is invalid as against creditors of
the transferor without notice of the
transfer.
Shares of stock against which the
corporation holds any unpaid claim shall
not be transferable in the books – no
unpaid claims against the stock.
 no unpaid subscriptions due and
payable.
Sec. 64. Issuance of stock certificates. – No
certificate of stock shall be issued to a
subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if
any is due, has been paid.
SEC. 64 It is prohibited to issue certificates
of stock to a subscriber who has not paid
the full amount of his subscription together
with interest and expenses.
Derivative suit – one brought by one or
more stockholders or members in the name
and in behalf of the corporation to redress
wrongs committed against it or to protect
or vindicate corporate rights.
Individual suit – one brought by a
stockholder in his own name against the
corporation for direct violation of his
contractual rights such as right to vote, to
dividends etc.
Representative suit – a group of
stockholders may bring a direct suit against
the corporation. This is when a wrong is
committed against a group of stockholders.
Certificate of Stock – a written instrument
signed by the proper corporate officers, and
evidencing the fact that the person therein
named is the registered owner of the share
or shares therein described.
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Nature and Functions of Certificates
It represents the number of shares which
the corporation acknowledges that the
holder of the certificate is entitled to and is
a solemn and continuing affirmation by the
corporation that the person to whom it was
issued is entitled to all the rights and
subject to all the liabilities of a stockholder
in the company in respect of the number of
shares named, and that the company will
respect his rights and the rights of anyone
to whim he may transfer such shares, by
refusing to admit any new transferee to the
rights of a stockholder except upon the
surrender of the certificate.
Issuance of Stock Certificate. It requires:
1. sign by the president or vice-president,
countersigned by the secretary or
assistant secretary, and sealed with the
seal of the corporation, and issued in
accordance with the law.
2. The certificate must be delivered or
mailed to the subscriber, with the
documentary stamps required by law
affirmed thereon.
3. The par value with respect to shares
with par value, or the full subscriptions,
as to no-par value shares must be fully
paid.
4. Where it involves transfer of
outstanding shares, the original
certificate must be retained.
Purpose of Registration of Transfer
1. To enable the corporation to know at all
times who its actual shareholders are,
because mutual rights and obligations
exist between the corporation and its
stockholders.
2. To afford to the corporation an
opportunity to object or refuse its
consent to the transfer in case it has
any claim against the stock sought to be
transferred or for any other valid
reason.
3. To avoid fraudulent or fictitious
transfer.
4. It is intended also for the benefit and
protection of persons who may deal
with the corporation and become
creditors, so that they know who are
the stockholders, and as such liable to
its creditors.
Right to Transfer shares of stock
1. By delivering the certificate, duly
indorsed on the back.
Law on Business Organizations Reviewer
2. By delivering the certificate
accompanied by a separate assignment.
3. Where stock is levied on in execution of
judgment, by delivering the certificate
coupled with an assignment by the
sheriff who conducted the levy.
4. Transfer by sale of delinquent shares.
Liabilities of a stockholders
1. Liability to the corporation for unpaid
subscription
2. Liability to the corporation for interest
on unpaid subscription
3. Liability to creditors of the corporation
on unpaid subscription
4. Liability for watered stock
5. Liability for dividends unlawfully paid
6. Liability for failure to create a
corporation
Sec. 65. Liability of directors for watered
stocks. – Any director or officer of a
corporation consenting to the issuance of
stocks for a consideration less than its par
or issued value or for a consideration in any
form other than cash, valued in excess of its
fair value, or who, having knowledge
thereof, does not forthwith express his
objection in writing and file the same with
the corporate secretary, shall be solidarily,
liable with the stockholder concerned to
the corporation and its creditors for the
difference between the fair value received
at the time of issuance of the stock and the
par or issued value of the same.
SEC. 65 watered stocks – stock issued for no
value at all or for a value less than its
equivalent either in cash, property, shares,
stock dividends, or services the law
prohibits the issuance of watered stocks
(only refers to original issue)
1. To protect persons who may acquire
stock and those who may become the
creditors of the corporation on the faith
of its outstanding capital stock being
fully paid.
2. To secure equality among subscribers
and prevents discrimination against
those who have paid in full the par or
issued value.
Who are liable for watered stocks?
Both consenting director or officer and the
stockholder concerned for the whole
amount of difference.
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Trust Fund Theory – involves an implied
promise to the corporation to pay the par
value of the shares in money or its
equivalent, supplementing it by a legal
restriction against release or fictitious
payment of this obligation to the prejudice
of creditors.
Sec. 66. Interest on unpaid subscriptions. –
Subscribers for stock shall pay to the
corporation interest on all unpaid
subscriptions from the date of subscription,
if so required by, and at the rate of interest
fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be
deemed to be the legal rate.
Sec. 67. Payment of balance of
subscription. – Subject to the provisions of
the contract of subscription, the board of
directors of any stock corporation may at
any time declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same or
such percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary.
Payment of any unpaid subscription or any
percentage thereof, together with the
interest accrued, if any, shall be made on
the date specified in the contract of
subscription or on the date stated in the call
made by the board. Failure to pay on such
date shall render the entire balance due
and payable and shall make the stockholder
liable for interest at the legal rate on such
balance, unless a different rate of interest is
provided in the by-laws, computed from
such date until full payment. If within thirty
(30) days from the said date no payment is
made, all stocks covered by said
subscription shall thereupon become
delinquent and shall be subject to sale as
hereinafter provided, unless the board of
directors orders otherwise.
Remedies to enforce payment of stock
subscription
1. Extra-judicial sale at public auction –
Permits the corporation to put up
unpaid stock for sale and dispose of it
for the account of the delinquent
subscribers (governed by sections 67-69
of the Corporation Code of the
Philippines).
2. Judicial action by court action (provided
under Section 70)
Law on Business Organizations Reviewer
3. Denying a stockholder delinquent for
unpaid subscription the right to vote
(under section 71)
4. Collection from cash dividends and
withholding stock dividends (under
Section 43)
Sanctions on stock delinquent
1. Rights denied to stockholder shall not
be voted or be entitled to vote or
representation at any stockholders'
meeting, nor entitled the holder thereof
to any of the rights of a stockholder
except the right to dividends.
2. Right given to the corporation.
3. The corporation has the right to apply
cash dividends due on delinquent stock
to the unpaid balance on the
subscription plus cost and expenses.
While stock dividends, corporation to
withhold the same from the delinquent
stockholder until his unpaid subscription is
fully paid.
When is the balance of subscription
payable?
1. On the date specified in the contract of
subscription.
2. In the absence of any specified date in
the contract of subscription, on the
date stated in the call made by the
board of directors.
When does the stock become delinquent?
A stock becomes delinquent upon failure of
the holder to pay the unpaid subscription or
balance thereof within 30 days from the
date specified in the contract of
subscription or on the date stated in the
call.
Call – a declaration officially made by a
corporation usually expressed in the form
of a resolution of the board of directors
requiring payment of all or a certain
prescribed portion of a subscriber's stock
subscription.
Requisites for a valid call
1. It must be made in the manner
prescribed by law.
2. It must be made by the board of
directors.
3. It must operate uniformly upon all
shares.
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Sec. 68. Delinquency sale. – The board of
directors may, by resolution, order the sale
of delinquent stock and shall specifically
state the amount due on each subscription
plus all accrued interest, and the date, time
and place of the sale which shall not be less
than thirty (30) days nor more than sixty
(60) days from the date the stocks become
delinquent.
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by
registered mail. The same shall furthermore
be published once a week for two (2)
consecutive weeks in a newspaper of
general circulation in the province or city
where the principal office of the
corporation is located.
Unless the delinquent stockholder pays to
the corporation, on or before the date
specified for the sale of the delinquent
stock, the balance due on his subscription,
plus accrued interest, costs of
advertisement and expenses of sale, or
unless the board of directors otherwise
orders, said delinquent stock shall be sold
at public auction to such bidder who shall
offer to pay the full amount of the balance
on the subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest number of
shares or fraction of a share. The stock so
purchased shall be transferred to such
purchaser in the books of the corporation
and a certificate for such stock shall be
issued in his favor. 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.
Should there be no bidder at the public
auction who offers to pay the full amount of
the balance on the subscription together
with accrued interest, costs of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share, the corporation may, subject to the
provisions of this Code, bid for the same,
and the total amount due shall be credited
as paid in full in the books of the
corporation. Title to all the shares of stock
covered by the subscription shall be vested
in the corporation as treasury shares and
may be disposed of by said corporation in
accordance with the provisions of this Code.
Law on Business Organizations Reviewer
Procedure:
1. The board of directors passes a
resolution declaring payable the whole
or certain percentage of the unpaid
subscription stating the date fixed for
payment. If the date of payment is
specified in the contract of subscription,
no call is necessary.
2. The stockholders are given notice of the
resolution by the secretary of the
corporation. If the stockholders fails to
pay within 30 days from date specified,
the stocks becomes delinquent.
3. the board of directors, by resolution,
orders the sale of delinquent stocks,
stating the amount due and the date,
time, and place of sale with notice to
the delinquent stockholders which
notice shall be published.
4. On the date of sale, will be sold at
public auction to higher bidder for cash.
Highest bidder – the person offering at the
sale to pay the full amount of the balance
on the subscription together with accrued
interest, cost of advertisement and
expenses of sale, for the smallest number of
shares.
In the absence of bidders or highest bidder,
the corporation may purchase for itself the
delinquent stock.
Sec. 69. When sale may be questioned. –
No action to recover delinquent stock sold
can be sustained upon the ground of
irregularity or defect in the notice of sale, or
in the sale itself of the delinquent stock,
unless the party seeking to maintain such
action first pays or tenders to the party
holding the stock the sum for which the
same was sold, with interest from the date
of sale at the legal rate; and no such action
shall be maintained unless it is commenced
by the filing of a complaint within six (6)
months from the date of sale.
Grounds for the recovery of stock
unlawfully sold for delinquency are:
1. Irregularity or defect in the notice of
sale
2. Irregularity or defect in the sale itself of
the delinquent stock
Sec. 70. Court action to recover unpaid
subscription. – Nothing in this Code shall
prevent the corporation from collecting by
76

action in a court of proper jurisdiction the
amount due on any unpaid subscription,
with accrued interest, costs and expenses.
As a general rule, a corporation may not
maintain a suit for the enforcement of
unpaid subscription without first making a
call.
Judicial remedy is limited to the amount
due on any unpaid subscription with
accrued interest, costs and expenses
Sec. 71. Effect of delinquency. – No
delinquent stock shall be voted for be
entitled to vote or to representation at any
stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code,
until and unless he pays the amount due on
his subscription with accrued interest, and
the costs and expenses of advertisement, if
any.
SEC. 71 Stock delinquency does not deprive
the holder of all his rights as a stockholder
except the right to be voted for or be
entitled to representation at any
stockholders' meeting. He shall still receive
dividends. But delinquent stocks shall be
subject to delinquency sale.
Effects of Stocks declared delinquent:
1. Cannot be voted for or be entitled to
vote in corporate meetings or be
represented by proxy at any
stockholders’ meeting.
2. The holder of delinquent stock is not
entitled to exercise the rights of a
stockholder (i.e. to inspect books and
records, etc.).
3. The holder of delinquent stocks is
entitled to dividends. Section 43
provides however, that “ any cash
dividends due on delinquent stock shall
first be applied to the unpaid balance
on the subscription plus costs and
expense, while stock dividends shall be
withheld from the delinquent
stockholder until his unpaid
subscription is fully paid”.
Sec. 72. Rights of unpaid shares. – Holders
of subscribed shares not fully paid which
are not delinquent shall have all the rights
of a stockholder.
Law on Business Organizations Reviewer
SEC. 72 Before unpaid shares become
delinquent, the holder thereof is not
considered to have violated any contract
with the corporation, and, therefore, he has
all the rights of a stockholder which rights
include the right to vote.
Sec. 73. Lost or destroyed certificates. –
The following procedure shall be followed
for the issuance by a corporation of new
certificates of stock in lieu of those which
have been lost, stolen or destroyed:
1. The registered owner of a certificate of
stock in a corporation or his legal
representative shall file with the
corporation an affidavit in triplicate
setting forth, if possible, the
circumstances as to how the certificate
was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the
certificate and the name of the
corporation which issued the same. He
shall also submit such other information
and evidence which he may deem
necessary.
2. After verifying the affidavit and other
information and evidence with the
books of the corporation, said
corporation shall publish a notice in a
newspaper of general circulation
published in the place where the
corporation has its principal office, once
a week for three (3) consecutive weeks
at the expense of the registered owner
of the certificate of stock which has
been lost, stolen or destroyed. The
notice shall state the name of said
corporation, the name of the registered
owner and the serial number of said
certificate, and the number of shares
represented by such certificate, and
that after the expiration of one (1) year
from the date of the last publication, if
no contest has been presented to said
corporation regarding said certificate of
stock, the right to make such contest
shall be barred and said corporation
shall cancel in its books the certificate
of stock which has been lost, stolen or
destroyed and issue in lieu thereof new
certificate of stock, unless the
registered owner files a bond or other
security in lieu thereof as may be
required, effective for a period of one
(1) year, for such amount and in such
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form and with such sureties as may be
satisfactory to the board of directors, in
which case a new certificate may be
issued even before the expiration of the
one (1) year period provided herein:
Provided, That if a contest has been
presented to said corporation or if an
action is pending in court regarding the
ownership of said certificate of stock
which has been lost, stolen or
destroyed, the issuance of the new
certificate of stock in lieu thereof shall
be suspended until the final decision by
the court regarding the ownership of
said certificate of stock which has been
lost, stolen or destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation
and its officers, no action may be brought
against any corporation which shall have
issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the
procedure above-described.
SEC. 73 The registered owner of certificates
of stock in a corporation or his legal
representative shall file with the
corporation an affidavit setting forth how
certificate were lost, stolen or destroyed,
the number of shares represented by each
certificate, the serial numbers of the
certificate and name of the corporation
which issued the same.
The affidavit shall be verified
Corporation shall publish a notice in a
newspaper in general circulation published
in the place where the corporation has its
principal office for 3 consecutive weeks.
After 1 year from the date of the last
publication, if no contest presented to the
corporation, corporation shall cancel in the
books the lost certificates and issue new
certificates.
Sec. 74. Books to be kept; stock transfer
agent. – Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in detail
the time and place of holding the meeting,
how authorized, the notice given, whether
the meeting was regular or special, if special
its object, those present and absent, and
Law on Business Organizations Reviewer
every act done or ordered done at the
meeting. Upon the demand of any director,
trustee, stockholder or member, the time
when any director, trustee, stockholder or
member entered or left the meeting must
be noted in the minutes; and on a similar
demand, the yeas and nays must be taken
on any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on
any action or proposed action must be
recorded in full on his demand. The records
of all business transactions of the
corporation and the minutes of any
meetings shall be open to inspection by any
director, trustee, stockholder or member of
the corporation at reasonable hours on
business days and he may demand, writing,
for a copy of excerpts from said records or
minutes, at his expense.
Any officer or agent of the corporation who
shall refuse to allow any director, trustees,
stockholder or member of the corporation
to examine and copy excerpts from its
records or minutes, in accordance with the
provisions of this Code, shall be liable to
such director, trustee, stockholder or
member for damages, and in addition, shall
be guilty of an offense which shall be
punishable under Section 144 of this Code:
Provided, That if such refusal is made
pursuant to a resolution or order of the
board of directors or trustees, the liability
under this section for such action shall be
imposed upon the directors or trustees who
voted for such refusal: and Provided,
further, That it shall be a defense to any
action under this section that the person
demanding to examine and copy excerpts
from the corporation's records and minutes
has improperly used any information
secured through any prior examination of
the records or minutes of such corporation
or of any other corporation, or was not
acting in good faith or for a legitimate
purpose in making his demand.
Stock corporations must also keep a book to
be known as the "stock and transfer book",
in which must be kept a record of all stocks
in the names of the stockholders
alphabetically arranged; the installments
paid and unpaid on all stock for which
subscription has been made, and the date
of payment of any installment; a statement
of every alienation, sale or transfer of stock
made, the date thereof, and by and to
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whom made; and such other entries as the
by-laws may prescribe. The stock and
transfer book shall be kept in the principal
office of the corporation or in the office of
its stock transfer agent and shall be open
for inspection by any director or
stockholder of the corporation at
reasonable hours on business days.
No stock transfer agent or one engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation shall be allowed to operate in
the Philippines unless he secures a license
from the Securities and Exchange
Commission and pays a fee as may be fixed
by the Commission, which shall be
renewable annually: Provided, That a stock
corporation is not precluded from
performing or making transfer of its own
stocks, in which case all the rules and
regulations imposed on stock transfer
agents, except the payment of a license fee
herein provided, shall be applicable.
Books and records to be kept by
Corporation
1. Record of all business transactions
2. Minutes of all meetings of stockholders
or members, or of board of directors or
trustees
3. Stock and transfer books
4. Optional records and supplementary
books as many be necessary or required
by special laws
SEC Rules requiring filing of documents. The
SEC requires all corporations whose
securities are listed in any stock exchange
or with permits to sell shares to the public
or with twenty or more stockholders shall
hereafter submit to this Commission within
thirty (30) days after approval of the
corporate action, certified true copies of
the following documents evidencing the
same, to wit:
a. Minute of meetings
1. Calling for payment of unpaid
subscriptions
2. Increasing or decreasing the capital
stock
3. Changing the nomenclature of
shares of stock or certificates of
indebtedness
4. Authorizing the borrowing of
material sums of money
b. Other documents, such as:
Law on Business Organizations Reviewer
1. Certificated changing the
composition of the board of
directors and officers
2. Certificates changing the ownership
of the controlling interest in the
corporation
Management contracts duly approved by
the stockholders.
Sec. 75. Right to financial statements. –
Within ten (10) days from receipt of a
written request of any stockholder or
member, the corporation shall furnish to
him its most recent financial statement,
which shall include a balance sheet as of the
end of the last taxable year and a profit or
loss statement for said taxable year,
showing in reasonable detail its assets and
liabilities and the result of its operations.
At the regular meeting of stockholders or
members, the board of directors or trustees
shall present to such stockholders or
members a financial report of the
operations of the corporation for the
preceding year, which shall include financial
statements, duly signed and certified by an
independent certified public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the
financial statements may be certified under
oath by the treasurer or any responsible
officer of the corporation.
Stockholder’s rights to financial statements
and reports
1. Balance sheet as of the end of the last
taxable year.
2. A profit and loss statement for said
taxable year.
3. The board of directors or trustees shall
present “a financial report” to
stockholders or members.
SEC REPORTORIAL REQUIREMENTS
Period Requirements
Within 30 days from a) Set up books of
registration of accounts duly
articles onaf registered with the
incorporation BIR wherein receipts
and disbursements
made are
immediately
recorded.
b) Set up and
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 Law on Business Organizations Reviewer

register with the SEC stockholder

its stock and  Address
transfer book.  Nationality
 No. of shares
c) File its by-laws subscribed
with the  Amt. subscribed
Commission. by each
Within 15 days from Submit a statement Shall be made for
end of 3 months of sources and inspection.
from registration application of funds Within 5 days Submit list of
certified by an before the date of stockholders/memb
independent CPA. annual meeting ers entitled to vote
a) Within 105 days i) If paid-up capital > as of a date prior to
after the end of its P50,000, file a copy the meeting.
fiscal year of BS and P&L
statement. The SEC must be notified of any:
1. Change or transfer of address.
ii) If paid-up capital 2. Any investment of corporate funds in
< P50,000, same as any of the secondary purposes of the
(i) and certified corporation by filing a copy of the
under oath by the resolution approved by 2/3 of the
Treasurer or any subscribed capital stock entitled to vote
responsible officer. authorizing the BoD to invest in any of
b) Within 45 days Certified under oath the secondary purposes.
by the Treasurer or
any responsible Sec. 76. Plan of merger or consolidation. –
officer. Two or more corporations may merge into a
Within 30 days from Submit: single corporation which shall be one
the date of annual 1) General constituent corporations or may
meeting information sheet consolidate into a new single corporation
for the fiscal year. which shall be consolidated corporation.

2) Minutes of The board of directors or trustees of each

meeting of corporation, party to the merger or
stockholders/memb consolidation, shall approve a plan of
ers electing the BoD merger or consolidation setting forth the
certified by the following:
Secretary and
subscribed and 1. The names of the corporations
sworn to before a proposing to merge or consolidate,
notary public. hereinafter referred to as the
constituent corporations.
3) Minutes of
meeting of BoD 2. The terms of the merger or
electing the officers, consolidation and the mode of carrying
certified by the the same into effect.
secretary and
subscribed and 3. A statement of the changes. If any, in
sworn to before a the articles of incorporation of the
notary public surviving corporation in case of merger;
Within 5 days from Submit list of and, with respect to the consolidated
stockholders/memb stockholders/memb corporation in case of consolidation, all
ers meeting ers as of the date of the statements required to be set forth
annual or special in the articles of incorporation for
stockholders/memb corporations organized under this Code.
ers’ meeting,
showing:
 Name of the

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4. Such other provisions with respect to
the proposed merger or consolidation
as are deemed necessary or desirable.
Sec. 77. Stockholders’ or members’
approval. – Upon approval by majority vote
of each of the board of directors or trustees
of the constituent corporations of the plan
of merger or consolidation, the same shall
be submitted for approval by the
stockholders or members of each of such
corporations at separate corporate
meetings duly called for stockholders or
members of the respective corporations, at
least two (2) weeks prior to the date of
meeting, either personally or by registered
mail. Said notice shall state the purpose of
the meeting and shall include a copy or a
summary of the plan of merger or
consolidation as the case may be. The
affirmative vote of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock of each
corporations in case of stock corporations
or at least two-thirds of the members in
case of non-stock corporations, shall be
necessary for the approval of such plan. Any
dissenting stockholder in stock corporations
may exercise his appraisal right in
accordance with this Code; Provided, That if
after the approval by the stockholders of
such plan, the board of directors should
decide to abandon the plan, the appraisal
right shall be extinguished.
Any amendment to the plan of merger or
consolidation may be made, provided such
amendment is approved by majority vote of
the respective boards of directors or
trustees of all the constituent corporations
and ratified by the affirmative vote of
stockholders representing at least two-
thirds (2/3) of the members of each of the
constituent corporations. Such plan,
together with any amendment, shall be
considered as the agreement of merger or
consolidation.
Definition
Consolidation – the uniting or
amalgamation of two or more existing
corporations to form a new corporation.
The united concern resulting from the union
is called the consolidated corporation.
Merger – a union effected by the absorbing
of one or more existing corporations by
another which survives and continues the
combined business. The parties to a
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combination by consolidation or merger are
called the “constituent” corporations.
Sec. 78. Articles of merger or consolidation.
– After the approval by the stockholders or
members as required by the preceding
section, articles of merger or articles of
consolidation shall be executed by each of
the constituent corporations, to be signed
by the president or vice-president and
certified by the secretary or assistant
secretary of each corporation setting forth:
1. The plan of the merger or the plan of
the consolidation.
2. As to stock corporations, the number of
shares outstanding, or in case of non-
stock corporations, the number of
members.
3. As to each corporation, the number of
shares or members voting for and
against such plan, respectively.
Sec. 79. Securities and Exchange
Commission’s approval and effictivity of
merger or consolidation. – The articles of
merger or of consolidation signed and
certified as hereinabove required, shall be
submitted to the Securities and Exchange
Commission in quadruplicate for its
approval: Provided, That in the case of
merger or consolidation of banks or banking
institutions, building and loan associations,
trust companies, insurance companies,
public utilities, educational institutions and
other special corporations governed by
special laws, the favorable recommendation
of the appropriate government agency shall
first be obtained. Where the Commission is
satisfied that the merger or consolidation of
the corporations concerned is not
inconsistent with the provisions of this Code
and existing laws, it shall issue a certificate
of merger or consolidation, as the case may
be, at which time the merger or
consolidation shall be effective.
If, upon investigation, the Securities and
Exchange Commission has reason to believe
that the proposed merger or consolidation
is contrary to or inconsistent with the
provisions of this Code or existing laws, it
shall set a hearing to give the corporations
concerned the opportunity to be heard.
Written notice of the date, time and place
of said hearing shall be given to each
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constituent corporation at least two (2)
weeks before said hearing. The Commission
shall thereafter proceed as provided in this
Code.
Sec. 80. Effects of merger or consolidation.
– The merger or consolidation, as provided
in the preceding sections shall have the
following effects:
1. The constituent corporations shall
become a single corporation which, in
case of merger, shall be the surviving
corporation designated in the plan of
merger; and, in case of consolidation,
shall be the consolidated corporation
designated in the plan of consolidation.
2. The separate existence of the
constituent corporations shall cease,
except that of the surviving or the
consolidated corporation.
3. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and powers and
shall be subject to all the duties and
liabilities of a corporation organized
under this Code.
4. The surviving or the consolidated
corporation shall thereupon and
thereafter possess all the rights,
privileges, immunities and franchises of
each of the constituent corporations;
and all property, real or personal, and
all receivables due on whatever
account, including subscriptions to
shares and other chooses in action, and
all and every other interest of, or
belonging to, or due to each constituent
corporation, shall be taken and deemed
to be transferred to and vested in such
surviving or consolidated corporation
without further act or dead.
5. The surviving or consolidated
corporation shall be responsible and
liable for all the liabilities and
obligations of each of the constituent
corporations in the same manner as if
such surviving or consolidated
corporation had itself incurred such
liabilities or obligations; and any claim,
action or proceeding pending by or
against any of such constituent
corporations may be prosecuted by or
against the surviving or consolidated
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corporation, as the case may be.
Neither the rights of creditors nor any
lien upon the property of any of such
constituent corporations shall be
impaired by such merger or
consolidation.
Steps to achieve merger or consolidation
1. The BoD of each corporation must draw
up a plan of merger or consolidation.
2. A plan must be submitted to the S/M of
each corporation for approval. The vote
or two-thirds (members) or two-thirds
of the outstanding capital stock
(stockholders) would be required.
3. There has to be a formal agreement
known as the articles of M/C by the
officers of each of the constituent
corporations.
4. The articles of M/C must be submitted
to the SEC for approval.
5. The SEC shall if it deems necessary set a
hearing giving notice to all corporations
concerned.
6. The SEC issues the certificate of M/C.
The M/C becomes effective upon the
issuance of the corresponding
certificate.
Remedy of creditors of constituent
corporations
The only remedy is either against the united
corporation, or to pursue the assets of the
constituents into its hands on the ground of
fraudulent conveyance.
Sec. 81. Instances of appraisal right. – Any
stockholder of a corporation shall have the
right to dissent and demand payment of the
fair value of his shares in the following
instances:
1. In case any amendment to the articles
of incorporation has the effect of
changing or restricting the rights of any
stockholders or class of shares, or of
authorizing preferences in any respect
superior to those of outstanding shares
of any class, or of extending or
shortening the term of corporate
existence.
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in this Code.
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3. In case of merger or consolidation.
Sec. 81, not exclusive.
Such appraisal right may also be exercised
when a stockholder dissents when a
corporation or business or for a purpose
other than its main purpose. (Sec. 42)
When a stockholder of a close corporation
may for any reason compel the corporation
to purchase his shares from the par or
issued value, when the corporation has
sufficient assets in its books to cover its
debts and liabilities, exclusive of capital
stock. (Sec. 105)
Sec. 82. How right is exercised. – The
appraisal right may be exercised by any
stockholder who shall have voted against
the proposed corporate action, by making a
written demand on the corporation within
thirty (30) days after the date on which the
vote was taken for payment of the fair
value of his shares: Provided, That failure to
make the demand within such period shall
be deemed a waiver of the appraisal right. If
the proposed corporate action is
implemented or effected, the corporation
shall pay to such stockholder, upon
surrender of the certificate(s) of stock
representing his shares, the fair value
thereof as of the day prior to the date on
which the vote was taken, excluding any
appreciation or depreciation in anticipation
of such corporate action.
If within a period of sixty (60) days from the
date the corporate action was approved by
the stockholders, the withdrawing
stockholder and the corporation cannot
agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be
named by the stockholder, another by the
corporate and the third by the two (2) thus
chosen. The findings of the majority of the
appraisers shall be final, and their award
shall be paid by the corporation within
thirty (30) days after such award is made:
Provided, That no payment shall be made to
any dissenting stockholder unless the
corporation has unrestricted retain earnings
in its books to cover such payment: and
Provided, further, That upon payment by
the corporation of the agreed or awarded
price, the stockholder shall forthwith
transfer his shares to the corporation.
Law on Business Organizations Reviewer
Exercising the appraisal right
By one who has voted against the proposed
corporate action, by making a written
demand on the corporation within thirty
(30) days after the date on which the vote
was taken for payment of the fair value of
his shares. Those who are absent and
present abstained their vote cannot
exercise the appraisal right.
Sec. 83. Effect of demand and termination
of right. – From the time of demand for
payment of the fair value of a stockholder’s
shares until either the abandonment of the
corporate action involved or the purchase
of the said shares by the corporation, all
rights accruing to such shares, including
voting and dividend rights, shall be
suspended in accordance with the
provisions of this Code, except the right of
such stockholder to receive payment of the
fair value thereof: Provided, That if the
dissenting stockholder is not paid the value
of his shares within 30 days after the award,
his voting and dividend rights shall be
immediately be restored.
Sec. 84. When right to payment ceases. –
No demand for payment under this Title
may be withdrawn unless the corporation
consents thereto. If, however, such demand
for payment is withdrawn with the consent
of the corporation, or if the proposed
corporate action is abandoned or rescinded
by the corporation or disapproved by the
Securities and Exchange Commission where
such approval is necessary, or if the
Securities and Exchange Commission
determines that such stockholder is not
entitled to the appraisal right, then the right
of said stockholder to be paid the fair value
of his shares shall cease, his status as a
stockholder shall thereupon be restored,
and all dividend distributions which would
have accrued on his shares shall be paid to
him.
Effect of refusal of corporation to pay
If... Then...
FV of the shares Restore all his rights
within thirty (30) automatically.
days from the award
Insufficiency of the Restore by
unrestricted RE reacquiring his
former status as a
stockholder.
Abandoned;
83

Rescinded;
Unsecured approval
of the SEC;
Stockholder is not Same effects as
entitled; above.
Withdrawal
(dissenting
stockholder with
consent of the corp)
Sec. 85. Who bears costs of appraisal. –
The costs and expenses of appraisal shall be
borne by the corporation, unless the fair
value ascertained by the appraisers is
approximately the same as the price which
the corporation may have offered to pay
the stockholder, in which case they shall be
borne by the latter. In case of an action to
recover such fair value, all costs and
expenses shall be assessed against the
corporation, unless the refusal of the
stockholder to receive payment was
unjustified.
Consideration of the costs of appraisal
Expenses of appraisal:
 Appraisers’ fees
 Attorneys’ fees
 Expert accountants’ fees
 Witnesses before the appraisers’
fees
Thus, clarifies an otherwise delicate aspect
of appraisal proceeding.
Sec. 86. Notation on certificate(s); right of
transferee. – Within ten (10) days after
demanding payment for his shares, a
dissenting stockholder shall submit the
certificate(s) of stock representing his
shares to the corporation for notation
thereon that such shares are dissenting
shares. His failure to do so shall, at the
option of the corporation, terminate his
rights under this Title. If shares represented
by the certificate(s) bearing such notation
are transferred, and the certificate(s)
consequently cancelled, the rights of the
transferor as a dissenting stockholder under
this Title shall cease and the transferee shall
have all the rights of a regular stockholder;
and all dividend distributions which would
have accrued on such shares shall be paid
to the transferee.
Valuation of shares of dissenting
shareholders
Appraisers should consider the elements
that tend to affect market quotations:
Law on Business Organizations Reviewer
 The rate of dividends
 The regularity with which they have
been paid
 The management and reputation of
the company
 Its prospects for the future
 All other circumstances which will
aid them in estimating the future
course of the stock in the market
The important thing to consider in arriving
at the appraisal value is whether the
valuation arrived at is fair, just and
reasonable to all parties concerned.
Other instances when appraisal right may
be granted
1. Amendment of “any provision or matter
stated in the articles of incorporation.”
2. When the corporate term is extended.
3. Any purpose other than the primary
purpose.
4. Close corporation – a stockholder may
compel the corporation to purchase FV
“for any reasons.”
Exercise of appraisal right provided
compensatory alternative to investor
Appraisal statutes extending to corporate
purpose or duration amendments would
seem to be of limited value.
Appraisal rights cannot challenge this power
but they can provide a compensatory
alternative to an investor faced with a loss
of existing stock rights and should be so
employed.
When right of stockholder to payment
ceases
1. The demand for payment is withdrawn
with the consent of the corporation.
2. The proposed corporate action is
abandoned or rescinded by the
corporation.
3. Proposed action is disapproved by the
SEC where such approval is necessary.
4. Such stockholder is not entitled to
exercise his appraisal right.
Sec. 87. Definition. – For the purposes of
this Code, a non-stock corporation is one
where no part of its income is distributable
as dividends to its members, trustees, or
officers, subject to the provisions of this
Code on dissolution: Provided, That, any
profit which a non-stock corporation may
obtain as an incident to its operation shall,
whenever necessary or proper, be used for
84

the furtherance of the purpose or purposes
for which the corporation was organized,
subject to the provisions of this Title.
The provisions governing stock
corporations, when pertinent, shall be
applicable to non-stock corporations,
except as may be covered by specific
provisions of this Title.
Definition
Non-stock corporation – one where no part
of its income is distributable as dividends to
its members, trustees, or officers.
Sec. 88. Purposes. – Non-stock corporations
may be formed or organized for charitable,
religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic
service, or similar purposes, like trade,
industry, agricultural and like chambers, or
any combination thereof, subject to the
special provisions of this Title governing
particular classes of non-stock corporations.
Distinction between a stock corporation
and a non-stock corporation
Point of Stock Non-Stock
Comparison Corporation Corporation
Membership Ownership Consent of
of stock the
associates
Solicitation of gifts, donations or
contributions by non-stock corporations
A certificate of registration must be secured
from the Insurance Commissioner
otherwise the articles of incorporation
cannot be filed.
Sec. 89. Right to vote. – The right of the
members of any class or classes to vote may
be limited, broadened or denied to the
extent specified in the articles of
incorporation or the by-laws. Unless so
limited, broadened or denied, each
member, regardless of class, shall be
entitled to one vote.
Unless otherwise provided by the articles of
incorporation or the by-laws, a member
may vote by proxy in accordance with the
provisions of this Code.
Voting by mail or other similar means by
members of non-stock corporations may be
authorized by the by-laws of non-stock
corporations with the approval of, and
Law on Business Organizations Reviewer
under such conditions which may be,
prescribed by, the Securities and Exchange
Commission.
Voting by proxy may be denied in articles
or by-laws
The law makes voting by proxy merely
directory in the case of non-stock
corporations and even allows the articles of
incorporation or by-laws thereof to deny
proxy voting.
If proxy voting may be denied outrightly in
the articles or by-laws of non-stock
corporations, it necessarily follows that the
qualifications or limitations on who should
be appointed proxies may also be made
therein.
Sec.90. Non-transferability of membership.
– Membership in a non-stock corporation
and all rights arising therefrom are personal
and non-transferable, unless the articles of
incorporation or the by-laws otherwise
provide.
Sec.91. Termination of membership. –
Membership shall be terminated in the
manner and for the causes provided in the
articles of incorporation or the by-laws.
Termination of membership shall have the
effect of extinguishing all rights of a
member in the corporation or in its
property, unless otherwise provided in the
articles of incorporation or the by-laws.
Sec.92. Election and term of trustees. –
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of
trustees of non-stock corporations, which
may be more than fifteen (15) in number as
may be fixed in their articles of
incorporation or by-laws, shall, as soon as
organized, so classify themselves that the
term of office of one-third (1/3) of their
number shall expire every year; and
subsequent elections of trustees comprising
one-third (1/3) of the board of trustees shall
be held annually and trustees so elected
shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies
occurring before the expiration of a
particular term shall hold office only for the
unexpired period.
No person shall be elected as trustee unless
he is a member of the corporation.
85

Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a
non-stock corporation may be directly
elected by the members.
Three-year term for trustees in non-stock
corporation
The term of trustees in non-stock
corporation is three (3) years except
educational corporations where the term is
five (5) years.
Elections of directors by regions in non-
stock corporations not allowed
The Securities and Exchange Commission in
an opinion stated that the “Election of
members of the Board of Directors of a non
stock corporation by zones or regions would
violate the law which requires that at all
elections of directors, there must be
present a majority of the members entitled
to vote. ”
Sec.93. Place of meetings. – The by-laws
may provide that the members of a non-
stock corporation may hold their regular or
special meetings at any place even outside
the place where the principal office of the
corporation is located: Provided, That
proper notice is sent to all members
indicating the date, time and place of the
meeting: and Provided, further, That the
place of meeting shall be within the
Philippines.
Supporting papers required to be
submitted to the Securities and Exchange
Commission:
1. LETTER OF UNDERTAKING addressed to
the Commission signed by at least a
majority of the incorporators or by a
duly authorized representative, to the
effect that the association will change
its corporate name in the event another
person, firm or entity has acquired a
prior right to use the same name or
similar to it. (3 copies)
2. MODUS OPERANDI or a detailed
explanation as to how the association
shall carry out its objectives signed by
atleast a majority of the incorporators
or by a duly authorized representative.
(3 Copies)
3. RESOLUTION of the Board signed by
atleast a majority of the Directors or
certified under oath by the Secretary in
the following tenor to wit: (3 Copies)
Law on Business Organizations Reviewer
“RESOLVED, that the corporation or
associatin will comply with the S.E.C.
REQUIREMENTS FOR NON-STOCK
CORPORATION dated May 24, 1963 , in
the course of its operation.”
4. LIST OF MEMBERS of the association
containing their manual signature and
attested by the Acting Secretary, if the
incorporators are the present members
so far, state such fact in writing and
further state that the list of additional
members who will be admitted in
accordance with the by-laws of the
association shall e submitted to the
Commission from time to time. (3
Copies)
Sec. 94. Rules of distribution. – In case
dissolution of a non-stock corporation in
accordance with the provisions of this Code,
its assets shall be applied and distributed as
follows:
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall
be made therefore.
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition
occurs by reason of the dissolution,
shall be returned, transferred or
conveyed in accordance with such
requirements.
3. Assets received and held by the
corporation subject to limitations
permitting their use only for charitable,
religious, benevolent, educational or
similar purposes, but not held upon a
condition requiring return, transfer or
conveyance by reason of the
dissolution, shall be transferred or
conveyed to one or more corporations,
societies or organizations engaged in
activities in the Philippines substantially
similar to those of the dissolving
corporation according to a plan of
distribution adopted pursuant to this
Chapter.
4. Assets other than those mentioned in
the preceding paragraphs, if any, shall
be distributed in accordance with the
provisions of the articles of
incorporation or the by-laws, to the
extent that the articles of incorporation
86

or the by-laws, determine the
distributive rights of members, or any
class or classes of members, or provide
for distribution.
5. In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether
or not organized for profit, as may be
specified in a plan of distribution
adopted pursuant to this Chapter.
Sec. 95. Plan of distribution of assets. – A
plan providing for the distribution of assets,
not inconsistent with the provisions of this
Title, may be adopted by a non-stock
corporation in the process of dissolution in
the following manner:
The board of trustees shall, by majority
vote, adopt a resolution recommending a
plan of distribution and directing the
submission thereof to a vote at a regular or
special meeting of members having voting
rights. Written notice setting forth the
proposed plan of distribution or a summary
thereof and the date, time and place of
such meeting shall be given to each
member entitled to vote, within the time
and in the manner provided in this Code for
the giving of notice of meetings to
members. Such plan of distribution shall be
adopted upon approval of at least two-
thirds (2/3) of the members having voting
rights present or represented by proxy at
such meeting.
Distribution of assets of non-stock
corporations to the members on dissolution
is not forbidden, unless it holds its assets
upon some trust, public or private, in which
case the claims of the state, the
beneficiaries, or of the founder and his
successors may have to be considered.
A non-stock (non-profit) corporation may
not ordinarily organize as a stock
corporation, authorized to issue shares of
stock, but may issue membership
certificates which do not entitle to the
holder to dividends.
Sec. 96. Definition and applicability of
Title. – A close corporation, within the
meaning of this Code, is one whose articles
of incorporation provide that:
1. All the corporation's issued stock of all
classes, exclusive of treasury shares,
Law on Business Organizations Reviewer
shall be held of record by not more
than a specified number of persons, not
exceeding twenty (20).
2. All the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by
this Title.
3. The corporation shall not list in any
stock exchange or make any public
offering of any of its stock of any class.
Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds
(2/3) of its voting stock or voting rights
is owned or controlled by another
corporation which is not a close
corporation within the meaning of this
Code.
Any corporation may be incorporated as a
close corporation, except mining or oil
companies, stock exchanges, banks,
insurance companies, public utilities,
educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That
the provisions of other Titles of this Code
shall apply suppletorily except insofar as
this Title otherwise provides.
Sec. 97. Articles of incorporation. – The
articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights
and the qualifications for owning or
holding the same and restrictions on
their transfers as may be stated therein,
subject to the provisions of the
following section.
2. For a classification of directors into one
or more classes, each of whom may be
voted for and elected solely by a
particular class of stock.
3. For a greater quorum or voting
requirements in meetings of
stockholders or directors than those
provided in this Code.
The articles of incorporation of a close
corporation may provide that the business
of the corporation shall be managed by the
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stockholders of the corporation rather than
by a board of directors. So long as this
provision continues in effect:
1. No meeting of stockholders need be
called to elect directors.
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors for the purpose of applying
the provisions of this Code.
3. The stockholders of the corporation
shall be subject to all liabilities of
directors.
The articles of incorporation may likewise
provide that all officers or employees or
that specified officers or employees shall be
elected or appointed by the stockholders,
instead of by the board of directors.
Requisites of Close Corporation
Within the meaning of a close corporation
under the Corporation Code the following
are its attributes:
1. Its stockholders are limited not
exceeding 20 persons.
2. Its shares of stock are subject to one or
more restrictions on transfer.
3. Its shares of stock are not listed in any
stock exchange.
Salient Feature of Close Corporations
1. It has only a few stockholders, who if
not related by blood or marriage, know
each other well and are aware of each
other’s business skills.
2. All or more of them are active in the
corporate business, either as directors,
officers or as key men in management.
3. The stocks of the corporation are not
listed on the exchange nor is there
trading in them outside the stock
market.
*It would seem that base on these
features many corporations in the
Philippines would be close
corporations.
Reasons for formation of close
corporations
“The existence of close corporations can be
attributed to the desire of intimate groups
of business associates to obtain the
advantages of a corporate organization, like
that of limited liability. However, the
Law on Business Organizations Reviewer
identity and personality of each shareholder
are important to his associates, so that
although they may consider their business
as corporation in their dealings with third
persons, among themselves the
stockholders act and feel as partners.”
Entities which may not be organized as
close corporations
 Mining or oil companies
 Stock exchanges
 Banks
 Insurance companies
 Public utilities
 Educational institutions
 Corporations declared to be vested
with public interest
Stockholders authorized to manage close
corporations
As a rule, management of stock corporation
is normally given to board of directors or
trustees. However, the Corporation Code
provides: “The articles of incorporation of a
close corporation may provide that the
business of the corporation shall be
managed by the stockholders of the
corporation rather than by a board of
directors.” Also, “The articles of
incorporation may likewise provide that all
officers or employees or that specified
officers or employees shall be elected or
appointed by the stockholders, instead of by
the board of directors.”
Sec. 98. Validity of restrictions on transfer
of shares. – Restrictions on the right to
transfer shares must appear in the articles
of incorporation and in the by-laws as well
as in the certificate of stock; otherwise, the
same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall
not be more onerous than granting the
existing stockholders or the corporation the
option to purchase the shares of the
transferring stockholder with such
reasonable terms, conditions or period
stated therein. If upon the expiration of said
period, the existing stockholders or the
corporation fails to exercise the option to
purchase, the transferring stockholder may
sell his shares to any third person.
Sec. 99. Effects of issuance or transfer of
stock in breach of qualifying conditions. –
1. If stock of a close corporation is issued
or transferred to any person who is not
entitled under any provision of the
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articles of incorporation to be a holder
of record of its stock, and if the
certificate for such stock conspicuously
shows the qualifications of the persons
entitled to be holders of record thereof,
such person is conclusively presumed to
have notice of the fact of his ineligibility
to be a stockholder.
2. If the articles of incorporation of a
close corporation states the number of
persons, not exceeding twenty (20),
who are entitled to be holders of record
of its stock, and if the certificate for
such stock conspicuously states such
number, and if the issuance or transfer
of stock to any person would cause the
stock to be held by more than such
number of persons, the person to
whom such stock is issued or
transferred is conclusively presumed to
have notice of this fact.
3. If a stock certificate of any close
corporation conspicuously shows a
restriction on transfer of stock of the
corporation, the transferee of the stock
is conclusively presumed to have notice
of the fact that he has acquired stock in
violation of the restriction, if such
acquisition violates the restriction.
4. Whenever any person to whom stock of
a close corporation has been issued or
transferred has, or is conclusively
presumed under this section to have,
notice either (a) that he is a person not
eligible to be a holder of stock of the
corporation, or (b) that transfer of stock
to him would cause the stock of the
corporation to be held by more than
the number of persons permitted by its
articles of incorporation to hold stock of
the corporation, or (c) that the transfer
of stock is in violation of a restriction on
transfer of stock, the corporation may,
at its option, refuse to register the
transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall
not applicable if the transfer of stock,
though contrary to subsections (1), (2)
of (3), has been consented to by all the
stockholders of the close corporation,
or if the close corporation has amended
its articles of incorporation in
accordance with this Title.
Law on Business Organizations Reviewer
6. The term "transfer", as used in this
section, is not limited to a transfer for
value.
7. The provisions of this section shall not
impair any right which the transferee
may have to rescind the transfer or to
recover under any applicable warranty,
express or implied.
Restrictions on transfer of shares of stock
The corporation may provide in its articles
of incorporation, in its by-laws as well as in
the certificate of stock restrictions on the
right of stockholders to transfer their shares
of stocks. If not so provided as aforesaid the
same “shall not be binding on any purchaser
thereof in good faith.” Charter restrictions
on the transfer of shares are binding on all
who become shareholders, as they become
parties to the charter contract and take
their shares subject to it. Considerable
latitude allowed incorporators and
shareholders in imposing transfer
restrictions in the articles of incorporation
and they will not usually be declared
against public policy unless palpably
unreasonable under the circumstances.
“Stock in the corporation is not merely
property. It also creates a personal relation
analogous otherwise than technically to a
partnership. There seems to be no greater
objection to retaining the right of choosing
one’s associates in a corporation than in a
firm.”
Reasons for restriction on shares of stock
In a close corporation, the identity of the
other stockholders is important to each; the
incorporators have confidence in one
another which they may not have in an
outsider. Furthermore, the incorporators
may feel that the success of the enterprise
depends upon the retention of the
personnel who formed it, or they may be
manufacturing under secret processes
which they do not want outsiders to learn.
In the family corporation it is often the
desire of he father to pass the corporation
to his son without interference from other
outside the family. Any one of these factors
may induce the incorporators to attempt to
restrict the transfer of stock.
Effect of the transfer of stock in breach of
qualifying conditions
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Unless “consented to by all the
stockholders or if the close corporation has
amended its articles of incorporation,” a
transfer of shares of stock in breach of
qualifying conditions would justify the
corporation through the corporate
secretary to refuse to register the transfer
of stock. Such transfer need not be for
value, hence it may be the result of a
donation.
Sec. 100. Agreements by stockholders. –
1. Agreements by and among stockholders
executed before the formation and
organization of a close corporation,
signed by all stockholders, shall survive
the incorporation of such corporation
and shall continue to be valid and
binding between and among such
stockholders, if such be their intent, to
the extent that such agreements are
not inconsistent with the articles of
incorporation, irrespective of where the
provisions of such agreements are
contained, except those required by
this Title to be embodied in said articles
of incorporation.
2. An agreement between two or more
stockholders, if in writing and signed by
the parties thereto, may provide that in
exercising any voting rights, the shares
held by them shall be voted as therein
provided, or as they may agree, or as
determined in accordance with a
procedure agreed upon by them.
3. No provision in any written agreement
signed by the stockholders, relating to
any phase of the corporate affairs, shall
be invalidated as between the parties
on the ground that its effect is to make
them partners among themselves.
4. A written agreement among some or all
of the stockholders in a close
corporation shall not be invalidated on
the ground that it so relates to the
conduct of the business and affairs of
the corporation as to restrict or
interfere with the discretion or powers
of the board of directors: Provided,
That such agreement shall impose on
the stockholders who are parties
thereto the liabilities for managerial
acts imposed by this Code on directors.
5. To the extent that the stockholders are
actively engaged in the management or
Law on Business Organizations Reviewer
operation of the business and affairs of
a close corporation, the stockholders
shall be held to strict fiduciary duties to
each other and among themselves. Said
stockholders shall be personally liable
for corporate torts unless the
corporation has obtained reasonably
adequate liability insurance.
Effect of the Stockholders’ agreement
before and after formation of corporation
Stockholders’ agreements before and after
formation and organization of the
corporation survive incorporation and shall
be valid and binding for as long as they are
not inconsistent with the articles of
incorporation. Agreements made prior to
incorporation require fairly literal
performance. There must be an actual
contractual relation. Given such relation,
the pre-incorporators are promoters and
may arrange agreements to form and
manage the corporation.
Sec. 101. When board meeting is
unnecessary or improperly held. – Unless
the by-laws provide otherwise, any action
by the directors of a close corporation
without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken,
written consent thereto is signed by all
the directors.
2. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection thereto in
writing.
3. The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders.
4. All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
thereto in writing.
If a director's meeting is held without
proper call or notice, an action taken
therein within the corporate powers is
deemed ratified by a director who failed to
attend, unless he promptly files his written
objection with the secretary of the
corporation after having knowledge
thereof.
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Sec. 102. Pre-emptive right in close
corporations. - The pre-emptive right of
stockholders in close corporations shall
extend to all stock to be issued, including
reissuance of treasury shares, whether for
money, property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
Exceptions in Section 39, not applicable
It is submitted that in a close corporation,
the exceptions provided in Sec 39 are not
applicable. The first exception mentioned
therein regarding the shares issued in
compliance with laws requiring stock
offerings or minimum stock ownership by
the public cannot by its very nature refer to
a close corporation. The pre-emptive right
of shareholders in close corporation is thus
broadened to include all issues without any
exception, unless of course, restricted by
the articles of incorporation and printed in
the stock certificates. It may be mentioned
however, that any prior waiver of pre-
emptive right must be expressly provided
for in the articles of incorporation and not
in an ordinary agreement executed by the
parties. This rule however, would not
militate against the unanimous agreement
of all the stockholders.
Sec. 103. Amendment of articles of
incorporation. – Any amendment to the
articles of incorporation which seeks to
delete or remove any provision required by
this Title to be contained in the articles of
incorporation or to reduce a quorum or
voting requirement stated in said articles of
incorporation shall not be valid or effective
unless approved by the affirmative vote of
at least two-thirds (2/3) of the outstanding
capital stock, whether with or without
voting rights, or of such greater proportion
of shares as may be specifically provided in
the articles of incorporation for amending,
deleting or removing any of the aforesaid
provisions, at a meeting duly called for the
purpose.
Rule and Exceptions when board meeting
unnecessary
General Rule: the directors of a corporation
cannot act individually or separately in
order to bind the corporation. They must
act as a board at a meeting duly called for
the purpose.
Exception: Section 101. It enumerates the
instances when a board at a meeting is
Law on Business Organizations Reviewer
unnecessary or even if improperly held
would be valid. The by-laws, however, may
provided otherwise or a stockholder may
file his written objection in writing after
having knowledge of the action taken by
the directors.
Pre-emptive right in close corporations;
Issuance of new Stock
A stockholder in a close corporation has a
right to purchase his pro rata share of the
new stock. If the pre-emptive right is
violated he can sue the corporation for
damages, enjoin the stock issue, obtain an
order permitting him to subscribe, or obtain
cancellation of the issue. But even where
the stockholder’s pre-emptive right is
preserved. The right may be inadequate as
a protective devise for the stockholder in a
close corporation because the lack of a
market for his stock leaves him with the
alternatives of investing more capital or
having the value of his stock diluted.
Sec. 104. Deadlocks. - Notwithstanding any
contrary provision in the articles of
incorporation or by-laws or agreement of
stockholders of a close corporation, if the
directors or stockholders are so divided
respecting the management of the
corporation's business and affairs that the
votes required for any corporate action
cannot be obtained, with the consequence
that the business and affairs of the
corporation can no longer be conducted to
the advantage of the stockholders
generally, the Securities and Exchange
Commission, upon written petition by any
stockholder, shall have the power to
arbitrate the dispute. In the exercise of such
power, the Commission shall have authority
to make such order as it deems appropriate,
including an order:
1. Canceling or altering any provision
contained in the articles of
incorporation, by-laws, or any
stockholder's agreement.
2. Canceling, altering or enjoining any
resolution or act of the corporation or
its board of directors, stockholders, or
officers.
3. Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons
party to the action.
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4. Requiring the purchase at their fair
value of shares of any stockholder,
either by the corporation regardless of
the availability of unrestricted retained
earnings in its books, or by the other
stockholders.
5. Appointing a provisional director.
6. Dissolving the corporation.
7. Granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial
person who is neither a stockholder nor a
creditor of the corporation or of any
subsidiary or affiliate of the corporation,
and whose further qualifications, if any,
may be determined by the Commission. A
provisional director is not a receiver of the
corporation and does not have the title and
powers of a custodian or receiver. A
provisional director shall have all the rights
and powers of a duly elected director of the
corporation, including the right to notice of
and to vote at meetings of directors, until
such time as he shall be removed by order
of the Commission or by all the
stockholders. His compensation shall be
determined by agreement between him
and the corporation subject to approval of
the Commission, which may fix his
compensation in the absence of agreement
or in the event of disagreement between
the provisional director and the
corporation.
Deadlock – Deadlock signifies a standstill in
the management of the corporate affairs
resulting from the evenly divide action of
directors or stockholders in a close
corporation.
In the event of deadlocks SEC may
arbitrate
In the event of a deadlock in a close
corporation, the SEC has the power to
arbitrate the deadlock “upon written
petition of any stockholder.” In close
corporations that are subject to a checks
and balances system because of control
devices there are bound to be deadlocks,
and some steps must be taken to cope with
them. Many of the problems that arise can
be settled by arbitration, Arbitration (the
determination of a matter of difference
between contending parties) may be
Law on Business Organizations Reviewer
provided either for directorial disputes or
for stockholder disputes. Although there
are some disadvantages of arbitration
proceedings, nevertheless, the advantages
of arbitration, in saving both money and
hard feelings, would seem to outweigh the
disadvantages in most cases.
Provisional director and SEC supervised
management
In accordance with Section 104, the SEC
may in case of deadlocks in the close
corporation appoint a provisional director.
“A provisional director shall be an impartial
person who is neither a stock-holder nor a
creditor of the corporation and whose other
qualifications, may be determined by the
SEC.”
Under Section 2 (Pres Decree No. 1653), the
SEC has the power “to create and appoint a
management committee, board, or body to
undertake the management of
corporations, partnership or other
associations in appropriate cases wherein
there is imminent danger or dissipation,
loss or wastage or destruction of assets or
other properties or paralization of business
operations of such corporations or entities
prejudicial to the interest of the minority,
party-litigants or the general public.”
Sec. 105. Withdrawal of stockholder or
dissolution of corporation. – In addition
and without prejudice to other rights and
remedies available to a stockholder under
this Title, any stockholder of a close
corporation may, for any reason, compel
the said corporation to purchase his shares
at their fair value, which shall not be less
than their par or issued value, when the
corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of
capital stock: Provided, That any
stockholder of a close corporation may, by
written petition to the Securities and
Exchange Commission, compel the
dissolution of such corporation whenever
any of acts of the directors, officers or those
in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or
any stockholder, or whenever corporate
assets are being misapplied or wasted.
• Appraisal rights in regular corporations
can be opted by the dissenting stockholder
only in cases where the fundamental
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change in the corporate structure or
operations is involved, whereas a
stockholder of a close corporation may, for
any reason, compel the said coporation to
purchase his shares at their par value, when
the corporation has sufficient assets in its
books to cover his debts and liabilities
exclusive of capital stock. ( In Appraisal
right, fair value of shares is given but in
Withdrawal Right, the fair value cannot be
less than the par or issued value of the
shares; In Appraisal right, there must be
present unrestricted retained earnings in
the books of the corporation)
• The corporation is not a close corporation
even if the shares belong to less than
twenty if not all the requisites are present.
San Juan Structural and Steel Fabricators v.
CA (1998)
EDUCATIONAL CORPORATIONS
For Educational corporations, where the
trustees should be divided into multiples of
five. So you should have five, ten or fifteen
trustees if they are organized as non-stock
corporation. And unless otherwise provided
in the articles of incorporation or by-laws,
the terms of the trustees should be five
years, and every year only one fifth (1/5) is
elected, again to provide for continuity in
policies. But you can provide that they will
be all elected instead for a term of one
year, everybody has to be elected.
Sec. 106. Incorporation. – Educational
corporations shall be governed by special
laws and by the general provisions of this
Code.
Sec. 107. Pre-requisites to incorporation. –
Except upon favourable recommendation of
the Ministry of Education and Culture, the
Securities and Exchange Commission shall
not accept or approve the articles of
incorporation and by-laws of any
educational institution.
Sec. 108. Board of trustees. – Trustees of
educational institutions organized as non-
stock corporations shall not be less than
five (5) nor more than fifteen (15):
Provided, however, That the number of
trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of
incorporation on the by-laws, the board of
trustees of incorporated schools, colleges,
Law on Business Organizations Reviewer
or other institutions of learning shall, as
soon as organized, so classify themselves
that the term of office of one-fifth (1/5) of
their number shall expire every year.
Trustees thereafter elected to fill vacancies,
occurring before the expiration of a
particular term, shall hold office only for the
unexpired period. Trustees elected
thereafter to fill vacancies caused by
expiration of term shall hold office for five
(5) years. A majority of the trustees shall
constitute a quorum for the transaction of
business. The powers and authority of
trustees shall be defined in the by-laws.
For institutions organized as stock
corporations, the number and term of
directors shall be governed by the
provisions on stock corporations.
**
There are three (3) ways by which a
religious organization can provide for the
administration of its properties:
1. by forming a non-stock corporation
2. by corporation sole
3. by religious aggregate or society
Corporation sole may constitute of one
person only so the head of a religious sect
would incorporate himself for the purpose
of administering the properties of a
religious sect. To incorporate what you will
file with the SEC is an affidavit. The affidavit
will state that the affiant is the head of a
religious denomination or sect and would
want to become a corporation sole. and the
rules of his religion allow him to incorporate
as a corporation sole and that he is charged
with the administration of its properties
and in fact he will be required to submit an
inventory and the manner in which the
successor will be chosen and the place
where he will hold his office.
The Roman Catholic Archbishop of Manila is
a corporation sole so if Cardinal Sin dies the
new archbishop will simply submit his
appointment and he need not incorporate
again because the corporation is different
from the occupant of the position. The
Iglesia ni Kristo is incorporated as a
corporation sole.
The court has held in Roman Catholic
Apostolic Adm. of Davao, Inc. v. Land
Registration Commission that although the
Bishop was a foreigner, he could register a
parcel of land in his name because he is a
mere administrator the property really
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belongs to the faithful and since they are
Filipinos they could register the land in the
administrator’s name.
Under the law if a corporation sole wants to
dispose of or mortgage real property, he
has to get authorization from the Regional
Trial Court unless the rules of the religious
sect allow him to dispose of or mortgage
real property and that is usually the case.
The last is the religious aggregate or
religious society. It can incorporate for the
purpose of managing its properties and the
articles would indicate that the members
constitute a religious order or society and
that at least 2/3 of the members have
agreed to incorporate, that the rules allow
them to incorporate they desire to
incorporate to manage their properties in
the place where located. The recollects are
incorporated to manage their properties,
they are the single biggest bloc of
stockholder of San Miguel Corporation.
RELIGIOUS CORPORATIONS
Sec. 109. Classes of religious corporations.
– Religious corporations may be
incorporated by one or more persons. Such
corporations may be classified into
corporations sole and religious societies.
Religious corporations shall be governed by
this Chapter and by the general provisions
on non-stock corporations insofar as they
may be applicable.
a) Corporation Sole
 Corporation sole is a special form of
corporation usually associated with the
clergy and consists of one person only
and his successors, who are
incorporated by law to give some legal
capacities and advantages.
 Nationality. A corporation sole does not
have any nationality but for purposes of
applying our nationalization laws,
nationality is determined not by the
nationality of its head but by the
nationality of the members constituting
the sect in the Philippines even if it is
headed by the Pope. (Roman Catholic
Apostolic Church v. LRC, 1957)
 Effect of Separation of Members.
Members of the sect who left and who
formed a separate religious group are
not entitled to any right to vote over
the properties of their former sect.
(Canete v. CA, 1989)
 Dissolution. By filing a verified
declaration of dissolution. (JRS at 323)
Law on Business Organizations Reviewer
Who may form and for what purpose?
Sec. 110. Corporation sole. – For the
purpose of administering and managing, as
trustee, the affairs, property and
temporalities of any religious
denomination, sect or church, a corporation
sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi
or other presiding elder of such religious
denomination, sect or church. (154a)
How formed?
Sec. 111. Articles of incorporation. – In
order to become a corporation sole, the
chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file with
the Securities and Exchange Commission
articles of incorporation setting forth the
following:
1. That he is the chief archbishop, bishop,
priest, minister, rabbi or presiding elder
of his religious denomination, sect or
church and that he desires to become a
corporation sole.
2. That the rules, regulations and
discipline of his religious denomination,
sect or church are not inconsistent with
his becoming a corporation sole and do
not forbid it.
3. That as such chief archbishop, bishop,
priest, minister, rabbi or presiding
elder, he is charged with the
administration of the temporalities and
the management of the affairs, estate
and properties of his religious
denomination, sect or church within his
territorial jurisdiction, describing such
territorial jurisdiction.
4. The manner in which any vacancy
occurring in the office of chief
archbishop, bishop, priest, minister,
rabbi of presiding elder is required to
be filled, according to the rules,
regulations or discipline of the religious
denomination, sect or church to which
he belongs.
5. The place where the principal office of
the corporation sole is to be established
and located, which place must be within
the Philippines.
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The articles of incorporation may include
any other provision not contrary to law for
the regulation of the affairs of the
corporation.
Sec. 112. Submission of the articles of
incorporation. – The articles of
incorporation must be verified, before
filing, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi
or presiding elder, as the case may be, and
accompanied by a copy of the commission,
certificate of election or letter of
appointment of such chief archbishop,
bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any
notary public.
From and after the filing with the Securities
and Exchange Commission of the said
articles of incorporation, verified by
affidavit or affirmation, and accompanied
by the documents mentioned in the
preceding paragraph, such chief archbishop,
bishop, priest, minister, rabbi or presiding
elder shall become a corporation sole and
all temporalities, estate and properties of
the religious denomination, sect or church
theretofore administered or managed by
him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be
held in trust by him as a corporation sole,
for the use, purpose, behalf and sole
benefit of his religious denomination, sect
or church, including hospitals, schools,
colleges, orphan asylums, parsonages and
cemeteries thereof.
Need for by-laws
 No need for by-laws since the business
is conducted by only one man.
Power to acquire and alienate property
Sec. 113. Acquisition and alienation of
property. – Any corporation sole may
purchase and hold real estate and personal
property for its church, charitable,
benevolent or educational purposes, and
may receive bequests or gifts for such
purposes. Such corporation may sell or
mortgage real property held by it by
obtaining an order for that purpose from
the Court of First Instance of the province
where the property is situated upon proof
made to the satisfaction of the court that
notice of the application for leave to sell or
mortgage has been given by publication or
otherwise in such manner and for such time
Law on Business Organizations Reviewer
as said court may have directed, and that it
is to the interest of the corporation that
leave to sell or mortgage should be granted.
The application for leave to sell or mortgage
must be made by petition, duly verified, by
the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by
any member of the religious denomination,
sect or church represented by the
corporation sole: Provided, That in cases
where the rules, regulations and discipline
of the religious denomination, sect or
church, religious society or order concerned
represented by such corporation sole
regulate the method of acquiring, holding,
selling and mortgaging real estate and
personal property, such rules, regulations
and discipline shall control, and the
intervention of the courts shall not be
necessary.
Filling of vacancies
Sec. 114. Filling of vacancies. – The
successors in office of any chief archbishop,
bishop, priest, minister, rabbi or presiding
elder in a corporation sole shall become the
corporation sole on their accession to office
and shall be permitted to transact business
as such on the filing with the Securities and
Exchange Commission of a copy of their
commission, certificate of election, or
letters of appointment, duly certified by any
notary public.
During any vacancy in the office of chief
archbishop, bishop, priest, minister, rabbi
or presiding elder of any religious
denomination, sect or church incorporated
as a corporation sole, the person or persons
authorized and empowered by the rules,
regulations or discipline of the religious
denomination, sect or church represented
by the corporation sole to administer the
temporalities and manage the affairs,
estate and properties of the corporation
sole during the vacancy shall exercise all the
powers and authority of the corporation
sole during such vacancy.
Dissolution
Sec. 115. Dissolution. – A corporation sole
may be dissolved and its affairs settled
voluntarily by submitting to the Securities
and Exchange Commission a verified
declaration of dissolution.
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The declaration of dissolution shall set
forth:
1. The name of the corporation.
2. The reason for dissolution and winding
up.
3. The authorization for the dissolution of
the corporation by the particular
religious denomination, sect or church.
4. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation.
Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to
carry on its operations except for the
purpose of winding up its affairs.
Religious societies or corporations
aggregate
Sec. 116. Religious societies. – Any religious
society or religious order, or any diocese,
synod, or district organization of any
religious denomination, sect or church,
unless forbidden by the constitution, rules,
regulations, or discipline of the religious
denomination, sect or church of which it is a
part, or by competent authority, may, upon
written consent and/or by an affirmative
vote at a meeting called for the purpose of
at least two-thirds (2/3) of its membership,
incorporate for the administration of its
temporalities or for the management of its
affairs, properties and estate by filing with
the Securities and Exchange Commission,
articles of incorporation verified by the
affidavit of the presiding elder, secretary, or
clerk or other member of such religious
society or religious order, or diocese, synod,
or district organization of the religious
denomination, sect or church, setting forth
the following:
1. That the religious society or religious
order, or diocese, synod, or district
organization is a religious organization
of a religious denomination, sect or
church.
2. That at least two-thirds (2/3) of its
membership have given their written
consent or have voted to incorporate,
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at a duly convened meeting of the
body.
3. That the incorporation of the religious
society or religious order, or diocese,
synod, or district organization desiring
to incorporate is not forbidden by
competent authority or by the
constitution, rules, regulations or
discipline of the religious denomination,
sect, or church of which it forms a part.
4. That the religious society or religious
order, or diocese, synod, or district
organization desires to incorporate for
the administration of its affairs,
properties and estate.
5. The place where the principal office of
the corporation is to be established and
located, which place must be within the
Philippines.
6. The names, nationalities, and
residences of the trustees elected by
the religious society or religious order,
or the diocese, synod, or district
organization to serve for the first year
or such other period as may be
prescribed by the laws of the religious
society or religious order, or of the
diocese, synod, or district organization,
the board of trustees to be not less
than five (5) nor more than fifteen (15).
Case
Long v. Basa (2001)
• Since in matters purely
ecclesiastical the decisions of the proper
church tribunals are conclusive upon the
civil tribunals, then a church member who is
expelled from the membership by the
church authorities, or a priest or minister
who is by them deprived of his sacred
office, is without remedy in the civil courts.
Long v. Basa, 366 SCRA 113 (2001).
Additional Material: SEC Opinion No. 04-45,
Nov.28, 2004 to Ferrer and Ferrer Law
Office re term of existence of religious
corporation.
SEC Opinion No. 04-45, (Nov. 28, 2004)
Re: Term of Existence of Religious
Corporations
Section 116 (as well as Sec. 160 of the
former Corporation Law) does not provide
for a term of existence of religious
corporations, whether classified as a
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corporation sole or a corporation
aggregate. As such, the law intends that
religious organizations may exist
perpetually (SEC Opinion dated Dec. 10,
1981). Moreover, where the Articles of
Incorporation does not provide for a term
of existence, it shall be understood that the
intention is for the corporation to exist for
an indefinite period (SEC Opinion dated Oct.
23, 1995)
DISSOLUTION
Dissolution of a corporation is the
extinguishment of the franchise of a
corporation and termination of its
corporate existence.
Modes of Dissolution:
1. Voluntary Dissolution
2. Involuntary Dissolution
3. Shortening of term
4. Expiration of term (JRS at 311)
5. Failure to organize and commence
business within two years from the date
of issuance of certificate of
incorporation
6. Legislative Dissolution (CLV’s CLR at
936)
Effects of Dissolution:
1. Transfer of Legal title to corporate
property.
2. The corporation ceases as a body
corporate to continue the business for
which it was established.
3. Continuation of a body corporation (the
corporation continues as a body
corporate for 3 years for purposes of
winding up or liquidation).
4. After the expiration of the 3 year
winding up period, the corporation
ceases to exist for all purposes. (JRS at
314).
 The termination of the life of a juridical
entity does not by itself cause the
extinction or diminution of the rights
and liability of such entity, since it is
allowed to continue as a juridical entity
for 3 years for the purpose of
prosecuting and defending suits by or
against it and enabling it to settle and
close its affairs, to dispose of and
convey its property, and to distribute its
assets. Republic v. Tancinco, 394 SCRA
386 (2002).
 A board resolution to dissolve the
corporation does not operate to so
Law on Business Organizations Reviewer
dissolve the juridical entity. For
dissolution to be effective “[t]he
requirements mandated by the
Corporation Code should have been
strictly complied with.” Vesagas v. Court
of Appeals, 371 SCRA 509, 516 (2002).
 A corporation cannot extend its life by
amendment of its articles of
incorporation effected during the three-
year statutory period for liquidation
when its original term of existence had
already expired, as the same would
constitute new business. Alhambra
Cigar & Cigarette Manufacturing
Company, Inc. v. SEC, 24 SCRA 269
(1968).
 When the period of corporate life
expires, the corporation ceases to be a
body corporate for the purpose of
continuing the business for which it was
organized. PNB v. Court of First Instance
of Rizal, Pasig, Br. XXI, 209 SCRA 294
(1992).
DISSOLUTION **
There are different ways to dissolve a
corporation one is voluntarily and the other
involuntarily, under the law there are three
provisions governing voluntary dissolution.
The first one is if no creditors are affected.
In all the methods of voluntary dissolution,
you need a resolution approved by a
majority of directors and a resolution
approved by at least 2/3 of the stockholders
In Section 118, where no creditors are
affected the directors and the stockholders
pass the resolution dissolving the
corporation and that will be filed in the SEC
for approval. In a case where a suit was filed
and the corporation said, we have already
been dissolved and they submitted a board
resolution, the SC held that it is not enough
to dissolve a corporation.
The Second one, is under Section 119 where
creditors are affected. Here the board and
the stockholders will approve the
dissolution but a petition will be filed signed
by the majority of the directors and verified
by the president, secretary or one of the
directors which will indicate the claims of
creditors. That will be set for hearing and
not less than thirty (30) days nor more than
sixty (60) days after the entry of the
issuance of the order and a copy of the
order will be published once a week for
three consecutive weeks in a newspaper of
general circulation and that will also be
posted for three weeks in three public
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places like the bulletin board of a municipal
hall, post office, the plaza and then the SEC
will set that for hearing and determine w/n
the corporation should be dissolved.
The third one you will just shorten the
corporate life and this is the simplest and
fastest way of dissolving the corporation
voluntarily like when Ford Philippines
decided to close its subsidiary they simply
amended the articles of corporation that
the corporation will exist until December
31, 1978.
The SEC will require getting a tax clearance
from the BIR and the stockholders will be
required to sign an undertaking that they
will answer for the claim of the creditors to
the extent of the liquidating dividends they
will receive.
Then you can have an involuntary
dissolution. This could be done by filing a
quo warranto case under rule 66 of the ROC
on the ground mentioned there or a
corporation can be dissolved for certain
violation of the corporation code as
mentioned in the Corporation Code or PD
902-A and also a minority stockholder may
file a petition to dissolve the corporation
where the majority is mismanaging the
assets of the corporation, dissipating its
assets, and fraudulently disposing of its
properties and a receiver may be appointed
in an action for involuntary dissolution.
The SC held in the leading case of El Hogar
Filipino, 50 Phil. 399(1927) the first
corporation organized under the
Corporation Act, the government filed a
case to dissolve that corporation and
invoked 17 grounds, the SC denied the
petition.
Building and loans association like banks are
required to dispose of within 5 years of any
properties they foreclosed they disposed of
the properties after 6 years but they
exerted their best efforts, they hired real
estate brokers, they advertised in
newspapers but they just could not find
buyers, they acquired this land and building,
the SC held that it is not illegal, that they
leased the space that they did not need for
their office, that is not illegal they are
maximizing their property, that they
provide a provision in the by-laws that
stockholders can be compelled to surrender
their shares, to be bought out well the court
said that that is void but that is not
sufficient ground to dissolve the
corporation. In other words the court is
saying that you do not dissolve a
Law on Business Organizations Reviewer
corporation for every infraction, the
infraction must be serious, because
dissolution is imposing the death penalty
upon the corporation.
The Court said the employees of a railroad
are required to wear uniform indicating
their positions in their nameplate, now tell
me if one employee did not have such a
nameplate you are going to dissolve a
corporation because that is a legal
requirement?
It has to be a serious violation! But in one
case, the SC dissolved a corporation which
was engaging in banking without
authorization from the monetary board, it
was accepting deposits from the public, the
court considered that as a serious violation.
When a minority stockholder files a case
and asks to dissolve the corporation, the
court said that that is a harsh remedy unless
the situation is really beyond redemption
you should not impose that remedy.
The corporation has three years after it
should have been dissolved for the purpose
of winding up its affairs. The SEC has said
the three year period should be counted
from the time the dissolution was approved
by the SEC even if the directors and
stockholders pass a resolution dissolving
the corporation that is not effective until it
has been approved by the SEC.
For three years, the corporation will
continue to exist it will no longer be a going
concern but only for the purpose of winding
up that is why the SC has said that the
corporation cannot for example renew its
contract of lease because it is no longer a
going concern.
During the three year period, it should
devote its time prosecuting and defending
law suits, winding up its affairs disposing its
properties so they can be used to pay off its
creditors and to distribute balance to the
stockholders.
There are two ways of providing for the
winding up of its affairs under the law. This
is voluntary either the directors themselves
may take care of winding up the affairs of
the corporation or they may appoint a
trustee like when Ford Philippines decided
to close its subsidiary here one of the last
acts of the BOD was to pass a resolution
appointing Ricardo Romulo as trustee
vesting upon him legal title to all the assets
of Ford Philippines to be used to pay off its
creditors and to dispose of its properties of
Ford Philippines. to distribute the balance
as liquidating dividends.
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Supposed to be, this was the rule before if
any case is not finished within the three
year period, the case will be abated
whether the corporation is plaintiff or
whether it is defendant but recent
jurisprudence has rendered that obsolete.
That rule is applicable if it is the directors
winding up the corporation. if the
corporation is under receivership, it is the
receiver who may wind up the affair of the
corporation. But if it is the trustee that will
not apply, the trust will subsist until the
affairs of the corporation are wound up and
until any creditor can sue the trustee
provided that the applicable prescriptive
period has not yet lapsed. So if his cause of
action is based on a written contract he has
ten (10) years to sue the trustee.
The Court has said that the remedy there if
the three years will end and there are still
pending cases, is for the board to appoint a
trustee but more recent jurisprudence has
fashioned a practicable solution to that the
lawyer handling the cases may be
considered as trustee of the corporation
and therefore the cases will not be abated
but should continue.
In one case, the SC held that the directors
may be considered as trustees after three
years so that they can continue to wind up
the affairs of the corporation and in effect
the three year period has become
ineffectual.
What are the various methods of
dissolving corporations?
Sec. 117. Methods of dissolution. – A
corporation formed or organized under the
provisions of this Code may be dissolved
voluntarily or involuntarily.
Voluntary
Requirements where no creditors are
affected.
Sec. 118. Voluntary dissolution where no
creditors are affected. – If dissolution of a
corporation does not prejudice the rights of
any creditor having a claim against it, the
dissolution may be effected by majority
vote of the board of directors or trustees,
and by a resolution duly adopted by the
affirmative vote of the stockholders owning
at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3)
of the members of a meeting to be held
upon call of the directors or trustees after
publication of the notice of time, place and
Law on Business Organizations Reviewer
object of the meeting for three (3)
consecutive weeks in a newspaper
published in the place where the principal
office of said corporation is located; and if
no newspaper is published in such place,
then in a newspaper of general circulation
in the Philippines, after sending such notice
to each stockholder or member either by
registered mail or by personal delivery at
least thirty (30) days prior to said meeting.
A copy of the resolution authorizing the
dissolution shall be certified by a majority of
the board of directors or trustees and
countersigned by the secretary of the
corporation. The Securities and Exchange
Commission shall thereupon issue the
certificate of dissolution.
 When a corporation is contemplating
dissolution, it must submit tax return on
the income earned by it from the
beginning of the year up to the date of
its dissolution and pay the
corresponding tax due. BPI v. Court of
Appeals, 363 SCRA 840 (2001).
Requirements where creditors are affected
Sec. 119. Voluntary dissolution where
creditors are affected. – Where the
dissolution of a corporation may prejudice
the rights of any creditor, the petition for
dissolution shall be filed with the Securities
and Exchange Commission. The petition
shall be signed by a majority of its board of
directors or trustees or other officers having
the management of its affairs, verified by its
president or secretary or one of its directors
or trustees, and shall set forth all claims and
demands against it, and that its dissolution
was resolved upon by the affirmative vote
of the stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of the
members at a meeting of its stockholders or
members called for that purpose.
If the petition is sufficient in form and
substance, the Commission shall, by an
order reciting the purpose of the petition,
fix a date on or before which objections
thereto may be filed by any person, which
date shall not be less than thirty (30) days
nor more than sixty (60) days after the
entry of the order. Before such date, a copy
of the order shall be published at least once
a week for three (3) consecutive weeks in a
newspaper of general circulation published
in the municipality or city where the
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principal office of the corporation is
situated, or if there be no such newspaper,
then in a newspaper of general circulation
in the Philippines, and a similar copy shall
be posted for three (3) consecutive weeks
in three (3) public places in such
municipality or city.
Upon five (5) days’ notice, given after the
date on which the right to file objections as
fixed in the order has expired, the
Commission shall proceed to hear the
petition and try any issue made by the
objections filed; and if no such objection is
sufficient, and the material allegations of
the petition are true, it shall render
judgment dissolving the corporation and
directing such disposition of its assets as
justice requires, and may appoint a receiver
to collect such assets and pay the debts of
the corporation.
Sec. 120. Dissolution by shortening
corporate term. – A voluntary dissolution
may be effected by amending the articles of
incorporation to shorten the corporate
term pursuant to the provisions of this
Code. A copy of the amended articles of
incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon approval
of the amended articles of incorporation of
the expiration of the shortened term, as the
case may be, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of
this Code on liquidation.
SEC requirements on shortening corporate
term
1. Amended article of incorporation
shortening its corporate term in
accordance with Section 16 of the Code.
2. A director’s certificate signed by at least
a majority of the directors/trustees and
attested by the secretary, certified
under oath, stating that the amended
articles of incorporation is a true and
correct copy as amended by the
stockholders representing at least 2/3
of the outstanding capital stock or at
least 2/3 of the members in case of
non-stock corporations.
3. A certification that no creditor shall be
prejudiced by the dissolution.
4. A list of creditors, if any.
5. Consent of the creditors with regard to
the dissolution.
Law on Business Organizations Reviewer
6. Affidavit of stockholders/directors/
officers/members regarding any valid
claim against the corporation.
7. Latest balance sheet which must be
earlier than the date of the meeting of
the stockholders approving the
amendment of the articles of
incorporation.
8. Notice of dissolution.
9. Tax clearance from the BIR.
10. Affidavit of the publisher anent the
publication of the notice of the
dissolution once a week for three (3)
consecutive weeks in two (2)
newspapers of general circulation in the
Philippines.
The SEC may appoint a receiver to collect
such assets and pay the debts of the
corporation.
It has been held that where corporate
directors are guilty of a breach of trust and
intracorporate remedy is futile, the minority
stockholders may resort to the courts for
appropriate relief and, incidentally, as for
the appointment of a receiver for the
protection of their rights.
Section 121. Involuntary dissolution. – A
corporation may be dissolved by the
Securities and Exchange Commission upon
filing of a verified complaint and after
proper notice and hearing on the grounds
provided by existing laws, rules and
regulations.
Rules of Court provides that a quo
warranto proceedings may be brought
against a corporation:
1. When it has offended against a
provision of an Act for its creation or
renewal.
2. When it has forfeited its privileges and
franchises by non-user.
3. When it has committed or omitted an
act which amounts to a surrender of its
corporate rights, privileges, or
franchises.
4. When it has misused a right, privilege,
or franchise conferred upon it by law,
or when it has exercised a right,
privilege or franchise in contravention
of law.
Section 122. Corporate liquidation. – Every
corporation whose charter expires by its
own limitation or is annulled by forfeiture
or otherwise, or whose corporate existence
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 Law on Business Organizations Reviewer

for other purposes is terminated in any 5. Dissolution and liquidation

other manner, shall nevertheless be
continued as a body corporate for three (3) A corporation that has a pending action and
years after the time when it would have which cannot be terminated within the
been so dissolved, for the purpose of three-year period after dissolution is
prosecuting and defending suits by or authorized to convey all its property to
against it and enabling it to settle and close trustees to enable it to prosecute and
its affairs, to dispose of and convey its defend suits by or against the corporation
property and to distribute its assets, but not beyond the three-year period.
for the purpose of continuing the business
for which it was established. Distribution of Assets
Distribution among the shareholders of the
At any time during said three (3) years, the assets in winding up, formal or informal
corporation is authorized and empowered may be made only to the prior claim of
to convey all of its property to trustees for creditors and after all debts have been paid
the benefit of stockholders, members, or provided for. This is sometimes
creditors, and other persons in interest. expressed in terms of the trust fund
From and after any such conveyance by the doctrine.
corporation of its property in trust for the
benefit of its stockholders, members, Liquidation Rehabilitation
creditors and others in interest, all interest - Connotes a winding - Connotes a
which the corporation had in the property up or setting with reopening of
terminates, the legal interest vests in the creditors and reorganization
trustees, and the beneficial interest in the debtors. .
stockholders, members, creditors or other
persons in interest. - It is a winding up of - Contemplates
a corporation so a continuance
Upon the winding up of the corporate that assets are of corporate
affairs, any asset distributable to any distributed to those life and
creditor or stockholder or member who is entitled to receive activities in an
unknown or cannot be found shall be them. effort to
escheated to the city or municipality where restore and
such assets are located. - It is the process of reinstate the
reducing assets to corporation in
Except by decrease of capital stock and as cash, discharging its former
otherwise allowed by this Code, no liabilities and position of
corporation shall distribute any of its assets dividing surplus or successful
or property except upon lawful dissolution loss. operation and
and after payment of all its debts and solvency.
liabilities.
Section 123. Definition and rights of
Methods of Liquidation foreign corporations. – For the purposes of
1. Liquidation by the directors themselves. this Code, a foreign corporation is one
2. Liquidation by a duly appointed formed, organized or existing under any
receiver. laws other than those of the Philippines and
3. Liquidation by trustees to whom the whose laws allow Filipino citizens and
board of directors had conveyed the corporations to do business in its own
corporate assets. country or state. It shall have the right to
transact business in the Philippines after it
Rules of corporate recovery shall have obtained a license to transact
The SEC approved the Rules of Procedure business in this country in accordance with
on Corporate recovery effective on January this Code and a certificate of authority from
15, 2000. the appropriate government agency.
1. It governs the rules on definition of
terms Definition
2. Common provisions Foreign Corporation is one formed,
3. Suspension of payments organized or existing under any laws other
4. Rehabilitation than those of the Philippines and whose

101

laws allow Filipino citizens and corporations
to do business in its own country or state.
Section 124. Application to existing foreign
corporations. – Every foreign corporation
which on the date of the effectivity of this
Code is authorized to do business in the
Philippines under a license therefore issued
to it, shall continue to have such authority
under the terms and condition of its license,
subject to the provisions of this Code and
other special laws.
A foreign corporation can have no legal
existence beyond the bounds of the state or
sovereignty by which it is created. It exists
only in contemplation of law and by force of
the law, and where that law ceases to
operate, the corporation can have no
existence. It must dwell in the place of its
creation, and cannot migrate to another
sovereignty.
Foreign corporations may do business in the
Philippines either by directly entering into
transactions with resident persons, firms or
corporations or by creating a domestic
subsidiary corporation which would have its
own distinct personality.
Licensed foreign corporations is authorized
to do business in the Philippines shall
continue to have such authority under the
terms and condition of its license, subject to
the provisions of the Code and other special
laws.
Section 125. Application for a license. – A
foreign corporation applying for a license to
transact business in the Philippines shall
submit to the Securities and Exchange
Commission a copy of its articles of
incorporation and by-laws, certified in
accordance with law, and their translation
to an official language of the Philippines, if
necessary. The application shall be under
oath and, unless already stated in its
articles of incorporation, shall specifically
set forth the following:
1. The date and term of incorporation.
2. The address, including the street
number, of the principal office of the
corporation in the country or state of
incorporation.
Law on Business Organizations Reviewer
3. The name and address of its resident
agent authorized to accept summons
and process in all legal proceedings and,
pending the establishment of a local
office, all notices affecting the
corporation.
4. The place in the Philippines where the
corporation intends to operate.
5. The specific purpose or purposes which
the corporation intends to pursue in the
transaction of its business in the
Philippines: Provided, That said purpose
or purposes are those specifically stated
in the certificate of authority issued by
the appropriate government agency.
6. The names and addresses of the
present directors and officers of the
corporation.
7. A statement of its authorized capital
stock and the aggregate number of
shares which the corporation has
authority to issue, itemized by classes,
par value of shares, shares without par
value, and series, if any.
8. A statement of its outstanding capital
stock and the aggregate number of
shares which the corporation has
issued, itemized by classes, par value of
shares, shares without par value, and
series, if any.
9. A statement of the amount actually
paid in.
10. Such additional information as may be
necessary or appropriate in order to
enable the Securities and Exchange
Commission to determine whether such
corporation is entitled to a license to
transact business in the Philippines, and
to determine and assess the fees
payable.
Attached to the application for license shall
be a duly executed certificate under oath by
the authorized official or officials of the
jurisdiction of its incorporation, attesting to
the fact that the laws of the country or
state of the applicant allow Filipino citizens
and corporations to do business therein,
and that the applicant is an existing
corporation in good standing. If such
certificate is in a foreign language, a
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translation thereof in English under oath of
the translator shall be attached thereto.
The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of
the president or any other person
authorized by the corporation, showing to
the satisfaction of the Securities and
Exchange Commission and other
governmental agency in the proper cases
that the applicant is solvent and in sound
financial condition, and setting forth the
assets and liabilities of the corporation as of
the date not exceeding one (1) year
immediately prior to the filing of the
application.
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case
of all other foreign corporations, no
application for license to transact business
in the Philippines shall be accepted by the
Securities and Exchange Commission
without previous authority from the
appropriate government agency, whenever
required by law.
Section 126. Issuance of a license. – If the
Securities and Exchange Commission is
satisfied that the applicant has complied
with all the requirements of this Code and
other special laws, rules and regulations,
the Commission shall issue a license to the
applicant to transact business in the
Philippines for the purpose or purposes
specified in such license. Upon issuance of
the license, such foreign corporation may
commence to transact business in the
Philippines and continue to do so for as long
as it retains its authority to act as a
corporation under the laws of the country
or state of its incorporation, unless such
license is sooner surrendered, revoked,
suspended or annulled in accordance with
this Code or other special laws.
Within sixty (60) days after the issuance of
the license to transact business in the
Philippines, the license, except foreign
banking or insurance corporation, shall
deposit with the Securities and Exchange
Commission for the benefit of present and
future creditors of the licensee in the
Philippines, securities satisfactory to the
Law on Business Organizations Reviewer
Securities and Exchange Commission,
consisting of bonds or other evidence of
indebtedness of the Government of the
Philippines, its political subdivisions and
instrumentalities, or of government-owned
or controlled corporations and entities,
shares of stock in “registered enterprises”
as this term is defined in Republic Act No.
5186, shares of stock in domestic
corporations registered in the stock
exchange, or shares of stock in domestic
insurance companies and banks, or any
combination of these kinds of securities,
with an actual market value of at least one
hundred thousand (P100,000.) pesos;
Provided, however, That within six (6)
months after each fiscal year of the
licensee, the Securities and Exchange
Commission shall require the licensee to
deposit additional securities equivalent in
actual market value to two (2%) percent of
the amount by which the licensee’s gross
income for that fiscal year exceeds five
million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall
also require deposit of additional securities
if the actual market value of the securities
on deposit has decreased by at least ten
(10%) percent of their actual market value
at the time they were deposited. The
Securities and Exchange Commission may at
its discretion release part of the additional
securities deposited with it if the gross
income of the licensee has decreased, or if
the actual market value of the total
securities on deposit has increased, by
more than ten (10%) percent of the actual
market value of the securities at the time
they were deposited. The Securities and
Exchange Commission may, from time to
time, allow the licensee to substitute other
securities for those already on deposit as
long as the licensee is solvent. Such licensee
shall be entitled to collect the interest or
dividends on the securities deposited. In the
event the licensee ceases to do business in
the Philippines, the securities deposited as
aforesaid shall be returned, upon the
licensee’s application therefor and upon
proof to the satisfaction of the Securities
and Exchange Commission that the licensee
has no liability to Philippine residents,
including the Government of the Republic
of the Philippines.
Definition
Transacting business means the carrying on
of the operations of the corporation, or
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some portion of them, in the usual and
regular course of the prosecution of the
corporate enterprise for profit.
The Corporation Code outlines the
procedural requirements for the application
and issuance of a license before a foreign
corporation may transact business in the
Philippines. Except in the case of foreign
banking, financial and insurance
corporations and other subject to special
laws, rules and regulations, if the applicant
foreign corporation has complied with all
the requirements of issuance of a license,
the SEC shall issue such license and
thereafter the foreign corporation may
transact business in the Philippines.
Republic Act No. 5455. Regulates the entry
of foreign investments whenever foreign
equity participation exceeds 30 percent of
the capital stock.
Under Republic Act no. 5455 “doing
business includes”:
a. Soliciting orders, purchases, service
contracts, opening offices whether
called liaison offices or branches.
b. Appointing representatives or
distributors who are domiciled in the
Philippines or who in any calendar year
stay in the Philippines for a period or
periods totalling one hundred eighty
days or more.
c. Participating in the management,
supervision, or control of any domestic
business firm, entity, or corporation in
the Philippines.
d. Any other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplates to
that extent the performance of acts or
works, or the exercise of some of the
function normally incident to, and in
progressive prosecution of, commercial
gain or of the purpose and object of the
business organization.
The Board of Investments requires license
not only of corporations organized abroad
but also of domestic corporations, if more
than 40% of its voting shares are owned
and held by aliens or more than 30% of its
total capitalization is in the hands of aliens.
Guidelines for issuance of certificate of
authority to do business under BOI (Rep.
Act No.5455)
Law on Business Organizations Reviewer
1. That the operation or activity is not
inconsistent with the Investment
Priorities Plan.
2. That the business or economic activity
will contribute to the sound and
balanced development of the national
economy on a self-sustaining basis.
3. That the activity will not conflict with
the Constitution and laws of the
Philippines.
4. That the nosiness or economic activity
is not one (1) adequately exploited by
Philippine Nationals.
5. That the entry of the applicant will not
pose a clear and present danger of
promoting monopolies or combination
in restraint of trade.
Presidential Decree No. 151 allows citizens
of the Philippines or corporations which
have acquired lands of the public domain or
which or any other law, to enter into service
contracts for financial, technical,
management or other forms of assistance
with any foreign person or entity whenever
and wherever such contracts are vital to
achieve sound and more expeditious
exploration, development, exploitation or
utilization of such lands owned, held or
controlled by such citizens or corporations.
Section 127. Who may be a resident agent.
– A resident agent may be either an
individual residing in the Philippines or a
domestic corporation lawfully transacting
business in the Philippines: Provided, That
in the case of an individual, he must be of
good moral character and of sound financial
standing.
Section 128. Resident agent; service of
process. – The Securities and Exchange
Commission shall require as a condition
precedent to the issuance of the license to
transact business in the Philippines by any
foreign corporation that such corporation
file with the Securities and Exchange
Commission a written power of attorney
designating some person who must be a
resident of the Philippines, on whom any
summons and other legal processes may be
served in all actions or other legal
proceedings against such corporation, and
consenting that service upon such resident
agent shall be admitted and held as valid as
if served upon the duly authorized officers
of the foreign corporation at its home
office. Any such foreign corporation shall
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likewise execute and file with the Securities
and Exchange Commission an agreement or
stipulation, executed by the proper
authorities of said corporation, in form and
substance as follows:
“The (name of foreign corporation) does
hereby stipulate and agree, in consideration
of its being granted by the Securities and
Exchange Commission a license to transact
business in the Philippines, that if at any
time said corporation shall cease to transact
business in the Philippines, or shall be
without any resident agent in the
Philippines on whom any summons or other
legal processes may be served, then in any
action or proceeding arising out of any
business or transaction which occurred in
the Philippines, service of any summons or
other legal process may be made upon the
Securities and Exchange Commission and
that such service shall have the same force
and effect as if made upon the duly-
authorized officers of the corporation at its
home office.”
Whenever such service of summons or
other process shall be made upon the
Securities and Exchange Commission, the
Commission shall, within ten (10) days
thereafter, transmit by mail a copy of such
summons or other legal process to the
corporation at its home or principal office.
The sending of such copy by the
Commission shall be necessary part of and
shall complete such service. All expenses
incurred by the Commission for such service
shall be paid in advance by the party at
whose instance the service is made.
In case of a change of address of the
resident agent, it shall be his or its duty to
immediately notify in writing the Securities
and Exchange Commission of the new
address.
The SEC shall require as a condition
precedent to the issuance of the license to
transact business in the Philippines by any
foreign corporation that such corporation
file with the SEC, a written power of
attorney designating some person who
must be a resident of the Philippines, on
whom any summons and other legal
processes may be served in all actions or
other legal proceedings against such
corporation.
Law on Business Organizations Reviewer
Section 129. Law applicable. – Any foreign
corporation lawfully doing business in the
Philippines shall be bound by all laws, rules
and regulations applicable to domestic
corporations of the same class, except such
only as provide for the creation, formation,
organization or dissolution of corporations
or those which fix the relations, liabilities,
responsibilities, or duties of stockholders,
members, or officers of corporations to
each other or to the corporation.
Licensed foreign corporations lawfully doing
business in the Philippines shall be subject
to our laws just like domestic corporations
of the same class.
Philippine laws will not apply when it refers
to the creation, formation, organization or
dissolution of corporations or such as fux
the relations, liabilities, responsibilities, or
duties of stockholders, members, or officers
of corporations to each other or to the
corporation.
Section 130. Amendments to articles of
incorporation or by-laws of foreign
corporations. – Whenever the articles of
incorporation or by-laws of a foreign
corporation authorized to transact business
in the Philippines are amended, such
foreign corporation shall, within sixty (60)
days after the amendment becomes
effective, file with the Securities and
Exchange Commission, and in the proper
cases with the appropriate government
agency, a duly authenticated copy of the
articles of incorporation or by-laws, as
amended, indicating clearly in capital letters
or by underscoring the change or changes
made, duly certified by the authorized
official or officials of the country or state of
incorporation. The filing thereof shall not of
itself enlarge or alter the purpose or
purposes for which such corporation is
authorized to transact business in the
Philippines.
Section 131. Amended license. – A foreign
corporation authorized to transact business
in the Philippines shall obtain an amended
license in the event it changes its corporate
name, or desires to pursue in the
Philippines other or additional purposes, by
submitting an application therefor to the
Securities and Exchange Commission,
favorably endorsed by the appropriate
government agency in the proper cases.
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Section 132. Merger or consolidation
involving a foreign corporation licensed in
the Philippines. – One or more foreign
corporations authorized to transact
business in the Philippines may merge or
consolidate with any domestic corporation
or corporations if such is permitted under
Philippine laws and by the law of its
incorporation: Provided, That the
requirements on merger or consolidation as
provided in this Code are followed.
Whenever a foreign corporation authorized
to transact business in the Philippines shall
be a party to a merger or consolidation in
its home country or state as permitted by
the law of its incorporation, such foreign
corporation shall, within sixty (60) days
after such merger or consolidation becomes
effective, file with the Securities and
Exchange Commission, and in proper cases
with the appropriate government agency, a
copy of the articles of merger or
consolidation duly authenticated by the
proper official or officials of the country or
state under the laws of which merger or
consolidation was effected: Provided,
however, That if the absorbed corporation
is the foreign corporation doing business in
the Philippines, the latter shall at the same
time file a petition for withdrawal of it
license in accordance with this Title.
Section 132 covers two legal situations:
1. The merger of a licensed foreign
corporation with a domestic
corporation.
 Must be accomplished by
complying with the provisions of
the Corporation Code.
2. The merger of a licensed foreign
corporation with another corporation in
its country of origin which is not doing
business in the Philippines.
 If the licensed foreign corporation is
absorbed by merger or
consolidation, it must withdraw its
license to do business in the
Philippines.
 Nevertheless, if the foreign
absorbing corporation desire to
continue the business of the
absorbed corporation in the
Philippines, it has to file an
application for a license to do
business pursuant to the
requirements of Philippines law on
the matter.
Law on Business Organizations Reviewer
Section 133. Doing business without a
license. – No foreign corporation
transacting business in the Philippines
without a license, or its successors or
assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding
in any court or administrative agency of the
Philippines; but such corporation may be
sued or proceeded against before Philippine
courts or administrative tribunals on any
valid cause of action recognized under
Philippine laws.
Unlicensed foreign corporations doing
business in the Philippine do not have the
capacity to sue before the local court is
well-established.
A foreign corporation which is not licensed
to transact business therein can maintain an
action in the courts of the Philippines for
the purpose of protecting its reputation,
corporate name and goodwill.
A foreign corporation doing business in the
Philippines without a license may maintain
suit in the Philippines against a domestic
corporation or person who is party
to a contract as the domestic corporation or
person is deemed estopped from
challenging the personality of the foreign
corporation.
Section 134. Revocation of license. –
Without prejudice to other grounds
provided by special laws, the license of a
foreign corporation to transact business in
the Philippines may be revoked or
suspended by the Securities and Exchange
Commission upon any of the following
grounds:
1. Failure to file its annual report or pay
any fees as required by this Code.
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title.
3. Failure, after change of its resident
agent or of his address, to submit to the
Securities and Exchange Commission a
statement of such change as required
by this Title.
4. Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
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incorporation or by-laws or of any
articles of merger or consolidation
within the time prescribed by this Title.
5. A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title.
6. Failure to pay any and all taxes,
imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivisions.
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized
under its license.
8. Transacting business in the Philippines
as agent of or acting for and in behalf of
any foreign corporation or entity not
duly licensed to do business in the
Philippines.
9. Any other ground as would render it
unfit to transact business in the
Philippines.
Sec. 135. Issuance of certificate of
revocation. – Upon the revocation of any
such license to transact business in the
Philippines, the Securities and Exchange
Commission shall issue a corresponding
certificate of revocation, furnishing a copy
thereof to the appropriate government
agency in the proper cases. The Securities
and Exchange Commission shall also mail to
the corporation at its registered office in
the Philippines a notice of such revocation
accompanied by a copy of the certificate of
revocation.
Sec. 136. Withdrawal of foreign
corporations. – Subject to existing laws and
regulations, a foreign corporation licensed
to transact business in the Philippines may
be allowed to withdraw from the
Philippines by filing a petition for
withdrawal of license. No certificate of
withdrawal shall be issued by the Securities
and Exchange Commission unless all the
following requirements are met:
Law on Business Organizations Reviewer
1. All claims which have accrued in the
Philippines have been paid,
compromised or settled.
2. All taxes, imposts, assessments, and
penalties, if any, lawfully due to the
Philippine Government or any of its
agencies or political subdivisions have
been paid.
3. The petition for withdrawal of license
has been published once a week for
three (3) consecutive weeks in a
newspaper of general circulation in the
Philippines.
Sec. 137. Outstanding capital stock
defined. – The term "outstanding capital
stock", as used in this Code, means the total
shares of stock issued under binding
subscription agreements to subscribers or
stockholders, whether or not fully or
partially paid, except treasury shares.
Sec. 138. Designation of governing boards.
– The provisions of specific provisions of
this Code to the contrary notwithstanding,
non-stock or special corporations may,
through their articles of incorporation or
their by-laws, designate their governing
boards by any name other than as board of
trustees.
Sec. 139. Incorporation and other fees. –
The Securities and Exchange Commission is
hereby authorized to collect and receive
fees as authorized by law or by rules and
regulations promulgated by the
Commission.
Sec. 140. Stock ownership in certain
corporations. – Pursuant to the duties
specified by Article XIV of the Constitution,
the National Economic and Development
Authority shall, from time to time, make a
determination of whether the corporate
vehicle has been used by any corporation or
by business or industry to frustrate the
provisions thereof or of applicable laws, and
shall submit to the Batasang Pambansa,
whenever deemed necessary, a report of its
findings, including recommendations for
their prevention or correction.
Maximum limits may be set by the Batasang
Pambansa for stockholdings in corporations
declared by it to be vested with a public
interest pursuant to the provisions of this
section, belonging to individuals or groups
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of individuals related to each other by
consanguinity or affinity or by close
business interests, or whenever it is
necessary to achieve national objectives,
prevent illegal monopolies or combinations
in restraint or trade, or to implement
national economic policies declared in laws,
rules and regulations designed to promote
the general welfare and foster economic
development.
In recommending to the Batasang
Pambansa corporations, business or
industries to be declared vested with a
public interest and in formulating proposals
for limitations on stock ownership, the
National Economic and Development
Authority shall consider the type and nature
of the industry, the size of the enterprise,
the economies of scale, the geographic
location, the extent of Filipino ownership,
the labor intensity of the activity, the export
potential, as well as other factors which are
germane to the realization and promotion
of business and industry.
Sec. 141. Annual report or corporations. –
Every corporation, domestic or foreign,
lawfully doing business in the Philippines
shall submit to the Securities and Exchange
Commission an annual report of its
operations, together with a financial
statement of its assets and liabilities,
certified by any independent certified
public accountant in appropriate cases,
covering the preceding fiscal year and such
other requirements as the Securities and
Exchange Commission may require. Such
report shall be submitted within such
period as may be prescribed by the
Securities and Exchange Commission.
Sec. 142. Confidential nature of
examination results. – All interrogatories
propounded by the Securities and Exchange
Commission and the answers thereto, as
well as the results of any examination made
by the Commission or by any other official
authorized by law to make an examination
of the operations, books and records of any
corporation, shall be kept strictly
confidential, except insofar as the law may
require the same to be made public or
where such interrogatories, answers or
results are necessary to be presented as
evidence before any court.
Law on Business Organizations Reviewer
Sec. 143. Rule making power of the
Securities and Exchange Commission. – The
Securities and Exchange Commission shall
have the power and authority to implement
the provisions of this Code, and to
promulgate rules and regulations
reasonably necessary to enable it to
perform its duties hereunder, particularly in
the prevention of fraud and abuses on the
part of the controlling stockholders,
members, directors, trustees or officers.
Sec. 144. Violations of the Code. –
Violations of any of the provisions of this
Code or its amendments not otherwise
specifically penalized therein shall be
punished by a fine of not less than one
thousand (P1,000.00) pesos but not more
than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30)
days but not more than five (5) years, or
both, in the discretion of the court. If the
violation is committed by a corporation, the
same may, after notice and hearing, be
dissolved in appropriate proceedings before
the Securities and Exchange Commission:
Provided, That such dissolution shall not
preclude the institution of appropriate
action against the director, trustee or
officer of the corporation responsible for
said violation: Provided, further, That
nothing in this section shall be construed to
repeal the other causes for dissolution of a
corporation provided in this Code.
Sec. 145. Amendment or repeal. – No right
or remedy in favor of or against any
corporation, its stockholders, members,
directors, trustees, or officers, nor any
liability incurred by any such corporation,
stockholders, members, directors, trustees,
or officers, shall be removed or impaired
either by the subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code or of any
part thereof.
Sec. 146. Repealing clause. – Except as
expressly provided by this Code, all laws or
parts thereof inconsistent with any
provision of this Code shall be deemed
repealed.
Sec. 147. Separability of provisions. –
Should any provision of this Code or any
part thereof be declared invalid or
unconstitutional, the other provisions, so
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 Law on Business Organizations Reviewer

far as they are separable, shall remain in

force.

Sec. 148. Applicability to existing

corporations. – All corporations lawfully
existing and doing business in the
Philippines on the date of the effectivity of
this Code and heretofore authorized,
licensed or registered by the Securities and
Exchange Commission, shall be deemed to
have been authorized, licensed or
registered under the provisions of this
Code, subject to the terms and conditions
of its license, and shall be governed by the
provisions hereof: Provided, That if any
such corporation is affected by the new
requirements of this Code, said corporation
shall, unless otherwise herein provided, be
given a period of not more than two (2)
years from the effectivity of this Code
within which to comply with the same.

Sec. 149. Effectivity. – This Code shall take

effect immediately upon its approval.
Approved: May 1, 1980

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