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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. (Sec.

Attributes of a Corporation
i. An Artificial Being (Capacity to Contract and
Transact Business)
A corporation exists by fiction of law. Hence, it can
act only through its directors, officers, and

ii. Created by Operation of Law (Creature of the
Mere consent of the parties is not sufficient. The
State must give its consent either through a special
law (in case of government corporations) or a
general law (i.e., Corporation Code in case of
private corporations).

iii. Has the Right of Succession (Strong Juridical
A corporation has the capacity for continuous
existence despite changes in
stockholders/members or by any transfer of shares
by a stockholder to a 3

iv. Has the Powers, Attributes, and Properties
Expressly Authorized by Law or Incident to Its
Existence (A Creature of Limited Powers)
As a mere creature of law, it can exercise only such
powers as the law may choose to grant it, either
expressly or impliedly.

Corporate Fiction: A corporation has a personality separate
and distinct from the persons composing it. (Art. 44-47 of
the Civil Code; PNB vs. Andrada Electric Engineering Co.,
381 SCRA 244 (2002).
a. Public Corporations
Formed or organized for the government of the
portion of the state (e.g., barangay, municipality,
city, and province).
Created for political purposes connected with the
public good in the administration of the civil
Note: Ownership of the government of the majority of
the shares of a corporation does not qualify such entity
as a public corporation (National Coal Co., vs. CIR, 46
Phil 583, 1924).
b. Private by private persons alone or with the State.
A corporation is created by operation of law under
the Corporation Code.
Mainly governed by the Corporation Code.
A government-owned or controlled corporation
when organized under the Corporation Code is still
a private corporation. But being a government-
owned or controlled corporation makes it liable
for laws and provisions applicable to the
Government of its entities and subject to the
control of the Government (Cervantes vs. Auditor
General, 91 Phil 359, 1952).

c. On GOCCs
i. Created under a special law or charter
ii. Treated as private corporations not as public

Test to Determine Whether a Corporation is Government
Owned or Controlled or Private in Nature:
Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation

d. Quasi-Public Corporations
A cross between private corporations and public
Usually cover school districts, water districts and
the like (Villanueva, p. 75).

a. Domestic
One formed, organized, or existing under the laws of the
b. Foreign
One formed, organized or existing under any law other than
those of the Philippines
- Whose laws allow Filipino citizens and corporations to
do business in its own country or State (principle of
- Licensed by SEC to do business in the Philippines after
securing a certificate of authority from the Board of
Investments and after complying with the conditions for
issuance of license on application forms, structural
organizations and capitalization.

a. Public Special Laws and Local Government Code
b. Private Corporation Code
c. Quasi-Public Corporations seems to be a cross
between private corporations and public corporations.

a. De Jure Corporation
A corporation organized in accordance with the
requirements of law.
Every corporation is deemed de jure until proven
b. De Facto Corporation (Sec. 20)
- A corporation claiming in good faith to be a
corporation under the Corporation Code.
- Corporation where there exists a flaw in its
incorporation, it falls short of the requirements of
- It is the result of an attempt to incorporate under
an existing law coupled with the exercise of
corporate powers.
- Under the Sec. 66 of the Rules of Court, inquiry
must be done by the Solicitor General in a quo
warranto proceeding - the main issue is the right to
exist as a corporation.
- A de facto corporation will incur the same
obligation, have the same powers and rights as a de
jure corporation.
1. A valid law under which incorporated;
2. Attempt in good faith to incorporate of
colorable compliance;
3. Assumption of corporate powers; and
4. Issuance of certificate of incorporation.
(Arnold Hall vs. Piccio, 86 Phil 634, 1950)
A corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such
(Sawadjaan vs. CA, 459 SCRA 516, 2004).

Created in strict or
substantial conformity with
the statutory requirements
for incorporation
Actually exists for all
practical purposes as a
corporation but which has
no legal right to corporate
existence as against the
Right to exist cannot be
successfully attacked even in
a direct proceeding by the
Right to exercise powers
cannot be inquired into
collaterally in any private
suit. But such inquiry may
be made by the State in a
proper court proceeding.

c. 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.
- Where a group of persons misrepresent themselves
as a corporation (ostensible corporation), they are
subsequently estopped from claiming lack of
corporate life in order to avoid liability.
- A third party who assumes an obligation to an
ostensible corporation cannot resist performance
by alleging the ostensible corporations lack of
Existence in Law Yes None
Dealings among
parties on a
corporate basis
Not required Required
Effect of lack of
Could be a
corporation by
Not a corporation
in any shape or

d. Corporation by Prescription
- The Roman Catholic Church is a corporation by
prescription, with acknowledged juridical personality
inasmuch as it is an institution which antedated by
almost a thousand years any other personality in
Europe (Barlin vs. Ramirez, 7 Phil. 41, 1906).

a. Stock Corporation
- One which has a capital stock divided into shares and
is authorized to distribute to the holders such
shares, dividends or allotments of the surplus profits
(i.e., retained earnings on the basis of the shares held
(Sec. 3)
- It is organized for profit.
- The governing body is usually the Board of Directors
(except in certain instances, e.g. close corporations)
- Even if there is a statement of capital stock, the
corporation is still NOT a stock corporation if
dividends are not supposed to be declared, that is,
there is no distribution of retained earnings (CIR vs.
Club Filipino de Cebu, 1962).

b. Non-Stock Corporation (See Sec. 87-88)
- A corporation where no part of its income is
distributable as dividends to members, trustees or
- Corporation that does not issue stocks and does not
distribute dividends to their members.
- Not organized for profit.
- Profit obtained as incident to operation had to be
used for the furtherance of the purpose/s for which
the corporation was organized.
- The governing body is usually the Board of Trustees.

a. Holding Company one that controls another as a
subsidiary or affiliate by the power to elect its
management; one which holds in other companies for
the purpose of control rather than for mere investment.
b. Affiliate Company one that is subject to common
control to a mother or holding company and operated as
part of a system.
c. Parent and Subsidiary Companies when a
corporation has a controlling financial interest in one or
more corporations, the one having in control is known
as the parent company and the others are known as
subsidiary companies.
- A subsidiary of a specified person is an
affiliate controlled by such person, directly or
indirectly, though one or more intermediaries.

a. Public government of a portion of the State; and
b. Private - usually for profit-making functions.

a. Municipal Corporation
b. Religious Corporation
c. Educational Corporation
d. Charitable, Scientific or Vocational Corporation
e. Business Corporation

a. Aggregate a corporation which consists of many
persons united to form a body politic and corporate
(Quimson, p. 156)
b. Corporation Sole may be formed by the chief
archbishop, bishop, minister, rabbi, or other presiding
elder of any religious denomination, sect or church.
- Purpose: formed for the purpose of
administering and managing, as trustee, the
affairs, properties, and temporalities of any
religious denomination to which the holder of
the office belongs and also to transmit the
same to his successor in office (Sec. 110).
Director of Land vs. IAC, 146 SCRA 509 (1986) held that a
corporation sole has no nationality, overturned the previous
doctrine (Republic vs. Villanueva, 114 SCRA 875 [1982]
and Republic vs. Iglesia ni Cristo, 127 SCRA 687 [1984]
that a corporation sole is disqualified to acquire or hold
alienable lands of the public domain, because of the
constitutional prohibition qualifying only individuals to
acquire land of the public domain and the provision under
the Public Land Act which applied only to Filipino citizens or
natural persons. {Republic vs. Iglesia ni Cristo, 127 SCRA
687 (1984); Republic vs. IAC, 168 SCRA 165 (1988)}.

a. Close Corporation the issued stock of all classes shall
be held of record by not more than twenty persons; shall
not list in any stock exchange or make any public
offering any of its stocks.
- 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 (Sec. 96).
b. Eleemosynary Corporation one organized for
charitable purposes.

Serves as a legal basis for subjecting the enterprise or its
activities to the laws, the economic and fiscal powers, and
various social and financial policies of the state to which it is
supposed to belong.

1. Place of Incorporation
- Principal doctrine on the test of the nationality
of a corporate identity in the Philippines
- A corporation is a national of the country
under whose laws has been organized and
2. Control Test
A corporation shall be considered a Filipino corporation
if the Filipino ownership of its capital stock is at least
60%, and where the 60-40 Filipino-Alien equity
ownership is NOT in doubt (SEC opinion dated 6
November 1989; DOJ Opinion No. 18, s. 1989).
Therefore, its shareholdings in another corporation
shall be considered to be Filipino nationality when
computing the percentage of Filipino equity of the
second corporation (SEC Opinion dated 23 November

Control test is applied in the following:
Exploitation of natural resources Only Filipino
citizens or corporations whose capital stock are at
least 60% owned by Filipinos can qualify to exploit
natural resources. (Sec. 2, Art. XII, Conti.)
Public Utilities xxx no franchise, certificate or
any other form of authorization for the operation of
a public utility shall be granted except to citizens of
the Philippines or corporations organized under
the laws of the Philippines at least 60% of whose
capital is owned by such citizens. (Sec. 11, Art. XII,
Mass Media Ownership of mass media shall be
limited to the citizens of the Philippines, or to
corporations, cooperatives, or associations, wholly-
owned and managed by such citizens (100%
Filipino management of the entity)[Sec 11, Art. XVI,

Cable Industry CATV as a form of mass media
which must, therefore, be owned and managed by
Filipino citizens, or corporations, cooperatives, or
associations, wholly-owned and managed by such
citizens pursuant to the mandate of the
Constitution. (DOJ Opinion No. 95, s. 1999)
Advertising Industry xxx only Filipino citizens
or corporations or associations at least 70% of
whose capital is owned by such citizens is allowed
to engage in the advertising agency. (Sec 11, Art.
XVI, Constitution)

3. Grandfather Rule
It is a method of determining the nationality of a
corporation which in turn is owned in part by another
corporation by breaking down the equity structure of
the shareholder corporation.
It involves the computation of Filipino ownership of a
corporation in which another corporation of partly
Filipino and partly foreign equity owns capital stock.
The percentage of shares held by the second
corporation in the first is multiplied by the latters own
Filipino equity, and the product of these percentages is
determined to be the ultimate Filipino ownership of the
subsidiary corporation (SEC Opinion re: Silahis)

Ex. MV Corporation and AC Corporation have equal
interest in XYZ Corporation. MV Corporation is 60%
owned by Filipinos while AC Corporation is 50% owned
by Filipinos. By the grandfather rule, MV Corporation
would have a 30% Filipino interest in XYZ Company
(60% 0f 50%), while AC Corporation would have a 25%
Filipino interest in XYZ Company (50% of 50%). Hence,
the total Filipino interest is only 55%.

Note: the application of the test is limited to the issues
of investment. Only when the corporation is less than
60% owned shall the grandfather rule be applied.

1. Doctrine of Separate Juridical Personality
A corporation has personality separate and distinct
from that of its stockholders and members and is not
affected by the personal rights, obligations, and
transactions of the latter.
The property of the corporation is not the property of its
stockholders or members and may not be sold by them
without express authorization from the Board of
Directors (Woodchild Holdings, Inc. vs. Roxas
Electric and Construction Co. 436 SCRA 235, 2004)
Stockholders have no claim on corporate property as
owners, but mere expectancy or inchoate right to the
same upon dissolution of the corporation after all
corporate creditors have been paid. Such right is limited
only to their equity interest (doctrine of limited liability).
Although a stockholders interest in the corporation may
be attached by his personal creditor, corporate property
cannot be used to satisfy his claim (Wise & Co. vs. Man
Sun Lung, 1940)
a. Liability for Torts
As a separate juridical personality, a corporation
can be held liable for torts committed by its officers
for corporate purpose (PNB vs. CA, 1978).

Corporate tort consists in the violation of a right
given or the omission of a duty imposed by law; a
breach of legal duty.
The failure of the corporate employer to comply
with the law-imposed duty under the Labor Code to
grant separation pay to employees in case of
cessation of operations constitutes tort and its
stockholder who was actively engaged in the
management or operation of the business should be
personally liable. (Sergio F. Naguiat vs. NLRC, 269
SCRA 564, 1997)
b. Liability for Crimes
Since a corporation is a mere legal fiction, it cannot
be proceeded against criminally because it cannot
commit a crime in which personal violence or
malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act
amounting to a crime and never against the
corporation itself (West Coast Life Insurance Co.
vs. Hurd [1914], Time Inc. vs. Reyes [1971]).

General Rule: Corporations cannot commit
felonies punishable under the RPC for it is
incapable of the requisite intent to commit these
crimes. Also, crimes are personal in nature
requiring personal performance of overt acts.
Finally, a corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment.
If the crime is committed by a corporation, the
directors, officers, employees or other officers
thereof responsible for the offense shall be charged
and penalized for the crime, precisely because of
the nature of the crime and the penalty therefore. A
corporation cannot be arrested and imprisoned;
hence, cannot be penalized for a crime punishable
by imprisonment. However a corporation may be
charged and prosecuted for a crime if the
imposable penalty is fine (Ching vs. Secretary of
Justice, GR NO. 164317, February 6, 2006)

When express provisions of law are enacted
specifically providing that a corporation may be
proceeded against criminally, it is the responsible
officer who will be held personally liable for the
crimes committed by the corporation. (Sia vs. CA ,
GR No 111809, May 5, 1997)
Under the Anti-Money Laundering Act, juridical
persons are also defined as offenders of criminal
c. Recovery of Moral Damages
General Rule:
Moral damages cannot be awarded in favor of
corporations because they do not have feelings and
mental state. They may not even claim moral
damages for besmirched reputation (NAPOCOR vs.
Philipp Brothers Oceanic, G.R. No. 126204.
November 20, 2001).
A corporation can recover moral damages under
Art. 2219 (7) if it was the victim of defamation
(Filipinas Broadcasting Network vs. Ago
Medical and Educational Center 448 SCRA 413,
A corporation with a good reputation, if
besmirched, is allowed to recover moral damages
upon proof of existence of factual basis of damage
(actual injury) and its causal relation (Crystal vs.
BPI, 2008).
2. Doctrine of Piercing the Corporate Veil
This doctrine means that the court may disregard the
separate and distinct personality of the corporation
from its members or stockholders and treat the
corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group
especially when the corporate legal entity is used as a
cloak for fraud or illegality. (Kukan Internatl. Vs.
Reyes, September 29, 2010).
It is merely an equitable remedy, and may be granted
only in cases when the corporate fiction is used to defeat
public convenience, justify a wrong, protect fraud
defend crime or where the corporation is a mere alter
ego of business conduit of a person.
a. Grounds for Application of Doctrine
i. If done to defraud the government of
taxes due it.
ii. If done to evade payment of civil liability.
iii. If done by a corporation which is merely a
conduit or alter ego of another
iv. If done to evade compliance with
contractual obligations.
v. If done to evade compliance with financial
obligation to its employees.
b. Test in Determining Applicability
General Rule: The mere fact that a corporation
owns all or substantially all of the stocks of another
corporation is NOT sufficient to justify their being
treated as one entity.
Exception: The subsidiary is a mere
instrumentality of the parent corporation.

Circumstances rendering subsidiary an
instrumentality (PNB vs. Ritratto Group, 2001):
i. The parent corporation owns all or most of
the capital of the subsidiary.
ii. The parent and subsidiary corporations
have common directors and officers.
iii. The parent company finances the
iv. The parent company subscribed to all the
capital stock of the subsidiary or otherwise
causes its incorporation.
v. The subsidiary has grossly inadequate
vi. The parent corporation pays the salaries
and other expenses or losses of the
vii. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent corporation.
viii. The papers of the parent corporation or in
the statements of its officers, is subsidiary
described as a department or subdivision of
the parent corporation, or its business or
financial responsibility is referred to as
the parent corporations own.
ix. The parent corporation uses the property
of the subsidiary as its own.
x. The directors or executives of the
subsidiary do not act independently in the
interest of the subsidiary but take their
orders from the parent corporation.
xi. The formal and legal requirements of the
subsidiary are not observed.

1. Promoter
Promoters are persons who, acting alone or with others,
take the initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefore (RA 8799, Securities Regulation
a. Liability of Promoter
General Rule: The promoter binds himself
personally and assumes the responsibility of
looking to the proposed corporation for
Any express or implied agreement to the contrary,
or novation of the contract.
The court ruled in Caram Jr. vs. CA that the
investors who were not the moving spirit behind
the organization of the corporation, but who were
merely convinced to invest in the proposed
corporate venture on the basis of the feasibility
study undertaken, are NOT liable personally with
the corporation for the cost of such feasibility study
(Caram Jr. vs. CA 151 SCRA 372, 1987).
Exception to Exception: Where there
was a showing that the corporation was
fictitious and did not have a separate
juridical personality, to justify the making
the principal stockholders thereof,
responsible for its stockholders.
b. Liability of Corporation for Promoters
General Rule: A corporation is not bound by the
contract. Since the corporation did not yet exist at
the time of the contract, it could not have an agent
who could legally bind it.
Exceptions: A corporation may be bound by the
contract if it makes the contract its own by:
Adoption of ratification of the entire contract after
Acceptance of benefits under the contract with
knowledge of the terms thereof.
Performance of its obligation under the contract.
2. Number and Qualifications of Incorporators
Incorporators are stockholders or members mentioned
in the articles originally forming and composing the
corporation and who are signatories thereof.
Natural persons
Of legal age
Must own or subscribe at least one share of stock of
the corporation (Genuine interest)
5 to 15 incorporators who must sign the articles of
incorporation (AOI)
Majority of the incorporators must be residents of
the Philippines

3. Corporate Name Limitations on Use of Corporate
Must not be identical or deceptively or confusingly
similar to that of any existing corporation including
internationally known foreign corporation though
not used in the Philippines;
Any other name already protected by law;
Name that is patently defective, confusing or
contrary to existing laws, morals or public policy
(Sec. 18).
Must include the word Corporation/Corp.or

Change of Corporate Name
Requires amendment of the AOI: majority vote of the
board and the vote or written assent of stockholders
holding 2/3 of the outstanding capital stock (Sec 16).

Doctrines Pertaining to Corporate Name
A corporation may change its name by the amendment
of AOI, but the same is not effective until approved by
the SEC (Philippine First Insurance Co. vs. Hartigan
34 SCRA 252, 1970).

A change in the corporate name does not make a new
corporation, and whether affected by a special act or
under a general law, has no effect on the identity of the
corporation, or on its property, rights, or liabilities.
Consequently, the new corporation is still liable for the
debts and obligations of the old corporation (Republic
Planters Bank vs. CA 216 SCRA 738, 1992).

Similarity on corporate names between two
corporations would cause confusion to the public
especially when the purposes stated in their charter are
also the same type of business (Universal Mills Corp.
vs. Universal Textile Mills Inc. 78 SCRA 62, 1977).

A corporation has no right to intervene in a suit using a
name other than its registered name; if a corporation
legally and truly wants to intervene, it should have used
its corporate name as the law requires and not another
name which it had not registered (Laureano
Investment and Development Corp. vs. CA 272 SCRA
253, 1997).

There would be no denial of due process when a
corporation is sued and judgment is rendered against it
in its unregistered trade name, holding that a
corporation may be sued under the name by which it
makes itself known to its workers (Pison-Arceo
Agricultural Development Corp. vs. NLRC 279 SCRA
312, 1997).

4. Corporate Term
Not more than 50 years from date of incorporation
subject to extension for periods not exceeding 50 years
per extension unless:
Sooner dissolved, or
Not earlier than 5 years prior to expiry
Unless earlier extension is for justifiable
reasons as determined by SEC.
How to extend amend the AOI during the life of
the corporation before the expiry of its term.
Any dissenting stockholder may exercise his
appraisal right (Sec. 37).
5. Minimum Capital Stock and Subscription
At the time of incorporation:
At least 25% of authorized capital stock as stated
in the AOI must be subscribed
At least 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 a fixed date or dates, upon call for payment by
the BOD.
Call term used when the Board formally
asks for payment of the balance of the
subscription or a part thereof.
No minimum authorized capital stock is required except
if required by special laws (Sec. 12 and 13)
Minimum paid-up capital is not less than P5,000.
6. Articles of Incorporation
a. Nature and Function of Articles
The AOI is a basic contract document in
Corporation Law that defines the charter of the
corporation. Section 14 of the Corporation Code
provides that the AOI do not become binding as the
charter of the corporation unless they have ben filed
with the SEC.

b. Contents
i. Name of corporation;
ii. Purpose/s, indicating the primary and
secondary purposes;
iii. Place of principal office;
iv. Term which shall not be more than 50 years;
v. Names, citizenship and residences of
vi. Number, names, citizenships and residences of
vii. If stock corporation, amount of authorized
capital stock, number of shares;
viii. In par value stock corporations, the par value
of each share;
ix. Number of shares and amounts of subscription
of subscribers which shall not be less than
25% of authorized capital stock;
x. Amount paid by each subscriber on their
subscription, which shall not be less than 25%
of subscribed capital and shall not be less than
xi. Name of treasurer elected by subscribers; and
xii. If the corporation engages in a nationalized
industry, a statement that no transfer of stock
will be allowed if it will reduce the stock
ownership of Filipinos to a percentage below
the required legal minimum.

c. Amendment
i. A legitimate purpose for the amendment;
ii. by a majority vote of the board of directors or
iii. by a vote or written assent of the stockholders
representing at least two thirds (2/3) of the
outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholders
in accordance with the provisions of the
Corporation Code;
iv. by a vote or written assent of at least two
thirds (2/3) of the members if it be a non-stock
v. The original and amended articles, together,
shall contain all provisions required by law to
be set out in the articles of incorporation. Such
articles, as amended, shall be indicated by
underscoring the change or changes made, and
a copy thereof duly certified under oath by the
corporate secretary and a majority of the
directors or trustees stating the fact that the
said amendment or amendments have been
duly approved by the required vote of
stockholders or members, shall be submitted
to the Securities and Exchange Commission
(SEC). When the SEC is satisfied that the
amendment should be allowed, the SEC will
issue a certificate indicating its approval. The
amendments shall take effect upon approval
by the SEC, or from the date of filing with the
SEC if not acted upon within six (6) months
from the date of filing for a cause not
attributable to the corporation.

d. Non-amendable Items
i. Names of incorporators
ii. Names of incorporating directors/trustees
iii. Names of original subscribers to capital stock
and subscribed and paid- up capital
iv. Treasurer-in-trust elected by original
v. Members who contributed to the initial capital
of non-stock corporation
vi. Place and date of execution
vii. Witnesses and acknowledgments (De Leon,

7. Registration and Issuance of Certificate of

Documents to be filed with the SEC:
i. Articles of Incorporation
ii. Treasurers affidavit certifying that 25% of the
total authorized capital stock has been
subscribed and at least 25% of such has been
fully paid in cash or property
iii. Bank certificate showing the paid-up capital
iv. Letter authority authorizing the SEC to
examine the bank deposit and other corporate
books and records to determine the existence
of paid-up capital.
v. Undertaking to change the corporate name in
case there is another person or entity with
same or similar name that was previously
vi. Certificate of authority from proper
government agency whenever appropriate like
BSP for banks and Insurance Commission for
insurance corporation (Sundiang and Aquino).

Issuance of Certificate of Incorporation by SEC
The SEC shall give the incorporators reasonable time to
correct or modify the objectionable portions of the
articles or amendments (Sec. 17).

Grounds for Disapproving AOI:
i. AOI does not substantially comply with the
form prescribed
ii. Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
iii. Treasurers Affidavit concerning the amount
of capital subscribed and or paid is false
iv. Required percentage of ownership of Filipino
citizens has not been complied with.
Remedy in case of rejection of AOI petition
for review in accordance with the Rules of
Court (Sec. 6, last par., PD 902-A).
Commencement of corporate existence and
juridical personality upon issuance of
certificate of incorporation (Sec. 19)
Revocation of certificate of incorporation if
the incorporators are guilty of fraud in
procuring the same after due notice and
hearing (Sec. 6(i), PD 902-A).

8. Adoption of By-Laws (Sec. 46)
After Incorporation within one month after receipt of
official notice of the issuance of its certificate on
incorporation by the SEC.
Before Incorporation approved and signed by all the
incorporators and submitted to SEC together with AOI.

a) Nature and Functions
By-laws are mere internal rules among
stockholders and cannot affect or prejudice third
persons who deal with the corporation unless they
have knowledge of the same (China Banking
Corporation vs. CA, 1997).

Regulations, ordinances, rules or laws adopted by
an association or corporation or the like for its
internal governance, including rules for routine
matters such as calling meetings and the like (SMC
Vs. Mandaue Packing Products Plants Union-
FFW, 467 SCRA 107, 2005).

b) Requisites of Valid By-Laws (Sec. 46)
i. Must be approved by the affirmative vote
of the stockholders representing the
majority of the outstanding capital stock
or majority of members (if filed prior to
incorporation, approved and signed by all
ii. Must be kept in the principal office of the
corporation; subject to inspection of
stockholders or members during office
hours (Sec. 64).
iii. It must be consistent with the Corporation
Code, other pertinent laws and
iv. It must be consistent with the AOI.
v. It must be reasonable and not arbitrary or
vi. It must not disturb vested rights, impair
contracts or property rights of
stockholders or members or create
obligations unknown to law.

c) Binding Effects
Only from the issuance of SEC certification that by-
laws are not inconsistent with the Code.
Cannot bind stockholders or corporation pending
As to the Corporation and its Components
- Binding not only upon the corporation but also on
its stockholders, members and those having
direction, management and control of its affairs.
They have the force of contract between
As to Third Persons
- Not binding unless there is actual knowledge.
Third persons are not even bound to investigate the
content because they are not bound to know the by-
laws which are merely provisions for the
government of a corporation and notice to them
will not be presumed (China Banking
Corporation vs. CA, 1997).

d) Amendment or Revision (Sec. 48)
Majority vote of the members of the Board and
majority vote of the owners of OCS or members, in
a meeting duly called for the purpose; or
Delegation to the BOD of power to amend or repeal
by-laws by vote of stockholders representing 2/3 of
OCS or 2/3 of the members.
Such delegated power is considered revoked by
majority vote only of stockholders representing 2/3
of OCS or 2/3 of the members.



Every corporation has the power and capacity:

i. To sue and be sued in its corporate name;

In the absence of a special authority from the Board of Directors
to institute a derivative suit, the President or Managing Director
is disqualified by law to sue in her own name or on behalf of the
corporation. The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the Board of
Directors that exercises corporate powers and not in the
President. (Bitong v. CA, 292 SCRA 304)

ii. Of succession by its corporate ;

A corporation has a capacity of continuous existence irrespective
of the death, withdrawal, insolvency, or incapacity of the
individual stockholders or members and regardless of the
transfer of their interest or shares of stock.

iii. To adopt and use a corporate seal;

However, a corporation may exist without a seal.

iv. To amend its articles of incorporation;
v. To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal the same;
vi. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks, or admit members to
the corporation if it be non-stock corporation;
vii. 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

While a corporation may appoint agents to negotiate for the
purchase of real property needed by the corporation, the final say
will have to be with the Board of Directors whose approval will
finalize the transaction. (Firme v. Bukal Enterprises, 414 SCRA

viii. To enter into merger or consolidation with other
ix. To make reasonable donations, provided, that no corporation
shall give donations in aid of any political party or candidate
or for purposes of partisan political activity;
x. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees;
xi. To exercise other powers as may be essential or necessary to
carry out its purpose or purposes stated in the articles of


i. Power to Extend or Shorten Corporate Terms

- Majority vote of the Board of Directors or Trustees
- Ratification at a meeting by 2/3 of the outstanding
capital stock or members
An extension of corporate term allows a dissenting stockholder to
exercise his appraisal right.

ii. Power to Increase or Decrease Capital Stock or Incur,
Create, Increase Bonded Indebtedness

- Majority vote of the board of directors
- Favored by 2/3 of the outstanding capital stock

Ways to increase or decrease capital stock:
i. By increasing/decreasing the number of shares
authorized to be issued without increasing/decreasing
the par value thereof;
ii. By increasing/decreasing the par value of each share
without increasing/decreasing the number thereof;
iii. By increasing/decreasing both the number of shares
authorized to be issued and the par value thereof.

A corporate bond is an obligation to pay a definite sum of money
at a future time at fixed rate of interest.

A business corporation may borrow money whenever the
necessity of its business so requires and issue security or
customary evidence of debt such as notes, bonds or mortgages.
This includes non-stock corporations as well.

iii. Power to deny pre-emptive right

Whenever the capital stock of a corporation is increased and new
shares of stock are issued, the new issue must be offered first to
the stockholders who are such at the time the increase was made
in proportion to their existing shareholdings and on equal terms
with other holders of the original stocks before subscriptions are
received from the general public. This is called a Pre-emptive
right .

The pre-emptive right of stockholders of a stock corporation to
subscribe to all issues or disposition of shares of any class in
proportion to their respective shareholdings may be denied by
the articles of incorporation.

i. Stocks issued in compliance with laws requiring
stock offerings or minimum stock ownership by the
ii. Stocks issued in good faith with approval of
stockholders representing 2/3 of the OSC:
-In exchange for property needed for corporate purposes
-in payment of a previously contracted debt.

iv. Power to Sell or Dispose All or Substantially All of the
Corporate Assets

- Majority vote of its board of directors
- Authorization by 2/3 of stockholders of the OSC or
members. Provided, that in non-stock corporations,
where there are no members with voting rights, the vote
of at least a majority of the trustees will be sufficient for
- Authorization must be done at a stockholders or
members meeting duly called for that purpose after
written notice.

Any dissenting stockholder may exercise his appraisal rights.

A sale or 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

If the corporation can sell, it can also abandon the
transaction through the board without further action or
approval by the stockholders or members but subject to
rights of third parties under any contract relating thereto.

v. Power to Acquire Its Own Shares

A stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose,
provided that the corporation has unrestricted retained
earnings. It includes the following cases:

i. To eliminate fractional shares arising out of stock
ii. 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;
iii. To pay dissenting or withdrawing stockholders
entitled to payment for their shares. (Sec. 41,
Corporation Code)

Conditions for the exercise of the power:
i. The capital is not impaired;
ii. For a legitimate and proper corporate purpose;
iii. There is unrestricted retained earnings to purchase
the same;
iv. The corporation acts in good faith without
prejudicing the rights of creditors and
v. The conditions of corporate affairs warrant it;
(De Leon, Corporation Code of the Philippines, 2010)

vi. Power to Invest Corporate Funds in Another Corporation
or Business

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.

- Majority vote of board of directors or trustees
- Ratification by the 2/3 stockholders representing the
OSC or members. However, if the investment is
reasonably necessary to accomplish the corporations
primary purpose, the approval of the stockholders or
members shall not be necessary.

Any dissenting stockholder may exercise his appraisal right.

The other purposes for which the funds may be invested without
amending the articles of incorporation must be those enumerated
in the articles of incorporation. In order to engage in any of its
secondary purposes, the corporation must comply with the above
requirement. A corporation is not allowed to engage in a
business distinct from those enumerated in the articles of
incorporation without amending the purpose clause of said
articles to include the desired business activity among its
secondary purpose. (De Leon, Corporation Code of the
Philippines, 2010)

vii. 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 stock holder until his unpaid subscription is fully
paid; (Sec. 43)

- Approval of stockholders representing not less than 2/3
of the OSC
- In a regular or special meeting duly called for its
- Existence of unrestricted retained earnings

A stock corporation is prohibited from retaining surplus
profit in excess of 100% of their paid-in capital stock, except:
- When justified by definite corporate expansion projects
or programs approved by the board of directors;
- When prohibited under any loan agreement with any
financial institution or creditor without their his/her
- That such retention is necessary under special
circumstances obtaining in the corporation, such as
when there is a need for special reserve for probable
contingencies. (Sec. 43, par 2)

Dividend, is that part or portion of the profits of a
corporation set aside, declared and ordered by the directors
to be paid ratably to the stockholders on demand or at a
fixed time.

Stock Dividends, these dividends are payable in unissued
additional shares of the corporation instead of cash or
property out of the unrestricted retained earnings. These
are issued by a resolution of the board and approval of
stockholders. It must also require to have unissued shares
for distribution to stockholders, otherwise, it must increase
its capital stock to the extent of corporate earnings to be

Cash Dividends, these are dividend payable in cash. These
can be declared by mere board resolution from unrestricted
retained earnings.

Property Dividends, these are dividends distributed to the
stockholders in the form of property, real or personal, such
as warehouse receipts, or shares of stock of another
corporation. This is actually cash dividend since the
stockholder may sell the property received and realize cash.
These must be properties no longer intended to be used by
the corporation for its business. However, no actual
distribution of property dividend shall be made without
approval by the Commission.

The participation of each stockholder in the earnings of the
corporation is based on his total subscription and not on the
amount paid by him in account thereof. Ex. A subscribes to
1,000 shares of the par value P10.00 per share and has paid
P5,000 on his subscription, he will participate in dividends
on the basis of 1,000 shares, not 500 shares. (De Leon,
Corporation Code of the Philippines, 2010)

Dividends are usually declared generally quarterly. But the
directors may declare dividends in advance for succeeding
quarters when the business is in good shape and abundant
with revenues.

viii. Power to enter into Management Contract

A management contract is one whereby the corporation
undertakes to manage or operate all or substantially all of
the business of another corporation. A management
contracts must not be longer than 5 years for any one term.
However, service contracts which relate to the exploitation,
development, exploration or utilization of natural resources
may be entered into for such periods provided by law or
regulation. (De Leon, 2010)

- Resolution of a quorum of the Board of
Directors/Trustees; and
- Ratified by a majority vote by the stockholders
representing the outstanding capital stock or members,
as the case may be, in a meeting called for the purpose;
- In both cases, such votes must be made by both the
managing and managed corporation.

EXCEPT: That 2/3 votes shall be necessary if:
- Stockholder who represents the interest of both
corporations owns 1/3 of the outstanding capital stock
of the managing corporation.
- Majority of the members of the Board of the managing
corporation compose also majority of the members of
the board of the managed corporation.
(Villanueva, Commercial Law Reviewer, 2009)

ix. Ultra Vires Acts

These are acts not within the express, implied, and incidental
powers of the corporation conferred by the Corporation Code or
its articles of incorporation.

There are three types of ultra vires acts:
1. Those outside the express, implied or incidental powers
of the corporation;
2. Those which are effected by corporate representatives
who act without authority;
3. Those which are contrary to laws or public policy.

Applicability of Ultra Vires Acts

The term ultra vires is distinguished from an illegal act since
the former is merely voidable which may be enforced by
performance, ratification, or estoppels, while the latter is
void and cannot be validated.

When a contract or act is illegal per se, it is wholly void or
inexistent. But when a contract is not illegal per se but
merely beyond thepower of a corporation, the same is
merely voidable and may be enforced by performance,
ratification, or estoppels or on equitable ground.

Consequences of Ultra Vires Acts
- If executor on both sides, it cannot be enforced by either
party thereto.
- If fully performed on both sides, neither party can
maintain an action to set aside the transaction or to
recover what he has parted with.
- If performed on one side and the other has received
benefits by reason of such performance, recovery is
permitted on the ground that it would be unjust to
sanction retention of benefits coupled with refusal to
perform (De Leon, 2010)


a. Stockholders

Stockholders have residual power of fundamental corporate
changes in the exercise of their right to vote.

b. Board of Directors

Generally, the Board of Directors alone exercises the powers of
the corporation. The board exercises their power through board

c. Officers

Corporate officers may exercise corporate powers via authority
1. Law
2. Corporate By-laws
3. Authorization from the board, either expressly or impliedly
by habit, custom or acquiescence in the general course of


The assets of a corporation of the corporation as represented by
its capital stock are trust funds to be maintained unimpaired
and to be used to pay corporate creditors in the sense that there
can be no distribution of such assets among the stockholders
without provision being first made for the payment of the
corporate debts and that any such disposition of it is a fraud on
the creditors of a corporation who extend credit on good faith of
its outstanding capital stock and, therefore, void. (Philippine
Trust Co. v. Rivera, 144 Phil 469)

Under the trust fund doctrine, the capital stock, property and
other assets of a corporation are regarded as equity in trust for
the payment of the corporate creditors. (CIR v. CA, 301 SCRA



Unless otherwise provided in the Corporation Code, the
corporate powers of all corporations shall be exercised, 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 stocks, or where there is
no stock, from among the members of the corporations, who
shall hold office for one (1) year and until their successors
are elected and qualified. (Sec. 23, Corporation Code)

A corporations Board of Directors is understood to be that
body which:
a. Exercises all powers provided for under the Corporation
b. Conducts all business of the corporation; and
c. Controls and holds all property of the corporation.
(Hornilla v. Salunat, 405 SCRA 220)


The courts cannot undertake to control the discretion of the
board of directors about administrative matters as to which
they have legitimate power of action, and contracts intra
vires entered into by the board of directors are binding upon
the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount
to a wanton destruction of the rights of the minority.

a. When otherwise provided by the Corporation Code
b. When the Directors or officers acted with fraud, gross
negligence or in bad faith; and
c. When directors or officers act against the corporation in
conflict of interest situation.

3. Tenure, Qualifications and Disqualifications of
Directors or Trustees

Tenure: Under section 23, the board of directors and
trustees shall hold office for one (1) year and until their
successors are elected and qualified. As a general rule, the
directors or trustees of a corporation shall serve for a term
as fixed in the by-laws.

Hold-over: Upon failure of a quorum at any meeting of the
stockholders or members called for an election, the
directorate naturally holds over and continues to function
until another directorate is chosen and qualified.

Stock Corporations:
a. Own at least one (1) share;
b. Share of stock must be registered in his name;
c. Must continually own such share during his term;
otherwise he automatically ceases to be a director;
d. Majority must be residents of the Philippines;

Non-stock Corporation:
a. He must be a member in good standing thereof;
b. a majority of them must be residents of the Philippines;

Only a natural person may be elected as directors or trustees.
However, a corporation which owns shares of stocks or is a
member in another corporation can designate by board
resolution its officer or representative to sit in the latters
board and thus qualifying him to be elected as director or
trustee. (De Leon, 2010)

A trustee in a voting trust may be elected as director/trustee.
(Villanueva, 2009)

No stockholder or member can be elected as director or
trustee if he has been convicted by final judgment of an
offense carrying an imprisonment exceeding 6 years, or an
offense constituting a violation of the Code, 5 years prior to
his election or appointment.

Every Director requires at least one share of stock to be
elected. If he transfers all his shares during his tenure, he
automatically ceases to be a director. This applies to a
Director who transfers all his shares to a trustee under a
Voting Trust Agreement. (Lee v. CA, 205 SCRA 752)


In order for the election of the Directors or Trustees to take
place, the presence of a majority of the capital stock or
members, either personally or by written proxy is required.

Elections must be held by secret ballot if requested by any
voting stockholder or member, otherwise, it may be held in
any form.


Example: A owns 100 shares of stock in a corporation and 5
directors are to be elected. A is entitled to 500 votes (100
shares x 5 directors)

Straight Voting - every stockholder may vote such number
of shares for as many persons as there are directors to be
elected. In this case, A may distribute equally 100 shares to
each of the 5 directors without preference. The same rule
applies to elections of the board of trustees, whereby A has 1
vote for each trustee to be elected.

Cumulative Voting for one Candidate a stockholder is
allowed to concentrate his votes and give one candidate as
many votes as the number of directors to be elected
multiplied by the number of his shares shall equal. In this
case, A may vote all his 500 shares to a single director to be

Cumulative Voting by Distribution By this method, a
stockholder may cumulate his shares by multiplying also the
number of his shares by the number of directors to be
elected and distribute the same among as many candidates
as he shall see fit. Here, A may distribute his votes as he may
desire among the directors to be elected, i.e., 200 shares to
Director 1, 100 shares to director 2, and 200 shares to
director 3, giving no favorable vote to Directors 4 and 5.

However, the Corporation Code states that the total number
of votes cast by a stockholder shall not exceed the number of
shares owned by him. Lastly, no delinquent stock shall vote
or be voted.


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. Except, when it is
otherwise provided in the articles of incorporation or the by-
laws that a greater majority is required. (Sec. 25, Corporation

Note: There is a difference between requiring A majority
vote of the directors or trustees and A vote of majority of
the directors or trustees constituting a quorum. In the
former, you require a vote of majority plus one of all the
directors. In contrast, the latter requires a majority plus one
vote of directors enough to constitute a quorum (majority).


Any director or trustee of a corporation may be removed
from office:
a. By a vote of the stockholders representing 2/3 of the
outstanding capital stock, or 2/3 vote of the members.
b. At a regular meeting of the corporation or at a special
meeting called for such purpose,
c. Previous notice to stockholders or members
d. May be without just cause, except when it operates to
deprive minority stockholders or members the right of
representation (requires just cause).

The board of directors has no power to remove one of its
members as director or trustee.


Generally, if still constituting a quorum, at least a majority of
the members are empowered to fill any vacancy occurring in
the board other than by removal by the stockholders or
members or by expiration of term.

Stockholders or members may fill the vacancy in the
following cases:
a. Vacancy results from removal by the stockholders or
members, or the expiration of term;
b. Vacancy occurs other than by removal or expiration of
term, such as death, resignation, abandonment, or
disqualification; provided that the remaining directors
do not constitute a quorum;
c. When the board refers the matter to the stockholders;
d. Increase in the number of the board;

A director or trustee so elected to fill a vacancy shall only be
for the unexpired term of his predecessor in office.


Generally, the by-laws of a corporation fixes the
compensation of the directors. However, if no compensation
is provided for therein, then directors shall receive only
reasonable per diems. Per diems are paid per attendance in
board meetings.

The amount of compensation may also be fixed in a
resolution of the stockholders by a majority vote
representing the outstanding capital stock. Notwithstanding,
the stockholders cannot delegate to the board of directors
the authority to fix the amount of their own compensation.

Where the compensation is granted either in the by-laws or
by the vote of stockholders, the total yearly compensation of
directors or trustees shall in no case exceed 10% of the net
income before income tax of the compensation during the
preceding year.


A director is a fiduciary. Their powers are powers in trust.
He who is in such fiduciary position cannot serve himself
first and his cestuis second. He cannot manipulate the affairs
of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the
intervention of a corporate entity violate the ancient precept
against serving two masters. (De Leon, The Corporation
Code of the Philippines, 2010)

Duty of Obedience 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. Any director, trustee
or officer violating this duty is liable for ultra vires acts.

Duty of Diligence Directors or trustees who (1) willfully and
knowingly vote for, or assent to patently unlawful acts of the
corporation, (2) or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation, shall be liable
jointly and severally for all the damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons. (Sec. 31, Corporation Code)

Personal Liability of corporate director, trustee or officer
shall attach only when:
a. He affirms an unlawful act, or acts with bad faith or
gross negligence in directing its affairs, or for conflict of
interest resulting in damage to the corporation,
stockholders or other persons;
b. He consents to the issuance of watered stocks or does
not file with the secretary his written objection thereto;
c. He agrees to hold himself personally and solidarily
liable with the corporation;
d. Law makes him personally liable for his corporate
action. (Tramat Mercantile v. Court of Appeals 238
SCRA 14)

Duty of Loyalty When a director, trustee or officer attempts
to acquire or acquires, in violation of his duty, any interest
adverse to the corporation with respect to 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. (Sec. 31, Corporation Code)

This liability shall attach despite the fact that the director
risked his own funds in the venture. However, violation of
this duty may be ratified by a vote of the stockholders
owning or representing at least 2/3 of the outstanding
capital stock. (Sec. 34, Corporation Code)

These two provisions are contained in the doctrine of
corporate opportunity, which states that a corporate
director cannot take advantage for his personal benefit a
business opportunity which has an inherent aptitude of
being integrated into the existing business of the


Since a corporation is a mere legal fiction, it cannot be held
liable for a crime committed by its officers, since it does not
have the essential element of malice; in such case, the
responsible officers would be criminally liable.

The performance of the act is an obligation directly imposed
by the law on the corporation. Since it is a responsible officer
or officers of the corporation who actually perform the act
for the corporation, they must of necessity be the ones to
assume the criminal liability (People v. Tan Boon Kong, 54
Phil 607)


The fiduciary position of insiders, directors, and officers
prohibits them from using confidential information relating
to the business of the corporation to benefit themselves or
any competitor corporation in which they may have a mere
substantial interest.
Since loss and prejudice to the corporation is not a
requirement for liability, the corporation has a cause
of action as long as there is unfair use of inside information.

It is inside information if it is not generally available to
others and is acquired because of the close relationship of
the director or officer of the corporation. (Sec. 3.8, 27
Securities Regulation Code)


a. By Self-Dealing Directors with the Corporation

A contract of the corporation with one ore more of its
directors or trustees or officers is voidable, at the option of
such corporation, unless the following conditions are

i. The presence of such director or trustee in the board
meeting in which the contract was approved is not necessary
to constitute a quorum for such meeting;
ii. The vote of such director or trustee was not
necessary for the approval of the contract;
iii. That the contract is fair and reasonable under the
iv. (In the case of an officer) The contract with the
officer has been previously authorized by the board
of directors.

In the absence of the first two conditions, a ratification may
be made by a vote of the stockholders representing at least
2/3 of the outstanding capital stock or at least 2/3 vote of
the members in a meeting called for the purpose. Full
disclosure of the adverse interest of the directors or trustees
must be made at such meeting. (Sec. 32, Corporation Code)

b. Between Corporations with Inter-locking Directors

General Rule: A contract between two or more corporations
having interlocking directors shall not be invalidated on that
ground alone.
Exceptions: (1) There is Fraud and (2) The contract is not
fair and reasonable under the circumstances.

Rule when the directors interest is nominal in one
corporation and substantial in the other: The
requirements under Section 32, as stated above, must be
complied with to make the contract between the corporation
and interlocking directors valid.

Stockholdings exceeding 20% of the outstanding capital
stock shall be considered substantial for the purposes of
interlocking directors.

The By-Laws may prohibit a director of a corporation from
serving at the same time a director of a competing
corporation. (Gokongwei, Jr. v. SEC, 89 SCRA 336)

c. Management Contracts

Previously tackled under Corporate Powers.

A management contract cannot delegate entire supervision
and control over the officers and business of a corporation to
another as this will contravene the fundamental rule that the
corporate powers of all corporations shall be exercised by
the board. The board cannot surrender its power and duty of
supervision and control for otherwise, it becomes a mere
instrumentality of the managing company.

Where majority of the members of the members of the board
of the managing corporation also constitute a majority of the
members of the board of directors of the managed
corporation, the management contract must be approved by
the stockholders of the MANAGED Corporation owning 2/3
of the total outstanding stock or members.

Illustration: If A, B, C, D, and E constitute the majority of the
members of the board of directors of X corporation and also
of Y corporation, the bigger 2/3 vote by the stockholders of Y
corporation is necessary. This is a case of a contract between
two corporations with interlocking directorates. (De Leon,


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
in the by-laws, or on a majority vote of the board.

The purpose of the Executive Committee is to take off part of
the work from the Board during the periods when the Board
does not meet.

Matters they cannot act on:
a. Approval of any action for which shareholders approval
is also required;
b. Filling of vacancies in the board;
c. Amendment or repeal of any resolution of the Board
which by its express terms is not so amendable or
d. Distribution of cash dividends.


a. Regular or Special Meetings

Regular meetings of directors or trustees are those held by the
board monthly, unless the by-laws provide otherwise.

Special meetings of directors or trustees are those held by the
board at any time upon the call of the president or as
provided in the by-laws.

These meetings maybe held anywhere in or outside the
Philippines, unless provided otherwise in the by-laws.
Notice must be sent to every director or trustee at least 1 day
prior to the scheduled meeting.

b. Who Presides

Section 54 provides, the president shall preside at all
meetings of the directors or trustees as well as of the
stockholders or members, unless the by-laws provide

The by-laws may provide that the chairman, instead of the
president, shall preside at board meetings. Where there is a
vice-chairman provided in the by-laws, he presides in the
absence of the chairman.

Where the officer entitled to preside is not present at the
time of the meeting, a stockholder or member who takes the
floor may temporarily preside at the meeting pending the
selection of the presiding officer.

c. Quorum

Under Sec. 52, 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 nonstick corporations.

d. Rule on Abstention

When time comes for directors to vote on an issue, a director
may vote "yes" or "no." If a director abstains from voting,
that means the director has not voted. An abstention is a
non-vote, a decision not to make a decision. When the chair
calls for a vote, abstentions are not called for, only the yeas
and nays.

Whenever a director believes he/she has a conflict of
interest, the director should abstain from voting on the issue
and make sure his/her abstention is noted in the minutes.
The other reason a director might abstain is that he/she
believes there was insufficient information for making a
decision. Otherwise, directors should cast votes on all issues
put before them. Failure to do so could be deemed a breach
of their fiduciary duties.

Direct or indirect participation in management
Voting Rights
Right to remove directors
Proprietary Rights
Right to Inspect books and records
Right to be furnished with the most recent financial
Right to recover stocks unlawfully sold for delinquent
payment of subscription
Right to file individual suit, representative suit and derivative

a. Doctrine of Equality of Shares
Each share shall be EQUAL in ALL respects to every other
share, except as otherwise provided in the Articles of
Incorporation and stated in the certificate of stock.

a. PROXY - Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members.
- A written authorization given by one person to another so
that the second person can act for the first.
- A proxy is a special form of agency. The proxy holder is in
the eye of the law an agent and as such a fiduciary.
(Ballantine, p. 412)
Requirements for Validity: (Sec. 58)
i. Unless otherwise provided in the proxy, it shall be valid
only for the meeting which it was intended.
ii. It shall be signed by the stockholder or member
iii. Proxies shall be in writing;
iv. It shall be filed before the scheduled meeting with the
corporate secretary;
v. No proxy shall be valid and effective for a period longer
than 5 years at any one time.

b. VOTING TRUST - An arrangement created by one or more
stockholders for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time.
The trustee can also be voted as director.
If the voting trust was a requirement for a loan agreement,
period may exceed 5 years but shall automatically expire upon
full payment of the loan. (Sec. 59, Corporation Code).

i. By a Majority Vote (of the outstanding capital stock and
entitled to vote)
Fixing of the issue value of no par value shares but the
articles may fix the issue price or may authorize the Board
of Directors to fix said issue value (Sec. 62);
Adoption or amendments to the By-Laws (Sec. 48);
Execution of Management Contracts, unless in case of
interlocking shareholders of more than one-third (1/3) in
the managing corporation or interlocking majority of
directors in both managed and managing corporations
(Sec. 44);
Revocation of delegation to the Board of Directors on
the amendment of By-Laws (Sec. 48);
Calling a meeting to remove directors (Sec. 26); and
Payment of compensation for directors unless already
fixed in the By-Laws.

ii. By a Two-Thirds Vote
Declaration of bond or stock dividends (Sec. 43);
Investment in other corporations or for purposes
other than those provided in the Articles of
Incorporation (Sec. 42);
Certain amendments to the Articles of Incorporation
(Sec. 16; Sec. 37);
Delegation to the Board of Directors to amend the By-
Laws (Sec. 48);
Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially of the corporate
assets, but stockholders action is not required if
corporations business is not substantially limited or if
the proceeds are used to continue the remaining
business (Sec. 40);
Removal of a director (Sec. 28);
Ratification of voidable contracts in certain cases
between a corporation and its director or trustee (Sec.
Voluntary dissolution of the corporation (Sec.118);
Execution of management contracts in cases of
interlocking stockholders or directors (Sec.44);
Increase or decrease of capital stock and creation or
increase of bonded indebtedness (Sec. 38);
Extending or shortening corporate term (Sec. 37);
Issuance of shares not subject to pre-emptive right
(Sec. 39);

iii. By Cumulative Voting Cumulative voting is allowed in the
election of directors or trustees (Sec. 24).
- A stockholder 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
candidates as he shall see fit (Sec. 24).

Provided that the total number of votes cast by him shall
not exceed the number of shares owned by him as shown
in the books of the corporation multiplied by the whole
number of directors to be elected.

The proprietary rights of shareholders consist principally in their
right to dividends and to liquidation of assets.

While a share of stock represents a proportionate or aliquot interest
in the property of the corporation, it however, does not vest the
owner thereof with any legal right or title to any of the assets, his
interest in the corporate property being equitable or beneficial in
nature. Shareholders are in no legal sense the owners of corporate
property, which is owned by the corporation as a distinct legal

Right to dividends vests upon lawful declaration by the Board of
Directors. From that time, dividends become a debt owing to the
stockholder. No revocation can be made except if NOT yet
announced or communicated to the stockholders.
Stock corporations are prohibited from retaining surplus profits in
the excess of 100% of their paid-in capital stock,
i. When justified by definite corporate expansion projects or
programs approved by the board of directors;
ii. 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
iii. When it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation,
such as when there is a need for special reserve for probable
Forms of Dividends: Cash, Property or Stock.
NOTE: Right to dividends vests upon declaration so whoever owns
the stock at such time also owns the dividends. Subsequent transfer
of stock would not carry with it right to dividends UNLESS agreed
upon by the parties.

Right to demand payment of the fair value of his shares, after
dissenting from a proposed corporate action involving a fundamental
change in the corporation in the cases provided by law.
When Right of Appraisal May be Exercised:
i. Extend or shorten corporate term;
ii. Restriction of rights or privileges of shares through the
amendment of the articles of incorporation;
iii. Sale of all or substantially all corporate assets;
iv. Equity investment in non-primary purpose business enterprise;
v. Merger or consolidation
NOTE: (a) All the above instances require the 2/3 votes of the
outstanding capital stock;
(b) The appraisal right pertains only to stockholders who have
actually dissented from the above-enumerated transactions.

Under Section 74 of the Corporation Code, the stockholder has a
right to examine the books of the corporation. That it be done during
business hours on a business day in the place where the corporation
keeps all its records; the stockholders has not improperly used any
information he secured through any previous examination; demand
is made in good faith or for a legitimate purpose.

If the director or officer unjustly refuses to allow stockholder to
inspect the corporate books, he can be held liable for damages and
for criminal offense punished under Sec. 144 of the Corporation

A stockholders right of inspection is based on his ownership of
the assets and property of the corporation. Therefore, it is an
incident of ownership of the corporate property, whether this
ownership or interest is termed an equitable ownership, a
beneficial ownership, or quasi-ownership. Such right is
predicated upon the necessity of self-protection. (Gokongwei
Jr. Vs. SEC, 1979).

Right to subscribe to all issues or disposition of shares of any
class in proportion to his present stockholdings, the purpose
being to enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the
retained earnings, and also in the net assets in the event of
Sec. 39 has widened the coverage of pre-emptive right which
now includes re-issuance of treasury shares because of the use
of the words disposition of shares, which would cover the
following instances:
i. Increase in the Authorized Capital Stock;
ii. Opening for subscription the unissued portion of existing
capital stock; and
iii. Disposition of treasury shares.

Pre-emptive right not available in the following instances:
i. Shares to be issued to comply with laws requiring stock
offering or minimum stock ownership by the public;
ii. Shares issued in good faith in exchange for property
needed for corporate purposes;
iii. Shares issued in payment of previously contracted debts;
iv. In case the right is denied in the articles of incorporation.
(Sec. 39)

A stockholder is given the right to participate in the corporate
affairs by giving him the right to attend meetings after due
notice and the right to vote thereat in person or through a
proxy or trustee.
- Non-voting shares are not entitled to vote except as
provided for in the last paragraph of Sec. 6 of the
Corporation Code.
- Preferred or redeemable shares may be deprived of the
right to vote.
- Fractional shares of stock cannot be voted.
- Treasury shares have no voting rights as long as they
remain in the treasury.
- No delinquent stock shall be voted. (Sec. 71)
- A transferee of stock cannot vote if his transfer is not
registered in the stock and transfer book of the
Except in the case of close corporations where the right of first
refusal is required to be a feature to be found in the articles of
incorporation, the right of first refusal can only arise in
Corporate Law by means of a contractual stipulation, or when it
is provided in the articles of incorporation. The nature and
purpose of by-laws would not allow rights of first refusal to be
found in its provisions.

a. Individual Suit A suit instituted by a shareholder for his own
behalf against the corporation.
b. Representative Suit A suit filed by a shareholder in his behalf
and in behalf likewise of other stockholders similarly situated and
with a common cause against the corporation (Pascual vs. Del Saz
Orozco, 19 Phil. 82).

c. Derivative Suit A suit filed in behalf of the corporation by its
shareholders (not creditors whose remedies are merely subsidiary such as
in accion subrogatoria or in accion pauliana) upon a cause of action
belonging to the corporation, but not duly pursued by it, against any
person or against the directors, officers and/or controlling shareholders
of the corporation. If the suit is filed against a third person, the case is not
infra-corporated in nature. A derivative suit is a remedy designed by
equity and has been the principal defense of the minority stockholders
against abuses by the majority. The real party-in-interest in a derivative
action is the corporation itself, not the shareholders who have actually
instituted it. (Gilda Lim vs. Patricia Lim-Yu, 352 Scra 216)

Requisites of a derivative suit
i. Cause of action is in favor of the corporation, such as
those arising from fraudulent conveyances, breach of
trust (but not error of judgment) on the part of the
board of directors, ultra vires acts and similar others;
ii. There is refusal on the part of the corporation to sue
after the corporation is advised to take appropriate
remedies but the exhaustion of intra-corporate
remedies may be dispensed with if that recourse would
be a futile exercise, such as when it is under the
complete control of the defendants (Everest vs. Asia
Banking Corporation, 49 Phil. 512).
iii. There would be injury to the corporation if the action is
not taken; and
iv. The action is brought by a shareholder or group of
shareholders in the name of the corporation.

i. Liability to the corporation for unpaid subscription (Sec. 67-
70, CCP);
ii. Liability to the corporation for interest on unpaid subscription
if so required by the by-laws (Sec. 66);
iii. Liability to the creditors of the corporation for unpaid
subscription (Sec. 60);
iv. Liability for watered stock (Sec. 65);
v. Liability for dividends unlawfully paid (Sec. 43);
vi. Liability for failure to create corporation (Sec. 10).


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. (Sec. 50).
Stock Corporations: City or municipality where the principal
office of the corporation is located, or, if practicable, in the
principal office of the corporation; Provided, Metro Manila shall
be considered a city or municipality. (Sec. 51).
Exception: Such meeting shall be valid even if not held in the
proper place when all the stockholders or members of the
corporation are present or duly represented at the meeting.
Failure to comply with the mandatory provisions of Section 51
would render the meeting illegal.

Regular Meeting written notice sent to tall stockholders or
members at least (2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special Meeting written notice sent at least 1 week prior to
the meeting, unless otherwise provided in the by-laws.
Subject to waiver, expressly or impliedly.
Failure to give notice would render a meeting VOIDABLE at the
instance of an absent stockholder, who was not notified of the
meeting. (Board vs. Tan, 1959).

i. The President, unless the by-laws provide otherwise. (Sec.
ii. The person or persons designated in the by-laws have the
authority to call stockholders or members meeting.
iii. In the absence of such provision in the by-laws, the
meeting may be called by a director or trustee or by an
officer entrusted with the management of the corporation
unless otherwise provided by law.
iv. Whenever for any cause there is no person authorized to
call a meeting, SEC upon petition of a stockholder/member,
and on the showing of good cause therefore, may issue an
order to petitioner to call a meeting by giving proper notice,
with the petitioner presiding thereat until at least a majority
of stockholders/members present have chosen a presiding
officer. (Sec. 50)

Pursuant to the powers granted to the SEC under Section 50
of the Corporation Code, and Section 6(f) of Pres. Decree
902-A, the SEC has opined that when there is no person
authorized in the by-laws to call a meeting or in the event
the person authorized in the by-laws to call a meeting fails
or refuses to call for a meeting, any interested stockholder
may petition the SEC to authorize him to call a meeting, or
compel the officers of the corporation to call a meeting.

Under Section 52 of the Corporation Code, unless otherwise
provided for in the Code itself 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 case
of non-stock corporations.

In those cases in which the law determines the number of
shareholders or members whose concurring votes are necessary
to make their action binding on the corporation, no less than
such number is necessary to constitute a quorum at a meeting
called to transact such business. In such cases, the by-laws may
provide for a greater quorum.

In other cases, the by-laws may provide for the holding of
meetings with the presence of any number of stockholders or
members, even less than a majority, provided there are at least
two. It is customary however, to provide in the by-laws that the
presence of the registered holders of a majority of the
outstanding shares is necessary to constitute a quorum, but
that a smaller number may meet and adjourn to a later date,
and that at such adjourned meeting, the shareholders attending
shall constitute a quorum.

The SEC has opined that where a corporation encounters
several unsuccessful attempts or if it would be impossible for
the corporation to get the required quorum of the
stockholders/members necessary to transact business, it may,
pursuant to the provisions of Pres. Decree 902-A, petition the
SEC for the appointment of a management committee to
undertake the management thereof.

Where quorum is present at the start of a lawful meeting,
stockholders present cannot without justifiable cause break the
quorum by walking out from said meeting so as to defeat the
validity of any act proposed and approved by the
majority.(Johnston vs. Johnston, 1965 CA decision)


Under Section 74 of the Corporation Code, the corporation
shall, at its principal office, keep and carefully preserve a record
of all minutes of all meetings of stockholders and members, in
which it shall be set forth in detail the time and place of holding
the meeting; the notice given; whether regular or special; if
special, its object, those present and absent; and every act done
or ordered done at the meeting.

Upon the demand of any director, trustee, shareholder or
member, the time when any director, trustee, shareholder 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,
shareholder or member or any action or proposed action must
be recorded in full on his demand.

Without the signature of the secretary of the meeting, alleged
minutes taken at that meeting has no probative value nor

VI. The Corporation Code
I. Capital Structure
Subscription Agreements: The Root to Stockholder Standing
Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed. It is
considered as such not withstanding the fact that the
parties refer to it as purchase or some other contract (Sec.
60, CCP)
Underpins the relationship between the stockholder and
the corporation and therefore is a special contract in
Corporate Law.
It is subscription to shares of stock that creates the legal
relationship between the stockholder and the corporation.
It is subscription and not the payment of such subscription
that grants the stockholder the statutory common rights
granted to stockholders.
It is the issuance of shares by the corporation to a
subscriber pursuant to a subscription agreement that
creates ownership over such shares in the person of the
It essentially constitutes a contract between the
corporation and the subscriber covering unissued shares.

Characteristics of Subscription Agreements
There can be a subscription (and also issuance) only with
reference to shares of stock which have never been issued by
the corporation (i.e. over unissued shares of the Authorized
capital Stock) in the following cases:
The original issuance from Authorized Capital Stock at the
time of the incorporation;
The opening, during the life of the corporation, of the
portion of the original Authorized Capital Stock previously
unissued; or
The increase of Authorized Capital Stock achieved through
a formal amendment of the articles of incorporation and
registration thereof with the SEC.

How does one become a shareholder in a corporation?
A person becomes a shareholder the moment he:
1. Enters into a subscription contract with an existing
corporation (he is a stockholder upon acceptance of
the corporation of his offer to subscribe whether the
consideration is fully paid or not)
2. Purchase treasury shares from the corporation or
3. Acquires shares from existing shareholders by sale or
any other contract.

What are the kinds of subscription contracts?
1. 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 6
months from the date of subscription.
a. All of the other subscribers consent to the
revocation; or
b. Incorporation of said corporation fails to
materialize within said period or within a longer
period as may be stipulated in the contract of
No pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the SEC.
2. Post-Incorporation Subscription
Entered into after incorporation.

Subscription Agreement under Statute of Frauds
Subscription agreements are not covered by the Statute of Frauds,
and the corporation has a right to enforce and collect, and to adduce
oral evidence upon oral subscription agreement, on the following
1. The special treatment accorded to subscription agreements
under Corporate Law requires that subscription agreements,
even when they have been entered into orally, should be
allowed to be proved and enforced by parol evidence, in order
to fully protect corporate creditors under the trust fund
doctrine; and
2. Even if subscription agreements are covered by the Statute of
Frauds, but by their nature which upon consent would make the
subscriber a stockholder and owner of the covered shares,
which would constitute partial execution, they are deemed to
be exempted from the prohibition against the presenting of oral
evidence to prove and enforce them.

Consideration for Stocks
Since the capital stock of a corporation constitutes the area or basis
upon which the trust fund doctrine operates, the law ensures that
the consideration received (which becomes part of the assets of the
corporation) would have proper value to support the capital stock.

What are valid considerations for subscription agreements?
1. Cash;
2. Property;
3. Labor or services actually rendered to the
4. Prior corporate obligations;
5. Amounts transferred from unrestricted retained
earning to stated capital (in case of declaration of
stock dividends);
6. Outstanding shares in exchange for stocks in the
event of reclassification or conversion.
Note: Promissory notes or future services are not valid
Rationale: It would convert the legal relationship into an
ordinary mutuum or account receivable, and covered by the
ordinary rules pertaining to contracts in general, which may
then be invoked to undermine the trust fund doctrine.

Consideration as Cash or Property:
It is not necessary for the subscription agreement to be valid
that the same must be delivered at perfection, for a
subscription agreement is a consensual (not real) contract,
being a species of genus sale.

Definition of actually...paid and actually received under
Sec. 62, CCP:
It indicates that eventually the consideration must be paid and
cannot be given as a discount or amount to watered stock.

Consideration Other Than Cash or Consists of Intangible
Properties such as Patents or Copyrights:
The valuation thereof shall initially be determined by the
incorporators or the Board of Directors, subject to final SEC

Issued Price or Par Value:
Stocks shall not be issued for a consideration less than the par
or issued price thereof. The issued price of no-par value shares
may be fixed:
In the articles of incorporation
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 at a meeting
duly called for the purpose representing at least a majority
of the outstanding capital stock.

Shares of Stock
Nature of Stock
Shares of stock in a corporation constitute intangible
personal property of the stockholder, which he can
contract with as in any other form of property, like
assignment by way of disposition, or pledge by way of
Shares of stock, therefore, are properties and have intrinsic
pecuniary value to the stockholders.
They do not, however, represent proprietary rights of
stockholders to the assets or properties of the corporation.

Characteristics of stockholders interest in corporate contracts:
1. It is indirect.
2. It is contingent.
3. It is remote.
4. It is conjectural.
5. It is consequential.
6. It is collateral.
7. It is purely inchoate or in sheer expectancy of a right
in the following after payment of the corporate debts
and obligations:
Management of the corporation
Share in the profits and assets thereof on the
Shares of stock, whether issued or unissued, do not
constitute part of the Assets of the corporation as
reported in its financial statements (i.e. the balance
They do not constitute debts or liabilities of the
corporation; and they are not reported as components of
liabilities in the corporations financial statements (i.e.
the balance sheet).
Shares of stock fall within that special category of
intangible personal properties under the generic name
Rationale: All dealings pertaining to shares of
stock (e.g. authorized capital stock, outstanding
capital stock, subscription receivables, paid up
capital stock and treasury shares) and all claims
that arise therefrom (e.g. retained earnings or
deficit) are reported in the Stockholders Equity
section of the corporations financial statements
(i.e. balance sheet).
Stockholders Equity represents the primary
claim of the stockholders to the results of the
operations of the corporations business
enterprise, which if run profitably (i.e. there are
accumulated retained earnings) tend to increase
the Assets of the corporation; and when run
unprofitable or at a loss (i.e. there is a deficit)
tends to decrease the Assets of the corporation.
A share of stock represents a proportionate proprietary
claim by the holder thereof (stockholder) to the business
enterprise pursued through the medium of a corporation.
Watered Stock
Shares issued as fully paid-up when in fact the
consideration agreed to and accepted by the
directors of the corporation was something
known to be much less than the par value or
issued value of the shares.
Stocks issued by a corporation for which it has in
fact intentionally or knowingly received or
agreed to receive nothing at all from them or less
than their par value either in money or in
property or in service.
The water in the stock refers to the difference
between the fair market value at the same time
of the issuance of the stock (not at the time of
discovery of the inadequate consideration or at
the time of demand for payment) and the par or
issued value of said stock. Subsequent increase in
the value of the property used in paying the
stock does not do away with the water in the
stock. The existence of such water is
determined at the time of the issuance of the

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, Corporation Code).

Trust Fund Doctrine for Liability for Watered Stocks
The doctrine serves as basis for holding such
stockholders and officers liable for watered stocks.
Under which all corporate creditors would have legal
basis to recover against stockholders and guilty officers.
The trust fund doctrine on watered stock prevails.
It is established doctrine that subscriptions to the capital
of a corporation constitute a fund to which creditors
have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize
assets for the payment of its debts...A corporation has
no power to release an original subscriber to its capital
stock from the obligation of paying for his shares,
without a valuable consideration for such release; and as
against creditors a reduction of the capital stock and
take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the
statutory regulations is necessary (Philippine Trust Cop.
V. Rivera, 1923).

Situs of the Shares of Stock
The actual situas of shares of stock is the domicile of the
corporati on (Tayag vs. Benguet Consolidated Inc., 26 SCRA
242, 1968)

Classes of Shares of Stock
Common Shares
a. A stockholder, owner of at least one common
share has the following rights:
Right to vote at meetings;
Right to dividends;
Right to examine corporate books.
b. A common stock represents the residual
ownership interest in the corporation. It is a
basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and
entitles the shareholder to a pro rata division of

Preferred Shares
a. May enjoy a right of preference in:
i. Dividends;
ii. Voting (Particularly in election of directors);
iii. Corporate property upon dissolution.
b. Preferred stocks are those which entitle the
shareholder to some priority on dividends and
asset distribution.
c. Limitations:
i. Preferred shares can only be issued with par
ii. Preference must be:
Stated in the articles of incorporation;
May be fixed by the Board of Directors
when authorized by articles of
incorporation, provided, such terms
and conditions shall be effective upon
filing of a SEC certificate.

Par Value Shares
Their value is fixed in the articles of
incorporation, which nominal value remains the
same regardless of the profitability of the
This gives rise to financial stability and is the
reason why banks, trust corporations, insurance
companies and building and loan associations
must always be organized with par value shares.

No Par Value Shares
They have no assigned value, their value being
dependent on the changes in the profits of the
corporation and the market value of the shares
themselves at the time the shares are issued.
Minimum consideration: 55.00.
The following cannot issue no par value shares:
i. Banks;
ii. Insurance companies;
iii. Trust companies;
iv. Building & Loan Associations; and
v. Public Utilities

The above-types of corporations deal with the public and
most of them manage the savings of the people; thus, the
law seeks to protect the investing public by making sure
that such corporations have sufficient funds in the form of
capital so that the public could determine the financial
viability of such corporations.
Three ways of Determining Value of No-Par Value
By majority vote of the outstanding shares
(issued shares) in a meeting called for that
By Board of Directors pursuant to authority
conferred upon it by the articles of
incorporation; or
By amendment of articles of incorporation (Sec.
62, Corporation Code).
Redeemable Shares
Redeemable shares can only be issued when
expressly authorized by the articles of
The terms and conditions affecting redeemable
shares are required to be provided for in the
articles of incorporation and to be stated on the
certificates of stock.
Founders Shares
These must be provided for in the articles of
incorporation, which would be entitled to vote
and be voted directors to the Board of Directors.
But such privilege is good only for 5 years, which
period shall begin from the date of the approval
thereof by SEC.
Treasury Stocks
These 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.
Escrow Shares
Shares that have been issued subject to a condition.

General Rule on Classification of Shares:
The shares of stock in a corporation 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 thus
must be stated in the articles of incorporation in order to be
valid (Sec. 6, Corporation Code).

No share may be deprived of voting rights except
those classified and issued as preferred or
redeemable shares.
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, except 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.
Note: There can be no privilege or restriction on any share other
than what is provided for in the articles of incorporation (Sec. 6,
Corporation Code).

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 (Sec. 67,
Corporation Code).

May be through any of the following means:
As specified in the subscription contract.
The Board, through a resolution, may call for all or part of the
unpaid subscriptions.
Failure to pay on a specified date, the entire balance which is
due and payable.
Failure to pay within 30 days from the date the subscription
becomes delinquent and is subject to sale.

Call by Board of Directors
3 meanings of the nature of the call:
a. It may mean the resolution of the Board of
Directors for the payment of unpaid
b. Notification of such resolution made on the
stockholders; or
c. The time when subscriptions become payable.
It is usually expressed in the form of a resolution
adopted by the Board of Directors, specifying the:
i. Proportion of the unpaid subscription which
it is desired to call in and the
ii. Time or times when it is to be payables.
b. The entire amount of the unpaid subscription
maybe called at once or it may be made payable
by instalments, at stated intervals, or by
successive calls.
When call not necessary:
a. A specific date of payment is specified in the
subscription contract;
b. Failure to pay the unpaid subscription within the
prescribed 30-day period from the date specified
in the subscription contract.
c. If the corporation becomes insolvent, which
makes the liability on the unpaid subscription
due and demandable regardless of any
stipulation to the contrary in the subscription

Notice Requirement
The Notice of Call shall be served on each stockholder
either personally or by registered mail.

The Notice of Call for unpaid subscribed stock must be
published, except when the corporation is insolvent, in which
case, payment is immediately demandable (Lingayen Gulf
Electric Power Co. v. Baltazar, 93 Phil. 404 (1953)

Sale of Delinquent Shares

Sections 67 to 70 give the two ways by which a corporation
can collect from the stockholders the balance of their
subscriptions: extrajudicially or judicially.

Procedure of Delinquency Sale (EXTRAJUDICIAL
a. The Board of Directors must make a call by
resolution demanding the payment of the
balance of the subscription. This is called the
b. The NOTICE OF CALL shall be served on each
stockholder either personally or by registered
mail (There is no need for publication).
c. If the stockholders do not pay the amount due
on the date designated in the notice, the Board
shall issue, by resolution, a NOTICE OF
d. NOTICE OF DELINQUENCY shall be served on the
non-paying subscriber either personally or by
registered mail PLUS
i. Publication in a newspaper of general
circulation in the province or city where the
principal office of the corporation is located.
ii. PERIOD FOR PUBLICATION: Once a week for
two consecutive weeks.
The amount due on each subscription
plus accrued interest.
The date, time and place of the sale.
iv. Such notices are jurisdictional.

e. In the public auction, the highest bidder is the
one who is willing to pay the amount of the
balance of the subscription for the least number
of shares.
f. After the bidding, the corporation will give the
highest bidder the certificate of stock in the
number of his bid while the remaining number, if
any, will be issued a certificate of stock in favour
of the original subscriber as fully paid.
g. On the other hand, if there are no bidders, then
the corporation must bid for the whole number
of shares (regardless of how much the
stockholder has paid), which shall then pertain to
the corporation as fully-paid treasury stocks.

Effect of Delinquency
On the holder:
a. It disqualifies the stockholder to be voted for or
be entitled to vote or to representation at any
stockholders meeting.
b. It disqualifies the stockholder to exercise any
rights of a stockholder except the right to
dividends, until and unless he pays the amount
due on his subscription with accrued interest and
the costs and expenses of advertisement, if any.
i. The CASH DIVIDEND DUE shall first be
applied to the unpaid balance.
ii. The STOCK DIVIDEND shall be withheld until
the unpaid balance is fully paid.
c. The stockholder shall not be entitled to notice of
the regular or special meetings of the
d. The stockholders delinquent shares be included
in the determination of a quorum for
shareholdings meetings.
Auction Sale and the Highest Bidder
It shall not be less than 30 days nor more than 60 days
from the date the stocks become delinquent.
a. 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.
b. 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 favour.

Certificate of Stock
Nature of the Certificate
It is an instrument that is issued formally by the
corporation, with the intention that the same
constitute the best evidence of the issuance of shares
of stock that are fully paid and no longer assessable.

It is the evidence of a holders interest and status in a

It is a written instrument signed by the proper officer
of a corporation stating or acknowledging that the
person named in the document is the owner of a
designated number of shares of its stock.

It is prima facie evidence that the holder is a
shareholder of a corporation.

Uncertificated Shares
Rule on Uncertificated Shares
Notwithstanding Section 63 of the Corporation Code,
under Section 43.1 of the Securities Regulation Code,
a corporation whose shares of stock are registered
pursuant to the Code or listed on a stock exchange
i. If so resolved by its Board of Directors and
agreed by a shareholder, issue shares to, or
record the transfer of some or all of its
shares into the name of said shareholders,
investors or, securities intermediary in the
form of uncertificated securities;
ii. The use of uncertificated securities shall be
without prejudice to the rights of the
securities intermediary subsequently to
require the corporation to issue a certificate
in respect of any shares recorded in its
name; and
iii. If so provided in its articles of incorporation
and by-laws, issue all of the shares of a
particular class in the form of uncertificated
securities and subject to a condition that
investors may not require the corporation
to issue a certificate in respect of any shares
recorded in their name.

Binding Effect on Shares Transactions
Under Section 43.3 of the Securities Regulation
Code, transfers of securities, including
uncertificated securities may be validly made and
consummated in any of the following manner:
iv. By appropriate book-entries in the securities
accounts maintained by securities
v. In the stock and transfer book held by the
corporation or the stock transfer agent and
such bookkeeping entries shall be binding
on the parties to the transfer.
b. A transfer made pursuant to the foregoing has
the effect of the delivery of a security in bearer
form or duly indorsed in blank representing the
quality or amount of security or right transferred
, including the unrestricted negotiability of that
security by reason of such delivery.
c. However, transfer of uncertificated shares shall
only be valid, so far as the corporation is
concerned, when a transfer is recorded in the
books of the corporation so as to show the
names of the parties to the transfer and the
number of shares transferred.

Since certificates of stock are quasi-negotiable in
nature, the normal mode of dealing with such
certificates is by the process of endorsement and

It must be noted that endorsement and delivery of
certificates of stock may be for any of the three
a. For sale or assignment of the shares;
b. Pursuant to a trust or nominee arrangement; or
c. By way of pledge or encumbrance of the shares.

Endorsement is an essential ingredient in dealing with
certificates of stock, and generally cannot be
dispensed with.

The delivery of the stock certificate duly endorsed by
the owner is the operative act of transfer of shares
from the lawful owner to the new transferee.

Registration of the transfer of the share in the stock
and transfer books is necessary to complete the
process of negotiation of the certificate of stocks.

Requirements for Valid Transfer of Stocks
a. The certificate must be endorsed by the owner
or his attorney-in-fact or other persons legally
authorized to make the transfer;
b. There must be delivery of the stock certificate;
c. To be valid against third parties, the transfer
must be recorded in the books of the

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, Corporation Code).

Full payment
A subscriber must first totally pay his subscription
before a certificate of stock covering shares
subscribed and paid for could be issued to him.
Every stockholder has a right to have a proper
certificate issued to him by the corporation upon
demand, as soon as he has complied with the
conditions under Sec. 64 of the Corporation Code,
which requires full payment of the subscription.
The provisions under Section 64 of the Corporation
Code actually operates as a legal basis on the part of
the corporation, through its Board of Directors and
officers, to refuse any claim by a subscriber to issue
certificate of stock covering the extent of shares that
have been paid-up while leaving the remaining
balance unpaid.
The SEC has opined that a stockholder shall only be
entitled to the issuance of his certificate of stock upon
payment of the full amount of his subscription,
together with interest and expenses (in case of
delinquent shares), if any is due: Section 64 of the
Corporation Code clearly provides that a subscription
is one, entire and indivisible whole contract.

Payment Pro-Rata
The corporation is not prohibited from dividing the
subscription of a subscriber by considering portion thereof
as fully paid and issuing a corresponding certificate over
the paid-up shares. This option is ONLY granted to the
In the absence of provisions in the by-laws to the contrary,
a corporation may apply payments made by subscribers on
account of their subscriptions either as:
a. Full payment for the corresponding number of shares
the par value of which is covered by such payment; or
b. Payment pro rata to each and all the entire number of
shares subscribed for.
The two alternatives cannot be availed of by the
corporation at the same time.
Once an alternative is chosen, it must be applied
uniformly to all stockholders similarly situated, and
therefore, it cannot be changed without the consent
of all stockholders who might be affected.

Lost or Destroyed Certificates
a. The following procedure shall be followed for the issuance
by a corporation of new certificates of stock in lieu of hose
which have been lost, stolen or destroyed:
a. The registered owner of certificates of stock or his
legal representative shall file with the corporation an
affidavit setting forth, if possible:
i. The circumstances as to how the certificates
were lost, stolen or destroyed;
ii. The number of shares represented by each
certificate, the serial numbers of the
iii. The name of the corporation which issued
the same;
iv. He shall submit such other information and
evidence which he may deem necessary.
b. The 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 3 consecutive weeks at the expense of the
registered owner.
c. However, instead of waiting for one (1) year, the
registered owner may file a bond or other security,
running for a period of one (1) year for a sum and in
such 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;
d. Provided, That if there is a pending contest regarding
the ownership of said certificates of stock the
issuance of the new certificates of stock in lieu
thereof shall be suspended until the final decision by
the court.
NOTE: Except in cases 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
certificates of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-described.

Stock and Transfer Book
Under Section 74 of the Corporation Code, a stock
corporation must keep a book to be known as the stock
and transfer book.
a. All stocks in the names of the stockholders alphabetically
b. The instalment paid and unpaid on all stock for which
subscription has been made, and the date of payment of
any instalment;
c. A statement of every alienation, sale or transfer of stock
made; and
d. Such other entries as the by-laws may prescribe.
Who May Make Valid Entries
Entries made on the stock and transfer book by any person
other than the CORPORATE SECRETARY, such as those
made by the President and Chairman, cannot be given any
valid effect.

It is the CORPORATE SECRETARYs duty and obligation to
register valid transfers of stock and if said corporate officer
refuses to comply, the transferor-stockholder may
rightfully bring suit to compel performance.

A stockholder who transfer shares of stock has no
authority to effect their entries in the stock and transfer
book of the corporation, even when the Corporate
Secretary happens to be at odds with such stockholder,
and even when such stockholder happens to be in
possession of the book. The entries would be considered

Disposition and Encumbrance of Shares
Allowable Restrictions on the Sale of Shares
The authority granted to a corporation to regulate the
transfer of its stock does not empower the corporation to
restrict the right of a stockholder to transfer his shares, but
merely authorizes the adoptions of regulations as to the
formalities and procedure to be followed in effecting

SEC has allowed reasonable restrictions on the transfer of
shares in the articles of incorporation if the restrictions
comply with the provisions of Section 63 of the
Corporation Code, namely, that:
i. The restriction must appear in the articles of
incorporation, by-laws and the certificate of stock,
ii. That 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.

Sale of Partially Paid Shares
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation. A corporation may refuse to acknowledge and
register a sale or assignment of shares which are not fully
paid, and may continue to hold the original subscriber
liable on the payment of the subscription.

The term unpaid claims refers to any unpaid claims
arising from unpaid subscription and not to any
indebtedness which a subscriber or stockholder may owe
the corporation arising from any other transactions.

The lien created under Section 63 of the Corporation Code
can only cover unpaid subscriptions to the corporation,
and is without application to other obligations that a
stockholder may have against the corporation.

Sale of a Portion of Shares Not Fully Paid
A stockholder cannot transfer part of his subscription in
view of the indivisible nature of a subscription contract.

i. It would be difficult to determine whether or not the
partial payments made should be applied as full
payment for the corresponding number of shares
which can only be covered by such payment as
proportional payment to each and all of the entire
number of subscribed shares.
ii. The difficulty in determining the unpaid balance to be
assumed by each transferee.

Sale of All Shares Not Fully Paid
The entire subscription although not yet fully paid, may be
transferred to a single transferee, who although not yet
fully paid, may be transferred to a single transferee, who
as a result of the transfer must assume the unpaid balance.

It is necessary, however, to secure the consent of the
corporation since the transfer of subscription rights and
obligations contemplates a novation of contract which
under Article 1293 of the Civil Code cannot be made
without the consent of the creditor.

The contract of sale or assignment between the original
subscriber and his transferee, although binding between
them, cannot be forced upon the corporation, when it
covers not fully paid shares. This principle is in consonance
with the principle in Contract Law that the substitution of
the party obligor can be made only with the express
consent of the oblige, the corporation being considered
the oblige in a subscription contract.

Sale of Fully Paid Shares
The proper mode to deal with fully paid shares covered by
certificates of stock would be endorsement of the
certificates and their due delivery to the assignee.

No transfer 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

The failure to register a sale or transfer in the stock and
transfer book of the corporation would render the sale
invalid and not binding to all persons, including attaching
creditors of the seller.

The rationale for holding registration of a sale or
disposition of shares of stock valid only when registered in
the stock and transfer book of the corporation, thus:
a. To enable the corporation to know at all times who
the actual stockholders are, because mutual rights
and obligations exist between the corporation and its
b. 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; and
c. To avoid fictitious or fraudulent transfer.

Involuntary Dealings with Shares
a. A mortgage or pledge of shares of stock that would
involve the outright assignment or delivery and
indorsement of the certificates of stock to the pledge
or mortgagee would constitute a valid mortgage even
without registration with the register of deeds, but it
would always be subject to prior attachment or levy
of the shares duly effected pursuant to the Rules of
Court by the judgment creditors of the registered
b. Outside of physical transfer or delivery of the
certificates of stock, a chattel mortgage over the
shares of stock, whether or not covered certificates of
stock, would be valid and binding on third parties only
if the mortgage was registered with the register of
deeds or registers of deeds as the case may be, of the
province or city where the mortgagor has his domicile
and where the corporation has its principal place of
c. A writ of attachment/execution against the shares of
stock of the judgment debtor would be valid and
binding on the shares and against third parties, the
moment there is proper service of the writ to the
proper officer of the corporation pursuant to Section
7(d), Rule 57 of the Rules of Court.
d. In any of the three cases above, the pledge, mortgage,
attachment or levy of the shares of stock would
thereupon be valid and binding on the entire world
upon their constitution or completion of process; no
registration of the pledge, mortgage, attachment or
levy in the stock and transfer book of the corporation
is required to make any of them either valid or
binding; and their registration in the stock and
transfer book would have no legal effect at all and
such registration does not produce the effect of
notice to third parties;
e. As between two contending creditor, it would seem
that the first to have the writ served upon the proper
officer of the corporation would be preferred;
f. As between contending pledge/mortgagee and an
attaching creditor, if the registration requirement for
the pledge or mortgage happened first in point of
time prior to service of the writ to the proper
corporate officer, the pledge or mortgage shall be
preferred; whereas, if the service of the writ to the
proper court officer happened ahead of the
registration of the pledge or mortgage, then the
attaching creditor would be preferred;
g. As between a pledge/mortgage duly constituted (even
when not registered in the stock and transfer book)
and the buyer or assignee of the shares, if the pledge
or mortgage was constituted and registered ahead of
the registration of the sale or assignment in the stock
and transfer book (even when the sale or assignment
was perfected and consummated ahead of the pledge
or mortgage) the pledge or mortgage would still be
preferred because the registration of the sale or
assignment in the stock and transfer book is a
necessary ingredient to make the sale or assignment
binding on third parties, including the
h. As between an attaching/levying creditor where there
has been proper service of the writ to the proper
corporate officer (even when not registered in the
stock and transfer book) and the buyer or assignee of
the shares, if writ was properly served upon the
corporate officer ahead of the registration of the sale
or assignment in the stock and transfer book (even
when the sale or assignment was perfected and
consummated ahead of the service of the writ) the
attachment/levy would still be preferred because the
registration of the sale/assignment in the stock and
transfer book is a necessary ingredient to make the
sale or assignment binding on third parties, including
on attaching/levying creditor.

Dissolution and Liquidation
Modes of Dissolution
Dissolution signifies the extinguishment of a corporations
franchise and the termination of its corporate existence for
business purpose.

A de jure dissolution is one adjudged and determined by
administrative or judicial sentence, or brought about by an act
of the sovereign power, or which results from the expiration of
the charter period of corporate life.

A de facto dissolution is one which takes place in substance and
in fact when the corporation by reason of insolvency, cessation
of business, or suspension of all its operations, as the case may
be, goes into liquidation, still retaining its primary franchise to
be a corporation. This is actually a dissolution only of the
business enterprise, while leaving intact the juridical entity.
a. Voluntary
i. Where No Creditors Are Affected
By an administrative application for dissolution filed with
the SEC
a. Majority vote of the Board by resolution;
b. Affirmative vote of 2/3 of the outstanding capital
stock or 2/3 of the members, as the case may be:
i. Provided: Notice of such meeting was
published in the principal office; if none,
then in a newspaper of general circulation in
the Philippines, with notice sent to each
stockholder or member at least 30 days
prior to the meeting;
c. Copy of the resolution certified by majority of directors
or trustees and countersigned by secretary and filed with
d. SEC must issue certificate of dissolution.

ii. Where Creditors Are Affected
By a formal petition for dissolution filed with the SEC,
with due notice, and hearing to be duly conducted
a. Formal petition with SEC
Signed by majority of the directors/trustees or
officers having management of its affairs, verified
by president or secretary or one director/trustee;
Set forth all claims and demands against it;
Set forth that dissolution was resolved upon
affirmative vote of 2/3 of the outstanding capital
stock or 2/3 of the members, as the case may be;
b. SEC shall issue an order reciting purpose of petition
and shall fix date before which objections may be
filed, which shall not be less than 30 days nor more
than 60 days after the entry of order;
c. Order shall be published once a week for three consecutive
weeks in a newspaper published in the municipality or city
where the principal office of the corporation is situated; if none,
in a newspaper of general circulation in the Philippines, and a
copy is to be posted for 3 consecutive weeks in 3 public places
in such municipality or city;
d. After 5 days notice from expiry date, SEC shall hear the
petition and the objections thereto;
e. If lawful, it shall order the corporation dissolved, provide for
the disposition of properties, and may appoint receiver.

iii. By Shortening of Corporate Term
i. By the amendment of the articles of incorporation.
ii. By vote of 2/3 of the outstanding shares or 2/3 of the
members, the articles may be amended to shorten the
corporate life.
iii. SEC internal rules require the following:
Notice of the dissolution to be published in a
newspaper of general circulation for 3 consecutive
List of corporate creditors, with their consent to the
shortening of corporate term;
Submission by a majority stockholders/principal
officers an Undertaking to personally answer for
any outstanding corporate obligations of the
corporation; and
Latest audited financial statements which must not
be earlier than the date of the stockholders
meeting approving amendment to the articles of
incorporation, and a BIR clearance on the tax
liabilities of the corporation.
iv. Under Section 120 of the Corporation Code, it is only upon
approval of the amended articles of incorporation by the SEC
that the corporation shall be deemed dissolved. This means
that if the shortened term, as proposed in the amendment of
the articles of incorporation, expires before the approval by
the SEC, the corporation will not be automatically dissolved
upon such expiration but only upon SEC approval of the
amendment. On the other hand, if the SEC give its approval
before such shortened term expires, the dissolution can take
effect only upon the expiration of such shortened term (SEC
Opinion No. 06-20, 13 March 2006).
b. Involuntary
A corporation may be dissolved by SEC upon filing of a
verified complaint, after proper notice and hearing on
grounds provided by existing laws, rules and regulations.
i. By expiration of Corporate Term
When the corporate life of the corporation as stated
in its articles of incorporationis allowed to expire,
without extension, the corporation is deemed
dissolved by such expiration without need of further
action on the part of the corporation or the State.
ii. Failure to Organize and Commence Business Within 2
Years from Incorporation
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 a ground for the
suspension or revocation of its corporate franchise or
certificate of incorporation (Section 22, Corporation

The term to organize when used in reference to a
corporation, involves the:
i. Election of officers,
ii. Providing for the subscription and payment
of the capital stock,
iii. The adoption of by-laws. And
iv. Such other steps as are necessary to endow
the legal entity with the capacity to transact
the legitimate business for which it was

It referred to the term organization as relating to
the systematization and orderly arrangement of the
internal and managerial affairs and organs of the

The same SEC rules consider a corporation to have
commenced the transaction of its business when it
has performed preparatory acts geared towards the
fulfilment of the purposes for which it was established
such as but not limited to the following:

a. Entering into contracts or negotiations for lease or
sale of properties to be used as business or factory
b. Making plans for and construction of the factory;
c. Taking steps to expedite the construction of the
companys working equipment.

iii. Legislative Dissolution (see FRIAs discussion on
Corporations Dissolution)
iv. Dissolution by the SEC on Grounds Under Existing
a. Failure to organize and commence business within 2
years from incorporation;
b. Continuously inoperative for 5 years;
c. Failure to file by-laws within 30 days from issue of
certificate of incorporation;
d. Continuance of business not feasible as found by
Management Committee or Rehabilitation Receiver;
e. Fraud in procuring Certificate of Registration;
f. Serious Misrepresentation; and
g. Failure to file required reports.

Methods of Liquidation
The process by which all the assets of the corporation are converted
into liquid assets (cash) in order to facilitate the payment of
obligations to creditors, and the remaining balance, if any, is to be
distributed to the stockholders or members.

NOTE: A dissolved corporation continues to be a body corporate for
3 years from the time it is dissolved for the purpose of liquidation or
winding up its corporate affairs.

The termination of the life of a juridical entity does not by itself
cause the extinction or diminution of the rights and liabilities of such
entity nor those of its owners and creditors alike (see Sec. 145 of the
Corporation Code).

By the Corporation Itself
Through its board of directors/trustees

Every corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner,
shall nevertheless be continued as a body corporate for three
(3) years after the time when it would have been so dissolved,
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, but not for the
purpose of continuing the business for which it was established
(Sec. 122, Corporation Code)

Conveyance to a Trustee within a 3-Year Period
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or
other persons in interest (Sec. 122, Corporation Code)

By Management Committee or Rehabilitation Receiver
Upon five (5) day's 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. 119, Corporation Code)

Grounds for Appointment of Management Receiver
a. Imminent danger of loss, wastage, dissipation or
destruction of assets; or
b. Paralysation of business operations of the corporation
that may be prejudicial to the interest of minority
stockholders, party-litigants or general public.

A close corporation, within the meaning of this Code is one whose
Articles of Incorporation provide: (REQUIREMENTS)
a. Number of stockholders not to exceed 20
b. Restriction on the transfer of issued stocks (Restriction: right of
first refusal in favor of the stockholder or the corporation); and
c. The stocks cannot be listed in the stock exchange nor should
they be publicly offered

Special Rule on Stock Ownership: not deemed a close corporation
whenever 2/3 of the voting stocks or voting rights is owned or
controlled by another corporation which is not a close corporation

1.The stockholders themselves can directly manage the corporation
and perform the functions of directors without need of election:
a. When they manage, stockholders are liable as directors;
b. There is no need to call a meeting to elect directors;
c. The stockholders are liable for tort.

2. Despite the presence of the requisites, the corporation shall not
be deemed a close corporation if at least 2/3 of the voting stocks or
voting rights belong to a corporation which is not a close

(a) Mining companies
(b) Oil companies
(c) Stock exchange
(d) Banks
(e) Insurance companies
(f) Public utilities
(g) Educational institutions
(h) Other corporations declared to be vested with public interest

1. The restrictions in the transfer of the stocks must appear:
(a) In the AOI
(b) In the By-Laws and
(c) On the stock certificates.
OTHERWISE: they shall not be binding on any purchaser thereof in
good faith.

2. Restriction 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 terms,
conditions or period stated therein.

1. If stock is issued or transferred to any person not entitled
and the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders
conclusive presumption of notice of fact of ineligibility
2. If AOI states the number of persons, not in excess of 20
entitled to be holders of stock and if the certificate
conspicuously states such number, and if issuance or
transfer would cause stock to be held by more person to
whom such stock is issued or transferred is conclusively
presumed to have notice of this fact
3. If stock certificate conspicuously shows a restriction on
transfer of stock- conclusive presumption of notice of the
fact by transferee
The corporation may, at its option, refuse to register the transfer of
stock in the name of the transferee. EXCEPT:
(a) consented to by all stockholders, or
(b) if close corporation has amended AOI in accordance with this
This does not in any way impair any right of a transferee regarding
any right to rescind the transaction or to recover under any
applicable warranty, express or implied.

Unless By-Laws provide otherwise, VALID if:
1. before or after such action is taken, written consent
thereto is signed by all the directors; or
2. all stockholders have actual or implied knowledge of the
action and make no prompt objection thereto in writing; or
3. the directors are accustomed to take informal action with
the express or implied acquiescence of all the
stockholders; or
4. all the directors have express or implied knowledge of the
action in question and none of them makes prompt
objection thereto in writing
5. ratified by a director who failed to attend, unless promptly
files his written objection, if directors meeting is held
without proper cal or notice

stock to be issued, including reissuance of treasury shares, whether
for money or for property or personal services, or in payment of
corporate debts, unless AOI provides otherwise.

f. AMENDMENT OF AOI Any amendment to the AOI which seeks:
(a) to delete or remove any provisions required by the Corporation
Code to be contained in the AOI;
(b) to reduce a quorum or voting requirement stated in said AOI;
shall not be valid or effective unless approved by at least 2/3 of
the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be
specified provided in the AOI for amending, deleting or
removing any of the aforesaid provisions, at a meeting duly
called for such purpose.

if the stockholders split into camps, and there is a deadlock with
the result that the business and affairs of the corporation can
no longer be conducted to the advantage of the stockholders in
general any stockholder can petition the SEC, which is
empowered to take the necessary steps to break the deadlock,
even by amending the AOI or By-laws and to the extent of
appointing a 3
party as a provisional director.
i. 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.

ii. Not a receiver of the corporation and does not have the title
and powers of a custodian or receiver

iii. Have all the rights and powers of a duly elected director of the
corporation (right to notice, to vote) until such time as he shall
be removed by order of the Commission or by all stockholders.

iv. Compensation determined by agreement between him and
corporation subject to approval of SEC (SEC may fix in absence
of agreement or in the event of disagreement)
So long as the close corporation has unrestricted profits, it can
be compelled to buy out the stockholder
A stockholder may also petition the SEC to compel dissolution
whenever affairs are carried out for illegal, fraudulent or
dishonest, or unfairly prejudicial, or corporate assets are

a. Definition
-one organized for an eleemosynary purpose and where no
part of its income is distributable to its members, trustees,
officers, subject to the provisions on dissolution
PROVIDED: that any profit which a non-stock corporation may
obtain as an incident to its operations shall whenever necessary
or proper, be used for the furtherance of the purpose/s for
which it was organized.

1.Incidental Profits obtained from operations
2.Profits obtained from investment of accumulated funds it
may subscribe to the capital stock of a corporation or invest in
commercial papers such as money instruments, but such power
must be included in its AOI in order that the investment may
not be considered ultra vires (must be necessary and incidental)
3.Powers necessary in furtherance of purposes

The mere realization of profits out of the
operations of a non-stock corporation does not
automatically result in the loss of its exemption
from income taxation as long as no part of its
profit inures to the benefit of any stockholder or
individual. It is not earning of incidental profits
that make the entity non-stock, but the actual or
legal authority to distribute such profits to the
officers or members. (Collector vs. University of
the Visayas, 1 SCRA 669)


1. Charitable
2. Religious
3. Educational
4. Professional
5. Cultural
6. Recreational
7. Fraternal
8. Literary
9. Scientific
10. Social
11. Civic Service
12. Or similar purposes, like trade, industry, agriculture and like
13. Any combination thereof


Its assets shall be applied and distributed as follows:

1.All liabilities and obligations of the corporation

2.Assets held by corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of
the dissolution

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 1 or more
corporations, societies or organizations engaged in activities in the
Philippines substantially similar

4.Assets other than those mentioned in the preceding paragraphs,
if any shall be distributed in accordance with the AOI or the By-

5.Assets may be distributed to such persons, societies,
organizations, or corporations, whether organized for profit as
may be specified in the plan of distribution


-a corporation that is organized other than under the laws of
the Philippines, provided said foreign country allows Filipinos
and Philippine corporations to do business there

General Rule: FC can have no legal corporation or status
beyond the bounds of the State or sovereignty by which it is
created or incorporated

1) CONSENT DOCTRINE the FC may act in another State or
country with the latters express or implied consent, however,
subject to conditions and restrictions it may impose

commercial dealings incident to prosecution of purpose and
object of the organization. Isolated, occasional or casual
transactions do not amount to engaging in business. But where
the isolated act is not incidental/casual but indicates the FCs
intention to do other business, said single act constitutes
engaging in business in the Philippines.

A corporation has legal status only within the state or
territory in which it was organized. For this reason, a
corporation organized in another country has no
personality to file suits in the Philippines. In order to
subject a foreign corporation doing business in the country
to the jurisdiction of our courts, it must acquire a license
from SEC and appoint an agent for service of process.
Without such license, it cannot institute a suit in the
Philippines. (European Resources vs. Ingenieuburo
Birkhanh, 435 SCRA 246)

A foreign corporation has the right to transact business in the
Philippines after it has obtained a license to do business.


Doing Business in the
Philippines, With a License
May sue and can be sued in
the Philippines
Doing Business in the
Philippines, Without a
Cannot sue, but may be
sued in the Philippines
Not doing Business in the
Philippines, on Isolated
May sue and May be sued

Doctrine of Doing Business (Sec.3(d) of Foreign Investments Act of

(a) Soliciting orders
(b) Service Contracts
(c) Opening offices, whether called liaison offices or branches
(d) Appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a
period/s totaling 180 days or more
(e) Participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines
(f) Any other act/s that imply continuity of commercial dealings or
arrangements, and contemplate to that extent, performance
normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business

PROVIDED: the phrase doing business shall not be deemed to include:

(a) Mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business and/or
exercise of rights as such investor
(b) Having a nominee director or officer to represent its interests in
such corporation and
(c) Appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its
own account.

TRUE TEST: whether the FC is continuing a body or substance of
the business or enterprise for which it was organized or whether it
has substantially retired from it and turned it over to another

The term implies a 1) (existence of continuing intent) continuity of
commercial dealings and arrangements, and 2) (nature of the act
or transaction) contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and
object of its organization. (Mentholatum Co., Inc. vs.
Mangaliman, 72 Phil. 524)

CONTRACT TEST: So long as the perfection and consummation of a
series of transactions are done outside Philippine territory, the
same would not constitute doing business in the Philippines, even
if the products themselves should be manufactured or processed
in the Philippines by locals. The implication of this doctrine is that
if the salient points of a contract are not performed within
Philippine territory, Philippine authorities would have no business
subjecting the parties to local registration and licensing
requirements. (Pacific Vegetable Oil Corp. vs. Singzon, 267 SCRA


i. To place them under the jurisdiction of the courts
ii. To place them in the same footing as a domestic corporation
iii. Protection for the public in dealing with said corporations

1.Issuance of License - FC shall have a right to transact business in
the Philippines; and to subject the FC doing business in the
Philippines to the jurisdiction of the courts

OTHERWISE: a FC illegally doing business may refuse or neglect to
obtain the required license and may successfully, though unfairly,
plead such neglect or illegal act so as to avoid service and thereby
impugn the jurisdiction of the local courts

SEC will issue a license to the FC to do business in the Philippines
provided the ff. conditions are met:

a) Appointment of a Resident Agent
i. Either a Filipino or domestic corporation and
ii. Power of attorney for SEC to receive process
b) Must prove that FCs country grants reciprocal rights to Filipinos
and Philippine corporation
c) Establish an office in the Philippines
d) Bring in its assets
e) In the event of insolvency undertaking that Filipino creditors
will be preferred
f) Notice of 6 months should there be a desire to terminate
g) Franchise and patents must remain belonging to the Philippines,
if this is possible
h) Must file a bond of P100,000 which may be in the ff. form:
i. Surety bond
ii. Government Securities
iii. Securities of political subdivisions
iv. Shares of stock of registered with SEC
v. Shares of stock of any corporation being sold at the
stock exchange

That within 6 months after each fiscal year, SEC shall require the
deposit of additional securities equivalent to 2% of the amount
in excess of P5,000,000 of the gross income

a) an individual residing in the Philippines, of good moral character
and of sound financial standing, or
b) a domestic corporation lawfully transacting business in the

single or isolated acts, contracts, or transactions of FC are not
regarded as a doing or carrying on of business
a series of transactions which are occasional, incidental and
casual not of a character to indicate a purpose to engage in
the fact that a FC is not doing business in the Philippines must
be disclosed if it desires to sue in Philippine courts under the
isolated transactions rule, otherwise the court may choose to
deny its right to sue


(a) To protect Its corporate reputation, name and goodwill
(b) To enforce its right not arising out of a business transaction
(c) To seek redress for an isolated business transaction
(d) The subject contracts provide that Phil. Courts will be venue to
(e) A license subsequently granted enables the FC to sue on
contracts executed before the grant of the license
(f) Recovery of misdelivered property
(g) Where unlicensed FC has a domestic corporation

Estoppel after contracting or accepting benefits with a FC, a
domestic firm or individual can no longer deny the formers
capacity to sue
Wrongful assumption of Jurisdiction by a court

Single or isolated acts, contracts, or transactions of foreign
corporations are not regarded as a doing or carrying on of
business. Typical examples of these are the making of a
single contract, sale, sale with the taking of a note and
mortgage in the state to secure payment thereof,
purchase, or note, or the mere commission of a tort. In
these instances, there is no purpose to do any other
business within the country. (MR. Holdings, Ltd. vs. Bajar,
GR No. 138104, April 11, 2002)


(a) Failure to file annual reports required by Code
(b) Failure to appoint or maintain a resident agent
(c) Failure to inform SEC of the change of resident agent or the
latters change of address
(d) Failure to submit a copy of amended AOI or by-laws; or articles
of merger or consolidation
(e) A misrepresentation in material matters in reports
(f) Failure to pay taxes, impost, assessments
(g) Engaged in business not authorized by SEC
(h) Acting as a dummy of a FC not licensed to do business in the
(i) Any other ground as would render it unfit to transact business
in the Philippines


MERGER is when a corporation absorbs the other and remains
in le the others are dissolved.

CONSOLIDATION is the union of two or more existing
corporations. A ration is created, and consolidating
corporations are extinguished.


1.ASSET ONLY LEVEL. Purchase of raw assets of the enterprise.
Transferee is NOT liable for the debts and liabilities of the
transferor corporation as there is no privity of contract between
transferee and creditors except when there is fraud,
assumption of liability, or take over of the assets of a dissolved

2.BUSINESS ENTERPRISE LEVEL. Purchase of substantially all the
assets of the corporation extending to its going concern:
ability to do business and make money, goodwill, clientele,
stock-in-trade, etc. the transferee is liable for the debts and
liabilities of the transferor. A free and harmless clause holding
the transferee free from the liabilities of the transferor is
binding only between them and cannot prejudice creditors who
are not parties thereto.

3.EQUITY LEVEL. Purchaser takes control of the business by
purchasing the shareholdings. Purchasing corporation is still
protected by the limited liability feature but the same can be


1. The Boards of each corporation shall draw-up a plan of merger
or consolidation setting forth:
i. Names of corporations involved
ii. Terms and mode of carrying it out
iii. Statement of changes, if any in the present articles of
surviving corporation; or the articles of the new
corporation to be formed in case of consolidation
iv. Such other provisions with respect to the proposed merger
or consolidation as are deemed necessary or desirable

2. Approval of plan Majority Vote of stockholders of each

3. Right of Appraisal of Dissenting Stockholders
4. Amendment of Plan of Merger or Consolidation majority vote
of Board and ratified by 2/3 of stockholders
5. Articles of Merger or Consolidation (by each constituent)
signed by the president or vice-president and certified by the
secretary or assistant secretary setting forth:

i. Plan of merger or consolidation
ii. As to stock corporations, the number of shares outstanding, or
in case of non-stock, the number of members; and
iii. As to each corporation, the number of shares or members
voting for or against such plan, respectively.

6. Requirements on Submission of Financial Statements serve as
basis of fixing the shares to be issued in favor of the merged
corporation vis--vis the net assets to be absorbed by the
surviving corporation as of a specific date
7. Approval by SEC signed and certified, submitted in


1. The constituent corporations shall become a single corporation.

2. The separate existence of the constituents shall cease except that
of the surviving corporation (in merger) or the consolidated
corporation (in consolidation)

3. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities, franchise of each of the constituent

4. All property, real or personal, and all receivables due on whatever
choses in action, and all the every other interest thereof, or
belonging to, or due to each constituent corporation, shall be taken
and deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed

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 surviving or consolidated
corporation had itself incurred such liabilities or obligations

6. Any claim, action or proceeding pending by or against any
may be prosecuted by or against the surviving or consolidated
7. Neither the rights of creditors nor any lien upon the property
of any of each constituent corporation shall be impaired by such
merger or consolidation.

SPIN-OFF- has the opposite effect of merger or consolidation,
whereby a department, division or portions of the corporate
business enterprise is sold-off or assigned into a new
corporation that will arise by the process which may constitute
it into a subsidiary of the original corporation

1. Must be consistent with provisions of Corporation Code or
existing laws
2. Issuance of Certificate, not upon mere agreement of the
constituent corporations
3. Claims of employees of the constituent corporation shall be
4. Power to merge or consolidate must be expressly granted by
5. Procedure must be followed

As specifically provided under Sec. 79 of Corporation Code,
the merger (or consolidation) shall only be effective upon
the issuance of a certificate of merger (or consolidation) by
the SEC, subject to its prior determination that the merger
(or consolidation) is not inconsistent with the Code or
existing laws. (Poliand Industrial Ltd. vs. NDC, 467 SCRA