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THE CORPORATION CODE

OF THE
PHILIPPINES
(Batas Pambansa Big. 68.)

Introduction
Different f o r m s of b u s i n e s s organization.

With the development of business enterprise, there has been


a gradual evolution in the form of business organization. Various
influences and considerations enter into the selection of the business form for any particular business enterprise.
(1) Individual proprietorship. The primitive form of business
is, of course, that of the individual proprietor. The individual, as
a rule, operates a small business, usually with the limited capital,
and is responsible alone for its success or failure.
(2) Partnership. The partnership is the first step towards
a wider field of operation and a more complex organization.
Often, it is a family affair. The business of the individual grows
too large for his sole management and he takes his son or some
other member of the family into partnership. In other cases, two
men in the same business unite their capital in order to secure ad
equate capital for the conduct of their business.
Whatever the motive and the circumstances, the partnership
is almost invariably a larger business unit than the proprietorship. It is common in retail trade, in the professions, and to a
limited extent, among manufacturing establishments. As a form
of business organization, it is losing ground.
(3) Joint stock company. The joint stock company is a form
of business organization at one time frequent in connection with
l

THE CORPORATION CODE OF THE PHILIPPINES

larger enterprises, which, so far as the United States is concerned,


is now almost extinct. This form of company was highly popular
in England during the seventeenth and early eighteenth centuries.
The joint stock company can be best considered as a combination of the partnership in that it is formed under a contract
and requires no special sanction from the State. The members are
liable, jointly and severally, for all the company's debts. It resembles the corporation in control and management. The members
do not control the company but choose a board of directors who
were the authorized agents and managers. Thus, while membership in the company might change thru death or transfer of
membership interest, the company is not dissolved.
(4) Cooperative association. It represents another form of
business organization which proved more popular in Europe
than in America. This form of organization is not of sufficient
interest or importance to the business world to require consideration in this text.
(5) Business trust. Another form of business organization
less widely known is the business trust, sometimes called
the "Massachussets trust." The main feature of this form of
organization is that it is formed by a contract and that the title to
property and the conduct of business is in the hands of trustees
who act for a large group of beneficiaries.
1

(6) Corporation. It is now the dominant form of organization in modern business. The corporation is a creature of law and
all its rights, powers, and duties are derived from legislation. In
some forms of business of a public or quasi-public nature like
that of public utilities, railroads, insurance companies, and banking institutions, it is almost the exclusive form of business organization. In other fields of enterprise, the corporation competes
with other forms of business organization.
'Membership depends entirely upon the ownership of shares rather than on the
agreement of the associates as in the partnership. The death of a "partner" does not dissolve the firm. The trustees (managers) have a legal title to its property and act as principals for the shareholders who have all the legal status of a cestui que trust (beneficiaries).
It bears such a close resemblance to a corporation that it is or has been frequently considered as a corporation. (Chester Rohlich, Organizing Corporate and Other Business
Enterprises [1953], p. 155.) But it is not a corporation.

INTRODUCTION

(7) Other business forms. They arise where different enterprises, whether organized in the same form or different forms,
unite for a common purpose. The purpose may be temporary in
character, giving us the syndicate, or it may contemplate more
permanent associations, giving us varying forms of combinations, "the trust," the holding company, and the like.
(a) The distinguishing characteristic of the syndicate is that
it is a temporary alliance of individuals, firms, or corporations,
usually for the purpose of financing an enterprise. After
the purpose of organization has been accomplished, the
syndicate is dissolved. It is a form of organization used
largely by bankers for underwriting purposes. Syndicates
reflect the general state of business when business is at a
standstill, there is obviously little need for them and few are
formed.
(b) Combinations take varying forms. Their primary
purpose is to secure the savings and other advantages which
result from consolidation and large-scale operation. In the
first phase, such combinations were really "trusts" in the
sense above described, except that corporations formed the
constituent elements and beneficiaries of the trust. This form
of association having been in some instances declared to be
illegal by the courts, resort has been had to other methods.
(c) The practice followed in some cases is to organize a
new corporation which buys the individual plants it wishes to
bring into the combination and which thus becomes a single
owner of all the establishments. In the largest combinations,
however, the stock of the constituent companies is all
brought by a unifying company called a holding company. The
constituent companies retain their organization intact. They
are controlled by the central corporation as a stockholder
which has power to elect directors and officers at will and
thus have complete power over the management.
Though trusts as combinations of corporations have long
ceased to have any existence, popular phraseology continues to
use the word "trust" to designate any large aggregation of capital under unified direction and control, (see C.W. Gestenberg,

THE CORPORATION CODE OF THE PHILIPPINES

"Organization and Control," in 3 Modern Business [1919], pp.


3-8.)
In the Philippines, the only types of business organization
provided by law are the partnership (Arts. 1767-1806, Civil
Code.) and the corporation. No prohibition, however, exists for
the other forms. As distinguished from corporations, the other
types of business organization are unincorporated.
Theories as to origin of corporations.

(1) Ethnological theory. There is authority for the statement


that the concept of collective entity antedates that of the individual; that "groups of men united by the reality or fiction of blood
relationship" into families, clans or tribes were recognized units
of primitive society even before the individual was so regarded.
Upon this assumed ethnological predicate has been erected
the theory that the basic principle of corporate organization, the
embodiment of which is now described as a fictitious, intangible
person, created by law and existing only in contemplation thereof, is in reality but a manifestation of the gregarious instinct in
man, existing inchoate from earliest times and before law itself
became an effective social force. The law, it is argued, has done
no more than to recognize the existence of this phase of human
activity, guide its development, and define its functions and relations.
In short, instead of the role of creator, assumed by the law for
its own convenience, the relation would be more aptly described
by assigning to the law the part of one who, having discovered a
foundling upon his doorstep, clothes and feeds it and thereafter
treats it as his own. Under this theory, the corporate idea, therefore, is the product of no one people and no one country, but, on
the contrary, developed more or less independently, in varying
forms among the several ethnological units.
(2) Imitative theory. The other theory as to the origin of
corporations is the imitative theory of jural development. This
theory traces the genesis of the modern corporation to the Greece
of Solon (638-559 B.C.), citing the writings of Gaius on Roman
Law and passages from the Pandects of Justinians, as authority
for the assertion that laws fathered by the great Hellenic jurist

INTRODUCTION

permitted the formation of private corporations for certain


purposes, upon condition that they do not operate in violation of
the laws of the state.
Blackstone, however, ascribes the birth of the corporation
to the political necessities of Numa Pompilius (715-672 B.C.)
who, upon his accession to power in Rome, desiring to end the
disrupting influence of the private war being waged between the
Sabine and the Roman factions, "thought it a prudent and politic
measure to subdivide these two into smaller ones by instituting
separate societies of every manual trade and profession." (1
Fletcher, Cyclopedia of the Law of Private Corporations, Perm
Ed., p. 3, footnote No. 3, quoting Blackstone, 1 BL Comm. 468,
469.)
Rise a n d d e v e l o p m e n t o f c o r p o r a t i o n s.

(1) In Roman times. The corporations, like most other


forms of business organization, take their rise in Roman times.
Probably the earliest form is that of the Collegium or college of
priests. This body had many of the rights and privileges which
the law gives to the modem corporation. The Collegium could
hold property; it could sue and be sued; the rights of the corporate body were separate from those of individual members; it
existed in perpetuity, and it was autonomous.
Besides the Collegium, other Roman organizations such as
municipalities, official societies engaged in state administration,
military groups, and trade and societies took on corporate form.
(2) In Medieval times. In medieval times, something akin
to the Roman Collegia appeared in the municipal and guild
organizations which were often closely related. Like the nonstock corporations of the present day, they embodied the idea of
the group working as a whole thru chosen representatives, and
so exhibit one of the chief characteristics of a corporation from
the legal standpoint.
Though the guilds are spoken of as trade and industrial corporations and were intimately concerned with business affairs, it
would be a mistake to assume that they were like the present day
corporations business units operating in any given trade or

THE CORPORATION CODE OF THE PHILIPPINES

industry for the joint profit of those who composed them. If you
can imagine a voluntary association of retailers or manufacturers
in any given line, clothed not only with the desire but full legal
authority to regulate the business practices of its members, you
have a much closer analogy to the real nature of the guild. It can
be understood, too, how, under such circumstances, the guilds
became so autocratic in their proceedings that as time went on,
they became a hindrance rather than a help to progress.
(3) In England. At a later period, the regulated company,
such as The Plymouth Company, the Hudson Bay Company,
and the East India Company, became a dominant factor in
British trade, particularly in foreign trade. Chartered by the
government and granted special privileges by their charters,
these organizations were forerunners of modern corporations.
In some instances, the trading company was hardly a company
at all as we understand it. It consisted of a grant of the right to
carry on a certain kind of business in a certain place conferred
upon a group of persons. Any member of the group or a number
of member jointly might exercise the right, and only those who
participated in the particular venture would be entitled to its
profits. This was a frequent form of the trading company.
Other companies conducted their operations as a unit and all
the associates shared in the common profit. They became in effect
and often in name joint stock companies and in the early part of
the last century, this was the common form of organization for
larger business units in Great Britain.
(4) In the United States. In the American colonies before the
Revolution, corporations were mostly educational, religious, or
military. They had not been introduced into business affairs. The
company as it was then known in the mother country smacked
of exclusive privilege and carried the idea of a monopoly
granted by the Crown. It was not until the beginning of the 19th
century, with the growth of manufactures brought about by the
Napoleonic wars and a consequent rise of an investing class,
that the corporation really began to make strides. In 1800 up to
1815, many manufacturing companies and turnpike companies
were incorporated and between the latter year and 1835, a large
number of canal and railway companies. Within this period too,

INTRODUCTION

banking institutions spread rapidly over the country so that the


corporate form of organization became thoroughly established.
While New York, in 1811, was the first state to provide for
incorporation under general laws for business purposes, it was
not until about the middle of the last century that the States in
general made provision for it. At the same time, the principle of
limited liability was generally recognized. This principle was not
adopted in England until 1855 when Parliament passed a statute
providing that only such companies which announce that their
stockholders' liability is limited shall escape the common-law
rule that stockholders shall be liable as partners. This is usually
done by the use of the abbreviation "Ltd." after the name of the
company. (C.W. Gesternberg, op. cit., pp. 94-97.)
(5) In the Philippines. "During the Spanish regime and
prior to the enactment of the former Corporation Law (Act No.
1459.), there existed in the Philippines several forms of commercial companies, associations, and partnerships. The concept of a
corporation not having introduced yet, these named associations
and partnerships were the most common entities by which business was generally conducted during that time. Among these
were the sociedad en comandita (limited partnership) and the sociedad regular colectiva (general partnership), which were governed
by Articles 116 to 150 and 160 to 174 of the Code of Commerce
which became effective in these Islands on December 1, 1888.
Most known among these associations, however, was the sociedad anonima then governed by Article 151 to Article 159 of the
Code of Commerce. There was also a sociedad de cuentas en participacion (joint account participation) governed by Articles 239
to 243 of the same Code of Commerce.
Of these Spanish commercial entities, the one which could
remarkably compare to the present day concept of corporate
entity is the sociedad anonima. This is not to say, however, that
the sociedad anonima exactly corresponded to the notion of
corporation in English and American Law particularly in
matters concerning organization of the enterprise, the distribution
of dividends, and those in which equity intervenes for the benefit
of the stockholders (Harden vs. Benguet Consolidated Mining
Co., 58 Phil. 145 [1933].) but that this, of all the then existing

THE CORPORATION CODE OF THE PHILIPPINES

commercial entities, most nearly approached the concept of a


corporation.
With the passage of the former Corporation Law on March
1, 1906, and the later enactment of the new Civil Code, all these
societies and associations were abolished with the sole exception
of the sociedad de cuentas en participacion. The sociedad en comandita
and sociedad regular colectiva were abolished when Articles 116 to
150 and 160 to 174 of the Code of Commerce were repealed by
Article 2270 and superseded by the provisions on Partnership
in Title IX, Book IV of the new Civil Code." (C.G. Alvendia, The
Law of Private Corporations in the Philippines, 1967 ed., pp. 1-2.)
2

In the Philippine Bill of 1902, which was approved on July 1,


1902 after the Philippine Islands passed to the sovereignty of the
United States, the Congress of the United States inserted certain
provisions intended to control the law-making power in the Philippine Islands in the matter of granting of franchises, privileges
and concessions. These provisions were found in Sections 74
and 75 of the Bill. The provisions of Section 74 were superseded
by Section 28 of the Act of Congress of August 29, 1916, but in
Section 75, there is a provision referring to mining corporations
which then remained the law, as amended. The provision, in its
original form, reads as follows: "x x x it shall be unlawful for any
member of a corporation engaged in agriculture or mining and
for any corporation organized for any purpose except irrigation,
to be in any wise interested in any other corporation engaged in
agriculture or in mining.''
Under the guidance of the Philippine Bill of 1902 and certain
other Acts enacted by the U.S. Congress, including some American state corporation laws, the Philippine Commission, then the
law-making body in the Philippines, subsequently approved on
March 1, 1906, Act No. 1459, the former Corporation Law, providing for the organization of corporations in the Philippines.
The Act took effect on April 1,1906.
Before the passage of the present Corporation Code of the
Philippines on May 1, 1980, numerous statutes were enact'The partnerships and the sociedades anonimas, the business associations then existing, were created by mere agreements.

INTRODUCTION

ed affecting corporations. Among them are laws creating


government corporations, and those governing or relating to
special types of corporations, such as the General Banking Act
(R.A. No. 337. ), Rural Banks Act (R.A. No. 7353.), Investment
Company Act (R.A. No. 2629.), Savings and Loans Association
Act (R.A. No. 3779.), Private Development Banks Act (R.A. No.
4093.), Financing Company Act (R.A. No. 5980.), the Investment
Houses Law (Pres. Decree No. 129.), Pawnshop Regulation Act
(Pres. Decree No. 114.), and the Insurance Code of the Philippines.
(Pres. Decree No. 1460.)
3

(6) Corporations in modern business. The merits of the corporation so far overshadow its drawbacks that today it is the
representative type of modern business organization. Its growth
within the past half century has been by leaps and bounds. In
some fields particularly in public utilities, insurance, banking,
and manufacturing, it has, practically, exclusive possession.
(a) In the first place, its form is flexible. By means of various
kinds of stocks and bonds and thru the judicious drafting of
charter and by-laws, the control of the corporation can be
scientifically determined, the risk equitably apportioned,
and the income distributed among the owners and creditors.
(b) The corporation assembles huge quantities of capital
gathered from many different quarters and then provides the
means for efficiently administering it. It secures in this way
all the advantages which are a part of large-scale production.
(c) Moreover, it possesses a degree of permanence that
carries on its business beyond the span of any one generation. It usually outlives the men who make and manage it.
(C.W. Gestemberg, op.cit., p. 14.)
oOo

Now General Banking Act of 2000. (R.A. No. 8791.)

Title I
GENERAL PROVISIONS

DEFINITIONS AND CLASSIFICATIONS


Section 1. Title of the Code. This Code shall be known
as "The Corporation Code of the Philippines." (a)*
Historical b a c k g r o u n d of our Corporatio n
Code.

(1) Business associations under the Code of Commerce. Prior


to 1906, the business associations existing were the partnerships and the sociedades anonimas which were created by mere
agreements. There was no entity in the Spanish Law exactly corresponding to the notion of the corporation in American Law.
Its attention drawn to this fact, the Philippine Commission, the
legislative body of the Philippines during the American regime,
enacted on March 1, 1906, Act No. 1459, a general law authorizing the creation of corporations in the Philippine Islands.
With the enactment of Act No. 1459, popularly known as the
Corporation Law, which took effect on April 1, 1906, providing
for the organization of corporations in the Philippines,it became
necessary to make certain adjustments in view of the existence of
the Spanish sociedades anonimas previously organized and existing in the Philippines.
(2) Business associations under the former Corporation Law.
Accordingly, Section 75 of the Act was inserted under which
sociedades anonimas were made subject to the provisions of the
Corporation Law "so far as such provisions may be applicable"
Signifies that original provision in Act No. 1459 has been amended.
10

Sec. 1

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

11

and were given the "option to either continue business as such


corporation or to form and organize under and by virtue of the
provisions of this Act." Section 191 of the Act expressly repealed
the pertinent provisions of the Code of Commerce (Sees. 151159 thereof.) governing sociedades anonimas with the proviso that
"those which elect to continue their business as such sociedades
anonimas" instead of reforming and organizing "under the
Corporation Law shall continue to be governed by the Code
of Commerce" in relation to their organization and method of
transacting business and to the rights of members thereof as
among themselves." However, "their relations to the public and
public officials shall be governed by the provisions of this Act."
Thus, the old Corporation Law recognized the difference
between sociedades anonimas and corporations. (Phil. Products
Co. vs. Primatera [Phils.], Inc., 15 SCRA301 [1965].)
The evident purpose of the Philippine Commission in
enacting Act No. 1459 was to introduce into the Philippines the
American corporation as the standard commercial entity and
to hasten the day when the sociedad anonimas of the Spanish
Law would become obsolete. This rather elaborate Philippine
legislation is a sort of a codification of American corporate laws.
(Harden vs. Benguet Consolidated Mining Co., 58 Phil. 141
[1933].) It remained practically intact except for some repeals or
amendments until the enactment of Batas Pambansa Big. 68.
(3) Business corporations under the Corporation Code. The law
governing private corporations in the Philippines is now embodied in Batas Pambansa Big. 68, the present Corporation Code
of the Philippines, which took effect on the date of its approval
on May 1,1980. (see Sec. 149.) The new Code supplants Act No.
1459, as amended. It reproduced with amendments many provisions of the old Corporation Law. In its explanatory note, Cabinet Bill No. 3 which became Batas Pambansa Big. 68, states:
1

'A code, in modern times, is a systematic, complete, written collection of laws arranged logically with index and table of contents and covering fully one or more subject
of law. It is a written compilation of statutory laws of general and permanent importance, eliminating clerical errors and obsolete provisions, expressly repealing all prior
laws inconsistent with the compilation and occasionally including amendments and new
provisions, (see Webster's 3rd New International Dictionary, 1976 ed., p. 437; see note 2.)

THE CORPORATION CODE OF THE PHILIPPINES

12

Sec. 1

"This bill is intended to supplant the present Corporation


Law, Act No. 1459, as amended, and to be hereafter known as
the 'Corporation Code of the Philippines.'
2

The proposed Code seeks to establish a new concept of


business corporations so that they are not merely entities
established for private gain but effective partners of the
National Government in spreading the benefits of capitalism
for the social and economic development of the nation.
Significant changes have been introduced in the proposed
Code in order to update the provisions of our present Corporation Law. Among the significant changes in this Code is the
grant of ample powers to the Securities and Exchange Commission to enable it to exercise adequate supervision over
the operations and activities of private corporations. The other
innovative provisions constitute definite improvements to
make the proposed Code more responsive to the plans and
policies of the Government."
Section 16 of Article XII (National Economy and Patrimony)
of the Constitution provides:
"The Congress shall not, except by general law, provide
for the formation, organization, or regulation of private cor-

(l)The Corporation Code deleted the following sections of the old law: Sees. 8 (fees),
10 (articles of incorporation as prima facie evidence of facts therein stated), 12 (corporate
power of eminent domain), 15 (liability of corporation for holding persons in involuntary
servitude), 29 (time of holding election of directors except term of office), 32 (who may
call meeting for election of directors where no such meeting is held), 48 (posting of notices of call, and delinquency and sale of stock), 53-55 (visitorial powers), 56-61 (forced
sale of franchises), 70 (license of foreign corporations organized before Act No. 1459), 7474-1/2 (miscellaneous provisions), 75 (sociedad anonima), 76 (1st sentence: legislative dissolution), 79 (delegated power of eminent domain), 80 (application of provisions), 81-102
(railroad corporations), 165-167,170 (provisions on colleges and institutions of learning),
and 161-164 (provisions on corporation sole).
(2) It amended the remaining provisions except Section 2. (now also Sec. 2.) In the
case of Section 35 (now Sec. 63.), the amendment consists merely in the substitution in the
first paragraph of "or clerk" by "or assistant secretary."
(3) It introduced title headings and rearranged accordingly the amended provisions.
(4) It added new provisions many of which were taken from judicial rulings on the
subject including principles in common law jurisdictions, rules and regulations of the
S.E.C., and recognized modem corporate practices.
The Code is divided into 16 titles and is composed of 149 sections.
2

Sec. 2

TITLE i. GENERAL PROVISIONS


Definitions and Classifications

13

porations. Government-owned or -controlled corporations


may be created or established by special charters in the interest of the common good and subject to the test of viability."
The Corporation Code of the Philippines, the new general
law governing private corporations in the Philippines,
implements the above provision of the Constitution.
3

S c o p e o f the C o d e .

The Corporation Code of the Philippines law is an act which:


(1) provides for the incorporation, organization, and regulation of private corporations, both stock and non-stock, including
educational and religious corporations;
(2) defines their powers and provides for their dissolution;
(3) fixes the duties and liabilities of directors or trustees and
other officers thereof;
(4) declares the rights and liabilities of stockholders and
members;
(5) prescribes the conditions under which corporations
including foreign corporations may transact business;
(6) provides penalties for violations of the Code; and
(7) repeals all laws and parts of laws in conflict and inconsistent with the Code.
Sec. 2. Corporation defined. A corporation is an
artificial being created by operation of law, having the right
of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
(2)*
Statutory definition of corporation.

Section 2 gives a definition of the "corporation." The above


T h e Corporation Code was enacted under the 1973 Constitution which provides a
similar restriction with respect to private corporations.
'Signifies section number of original provision in Act No. 1459. This is the only provision that has not been amended by the new Code.

14

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

statutory definition refers only to private corporations or to corporations organized under the Corporation Code.
4

Judicial definitions of corporation.

A corporation was early defined by the Supreme Court of


the United States as "an artificial being, invisible, intangible, and
existing only in contemplation of law." (Dartmouth College vs.
Woodward, 4 Wheat [U.S.] 518, 4 L. ed. 629.)
Other judicial definitions of a corporation aggregate are:
(1) An artificial intellectual being, the mere creature of the
law, composed generally of natural persons in their natural
capacity, but which may also be composed of persons in their
political capacity of members of other corporations (Bank of
United States vs. Deveaux, 5 Cranch [U.S.] 61, 3 L. ed. 38.);
(2) An artificial being created by law, and composed of
individuals who subsist as a body politic under a special
denomination, with the capacity of perpetual succession, and of
acting, within the scope of its charter, as a natural person (Fietsam
vs. Hay, 122 111. 293,13 N.E. 501.);
(3) A collection of many individuals, united in one body under a special denomination, and vested by the policy of the law
with the capacity of acting in several respects as an individual
(State vs. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279.); and
(4) A legal institution devised to confer upon the individuals of which it is composed powers, privileges, and immunities
which they would not otherwise possess, the most important of
which are continuous legal identity and perpetual or indefinite
succession under the corporate name, notwithstanding succes-

sor income tax purposes, "the term corporation" includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the
Government. General professional partnerships are partnerships formed by persons for
the sole purpose of exercising their common profession, no part of the income of which
is derived from engaging in any trade or business. (Sec. 20[b], National Internal Revenue
Code.)

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

15

sive changes by death or otherwise in the corporation or members of the corporation. (Coyle vs. Mclntire, 7 Houst [Delll 4 30
A 728.)
But though the terminology varies, the elements are usually
the same. (18 Am. Jur. 2d 548-549.)
Attributes of a c o r p o r a t i o n .

An analysis of the definition in Section 2 reveals the following attributes of a corporation:


(1) It is an artificial being;
(2) It is created by operation of law;
(3) It has the right of succession; and
(4) It has only the powers, attributes and properties expressly authorized by law or incident to its existence.
C o r p o r a t i o n as an artificial personality.

Doctrinally, a corporation is a legal or juridical person with


a personality separate and apart from its individual stockholders or members and from any other legal entity to which it may
be connected. It is not in fact and in reality a person but the law
treats it as though it were a person by process of fiction. The
stockholders or members who, as natural persons, are merged in
the corporate body, compose the corporation but they are not the
corporation.
As a consequence of this legal concept of a corporation:
(1) Liability for acts or contracts. The general rule is
that obligations incurred by a corporation, acting through its
authorized agents, are its sole liabilities. Similarly, a corporation
may not, generally, be made to answer for acts or liabilities of its
stockholders (or members) or those of the legal entities to which
it may be connected and vice versa. (Creese vs. Court of Appeals,
93 SCRA 483 [1979]; Palay, Inc. vs. Clave, 124 SCRA 638 [1983];
ARB Construction Co., Inc. vs. Court of Appeals, 332 SCRA 427
[2000]; Tupaz IV vs. Court of Appeals, 475 SCRA 398 [2005].)
(a) A suit against certain stockholders of a corporation
cannot ipso facto be a suit against the unpleaded corporation

16

Sec. 2

THE CORPORATION CODE OF THE PHILIPPINES

itself without violating the fundamental principle that a corporation has a legal personality distinct and separate from
its stockholders. The failure to implead the corporations as
defendants and merely annexing a list of such corporations
to the complaint is a violation of their right to due process for
it would in effect be disregarding their separate personality
without a hearing. (Presidential Commission on Good Government vs. Sandiganbayan, 290 SCRA 639 [1998]; Booc vs.
Bantuas, 354 SCRA 279 [2000]; PCGG vs. Sandiganbayan, 365
SCRA 538 [2001].)
(b) A corporate officer is not personally and solidarily
liable with the corporation for the money claims of discharged
or retrenched employees unless he acted with evident malice
or bad faith in terminating their employment. (Business
Day vs. National Labor Relations Commission, 221 SCRA 9
[1993]; MAM Realty Development Corp. vs. National Labor
Relations Commission, 244 SCRA 797 [1995]; Asionics Phils.,
Inc. vs. National Labor Relations Commission, 290 SCRA 164
[1998].) The act of the President of a corporation in dismissing
an employee, done as such officer in good faith, cannot result
in his private liability. (Cebu Filveneer Corp. vs. National
Labor Relations Commission, 286 SCRA 556 [1998]; AMA
Computer College vs. Ignacio, 590 SCRA 633 [2009].)
5

(c) All contracts entered into in its name by its regular


appointed officers and agents are the contracts of the
corporation and not those of the stockholders or members. A
corporation cannot be held liable for the personal indebtedness
of a stockholder even if he should be its president. {Smith &
Co., Inc. vs. Ford, 63 Phil. 786 [1936].) The stockholder's debt
or credit is not the debt or credit of the corporation, nor is
the debt or credit of the latter that of the former. (Good Earth
Emporium, Inc. vs. Court of Appeals, supra.; Mendoza vs.
Banco Real Development Bank, 470 SCRA 86 [2005].)
^ince a corporation is an artificial person it must have an officer who can be presumed to be the employer, being the "person acting in the interest of the employer." In
other words, the corporation, in the technical sense only, is the employer. The manager of
a corporation falls within the meaning of an "employer" as contemplated by the Labor
Code, who may be held solidarily liable for the obligations of the corporation to its dismissed employees. (NYK International Knitwear Corporation vs. National Labor Relations Commission, 397 SCRA 607 [2003].)

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

17

(d) For the same reason, the President and manager of


a corporation who entered into and signed a contract in his
official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect.
(Rustan Pulp Paper Mills, Inc. vs. Intermediate Appellate
Court, 214 SCRA 665 [1992]; see Consolidated Bank and Trust
Corporation vs. Court of Appeals, 356 SCRA 671 [2001].) Corporate officers cannot be held personally liable for the consequences of their acts, for as long as they are for and on behalf
of the corporation, within the scope of their authority and in
good faith. (Solidbank Corporation vs. Mindanao Ferroalloy
Corporation, 463 SCRA 409 [2005]; Price v. Innodata Phils.,
Inc., 567 SCRA 269 [2008]; Dy-Dumalasa vs. Fernandez, 593
SCRA 656 [2009].)
(e) A corporation is vested by law with a personality
separate and distinct from its stockholders, including its
officers as well as from that of any other legal entity to
which it may be related. Thus, a company manager acting
in good faith within the scope of his authority in terminating
the services of certain employees cannot be held liable for
damages. (Sunio vs. National Labor Relations Commission,
127 SCRA 390 [1984]; Pabalan vs. National Labor Relations
Commission, 184 SCRA 495 [1990]; Malayang Samahan ng
Manggagawa vs. Ramos, 326 SCRA 428 [2000].) In cases
of illegal dismissal, corporate directors and officers are
solidarily liable with the corporation, where terminations of
employment are done with malice or bad faith. The fictional
veil of separate corporate entity may be pierced. (Acesite
Corporation vs. National Labor Relations Commission, 449
SCRA 360 [2004]; Perron Corporation vs. National Labor
Relations Commission, 505 SCRA 596 [2006].)
(f) The property of the corporation is not the property
of the stockholders or members and may not be sold by the
stockholders or members without express authorization of
its board of directors or trustees. (Woodchild Holdings, Inc.
vs. Roxas Election & Construction Company, 436 SCRA 235
[2004]; Sec. 23.) Their interest, if any, is indirect, contingent
and inchoate. (Asia's Emerging Dragon Corp. vs. Dept. of
Transportation and Communications, 579 SCRA 44 [2008].)

18

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

The separate personality of a corporation is a shield against


personal liability of its officers.
(2) Liability when exceptional circumstances warrant. Personal
or solidary liability may be incurred by corporate agents acting
in behalf of the corporation only when exceptional circumstances
warrant. Thus, it may validly attach when the director/trustee or
officer acted maliciously or in bad faith, or with gross negligence
(see Sees. 31, 65.), or agreed to hold himself personally and solidarily liable with the corporation, or made, by specific provision
of law, personally liable for corporate action, or it is proven that
the officer has used the fiction of separate corporate personality
to defraud a third party or for wrongful ends.
There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt. (Toh vs.
Solid Bank Corporation, 408 SCRA 544 [2003].)
(3) Right to bring actions. It may incur obligations and
bring civil and criminal actions (Art. 46, Civil Code.) in its own
name in the same manner as a natural person, although it may
not perform certain actions that can be done only by natural persons, such as the practice of law or medicine.
(a) A corporation has no personality to bring an action for
and in behalf of its stockholders or members for the purpose
of recovering property which belongs to said stockholders or
members in their personal capacities. (Sulo ng Bayan, Inc. vs.
G. Araneta, Inc., 72 SCRA 347 [1976].)
(b) Since it is well-settled that the legality of a seizure
can be contested only by the party whose rights had been
violated, the right to object to the seizure of papers and
documents of the corporation belongs to the corporation as a
separate entity and not to its stockholders as such. (Stonehill
vs. Diokno, 20 SCRA 383 [1967].)
(c) Whatever mental anguish, wounded feelings, etc.
(see Art. 2217, Civil Code.) the stockholders and officers of a
corporation may suffer cannot be considered to be equally felt
by the corporation, for it is elementary that a corporation is a
personality separate and distinct from that of its stockholders
and officers. Besmirched reputation cannot cause mental

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

19

anguish to a corporation unlike in the case of a natural


person, for a corporation has no reputation in the sense that
an individual has, and besides, it is inherently impossible
for a corporation to suffer mental anguish, (see The Insular
Life Assurance Co., Ltd. vs. Court of Appeals, 428 SCRA 79
[2004]; Rural Bank of Makati, Inc. vs. Municipality of Makati,
433 SCRA 362 [2004].)
(d) A juridical person is not entitled to moral damages
because, not being a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish, or moral shock. Mental
suffering can be experienced only by one having a nervous
system. However, a corporation may have a good reputation
which, if debased or besmirched resulting in social humiliation, may be a ground for recovery of moral damages and
attorney's fees. (Mambulao Lumber Co. vs. Phil. National
Bank, 22 SCRA 359 [1968]; People vs. Manero, Jr., 218 SCRA
85 [1993]; LBC Express, Inc. vs. Court of Appeals, 236 SCRA
602 [1994]; Acme Shoe, Rubber & Plastic Corp. vs. Court of
Appeals, 260 SCRA 714 [1996]; Solid Homes vs. Court of
Appeals, 275 SCRA 267 [1997].)
Moral damages include besmirched reputation which a
corporation may possibly suffer. (Art. 2217, Civil Code.) A
corporation whose credit reputation is not exactly something
to be considered sound and wholesome cannot be entitled to
a big amount of moral damages. (Asset Privatization Trust
vs. Court of Appeals, 300 SCRA 579 [1998].) While courts
may allow the grant of moral damages to corporations, there
must be proof of the existence of the factual basis of the
damage and its causal relation to the defendant's acts. This
is so because moral damages through incapable of pecuniary
estimation, are in the category of an award designed to
compensate the claimant for "actual injury" suffered and not
to impose a penalty on the wrongdoer. (Crystal vs. Bank of
the Phil. Islands, 572 SCRA 697 [2008].)
(e) For purposes of venue, the place of business of the
suing corporation is considered as its residence. The residence
of the president is not the residence of the corporation because

20

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

a corporation has a personality separate and distinct from


that of its officers and stockholders. (Sy vs. Tyson Enterprises,
Inc., 119 SCRA 367 [1982].)
(4) Right to acquire and possess property. It may acquire and
possess property of all kinds. (Art. 46, Civil Code.) Property
conveyed to or acquired by the corporation is in law the property
of the corporation itself as a distinct legal entity (Art. 44[3], ibid.)
and not that of the stockholders or members as such and viceversa. Where real properties included in the inventory of the
estate of a decedent are in the possession of and are registered
in the name of the corporation, in the absence of any cogency
to shed the veil of corporate fiction (infra.), the presumption of
conclusiveness of the titles in favor of the corporation should
stand undisturbed. (Lim vs. Court of Appeals, 323 SCRA 102
[2000].)
(a) Stockholders or members are in no legal sense the
owners of corporate property (or credits) which is owned by
the corporation as a distinct person. (Traders Royal Bank vs.
Court of Appeals, 177 SCRA 788 [1989]; Magsaysay-Labrador
vs. Court of Appeals, 180 SCRA 266 [1989]; Good Earth
Emporium, Inc. vs. Court of Appeals, 194 SCRA 544 [1991].),
and may not be sold by them without express authorization
from the corporation's board of directors or trustees, (see Sec.
24.)
(b) While a share of stock represents a proportionate
interest in the property of the corporation, it does not vest
the owner thereof (even assuming that it / h e is the controlling shareholder) with any legal right or title to any of the
properties of the corporation owned by the latter as a distinct
juridical person. (Saw vs. Court of Appeals, 195 SCRA 740
[1991]; Silverio, Jr. vs. Filipino Business Consultants, Inc., 466
SCRA 584 [2005].) The ownership of that property is in the
corporation and not in the holders of shares of stocks. (Fisher
vs. Trinidad, 43 Phil. 973 [1922]; Mobilia Products, Inc. vs.
Umezaua, 452 SCRA 736 [2005].)
(c) The interest of shareholders in corporate property is
purely inchoate and, therefore, does not entitle them to intervene in a litigation involving corporate property. (Ibid.)

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

21

(d) The mere fact that one is president of a corporation does


not render the property he owns or possesses the property of
the corporation, since the president, as an individual, and the
corporation, are separate entities. The power to "pierce the
veil of corporate entity" belongs to the court and a sheriff
usurps this power when he enforces a writ of execution, not
against the property of the corporation, the judgment debtor,
but against that of its president on the ground that they are
one and the same. (Cruz vs. Dalisay, 152 SCRA 482 [1987]; see
Rosario vs. Bascar, Jr., 206 SCRA 678 [1992]; Booc vs. Bantuas,
354 SCRA 279 [2001].)
(e) A tax exemption granted to a corporation cannot be
extended to include the dividends paid by such corporation
to its stockholders. (Manila Gas Corporation vs. Collector of
Internal Revenue, 71 Phil. 513 [1941].)
(f) The agreement of co-shareholders to mutually grant
the right of first refusal to each other, by itself does not
constitute a violation of the constitutional provision limiting
land ownership to Filipinos and Filipino corporations. If the
foreign shareholders of a landholding corporation exceeds
40%, it is not the foreign stockholders' ownership which is
adversely affected but the capacity of the corporation to own
land, i.e., the corporation becomes disqualified to own land.
The corporation and its shareholders being separate juridical
entities, the right of first refusal over shares pertains to the
shareholders whereas the capacity to own land pertains to
the corporation. (J.G. Summit Holdings, Inc. vs. Court of
Appeals, 450 SCRA 169 [2005].)
(4) Acquisition by court ofjurisdiction. Where the appearance
in court of the president of a corporation was in the capacity
of counsel of another corporation and not as representative
or counsel of the first corporation, such appearance cannot be
construed as a voluntary submission of said corporation to
the court's jurisdiction. The personality of the president of a
corporation is distinct from that of the corporation itself. In the
absence of summons on the corporation, a judgment against it is
void for lack of jurisdiction and lack of due process. (Trimica, Inc.
vs. Polaris Marketing Corp., 60 SCRA 321 [1974].)

22

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

The participation by the general manager of a corporation


in an action involving the corporation cannot equate to participation by another corporation in the same proceedings, merely
because the general manager of the first corporation is also the
chairman of the board of the second corporation. (Padilla vs.
Court of Appeals, 370 SCRA 208 [2001].)
(5) Changes in individual membership. Likewise, as an
entity distinct from its members or stockholders, a corporation
remains unchanged and unaffected in its identity by changes
in its individual membership. The corporation, as an artificial
person, continues to exist as such "in like manner that the River
Thames is still the same river though the parts which compose it
are changing every instant." (1 Fletcher, pp. 18-19.)
The doctrine of "corporate entity" fills a useful purpose in
business life, and whether the purpose be to gain an advantage
under the law of the state of incorporation or to avoid, or to
comply with the demands of creditors or to serve the creator's
personal or undisclosed convenience so long as that purpose is
the equivalent of business activity or is followed by the carrying
on of business of the corporation, the corporation remains a
separate entity. But the doctrine is one of substance and validity
(9-A Words and Phrases 385 [1960 ed.].), and courts will, in proper
cases, disregarding forms and looking to substance, ignore the
legal fiction of corporate entity, (infra.)
Corporation as a p e r s o n , resident,
or citizen.

A corporation is regarded as a "person," "resident," or "citizen" within the purview of those terms as used in constitutional
or statutory provisions, whenever this becomes necessary in
order to give full effect to the purpose or spirit of the Constitution
or statute. The tendency is to regard corporations, as far as their
inherent nature will permit, as on the same footing as ordinary
individuals. Consequently, whether corporations are included
within a statute depends largely upon its object. (1 Fletcher, Sec.
53.)
(1) As a person. Persons are divided into natural and artificial persons. The term "person" prima facie includes both and,

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

23

therefore, as a general rule, includes corporations (18 Am. Jur. 2d


568.) but in a figurative sense only.
(a) A corporation has been held to be included by the
word "person" in statutes concerning attachment, taxation,
usury, insolvency and bankruptcy, limitations, prior notice to
bring suit, right to appeal, allowing action of trespass, prohibiting the banking business, conferring a cause of action for
wrongful death, allowing suit against usurpation of a public
office or franchise, allowing a petition to quiet title, and offering public lands for appropriation "by all persons" who enter
upon them.
(b) The word "person" has also been deemed to apply to
a corporation as used in statutes providing for suit because
of the wrongful exercise of a franchise by a "person," punishing "any person" employing a minor child, and providing
for a civil action against "any person" unlawfully holding a
franchise. Where the word "person" is used in a definition of
libel, corporations are included. (1 Fletcher, pp. 70-71.)
(c) A corporation is a "person" within the meaning of
Section 1, Article III (Bill of Rights) of the Constitution that
"no person shall be deprived of life, liberty or property without due process of law" and that it is entitled to the equal
protection of the laws in like manner as other persons in the
same situation, provided the corporation is "within the jurisdiction" of the State the protection of which is demanded.
(d) Insofar as liberty is concerned, however, a private
corporation is held not to be a person within the language
of the constitutional provision; the liberty guaranteed is the
liberty of natural, not artificial, persons. Neither is it a person
within the protection of Section 17, Article III of the Constitution against self-mcrimination. (18 Am. Jur. 2d 570-571.)
Thus, while an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special
privileges and franchises, may refuse to show its hand when
charged with an abuse of such privileges. (Bataan Shipyard
& Engineering Co., Inc. vs. PCGG, 150 SCRA 181 [1987].)

24

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

(e) But a corporation comes within the protection of


Section 3 of the same Article insuring the right of the people
to be secured in their persons against unreasonable seizures
and searches. A corporation is, after all, but an association
of individuals under an assumed name and with a distinct
legal entity. In organizing itself as a collective body, it waives
no constitutional immunities appropriate to such body. Its
property cannot be taken without compensation. It can only
be proceeded against by due process of law, and is protected
against unlawful discrimination. (Bache & Co. [Phils.], Inc.
vs. Ruiz, 37 SCRA 823 [1971].)
(2) As a resident or nonresident. Since a corporation is a person in the law, it is also to be deemed a resident or a nonresident
of a particular state or country within the meaning of a statute,
if it is within the purpose and intent of the statute, as in the case
of statutes defining the jurisdiction of the courts, or relating to
venue, taxation, etc. (18 C.J.S. 388.)
(a) A corporation formed in one State may be, for certain
purposes, domiciled or a resident in another State in which
it has its offices and transacts business, notwithstanding the
fiction of the law that a corporation dwells only in the State
of its creation and cannot migrate therefrom. (18 Am. Jur. 2d
694.) Thus, in a case, it was held that a foreign corporation
licensed to do business in the Philippines (see Sec. 123.) is not
a nonresident within the meaning of Section 424 (par. 2.) of
the Code of Civil Procedure (now Sec. l[f], Rule 57, Rules of
Court.) which allows the attachment of the property of the
defendant in an action where such defendant "resides out
of the Philippines, or on whom summons may be served by
publication" as to make its property subject to attachment
under said section. (Claude Neon Lights, Inc. vs. Phil. Advertising Corp. and Santamaria, 57 Phil. 607 [1932].)
(b) For taxation purposes, a foreign corporation may
be either a resident or nonresident, the former referring to
a "foreign corporation engaged in trade or business within
the Philippines," and the latter, to a "foreign corporation not
engaged in trade or business in the Philippines and not hav-

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

25

ing any office or place of business therein." (see Sec. 20[h, i],
National Internal Revenue Code.)
(3) As a citizen. "Citizenship" is the status of a citizen with
its rights and privileges and corresponding duties and obligations. The term "citizen," as it is commonly understood, implies
membership in a political body and, therefore, does not ordinarily include a corporation, unless the general purpose and import
of the statute in which the term is found seem to require it. (18
Am. Jur. 2d 569.)
(a) There is, however, no absolute and inflexible rule that
a corporation cannot be deemed a citizen for certain purposes.
(Ibid.) A corporation is a citizen within the meaning of a
statute conferring rights, defining the jurisdiction of courts,
or otherwise relating to citizens/if the purpose and intent of
the statute renders it applicable, and for such purpose it is,
as a general rule, a citizen of the State or country by or under
the laws of which it was created and exists without regard to
the citizenship of its stockholders or members. (18 C.J.S. 388.)
(b) "Most often when the term 'citizenship' is used in
connection with corporations, it is not used in the sense under
Political Law, but more in the sense of indicating the country
under whose laws the corporations were organized. In this
respect, 'citizen,' as used in connection with corporations,
is synonymous with domicile or residence. In fact, our
Corporation Law requires that the principal office of the
corporation must be located in the Philippines.
However, when the term 'citizenship' is used synonymously with residence or domicile, said use is for jurisdictional purposes only, for a corporation is subject to the jurisdiction of the country under whose laws it was organized.
Therefore, the citizenship of a corporation is not looked into
unless citizenship is an important factor in the determination
or the enjoyment of a privilege, exercise of a right or even the
legality of a contract entered into by the corporation." (C.G.
Alvendia, op. cit., pp. 10-11.)

26

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

Corporation as a collection
of individuals.

(1) True in actual fact. Although the doctrine that a corporation is an artificial entity and a person in law, distinct from the
members who compose it, will always be recognized and given
effect, both at law and in equity, in cases which are within its
reason and when there is no controlling reason against it, it is
clear that a corporation is in fact a collection of individuals. In the
case of modern private corporations, it is really the individuals
composing it who own its property and carry on the corporate
business, through the corporation and its officers and agents, for
their own profit or benefit.
The idea of the corporation as a legal entity or person apart
from its members is a mere fiction of the law introduced for convenience in conducting the business in this privileged way. (14
C.J.S. 59.) Courts, as a general rule, disregard this theory of separate entity under certain circumstances, as when the privilege is
misused by the corporation. (infra.)
(2) Recognized for many purposes. This conception of a
corporation as a collection of individuals owning the corporate
property and doing business through the corporation and in the
corporate name has always been recognized for many purposes as
between the stockholders or members themselves and as between
them and the corporation, in order to enforce and protect their
rights. Thus, the stockholders of a corporation are entitled to the
profits in the way of dividends and may enforce their rights in
this respect. They are entitled to insist that the corporation shall
keep within the powers and purposes for which it was formed,
and may sue in equity, if necessary, to compel it to do so.
It is not only in cases like these that the law recognizes that
a corporation is in reality a collection of individuals and the corporate entity a mere fiction, but the fiction also may be and often
is disregarded even for the purpose of giving effect to the acts of
the stockholders or members individually as the acts of the corporation. (18 C.J.S. 379-380.)

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

27

Doctrine of piercing t h e veil of corporate


entity.

The doctrine that a corporation is a legal entity or a person


in law, distinct from the persons composing it or any other
corporation to which it may be related, is merely a legal fiction for
purposes of convenience and to subserve the ends of justice. This
fiction, therefore, cannot be extended to a point beyond its reason
and policy, (see 13 Am. Jur. 2d 559.) Peculiar situations or valid
grounds may exist to warrant the disregard of its independent
being and the piercing of the corporate veil. (China Banking
Corp. vs. Dyne-Semi Electronics Corp., 494 SCRA 493 [2006].)
(1) When legal fiction to be disregarded. Being a mere creature of the law, a corporation may be allowed to exist solely for
lawful purposes but where the fiction of corporate entity is being
used as a cloak or cover for fraud or illegality, or "to defeat public convenience, justify wrong, protect fraud, or defend crime"
(Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160
[1961].), or for ends subversive of the policy and purpose behind
its creation, especially where the corporation is a closed family
corporation (Emiliano Cano Enterprises, Inc. vs. Court of Industrial Relations, 13 SCRA 290 [1965].), on equitable considerations,
this fiction will be disregarded and the individuals composing it
or two corporations will be treated as identical.
(a) In other words, the law will not recognize separate
corporate existence with reference to the particular transaction involved. This non-recognition is sometimes referred to
as the doctrine of piercing the veil of corporate entity or disregarding the fiction of corporate entity (see Claparols vs. Court of Industrial Relations, 65 SCRA 613 [1965]; Republic vs. Razon, 20
SCRA 234 [1967]; A.D. Santos, Inc. vs. Vasquez, 22 SCRA 1156
[1968]; Liddel & Co., Inc. vs. Collector, 2 SCRA 632 [1961].) or
the doctrine of corporate alter ego. (9-A Words and Phrases 377.)
The rationale is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent
and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities.
(Velarde vs. Lopez, Inc., 419 SCRA 422 [2003]; Francisco Motors vs. Court of Appeals, 309 SCRA 72 [1999].)

NNU TA6BILARAN
CCLLasE LffHtARY

28

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

(b) The doctrine requires the court to see through the protective shroud which exempts its stockholders from liabilities
that ordinarily they could be subject to, or distinguishes one
corporation from a seemingly separate one, were it not for
the existing corporate fiction. (Lim vs. Court of Appeals, 323
SCRA 102 [2000]; Marubeni Corporation vs. Lirag, 362 SCRA
620 [2001].)
(c) Moreover, for the corporate legal entity to be disregarded, the wrongdoing must be clearly and convincingly
established; it cannot be presumed, (see Del Rosario vs.
National Labor Relations Commission, 187 SCRA 777
[1990]; Matuguina Integrated Wood Products, Inc. vs. Court
of Appeals, 263 SCRA 490 [1996]; Complex Electronics
Employees Assoc. vs. National Labor Relations Commission,
310 SCRA 403 [1999]; Solidbank Corporation vs. Mindanao
Ferroalloy Corporation, 464 SCRA 409 [2005]; China
Banking Corp. vs. Dyne-Sem Electronics Corp., supra.) The
presumption is that the stockholders or officers and the
corporation are distinct entities.
(d) The burden of proving otherwise is on the party seeking to have the court pierce the veil. (Ramoso vs. Court of
Appeals, 347 SCRA 463 [2000]; Land Bank of the Phils, vs.
Court of Appeals, 364 SCRA 375 [2001].)
(2) Effect as to liability.In any of the cases where the separate
corporate identity is disregarded, the corporation will be treated
merely as an association of persons and the stockholders or
members will be considered as the corporation, that is, liability
will attach personally or directly to the officers and stockholders
(Umali vs. Court of Appeals, 189 SCRA 529 [1990].) or, where
there are two corporations, they will be merged into one, the one
being merely regarded as the instrumentality, agency, conduit or
adjunct of the other. (Koppel [Phils.], Inc. vs. Yatco, 77 Phil. 496
[1946]; Cease vs. Court of Appeals, 93 SCRA 483 [1979].)
(a) In other words, the transactions or acts of the real
parties shall be dealt with as though no corporation had
been formed. (Republic vs. Sandiganbayan, 266 SCRA 515
[1997].) The corporate character, however, is not necessarily
abrogated. The corporation continues for other legitimate
objectives. (Pamplona Plantation Co., Inc. vs. Tingkil,

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

29

450 SCRA 421 [2005].) But in the absence of proof that the
corporation's separate and distinct personality was used
as a protective shield for any wrongdoing, the general rule
on corporate liability, not the exception, should be applied.
(Soriano vs. Court of Appeals, 174 SCRA 195 [1989]; BayerRoxas vs. Court of Appeals, 211 SCRA 470 [1992].) Any
piercing of the corporate veil has to be done with caution.
(Reynoso IV vs. Court of Appeals, 345 SCRA 335 [2005];
Jardine Davies, Inc. vs. JRB Realty, Inc., 463 SCRA 555 [2005].)
(b) And even if fraud is established, this fact alone is not
sufficient to justify the piercing of the corporate fiction where
it is not sought to hold the officers and stockholders personally liable for corporate debt. Thus, where the petitioners are
merely seeking the declaration of the nullity of a foreclosure
sale, piercing the corporate veil is not the proper remedy, for
such relief may be obtained without having to disregard the
legal corporate entity, and this is true even if grounds exist to
pierce it. (Umali vs. Court of Appeals, supra.)
(3) Application of doctrine in three areas. The doctrine
applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle
for the evasion of an existing obligation; 2) fraud cases or when
the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely
a farce since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
In the absence of malice, bad faith, or a specific provision of
law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. (Pantianco
Employees Assoc. vs. National Labor Relations Commission, 581
SCRA 598 [2009].)
Instances w h e r e doctrine applied.

The question of piercing the corporate veil is essentially a


matter of proof.
In the instances given below and in furtherance of the ends
of justice to protect the rights of third persons, the courts have

30

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

pierced the veil of corporate entity, considering the corporation


and the individual or individuals owning all its stock and assets
as identical, or, in the case of two corporations, merging them
into one.
(1) Where a corporation functions for the benefit of a single person
who has complete control over the funds and the said person is
the sole owner thereof. In such case, the corporate entity is but
an alter ego or the business conduit of the owner and the property
of the corporation may be considered the property of the controlling individual and may be seized in an action against the latter.
(Marvel Bldg. Corp. vs. David, 94 Phil. 376 [1954]; Collector vs.
University of Visayas, 12 SCRA 193 [1964]; National Marketing
Corporation vs. Associated Finance Company, Inc., 19 SCRA 962
[1967]; Collector vs. Norton & Harrison Co., 11 SCRA 714 [1964];
see Valderrama vs. National Labor Relations Commission, 256
SCRA 466 [1996].)
(2) Similarly, where the transaction was entered into by the
President who was also the treasurer and general manager of a
close family corporation where the incorporators and directors belong
to one single family, the corporation is liable for the contract and
it cannot claim that it was entered into without the knowledge
and consent of the other members of the board. (M.R. Dulay
Enterprises, Inc. vs. Court of Appeals, 225 SCRA 678 [1993];
Camelcraft Corp. vs. National Labor Relations Commission, 186
SCRA 393 [1990].)
(a) The mere fact, however, that a corporation owns 50%
of the capital stock of another corporation (Manila Hotel
Corp. vs. National Labor Relations Commission, 343 SCRA
1 [2000].), or the mere majority ownership of the stocks of
a corporation is not per se a cause for piercing the corporate
veils (Republic vs. Sandiganbayan, 346 SCRA 760 [2000].),
nor the mere fact that a corporation owns all of the stocks
of another corporation, taken alone, sufficient to justify their
being treated as one entity. (MR Holdings, Ltd. vs. Bojar, 380
SCRA 617 [2002]; Borromeo vs. Court of Appeals, 550 SCRA
269 [2008].)
(b) Indeed, the mere fact that all or nearly all of the capital
stock of one or more corporations are owned and controlled

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

31

by the same or single stockholder or by another corporation,


or have the same president is not in itself sufficient ground
for disregarding separate corporate entities. There are three
(3) elements, all of which must be present for the ground (i.e.,
being a mere instrumentality or alter ego) to stand, (infra.) It
is lawful to obtain a corporation charter, even with a single
substantial stockholder, to engage in a specific activity, and
such activity may co-exist with other private activities of the
stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate activity or personality is to be respected, (see Liddel & Co., Inc. vs.
Coll. of Internal Revenue, 25 SCRA 632 [1961]; Palay, Inc. vs.
Clave, 124 SCRA 638 [1983]; Sunio vs. National Labor Relations Commission, 127 SCRA 390 [1984]; EPG Construction
Company, Inc. vs. Court of Appeals, 210 SCRA 230 [1992];
Traders Royal Bank vs. Court of Appeals, 269 SCRA 15 [1997];
Asionics Phils., Inc. vs. National Labor Relations Commission, 290 SCRA 164 [1998]; Complex Electronics Employees
Assoc. vs. National Labor Relations Commission, 310 SCRA
403 [1999]; Francisco vs. Mejia, 362 SCRA 738 [2001]; Secosa
vs. Heirs of E.S. Francisco, 433 SCRA 273 [2004]; Construction & Development Corp. of the Phils, vs. Cuenca, 466 SCRA
714 [2005]; Union Bank of the Phils, vs. Ong, 506 SCRA 256
[2006].)
(c) The liability of the parent corporation as well as the
subsidiary will be confined to those arising in their respective
business. The courts may, in the exercise of judicial discretion, step in to prevent the abuses of separate entity privilege
and pierce the veil of corporate entity. (Philippine National
Bank vs. Retratto Group, Inc., 362 SCRA 216 [2001].)
(d) Likewise, substantial identity of the incorporators of
two corporations does not necessarily imply fraud. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. (Del Rosario vs. National
Labor Relations Commission, 187 SCRA 777 [1990]; Development Bank of the Phils, vs. Court of Appeals, 363 SCRA 307
[2001]; Construction & Development Corp. of the Phils, vs.
Cuenca, supra.) But the shield of corporate fiction will be dis-

32

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

regarded if it is shown that it is designed as a means to perpetuate an illegal act or as a vehicle for the evasion of existing
obligations. (Pabalan vs. National Labor Relations Commission, 184 SCRA 495 [1970].)
(3) Where the corporation is a mere instrumentality of the individual stockholders, the latter must individually answer for corporate obligations. To hold the stockholders liable for the corporate
obligations is not really to ignore the corporation's separate entity but merely to apply the established principle that such entity
cannot be invoked or used for purposes that could not have been
intended by the law that created that separate personality. (McConnel vs. Court of Appeals, 1 SCRA 722 [1961]; also Ramirez
Telephone Corp. vs. Bank of America, 29 SCRA 191 [1962] ASJ
Corporation vs. Evangelista, 545 SCRA 300 [2008]; Phil. Commercial & International Bank vs. Custodio, 545 SCRA 367 [2008].)
(4) Where a corporation is merely instrumentality, an adjunct,
business conduit or alter ego of another corporation, the separate personality of the corporation may be disregarded. (Tan Boon Bee &
Co. vs. Jarencio, 163 SCRA 153 [1988]; Heirs of Ramon Durano,
Sr. vs. Sps. Uy, 344 SCRA 238 [2000]; Lipat vs. Pacific Banking
Corporation, 402 SCRA 339 [2003]; Comm. of Internal Revenue
vs. Menguito, 565 SCRA 461 [2008].) The corporate mask may be
removed and the two seemingly separate entities treated as one
entity only. Thus:
(a) Where sales of cars are made by corporation X to
corporation Y which are later sold to the public at a higher
price and it appears that both corporations are owned and
controlled by the same taxpayer and corporation Y was the
medium created by corporation X to reduce the price and the
sales tax liability of corporation X on original sales of cars
under the National Internal Revenue Code (see Sec. 195,
NIRC), there is sufficient justification to disregard the separate corporate identity of one from the other.
(b) Where three (3) security agencies are managed
through X Corporation with all their employees drawing
their salaries and wages from the latter entity, the agencies
have common and interlocking incorporators and officers,
and their employees have a single Mutual Benefit System

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

33

and followed a single system of compulsory retirement, with


security guards of one (1) agency being able easily to transfer to another and then back again by simply filling-up a pro
forma slip called "Request for Transfer," the veil of corporate
fiction of the three (3) agencies should be lifted for the purpose of allowing their employees to form a single labor union
without need of filing three (3) separate petitions for certification election. (Phil. Scout Veterans Security & Investigation
Agency vs. Torres, 224 SCRA 682 [1993]; see Guatson International Travel & Tours, Inc. vs. National Labor Relations Commission, 230 SCRA 815 [1994]; see Enriquez Security Services,
Inc. vs. Cabotaje, 496 SCRA 169 [2006].)
(c) Where it appears that (three) business enterprises
engaged in the same line of business (construction of public
roads and bridges) and using the same equipment including
manpower services are owned, conducted and controlled
by the same parties, both law and equity will, when
necessary to protect the rights of third persons (illegally
dismissed employees), disregard the legal fiction that the
(three) corporations are distinct entities and treat them as
identical and extend the liability of the corporations to the
responsible officers acting in the interest of the corporations
for the monetary awards due from the corporations for illegal
dismissal. (Tomas Lao Construction vs. National Labor
Relations Commission, 278 SCRA 716 [1997].)
(d) Where two corporations have identical incorporators and directors and are headed by the same official, only
one office and one payroll, and are under one management,
a suit by the employees against one corporation should be
deemed as a suit against the other. The attempt to make the
two corporations appear as two separate entities, insofar as
the workers are concerned, should be viewed as a devious but
obvious means to defeat the ends of the law. The corporate
fiction must yield to truth and justice.
(e) The mere fact, however, that: 1) the businesses of
two or more corporations are interrelated (Diatagon Labor
Federation vs. Ople, 101 SCRA 534 [1980]; China Banking
Corporation vs. Dyne-Sem Electronics Corp., 494 SCRA

34

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

493 [2006].), or 2) a common director sits on the boards of


directors of all three (3) companies organized as separate
corporate entities (Sesbreno vs. Court of Appeals, 222 SCRA
466 [1993].), and 3) even where some of the employees of one
corporation are the same persons manning and providing for
auxiliary services to the units of the other corporation and
that the physical plants, offices and facilities are situated in
the same compound (Indo-Phil. Textile Mill Workers Union
vs. Calica, 205 SCRA 697 [1992].), or 4) two corporations
are admittedly sister companies and sharing personnel
and resources (Padilla vs. Court of Appeals, 370 SCRA 308
[2001].), or 5) the mere existence of interlocking directors
(see Sec. 33.), corporate officers and shareholders (Velarde
vs. Lopez, Inc., 419 SCRA 422 [2003]; Jardine Davies, Inc. vs.
JRB Realty, Inc., 463 SCRA 555 [2005]; "G" Holdings, Inc. vs.
National Mines and Allied Workers Union, Oct. 16, 2009.),
absent a sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors and third
persons of their rights, or perpetrate wrong, is not enough
justification for disregarding their separate personalities.
(f) Similarly, not because two foreign corporations came
from the same country and closely worked together on certain projects (i.e., first corporation as the supplier and contractor of the project hired and subcontracted the project
to the second corporation), would the conclusion arise that
one was the conduit of the other, thus justifying the piercing
of the corporate veil. (Marubeni Corporation vs. Lirag, 362
SCRA 620 [2001]; Martinez vs. Court of Appeals, 438 SCRA
130 [2004].)
(g) The fiction of distinct corporate entities cannot be
disregarded where there is not the least indication that the
second corporation is a dummy or serves as a client of the
first corporate entity. (Yu vs. National Labor Relations Commission, 245 SCRA 134 [1995].) The legal corporate entity is
disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation.
(Umali vs. Court of Appeals, 189 SCRA 529 [1990].)
(h) Where a subsidiary company is created by a paren t company
merely as an agency of the latter especially if the stockholders or

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

35

officers of the two corporations are substantially the same or


their system of operations unified (Annotation: 1 A.R.L. 612;
also Yutivo Sons Hardware Company vs. Court of Appeals, 1
SCRA 160 [1961].); or where parent company assumes complete
control of the operation of its subsidiary's business, the separate
corporate existence of the subsidiary must be disregarded.
(Phil. Veterans Investment Development Corp. vs. Court
of Appeals, 181 SCRA 669 [1990]; see Reynoso vs. Court of
Appeals, 345 SCRA 335 [2000].)
(i) In workmen's compensation cases, where there is
admission that two corporations are sister companies, operating
under one single management, and housed in same building,
piercing the veil may be considered. (Telephone Engineering
& Service Co., Inc. vs. Workmen's Compensation Commission,
104 SCRA 354 [1981]; see Sibagat Timber Corp. vs. Garcia,
216 SCRA 470 [1992].) Where the corporate fiction was used
as a means to perpetrate a social injustice or as a vehicle to
evade obligations, it would be discarded and the two (2)
corporations would be merged as one, the first being merely
considered as the instrumentality, agency, conduit or adjunct
of the other. (Azcor Manufacturing, Inc. vs. National Labor
Relations Commission, 303 SCRA 26 [1999]; Pabalan vs.
National Labor Relations Commission, 184 SCRA 495 [1990].)
(j) But even when there is dominance over the affairs of
the subsidiary, the doctrine applies only when such fiction is
used as a subterfuge to commit injustice and circumvent the
law. (Union Bank of the Philippines vs. Court of Appeals, 290
SCRA 198 [1998]; Reynoso IV vs. Court of Appeals, supra.) In
the absence of circumstances justifying disregard of the corporate entity, a holding or parent corporation has a separate
corporate existence and is to be treated as a separate entity,
distinct from its subsidiary; hence, any claim or suit against
the latter does not bind the former, and vice versa. (Villarde
vs. Lopez, 419 SCRA 422 [2004]; Jardine Davies, Inc. vs. JRB
Realty, Inc., 463 SCRA 555 [2005].)
(k) The subsidiary corporations, too, are ordinarily
independent of each other. (18 Am. Jur. 2d 564-565.) Thus,
as earlier noted, the mere fact that a corporation owns all the

36

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

stocks of another corporation, taken alone is not sufficient


to justify their being treated as one entity. If used to perform
legitimate functions a subsidiary's separate existence shall be
respected and the liability of the parent corporation as well
as the subsidiary will be confined to those arising in their
respective business. (MR Holdings, Ltd. vs. Bajar, 380 SCRA
617 [2002].)
(5) Where it appears that a corporation is merely a business conduit of its president who entered into a contract of administration
and supervision for the painting of the factory of another corporation, and to evade liability, the first corporation claims that
the President acted as an agent of the second corporation. It is
a legal truism that when the veil of corporate fiction is made as
a shield to perpetrate a fraud and /or confuse legitimate issues
(here, the facts relating to employer-employee relationship), the
same should be pierced. (R.F. Sugay, Inc. vs. Reyes, 12 SCRA 700
[1964]; Jacinto vs. Court of Appeals, 198 SCRA 211 [1991].) Where
the petitioner, as president of the corporation, was ordered by
the court to pay the amounts adjudged, the fact that the obligation was incurred in the name of the corporation and he had
ceased to be corporate president, would not free him from personal liability where the court has pierced the veil of corporate
fiction, because in such case, for all legal intents and purposes,
he and the corporation are one and the same. (Arcilla vs. Court
of Appeals, 215 SCRA 120 [1992].)
(6) Where a domestic or Philippine corporation is controlled
by aliens, its nationality shall be deemed that of the controlling
stockholders thereof during wartime, for reasons of national
security. (Filipinas Cia de Seguros vs. Christen Huenefeld
& Co., Inc., 89 Phil. 54 [1951]; Davis Winship vs. Philippine
Trust Company, 90 Phil. 744 [1952].) This is the control test in
determining the nationality of a private corporation.
(7) Where a corporation is dissolved and its assets are transferred to
another corporation to avoid a financial liability of the first corporation
to its employees, both firms being owned and controlled by the
same persons with the result that the second corporation should
be considered a continuation and successor of the first entity.
(Claparols vs. Court of Industrial Relations, supra; see National
Federation of Labor Union [NAFLU] vs. Ople, 143 SCRA 124

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

37

[1986]; see A.C. Ransom Labor Union CCLU vs. National


Labor Relations Commission, 150 SCRA 498 [1987]; Cagayan
Valley Enterprises, Inc. vs. Court of Appeals, 179 SCRA 218
[1989]; see Pepsi-Cola Bottling Co. vs. National Labor Relations
Commission, 210 SCRA 277 [1992]; Avon Dale Garments, Inc.
vs. National Labor Relations Commission, 246 SCRA 733 [1995];
Phil. Bank of Communications vs. Court of Appeals, 195 SCRA
567 [1985]; Concepts Builders, Inc. vs. National Labor Relations
Commission, supra; Heirs of P.V. Pajarillo vs. Court of Appeals,
537 SCRA 96 [2007].) Where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter
is not, by that fact alone, liable for the debts and liabilities of
the transfer. "In sale of assets, the purchaser is only interested
in the raw assets of the selling corporation perhaps to be used
to establish his own business enterprise or as an addition to his
on-going business enterprise." (Allied Banking Corp. vs. DyneSemi Electronics Corp., 494 SCRA 493 [2006], citing Villanueva,
Philippine Corporate Law, 1998 Ed., p. 444.) Sale of assets is
legally distinct from merger, (see Sec. 80.)
(8) Where all the stockholders or members of a corporation, acting
as individuals instead of formal corporate action, enter into an illegal
act which, if done by formal corporate action, would be a ground
for forfeiting the charter of the corporation and dissolving it, the
fiction of corporate entity apart from the members will be disregarded, and such action of the stockholders or members will be
treated as the action of the corporation in a proceeding by the
State to forfeit the charter. (18 C.J.S. 381-382.)
(9) Where a corporation is formed by a seller of a certificate of public convenience for the purpose of evading his individual contract that
he "shall not for a period of ten (10) years from the date of this
sale, apply for any TPU service identical or competing with the
buyer." (see Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 [1968].)
(10) Where petitioner started his employment with X Corporation and was later transferred to Y Corporation, a sister
company, and the separation benefits given to the petitioner by
reason of his (illegal) dismissal corresponded only to the period
in which he was in the employ of Y Corporation, ignoring the
period when he was still in the employ of X Corporation. The

38

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

doctrine of corporate entity was envisaged for convenience and


to serve justice. Therefore, it should not be used as a subterfuge
to commit injustice and circumvent labor laws. (Indino vs. National
Labor Relations Commission, 178 SCRA 168 [1989].)
(11) Where a corporation is organized by an insolvent debtor
to defraud his creditors and he transfers his properties to it in
furtherance of such fraudulent purpose. (Kelluz vs. Douglas
County Back, 58 Conn. 43; see Palacio vs. Fely Transp. Co., 5
SCRA 1011 [1962].) But the mere amendment of the articles of
incorporation changing the name of the corporation is not an
indication to evade payment by one corporation of its obligations
to another. (Remo, Jr. vs. Intermediate Appellate Court, 172 SCRA
405 [1989].)
(12) Where a corporation is organized as a device in order to
evade an outstanding legal or equitable obligation, the courts, even
without reference to actual fraud, refuse to apply the doctrine of
corporate entity.
(a) In a California case, a lessee corporation with intent to
evade the payment of royalties under a lease, conveyed title
to a second corporation. Thereafter, the second corporation
conveyed to a third, with the same end in view. It appeared
that all of the three corporations had been formed by the same
persons, had their offices together in the same room and had
practically the same officers. The court did not find that there
was any actual fraud. Without regard to this, however, it
was held that the transfers were constructively fraudulent as
against the lessor and that all three corporations were jointly
liable for the payment of the royalties.
(b) In an old English case, a German vessel owned by a
German corporation, while sailing from Hamburg to London,
was sold by telegraph on August 1 to an English corporation,
controlled by the German corporation. On August 4, war
was declared between Germany and England. Next day,
the vessel arrived in England and was seized as a prize. The
English corporation claimed that the transfer to it made the
seizure illegal. The Prize Court held the seizure proper and
that the claim was invalid. It would clearly seem that in such

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

39

case the transfer was within the purview of the rule which
holds a transfer not valid when made in contemplation of
war and to avoid seizure as a prize. In such circumstances,
it was held that the application of the doctrine of distinct
corporate entity was uncalled for. (1 Fletcher, pp. 62-63.)
(13) Where the evidence on record shows that at the time
respondent pawned her jewelry, the pawnshop was owned by
petitioner (Sicam) himself and all the pawnshop receipts issued
to respondent shall all bear the words "Agenda de R.C. Sicam,
notwithstanding that the pawnshop was incorporated creating
the impression to respondent and the public as well that the
pawnshop was owned solely by petitioner and not by a corporation."
(Sicam vs. Jorge, 529 SCRA 443 [2007].)
(14) The corporate fiction has also been disregarded in
other cases as where it was used (a) to shield a violation of the
prohibition against forum shopping (First Phil. International
Bank vs. Court of Appeals, 252 SCRA 259 [1996].), or (b) to avoid
a judgment credit (Sibagat Timber Corp. vs. Garcia, 216 SCRA
470 [1992].), (c) to avoid the payment of higher taxes (Koppel
Phils., Inc. vs. Yatco, 77 Phil. 496 [1946]), or (d) to avoid inclusion
of corporate assets as part of the estate of a decedent (Cease vs.
Court of Appeals, 93 SCRA 483 [1979].), or (e) to promote unfair
objectives (Villanueva vs. Adre, 172 SCRA 876 [1989].), or (f)
to violate a provision under the Labor Code (see Arts. 288, 289
thereof.) declared to be penal in nature (Reahs Corporation vs.
National Labor Relations Commission, 271 SCRA 247 [1997].);
or (g) to confuse legitimate issues. (Jacinto vs. Court of Appeals,
198 SCRA 211 [1991].); or (h) to avoid a judgment in favor of an
employee where the employer corporation is no longer existing
and is unable to satisfy the judgment, the employee's recourse
being against the officers of the corporation who were, in effect,
acting in behalf of the corporation. (Restaurante Las Conchas vs.
Llego, 314 SCRA 24 [1999].)
When the veil of corporate fiction is pierced, the corporate
character is not necessarily abrogated. The corporation continues
for legitimate objectives. However, it is pierced in order to
remedy injustice. (Reynoso IV vs. Court of Appeals, 345 SCRA
335 [2000].)

40

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

Application of the "instrumentality" or


"alter e g o " rule.

The question of whether a corporation is a mere instrumentality or alter ego, a mere sheet or paper corporation, a sham or a
subterfuge, is purely one of fact. (Phoenix Safety, Inc. vs. James,
28 Ariz. 514, 237; Heirs of Ramon Durano, Sr. vs. Sps. Uy, supra.)
While there exists no definite test of general application
in determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have
been identified that will justify the application of the treatment
of the doctrine of the piercing of the corporate veil. The case
of Garrett vs. Southern Railway Co. (173 F Supp. 915, E.D. Term.
[1959].), cited in Philippine National Bank vs. Ritratto Group, Inc.
(362 SCRA 216 [2001].), involved a suit against the Southern
Railway Co. Plaintiff was employed by Lenoir Works and alleged
that he sustained injuries while working for Lenoir. He, however,
filed a suit against Southern Railway Company on the ground
that Southern had acquired the entire capital stock of Lenoir Car
Works, hence, the latter corporation but a mere instrumentality of
the former. The Tennessee Supreme Court stated that as a general
rule the stock ownership alone by one corporation of the stock of
another does not thereby render the dominant corporation liable
for the torts of the subsidiary unless the separate existence of the
subsidiary is a mere sham, or unless the control of the subsidiary
is such that it is but an instrumentality or adjunct of the dominant
corporation.
Said Court then outlined the circumstances which may be
useful in the determination of whether the subsidiary is but a
mere instrumentality of the parent-corporation:
"The circumstances rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite
variations of fact that can arise but there are certain common
circumstances which are important and which, if present in
the proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital
stock of the subsidiary.

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

41

(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except
with the parent corporation or no assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or
financial responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) 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.
(k) The formal legal requirements of the subsidiary are
not observed.
The Tennessee Supreme Court ruled:
"In the case at bar only two of the eleven listed indicia
occur, namely, the ownership of most of the capital stock of
Lenoir by Southern, and possibly subscription to the capital
stock of Lenoir... The complaint must be dismissed."
In Philippine National Bank, the contract questioned was one
entered into between respondent and PNB-IFL, not PNB. In their
complaint, respondents admit that petitioner PNB was a mere
attorney-in-fact for the PNB-IFL with full power and authority
to, inter alia, foreclose on the properties mortgaged to secure their
loan obligations with PNB-IFL. In other words, petitioner was an
agent with limited authority and specific duties under a special
power of attorney incorporated in the real estate mortgage. It

THE CORPORATION CODE OF THE PHILIPPINES

42

Sec. 2

was not privy to the loan contracts entered into by respondents


and PNB-IFL.
Our Supreme Court has laid the test in determining the applicability of the doctrine of piercing the corporate veil or corporate fiction if based on the "instrumentality" or "alter ego" rule.
In applying this rule, the courts are concerned with reality and
not with form, with how the corporation operated and the individual defendant's relationship to that operation. The absence
of any of the three (3) elements below prevents, under said rule,
"piercing the corporate veil":
(1) Control, not mere majority or complete stock control, but
complete dominion, not only of finances but of policy and business
in respect to the transaction attacked so that the corporate entity
as to this transaction had at the time no separate mind, will, or
existence of its own;
(2) Such control must have been used by the defendant to
commit fraud or wrong, violation of a statutory or other positive
duty, or dishonest and unjust act in contravention of plaintiff's
legal rights; and
(3) The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of. (Concept Builders,
Inc. vs. National Labor Relations Commission, 257 SCRA 149
[1996]; Lim vs. Court of Appeals, 323 SCRA 102 [2000]; Manila
Hotel Corp. vs. National Labor Relations Commission, 343 SCRA
1 [2000]; Heirs of Ramon Durano, Sr. vs. Sps. Uy, supra.; see Ramoso
vs. Court of Appeals/ 347 SCRA 463 [2000]; Lipat vs. Pacific
Banking Corporation, 402 SCRA 399 [2005]; R & E Transport, Inc.
In Reynoso IV vs. Court of Appeals, 345 SCRA 335 (2000), infra., the Supreme Court
(First Division) pierced the vei] of corporate entity, holding General Credit Corporation (GCC), formerly Commercial Credit Corporation (CCC), liable for the obligations
of CCC-QC basing its ruling (which reversed the decision of the Court of Appeals) "on
the records." The issue was whether or not the judgment in favor of petitioner against
CCC-QC may be executed against GCC which was not a formal party in the case. The
ruling directly conflicts with the above cited Ramoso decision of the Supreme Court [Second Division] affirming that of the Court of Appeals and that of the Securities and Exchange Commission that "the mere control on the part of GCC, one of the respondents,
through CCC Equity over the operations and business policies of the franchise companies
does not necessarily warrant piercing the corporate fiction without proof of fraud, x x x
Whether the existence of the corporation should be pierced depends on questions of facts,
appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual
stockholders is insufficient."
6

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

43

vs. Latag, 422 SCRA 698 [2004]; Martinez vs. Court of Appeals,
438 SCRA 132 [2004]; Child Learning Center, Inc. vs. Tagorio, 476
SCRA 236 [2005]; Nisce vs. Equitable PCI Bank, Inc., 516 SCRA
231 [2007]; Hi-Cement Corp. vs. Bank of Asia and America, 534
SCRA 269 [2007]; Yamamoto vs. Nishiro Leather Industry, Inc.,
551 SCRA 447 [2008].) and other cases. With respect to the second
element, the fraud or wrongful or dishonest and unjust act must
be clearly and convincingly established.
In Philippine National Bank, the Supreme Court concluded:
"Aside from the fact that PNB-IFL is a wholly owned
subsidiary of petitioner PNB, there is no showing of the
indicative factors that the former corporation is a mere
instrumentality of the latter are present. Neither is there a
demonstration that any of the evils sought to be prevented by
the doctrine of piercing the corporate veil exists. Inescapably,
therefore, the doctrine of piercing the corporate veil based on
the alter ego or instrumentality doctrine finds no application
in the case at bar.
In any case, the parent-subsidiary relationship between
PNB and PNB-IFL is not the significant legal relationship involved in this case since the petitioner was not sued because
it is the parent company of PNB-IFL. Rather, the petitioner
was sued because it acted as an attorney-in-fact of PNB-IFL
in initiating the foreclosure proceedings. A suit against an
agent cannot without compelling reasons be considered a
suit against the principal."
Corporation as a creation of law
or by operation of law.

It is well-established that no corporation can exist without


the consent or grant of the sovereign, and that the power to create
corporations is one of the attributes of sovereignty. (18 Am. Jur.
2d 573.)
(1) Special authority or grant by the State required. A corporation is created by law or by operation of law. This means that
corporations cannot come into existence by mere agreement of
the parties as in the case of business partnerships. They require
special authority or grant from the State. This power is exercised

44

Sec. 2

THE CORPORATION CODE OF THE PHILIPPINES

by the State through the legislature, either by a special incorporation law or charter which directly creates the corporation or
by means of a general corporation law under which individuals
desiring to be and act as a corporation may incorporate.
In the Philippines, the general law which governs the creation
of private corporations is Batas Pambansa Big. 68. Private
corporations owned or controlled by the government can only
be created by special laws (Constitution of the Philippines, Art.
XII, Sec. 16.), often referred to as "charters."
7

An exception to the rule that legislative grant or authority is


necessary for the creation of a corporation obtains with respect to
corporations by prescription, (infra.)
(2) Compliance with conditions prescribed by law required.
Corporations can only come into existence in the manner prescribed by law. General laws authorizing the formation of corporations are, in effect, general offers to any persons who may
bring themselves within their provisions; and if condition precedents are prescribed in the statute, or certain acts are required to
be done, they are terms of the offer and must be complied with
substantially before legal corporate existence can be acquired.
(18 C.J.S. 468.)
A corporation as a creature of the State is presumed to be
incorporated for the benefit of the public. It receives certain special privileges and franchises and holds them subject to the laws
of the State and the limitations of its charter. There is a reserved
right in the State to inquire how these privileges had been employed, and whether they had been abused. (Bataan Shipyard &
Engineering Co., Inc. vs. PCGG, 150 SCRA 181 [1987].)
Right of successio n of a c o r p o r a t i o n .

A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of

'Article 45 of the Civil Code provides, among other things, that: "Private corporations are regulated by laws of general application on the subject. Partnerships and associations for private interest or purpose are governed by the provisions of this Code
concerning partnerships."
"Before the adoption of the 1935 Constitution, private corporations, whether government-owned or -controlled or not, could be created either by general or special law.

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

45

the individual stockholders or members and regardless of the


transfer of their interest or shares of stock. Thus, it is frequently
said that one of the attributes of a corporation aggregate is immortality or perpetual succession. But the corporation is by no
means immortal.
(1) Under the Corporation Code, the life of the corporation is
limited to the period of time stated in the articles of incorporation
not exceeding 50 years from the date of incorporation unless
sooner dissolved or unless said period is extended (Sec
11.)
9

(2) Corporations created by special laws have the right of


succession for the term provided in the laws creating them.
P o w e r s , attributes, a n d properties
of a c o r p o r a t i o n .

A corporation, being purely a creation of law, may exercise only such powers as are granted by the law of its creation.
An express grant, however, is not necessary. All powers which
may be implied from those expressly provided by law and those
which are incidental or essential to the corporation's existence
may also be exercised, (see Sees. 36[11], 45.)
10

11

The test to be applied is whether the act of the corporation is in


direct and immediate furtherance of its business, fairly incidental to the express powers and reasonably necessary to their exer'"Since ownership in the corporation may be transferred by a sale of its stock without the assent of the other owners (see Sec. 63.), the corporation is highly permanent
in some cases almost perpetual. Since the Dartmouth College case, 1918, in which the
United States Supreme Court held that a charter granted by a State to a corporation was
a binding contract and could not be altered by the State without the consent of the corporation (see Sec. 16.), state laws limit the life of the corporation usually to twenty or fifty
years, (see Sec. 11.) New charters, however, are obtained without much difficulty." (C.L.
James, Principles of Economics, 9th ed., p. 46; Barnes & Noble College Outline Series.)
Strictly speaking, this is true only with respect to corporations created by special
acts of the legislature. Those organized under the Corporation Code, a general law, are
really the result of the contract of the parties. The State merely gives its approval to their
agreement.
"The powers that may be exercised by a corporation are not entirely dependent
upon the State. The purpose or purposes of the corporation as stated in its articles of incorporation determine to a large extent the powers it may exercise, (see Sees. 10, 36[11].)
Subject only to certain restrictions, the incorporators, stockholders, or members are entirely free to decide what the purpose or purposes of the corporation shall be. (see Sees.
14[2], 15[2nd].)
10

46

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

rise. If so, the corporation has the power to do it; otherwise, not.
(6 Fletcher, pp. 198-199; Montelibano vs. Bacolod-Murcia Milling
Co., Inc., 5 SCRA 36 [1962].)
(1) Thus, a corporation incorporated as a railroad corporation has the incidental power to build railroads because such
power is necessary for the accomplishment of the purpose for
which the corporation is created.
(2) Similarly, a corporation expressly authorized to engage
in agriculture has implied authority to buy agricultural lands
because such authority is reasonably appropriate to carry out its
express authority.
(3) Likewise, a corporation engaged in the manufacture of
cement could operate and maintain an electric plant for the purpose exclusively of supplying electricity to its cement factory
and to its employees living within its factory compound where it
appears that the operation of such plant is necessarily connected
with the business of the manufacture of cement. (Teresa Electric
and Power Co., Inc. vs. Public Service Commission, 21 SCRA 252
[1967].)
(4) But a corporation organized for the purpose of supplying
electricity to the public has no power to buy and sell agricultural
lands because it is not within the power expressly or impliedly
authorized by law or incidental to its existence, (see Sees. 36 and
45.)
(5) Neither may a corporation authorized under its articles
of incorporation to operate and otherwise deal in automobiles
and automobile accessories and to engage in the transportation
of persons by water, engage in the business of land transportation
(e.g., operation of a taxicab service) because such would have no
necessary connection with the corporation's legitimate business.
(Luneta Motor Co. vs. A.D. Santos, Inc., 5 SCRA 809 [1969].)
(6) Investment by a transportation company in an insurance
corporation with transportation operators as stockholders,
designed to reduce insurance costs, may be interpreted as an
act which is reasonably requisite and necessary to carry out the
business of land transportation, for the reason that insurance
costs form part of the legitimate expenses of a transportation
operator. (SEC Opinion, June 13,1961.)

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

47

(7) Also, a corporation which is engaged, among others, in


the manufacture of rubber shoes, slippers, sandals, and other
allied products may be permitted to buy worn-out or used shoes
and slippers to be reprocessed or reclaimed into raw materials
which are to be used in the manufacture of its products, and to
manufacture rubber cement, it appearing that the main ingredient
in the manufacture of the same is rubber and rubber cement is a
rubber product. (SEC Opinion, Dec. 15,1967.)
(8) But a corporation engaged primarily in fishing, and to
pursue this, it is empowered by its articles of incorporation "to
operate cold storage plants x x x as may be necessary for the carrying on of the said primary objective of the corporation" cannot
operate a cold storage plant or an ice plant as a public service
operator since it can operate such plant only insofar as it may
serve its primary purpose. (SEC Opinion, Feb. 17,1969.)
(9) The power to create or establish branch offices is generally
provided for in the articles of incorporation or in the by-laws.
In the absence, however, of such a provision, every corporation
formed under the law has the implied or incidental power to
establish branch offices in the Philippines or elsewhere as the
needs and exigencies of the business of the corporation may
require. Thus, the board of directors of a corporation may, even
in the absence of a provision in its articles of incorporation or
by-laws, establish branch offices if it is necessary or convenient
for the proper accomplishment of the purpose for which the
corporation has been created. (SEC Opinion, March 2,1970.)
(10) The Land Bank of the Philippines, being a commercial
bank clothed with authority to exercise all the general powers
mentioned in the Corporation Code and the General Banking Act,
as provided in its charter, among which is the power to write off
loans and advances, has been held to have also the lesser power
to charge off or condone interests and penalties. (Land Bank of
the Phils, vs. Commission on Audit, 190 SCRA 154 [1990].)
Distinctions between a partnership
a n d a corporation.

The following are the distinctions:


(1) Manner of creation. A partnership is created by mere

48

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

agreement of the parties, while a corporation is created by law or


by operation of law (Sec. 2.);
(2) Number of incorporators. A partnership may be organized by only two persons, while a corporation (except a corporation sole) requires at least five incorporators (Sec. 10.);
(3) Commencement of juridical personality. A partnership
commences to acquire juridical personality from the moment of
the execution of the contract of partnership, while a corporation
begins to have corporate existence and juridical personality only
from the date of the issuance of the certificate of incorporation by
the Securities and Exchange Commission under its official seal
(Sec. 19.);
(4) Powers. A partnership may exercise any power authorized by the partners provided it is not contrary to law, morals,
good customs, public order, or public policy (Art. 1306, Civil
Code.), while a corporation can exercise only the powers expressly
granted by law or implied from those granted or incident to its
existence (Sec. 2.);
(5) Management. In a partnership, when the management
is not agreed upon, every partner is an agent of the partnership,
while in a corporation, the power to do business is vested in the
board of directors or trustees (Sec. 23.);
(6) Effect of mismanagement. In a partnership, a partner as
such can sue a co-partner who mismanages, while in a corporation, the suit against a member of the board of directors or trustees who mismanages must be in the name of the corporation;
(7) Right of succession. A partnership has no right of
succession, while a corporation has such right (Sec. 2.);
(8) Extent of liability to third persons. In a partnership, the
partners (except limited partners) are liable personally and subsidiarily (sometimes solidarily) for partnership debts to third
persons, while in a corporation, the stockholders are liable only
to the extent of their investment as represented by the shares
subscribed by them (see Sees. 66, 67.);
(9) Transferability of interest. In a partnership, a partner
cannot transfer his interest in the partnership so as to make the

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

49

transferee a partner without the consent of all the other existing partners because the partnership is based on the principle of
delectus personarum, while in a stock corporation, a stockholder
has the right to transfer his shares without the prior consent of
the other stockholders because a corporation is not based on this
principle (see Sec. 63.);
(10) Term of existence. A partnership may be established
for any period of time stipulated by the partners, while a corporation may not be formed for a term in excess of 50 years extendible to not more than 50 years in any one instance (Sec. 11.);
(11) Firm name. A limited partnership is required by the
law to add the word "Ltd." to its name, while a corporation may
adopt any firm name provided it is not identical or deceptively
similar to any registered firm name or contrary to existing law
(see Sec. 18.);
(12) Dissolution. A partnership may be dissolved at any
time by the will of any or all of the partners, while a corporation
can only be dissolved with the consent of the State, (see Sees. 117122.)
(13) Laws which govern. A partnership is governed by the
Civil Code, while a corporation is governed by the Corporation
Code.
Similarities b e t w e e n a partnership
a n d a corporation.

The similarities are as follows:


(1) Like a partnership, a corporation has a juridical personality separate and distinct from that of the individuals composing
it;
(2) Like a partnership, a corporation can act only through
agents;
(3) Like a partnership, a corporation (except a corporation
sole) is an organization composed of an aggregate of individuals;
(4) Like a partnership, a (stock) corporation distributes its
profits to those who contribute capital to the business (although
an industrial partner also shares in partnership profits);

Sec. 2

THE CORPORATION CODE OF THE PHILIPPINES

50

(5) Like a partnership, a corporation can be organized only


where there is a law authorizing its organization. To organize a
corporation or a partnership that could claim juridical personality of its own and transact business as such is not a matter of
absolute right but a privilege which may be enjoyed only under
such terms as the State may deem necessary to impose (Ang Pue
& Co. vs. Sec. of Commerce and Industry, 5 SCRA 645 [1962].);
and
(6) A partnership, no matter how created or organized,
is taxable as a corporation, subject to income tax. (Sec. 24[a],
National Internal Revenue Code.)
12

Corporation as a partner.

(1) General rule. According to the prevailing view, corporations cannot ordinarily enter into partnership" with other corporations or with individuals. The reasons are as follows:
(a) A corporation can only act through its duly authorized
officers and agents and is not bound by the acts of anyone
else, while in a partnership, each member binds the firm
when acting within the scope of the partnership business. In
entering into a partnership, the identity of the corporation
is lost or merged with that of another and the direction of
its affairs is placed in other hands than those provided by
the law of its creation (SEC Opinion, Jan. 26, 1961, citing 6
Fletcher, pp. 325-326.);
(b) The limitation is based on grounds of public policy,
since in a partnership the corporation would be bound by the
acts of persons who are not its duly appointed and authorized
agents and officers, which would be entirely inconsistent
with the policy of the law that the corporation shall manage
its own affairs separately and exclusively (13 Am. Jur. 830.)
through the directors (or trustees) or officers chosen by the
stockholders (or members); and
"Except general professional partnerships or "partnerships formed for the sole purpose
of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business." (Sec. 20[b], NIRC.)
A corporation may be a "partner" under the Uniform Partnership Act. (see Sees.
2, 6 thereof.)
13

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

51

(c) Furthermore, such an arrangement would permit the


corporate assets to be subjected to risks and liabilities not
contemplated by the stockholders at the time of making their
investment. (19 Am. Jur. 2d 505.)
(2) Exceptions. The rule, however, is not absolute.
(a) Though a corporation has no power to enter into a
partnership, it may, however, enter into a joint venture with
another where the nature of that venture is in line with the
business authorized by their charters, (see Sec. 36[7].) Thus,
a corporation may be represented by another person, natural
or juridical, in a suit in court, where there is nothing in the
record to indicate that this venture in which the former is
represented by the latter as "its managing partner" is not in
line with the corporate business of either of them. (J.M. Tuazon & Co., Inc. vs. Bolanos, 95 Phil. 106 [1954].)
14

A joint venture need not be registered with the Securities and Exchange Commission provided it does not result
in the formation of a new corporation or partnership, and
provided further that existing laws governing joint ventures
and implementing rules and regulations are complied with.
(SEC Opinions, March 18,1993 and No. 04-42, Sept. 28,2004.)
(b) A joint venture partnership between a foreign corporation licensed to do business in the Philippines and a
domestic corporation (or an individual) "for the purpose
of undertaking certain phases of the construction of the
Philippine Sintering Plant in Misamis Oriental, an economic
development project registered as a pioneer enterprise
with the Board of Investments," with the manager of the
"It is an association of two or more persons to carry out a single business enterprise
for profit. It relates to a single transaction rather than to a continuous business (L. Teller,
Law of Partnership, 1949 ed., p. 20.) and is, thus, temporary. A joint venture falls within
the meaning of the term "particular partnership" as defined in Article 1783 of the Civil
Code, which provides: "A particular partnership has for its object determinate things,
their use or fruits, or a specific undertaking, or the exercise of a profession or vocation," and
thus is governed by the Civil Code provisions on partnership.
But while a corporation cannot enter into a partnership contract, it may engage, according to the Supreme Court, in a joint venture with others although "a joint venture is a
form of partnership and should thus be governed by the law of partnerships." (Aurbach
vs. Sanitary Wares Manufacturing Corp., 180 SCRA 130 [1989].)

52

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

partnership to be appointed jointly by the partners from


among those nominated by the foreign corporation, may be
allowed provided that the agreement expressly stipulates
that both parties shall be jointly and severally liable for all the
obligations of the partners in the Philippines. (SEC Opinion,
Dec. 2,1974.)
(c) Where the partnership agreement provides that
the two partners will manage the partnership so that the
management of the corporate interest is not surrendered,
the general rule will not apply. The Securities and Exchange
Commission, to meet the objection to allowing a corporation
to enter into a contract of partnership, may impose proper
safeguards and conditions, particularly where the other
partner is an entity organized under a foreign law. (SEC
Opinions, Dec. 22,1966 and Aug. 31,1971.)
(d) While as a rule, only natural persons are considered
legally capable of entering into a contract of partnership,
there have been cases where the Securities and Exchange
Commission has allowed corporations to enter into partnerships with other corporations or with individuals, provided:
1) All the corporation partners must be managing
partners and consequently, the articles of partnership
must stipulate that all the partners are and shall be solidarily liable (see Arts. 1207,1208, Civil Code.) for all the
obligations of the partnership;
15

2) The statute or their respective charters or articles


of incorporation must expressly allow the corporations

"Under this condition, a partnership of corporations should be organized as a


general partnership wherein all the partners are general partners. In such a situation, all
corporate partners shall take part in the management and are solidarily liable with the
other partners, (see Arts. 1776,1816,1822-1824, Civil Code.) It may be true that a limited
partner is given the option "to take part in the management" of a limited partnership (see
Arts. 1843,1848, Ibid.), but if a corporation is allowed to be a limited partner only, there is
no assurance that it shall participate in the management of the partnership as required,
and this may create a situation wherein the corporations may not be bound by the acts
of the partnership in the event that, as a limited partner, it opts not to participate in the
management, thereby defeating the policy requiring that all partners of a partnership
composed of corporations shall be jointly and severally liable for all the obligations of the
partnership. (SEC Opinion, Feb. 23,1994.)

Sec. 2

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

53

to enter into partnership agreement and the nature of the


business venture to be undertaken by the partnership is
in line with the business authorized by law or the articles
of incorporation of the constituent corporations; and
3) Where one of the partners is a foreign corporation, it must obtain a license to transact business in the
country in accordance with the Corporation Code (Sec.
123.) and the Foreign Investments Act. (see SEC Opinion,
Dec. 1,1993.)
The corporation-partners shall embody the terms and conditions of their relationship in the partnership agreement and
upon approval by the Securities and Exchange Commission, the
partnership shall attain a juridical personality separate and distinct from the corporation-partners. (Art. 1768, Civil Code.) The
liability of the corporation-partners shall not be limited to their
contributions (Art. 1816, Ibid.) and even the dissolution of a corporation-partner does not terminate a joint venture to which it
is a party so as to relieve the corporation of obligations incurred
by reason of its entering into the venture. (SEC Opinion, Aug. 24,
1981.)
(3) As a limited partner. A foreign corporation can be a
limited partner in a Philippine limited partnership in view of the
following:
(a) There is no existing Philippine law expressly prohibiting a foreign corporation from becoming a limited partner
in a partnership;
(b) Just as a corporate investor has the power to make
passive investments in other corporations by purchasing
stock, a corporate investor should also be allowed to make
passive investments in a partnership as a limited partner. By
being a limited partner, the corporation would not be bound
beyond the amount of its investment by the acts of the other
partners who are not its duly appointed and authorized
agents and officers;
(c) Section 42 of the Corporation Code which permits
a corporation to invest its funds in another corporation or
business, does not require that the investing corporation be

54

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 2

involved in the management of the investee corporation with


a view to protect its investment. Accordingly, there is no risk
that a corporate limited partner would be solidarily liable
with the partnership;
(d) Jurisprudence and common commercial practice in
the United States indicate that corporations are not barred
from acting as limited partners; and
(e) Such a ruling would be consistent with the policy to
encourage and facilitate domestic and foreign investments in
Philippine business enterprises.
The foreign corporation still has to obtain a license to do
business in the Philippines and must be authorized under its
articles of incorporation to enter into a partnership agreement.
(SEC Opinion Aug. 17, 1995.) It is believed that a license is not
required where the participation of the foreign corporation as a
limited partner in a partnership is merely for investment purposes and it shall not take part in the management and control of
the partnership as it shall not be deemed "doing business" in the
Philippines, (see Sees. 123-126.)
Advantages of a busines s c o r p o r a t i o n .

The advantages are the following:


(1) The corporation has a legal capacity to act and contract as
a distinct unit in its own name;
(2) It has continuity of existence because of its non-dependence on the lives of those who compose it;
(3) Its credit is strengthened by such continuity of existence;
(4) Its management is centralized in the board of directors;
(5) Its creation, organization, management, and dissolution
are standardized as they are governed under one general incorporation law;
(6) It makes feasible gigantic financial undertakings since it
enables many individuals to invest their separate funds in the enterprise in order to furnish large amounts of capital upon which
big business depends;
(7) The shareholders have limited liability;

Sec. 3

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

55

(8) They are not general agents of the business; and


(9) The shares of stocks can be transferred without the consent of the other stockholders.
D i s a d v a n t a g e s of a b u s i n e s s corporation.

They are as follows:


(1) The corporation is relatively complicated in formation
and management;
(2) It entails relatively high cost of formation and operations;
(3) Its credit is weakened by the limited liability of the stockholders;
(4) There is ordinarily lack of personal element in view of the
transferability of shares;
(5) There is a greater degree of governmental control and supervision than in any other forms of business organization;
(6) In large corporations, management and control are separated from ownership;
(7) The stockholders' voting rights have become theoretical
particularly in large corporations because of the use of proxies
and widespread ownership; and
(8) The stockholders have little voice in the conduct of the
business.
Sec. 3. Classes of corporations. Corporations formed
or organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to
the holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held are
stock corporations. All other corporations are non-stock
corporations. (3a)*

'Signifies section number of original provision in Act No. 1459 and that the
provision has been amended.

56

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 3

Classification of corporations under


the Code.

The Corporation Code classifies private corporations into


stock and non-stock corporations, according to whether their
membership is represented by shares of stock or not.
(1) A stock corporation is the ordinary business corporation
created and operated for the purpose of making a profit which
may be distributed in the form of dividends to stockholders on
the basis of their invested capital. The two (2) elements mentioned in Section 3 must be present to make a private corporation
fall under the definition of a stock corporation.
(2) Unlike stock corporations, non-stock corporations do not
issue stock and distribute dividends to their members; they are
created not for profit but for the public good and welfare. Of this
character are most of the charitable, religious, social, literary,
scientific, civic, and political organizations and societies. Nonstock corporations are primarily governed by Title XI (Sees. 8795.) of the Code.
The provisions governing stock corporations, when pertinent, are applicable to non-stock corporations except as may be
covered by specific provisions of Title XI. (Sec. 87.)
Generally, a corporation may be organized either as a stock
or non-stock such as educational corporations, (see Sees. 106108.) But some kinds of corporations cannot be organized except
in the form of stock corporations, like banks (Sec. 7, R.A. No.
337.) and close corporations, (see Sec. 96.) A religious corporation
is always non-stock, (see Sec. 109.)
Other classifications of corporations .

There are other classifications of corporations, such as those


enumerated below.
(1) As to number of persons who compose them:
(a) Corporation aggregate or a corporation consisting of
more than one member or corporator; or
(b) Corporation sole or a special form of corporation usually associated with the clergy. Under the Code, it is a reli-

Sec. 3

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

57

gious corporation which consists of one member or corporator only and his successors, such as a bishop. (Sec. 110.)
All other corporations must be corporation aggregate, that is,
they must be formed by "not less than five (5)" persons, (see
Sec. 10.)
A corporation aggregate does not become a corporation sole
by the mere fact that its shares of stock become vested in one
person because the shares may again be transferred or sold by
the holder to others. In the meantime, however, the holder and
the corporation may be treated as the same.
(2) As to whether they are for religious purposes or not:
(a) Ecclesiastical corporation or one organized for religious
purposes. Under the Code, religious corporations are classified into corporations sole and religious societies (Sec. 109,
par. 2.); or
(b) Lay corporation or one organized for a purpose other
than for religion. Lay corporations, in turn, may be either
eleemosynary or civil.
(3) As to whether they are for charitable purposes or not:
(a) Eleemosynary corporation or one established for or
devoted to charitable purposes or those supported by charity;
or
(b) Civil corporation or one established for business or
profit, i.e., with a view toward realizing gains to be distributed among its members.
(4) As to State under or by whose laws they have been created:
(a) Domestic corporation or one incorporated under the
laws of the Philippines; or
(b) Foreign corporation or one formed, organized, or
existing under any laws other than those of the Philippines.
It includes multinational corporations created under the laws
of another State, (see Sec. 123.) For tax purposes, a foreign
corporation is further classified into resident or non-resident.
(supra.)

THE CORPORATION CODE OF THE PHILIPPINES

58

Sec. 3

(5) As to their legal right to corporate existence:


(a) Dejure corporation or a corporation existing in fact and
in law; or
(b) De facto corporation or a corporation existing in fact
but not in law. (see Sec. 21.)
(6) As to whether they are open to the public or not:
(a) Close corporation or one which is limited to selected
persons or members of a family (see Sees. 96-105.); or
(b) Open corporation or one which is open to any person
who may wish to become a stockholder or member thereto.
(7) As to their relation to another corporation:
(a) Parent or holding corporation or one which is so related
to another corporation that it has the power, either directly or
indirectly, to elect the majority of the directors of such other
corporation;
16

(b) Subsidiary corporation or one which is so related to


another corporation that the majority of its directors can be
elected either directly or indirectly by such other corporation. It is one in which another corporation owns at least a
majority of the shares and thus has control; or
17

(c) Affiliated corporation or one related to another by owning or being owned by common management or by a longterm lease of its properties or other control device. An affiliation exists between a holding or parent company and its
subsidiary, or between two corporations owned or controlled

It is a corporation organized to hold the stock of another or other corporations


enabling it to control or substantially influence the policies and management of such corporation or corporations. It holds stock in other companies for purposes of control rather
than for mere investment.
Normally, a corporation is considered a wholly-owned subsidiary only if the rest
of the stockholders, other than the parent company, own one (1) share in the corporation
and only for purposes of qualifying them as incorporators and/or directors. Where the
corporation is not such a wholly-owned subsidiary (i.e., some stockholders own more
than one share), the SEC ruling that "dividends either in the form of cash or stock should
be declared on the basis of the outstanding capital stock held by the stockholders and any
transfer thereof must be done only after the amount declared has been proportionately
distributed to the stockholders" is applicable. (SEC Opinion, Oct. 17,1994.)
16

17

Sec. 3

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

59

by a third. (E.L. Kohler, A Dictionary for Accountants, 1975


ed., p. 26.)
(8) As to whether they are for public (government) or private purpose:
(a) Public corporations or those formed or organized for
the government of a portion of the State for the general good
and welfare; or
(b) Private corporations or those formed for some private
purpose, benefit, or end; it may be either a stock or non-stock
corporation, government-owned or -controlled corporation
or quasi-public corporation.
The true test is the purpose of the corporation. If the corporation is created by the State as its own agency or instrumentality
for political or public purpose connected with the administration of government, then it is a public corporation. If not, it is a
private corporation notwithstanding that it is created to promote
public good, interest, or convenience although the whole, or substantially the whole interest in the corporation, belongs to the
State. In the Philippines, the public corporations are the provinces, cities, municipalities, and barangays. In addition, the Constitution mandates the creation of autonomous regions in Muslim
Mindanao and the Cordilleras, (see Art. X, Sec. 1 thereof.)
These local units are also called municipal corporations or
local governments.
The Code eliminated the classification of corporations
into public or private obviously for the reason that it applies
only to private corporations.
Private corporations include:
1) Government-owned or -controlled corporations or
those created or organized by the government or of which
the government is the majority stockholder.
18

It may be organized as a stock or non-stock corporation. A government instrumentality (e.g., Manila International Airport Authority), which is neither a stock or non-stock
corporation vested with corporate powers to perform efficiently its governmental functions, does not qualify as a government-owned or -controlled corporation. It remains
part of the national Government machinery although not integrated with the department
framework. (Manila International Airport Authority vs. Court of Appeals, 295 SCRA 591
[2006].)
la

THE CORPORATION CODE OF THE PHILIPPINES

60

Sec. 3

These corporations are private and not public corporations because they are not established for the government of a portion of the State. Where the government
engages in a particular business thru the instrumentality
of a corporation, it divests itself pro hac vice of its sovereign character, so as to subject itself to the rules governing private corporations. (Phil. National Bank vs. Pabalan, 83 SCRA 595 [1978].) Examples are the Government
Service Insurance System, National Power Corporation,
Philippine National Railways, etc.; ' and
1

2) Quasi-public corporations or private corporations


which have accepted from the State the grant of franchise
or contract involving the performance of public duties (1
Fletcher, p. 216.) but which are organized for profit. They
have been denned also as corporations private in owner-

It has been ruled that employees of government-owned or -controlled corporations, whether formed by special law or under the Corporation Code (except private
firms taken over by the government in foreclosure or similar proceedings), are governed
by the Civil Service Law (Pres. Decree No. 807, as amended.) and not by the Labor Code
(Pres. Decree No. 442, as amended.) in view of Article XII-B, Section 1 of the 1973 Constitution, which provides: "The Civil Service embraces every branch, agency, subdivision
and instrumentality of the Government, including every government-owned or -controlled corporation."
A dissenting opinion holds that the constitutional provision contemplates only
those corporations created by special law. "Whether a corporation is government-owned
or -controlled depends upon the purpose of the inquiry. A corporation may be 'government-owned or -controlled' for one purpose but not for another. In other words, it is not
possible to broadly categorize a corporation as 'government-owned or -controlled.' Thus,
if the National Housing Corporation (which was created pursuant to Act No. 1459, the
former Corporation Law) is not covered by the Civil Service, it is not necessarily covered
by the Labor Code. For it may well be that the NHC is in limbo." (National Housing
Corp. vs. Juco, 134 SCRA 172 [1985].) The ruling in Juco is no longer applicable.
Under the present Constitution, only government-owned or -controlled corporations "with original charter" (i.e., created by special law and not under the Corporation
Code) are embraced within the Civil Service. (Art. IX, B-Sec. 2[1] thereof.) But a private
corporation acquired by the government utilizing public funds, while retaining its corporate existence, becomes a government-owned or -controlled corporation within the
constitutional precept of public accountability (see Art. XI, Sec. 1, Ibid.) and its employees
are, therefore, public servants, falling within the investigatory and prosecutory power
of the Office of the Ombudsman for purposes of the Anti-Graft and Corrupt Practices
Act. (Quimpo vs. Tanodbayan, 146 SCRA 137 [1986].) Neither are government-owned or
-controlled corporations which are organized as subsidiaries of such corporations under
the Corporation Code included in the Civil Service. (Bliss Development Corp. Employees
Union vs. Calleja, 237 SCRA 271 [1994].) Their employees are subject to the provisions of
the Labor Code.
I9

Sec. 3

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

61

ship but having an appropriate franchise from the State


to provide for a necessity or convenience of the general
public, incapable of being furnished through the ordinary
channels of private competitive business and dependent
for its exercise upon eminent domain or some agency of
the government. (Ibid., p. 217.) They are private corporations that perform public service.
20

These corporations are also known as "public utilities" or "public service corporations." Examples of these
corporations are those organized as electric, water,
telephone and transportation companies. Because the
business in which they are engaged are impressed with
a public interest, they may not engage in that business
without authority of the State in the form of franchise.
Neither may they cease engaging in that business unless
the State permits them to do so. A quasi-public corporation is given certain powers of a public nature such as
the power of eminent domain in order to enable it to
discharge its duties for the public benefit, in which respect it differs from an ordinary private corporation, the
powers of which are given and exercised exclusively for
the profit and advantage of its stockholders. (18 Am. Jur.
2d 555.)
21

(9) As to whether they are corporations in a true sense or


only in a limited sense:
^The fact that a certain juridical entity is impressed with public interest does not, by
that circumstance alone, make the entity a public corporation, inasmuch as a corporation
may be private although its charter contains provisions of a public character, incorporated solely for the public good. This class of corporations may be considered quasi-public
corporations, which are private corporations that render public service, supply public
wants, or pursue other eleemosynary objectives. While purposely organized for the gain
or benefit of its members, they are required by law to discharge functions for the public
benefit. (Phil. Society for the Prevention of Cruelty to Animals vs. Commission on Audit,
534 SCRA 112 [2007].)
"The juridical entities known as water districts created by Presidential Decree No.
198 have been held as quasi-public corporations, performing public services and supplying public wants and are entirely distinct from corporations organized under the Corporation Code. The function of supervision or control over them is entrusted to the Local
Water Utilities Administration (LWUA), a government corporation established by the
decree. (Marilao Water Consumers' Assoc. vs. Intermediate Appellate Court, 201 SCRA
437 [1991].)

62

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 3

(a) True corporation or one which exists by statutory


authority; or
(b) Quasi-corporation or one which exists without formal
legislative grant. It is an exception to the general rule that a
corporation can exist only by authority of law. It may be:
1) Corporation by prescription or one which has
exercised corporate powers for an indefinite period
without interference on the part of the sovereign power
and which by fiction of law is given the status of a
corporation. (1 Fletcher, p. 415.)
The Roman Catholic Church has been recognized
as a corporation by prescription, having acted as such
and assumed corporate powers for a long period of
time. According to the Supreme Court, it "antedates by
almost a thousand years any other personality in Europe
and existed when the Grecian eloquence still flourished
in Antioch and when idols were still worshipped in
the temples of Mecca, x x x. Persecuted as an unlawful
association since the early days of its existence up to the
time of Galieno, who was the first of the Roman emperors
to admit it among the the juridical entities protected by
the laws of the Empire, it existed until then by mercy and
will of the faithful and depended for such existence upon
pious gifts and offerings. Since the latter half of the third
century, and more particularly since the year 313, when
Constantine, by the Edict of Milan, inaugurated an era
of protection for the church, the latter gradually entered
upon the exercise of such rights as were required for the
acquisition, preservation, and transmission of property
the same as any other juridical entity under the laws of
the Empire, x x x" (Barlin vs. Ramirez, 7 Phil. 41 [1906].);
or
2) Corporation by estoppel or one which in reality is
not a corporation, either de jure or de facto, because it is
so defectively formed, but is considered a corporation
in relation to those only who, by reason of their acts or
admissions, are precluded from asserting that it is not a
corporation. This legal assumption is not good, however,

Sec. 3

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

63

as against the State but may arise only for purposes of


private litigation.
Corporation by estoppel is another instance whereby
a corporation may exist without formal statutory authority. It has no real existence in law as has a de facto corporation but is a mere fiction. (8 Fletcher, pp. 218-219; see Sec
21.)
Important distinctions b e t w e e n public
a n d private c o r p o r a t i o n s .

The most important division of corporations is into public


and private, for there are many principles of law which apply to
the former and not to the latter.
(1) The most important distinction is with respect to governmental control. Public corporations, being mere instrumentalities of the State, are subject to governmental visitation and
control, whereas the charter of a private corporation is a contract
between the State and the corporation or incorporators, which,
under the provision of the Constitution prohibiting laws impairing the obligation of contracts, renders such corporations not
subject to visitation, control, or change by the State, except in the
exercise of the police power.
(2) Another distinction is that a public corporation may be
created without the consent of the locality to be affected, whereas
the consent of the incorporators is necessary to the creation of a
private corporation.
(3) The distinction is also important with respect to taxation,
to the question of liability for the torts or negligence of officers
and agents, and to various other questions. (14 C.J. 72-73.)
Dual status of public corporations.

A public or municipal corporation possesses two kinds of


power, governmental or public and proprietary or private, and
in the exercise of the former, it is a "municipal government,"
while as to the latter, it is a "corporate legal individual." (see 9-A
Words and Phrases 391.)

64

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 4

A public corporation engaged in the performance of governmental or public functions {e.g., maintenance of peace and order)
as distinguished from corporate or proprietary functions (e.g.,
operation of a public market), in the absence of statute, is not liable
for damages occasioned by the negligent or wrongful actions
of its officers, agents, or employees. The test for distinguishing
the first kind of power from the second, and consequently, in
determining liability or nonliability for torts of its agents, is
whether the act performed is for the common good or whether it
is for the special benefit or profit of the corporate entity, (see Ibid.,
p. 390.)
Sec. 4. Corporations created by special laws or charters.
Corporations created by special laws or charters shall
be governed primarily by the provisions of the special law
or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are
applicable, (n)*
Incorporation of a private corporatio n
by a special act.

Section 4 authorizes the creation of private corporations by


special laws or charters. The enactment of special act creating a
private corporation is subject to the constitutional limitation that
such corporation shall be owned or controlled by the government. (Constitution of the Philippines, Art. XII, Sec. 16.)
The reason for the restriction is obvious:
(1) It is chiefly to prevent the granting of special privileges
to one body of men without giving all others the right to obtain
them in the same conditions; and
(2) Perhaps, it is partly to prevent bribery and corruption of
the legislature. (Clark on Corporations, p. 45.)
A special law creating a private corporation which is neither
owned nor controlled by the government is void for being violative of the constitutional provision, (see National Development
Co. vs. Phil. Veterans Bank, 192 SCRA 257 [1990].)
'ignifies that the provision is new, not found in Act No. 1459.

Sec. 4

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

65

G o v e r n i n g law.

(1) A corporation created by a special law or charter is


primarily governed by such law and suppletorily, by the provisions of the Code "insofar as they are applicable," either because
they are not inconsistent with, or are expressly made applicable
by, the special law. Thus, it has been held that the Philippine
National Bank (PNB), having a charter of its own (R.A. No. 1300,
as amended.), was not governed, as a rule, by the Corporation
Code. In view of Sections 15, 16, and 30 of its charter, the
provision of Section 74 of the Code with respect to the right of
a stockholder to demand an inspection or examination of the
books of the corporation does not apply even in a supplemental
capacity to said bank. (Gonzales vs. Phil. National Bank, 122
SCRA489 [1983].) The Philippine National Red Cross (PNRC) is a
government-owned and -controlled corporation with an original
charter under R.A. No. 95, as amended. (Baluyot vs. Holganza,
325 SCRA 248 [2000].)
22

23

(2) Under the Constitution (Art. IX, B-Sec. 2[1] thereof.),


officers and employees of government-owned or -controlled
corporations with original charters, i.e., created by special law, are
placed under the Civil Service, and thus, subject to Civil Service
Law. Those incorporated under the general incorporation law,
the Corporation Code, are governed by the Labor Code.
(3) A government-owned or -controlled corporation may be
organized under the provisions of the Corporation Code and not
by special law. Therefore, it would be proper to increase its capitalization by amending its articles of incorporation (see Sec. 16.)
pursuant to the Corporation Code instead of Congress passing
legislation to this effect. (SEC Opinion, July 10,1997.)

See Presidential Decree No. 2029 (Feb. 4, 1986) "defining government-owned or


-controlled corporations and identifying their role in national development."
Section 15 provides that the bank shall be subject to inspection by the Department
of Supervision and Examination of the Central Bank; Section 16 declares as confidential
the information obtained from such inspection; and Section 30 imposes penalties for violation of the provisions of the Act.
R.A. No. 1300 was superseded by Presidential Decree No. 694, the 1975 Revised
Charter of the Philippine National Bank. The corresponding provisions are Sections 19,
20, and 34, respectively. The Philippine National Bank is now privately owned.
22

23

66

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 5

Government as a member
of a corporation.

(1) Jurisdiction of SEC. The Securities and Exchange Commission (SEC) has no jurisdiction over corporations with original
charter or created by special law. It follows that it has no power
to interpret the law creating it. However, the SEC can rule on the
status of a corporation as to whether it is a government-owned
or -controlled corporation belonging to this type. It has jurisdiction to determine this issue, (see Phil. National Construction
Corporation vs. Pabion, 320 SCRA 188 [1999].)
(2) Rights, Powers, or privileges. As a member of a corpo-

ration, the government never exercises its sovereignty; it acts


merely as a corporator. (18 Am. Jur. 2d 584.) And the mere fact
that the government happens to be a majority stockholder of a
corporation does not make it a public corporation. As a private
corporation, it has no greater rights, powers, or privileges than
any other corporation organized for the same purpose under the
Corporation Code. (National Coal Co. vs. Collector of Internal
Revenue, 46 Phil. 583 [1924].)
Sec. 5. Corporators and incorporators, stockholders and
members. Corporators are those who compose a corporation, whether as stockholders or members. Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a)
C o m p o n e n t s of a corporation.

The four classes of persons composing a corporation are the


following:
(1) Corporators or those who compose the corporation,
whether stockholders or members. Hence, the term includes
incorporators and stockholders or members who become as such
after incorporation of the corporation;

Sec. 5

"TITLE I. GENERAL PROVISIONS


Definitions and Classifications

67

(2) Incorporators or those corporators mentioned in the


articles of incorporation as originally forming and composing
the corporation and who executed and signed the articles of
incorporation and acknowledged the same before a notary
public, (see Sees. 14,15.) So, all incorporators are corporators but
a corporator is not necessarily an incorporator.
The principal function of the incorporator is to incorporate
the corporation and to enable it to become a body politic and
corporate under the law. While the status of a corporator is temporary because one may cease to be a stockholder or member, an
incorporator will forever retain his status as such, notwithstanding that he has ceased to be a corporator. The articles of incorporation cannot be amended by deleting his name or substituting
it with that of another who is not an incorporator. Only natural
persons can be incorporators (Sec. 10.);
(3) Stockholders or the owners of shares of stock in a stock
corporation. They are the owners of the corporation. They are
also called shareholders. They are the corporators in a stock corporation. Stockholders may be natural or juridical persons but only
natural persons can be incorporators. (Sec. 10.)
Under Section 3, a corporation, to be classified as a stock corporation, (a) must have capital stock divided into shares, and (b)
must be "authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the
shares held"; and
(4) Members or corporators of a corporation which has no
capital stocks. All incorporators in a stock corporation must now
own or at least be a subscriber to at least one (1) share of the capital stock of such corporation. (Sec. 10.)
Under the old rule, members include corporators of a stock
corporation who do not own capital stock. In other words, a stock
corporation may be composed of stockholders and members, the
latter referring to incorporators who do not own shares of stock.
It was not required that an incorporator be a subscriber for stock
as long as the minimum capital requirements are complied with.
The Code eliminated this rule.

68

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 5

Three other classes.

There are three other classes of persons who play important


roles in the formation and organization of a corporation, namely:
(1) Promoters or persons who bring about or cause to bring
about the formation and organization of a corporation by
bringing together the incorporators or the persons interested
in the enterprise, procuring subscriptions or capital for the
corporation and setting in motion the machinery which leads to
the incorporation of the corporation itself. Simply signing and
verifying the articles of incorporation and subscribing for stock
in the proposed company is said, however, not to make one a
promoter thereof. (18 Am. Jur. 2d 647.)
When used in connection with corporations, the term refers
to persons who undertake the formation of a corporation without their being incorporators. They lay the groundwork for corporate existence;
(2) Subscribers or "persons who have agreed to take and pay
for original, unissued shares of a corporation formed or to be
formed." (Ballantine on Corporations, p. 375; see Sees. 60,61.) So,
a subscriber may not be a stockholder. He becomes a stockholder
only from the time his subscription is accepted by the corporation or the corporation's offer is accepted by him. Technically, a
person is not a stockholder (or member) unless he is recorded as
such in the books of the corporation, (see Sec. 62.)
All incorporators (supra.) are subscribers but a subscriber
need not be an incorporator; and
(3) Underwriter or "a person, usually an investment banker,
who (a) has agreed, alone or with others, to buy at stated terms
an entire issue of securities or a substantial part thereof; or (b)
has guaranteed the sale of an issue by agreement to buy from
the issuing party any unsold portion at a stated price; or (c) has
agreed to use his "best efforts" to market all or part of an issue; or
(d) has offered for sale stock he has purchased from a controlling
stockholder." (E.L. Kohler, op. cit., p. 480; for definition of the term
under the Securities Regulation Code [R.A. No. 8799], Appendix
"A," see Sec. 3[1.15] thereof, and under the Investment Company
Act [R.A. No. 2629], Sec. 3[dd] thereof.)

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

69

A g r e e m e n t or contract with a corporation.


(1) Between corporators and corporation. It is essential to the

existence of a private corporation that there shall be an agreement between the corporators and the corporation creating a
contractual relation between them. There can be no such thing as
a corporation aggregate without members, and a person cannot
become a member except by his own agreement or contract.
(2) Between each member and corporation. Some writers and

some cases say that there must be an agreement between the


members creating a contractual relation between them, but this
is inaccurate. There is ordinarily no contract between individual
members in the formation of a corporation. The contract is
between each individual member and the whole body of members
in their collective capacity, represented by the corporation, that
is, between each member and the corporation. A subscription
for shares, for instance, in the organization of a corporation is
not a contract between the subscriber and the other subscribers
individually, but it is a contract between each subscriber and the
corporate body. (Clark on Corporations, Sec. 27.)
Sec. 6. Classification of shares. The shares of stock
corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may
be stated in the articles of incorporation: Provided, That
no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of
the shares or series of shares may have a par value or
have no par value as may be provided for in the articles
of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to
issue no par value shares of stock.
Preferred shares of stock issued by any corporation
may be given preference in the distribution of the assets
to the corporation in case of liquidation and in the distri-

THE CORPORATION CODE OF THE PHILIPPINES

Sec.

bution of dividends, or such other preferences as may be


stated in the articles of incorporation which are not violative of the provisions of this Code; Provided, That preferred
shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That
such terms and conditions shall be effective upon filing
of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall
be deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided, That shares without
par value may not be issued for a consideration less than
the value of five pesos (P5.00) per share: Provided, further,
That the entire consideration received by the corporation
for its no par value shares shall be treated as capital and
shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for
the purpose of insuring compliance with constitutional or
legal requirements.
Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share
shall be equal in all respects to every other share.
Where the articles of incorporation provide for nonvoting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on
the following matters:
1.

Amendment of the articles of incorporation;

2.

Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other


disposition of all or substantially all of the corporate property;
4.
ness;
5.

Incurring, creating or increasing bonded indebtedIncrease or decrease of capital stock;

6. Merger or consolidation of the corporation with


another corporation or other corporations;

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

71

7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8.

Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights. (5a)
P o w e r to classify s h a r e s .

The shares of stock corporations "may be divided into classes


or series of shares, or both, any of which classes or series of shares
may have rights, privileges or restrictions as may be stated in the
articles of incorporation" (Sec. 6, par. 1.), not merely in the bylaws. (Title V.) Unless restricted by the law or the provision of
its articles of incorporation (see Sees. 14, 15.), a corporation has
unrestricted freedom to issue such classes or series of shares as
the prospects and needs of its business may require to attract
investors. A "series" refers to a subdivision of a class of shares.
The primary classification of shares is common and preferred, each of which may be divided into other classes, (infra.)
Thus, shares of stock may differ with respect to voting rights,
dividend rights, and, in case of liquidation, rights to corporate
assets. There must be at least one class of stock, and by Section 6
(par. 1.), a corporation must have at least one class of stock with
voting rights.
24

A corporation may issue only one class or kind of share.


W h e n classification of s h a r e s
may be made.

(1) By the incorporators. The classes and number of shares


which a corporation shall issue are first determined by the incorporators as stated in the articles of incorporation filed with the
Securities and Exchange Commission.
"Where no difference in "rights, privileges or restrictions" is provided for as required by Section 6, as where "the only difference between the series is that only B-l
Series shall be initially offered to the public and sold through the exchanges while B-2
Series shall be similarly offered and sold at a later date as the board of directors may determine," the classification should not be allowed. (SEC Opinion, March 15,1989.)

THE CORPORATION CODE OF THE PHILIPPINES

72

Sec. 6

(2) By the board of directors and the stockholders. After the

corporation comes into existence, they may be altered by the


board of directors and the stockholders by amending the articles
of incorporation pursuant to Section 16. If the amendment
changes or restricts the rights of any class of shares, or authorizes
preferences in any respect superior to those of outstanding shares
of any class, any stockholder shall have the right to dissent and
demand payment of the fair value of his shares. (Sec. 81.)
Classification to comply with constitutional
or legal requirements.

(1) A corporation may, furthermore, classify its shares for


the purpose of insuring compliance with constitutional or legal
requirements (Sec. 7, par. 4.), such as those which prescribe the
minimum percentage of capital stock ownership of Filipino citizens in corporations engaged in any business or activity reserved
for Filipino citizens (see Sec. 15[11].), or set the maximum limits
for stockholdings in corporations declared by law to be vested
with public interest, (see Sec. 140, par. 2.) Thus, the articles of incorporation may classify shares of stock into Class "A" and Class
" B " and provide that Class "A" shares shall be held exclusively
by Filipino citizens only, while Class " B " shares, by either Filipino citizens or foreigners. In such case, aliens or foreign corporations cannot own "A" shares; otherwise, it would be tantamount
to amending the articles of incorporation contrary to Section 16.
The articles, however, may permit aliens to buy "A" shares.
25

^With the general perception that the country is dependent on foreign investments,
many local investors invest in "B" shares, thereby creating a bigger demand for said
shares which are limited. The lopsided market has developed a psychological advantage
and a dual pricing scheme in favor of "B" shares at the expense of "A" shares. The resulting premium for "B" shares has been under attack from foreign fund managers who
questioned the wisdom of paying for a higher price than the "A" shares which are, with
exemption on foreign ownership, the same security with the same risks and yield. In
many cases, the local investors are the ones maintaining the relative strong performance
of "B" shares in the absence of foreign investors.
Without the classification, local investors will invest more in a particular issue not
because foreigners are investing but because of good potentials and foreigners can buy
more shares so long as they do not exceed the equity limit prescribed by the Constitution and existing laws. This will require strict monitoring to make sure that the limits on
foreign ownership will always be observed.
V*
^
r e s o f listed firms t o remain classified a s "A" and
"B" shares, while requiring firms still planning to go public to declassify their shares.
e p

y o f S

t o a

w s h a

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

73

(2) Corporations classify shares for reasons of expediency,


primarily for monitoring purposes. The par value or number of
one class of shares may be more than the others. The classification
of common shares of stocks into Class "A" and Class " B " shares
have never been obligatory. Some corporations which engage
in business where there is a cap on foreign ownership classify
their shares with the number of B shares corresponding to the
maximum percentage of foreign ownership allowed so that they
won't have to keep checking on their foreign shareholders.
Since the Constitution does not distinguish between common
and preferred shares, the latter kind of shares should be included
in the computation of the foreign ownership limit for domestic
corporations. This gives more room for additional foreign investments.
Shares presumed to be equal
in all respects.

The law provides that "Except as otherwise provided by the


articles of incorporation and stated in the certificate of stock, each
share shall be in all respects equal to every other share." (Sec. 6,
par. 5.) This is the doctrine of equality of shares. It means that in

the absence of any provision in the articles of incorporation and


in the certificate of stock to the contrary, all stocks, regardless of
their class nomenclature, enjoy the same rights and privileges
and subject to the same liabilities.
26

(1) Authority of the board of directors to classify others. The

board of directors has no authority to classify shares of stock


where the articles of incorporations are silent on the matter.
Hence, a corporation cannot, without express authority in the
articles of incorporation, and without amendment thereof, issue
preferred shares with superior rights and privileges than other

"In the absence of special provisions, the holders of preferred stock in a corporation
are in precisely the same position, both with respect to the corporation itself and with
respect to the creditors of the corporation, as the holders of the common stock, except
only that they are entitled to receive dividends on their shares, to the extent guaranteed
or agreed upon, before any dividend can be paid to the holders of common stock. (SEC
Opinion, July 16,1996, citing Fletcher Cyc. Corps., Sec. 5290.)

74

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 6

shares. (Sec. 6, pars. 1,2,5.) Subscription contracts covering such


shares are void, (see Art. 1409[1, 3].)
(2) Consent of stockholders to change of terms and preferences of

shares. The articles of incorporation or the charter of a corporation being considered as a contract between the corporation and
stockholders (see Sec. 16.), the corporation is under obligation to
observe the provisions thereof and it cannot without the consent
of the stockholders, change the terms and preferences of classes
of shares of stocks provided therein. Thus, any special agreement
between a particular subscriber and the corporation by which
he is allowed to subscribe for shares upon different terms from
other subscribers is invalid. (SEC Opinion, April 18,1985, citing
Ballantine, Rev. ed., p. 459.)
(3) Right to vote of all classes of shares. If one class of shares

has the right to vote, all other classes are presumed to have the
same voting power. Stockholders have one vote for each share
held by them, which excludes fractional voting, (see Sec. 52.)
Section 6 (par. 5.) is construed to mean that unless denied in the
articles of incorporation, all shares regardless of class (e.g., with
par value and without par value, common and preferred) enjoy
all the rights of a stockholder. Hence, said provision cannot be
invoked as a basis for a proposed amendment of the articles of
incorporation whereby Class "A" shares shall be entitled to, say,
four votes per share, and Class " B " shares, to one vote per share.
(SEC Opinion, Aug. 11,1988.)
But the right to vote may be denied by implication as where
the articles of incorporation provides that "only holders of common stock shall have the right to vote."
(4) Authority of board of directors to fix terms and conditions of

preferred shares. The terms and conditions of preferred shares


of stock may be fixed by the board of directors only when authorized in the articles of incorporation. (Ibid., par. 2.) In such case,
the preference enjoyed by the preferred stock will not appear in
the articles of incorporation.
Capital stock a n d capital e x p l a i n e d.

(1) Capital stock is the amount fixed in the articles of incorporation, to be subscribed and paid in or agreed to be paid in by the

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

75

stockholders of a corporation, in money, property, services, or


other means at the organization of the corporation or afterwards
and upon which it is to conduct its business (see 2 Fletcher, p.
12.), such contribution being made either directly through stock
subscription (see Sec. 60.) or indirectly through the declaration of
stock dividends. (18 Am. Jur. 2d 735.)
The capital stock is the money value assigned to a corporation's
issued shares, constituting generally the legal capital (infra.)
of the corporation. (E.L. Kohler, op. cit., p. 84.) It represents the
equity of the stockholders in the corporate assets. It limits the
maximum amount or number of each class of shares that may
be issued by the corporation without formal amendment of the
articles of incorporation, (see Sec. 16.) It remains the same even
though the actual value of the shares as determined by the assets
of the corporations is diminished or increased, unaffected by
profits and losses.
(a) Authorized capital stock refers to the amount of capital

stock as specified in the articles of incorporation. It is synonymous with capital stock where the shares of the corporation
have par value, (see Sees. 14[8], 15 [seventh].) If the shares of
stock have no par value, the corporation has no authorized
capital stock, but it has capital stock the amount of which is
not specified in the articles of incorporation as it cannot be
determined until all the shares have been issued. (Ibid.) In
this case, the two terms are not synonymous.
Additional shares may not be issued unless the articles of
incorporation are amended by vote of the stockholders, (see
Sees. 16, 38.) But unissued authorized shares may be issued
at a later date without amendment of the articles of incorporation or approval of the stockholders.
(b) Subscribed capital stock is the amount of the capital

stock subscribed, whether fully paid or not. It connotes an


original subscription contract for the acquisition by a subscriber of unissued shares in a corporation (see Sees. 60, 61.)
and would, therefore, preclude the acquisition of shares by
reason of subsequent transfer from a stockholder or resale of
treasury shares. (Sec. 9.)

76

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 6

(c) Outstanding capital stock is the portion of the capital

stock which is issued and held by persons other than the corporation itself. The Code defines the term as "the total shares
of stock issued to subscribers or stockholders, whether or not
fully or partially paid (as long as there is a binding subscription agreement), except treasury shares." (Sec. 137.) It is thus
broader than "subscribed capital stock."
The terms "subscribed capital stock" and "issued" or
"outstanding" capital stock are used synonymously since
subscribed capital stock, as distinguished from the certificate
of stock, can be issued even if not fully paid. But while every
subscribed share (assuming there is a binding subscription
agreement) is "outstanding," an issued share may not have
the status of outstanding shares. This is true in the case of
treasury shares. (Sec. 9.)
(d) Paid-up capital stock is that portion of the subscribed or

outstanding capital stock that is actually paid. (see Sec. 13.)


The term actual capital stock is also used to refer to the amount
of the capital stock actually subscribed and paid for.
27

(e) Unissued capital stock is that portion of the capital

stock that is not issued or subscribed. It does not vote and


draws no dividends.
(f) Legal capital is the amount equal to the aggregate par
value and/or issued value of the outstanding capital stock.
When par value shares are issued above par, the premium or
excess is not to be considered as part of the legal capital, (see
Sec. 43.) In the case of no par value shares, the entire consideration received forms part of legal capital and shall not be
available for distribution as dividends, (see Sec. 6, par. 3.)

^ r i o r approval of SEC is not necessary in case of increase of paid-up capital thru


payment of unpaid subscriptions, provided such payment consists in cash, (see Sec. 62,
par. 2.) If the increase is by way of issuance of unissued shares of the authorized capital stock, the corporation, whose shares of stock are not registered under the Securities
Regulation Code (Appendix "A."), must secure from SEC prior exemption from registration requirements under said Code, (see Sees. 8-10 thereof.) If it is in connection with an
increase of the authorized capital stock, the corporation must comply with the requirements laid down under Section 38. (SEC Opinion, March 18,1993.)

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

77

Under varying State laws, the term "stated capital" is


used instead of legal capital to refer to "the portion of the
amount contributed by purchasers of no par value stock that
is credited to the capital account." (E.L. Kohler, op. cit, 446.)
ILLUSTRATION:
Suppose the articles of incorporation of corporation X
provides that the authorized capital stock of said corporation
is P1,000,000.00 divided into 10,000 shares of the par value of
P100.00 per share. At its incorporation, only P250,000.00 of the
authorized capital stock was subscribed.
Under Section 13, at least 25% of the subscription is required
to be paid; thus, only P62,500.00 was paid to the treasurer of the
corporation.
Therefore, the authorized capital stock of corporation X is
P1,000,000.00, the subscribed, outstanding, or issued capital
stock is P250,000.00, the paid-up capital stock is P62,500.00,
and the unissued capital stock is P750,000.00. The legal capital
is also P250,000.00.
(2) Capital is used broadly to indicate the entire property
or assets of the corporation. It includes the amount invested by
the stockholders plus the undistributed earnings less losses and
expenses. In the strict sense, the term refers to that portion of
the net assets paid by the stockholders as consideration for the
shares issued to them, which is utilized for the prosecution of
the business of the corporation. It includes all balances or installments due the corporation for shares of stock sold by it and all
unpaid subscription for shares.
In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the
"trust fund" (see Sec. 60.) for the payment of the debts of the
corporation, to which the creditors may look for satisfaction.
(National Telecommunications Commission vs. Court of
Appeals, 311 SCRA 508 [1999]; see Sees. 41, 22.)
The term is also used synonymously with the words "capital
stock," as meaning the amount subscribed and paid-in and upon

78

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 6

which the corporation is to conduct its operation (11 Fletcher


Cyc. Corp., p. 15 [1986 ed.].) and it is immaterial how the stock is
classified, whether as common or preferred.
28

Capital stock and capital distinguished.

(1) Capital is the actual corporate property. It is, therefore, a


concrete thing. Capital stock is an amount. It is, therefore, something abstract.
(2) Capital fluctuates or varies from day to day according
as there are profits or losses or appreciation or depreciation of
corporate assets. Capital stock is an amount fixed in the articles of
incorporation (where shares are with par value) and is unaffected
by profits and losses. Thus, capital may be greater or lesser than
the amount of the capital stock.
(3) It is said that capital belongs to the corporation and
capital stock when issued belongs to the stockholders, and that
capital may be either real or personal property but capital stock
is always personal. (18 Am. Jur. 2d 736.)
The term "capital," however, is frequently used loosely in the
sense of capital stock.
Capital stock a n d legal capital
distinguished.

Like capital stock, legal capital is merely an amount and


remains unchanged except as outstanding shares are increased
or reduced in number or amount. But while capital stock limits
the maximum amount or number of shares that may be issued
without formal amendment of the articles of incorporation (see
Sec. 38.), legal capital sets the nurtimum amount of the corporate
assets which for the protection of corporate creditors, may not be
lawfully distributed to stockholders.

^The term "capital" denotes the sum total of the shares subscribed and paid by the
stockholders or agreed to be paid irrespective of their nomenclature. It would, therefore,
be legal for foreigners to own more than 40% of the common shares but not more than
the 40% constitutional limit of the outstanding capital stock which would include both
common and non-voting preferred shares. (SEC Opinion, Feb. 15,1988.)

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

79

ILLUSTRATION:
In the previous illustration, the payment of the subscription
of 2,500 shares in the amount of P250,000.00 whether in cash
or property or any consideration allowed by law (see Sec. 62.)
constitutes the original capital of corporation X.
If the corporation makes a profit of P50,000.00, the capital
would become P300,000.00. On the other hand, the capital
would be reduced to P200,000.00 if there is a loss of P50,000.00.
Suppose the corporation borrows P150,000.00 from a bank.
The capital of the corporation would then be P450,000.00 or
P350,000.00, according as there are profits or losses.
In any case, the capital stock of P1,000,000.00 and the
legal capital of P250,000.00 remain constant unless, of course,
the articles of incorporation is amended, either increasing
or decreasing the capital stock, or the number or amount of
outstanding shares is increased by the issuance of more shares
out of the unissued authorized shares or decreased by the
acquisition of previously issued shares, (see Sees. 9, 41.)
A decrease of the capital stock may also result in the
reduction of legal capital, (see Sec. 38.)
S t o c k or s h a r e of stock d e f i n e d .
Stock or share of stock is one of the units into which the capital stock is divided. It represents the interest or right which the
owner has
(1) in the management of the corporation in which he takes
part through his right to vote (if voting rights are permitted for
that class of stock by the articles of incorporation);
29

(2) in a portion of the corporate earnings, if and when segregated in the form of dividends; and
(3) upon its dissolution and winding up, in the property and
assets of the corporation remaining after the payment of corporate debts and liabilities to creditors, (see 11 Fletcher, p. 18 [1971
ed.].)

"The stockholders' right of management consists primarily of their privilege


in the election and removal of directors. (Sees. 24, 28.)

THE CORPORATION CODE OF THE PHILIPPINES

80

Sec. 6

Capital stock and share of stock


distinguished.

As distinguished from capital stock, the term "stock" or "share


of stock" is commonly used in a distributive sense to refer to the
stock in the hands of the stockholders and, therefore, belongs to
them. On the other hand, the former is used in a collective sense
to signify the whole body of shares of stock in the corporation.
(Ibid.)
Nature of share of stock.

(1) The ownership of share of stock confers no immediate


legal right or title to any of the property of the corporation. Each
share merely represents a distinct undivided share or interest in the

common property of the corporation. (18 Am. Jur. 2d 737.)


Such interest has been described as "indirect, contingent,
remote, conjectural, consequential, and collateral. It is purely
inchoate, or a mere expectancy of a right in the management
of the corporation and to share in the profits thereof and in the
properties and assets thereof on dissolution, after payment of
corporate debts and obligations." Hence, stockholders of such
are not entitled to intervene in a litigation involving corporate
property under Section 2, Rule 12 of the Rules of Court. (Saw vs.
Court of Appeals, 195 SCRA 740 [1991].)
(2) Shares of stock constitute property distinct from the capital or

tangible property of the corporation and belong to the different


owners. Incorporeal in nature, the shares are personal property (see
10

Sec. 63.) of the stockholder (except treasury stock which belongs


to the corporation; see Sec. 9.) and this is true even where the
property of the corporation consists wholly or chiefly of real
estate. This necessarily follows from the fact that the property
of a corporation does not belong, in law, to the stockholders but
to the corporation as a distinct legal entity or artificial person.
Art. 417. The following are also considered as personal property: x x x (2) Shares
of stock of agricultural, commercial, and industrial entities, although they may have real
estate. (Civil Code)
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading,
shares of stock, bonds, warehouse receipts and similar documents may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (Civil Code)
30

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

81

(Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds 6


SCRA 373 [1962].)
(3) They are in the nature of choses in action but are not such

in a strict sense. They do not constitute an indebtedness of the


corporation to the shareholder (18 Am. Jur. 2d 738.) and are,
therefore, not credits as to make the stockholder a creditor of
the corporation. (Garcia vs. Lim Chu Sing, 59 Phil. 562 [1936].)
Hence, no action can be maintained against the corporation for
the return of the contributions of the shareholders as long as the
corporation needs them and is not under dissolution, (see Sec.
64, as to nature of relation of stockholder to the corporation.)
(4) A share of stock only typifies a proportionate or aliquot part

of the corporation's property, or the right to share in its proceeds


to that extent when distributed according to law. It does not
represent property of a corporation. The corporation as a juridical
person, distinct from the members composing it, has property of
its own which consists chiefly of real estate.
As previously noted, a holder of shares is in no legal sense
the owner of any part of the capital of the corporation; nor is he
entitled to the possession of any definite portion of its property
or assets, nor a co-owner of the corporate property (see Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds, supra;
Boyer-Roxas vs. Court of Appeals, 211 SCRA 470 [1992].), his interest in the corporate property being equitable or beneficial in
nature.
Certificate of stock d e f i n e d.

Certificate of stock is a written acknowledgment by the corporation of the interest, right, and participation of a person in the
management, profits, and assets of a corporation.
It is a formal written evidence of the holder's ownership of
one or more shares and is a convenient instrument for the transfer of title, (see Sec. 63.)
Share of stock a nd certificate
of stock distinguished.

(1) Share of stock is incorporeal or intangible property, while


certificate of stock is tangible property;

82

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 6

(2) Share of stock represents the right or interest of a person


in a corporation, while certificate of stock is the written evidence
of that right or interest;
(3) Share of stock may be issued even if the subscription is
not fully paid (Sec. 137.), except in no par shares. (Sec. 6, par. 3.)
As a general rule, a certificate of stock may not be issued unless
the subscription is fully paid (Sec. 64.); and
(4) The situs of share of stock is deemed to be the State where
the corporation has its domicile which is ordinarily the State
under whose laws it was created, while a certificate of stock may
have a situs at the place where it is located or at the domicile of
the owner, even though the corporation is domiciled elsewhere.
(2 Fletcher, pp. 62-63, 95.) The situs of share of stock retains that
of the issuing corporation, even though the certificate is without
the State and is owned by a nonresident. (Ibid., p. 62.)
The possession of a certificate of stock is not essential to
ownership of stock because the right to stock may exist independently of the certificate.
Situs of shares of stock for certain
purposes.
(1) For purposes of execution, attachment, and garnishment.

The situs of shares of stock is the domicile or residence of the


corporation (Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil.
472 [1935].), which is the place where the principal office of the
corporation is located, (see Sec. 14[3].) "Stocks or shares, or an
interest in stocks or shares of any corporation or company" shall
be attached by the officer executing the order, "by leaving with
the president or managing agent thereof, a copy of the order
and a notice stating that the stock or interest of the party against
whom the attachment is issued, is attached in pursuance of such
order." (Rules of Court, Rule 57, Sec. 7[d].)
(2) For purposes of registration of chattel mortgages on shares of

stock. The situs is the province or city in which the corporation has its principal office or place of business. (Chua Guan vs.
Samahang Magsasaka, Inc., supra.)
(3) For purposes of property taxation. The general rule is that

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

83

the situs of intangible property is at the domicile or residence of


the owner.
(a) The above principle, however, is not controlling when
it is inconsistent with express provisions of statute, or when
justice does not demand that it should be, as where the property has in fact a situs elsewhere, (see 15 Am. Jur. 474-475.)
Thus, shares of stock in a domestic corporation of a nonresident foreigner are taxable in the Philippines. The reason is
that said shares receive the protection and benefit of our law.
(Wells Fargo Bank and Union Trust Co. vs. Coll. of Internal
Revenue, 70 Phil. 325 [1940].)
(b) Under the National Internal Revenue Code (Pres.
Decree No. 1158, as amended.), for purposes of the estate tax,
the gross estate of a resident decedent, whether citizen or
alien, or a citizen decedent, whether resident or nonresident,
includes his intangible personal property wherever situated,
(see Sees. 78, 81 thereof.)
Classes of shares in general.
Shares of stock may be:
(1) Par value or no par value;
(2) Voting or non-voting;
(3) Common or preferred, and preferred shares may be
voting, convertible, or redeemable, (infra.) They may be:
(a) Preferred as to assets in case of liquidation or preferred as to dividends and the latter, in turn, may be either:
1) Cumulative or non-cumulative; or
2) Participating or non-participating;
(4) Promotion share;
(5) Shares in escrow;
(6) Convertible share;
(7) Founders' share (see Sec. 7.);
(8) Redeemable share (see Sec. 8.); and
(9) Treasury share, (see Sec. 9.)

84

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Sec. 6

As already mentioned, a corporation may issue such classes


or series of shares as the prospects and needs of its business may
require. Furthermore, it may classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
(Sec. 6, par. 4.)
Par value share.

Par value share is one with a specific money value fixed in the
articles of incorporation and appearing in the certificate of stock.
(1) The primary purpose of par value is to fix the minimum
subscription or issue price of the shares, thus assuring creditors
that the corporation would receive a minimum amount for its
stock, (see Sec. 62.)
(2) A corporation may issue shares with different par values.
Shares issued less than par value are referred to as watered stock.
(see Sec. 65.)
(3) The par value of a stock remains the same regardless of
market value or book value (infra.) of the stock, except when
there is a stock split, (see annotation under Sec. 43.) It is not usually the price at which investors buy or sell the stock.
No par value s h a r e.

No par value share is one without any stated value appearing


on the face of the certificate of stock. In other words, it is a stock
which does not state how much money it represents.
(1) A no par value share has, therefore, no par value but it
has always an "issued value," i.e., the consideration fixed by the
corporation for its issuance, (see Sec. 62, last par.)
(2) A no par value share does not purport to represent any
stated proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of such
shares of the issuing corporation.
(3) A corporation may issue no par value only, or together
with par value shares. No par value stockholders have the same
rights as holders of par value stock.
(4) The capital stock of a corporation issuing only no par
shares is not set forth by a stated amount of money, but instead

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

85

is expressed to be divided into a stated number of shares, such


as 1,000 shares. This indicates that a shareholder of 100 shares is
an aliquot sharer in the assets of the corporation, no matter what
value they may have, to the extent of 100/1,000 or 1/10. Thus,
by removing the par value of shares, the attention of persons
interested in the financial condition of the corporation is focused
upon the value of assets and the amount of its debts. (Delpher
Trades Corp. vs. Intermediate Appellate Court, 157 SCRA 349
[1988], citing Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Phils., Vol. Ill, 1980 ed., p. 107.)
Voting s h a r e .

Voting share is share with right to vote.


(1) It is generally customary to give the right to vote to the
common stock and to withhold it from the preferred.
Each common share shall be equal in all respects to every
other common share. Corporations are hereby prohibited from
issuing multiple voting and non-voting common shares nor can
they limit the maximum number of votes per stockholder irrespective of the number of shares he holds. (SEC Memo. Cir. No.
4, series of 2004.)
(2) Only shares classified and issued as "preferred" or
"redeemable" may be deprived of voting rights. Article 6 (par. 1.)
expressly prohibits the depreciation of voting rights except only
as to said shares. (Castillo vs. Balinghasay, 440 SCRA 442 [2004].)
But founders' shares may be given the exclusive right to vote and
be voted for in the election of directors for a limited period (Sec.
7.) in which case voting common stocks will have no right to vote
for directors.
(3) Under the Code, whenever a vote is necessary to approve
a particular corporate act, such vote refers only to stocks with voting

rights except in certain cases when even non-voting shares may


also vote. (Sec. 6, par. 6 and last par.) The rule is not "one stockholder, one vote" but "one share, one vote" because representation in a corporation is commensurate to extent of ownership.

66

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 6

Non-voting share.

Non-voting share is share without right to vote.


(1) If stock is originally issued as voting stock, it may not
thereafter be deprived of the right to vote without the consent of
the holder.
(2) Under the Code, no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in the Code. (Sec.

6, par. 1.) The proviso refers to fundamental matters enumerated


in Section 6 (par. 6[l-8].) on which holders of non-voting shares
in stock corporations shall nevertheless be entitled to vote. Note
that the enumeration in Section 6 does not include the election of
directors or trustees (see Sec. 24.) as one of the matters on which
non-voting shares may vote. In non-stock corporations, Section
89 governs the right of the members to vote on corporate matters.
(3) Where non-voting shares are provided for, the Code
requires that there shall always be a class or series of shares
which have complete voting rights. (Sec. 6, par. 1.)
(4) Under Section 6 (par. 1.), only preferred or redeemable
shares may be denied the right to vote. The issuance of common
stock with a feature that voting rights thereof shall be exercised
by a trustee violates the rule that common shares cannot be
deprived of voting rights. The automatic assignment of voting
rights is an indirect violation of Section 6. (SEC Opinion, July 15,
1997.)
(5) In case any amendment of the articles of incorporation
has the effect of changing or restricting the rights of any stockholder, the latter shall have the right to dissent and demand payment of the fair value of his shares. (Sec. 81[1].)
C o m m o n share.

Common share of stock is one which entitles the holder thereof


to a pro rata division of the profits, if there are any, and in its
assets upon dissolution, without any preference or advantage
in that respect over other stockholders or class of stockholders
but equally with all other stockholders except preferred stockholders.

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

87

(1) It is so-called because it is the basic class of stock which


private corporations generally issue (hence, the name) or because
its holders stand upon an equal footing, without extraordinary
rights or privileges.
(2) Common shares have complete voting rights. They cannot be deprived of said rights except as provided by law.
(3) Common stockholders are the residual owners of the corporation. They get only the assets left over in case of liquidation
after all other securities holders are paid.
(4) As a result of restrictions upon other classes of stock with
respect to voting rights, the common stock, normally, as to those
classes, has preference in the matter of management, (see 18 Am.
Jur. 2d 741.)
(5) The simplest corporate structure has only one kind of
stock all common. When only a single class of stock is issued,
then all shares are alike and all issues are common stock. A corporation may issue more than one class of common stock, being
designated "Class A," "Class B , " etc.
Preferred s h a r e .

Preferred share of stock is one with a stated par value which


entitles the holder thereof to certain preferences over the holders
of common stock.
31

32

(1) Under the Code, preferred shares of stock may be issued


only with a stated par value. (Sec. 5, par. 2.) More than one class
of preferred shares may be issued usually designated "first preferred," "second preferred," etc.
(2) The preferences are designed to induce persons to
subscribe for shares of a corporation. They may consist in
the payment of dividends or the distribution of the assets of
33

In accounting, if there is more than one issue of stock, each class of stock is reported
in the balance sheet separately and presented in the order of the priority of their rights in
liquidation. Thus, preferred stock is usually stated ahead of common stock. (PICPA Bulletin No. 10[10], November 1975.)
"Republic Planters Bank vs. Agana, Jr., 269 SCRA 1 (1997), citing DE LEON, The
Corporation Code of the Philippines Annotated, p. 62 (1989 ed.).
31

lbid.

THE CORPORATION CODE OF THE PHILIPPINES

88

Sec. 6

a corporation in case of its dissolution ahead of the common


stockholders, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions
of the Code. (Sec. 6, par. 2.) But as already stated, each share
shall be in all respects equal to every other share except as
otherwise provided in the articles of incorporation and stated in
the certificate of stock. (Ibid., par. 5.) Thus, unless otherwise so
provided, preferred stocks are presumed to be voting although
they are rarely given voting privileges.
(3) The term guaranteed stock is sometimes used as synonymous with preferred stock on which the payment of dividend is
guaranteed and a distinction is sometimes drawn to the effect
that guaranteed stock is entitled to arrears in dividends, while
ordinary preferred stock is not. (18 C.J.S. 650.)
34

(4) Interest bearing stock on which the corporation agrees

absolutely to pay interest before dividends are paid to common


stockholders is legal only when construed as requiring payment
of interest as dividends from net earnings or surplus only. (see
Sec. 43.) Such stock is, in effect, preferred stock, except perhaps
that the discretion of board of directors to use profits for other
corporate purposes may be more limited.
35

Common and preferred shares are the two main classes or


forms of stock. Holders of preferred shares do not lose the voting rights in all matters affecting the corporation. Section 6 (par.
6) provides for the cases when non-voting shares like preferred
shares are granted voting rights.
Promotion shares.

Promotion shares are such shares as are issued to promoters, or


those in some way interested in the company, for incorporating
the company, or for services rendered in launching or promoting
the welfare of the company, such as advancing the fees for incorporating, advertising, attorney's fees, surveying, etc. (11 Fletcher,
p. 48; Enright vs. Hekscher, 240 F. 863.)
The guaranty merely means that the holders are entitled to specified dividends if
there are profits out of which dividends may be paid, (see Sec. 43.)
"Republic Planters Bank vs. Agana, Sr., supra, citing DE LEON, supra, p. 62, note 9.

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

89

They may mean such shares as are issued to those who may
originally own the mining or valuable rights connected therewith, in consideration of their deeding the same to the mining
company when the company is incorporated. (Ibid.)
Share in escrow.
Share in escrow is share subject to an agreement by virtue of
which the share is deposited by the grantor or his agent with a
third person to be kept by the depository until the performance
of a certain condition (usually the payment of the full subscription price) or the happening of a certain event contained in the
agreement. (Cannon vs. Handley, 12 P. 315.)
(1) The escrow deposit makes the depository a trustee under
an express trust, (see Arts. 1440,1441, Civil Code.)
(2) The legal title to the subject matter to be conveyed remains
in the grantor until the condition is fulfilled. The issuance of the
shares is thus made subject to a suspensive condition. (Lusk vs.
Stevens, 64 Phil. 1054 [1937].)
(3) Before the fulfillment of the condition, the grantee or
holder is not yet the owner of the shares and consequently, he is
not entitled to the rights belonging to a regular stockholder.
Convertible share.
Convertible share is share which is convertible or changeable
by the stockholder from one class to another class (such as from
preferred to common) at a certain price and within a certain
period.
(1) Except as may be restricted by the articles of incorporation, the stockholder may demand conversion at his pleasure.
The conversion ratio is the price at which the common is to be
valued as against the preferred.
(2) Where the corporation has previously issued stock to
the entire authorized limit, it cannot, of course, issue additional
stocks if the authorized common stock of the corporation is fully
subscribed.
(a) If it becomes necessary to create additional common
stocks into which preferred stocks can be converted, this can

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THE CORPORATION CODE OF THE PHILIPPINES

Sec. 6

be done simply by reclassifying the preferred shares into


common in such amount as would be necessary to cover the
conversion through an amendment of the articles of incorporation in accordance with Section 16.
(b) Thus, although the preferred shares possess the quality of being convertible into common shares per articles of
incorporation, such conversion is not automatic. An amendment of the articles of incorporation is required to formalize
the conversion which must not result in watering of stock
(see Sec. 65.), or issuance of stocks in excess of the authorized
capital stock of the corporation. (SEC Opinion, Sept. 3,1990.)
Convertibility of shares.
(1) Preferred shares into common. In the absence of an express

provision in the articles of incorporation as to their convertibility


feature, preferred shares cannot be converted into common. The
terms of the preferred share contract cannot be changed without
the consent of the stockholders. (Sec. 6, par. 1; SEC Opinion, May
19, 1992.)
(2) No par value share to par value. The conversion of no

par value shares to par value is allowed by SEC provided there


would be no change in the stockholders' percentage interest in
the total assets of the corporation. If the conversion would result
in the increase in the number of shares, the same should be allocated to the existing stockholders in proportion to the number
of shares held by them without changing the total peso amount
of the total outstanding shares. The individual allocation of the
shares as converted should be based on the average issue value of
the no par value shares and not in the individual actual contribution of the stockholders. (SEC Opinion, July 7,1992.)
Nature of par value/book value/
market value.

(1) Par value. The par value indicated in the certificate of


36

*"'Par" means equal, and "par value" means face value or value equal to the face of
the stocks or bonds. The par value of an interest-bearing bond on the day of its issuance is
the principal and the accrued interest. (31 Words and Phrases [1957 ed.] 559.) To say that a
bond is valued at par means that its value is equal to the face value of the bond. (Ibid., 63.)

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

91

stock represents the amount of money or property contributed


by the shareholder to the capital stock of the corporation. Patently, the assets of a company cannot always be equal to the par
value of the outstanding stock, the assets being constantly in a
state of fluctuation as the business prospers or declines. (13 Am.
Jur. 302.)
(2) Book value. Hence, the par value does not always reflect
its book value or its actual or true value which may be determined by dividing the total stockholders' equity or the net value
of the total corporate assets (capital and surplus, if any) by the
number of shares issued or outstanding. Since unpaid subscriptions (see Sec. 60.) are considered part of the asset of a corporation which the board of directors (see Sec. 24.) may at any time
declare due and payable (see Sec. 67.), they should be included in
the computation of book value. But book value does not attach to
unissued or reacquired shares, (see Sec. 9.)
(3) Market value. Par value and book value may be more
or less than market value which may be defined as the price at
which a willing seller would sell and a willing buyer would buy,
assuming that both have a reasonable knowledge of the facts,
and neither being under abnormal pressure. Market value is
affected by the law of supply and demand.
37

ILLUSTRATION:
Suppose that X Corporation has an authorized capital
stock of P1,000,000.00 divided into 10,000 shares with a par

"In accounting practice, the journal entries for transactions are recorded in historical value or cost. Thus, the purchase of properties or assets is recorded at acquisition
cost. The same is true with liabilities and equity transactions where the actual loan and
the amount paid for the subscription are recorded at the actual payment, including the
premiums paid for the subscription of capital stock.
Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not increased or decreased due to market forces. In the case of
properties, the appreciation in values is generally not recorded as income nor the increase
in the corresponding asset because the increase or decrease is not yet realized until the
property is actually sold. The same is true with the capital account. The market value may
be much higher than the actual payment of the par value and premium of capital stock.
Still, the books of account will not reflect such increase; and vice-versa, any decrease of
the value of stocks is likewise not reflected in the books of account." (PLDT vs. National
Telecommunications Communications, 539 SCRA 365 [2007].)
37

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Sec. 6

value of PI00.00 per share. The capital stock is fully subscribed


and paid up in cash. At this stage, the par value is the same
as its actual or book value. The book value is determined by
dividing P1,000,000.00, the net asset, by 10,000, the number of
shares issued or outstanding.
If the corporation makes a net profit of P100,000.00, the
increased book value of each share would be P110.00. On
the other hand, if the corporation suffers instead a loss of
P100,000.00, its net assets would then be reduced to P900,000.00,
thereby making the book value of each share at only P90.00.
The market value, however, of each share may not be
P100.00 or P110.00 or P90.00. Thus, the market value of each
share of X Corporation may be PI50.00 when the book value is
P110.00 or it may be P60.00 when the book value is P90.00. The
market value of stocks may be influenced by the present and
prospective net income of the corporation, attractive dividend
payments, and other factors.
Presumption as to value
of corporate stock.
Corporate stock is "at par" when it is worth its face value,
and is "above par" or at a "premium" when it is worth more. According to some authority, no presumption exists, in the absence
of supporting evidence, that corporate stock is worth its par or
face value. There is another authority, however, that in the absence of contrary evidence, there is a presumption that corporate
stock is worth its par or face value. (18 Am. Jur. 2d 750-751.)
It is difficult to determine the book or market value or price
of a corporation's stock when it is not traded publicly.
ILLUSTRATION:
C, the president, treasurer, and a director of X Corporation,
decided to withdraw from the corporation. According to its bylaws, the person withdrawing had to determine the book value
of his shares as of the date the person gave notice of withdrawal,
which value would then be the purchase price of the stock. The
by-laws specified that book value should be determined by
sound and accepted accounting rules and practices carried out
by a certified public accounting firm. A difference arose as to the

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

93

book value, C using the straight line method to determine asset


costs rather than the accelerated depreciation method adopted
by X Corporation, with the result that his determination of the
book value per share was higher.
Which method of depreciation is the correct one?
The book value of stock is the difference between the assets
and liabilities of a corporation. Depreciation covers the original
cost of each asset over its established useful life, in proportion
to the actual annual decrease in the value of such asset. Factors
affecting depreciation adjustments are the asset's original cost,
its life in years, salvage value, and the method of depreciation
chosen.
The straight line method chosen by C permits an equal
amount to be charged off as expense during each year of the
asset's life. The accelerated method adopted by X Corporation
allows a larger portion of depreciation expense to be charged
as an expense in the first year and lesser amounts in the
following years. Accounting practices permit several methods
of depreciation for different purposes. X Corporation used its
method for taxation purposes; C, to arrive at the value of the
stock.
According to the by-laws, the one withdrawing has the
right to choose the method to determine book value. (Chadwick
vs. Cross, Abbot Co., 205 A. 2d 416 [Sup. Ct. Vt. 1964].)
Statutory restrictions regarding the issuance
of no par v a l ue s h a r e s .

Any or all of the shares or series of shares issued by a stock


corporation may have a par value or have no par value as may be
stated in the articles of incorporation. (Sec. 6, par. 1.) The following are the limitations or restrictions imposed by law regarding
the issuance of no par value shares:
(1) Banks, trust companies, insurance companies, and building and loan associations shall not be permitted to issue no par
value shares of stock;
(2) Preferred shares of stock of any corporation may be
issued only with a stated par value (Ibid.);
(3) Shares issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not

94

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Sec. 6

be liable to the corporation or to its creditors in respect thereto.


(Ibid.) This does not mean that the holder is no longer liable for
the shares if they are not yet fully paid. It only means that the
holder shall not be liable beyond the issued price (see Sec. 62, last
par.), notwithstanding a change in their value;
38

(4) Shares without par value may not be issued for a consideration less than the value of five pesos per share (Sec. 5, par. 3.);
and
(5) The entire consideration received by the corporation for
its no par value shares shall be treated as capital, and, therefore,
shall not be available for distribution as dividends. (Ibid.) The
theory is that the shareholders intended that all the amounts
paid for no par value shares shall be employed permanently to
the prosecution of the venture.
Consideration for no par value s h a r e s .

Since the value of corporate stocks fluctuates and rarely


represents the par value, corporations are authorized to issue no
par value shares. Such shares may aid the investor to understand
the factors which determine stock value. They also make it easier
for corporations to sell stock under circumstances which may
militate against the interest of the investor. (C.L. James, Principles
of Economics, supra, p. 50.)

(1) A no par value share has no "par value" but it has always
an "issued value" based on the consideration for which it is
issued. Under Section 6, a no par value share may not be issued
for less than P5.00 per share.
(2) While all the par value stocks must be issued at a uniform
value or price, no par value stocks may be issued from time to
time at different prices or values although the holders of all these
shares are entitled to share equally in the distribution of the
profits and assets of the corporation, (see Sec. 62, last par.)

"Issued shares include subscribed shares which are unpaid or partially unpaid, (see
Sec. 137.)

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

95

A d v a n t a g e s of par v a l u e s h a r e s .

They are as follows:


(1) Par value shares are easily sold as the public is more attracted to buy this kind of shares;
(2) There is greater protection to creditors;
(3) There is unlikelihood of sale of subsequently issued
shares at a lower price; and
(4) There is unlikelihood of the distribution of dividends that
are only ostensible profits, (see Harold, Corporation Finance, p.
35.)
D i s a d v a n t a g e s of par v a l u e s h a r e s .

The following may be mentioned:


(1) The subscribers are liable to corporate creditors for their
unpaid subscription; and
(2) The stated face value of the share is not an accurate criterion of its true value.
A d v a n t a g e s of no par v a l ue s h a r e s .

They are the following:


(1) No par value shares are issued as fully paid and nonassessable;
(2) Their price is flexible;

39

(3) Low-priced stocks (most no par shares are low-priced)


enjoy wider distribution;
(4) They tell no untruth concerning the value of the stockholder's contribution; and
(5) Stock dividends are more easily issued, thereby simplifying accounting procedure. (Ibid.)

^They may be issued at their book value (but not less than P5.00) to raise funds
without the corporation having to incur or increase any bonded indebtedness, (see Sec.
38.)

96

Sec. 6

THE CORPORATION CODE OF THE PHILIPPINES

Disadvantages of no par value shares.

They are as follows:


(1) They legalize large issues of stock for property;
(2) They conceal the money or property represented by the
shares;
(3) They promote issuance of watered stock (19 Mich. L. Rev.
591-595; see Sec. 65.); and
(4) There is lesser protection to creditors.
Kinds of preferred shares .

They may be:


(1) Preferred share as to assets or share which gives the holder
thereof preference in the distribution of the assets of the corporation in case of liquidation. (Sec. 6, par. 2.) It has been held that
preferred stock, standing alone, creates a preference only to dividends and not to assets in case of liquidation (Hellmen vs. Penn.
Electric Vehicle Co., 67 Atl. 834.); or
(2) Preferred share as to dividends or share the holder of which
is entitled to receive dividends on said share to the extent agreed
upon before any dividends at all are paid to the holders of
common stock. (2 Fletcher, p. 44.) There is no guaranty, however,
that it will receive any dividends. The corporation is not bound
to pay dividends unless the board of directors declare them. The
preference simply means that holders of common stock may
receive dividends only after the satisfaction of the prior claims
on dividends of preferred stockholders.
40

Preference a m o n g preferred shares.

A corporation may issue more than one class of preferred


stock as to assets or as to dividends. Thus, certain preferred
shares may be given first preference or second preference on
earnings.
Unless a classification is provided in the articles of incorporation, the rule is that preferred shares of stock enjoy the same
"Republic Planters Bank vs. Agana, Sr., supra, citing DE LEON, p. 69, note 9.

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

97

preferences or privileges. Thus, if the articles do not distinguish


between those preferred shares subscribed from the corporation
and those acquired by other modes, as far as preferences are
concerned, the former cannot be considered to enjoy privileges
different from those of the latter. (SEC Opinion, Dec. 4,1981.)
Preferred s t o c k h o l d e r s not creditors
of c o r p o r a t i o n .

Preferred shares of stock issued by a corporation may be


given such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions of the
Code. (Sec. 6, par. 2.) Like common shares, they are part of the
corporation's stock. Both common and preferred stockholders
are no different from ordinary investors willing to share in the
profits and losses of the enterprise.
(1) Lien upon corporate property. Preferences granted to pre-

ferred stockholders do not give them a lien upon the property of


the corporation nor make them creditors of the corporation, the
rights of the former being always subordinate to the latter.
41

(2) Stock issued with a fixed interest. Stock cannot be issued

with a fixed interest instead of dividends inasmuch as this


will make the contract of subscription one of loan and make
the corporation a debtor of the subscriber. Shareholders, both
common and preferred, are risk takers who invest capital in the
business and who can look only to what is left after corporate
debts and liabilities are fully paid. (SEC Opinion, Feb. 10,1969,
citing Ballantine, p. 503.) They sink or swim with the corporation
and there is no obligation to return the value of their snares by
means of repurchase if the corporation incurs losses and financial
reverses, much less guarantee such repurchase through a surety
bond. (Lirag Textile Mills, Inc. vs. Social Security System, 153
SCRA 338 [1987].)
42

(3) Stock issued with dividends payable in the nature of interest.

However, the dividends payable by the corporation may be in


the nature of interest as where the parties, under an agreement,
"Ibid.
lbid.
a

98

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Sec. 6

intended the repurchase by the corporation of preferred shares


with agreed cumulative dividends of a fixed percentage per annum, on their respective scheduled dates to be an absolute or unconditional obligation which does not depend upon the financial
ability of the corporation, especially so where the obligation is
secured by a surety, notwithstanding that the dividends are supposed to be paid out of net profits and earned surplus. (Ibid.)
(4) Stock issued with dividends payable guaranteed. The fact

that dividends are, in terms, guaranteed, does not make them


creditors. They are entitled to dividends only when there are
profits out of which dividends may be declared. (SEC Opinion,
Nov. 3, 1986.) Such a guarantee may, however, have the possible
effect of making the dividends cumulative (infra.), that is, making the profits of one year make up for the deficiencies of the
preceding year or years. (SEC Opinion, Aug. 24, 1987, citing 11
Fletcher, Sec. 4294.)
(5) Stock issued to creditors. It is immaterial how or where

the holder obtained his stock since the preference belongs to the
stock and not to the stockholder. Hence, the fact that preferred
stockholders were formerly corporate creditors gives them no
greater right as against creditors. By abandoning their position
as creditors, they lose their rights as such. (Ibid.)
Limitations regarding issuance
of preferred s h a r e s.

There are four (4) legal limitations regarding preferred shares:


(1) Preferred shares deprived of voting rights in the articles
of incorporation (Sec. 6, par. 1.) shall still be entitled to vote on
matters enumerated in Section 6 (par. 6.), although they shall not
be entitled to vote on other matters (last par.);
(2) The preferences of preferred shares must not be violative
of the provisions of the Code;
(3) Preferred shares may be issued only with a stated par
value; and
(4) The board of directors may fix the terms and conditions
of preferred shares of stock or any series thereof only when so
authorized by the articles of incorporation and such terms and

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

99

conditions shall be effective upon filing a certificate thereof with


the Securities and Exchange Commission. {Ibid., par. 2.)
A u t h o r i t y of b o a r d of directors to fix t e r m s
a n d c o n d i t i o ns of preferred s h a r e s .

Section 6 (par. 2.) empowers the board of directors, where


authorized in the articles of incorporation, to fix the terms and
conditions of preferred shares of stock or any series thereof. The
financing of an enterprise goes on year after year, as business expands or the needs of capital arise. (Ballantine, Rev. ed. 1 [1946],
p. 471.)
(1) Benefits from authority given. The authority enables the

board, without the delay and expense of amendment of the articles


of incorporation, to "tailor its securities to meet changes in market
conditions which cannot be foreseen at the time of incorporation
or later amendment of the articles of incorporation. Typical of the
changes is the variance of the dividend rate to meet the demands
of the money market x x x. The resolution of the directors fixing
such preferences is generally required to be certified and filed or
recorded in the same manner as articles of incorporation, thus,
providing certain information as to the terms of the contract."
(SEC Opinion, Jan. 11,1982, citing Ballantine, Law of Corp., pp.
502-503, and 2 Fletcher, p. 531.)
(2) Concurrence of stockholders not required. It would not

need the concurrence of two-thirds (2/3) of the outstanding capital under Section 16 for the board to fix the terms and conditions
of the preferred shares where authorized by the articles of incorporation; otherwise, it would defeat the very purpose for which
the authority was granted, which is to allow the corporation
to respond quickly to the fluctuating conditions in the market.
Besides, Section 16 admits or recognizes of exceptions thereto
which is Section 6. (SEC Opinion, Jan. 11,1982.)
(3) Blanket authority not contemplated. It would be contrary

to Section 6 of the Code to give the board of directors blanket


authority to fix the terms and conditions of the preferred shares
without stating the privileges, preferences, restrictions, or rights
of the preferred shares, (see par. 1, 1st sentence; par. 2, 1st sentence and 2nd proviso.) Unless certain features, guidelines and

100

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 6

standards as to the issue of preferred shares are stated or spelled


out in the articles of incorporation, such authorization becomes a
dangerous power which may adversely affect the rights of shares
already issued. (Ibid.) Thus, as a matter of policy, the Securities
and Exchange Commission does not allow a provision giving the
board of directors a blanket authority to fix the terms of preferred
shares unless such guidelines (e.g., setting a specific range of dividend rate with minimum and maximum limits) are followed in
the determination thereof. (SEC Opinion, May 24,1994.)
Kinds of preferred shares
as to dividends.

They may be cumulative, non-cumulative, participating,


non-participating, and cumulative-participating.
(1) Cumulative preferred share is share which entitles the holder thereof not only to the payment of current dividends but also
to dividends in arrears. In other words, if the stipulated dividend is not paid in a given year, it shall be added to the dividend
which shall be due the following year and the accumulated dividends must be paid to the holder of said preferred share before
any dividend may be paid to the holders of common stock.
ILLUSTRATION:
Suppose S owns 10 preferred shares of X Corporation with
a par value of P100.00 per share at 5% guaranteed cumulative
dividends.
If after 4 years the corporation decided to declare the
regular annual dividend, S will receive a total of P250.00 for
the 10 shares: P50.00 for each year or a total of P200.00 for the 4
years (representing the dividends in arrears) plus the dividend
of P50.00 for the current year.
All the dividends must be paid to S before any dividends
can be paid to the holders of common shares. This kind of share
protects preferred stockholders against manipulation of the
financial accounts of the corporation to conceal profits.
(2) Non-cumulative preferred share is share which entitles

the holder thereof to the payment of current dividends only in


preference to common stockholders. In other words, if dividends

Sec. 6

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

101

are not declared in a given year, the right to the dividends for
that particular year is extinguished.
ILLUSTRATION:
In the preceding illustration, if the dividends of S were
non-cumulative, he would be paid only for the current year at
P5.00 per share, or a total of P50.00 for the 10 shares.
(3) Participating preferred share is share which gives the holder
thereof not only the right to receive the stipulated dividends at
the preferred rate but also to participate with the holders of common shares in the remaining profits pro rata (or in the proportion
stated in the articles of incorporation) after the common shares
have been paid the amount of the stipulated dividend at the
same preferred rate.
(4) Non-participating preferred share is share which entitles the
holder thereof to receive the stipulated preferred dividends and
no more. The balance, if any, is given entirely to the common
stocks.
ILLUSTRATION:
Suppose the capital stock of X Corporation is P100,000.00
divided into 1,000 shares with a par value of P100.00 per share.
Three hundred (300) of the shares are preferred and 700 are
common. The preferred shares are entitled to dividends at the
preferred rate of 10%.
If, at a given year, the corporation declares a dividend of
P5,100.00, the 10% preference must first be paid to the owners
of preferred shares at P10.00 per share or a total of P3,000.00.
The balance of P2,100.00 will be divided among the holders of
common shares at P3.00 each share.
If the dividends declared amount to Pll,400.00, then
the holders of common stock would be receiving P8,400.00
or P12.00 each share. However, if the preferred shares are
participating, the owners thereof share also in the remaining
profits of Pl,400.00 with the holders of common stock after the
latter have been granted a share (P7,000.00) in the balance of
P8,400.00 (Pll,400.00 - P3,000.00) at the same rate of 10%. Thus,
each share will be entitled to an additional dividend of PI.40
(Pl,400.00 -1,000).

102

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 7

In the absence of an agreement, express or implied, dividends should be deemed noncumulative and non-participating
in accordance with the presumption established in Section 6 (par.
5.) that shares are equal in all respects unless otherwise stated in
the articles of incorporation and in the certificate of stock.
(5) Cumulative-participating preferred share is share which is

a combination of the cumulative share and participating share.


This means that the holder is entitled not only to dividends in
arrears but also, after receiving his preferred share of dividends,
to participation with the holders of common stock in the
remaining profits.
Sec. 7. Founders'shares. Founders' shares classified
as such in the articles of incorporation may be given
certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to
vote and be voted for in the election of directors is granted,
it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange
Commission. Period shall commence from the date of
the aforesaid approval by the Securities and Exchange
Commission, (n)
Founders' shares.

Founders' shares have been defined as "shares issued to the


organizers and promoters of a corporation in consideration of
some supposed right or property. Such shares usually share in
profits only after a certain percentage has been paid upon the
common stock, but are often given special privileges over other
stock as to voting and as to division of profits in excess of a minimum dividend on the common stock." (Webster's Second Inter43

"They are not to be confused with so-called management shares which are "corporate
stocks generally held by officers or directors of a company that receives no dividends until a specified amount has been paid on the common stock but that receives a large share
of the residual profits." (Ibid. [Third], p. 1372.) Both shares have their origin in English
common law.
Founders' shares (also called managers' shares and deferred shares) are issued commonly in Great Britain, rarely in the United States. Their combined voting power is usually equal to the voting power of the common stock, and they generally have a special

Sec. 7

T I T L E I. G E N E R A L P R O V I S I O N S

Definitions and Classifications

103

national Dictionary, p. 997.)


(1) Special rights and privileges. The shares of stock of a cor-

poration, close or non-close (see Title XII.), may include founders' shares classified as such in the articles of incorporation. Such
shares may be given special rights and privileges not enjoyed
by the owners of other stock including common stocks, such as
preference in the payment of dividends and/or distribution of
assets in case of liquidation, right to convert the shares into other
shares, right to cumulative dividends, etc. to encourage them to
make large investments in the proposed corporation.
(2) Exclusive right to vote and be voted. Where, however, the

exclusive right to vote and be voted for in the election of directors


is granted, such right must be for a limited period not exceeding
five (5) years subject to approval of the Securities and Exchange
Commission, the period to commence from the date of said
approval, (see Sec. 97[3].)
(a) The five-year period limitation and Commission
approval requirement are designed to protect the interests of
the other stockholders against possible abuse by a minority
holding founders' shares granted the exclusive right to vote
and be voted for in the election of directors, to hold office
for an unlimited term. The limitation is non-extendible. The
claim on earnings, either before or after the payment of dividends to other stockholders.
Their participation in the assets of the corporation in the event of dissolution is usually
limited to the remaining assets after other stockholders have received the amounts to
which they are entitled, according to the provisions of the respective issues. ( E . L . Kohler,
op. cit., p. 221.)
In the deliberation of the Batasang Pambansa on founders' shares, it was the consensus of the lawmakers that the S E C will have to take into account: "x x x whether those
persons to whom the prerogative or right is reserved have, shall we say, contributed
substantially in the organization of the corporation or whether also the business of the
corporation is of a character that is necessary for a period of time that its control must be
to a certain group of individuals. Otherwise, it may not be able to obtain certain concessions, certain loans or certain business because these founders' shares may not only serve
to remunerate possible promoters x x x because of the existence of a certain group of individuals who have perhaps special qualifications to manage a corporation by reason of
which it is in their competence only that certain other groups with which the corporation
may be dealing and willing or agreeable to enter into transactions with the corporation
but only if the management of that corporation is reserved to that group x x x." (Proceedings of the Batasang Pambansa, Nov. 12,1979, cited in S E C Opinion, April 26,1981.)
It is not clear whether founders' shares would retain their character as such in case
they are transferred by their original owners.

104

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 8

Commission may approve or reject the grant of the exclusive


right having in mind as well the protection of the interests of
the corporation itself.
(b) Section 7 provides an exception to the rule in Section 6
(par. 1.) that "no share may be deprived of voting rights except
those classified and issued as 'preferred' or 'redeemable
shares/ unless otherwise provided in this Code."
(c) The limitation in Section 7 refers only to the exclusive right to vote and be voted for in the election of directors,
a right normally enjoyed by holders of common shares, the
class of shares which are supposed to have complete voting
rights. After the expiration of the limitation period, founders
shall have equal rights with the holders of common shares.
Preferred shares are not affected by the provisions in Section
7. Their status remains even after the expiration of the fiveyear period. (SEC Opinion, Aug. 8,1995.)
Sec. 8. Redeemable shares. Redeemable shares may
be issued by the corporation when expressly so provided
in the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such
other terms and conditions stated in the articles of incorporation, which terms and conditions must also be stated
in the certificate of stock representing said shares, (n)
Redeemable s h a r e s .
Redeemable or callable shares are shares, usually preferred,

which by their terms are redeemable at a fixed date or at the


option of either the issuing corporation or the stockholder or
both at a certain redemption price.
44

(1) Meaning of redemption.

It is the repurchase,

the

reacquisition of stock by a corporation which issued the stock


in exchange for cash or property, whether or not the acquired
stock is cancelled, retired or held in the treasury. Essentially,
"Republic Planters Bank vs. Agana, Sr., 269 SCRA 1 (1997), citing DE LEON, The
Corporation Code of the Philippines Annotated, p. 75 (1989 ed.).

Sec. 8

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

105

the corporation gets back some of its stock, distributes cash


or property to the shareholder, and continues in business as
before. The redemption of stock dividends previously issued is
sometimes used by corporations as a veil for the constructive
distributions of cash dividends. (Comm. of Internal Revenue vs.
Court of Appeals, 301 SCRA 152 [1999].)
45

(2) When redeemable shares may be issued. Under Section 8,

they refer to shares issued by a corporation which said corporation may purchase or take up from their holders upon the
expiration of a fixed period and upon such terms and conditions
expressly provided in its articles of incorporation and certificates
of stock representing said shares. They may be issued only when
expressly so provided in the articles of incorporation. Common
shares are never "redeemed."
(3) Redemption regardless of existence of unrestricted retained

earnings. Upon the expiration of the period fixed, they may be


taken up or purchased by the corporation, regardless of the existence of unrestricted retained earnings (see Sec. 43.) in the books
of the corporation.
(a) The rule in Section 41 is different. The power of the
corporation to acquire its own shares for the purposes stated
therein is subject to the condition that there be unrestricted
retained earnings in its books to cover the shares purchased
or acquired. In the case of redeemable shares, the shareholder
is conferred the right of a creditor to attract corporate financing.
(b) The issuance of the shares may be likened to the issuance of bonds or debt papers. Since the terms and conditions
of the purchase are stated in the articles of incorporation, as
well as in the corresponding certificates of stock, corporate
creditors and other shareholders are supposed to be aware of
the same.
(c) Strict compliance with statutory or contractual provisions of redemption is essential. The retirement or redemption of stock by a corporation is different from a purchase by
"See "Tax treatment of stock dividends," under Section 43.

106

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 8

a corporation of its own stock. It is said that the manner in


which a duly authorized plan for retiring stock is to be carried out is part of the corporate business, and in the absence
of fraud or bad faith, is not subject to judicial control, (see 11
Fletcher, pp. 381-382 [1971].)
(4) Where corporation insolvent. Redeemable shares may

be redeemed regardless of the existence of unrestricted retained


earnings, provided that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of
capital stock. (Sec. 5, par. 5, SEC Rules Governing Redeemable
and Treasury Shares.) Therefore, redemption may not be made
where the corporation is insolvent or if such redemption would
cause insolvency or inability of the corporation to meet its debts
as they mature. (SEC Opinion, Jan. 23, 1985.) Such a limitation is
based on the principle that corporate assets are a trust fund for
creditors." (see Sec. 41.)
(5) Terms and conditions. Section 8 requires that all the
terms and conditions affecting such shares must be stated not
only in the articles of incorporation but also in the certificate of
stock representing said shares.
Provisions in the articles relating to the redemption of preferred stock are, in effect, a contract between the issuing corporation and the preferred stockholders and strict compliance thereof
is essential. Thus, the corporation cannot redeem its preferred
shares before the redemption period or at a discount price in contravention of the articles of incorporation to improve its financial
position. The remedy is to amend the articles by changing the
redemption features of the preferred shares. (SEC Opinion, Jan.
23, 1985.)
(6) Redemption optional with corporation. Except as other-

wise provided therein, the redemption rests entirely with the


"Republic Planters Bank vs. Agana, Sr., 269 SCRA 1 (1997), citing DE LEON, p. 76.
If the redemption would prejudice the rights of corporate creditors, the latter have
the right to question the same. In case of dissolution, holders of redeemable shares are
not entitled to any part of the corporate assets until corporate debts and liabilities are
fully paid. The rights should be deemed subordinate to the rights of corporate creditors.
The rule then is that redeemable shares may be redeemed, regardless of the existence of
unrestricted retained earnings, provided that after such redemption, the corporation has
sufficient assets in its books to cover its debts and liabilities inclusive of its capital stock.

Sec. 8

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

107

corporation, and the stockholder is without right to either compel or refuse the redemption of his stock, i.e., the payment of cash
in exchange for the stock. The redeemable shares provided in
Section 8 are of the optional, not the obligatory type."
(7) Maintenance of a sinking fund. For the protection of

stockholders, all corporations which have issued redeemable


shares with mandatory redemption features are required by the
SEC to set up and maintain a sinking fund where cash is gradually
set aside in order to accumulate the amount necessary to meet
the redemption price of redeemable shares at specified dates in
the future. The fund shall be deposited with a trustee bank and
shall not be invested in risky or speculative ventures, (see SEC
Rules Governing Redeemable and Treasury Shares, [CCP] No.
1-1982.)
(8) Purpose of redemption. Redemption is not a preference

for the benefit of the shareholders but a restriction to be exercised


in the discretion of the board of directors for the benefit of the
owners of the corporation, holders of common shares. It is a safeguard to enable a corporation to retire an obligation or a claim
on the earnings, usually at a premium when it becomes advisable for purposes of financing. (Ballantine, p. 509 [1946 ed.].) It is
generally held that a corporation may redeem its preferred stock
only when it is expressly authorized by law or has contractually
reserved the right to do so, and that it has no inherent power in
this respect. (Bowman vs. Armour & Co., 17 111. 2d 43.)
In the light of the foregoing, unless expressly provided in the
articles of incorporation and stated in the certificate of stock, preferred shares shall be deemed irredeemable, (see SEC Opinion,
Dec. 4,1968.)
(9) Effect of redemption. A redemption by the corporation

of its stock is, in a sense, a repurchase of it for cancellation.* The


8

"Ibid., citing DE LEON, pp. 76-77, note 1.


"Ibid.
The redemption price usually includes the capital component, at par or stated value
per share, and if dividends are cumulative, any arrearages to the redemption date as
the dividend component. Payment of an additional sum is frequently provided for as a
"premium component." (William L. Cary, Cases and Materials on Corporations, 1969 ed.
[University Case Book Series], p. 1616.)

108

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 9

retirement of a class of stock destroys all rights adhering to the


shares of that class. (18 Am. Jur. 2d 805.)
(a) In the case of redeemable shares reacquired by the
corporation, the same shall be considered retired and no
longer issuable, unless otherwise provided in its articles of
incorporation, (see SEC Rules [CCP] No. 1-1982, supra.) The
rule is different with respect to treasury shares, (infra.)
(b) Upon redemption, redeemable shares lose their status
as part of the outstanding or unissued authorized capital
stock. They are considered treasury shares after redemption
if by provision of the articles of incorporation they can be
reissued."
(c) Where the reissuance of redeemed shares is prohibited,
either expressly or impliedly by silence, the number of
authorized shares of the capital stock of the corporation is
reduced accordingly, and the articles of incorporation must
be amended to reflect such reduction, (see Sec. 16.)
(10) Voting rights. Redeemable shares may be deprived of
voting rights in the articles of incorporation, unless otherwise
provided in the Code, (see Sec. 6, pars. 1, 6[l-8].)
Sec. 9. Treasury shares. Treasury shares are shares
of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by
purchase, redemption, donation, or through some other
lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors, (n)
Treasury shares.

Treasury shares are shares which have been lawfully issued


by the corporation and fully paid for and later reacquired by it
either by purchase, redemption (Sec. 8.), donation, forfeiture or
other lawful means.
(1) Status. Section 41 expressly empowers a stock corporation to purchase or acquire its own snares for legitimate corporate
"Although they are no longer issuable, they may still be considered treasury shares
they continue to be part of the authorized capital stock of the corporation.

Sec. 9

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

109

purposes. Only surplus earnings may be used for the purchase


of treasury shares. Under Section 68 (last par.), the corporation,
in the absence of a qualified bidder, may bid at the public sale
of delinquent shares and title to the shares purchased shall be
vested in the corporation as treasury shares. The purchase by the
corporation operates, in effect, as a forfeiture of the shares.
(a) Treasury shares are not retired shares. They do not
revert to the unissued shares of the corporation but are
regarded as property acquired by the corporation which may
be reissued or resold by the corporation at a price to be fixed
by the board of directors. (SEC Rules Governing Redeemable
and Treasury Shares, [CCP] No. 1-1982.) Hence, the price paid
out of retained earnings for the value of reacquired shares
should be treated in the corporate books as payment for the
purchase of the shares (SEC Opinion, Feb. 20, 1991.) and an
investment on such property.
Retirement of treasury shares can be effected by decreasing the capital stock of the corporation in accordance with
Section 38 for the purpose of eliminating the treasury shares.
(SEC Rules, CCP No. 1-1982, supra.)
(b) Treasury shares are issued shares but being in the
treasury (hence, the name), they do not have the status of
outstanding shares (Comm. of Internal Revenue vs. Marining,
66 SCRA 14 [1975].), in the sense that they do not constitute
a liability of the corporation. They are, therefore, not a part
of outstanding capital stock, (see Sec. 137.) A corporation
may eliminate the treasury shares by reducing its authorized
capital stock, (see Sees. 38, 57.) Since they do not lose their
status as issued shares, they cannot be treated as new issues
when disposed of or reissued.
50

T h e transaction is subject to the registration requirement of the Revised Securities Act (Part II) considering that the re-issuance thereof may constitute distribution of
securities to the public and consequently, new or additional stockholders may come in.
However, the same may be exempted by the SEC if the transaction is of limited character
where the corporation does not normally acquire its own shares of stock and the number
of shares to be disposed of is usually minimal. But exemption is not automatic. The corporation is still required to secure exemption from the SEC prior to such reissuance pursuant to Section 6(b) of the Act. (SEC Opinion, Jan. 14,1993.)
5

110

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 9

(c) A treasury share or stock, which may be common or


preferred, may be used for a variety of corporate purposes,
such as for a stock bonus plan for management and employees,
or for acquiring another company. It may be held indefinitely,
resold or retired. While held in the company's treasury, the
stock earns no dividends and has no vote in company's
affairs. (Philippine Coconut Producers Federation, Inc. vs.
Republic, 600 SCRA 102 [2009].)
(d) Treasury shares must be distinguished from the
authorized but unissued shares in that the acquisition of the
former does not reduce the number of issued shares or the
amount of stated capital stock and their sale does not increase
the number of issued shares or the amount of stated capital.
(SEC Opinion, Jan. 14, 1993, citing 11 Fletcher, chap. 58, sec.
5088.)
(2) Where acquisition from stockholders. Shares may be

acquired by the corporation from stockholders by purchase,


redemption, or donation, or through some other lawful means.
(a) If the corporation acquires the shares by purchase
from stockholders, the transaction is, in effect, a return to
them of the value of their investments in the company, and
a reversion of the shares to the corporation. It is required in
such cases, however, that the corporation must have surplus
with which to buy the shares so that the transaction will not
cause an impairment of its capital, (see Sec. 41.)
(b) On the other hand, if the shares are donated to the
corporation by the stockholders, their act would simply
amount to the surrender of their stock without getting back
their investments which are, instead, voluntarily given to the
corporation.
In both kinds of acquisition of the corporation, therefore,
the shares would have value but inasmuch as they have been
acquired by the corporation, they would cease to represent any
right. (SEC Opinion, Nov. 22,1966.) Treasury shares are recorded
at cost.
(3) Dividend restriction on retained earnings. As a general

rule, a corporation can reacquire its own shares provided it has

Sec. 9

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

111

an adequate amount of unrestricted retained earnings to support


the cost of the said shares. Thus, the capital stock is preserved.
51

Accordingly, the amount of such earnings equivalent to the


cost of the treasury shares being held, cannot be declared and
distributed as dividends. Such restriction shall be lifted only
after the treasury shares are reissued or retired in accordance
with law. (SEC Rules, CCP No. 1-1982.)
(4) Declaration as property dividend. Treasury shares being

unrealized income, are not considered as part of earned or


surplus profits, and, therefore, not distributable as dividends,
either in cash or stock. But if there are retained earnings arising
from the business of the corporation, treasury shares, being the
property of the corporation, may properly be distributed as
property dividend. (SEC Opinion, Oct. 1,1985.)
The Securities and Exchange Commission requires that an
amount of the retained earnings equivalent to the cost of treasury
shares be restricted from being declared as dividends, until said
shares are reissued or retired. Treasury shares may be declared
as property dividend to be issued out of the retained earnings
previously used to support their acquisition, provided that the
amount of the said retained earnings has not been subsequently
impaired by losses. Any declaration and issuance of treasury
shares as property dividend shall be disclosed and properly
designated as property dividend in the books of the corporation
and in its financial statements. (SEC Rules, CCP No. 182, supra.)
(5) Voting rights. Treasury shares have no voting rights as
long as they remain in the treasury (Sec. 57.), i.e., uncancelled
and subject to reissue. A corporation cannot in any proper sense
be a stockholder in itself, and shares of its own stock, therefore,
held by it cannot be voted or be entitled to vote, for otherwise,
equal distribution of voting powers among stockholders will
be effectively lost and the directors will be able to perpetuate
their control of the corporation. (Comm. of Internal Revenue vs.
Manning, supra; San Miguel Corporation vs. Sandiganbayan, 340
SCRA 289 [2000].)

51

For exceptions to this rule, see note under Section 41.

THE CORPORATION CODE OF THE PHILIPPINES

112

Sec. 9

(6) Right to dividends. Neither are treasury shares entitled


to dividends or assets because dividends cannot be declared by a
corporation to itself. (Ibid.) Such distribution of dividends would
be like making the corporation debtor and creditor of the same
amount at the same time or requiring it to take money or stock
from one of its pockets and putting the same in another, which
would be pointless. Hence, stock dividend (see Sec. 43.) may
not be declared on treasury stock even on the express condition
that such dividend shall also be treated as treasury stock. (SEC
Opinion, Nov. 2,1966.) "So, what rights, if any, remain? Perhaps
the right of the corporation to reissue its treasury shares for a
valuable consideration if its charter permits but this is a mere
incident of incorporation which is applicable to unissued as well
as to issued shares x x x." (Ballantine, p. 615 [1946].) Treasury
shares are no longer part of the "outstanding capital stock." (see
Sec. 137.)
52

(7) Resale. They may be sold by the corporation at any


price the board of directors sees fit to accept, even at less than
par or issued value, the corporation having already received
the full value upon their initial issuance, provided such price is
reasonable under the circumstances: (see Sec. 65.)
(a) Stockholders may rightfully complain if the price is
lower than reasonable.
(b) In case of sale or reissue, the treasury shares again
becomes outstanding stock and regain whatever dividends
and voting rights they originally held.
(c) Treasury shares differ from retired or cancelled
shares in that while the latter has disappeared altogether, the
former may be sold. Section 36(6) expressly authorizes stock
corporations to sell treasury shares subject to the provisions
of Section 9. Their status on resale differs from that of newly
M

Art. 1275. The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person. (Civil Code)
"There has been considerable discussion among accountants, and some shifting of
opinions, as to the proper accounting treatment of purchases of shares for the treasury.
Such shares are not, in fact, a corporate asset. Where they are acquired out of surplus, it
seems clear, particularly in states in which their acquisition out of capital is illegal, that
52

Sec. 9

TITLE I. GENERAL PROVISIONS


Definitions and Classifications

113

created shares which cannot be issued for less than the legal
minimum consideration, (see Sec. 62.)
(d) The sale of treasury shares should be treated as a sale
of ordinary property of the corporation; hence, the gain therefrom is subject to tax. The purpose of the sale is to recover the
amount paid by the corporation for said shares.
oOo

the surplus should be reduced or earmarked as restricted to the extent of the amount paid
for the shares. But the restriction may be lifted and the surplus restored, even as earned
surplus, if thereafter the treasury shares are resold (to the extent the amount received covers what has been paid to reacquire them), or if the shares are retired. (William L. Cary,
op. cit., p. 1615.)

Title II
INCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATIONS
Sec. 10. Number and qualifications of incorporators.
Any number of natural persons not less than five (5) but
not more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of
the incorporators of a stock corporation must own or be a
subscriber to at least one (1) share of the capital stock of
the corporation. (6a)
Incorporation of a private corporation
a mere privilege.

Generally, incorporation is generated by agreements of


a group of persons, and may, therefore, be likened to other
contracts which individuals may enter into. But such agreements
alone are not sufficient for a corporation to exist. It is necessary
that legislative authority be obtained to put a stamp of state
intervention in the creation of corporations, such power being
one of the attributes of sovereignty. (18 C.J.S. 404.)
In our jurisdiction, the right to be and act as a corporation
does not belong to any person as a natural and civil right, but
as a special privilege conferred upon a group of persons by the
sovereign power of the State. Until there is a grant of such right,
therefore, whether by special act of the legislature or under
general law, there can be no corporation. Under Section 10, the
formation of a corporation "for any lawful purpose or purposes,"
provided it is in accordance with the Code, is a matter of right
and cannot be restrained, (see Sec. 17.)
114

Sec. 10

TITLE n. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

115

Since a corporation is merely a creation of law, it can be dissolved at any time by legislative enactment subject to certain
limitations, (see Title XIV.)
Advantages of the corporate form.

The advantages of incorporation are so well understood that


it seems almost superfluous to enumerate them, (see Sec. 2.)
Nevertheless, it may be useful to mention here only its chief advantages as stated by a well-known authority.
First, through the process of incorporation, any number of
persons may unite in a single enterprise without using their
own names, without difficulty or inconvenience, and with the
valuable right to contract, to sue and be sued, to hold or convey
property in the corporate name, and to act as a legal unit.
Second, an individual stockholder may invest in the corporate
enterprise as much or as little as he sees fit, without risking more,
and, in the absence of statutes to the contrary, this is the limit of
his liability, since stockholders are not personally liable for the
debts of the corporation. They can transfer their shares without
the consent of the other stockholders.
Third, the rights and obligations of a corporation are not
affected by the death or change of the individual members, but
the corporate business continues uninterrupted and unaffected
so long as the corporate entity continues. Its credit is strengthened
by such continuity of existence.
Fourth, the modern corporation makes great undertakings
feasible since it enables many individuals to cooperate in order
to furnish the large amounts of capital necessary to finance the
gigantic enterprises of modern times, (see 1 Fletcher, p. 42.)
The resulting large-scale enterprise may be more efficient, thus
lowering the costs of production. (C.L. James, Principles of
Economics, supra, p. 46.)
Corporations a n d associations
distinguished.

(1) Concept of association. A corporation is defined by Section 2 of the Code. The word "association" is one of vague mean-

116

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 10

ing, used to indicate a collection of persons who have joined together for a certain object. The term is properly applied to an
unincorporated society or body of individuals, formed for moral,
benevolent, social, patriotic, or political purposes. (5 Am. Jur. 2d
430-431.)
(2) Possession of juridical personality. While an association

may, in its broadest sense, include a corporation, the two terms


ordinarily are used to denote different conceptions. The principal distinction lies in the fact that a corporation is a legal entity
deriving its existence from franchise, whereas an association, in
the narrower sense of the term, is a creature of contract without a
legal entity separate from the individuals composing it. (7 C.J.S.
21.) It is clear from the foregoing that the two terms, "corporation" and "association," denote two different significations in the
strict legal sense.
(3) Governing law. Moreover, private corporations are
governed by the Corporation Code, while associations are
generally governed by the provisions of the Civil Code or some
other laws. (SEC Opinion, July 27, 1962.) Article 45 of the Civil
Code provides, among other things, that "private corporations
are regulated by laws of general application on the subject; while
partnerships and associations for private purposes are governed
by the provisions of this Code concerning partnerships."
(4) Capacity to act in its name. Article 46 of the Civil Code
also provides: "Juridical persons may acquire and possess
property of all kinds as well as incur obligations and bring civil
or criminal actions in conformity with the laws and regulations
of their organization." Thus, an association cannot sue or be
sued, it cannot enter into contracts in the name of the association,
and neither can it acquire properties under its common name.
Contracts entered into in its behalf make the person signing
or executing them liable to the other contracting party. (SEC
Opinion, July 23,1990.)
An association is not competent to act as agent or create
agents or confer upon another authority to act on its behalf, and
those who act or purport to act as its representatives or agents
do so at their own risk. (Vda. de Salvatierra vs. Garlitos, 103 Phil.
757 [1958].)

Sec. 10

TITLE n. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

117

(5) Validity and enforcement of acts. The fact, however, that

a group of persons adopt a name and operate without first being


organized as a legal entity, does not make their acts necessarily
void. Their acts may be valid, although unenforceable under the
name they have adopted. If a suit is to be brought to enforce their
rights, they have to sue as individuals and not in the name of the
group or association, it not being a legal unit, (see Rules of Court,
Rule 3, Sec. 15.)
It follows that although an association has no juridical personality, its subscription to the capital stock of a corporation is
not necessarily invalid. Of course, the subscription should not
be taken and accepted under such name, in the first place. (SEC
Opinion, March 11,1969.)
(6) Powers, rights, and privileges. A society or association

not engaged in business and not desirous of acquiring juridical


personality need not be registered with the Securities and
Exchange Commission. (SEC Opinion, Aug. 22, 1989.) An
unregistered organization, however, cannot exercise the powers,
rights and privileges incident to incorporation and expressly
granted to registered corporations under Section 36 of the
Corporation Code.
(7) Policy of judicial non-interference. The general rule is that

courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between the members
on questions of policy, discipline, or internal government. (Lions
Clubs International vs. Amores, 121 SCRA 621 [1983].)
Concept of franchise.

In common usage, the term "franchise" includes any special


privilege or right affected with public interest, conferred by the
State on corporations or persons and which does not belong to
the citizens of the country, generally as a matter of common right,
(see J.R.S. Business Corp. vs. Imperial Insurance, Inc., 11 SCRA
634 [1964]; National Power Corporation vs. City of Cabanatuan,
401 SCRA 259 [2003].) To illustrate:
No persons can make themselves a body corporate without
legislative authority. The right to exist, therefore, as a corpora-

118

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 10

tion is a (primary or corporate) franchise. No person can take


another's property even for public use, without such authority,
which is the same as to say that the right of eminent domain can
only be exercised by virtue of a legislative grant. This right of
eminent domain is a (secondary or special) franchise.
As a privilege, a franchise is not exercised by private individuals at their mere will and pleasure only but under such conditions, regulations, and restrictions as the government may deem
necessary to impose in the public interest, security and safety.
Primary franchise a n d s e c o n d a ry franchise
defined an d distinguished.

For practical purposes, franchises, so far as relating to corporations, have been divided into two kinds:
(1) Primary or corporate franchise is the right or privilege

granted to individuals by the State to be and act as a corporation


after its incorporation. This privilege, which is granted to the incorporators, enables them to act for certain designated purposes
as a single individual and exempts them, unless otherwise especially provided, from individual liability for corporate debts. (18
Am. Jur. 2d 608-609.)
The primary franchise (also called "general franchise") is
granted to and vests in the individuals who compose the corporation and not in the corporation itself.
(2) The right to exist as a corporation is thus distinguished
from the franchise to exercise powers and privileges granted
to such corporation to the business for which it was created,
including those conferred for purposes of public benefit such as
the power of eminent domain and other powers and privileges
enjoyed by public utilities, which is called secondary or special
franchise. Only quasi-public corporations or those affected with
public interest are given the power to institute condemnation
proceedings against owners of private property. It is unlawful
to grant the right of eminent domain to purely private entities,
exercising functions which are not public in nature. For in such
cases, they would be using the right to take property for private
use. (SEC Opinion, Oct. 28,1968.)

Sec. 10

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

119

The secondary franchise is conferred upon the corporation


after its incorporation and not upon the individuals who compose the corporation.
It has been held by the Supreme Court that the term
"franchise" used in the 1935 Constitution of the Philippines,
that "no franchise, certificate or any other form of authorization
for the operation of a public utility shall be granted except to
corporations or other entities organized under the laws of the
Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines x x x." (Article XIV, Sec. 5 thereof.'),
refers to secondary franchise or the privilege to operate as a
public utility after the corporation has already come into being.
The Constitution does not prohibit the mere formation of a
public utility corporation without the required proportion of
capital. What it does prohibit is the granting of a franchise or
other form of authorization for the operation of a public utility
to a corporation already in existence but without the requisite
proportion of Filipino capital. (People vs. Quasha, 93 Phil. 333
[1935].) This ruling must be qualified in view of Section 17(4).
(infra.)
Transferability of f r a n c h i s e .

The term "franchise" is generic, covering all the rights granted


by the State. It may mean either the corporate or primary franchise
which is the right granted to a group of individuals to exist and
act as a corporation, or the secondary or special franchise which
is the right granted to a corporation to exercise certain powers
and privileges, (supra.)

(1) The primary franchise is in its nature inalienable. It is part


of the corporation and cannot be sold or assigned; otherwise, a
corporation would be created without the consent of the legislature. (Memphis, etc., RRC vs. Railroad Comrs., 112 U.S. 609, 28
L. ed. 837.) It may be conveyed provided there is express legislative authority to do so. (J.R.S. vs. Imperial Insurance Co., Inc., 11
SCRA 634 [1964].)
(2) The secondary franchise, which is vested in the corporation
itself, may ordinarily be conveyed or mortgaged under a general
Now Article XII, Section 11.

THE COPvPORATION CODE OF THE PHILIPPINES

120

Sec. 10

power granted to a corporation to dispose of its property, except


such franchises as are charged with a public use. (Ibid.) Thus, if
the corporation is a public utility, its franchise can only be sold
subject to the prior approval and authorization of the (now defunct) Public Service Commission. (Act No. 156, Sec. 20[g], as
amended.) It has been held that even if the franchise is sold
under execution, such approval of the Public Service Commission is still necessary. (Raymundo vs. Luneta Motor Co., 58 Phil.
880 [1933].) In the absence of such approval in the transfer of
the property covered by the franchise, the transferor or grantee
continues to be responsible under the franchise in relation to the
Commission and to the public. The transferee holds the property
as agent for the registered owner as far as the law is concerned.
("Y" Transit Co., Inc. vs. National Labor Relations Commission,
229 SCRA 508 [1994].)
A secondary franchise is subject to levy and sale on execution, together with all the property necessary for the enjoyment
thereof. However, where the judgment does not contain any special decree making the franchise of a private corporation answerable for its judgment debt, the inclusion of said corporation's
franchise (e.g., to operate a messenger as delivery service), trade
name and capital stocks in the execution sale of its properties
has no justification and such sale should be set aside insofar as it
authorizes such levy and sale. (J.R.S. Business Corp. vs. Imperial
2

Insurance, Inc., supra.)


Steps in the creation of a c o r p o r a t i o n .

There are three (3) steps in the creation and organization of a


corporation, namely:
(1) Promotion;
(2) Incorporation (Sec. 10.); and

Under the former Corporation Law (Act No. 1459, as amended.), voluntary transfer
of franchise is not permitted. Sections 51 to 61 of the law refer to forced or involuntary
transfer or sale of secondary franchise under execution. But the sale must be "especially
decreed and ordered in the judgment" of the court and "confirmed by the court after due
notice." (Sec. 56 thereof.)
2

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121

(3) Formal organization and commencement of business


operations, (see Sec. 22.)
P r o m o t i o n of c o r p o r a t i o n s.

The term "promotion" is said to be not a legal but a business


term, usefully summing up in a single word, a number of
business operations peculiar to the commercial world by which
a company is generally brought into existence. (18 Am. Jur. 2d
647.)
The formation and organization of a corporation are brought
about generally at the instance and under the supervision of one
or more so called "promoters." (see Sec. 4.) The activity on the
part of such persons is not, strictly speaking, a formal part of the
organization of a corporation, inasmuch as it occurs outside the
corporate form and theoretically, at least, independent thereof.
(Ibid.) Upon incorporation, the practice is for the board of directors to pass a resolution ratifying the contracts entered into by
the incorporators with the promoters.
A corporation, however, may be formed and organized by
the incorporators themselves without getting the services of socalled promoters.
P r o m o t e r s of c o r p o r a t i o n.

A promoter of a corporation is one who, alone or with others,


takes it upon himself to organize a corporation: to procure the
necessary legislation, where that is necessary; to procure the
necessary subscribers to the articles of incorporation, where
the corporation is organized under general laws; to see that
the necessary document is presented to the proper office to
be recorded and the certificate of incorporation issued; and
generally, to "float the company."
Promoters are often referred to, especially in the English
cases, as "projectors," "agents," "stewards," or "trustees,"
but whatever term is applied, it means "one who acts in the
formation, establishment, and control of a company prior to
the incorporation and the assumption of control by the board
of directors." (18 C.J.S. 521-522.) They are the agents of the
incorporators.

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Stages in corporate promotion.

A corporate promotion is said to include three (3) stages, to


wit:
(1) Discovery. This stage may represent a new product or
service, or the promoter may simply organize another company
in an existing line of business;
(2) Investigation. This second phase involves an analysis of
needs financial, management, plant, material and labor and
a decision whether the estimated earnings justify the effort; and
(3) Assembly. This last stage consists of bringing together
the property, money, and personnel into an organization. At
this stage, the promoter must have some assurance of control
lest third parties deprive him of the fruits of his efforts. Control
may cover such items, for example, as patents, leases, options on
property, and contracts for services.
The above is a description of the promoter in the economic
sense. At law, promoter problems arise in several contexts. For
example, the extent of his rewards and the manner of obtaining
them may sometimes be subject to question. (W.L. Cary, Cases
and Materials on Corporations, 1969 ed. [University Case Book
Series], p. 86.)
Nature of relations of p r o m o t e r s .

(1) To corporation. A promoter has a unique relation to a


corporation representing its interest when it does not legally exist or has just been created.
(a) The promoters of a corporation are not in any sense
the agents of the corporation before it comes into existence,
for there cannot be an agency unless there is a principal. But
they may, of course, become the agents of the corporation
after it has been formed provided there is assent, express or
implied, on the part of the corporation. (18 C.J.S. 522.)
(b) Although promoters cannot occupy the relation of
agent of the corporation before its formation, and although
they are not trustees in the proper sense, it is well-settled
that they occupy a fiduciary or quasi-trust relation toward
the corporation when it comes into existence and towards

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OF PRIVATE CORPORATIONS

123

the subscribers prior to its organization, as long as they are


acting as promoters. (Ibid.) This fiduciary relation imposes
upon the promoter to act in good faith in all dealings in behalf
of the corporation to protect the corporation from dishonest
promoters. A promoter violates this duty if, for example, he
secretly acquires property which he knows the corporation
will acquire and then sells it to the corporation at a secret
profit.
(2) To subscribers or corporators. Although promoters of

a corporation cannot be agents of the corporation before it is


formed, they may be agents of the subscribers or corporators.
(a) Since agency is a contract, it is essential that there is
an agreement to this effect.
(b) Even when there is no agency, the relation between
the promoters and the persons who have become, or who are
expected to become, subscribers for its capital stock, or corporators, or purchasers of stock from the corporation, is one
of trust and confidence, so as to impose upon the former the
duty to act in perfect good faith and in the interest of all the
subscribers and corporators.
(c) Subscribers for stock in a proposed corporation do
not, without agreement to such effect, become partners with
the promoters of it. (14 C.J. 254.)
(d) Stockholders of a corporation cannot be held personally liable for the compensation claimed by promoters for
services performed by them in the organization of the corporation in the absence of any showing that said stockholders
contracted such services. The fact that they benefited from
such services is no justification to hold them personally liable
therefor. The corporation should alone be liable for its corporate acts as duly authorized by its officers and directors.
(Caram, Jr. vs. Court of Appeals, 151 SCRA 372 [1987].)
(3) Inter se. A partnership can be created, as between the
parties themselves, only by mutual agreement, and, therefore,
promoters do not become partners as between themselves, in the
absence of such agreement, by merely joining in an attempt to
create a corporation, by uniting in subscriptions for stock, or by

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otherwise promoting the creation of the corporation. But such a


relation may, of course, be created by agreement of the parties, in
which case it is governed by the general principles of the law of
partnership. (14 C.J. 254.)
It is, however, unimportant to determine whether the relationship is a partnership or a mere joint venture since in both
cases, the legal rules which apply and the principles which
govern the parties are the same. Each member is bound to the
same scrupulous good faith toward his fellow members as
though all were partners, and each has the right to demand from
the others the utmost good faith in everything concerning the
common interest. (18 Am. Jur. 2d 676.)
Liability of corporation for p r o m o t i o n
fees.

(1) General rule. In the absence of character or statutory


provisions, a corporation is not liable to its promoters in respect
for any payment in services rendered or expenses incurred before
its incorporation in promoting it, unless after its incorporation it
expressly agrees to make such payment or from the other facts
the court can infer a new contract to reimburse.
(a) It is more reasonable to hold services performed or
expenses incurred prior to organization of a corporation to
have been gratuitous in view of the general good or private
benefit expected to result from the object of the corporation,
and because it is unjust to stockholders who subscribe and
pay for stock, that their property be subject to claims to which
they have no voice in creating.
(b) It is a fraud for promoters to undertake to decide for
the future stockholders in the corporation to be organized
that a large part of the capital stock is a fair remuneration
for their services, to issue that amount to themselves as such
remuneration, and then to invite the public to subscribe to
stock without disclosing that fact and getting the subscribers
consent to the payment of that remuneration. (18 Am. Jur. 2d
649.)
(2) Authorization by stockholders. After due organization of

the corporation, it may, with the consent of all its stockholders

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125

and where there is no question as to the rights of subsequent


stockholders, authorize the payment of compensation to promoters and the issuance to them of stock unless prohibited by
statute. (Ibid.)
(3) Under the Revised Securities Act. The Code contains

no provision regarding the payment of promotion fees for the


promotion of corporations. The Revised Securities Act, however,
authorizes the payment of such fees if the same is provided for
in the registration statement of securities filed with the Securities
and Exchange Commission under Section 8(34) of said Act. It
follows that if the securities of the company are not registered
under the Securities Act, the prevailing rule of proper corporate
practice on the payment of such fee should be the one observed,
but if the securities are registered under the said Act, the
provisions of the registration statement on the matter should be
followed.
(4) Amount. The amount of promotion fees that the Securities and Exchange Commission allows depends principally upon
the effort exerted, the difficulties encountered, and the expenses
incurred in promoting and organizing the corporation. There is
no hard and fast rule in this regard. However, in certain cases in
which the Commission had authorized the payment of promotion fees as in the case of mining companies, the maximum fee
that had been allowed did not exceed 5% of the amount paid and
received on the subscriptions.
As a rule, this promotion fee is not given in lump sum but in
stages as the company proceeds in its operations. (SEC Opinions,
July 10,1963 and July 22,1970.)
Liability of corporation on promoter's
contracts.
(1) Before incorporation and organization. Until the certificate

of incorporation has been issued by the Securities and Exchange


Commission (see Sec. 19.), a corporation has no being, franchise
or faculties. Its promoters or those engaged in bringing it into
existence are in no sense identical with the corporation; nor do
they represent it in any relation of agency or have any authority
to enter into preliminary contracts binding upon the corporation.

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Therefore, since a corporation cannot, before its organization,


have agents contract for itself, or be contracted with, it is not
liable upon any contract which a promoter attempts to make
for it prior to its organization unless the contract is expressly or
impliedly adopted or ratified by it after organization is completed
or liability is imposed by statute.
In other words, a promoter's contract does not, by the incorporation of a contemplated company, ipso facto become the contract of the corporation.
(2) After incorporation and organization. Under the gene-

ral rule permitting a corporation to assume liability on a


promoter's contract, the contract must, of course, be one such as
the corporation can itself make. A corporation as a legal entity
cannot assume the obligations of an ultra vires contract (see Sec.
45.) made by its promoters anymore than it can legally initiate
such contract. (18 Am. Jur. 2d 600-601; see Cagayan Fishing Dev.
Co., Inc. vs. Sandiko, 65 Phil. 223 [1937].)
Until such assumption of liability is made, the better rule
seems to be that contracts entered into by promoters "should at
most be deemed suspended, and enforceable only after the incorporation and organization" of the corporation, (see C.G. Alvendia, op. cit., p. 135.)
Liability of promoter s for failure
to organize corporation.

(1) To subscribers. If money is paid to promoters or provisional directors by a subscriber for shares in a projected corporation preliminary to organization, and the promoters or provisional directors fail to organize the corporation according to the
prospectus or other agreement or abandon the enterprise before
it has been carried into execution, it is a case of money paid on
a consideration which has failed. The subscriber may, therefore,
recover it back from the promoters or directors in an action at
law although the money has been applied in payment of preliminary expenses or otherwise. (18 C.J.S. 537.) Where, however, the
subscriber agrees that the amount paid on his subscription may
be applied on certain promotional or development expenses and
it is so applied, the promoters are not personally liable for the

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OF PRIVATE CORPORATIONS

127

amount paid on the subscription where the project to organize


the corporation is abandoned. (18 Am. Jur. 2d 660.)
It must be shown by the subscriber that the person receiving
the money sought to be recovered was authorized to receive it
for the promoters or provisional directors or for the abortive corporation, and that he in fact did so receive it. (14 C.J. 276.)
(2) To each other. While it has been held that as between
themselves the rights of the stockholders in a defectively
incorporated association should be governed by the laws of the
State relating thereto and not by the rules governing partners,
it is ordinarily held that persons who attempt, but fail, to form
a corporation and who carry on business under the corporate
name, occupy the position of partners inter se. (see Sees. 22-23.)
But such a relation should be implied only to do justice between
the parties. So, one who takes no part except to subscribe for
stock in a proposed corporation which is never legally formed
does not become a partner with the other subscribers. (Pioneer
Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668
[1989].)
Underwriting agreements.
Underwriting agreements are now resorted to very generally
in order to float stock issues of large corporations.
There are four general types of underwriting contract.
First, the syndicate may make a firm commitment under
which the members severally but not jointly agree to purchase
the whole issue outright at a particular price for resale at a price
differential to the public, or to dealers who sell at another differential to the public.
3

Second, the underwriters may make an all-or-nothing commitment under which they agree to accept liability for the purchase

'Underwriting syndicate is the term used to refer to a group of investment bankers


who have pooled their resources to share in the profits of an underwriting on a pro rata
basis according to the amount of underwriting risk assumed. (Ibid., p. 64.) The contract
may be entered into by the underwriter or underwriters with the corporation or with the
promoter before incorporation.

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Sec. 10

of an issue at a given price only if the entire issue is not sold


usually within a 30-day period.
Third, the syndicate may make a standby commitment or rights

offering under which it will purchase and distribute at predetermined prices to the public any amount of the issue not taken by
stockholders in exercising their pre-emptive rights.
Fourth, the underwriters may decide to make only a best
efforts commitment. This merely means that the syndicate will
use its best efforts to distribute the issue to the public. Under
such commitment, the syndicate does not agree to purchase the
issue at predetermined prices. The security is sold for whatever
price it will bring, the underwriters take a predetermined spread,
and the issuers take the residual. Under a variation of this
arrangement, there may be a fixed price but no guarantee on the
quantity sold, (see J. Zwick & N. Norton, "Investment Banking
and Underwriting," in The Stock Market Handbook, edited by F.
Zarb & G. Kerekes, Vol. 1,1970 ed., p. 65.)
The term "underwriting" is defined under the Investment
Houses Law (Pres. Decree No. 129.) as "the act or process of
guaranteeing the distribution and sale of securities of any kind
issued by another corporation." (Sec. 3[a] thereof.)
Incorporation distinguished f r o m
creation.

The term "incorporation" is narrower in scope than the term


"creation."
The first "refers to the performance of conditions, acts, deeds,
and writings by incorporators, and the official acts, certifications
or records, which give the corporation its existence." On the other
hand, the second, "understood in its broadest sense, includes all
of the acts and doings from the enactment of the general incorporation law by the legislature through the promotion, underwriting, preparation and execution and filing of the incorporation
papers and obtaining the certificate or charter, to the organization and first meeting and election which set the corporation in
motion full-pledged." (C.G. Alvendia, op. cit., p. 73.)

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OF PRIVATE CORPORATIONS

129

Incorporation distinguished f r o m
corporation.

A corporation is a civil institution established by a law of


the State from considerations of public policy. Its existence, its
capacities, and its powers are all conferred by law from some
real or supposed public benefit to result from it. It is a political
institution of the State.
The words "corporation" and "incorporation" are frequently
confounded, particularly in the old books. The distinction between
them is, however, obvious: one is a legal or juridical institution;
the other, only the act by which that institution is created. When
a corporation is said to be a person, it is understood to be so
only in certain respects and for certain purposes, for it is strictly
a legal institution, (see 9-A Words and Phrases 453.)
S t e p s in incorporation.

Incorporation includes the following:


(1) Drafting and execution of the articles of incorporation by
the incorporators and other documents required for registration
of the corporation. In this connection, the person chosen as temporary treasurer pending incorporation must also execute:
(a) An affidavit certifying compliance with subscription
and paid-up requirements as to capital stock (see Sec. 14, last
par.);
(2) Filing with the Securities and Exchange Commission of
the articles of incorporation together with the following:
4

The Securities and Exchange Commission also requires the following documents to
be submitted with the articles of incorporation:
(1) Verification Slip, a certification to be attached to the articles of incorporation/
partnership and executed by the chief of the Records Section that the proposed name of
the corporation /partnership has been verified and found to be distinct from the names of
already existing corporations/partnerships or those pending registration;
(2) Sworn Statement of Assets and Liabilities, duly executed under oath by the corporate treasurer together with the amount of P50.00 to defray publication expenses;
(3) Bank Certificate of Deposit, issued under oath either by the Bank Manager or
any authorized Bank Officer that there is, as deposited, a stated amount representing
the paid-up capital of the corporation either in the name of the Treasurer in trust for the
corporation or in the name of the corporation itself, likewise to be attached to the articles
of incorporation;
4

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Sec. 10

(a) Treasurer's affidavit in the form prescribed in Section


15 showing at least 25% of the entire authorized shares has
been subscribed and at least 25% of the subscription has been
paid in cash and/or property to the corporation (Ibid.); and
(b) In case the corporation is governed by a special law
(e.g., educational institution), a favorable recommendation of
the appropriate government agency (i.e., Department of Education, Culture and Sports) that such articles of incorporation
is in accordance with law (see Sec. 17, last par.);
(3) Payment of the filing and publication fees (see Sec. 139.);
and
(4) The issuance by the Securities and Exchange Commission of the certificate of incorporation if all the papers filed after
verification and examination are found in order, (see Sec. 19.)
There are rules or requirements under special laws to be
complied with in organizing specific business and to endow the
corporation with the capacity to transact the business for which
it was created.
5

Substantial c o m p l i a n c e w i t h r e q u i r e m e n t s.

Where the formation or organization of corporations is not


governed by special laws (e.g., those engaged in real estate development), the Securities and Exchange Commission may accept
and approve the articles of incorporation or amendments therein
upon mere showing of a substantial compliance with the Corporation Code (SEC Opinion, Oct. 12, 1988.) and that it meets the
guidelines established by the Commission. (SEC Opinion, June
19,1989.)
(4) Written Authority to Verify Bank Deposits, signed by the corporate treasurer empowering the SEC and / or the Central Bank to check and inspect the existence of the bank
deposit of the corporate paid-up capital;
(5) Taxpayer Account Number (TAN), now Taxpayer Identification Number (TIN) of the
Incorporators, pursuant to Executive Order No. 213; and
(6) Registration Data Sheet, a statement in statistical data form signed by an
authorized representative of the corporation regarding important information about the
corporation seal, corporate name, principal office, capital structure, incorporators, their
subscriptions, and TAN (SEC Bulletin, Oct. 1982, p. 6 ) , now TIN.
sSee Guidelines in the Formation and Organization of a Private Stock Corporation.
(Appendix "D.")

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OF PRIVATE CORPORATIONS

131

It is a general principle that substantial compliance with


the requirements of the statute authorizing the formation of
corporations is all that is necessary to legal incorporation and
to the existence of a corporation. Thus, Section 14 requires
that articles of incorporation shall contain "substantially" the
matters enumerated, "except as otherwise provided by this
Code or by special law," while Section 15 provides that the
articles of incorporation shall comply "substantially" with the
form prescribed therein. Section 17(1) likewise requires a mere
substantial compliance with the form prescribed in the Code
relative to the approval of articles of incorporation and any
amendment thereto. (Ibid.)
Where there is substantial compliance with the legal requirements, the registration of the proposed corporation becomes a
matter of right, (see Sec. 17.)
The Securities and Exchange Commission has adopted an
express lane service whereby the required forms for incorporation
of corporations, whether stock or non-stock, are made available
to the public for nominal fees.
Incorporators: n u m b e r a n d qualifications.

Section 10 provides that the incorporators must be not less


than five but not more than fifteen, all of legal age, a majority of
whom are residents of the Philippines, and each of whom must
own or be a subscriber to at least one share of the capital stock
of the corporation. If the number of incorporators is more than
fifteen, the excess will not be considered as incorporators. Unless
otherwise expressly provided in the articles of incorporation, a
corporation cannot impose other qualifications. The same rule
applies as to stockholders.
The general practice is for the incorporators to serve as the
first directors of the corporation.
(1) These five or more persons must be natural persons. Consequently, a corporation cannot be an incorporator of another
corporation. (El Hogar Filipino vs. Government, 50 Phil. 399
[1927].) The rule is premised on the nature of corporations as follows: "Artificial persons, without brain or body, existing only on
paper through legislative command and incapable of thought or

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Sec. 10

action except through natural persons, cannot create other artificial persons, and those others still, until the line is so extended
and the capital stock so duplicated and reduplicated as to result
in confusion and fraud." (Schwab vs. Poeter Co., 194 N.Y. 409.)
As an example of an exception to the rule, Section 4 of R.A.
No. 7353 (Rural Banks Act of 1992.) provides that duly established cooperatives and corporations primarily organized to
hold equities in rural banks may organize rural banks and/or
subscribe to shares of stock of any rural bank. Accordingly, if the
corporation is a cooperative, it may become an incorporator of a
rural banking corporation.
In any case, a corporation may become a stockholder
in another corporation by subscribing to or purchasing the
latter's stock (see Sec. 36[7].), for the power of one corporation
to own stock in another corporation is entirely different from
its power to create or itself become one of the incorporators of
another corporation, (see 18 C.J.S. 414.) However, as a practical
matter, a corporation could have its stockholders, directors, or
officers, acting as individuals, organize a new corporation and
thereafter the first corporation could acquire the stock of the new
corporation. (18 Am. Jur. 2d 584.)
(2) The incorporators must have the capacity to enter into a

valid contract, the act of forming a corporation as between the


parties being contractual. Furthermore, the articles of incorporation, under Section 15, must be acknowledged by the incorporators before a notary public. There is thereby the requirement that
the incorporators must be qualified to enter into a contract. The
purpose of requiring the acknowledgment is to secure the State
and all concerned against the possibility of any fictitious name
being subscribed to the articles and to furnish proof of the genuineness of the signatures. (1 Fletcher, p. 414.)
A married woman may be an incorporator without the need of
obtaining the consent of her husband since under the law, "either
spouse may exercise any legitimate profession, occupation,
business or activity without the consent of the other" subject
to the right of the husband to "object only on valid, serious
and moral grounds." (Art. 73, Family Code.) A minor who is

Sec. 10

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OF PRIVATE CORPORATIONS

133

emancipated either by marriage or by voluntary concession of


the parents is not qualified to be an incorporator because Section
10 requires that the incorporators must be "all of legal age."
6

The Code does not prohibit the formation or organization of


corporations with same stockholders/incorporators, subject to
the provisions of Section 140. (SEC Opinion, July 28,1978.)
(3) A majority of the incorporators must be residents of the
Philippines, the rest may be persons who are neither residents
nor citizens of the Philippines. Hence, a corporation composed
entirely of aliens may be incorporated as long as the majority of
the incorporators are residents of the Philippines except in the
case of nationalized corporations, (see Sees. 12,14 [eleventh].)
7

The Code does not define the word "residents" but the term
must be construed to mean domiciled residents, as distinguished
from temporary residents with a domicile in another country.
The term "resident" or "residence," as used in corporate statutes
requiring one or certain number of directors to be residents of the
State, is equivalent to domicile, the pertinent elements of which
are physical presence in the State and an intention to remain
therein. (SEC Opinion, Jan. 17, 1985, citing 2 Fletcher, 1969 ed.,
Sec. 307, p. 97.) The domicile of natural persons is the place of
their habitual residence (Art. 50, Civil Code.); it is the place
where one has his true, fixed, permanent home and to which he,
whenever he is absent, has the intention of returning. (25 Am.
Jur. 2d 5.)
The residence requirement is likewise mandatory. Section
10, however, does not require that majority of the members must
'Article 236 of the Family Code (Exec. Order No. 209, July 6, 1987.), however, provides: "Emancipation for any cause shall terminate parental authority over the person
and property of the child who shall then be qualified and responsible for all acts of civil
life." The Corporation Code is a special law. The Family Code, however, has reduced the
majority age to 18 years. (Art. 234.)
If the parents of minor children are still living and exercising parental authority over
them, other nominees cannot act as their legal guardians or trustees to hold the minors'
shares in trust. (SEC Opinion, Aug. 10,1987; see Arts. 220, 225, 226, Family Code.)
'Alien residents are required to submit the original as well as the photostat of their
Alien Certificate of Registration (ACR), Immigrant Certificate of Registration (ICR), and
the latest renewal of their ACR. In lieu of these certificates, a certification by the municipal or city treasurer of the municipality where the alien resides as to the number, place
and date of the ARC and IRC may be submitted. (SEC Bulletin, October 1982, p. 5.)

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Sec. 10

also be residents. Accordingly, a situation wherein majority of


the members of a corporation are nonresidents is allowable. (SEC
Opinion, July 22,1994.) But a majority of the directors or trustees
of all corporations must be residents of the Philippines, (see Sec.
23, last sentence.)
(4) By specific constitutional and legal provisions, citizenship
is a necessary qualification for incorporators in corporations in
which a certain percentage of the capital stock is required to be
owned by Filipino citizens, (infra., under Sec. 15[llth].) Foreign
shareholders may be debarred from certain nationalized activities which are exclusively reserved for Filipino citizens. The rule
applies to directors or trustees, (see Sees. 12, 23.) Enemy aliens
cannot become incorporators, for subjects of one country cannot
lawfully contract with the subjects of the country with which it is
at war. (White vs. Burneley, 20 How. 235.)
(5) The Code now expressly requires that "each of the incorporators of a stock corporation must own or be a subscriber to
at least one (1) share of the capital stock of the corporation."
(Sec. 10.) The presumption is that where an incorporator has a
pecuniary interest in the corporation, he will be concerned with
the management of its affairs.
Requirement regarding m i n i m u m n u m b e r
of incorporators mandatory.

The requirement of the law regarding the minimum number


of incorporators is mandatory and a dejure corporation (Sec. 20.)
cannot be legally formed by less than the prescribed number
except in the case of a corporation sole, (see Sec. 110.) In case of
educational corporations, their incorporation "shall be governed
by special laws and by the general provisions of [the] Code."
(Sec. 106.)
(1) Reduction of stockholders or members to less than minimum.

The number of stockholders (or members) after the corporation is organized may become less than the minimum number
required for incorporation without affecting corporate existence
unless valid grounds exist for piercing or lifting the corporate
veil, (see Sec. 2.)

Sec. 11

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135

(2) Beneficial ownership in one individual. The requirement

of minimum number of incorporators is one of those provisions,


however, which are formal rather than substantial and which are
regularly evaded in practice. Since the law permits a scheme by
which all the shares are owned by a single individual, the latter
may incorporate provided he associates with him, at least nominally, the number of persons required by the law. (Louiseville
Banking Co. vs. Eisenmen, 21 S.W. 531.)
The validity of the incorporation is not affected by the fact
that it is formed in the interest of a single individual, and that
the other persons under his control, without any substantial
interest, or without individual responsibility who may only be
called "qualifying stockholders," or who are popularly known
as dummies or "men of straw." Beneficial ownership is not
necessary, and a person who holds the legal title to stock is
qualified to become an incorporator.
8

(3) Subsequent accumulation of shares in one individual.

Nor is the existence of the corporation originally formed by the


required number of incorporators affected by the subsequent
accumulation of all the shares in the hands of one individual (18
C.J.S. 415-416.), unless, as previously said, circumstances exist to
justify the piercing of the veil of corporate entity, (see Sec. 2.)
Sec. 11. Corporate term. A corporation shall exist
for a period not exceeding fifty (50) years from the date
of incorporation unless sooner dissolved or unless said
period is extended. That corporate term as originally
stated in the articles of incorporation may be extended
for periods not exceeding fifty (50) years in any single
instance by an amendment of the articles of incorporation,
in accordance with this Code: Provided, That no extension
"In jurisdictions where the incorporators elect the directors, the custom is that the
dummy incorporators should terminate their duties with the meeting of the incorporators, and at that time elect those who are to be actual directors of the company. If, under
the statute, the incorporators are also directors, they may present to the first meeting their
resignation as directors and, as incorporators, proceed to fill the vacancies. If the incorporators are dummies and also subscribers to shares, they would execute the assignments of
their subscriptions to the real parties in interest, which assignments would be approved
at the meeting and annexed to the minutes. This would, of course, be the last item of the
business done at the meeting." (W.L. Cary, op. cit., p. 43.)
8

136

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 11

can be made earlier than five (5) years prior to the original
or subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined by
the Securities and Exchange Commission. (6a)
Term of corporate existence.

The corporation shall exist for the term specified in the


articles of incorporation' not exceeding fifty years, unless sooner
legally dissolved (Sees. 19, 22, 117-122, 144, 145.) or unless its
registration is revoked upon any of the grounds provided by law.
(see Sec. 6, Pres. Decree No. 902-A; see also Sec. 22.)
The corporate life may be reduced (see Sec. 120.) or extended by amendment of the articles of incorporation by complying
with the procedural requirements laid down in Section 37.
Extension of corporate t e r m .

(1) Limitations. The extension of corporate term is subject


to the following limitations:
(a) The term shall not exceed fifty years in any one
instance;
10

(b) The amendment is effected" before the expiration


'In line with the policy of the government encouraging deregulation in economic activities and eliminating the requirement of unnecessary licenses and permits to such legal
extent as possible and taking into consideration the huge number of existing corporations
and partnerships registered, the Securities and Exchange Commission does not require a
mandatory annual renewal of the Certificate of Registration of any corporation, partnership, or association under its jurisdiction. (SEC Opinion, July 29,1994.)
"The suspension of the activities and operations of a corporation during the period
of enemy occupation may not be considered as having automatically operated to deprive
it of a corresponding part of its juridical life as fixed in its articles of incorporation.
Consequently, the original term of existence cannot be extended without violating the
law. (SEC Opinion, Nov. 21,1962.) Under Article 605 of the Civil Code, "usufruct cannot
be constituted in favor of a town, corporation or association for more than fifty years x x
x." The law clearly limits any usufruct in favor of a corporation to 50 years. A usufruct is
meant only as a lifetime grant. The period cannot be extended in case the corporation's
lifetime is extended. (National Housing Authority vs. Court of Appeals, 456 SCRA 17
[2005].)
'
"Under the doctrine of relation which has been applied in American decisions, where
the delay in effecting the amendment is due to the neglect of the officer with whom the
application is required to be filed or to a wrongful refusal on his part to receive it, the
same will be treated as having been filed before the expiry date. The doctrine does not
apply where the delay is attributable to the corporation. (SEC Opinion, May 14,1987.)

Sec. 11

TITLE n. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

137

of the corporate term of existence, for after dissolution by


expiration of the corporate term there is no more corporate
life to extend. Hence, the extension cannot be done during
the three-year period of liquidation (Alhambra Cigar vs SEC
24 SCRA 269 [1968]; see Sec. 122.); and
12

(c) The extension cannot be made earlier than five (5)


years prior to the expiration date unless there are justifiable
reasons therefor as may be determined by the Securities and
Exchange Commission.
(2) Effect of extension!expiration of term. The mere extension

of the corporate term of existence made before the expiration of


the original term constitutes a continuation of the old, and not
the creation of a new, corporation.
Upon the expiration of the period fixed in the articles of
incorporation, in the absence of compliance with the legal
requisites for the extension of the period, the corporation ceases
to exist and is dissolved ipso facto. (Phil. National Bank vs. CFI of
Rizal, 209 SCRA 294 [1992].)
The expiration of the term for which the corporation was
created does not, however, produce its immediate dissolution for
all purposes. (Sec. 122.)
The occurrence of a fortuitous event (Act of God) or force majeure (Act of Man) is
considered a meritorious reason by the SEC to justify the doctrine. The test applied by
the SEC is whether under the particular circumstances there was such an insuperable
interference occurring without the corporation's intervention as could not have been prevented by prudence, diligence, and care. However, since the privilege of extension is
purely statutory, all of the statutory conditions precedent for extension of corporate life
are not to be given a liberal interpretation. (SEC Opinion, July 7,1987.)
"However, if it is desired to continue the business for which the corporation was
originally organized, the following steps leading to its reincorporation may be taken:
(1) A meeting of the stockholders should be called for the purpose of discussing and
deciding the question of reincorporation. Stockholders who do not consent to the reincorporation should be given their corresponding participations in the remaining assets
of the company after providing for its outstanding liabilities; (2) A copy of the resolution
signed by all the stockholders voting for the reincorporation of the company and duly
countersigned by the president and secretary of the meeting should be submitted to the
Securities and Exchange Commission, together with the new articles of incorporation
duly executed in accordance with law; and (3) A proper deed of assignment of the assets
and liabilities of the defunct corporation being conveyed to the new one may include,
among other things, the use of the corporate name of the former in case the latter desires
to do business under the old name, and should be attached to the articles of reincorporation. The deed of assignment should include or be accompanied by a detailed inventory
of the said assets and liabilities. (SEC Opinion, Nov. 21,1962.)

138

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 11

A corporation whose corporate life has expired may be reincorporated only by complying with the registration requirements under the Corporation Code, viz., filing of new articles
of incorporation and by-laws accompanied by supporting
documents required for registration. A corporation that has been
reincorporated after its original terms of existence has expired
does not automatically succeed to the assets of the original
corporation which is deemed dissolved in the absence of a
corporate liquidation under Section 222. (SEC Opinion No. 0633, Oct. 3, 2006.)
(3) Automatic extension of term. Section 11 allows the

automatic extension of the corporate existence by amendment


of the articles of incorporation within the five (5)-year period
before the expiration date of the existing term, during which the
Securities and Exchange Commission may look, if necessary, into
the financial structure of the corporation and its past operations
or actuations. (SEC Opinion, Dec. 18,1963.)
The Code places no limit to the number of extensions that
may be made.
Period of corporate existence a matter
of public interest.

The State has an obvious interest in the term of life of corporations, since the conferment of juridical capacity upon them
during such period is a privilege that is derived from statute. It
is obvious that no agreement between the stockholders or members can result in giving rise to a new and distinct personality,
possessing independent rights and obligations, unless the law
itself shall decree such result.
And the State is naturally interested that this privilege be
enjoyed only under the conditions and not beyond the period
that it sees fit to grant; and, particularly, that it be not abused
in fraud and to the detriment of other parties; for this reason,
it has been ruled that the limitation (of corporate existence) to
a definite period is an exercise of control in the interest of the
public. (Benguet Consolidated Mining Co. vs. Pineda, 98 Phil.
711 [1956], citing Smith vs. Eastwood Wire Manufacturing; Co.,
43 Atl. 568.)

Sec. 12

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

139

Sec. 12. Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code
shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for
by special law, and subject to the provisions of the following section, (n)
Capital stock r e q u i r e m e n t .

The Code does not set a minimum authorized capital stock


except as otherwise provided by special law as long as the paidup capital as required by Section 13 is not less than P5,000.00.
The old law has also no capital stock requirement. It merely requires that the articles of incorporation state the amount of the
corporation's capital stock.
13

A minimum capital stock requirement is considered arbitrary


and does not assure any practical protection to corporate creditors. Special laws may, however, require a higher paid-up capital,
as in the case of commercial banks, insurance companies, and
investment houses.
Filipino p e r c e n t a g e o w n e r s h i p requirement
regarding corporate capital.

By specific constitutional and legal provisions, Filipino ownership of a certain percentage of the capital stock or capital is
required in certain cases, such as:
(1) Corporations for exploration, development, and utilization of

natural resources. at least 60% of the capital of which is owned


by citizens of the Philippines. (Constitution of the Philippines,
Art. XII, Sec. 2.) The word "capital" in the above constitutional
provision should be understood to mean "outstanding capital
stock" in case of stock corporation;
(2) Public service corporations. at least 60% of the capital of

which is owned by citizens of the Philippines. The participation


of foreign investors in the governing body of any public utility
The Securities and Exchange Commission does not entertain any application for
incorporation or increase of capital stock where the par value per share is less than P0.01.
(SEC Bulletin, October 1982, p. 5.)
l3

THE CORPORATION CODE OF THE PHILIPPINES

140

Sec. 12

enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation must be Filipino citizens (Ibid., Art. XII, Sec. 11.);
(3) Educational corporations. other than those established
by religious orders and mission boards, at least 60% of the capital of which is owned by citizens of the Philippines. The control
and administration of educational institutions shall be vested in
Filipino citizens (Ibid., Art. XIV, Sec. 4[1].);
(4) Corporations engaged in mass media and advertising industry.

the first must be wholly (i.e., 100%) owned and managed


by Filipino citizens, while at least 70% of the capital stock of
the second must be owned by citizens of the Philippines. The
participation of foreign investors in the governing body of a
corporation engaged in the advertising industry shall be limited
to their proportionate share in the capital thereof, and all the
executive and managing officer of such corporation must be
Filipino citizens (Ibid., Art. XVI, Sec. 11.);
14

(5) Banking corporations. at least 60% of the capital stock of


any bank or banking institution which may be established after
the approval of the General Banking Act (July 24, 1948) shall be
owned by citizens of the Philippines (Rep. Act No. 377, Sec. 2.);
(6) Corporations engaged in retail trade. the capital of which

must be wholly owned by citizens of the Philippines (R.A. No.


1180, Sec. 1.);
(7) Rural banks. the capital stock of which must be fully
owned and held directly or indirectly by Filipino citizens or corporations, associations, or cooperatives qualified under Philippine laws to own or hold such capital stock (R.A. No. 7353, Sec.
4.);
(8) Corporations engaged in coastwise shipping. at least 60%

of the capital stock of which or of any interest in said capital is


totally owned by citizens of the Philippines (Pres. Decree No.
1464 [Tariff and Customs Code], Sec. 806.);
While a 60% Filipino/40% foreign-owned corporation may be considered a "Philippine National" (see Sec. 123.) for purposes of investment in another corporation, it is
not qualified to invest in business activities the ownership of which under the Constitution or other special laws is limited to Filipino citizens only. (SEC Opinion, June 18,1998.)
4

Sec. 13

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

141

(9) Financing companies. at least 60% of the capital stock

shall be owned by citizens of the Philippines (R.A. No. 5980, as


amended, Sec. 16.);
(10) Corporations engaged in the pawnshop business. at least

70% of the voting capital stock shall be owned by citizens of the


Philippines (Pres. Decree No. 114, Sec. 8.);
(11) Corporations engaged in the recruitment and placement of
workers, locally or overseas. at least 75% of the authorized and

voting capital stock is owned and controlled by Filipino citizens


(Pres. Decree No. 442 [Labor Code], as amended, Sec. 27.);
(12) Corporations engaged in the operation of a private detective,
watchman or security guard agencies. Must be 100% Filipino

owned (R.A. No. 5487, Sec. 4.); and


(13)

Under the Flag Law. In the purchase of articles for

the Government, preference shall be given to materials and


supplies produced, made, or manufactured in the Philippines,
and to domestic entities. The term "domestic entities" means any
citizen of the Philippines or any corporate body or commercial
company at least 75% of the capital of which is owned by citizens
of the Philippines. (C.A. No. 138, Sec. 1.)
Sec. 13. Amount of capital stock to be subscribed and paid
for purposes of incorporation. At least twenty-five percent
(25%) of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five percent (25%)
of the total subscription must be paid upon subscription,
the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by
the board of directors: Provided, however, That in no case
shall the paid-up capital be less than five thousand pesos
(P5.000.00). (n)
M i n i m u m subscription and paid-up
capital.

(1) Pre-incorporation. Section 13 requires that at least 25%


of the amount of the authorized capital stocks has been actually

THE CORPORATION CODE OF THE PHILIPPINES

142

Sec. 13

subscribed and that at least 25% of such subscription paid. In no


case shall the paid-up capital be less than P5,000.00. Violation of
the provision may subject the erring incorporators and/or directors for prosecution as provided under Section 144.
(a) The Commission, however, has the power to
require that the authorized capital stock to be not less than
a certain amount (e.g., P100,000.00) such that the 25% paidup capital will be more than P5,000.00. These requirements
are mandatory. Accordingly, if they are not complied with,
no stock corporation can be lawfully incorporated even if a
certificate of incorporation has been issued by the Securities
and Exchange Commission in good faith.
15

(b) The policy of the Commission is to require full payment of subscription by foreigners as it will be difficult to
compel them to pay their unpaid subscriptions when they
are outside the country unless they can give sufficient security to guarantee full payment. (SEC Opinion, Aug. 28,1989.)
(c) The number of shares subscribed, the amount subscribed, and the amount paid by each stockholder must be
stated in the articles of incorporation. (Sees. 14[8], 14[8th,
9th].)
(d) Special laws may require a higher paid-up capital. For
example, the minimum paid-up capital of insurance corporation is P5 million. (Pres. Decree No. 1460 [Insurance Code],

"If a corporation is organized and carries on business without substantial capital


in such a way that the corporation is likely to have no sufficient assets available to meet
its debts, it is inequitable that shareholders should set up such a flimsy organization to
escape personal liability. The attempt to do corporate business without providing any
sufficient basis of financial responsibility to creditors is an abuse of the separate entity
and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be
recognized as the policy of the law that shareholders should in good faith put at the risk
of the business unencumbered capital reasonably adequate for its prospective liabilities.
If capital is illusory or trifling compared with the business to be done and the risks of loss,
this is a ground for denying the separate entity privilege." (Keating, Judge [dissenting],
citing Ballantine, pp. 302-303, in Walkovszky vs. Carlton, 18 N.Y. 2d 414, 223 N.E. 2d 6.)
15

"An obvious inadequacy of capital, measured by the nature and magnitude of the
corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability . . . that rule has been invoked even in absence of
a legislative policy which undercapitalization would defeat." (Anderson vs. Abbot, 321
U.S. 349, 362-363.)

Sec. 13

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

143

Sec. 188.) A pawnshop established as a corporation must


have a paid-up capital of at least P100,000.00. (Pres. Decree
No. 114, Sec. 7.) A minimum paid-up capital of P50 million
is required for a financial intermediary applying (beginning
Aug. 22,1980.) for authority to perform quasi-banking functions. (Central Bank Cir. No. 757, dated Aug. 22,1980.)
(2) Post incorporation. The minimum 25% subscription and

25% paid-up capital is required not only during the incorporation period but also in case of increase of the authorized capital
stock. - (Sec. 38, par. 4.)
1

(a) The requirement is designed to give assurance to


the investing public dealing with the corporation that it is
financially and actually able to operate and undertake to do
business and meet its obligations as they arise from the start
of its operations. Accordingly, the 25% minimum paid-up
capital requirement would not apply to subsequent subscriptions to the unsubscribed shares of the corporation since the
evils or risks of insolvency against which the law intends to
safeguard the public no longer exist. (SEC Opinion, June 29,
1976.)
(b) The call by the board of directors for the payment of
the balance of subscriptions (see Sec. 67.) is required only
when there is no fixed date for payment in the contract of
subscription.
(c) It is not required for purposes of incorporation that
each and every subscriber shall pay 25% of his subscription.
The paid-up requirement is met as long as "25% of the total
subscription" is paid although some subscribers have paid
less than 25%, or even have not paid any amount.
It is the policy of the Securities and Exchange Commission to require full payment
of the subscription where the subscriber is a nonresident foreign individual. If full payment thereof cannot be made, any of the resident subscribers may, alone or jointly and
severally with other subscribers, undertake to pay the unpaid balance of the subscription
if the same is not paid upon call. (SEC Opinion, Nov. 14,1973.)
If female subscribers are married and the payments on their subscription consist of
conjugal funds, they must submit the written consent of their respective husbands. If the
subscription to the authorized capital stock exceeds 25% and the subscribers are more
than 15 persons, a request must be filed for exemption from registration under the Securities Act of the total issuance of shares. (SEC Bulletin, October 1982, p. 6.)
16

144

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 13

(d) It would seem that the minimum 25% paid-up requirement applies only to par value shares because a subscriber to
no par value shares must pay in full his subscription since
under Section 6 (par. 2.), "shares of capital stock issued
without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to
the corporation or to its creditors in respect thereto."
ILLUSTRATION:
Suppose it be desired that Corporation X be incorporated
with a capital stock of P100,000.00 divided into 1,000 shares
with a par value of P100.00 per share.
In such case, there must be subscribed 250 shares of the
par value of P25,000.00 which "shares represent twenty-five
percent (25%) of the authorized capital stock" and of the
subscription, there must be paid to the corporation "at least
twenty-five percent (25%)" thereof or P6,250.00 (paid-up
capital), in actual cash and/or property the fair valuation of
which equals P6,250.00. (see Sec. 14, last par.)
If the amount of the authorized capital stock is only
P75,000.00, the 25% subscription would be P18,750.00 and if
25% of the latter amount is paid, the paid-up capital would
only be P4,687.50. Section 13 requires that the paid-up capital
be not less than P5,000.00.
It is not required for purposes of incorporation that
each and every subscriber shall pay 25% of his subscription.
The paid-up requirement is met as long as "25% of the total
subscription" is paid although some subscribers have paid less
than 25%, or even have not paid any amount.
Computation of the 2 5 % subscription
requirement.
(1) Where the capital stock consists only of par value shares,
the minimum subscription should be 25% of the a m o u nt of the
authorized capital stock or 25% of the aggregate value of all the
shares of stock the corporation is authorized to issue.
In par value stock corporations, the percentage subscription
requirement shall always be based on the a m o u n t of the author-

Sec. 14

TITLE n. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

145

ized capital stock irrespective of the class, number, and par value
of the shares.
(2) Where the capital stock consists only of no par value shares,

the 25% requirement shall be computed on the basis of the entire


number of authorized shares. Corporations whose shares have
no par value have no authorized capital stock, (see Sec. ^ [ s e v enth].) The issued price of no par value shares need not be fixed
in the articles of incorporation, (see Sec. 62, last par.)
(3) Where the capital stock is divided into par value shares and

no par value shares, the requirement as to par value shares is as


indicated above and for the no par value shares, the 25% is based
on the number of said no par value shares.
Subscription of corporations.

(1) Domestic corporations. They may subscribe initially to


the capital stock of another proposed corporation but their subscriptions cannot be taken into consideration in the computation
of the 25% subscription and 25% paid-up capital requirement of
the law. The reason is because a corporation cannot become incorporators under Section 10. (SEC Opinion, May 23,1967.)
(2) Foreign corporations. Such corporations, whether resident (i.e., engaged in business in the Philippines) and nonresident, may subscribe to the stocks of domestic corporations as
long as they are authorized by their charters to hold shares in
other corporations. Their subscriptions shall not also be counted
in the computation of the minimum subscription and payment
requirements. (SEC Opinion, Nov. 14,1973.)
It is the policy of the Securities and Exchange Commission
to require corporations to pay their subscriptions in full. This is
based upon the fact that while a corporation has an unlimited
capacity to contract obligations, it has only a limited capacity to
pay. (SEC Opinion, May 23,1967.)
Sec. 14. Contents of articles of incorporation. All
corporations organized under this Code shall file with
the Securities and Exchange Commission articles of
incorporation In any of the official languages duly signed
and acknowledged by all of the incorporators, containing

146

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 14

substantially the following matters, except as otherwise


prescribed by this Code or by special law:
(1) The name of the corporation;
(2) The specific purpose or purposes for which the
corporation is being incorporated. Where a corporation
has more than one stated purpose, the articles of
incorporation shall state which is the primary purpose and
which is/are the secondary purpose or purposes; Provided,
That a nonstock corporation may not include a purpose
which would change or contradict its nature as such;
(3) The place where the principal office of the corporation is to be located, which must be within the Philippines;
(4) The term for which the corporation is to exist;
(5) The names, nationalities and residences of the
incorporators;
(6) The number of directors or trustees, which shall
not be less than five (5) nor more than fifteen (15);
(7) The names, nationalities and residences of the
persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified
in accordance with this Code;
(8) If it be a stock corporation, the amount of its
authorized capital stock in lawful money of the Philippines,
the number of shares into which it is divided, and in case
the shares are par value shares, the par value of each,
the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each
on his subscription, and if some or all of the shares are
without par value, such fact must be stated;
(9) If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of the
contributors and the amount contributed by each; and
(10) Such other matters as are not inconsistent with
law and which the incorporators may deem necessary and
convenient.
The Securities and Exchange Commission shall not
accept the articles of incorporation of any stock corporation
unless accompanied by a sworn statement of the Treasurer

. 15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

elected by the subscribers showing that at least twentyfive percent (25%) of the authorized capital stock of the
corporation has been subscribed, and at least twenty-five
percent (25%) of the total subscription has been fully paid
to him in actual cash and/or in property the fair valuation
of which is equal to at least twenty-five percent (25%) of
the said subscription, such paid-up capital being not less
than five thousand pesos (P5,000.00). (6a, 9a)
Sec. 15. Form of Articles of Incorporation. Unless
otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form:
ARTICLES OF INCORPORATION
OF
(Name of Corporation)

KNOW ALL MEN BY THESE PRESENTS:


The undersigned incorporators, all of legal age and a
majority of whom are residents of the Philippines, have
this day voluntarily agreed to form a (stock) (non-stock)
corporation under the laws of the Republic of the Philippines.
And we hereby certify:
FIRST: That the name of said corporation shall be

Inc. or
Corporation";
SECOND: That the purpose or purposes for which
such corporation is incorporated are (If there is more than
one purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is
located in the City/Municipality of
Province of
Philippines;
FOURTH: That the term for which the said corporation
is to exist is
years from and after the date
of issuance of the certificate of incorporation;

148

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 15

FIFTH: That the names, nationalities and residences of


the incorporators of the corporation are as follows:
Name

Nationality

Residence

SIXTH: That the number of directors or trustees of the


corporation shall be
; and the names,
nationalities and residences of the first directors or trustees of the corporation are as follows:
Name

Nationality

Residence

SEVENTH: That the authorized capital stock of the corporation is


(P.
) pesos in
lawful money of the Philippines, divided into
shares with the par value of
(P.
)
pesos per share.
(In case all the shares are without par value):
That the capital stock of the corporation is
shares without par value. (In case some shares have par
value and some are without par value): That the capital stock of said corporation consists of
shares of which
shares are of the par value of
(P) pesos each, and of which
shares are without par value.
EIGHTH: That at least twenty-five percent (25%) of the
authorized capital stock above stated has been subscribed
as follows:

15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

Name of
Subscriber

Nationality

No. of
Shares
Subscribed

Amount
Subscribed

NINTH: That the above-named subscribers have paid


at least twenty-five percent (25%) of the total subscription
as follows:
Name of
Subscriber

Amount
Subscribed

Total Paid-in

(Modify Nos. 8 and 9 if shares are with no par value. In


case the corporation is non-stock, Nos. 7, 8 and 9 of the
above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money
contributed or donated by specified persons, stating the
names, nationalities and residences of the contributors or
donors and the respective amount given by each.)
TENTH: That
has been
elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and
qualified in accordance with the by-laws, and that as such
Treasurer, he has been authorized to receive for and in the
name and for the benefit of the corporation, all subscriptions (or fees) or contributions or donations paid or given
by the subscribers or members.
ELEVENTH: Corporations which will engage in any
business or activity reserved for Filipino citizens shall provide the following:
"No transfer of stock or interest which will reduce the
ownership of Filipino citizens to less than the required

150

Sec. 15

THE CORPORATION CODE OF THE PHILIPPINES

percentage of the capital stock as provided by existing


laws shall be allowed or permitted to be recorded in the
proper books of the corporation and this restriction shall
be indicated in all the stock certificates issued by the
corporation."
IN WITNESS WHEREOF, we have hereunto signed
these Articles of Incorporation, this
day of
19
in the City/Municipality of
Province
of
Republic of the Philippines.

(Names and signatures of the incorporators)


Signed in the presence of:

(Notarial Acknowledgment)
TREASURER'S AFFIDAVIT

REPUBLIC OF THE PHILIPPINES)


CITY/MUNICIPALITY OF

)S.S.

PROVINCE OF
I,
duly sworn, depose and say:

, being

That I have been elected by the subscribers of the


corporation as Treasurer thereof, to act as such until
my successor has been duly elected and qualified in
accordance with the by-laws of the corporation, and that
as such Treasurer, I hereby certify under oath that at least
25% of the authorized capital stock of the corporation has
been subscribed and at least 25% of the total subscription
has been paid, and received by me, in cash or property, in
the amount of not less than P5.000.00, in accordance with
the Corporation Code.
(Signature of Treasurer)

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

151

Subscribed and sworn to before me, a Notary Public, for and in the City/Municipality of
Province of
this
day of
"!"l9"!"!!j
by
with Res. Cert. No
issued
at
on
19
NOTARY PUBLIC
My commission expires on
19
Doc. No
Page No
Book No
Series of 19.
(7a)

Meaning of articles of incorporation.


The articles of incorporation is the document prepared by the
persons establishing a corporation and filed with the Securities
and Exchange Commission containing the matters required by
the Code.
It has been described as one that defines the charter of the
corporation and the contractual relationships between the State
and the corporation, the stockholders and the State, and between
the corporation and the stockholders. (Government of the Phil.
Islands vs. Manila Railroad Co., 52 Phil. 699 [1929].)
A copy of the articles filed which is returned with the certificate
of incorporation issued by the Commission under its official seal
becomes its corporate charter enabling the corporation to exist
and function as such, (see Sec. 19.)
7

A corporation created by special law (see Sec. 4.) has no


articles of incorporation.
"The special law creating a government-owned or -controlled corporation (see Sec.
4.) is often referred to as "charter." The older word, charter, at one time referred to an
individual statute that through the first quarter of the 19th century was the only device
employed by American State Legislatures for permitting the establishment of a private
corporation. The corporation laws of the United States and foreign countries alike now
provide for the creation and licensing of a business corporation by action of administrative authorities. (E.L. Kohler, op. cit., p. 36.)

152

THE CORPORATION CODE OF THE PHILIPPINES

Sees. 14-15

Contents and form of articles of incorporation.

(1) Section 14 enumerates the matters (mandatory provisions) that must be stated in the articles of incorporation of domestic corporations, except as otherwise prescribed by the Code
or by special law.
(a) The incorporators may include such other matters
as are not inconsistent with law and which they may deem
necessary and convenient (No. 10.), such as the classes of
shares which the corporation may issue (Sec. 6.), provisions
on preemptive right (Sec. 39.), etc.
(b) The contents of the articles of incorporation may be
held valid as an agreement between the parties thereto, even
though the validity of such may be subject to question. (18
Am. Jur. 2d 585.)
(c) Under the last paragraph, the Securities and Exchange
Commission shall not accept the articles of incorporation
of any stock corporation unless accompanied by a sworn
statement of the treasurer elected by the subscribers showing
compliance with the requirement as to the niinimum amount
of the subscribed and paid-up capital stock.
(d) The articles of incorporations may provide other
matters or items (optional provisions) as long as they are not
contrary to any provision of the Code or special law.
(2) On the other hand, Section 15 provides the form of the
articles of incorporation of all domestic corporations, unless
otherwise prescribed by special law.
(a) It must include the affidavit of the treasurer of
the corporation concerning the amount of capital stock
subscribed and paid. The matter required to be stated by
Section 14(8) is the actual "amount subscribed and paid" by
each subscriber on his subscription. It is not to be confused
with the matter required to be certified in the affidavit of the
treasurer, i.e., that at least 25% of the authorized capital stock
has been subscribed and at least 25% of the total subscription
has been paid.
The Securities and Exchange Commission may reject
the articles of incorporation or any amendment thereto if

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

153

the same is not substantially in accordance with the forms


prescribed above (see Sec. 17[1].), or the treasurer's affidavit
is false, (see Sec. 17[3].)
(b) The articles of incorporation must be written in any
of the official languages, i.e., English or Filipino duly signed
and acknowledged by all of the incorporators. It is, therefore,
a public instrument.
18

(c) While under the Corporation Code, there is no


general requirement of Philippine citizenship, there are some
areas of business and industry where ownership is reserved,
wholly or partially, in favor of Filipino citizens by virtue of
the Constitution and special laws. In order to safeguard the
interest of transferees of stock who may not be aware of the
citizenship requirement and in order to secure compliance
with the limitation on alien ownership, Section 15(11) requires
the articles of incorporation to provide the restriction stated.
Such restriction serves as notice to all persons who may be
dealing with the stock of the corporation, and is intended
to deter the issue or transfer of shares in favor of aliens in
violation thereof. (SEC Opinion, Aug. 14,1990.)
An incorporator may delegate to an attorney-in-fact the signing of the articles of incorporation in a special power of attorney
to such effect. However, the acknowledgment (see Sec. 15.) must
reflect this fact so that the same must be prepared in the following tenor: "x x x, that Mr. A (agent) is signing for and in behalf of
B (incorporator) as his attorney-in-fact after due presentation of
his power of attorney." (SEC Opinion, Dec. 26, 1972.)

The Constitution provides that "the official languages of the Philippines are Filipino and until otherwise provided by law, English." (Art. XIV, Sec. 7 thereof.) Under
Presidential Decree No. 155 (issued March 15, 1973), however, it is provided that "the
Spanish language shall continue to be recognized as an official language in the Philippines while important documents in government files are in the Spanish language and
not translated either in English or Filipino." This will make Spanish an official language
for an indefinite length of time, for nobody can know when these "important documents"
will be translated in English or Filipino. It is clear from the Constitution that Spanish is
no longer an official language.
18

154

THE CORPORATION CODE OF THE PHILIPPINES

Sees. 14-15

Filing of the articles of incorporation.


(1) Actual filing or registration with SEC required. The mere

recording of the articles of incorporation without the intention


or the fact of allowing the same to remain in the office of the
Securities and Exchange Commission is not a sufficient filing to
complete the organization of the corporation or vest it with corporate powers. Literal filing of the papers is necessary because it
is so written in the law. The term "filing" and the verb "to file,"
as related to this subject, include the idea that the papers are to
remain in their proper order on file in said office. (18 Am. Jur. 2d
586.)
(2) Rule where corporation created by special law. A corpora-

tion created by special law or charter does not have to file with
the Securities and Exchange Commission its articles of incorporation and by-laws since the grantee of such a special charter
draws its life not from compliance with a general law, but from a
direct act of Congress. (SEC Opinion, May 28,1970.)
(3) Rule with respect to a joint venture. The Commission has

ruled that two or more corporations may enter into a joint venture
through a contract if the nature of the venture is in line with the
business authorized by their charters, which contract need not be
registered with it, provided that the joint venture will not result
in the formation of a new partnership or corporation. However,
if the parties to the agreement want the joint venture to be treated
as a separate entity or have a separate personality because they
intend to secure for the joint venture project a TIN (Taxpayer's
Identification Number) of its own from the BIR, registration with
the SEC is necessary in order to have a legal personality to obtain
a separate TIN. (SEC Opinion, March 30,1995.)
Power of Securities a n d E x c h a n g e C o m m i s s i o n
to reject articles of incorporation.
(1) Compliance with statute. The duty of the Securities and

Exchange Commission, on presentation of articles of incorporation and tender of proper fees, to file the articles, and to issue a
certificate of incorporation, is controlled by the provisions of the
statute. If the articles of incorporation substantially comply with
the statute, the Commission has no discretion, but may be com-

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

155

pelled by mandamus to file them. The discretion to be exercised


by the Commission does not extend to the merits of an application for incorporation, although it may be exercised as to matters
of form. On the other hand, it is under no duty to file articles of
incorporation not entitled to be filed for any reason, and hence, it
will not be compelled by mandamus to act in such a case.
Stated in another way, the duty of the Securities and Exchange
Commission to file and record incorporation papers exists
only when they are in the form in compliance with the statute.
Furthermore, it should refuse to file for record incorporation
papers not complying with the statute.
(2) Truthfulness of matters stated. Generally, the officer

concerned has no discretionary power to look beyond the face


of the incorporation papers and to determine from matters
outside of such papers whether or not to file the papers. He
cannot consider extraneous matters. Thus, he is not required
to make inquiry outside the articles of incorporation filed with
him, to determine whether the matters stated therein are in
fact true, or whether all conditions precedent have in fact been
performed. Ordinarily, if the association has complied with all
the pre-requisite requirements, and its purpose is a lawful and
authorized one, conditions cannot be imposed on granting the
certificate, (see 1 Fletcher, pp. 511-515; see also 14 C.J. 147-148.)
19

In fine, although the Securities and Exchange Commission


must exercise some judgment in the performance of its duty to
determine whether articles of incorporation are in the proper
form and entitled to be filed, it is not clothed with judicial discretion or arbitrary power. (18 Am. Jur. 2d 587.)
(3) Lawfulness of object or purpose. But simply because the

duties of the Commission happen to be ministerial, it does not


"Exception: In order to effectively exercise its jurisdiction over all corporations, partnerships, and other forms of associations, the Securities and Exchange Commission is
given the power "to pass upon, refuse or deny after consultation with the Board of Investments, Department of Industry (now Department of Trade and Industry), National
Economic and Development Authority or any other appropriate government agency, the
application for registration of any corporation, partnership or association or any form of
organization falling within its jurisdiction, if their establishment, organization or operation will not be consistent with the declared national policies." (Pres. Decree No. 902-A,
Sec. 6[k].)

THE CORPORATION CODE OF THE PHILIPPINES

156

Sees. 14-15

necessarily follow that it has no authority to pass upon the lawfulness of the object or purpose of the corporation as expressed
in the articles of incorporation. (Asuncion vs. De Yriarte, 28 Phil.
67 [1914].) Its duties are ministerial and it has no authority to
exercise discretion in receiving and registering articles of incorporation, but it may exercise judgment, that is, the judicial function, in the determination of the question of law whether or not
the objects of a proposed corporation are lawful. If it errs in the
determination of the question and refuses to file the articles of
incorporation, its decision is subject to review and correction by
the court. (Asuncion vs. De Yriarte, supra.)
Name of the corporation.

(1) Importance. The corporation acquires juridical personality under the name stated in the certificate of incorporation.
(Sec. 18.) A corporation has the power of succession by its corporate name. (Sec. 36[2].) It is the name of the corporation which
identifies and distinguishes it from other corporations, firms or
entities in the same manner as the name of an individual designates the person and distinguishes him from other persons. By
its name, a corporation is authorized to transact business.
20

The name of a corporation is, therefore, peculiarly essential


to its existence and to its identity.
(2) Nature. A corporate name is regarded as of the nature
of a trademark even though composed of individual names, and
its simulation may be restrained. After adoption, it follows the
corporation. (9-A Words and Phrases 391-392; see Sec. 18.)
A corporation's right to use its corporate and trade name is
a property right, a right in rem which it may assert and protect
against the whole world in the same manner as it may protect
its tangible property against trespass or conversion. It cannot be
impaired or defeated by subsequent appropriation by another
corporation in the same field. (Philips Export B.V. vs. Court of
Appeals, 206 SCRA 457 [1992].)
A corporation need not register with the Department of Trade and Industry (DTI)
if it does not have the intention to use another business name other than the corporate
name registered with the Securities and Exchange Commission. (SEC Opinion No. 04-21,
April 2, 2004.)
20

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

157

(3) Part of name. It is customary to use as part of the name


the word "corporation" or "incorporated" or an abbreviation of
either of them to distinguish it from a partnership and other
business organizations. But the character of a corporation is not
necessarily controlled by its name.
11

22

P u r p o s e or p u r p o s e s of t h e corporation .

The clause in the articles of incorporation which states the


specific purpose or purposes for which the corporation is being
incorporated is called the purpose clause. The Code allows corporations to have more than one stated purpose.
(1) The statement of the purpose or purposes operates as
an authorization to the management to enter into contracts and
transactions which may be considered as included within or incidental to the attainment of said purposes. It also imposes implied
limitations on the powers of the corporation by the exclusion of
lines of activity which are not covered.
23

(2) Where the purpose clause of the articles of incorporation


embodies a variety of different purposes, the corporation may be
allowed to have separate "modus operandi" for each of the stated
corporate purposes. (SEC Opinion, Sept. 9,1993.)
(3) There is no legal need to repeat in the articles of incorporation the powers granted by the law upon the corporation.
(Ballantine, p. 55 [1946 ed.].)
(4) A non-stock corporation may not include a purpose
which would change or contradict its nature as such. Section 88
enumerates the allowable purposes for which a non-stock corporation may be organized.

A person doing business in his personal capacity cannot use the word "corporation"; otherwise, he may be held criminally liable under Article 315(2, a) of the Revised
Penal Code if another person was deceived and defrauded. (SEC Opinion, Jan. 5, 1976.)
^"If the proposed name contains a word similar to a word already used as part of
the firm name of a registered company, the proposed name must contain two other words
different from the name of the company already registered." (see Letter [c], SEC Guidelines in the Approval of Corporate and Partnership Names.)
"DE LEON, The Corporation Code of the Philippines Annotated, 1989 ed., p. 120,
cited by the Supreme Court in Philippines Statehood U.S.A., Inc. vs. Securities and Exchange Commission, L-82493, Jan. 24, 1990.
21

158

THE CORPORATION CODE OF THE PHILIPPINES

Sees. 14-15

Purpose or purposes must be lawful.


(1) Effect in case unlawful. A corporation may be organized

only for "any lawful purpose or purposes." (see Sec. 10.) A


corporation the primary object of which is without statutory
authority can have no lawful existence, even though some
of its declared purposes may be lawful. (13 Am. Jur. 2d 580.)
"That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government
rules and regulations" is one of the grounds for the rejection or
disapproval by the Securities and Exchange Commission of the
articles of incorporation. (Sec. 17[2].)
(a) A corporation was held incorporated for an illegal
purpose, where the object of the incorporators is to organize
a pueblo or barrio in a municipality into a separate corporation

because it seeks to deprive the municipality in which the


pueblo or barrio is situated of its property and its citizens
of the right of enjoying the same and would, if permitted,
disrupt and destroy the government of municipalities of the
country and abrogate the laws relating to the formation and
government of municipalities. (Asuncion vs. De Yriarte, 28
Phil. 67 [1914].)
(b) Where the number one purpose of the proposed corporation as contained in its articles of incorporation is "to
study the possibility of the Philippines becoming a member.
. . of the American Union and, for this purpose, to undertake
surveys, polls, researches and hold seminars, and publish
and disseminate the results of these undertakings by way
of helping promote and enhance the incorporation of the Philip-

pines as an American State...," this portion of the purpose for


registration was held objectionable because the intention to
promote the statehood of the Philippines "shall adversely affect the independence and sovereignty of the country." The
denial of registration is not violative of the freedom of association and expression guaranteed under the Constitution
which freedom can be exercised without a group of individuals incorporating themselves to acquire juridical personality.
But the purpose to conduct a study, survey, research
and subsequently publish or disseminate the results there-

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

159

of as a corporation is not objectionable. (Philippines Statehood U.S.A., Inc. vs. Securities and Exchange Commission,
L-82493, Jan. 24,1990.)
(2) Where powers merely unauthorized by law. In authoriz-

ing the formation of corporations for "any lawful purpose," the


word "unlawful," as applied in this connection, is not used by
the Code exclusively in the sense of malum in se or malum prohi-

bitum. It is also used to designate powers which corporations are


not authorized to exercise, or contracts which they are not authorized to make, or acts which they are not authorized to do in
other words, such acts, powers, and contracts as are ultra vires.
(18 Am. Jur. 2d 582; see Sec. 45.)
Thus, a corporation cannot be formed for the practice of law,
medicine, or other learned professions in the absence of express

authority in the corporation law. (1 Fletcher, p. 339.) In the


Philippines, there is no legislation authorizing the formation
of professional corporations. The practice of a profession is
not a business and is open only to persons with the necessary
qualifications. In corporations, the profit motive is the principal
factor.
Human personal qualifications for such learned
professions cannot be possessed by a corporation which has a
distinct and separate personality from the individual stockholders
or members. Thus, it cannot have the power to obtain a license
which only the individual stockholders or members can obtain. As
a corporation cannot carry on the work of learned professionals,
it cannot indirectly do so, by employing, say, lawyers to practice
for it.
24

25

To accommodate professionals, most States in the United States have enacted professional incorporation laws that give lawyers, accountants, doctors, and other professionals the right to practice their profession through a corporation. Under the proposed
American Bar Association Model Professional Corporation Act (MPCA), the professional
corporation may practice only one profession and may not mix professional services with
non-professional services and only licensed professionals may perform the services of the
corporation. Non-licensed employees of the corporation may not assume a position of
control over the acts of licensed professionals when they perform their services to clients.
" x x x Congress has not adopted a unanimous position on the matter of prohibition
on indirect practice of optometry by corporations, specifically on the hiring and employment of licensed optometrists by optical corporations. It is clear that Congress left the resolution of such issue for judicial determination, and it is therefore proper for this Court to
resolve the issue, x x x In analogy, it is noteworthy that private hospitals are maintained
by corporations incorporated for the purpose of furnishing medical and surgical treatment. In the course of providing such treatments, these corporations employ physicians,
24

160

THE CORPORATION CODE OF THE PHILIPPINES

Sees. 14-15

The law, however, permits the formation of a partnership for


the exercise of a profession (Arts. 1767, 1783, Civil Code.) for in
such case, it is the individual partner and not the partnership
firm who exercises the profession and is responsible for his acts
as such.
(3) Determination of question of lawfulness. As a general rule,

the question as to whether the purposes for which a given corporation has been formed are lawful is to be determined by the
description of those purposes as stated in the articles of incorporation.
(a) A corporation is not illegal unless it is shown that the
end it has in view is illegal, or the means by which it proposes to attain that end are illegal.
(b) If, as expressed on the face of the instrument of incorporation, the purpose for which the corporation is formed is
not necessarily unlawful, it will be presumed that it was for
a purpose for which a corporation might lawfully be formed;
and this presumption holds in case of a foreign corporation.
(c) Where the object of a corporation as expressed in the
articles of incorporation is not illegal, the fact that such corporation afterwards entered upon illegal projects does not
make it an illegal corporation and such illegal acts cannot be
urged as a defense, in an action to recover unpaid subscription to the capital stock. (14 C.J.S. 427-428.)
(4) Inquiry into purposes other than those stated. The

best proof of the purpose of a corporation is its articles of


incorporation (supra.) and by-laws, (see Sec. 46.) The articles of
incorporation must state the primary and secondary purposes
of the corporation, while the by-laws outline the administrative
organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purposes. If the

surgeons and medical practitioners, in the same way that in the course of manufacturing
and selling eyeglasses, eye frames and optical lenses, optical shops hire licensed optometrists to examine, prescribe and dispense ophthalmic lenses. No one has ever charged
that these corporations are engaged in the practice of medicine. There is indeed no valid
basis for treating corporations engaged in the business of running optical shops differently." (Acebedo Optical Company vs. Court of Appeals, 329 SCRA 314 [2000].)

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

161

corporate purpose as stated in the articles of incorporation is


lawful, then the SEC has no authority to inquire whether the
corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation. (Gala
vs. Ellice Agro-Industrial Corp., 418 SCRA 431 [2003].)
Purpose or purposes must be stated
with sufficient clarity.
(1) May be stated in broad terms. The purpose or purposes stated in the articles of incorporation need not set out with
particularity the multitude of activities in which the corporation
may engage. The effect of broad purposes or objects is to confer
wide discretionary authority upon the directors and management of the corporation as to the kinds of business in which it
may engage. Dealings which are entirely irrelevant to the purposes are unauthorized and called ultra vires, (see Sec. 45.) It is,
therefore, important that the corporation's purposes be specified
in the articles of incorporation with sufficient clarity to define
with certainty the scope of its business.
However, the articles of incorporation of a manufacturing
corporation need not state the particular kind of manufacturing
in which it is proposed to engage, unless it is required by statute.
And in forming a charitable corporation, it is not necessary to
specify with exactness who are to be the ultimate recipients of
the charity, (see 1 Fletcher, pp. 372-386, 400-406; 14 C.J.S. 435436.)
(2) May not be indefinitely stated. While the purposes
may be stated in broad and general terms, they should not be
so stated ^definitely; otherwise, the articles of incorporation
may be rejected. Thus, an articles of incorporation authorizing
the corporation "to carry on any lawful business or purpose" (1
Fletcher, p. 367.) or one, after stating certain distinct purposes,
adding "and for such other purposes as may be agreed upon
by the corporation in the future," will be rejected because the
purpose or purposes are not definitely stated. (In re Chapter of
Journalists Fund of Philadelphia, 8 Pa. 272.)
It is not also sufficient to state that the purpose is to carry
on any business which may be deemed profitable. Such all-

Sees. 14-15

THE CORPORATION CODE OF THE PHILIPPINES

162

embracing proviso cannot be stretched to include purposes


not incidental, implied or necessary for the furtherance of the
purposes stated in the articles of incorporation.
Primary purpose must be stated.

The purposes for which a corporation is organized, where


it has more than one stated purpose, shall state which is the
primary or main purpose and which is/are the secondary or
subsidiary purpose or purposes. (Sec. 14[2].) The main purpose
must be specified. The law allows a corporation to have secondary
purposes because the primary purpose may not turn out to be
profitable, and in such case, all it has to do is invest its funds
in any such purposes instead of organizing a new corporation.
Evidently, a corporation may have only one primary purpose.
Under Section 42, a corporation is prohibited from investing
its funds "for any purpose other than the primary purpose for
which it was organized" unless it is approved by both its board
of directors or trustees and its stockholders or members. No such
disclosure is required in the case of a partnership. (SEC Opinion,
March 28,1985.)
Purposes m u s t be c a p a b l e of being
lawfully c o m b i n e d .

Although Section 10 allows the formation of corporations


"for any lawful purpose or purposes," the purposes, where there
are more than one, must be capable of being lawfully combined.
Thus, banks which are governed by the General Banking
Law (R.A. No. 8791.) are prohibited from directly engaging in
insurance business as the insurer. (Sec. 54 thereof.) Similarly,
26

The Act prohibits banks from engaging as principals in the insurance business or
through fully-owned subsidiaries but not investing in insurance companies themselves.
The Monetary Board of the BSP has classified investments in insurance companies as
investments in allied undertakings, allowing universal banks to increase their equity participation in these firms up to 51%. Through "bancassurance," an insurer utilizes bank
branches to distribute insurance policies. Presently, the BSP allows banks to sell insurance product at their branches. To comply with the ownership rules, a major insurance
company may set-up a subsidiary and sells 5% equity to a bank. Under present rules,
only commercial and universal banks are authorized to enter into a bank assurance tie-up
with insurers.
2<

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

163

insurance companies which are governed by the Insurance Code


(Pres. Decree No. 1460.) are not allowed to engage in banking
operations. The business of banking or insurance or other forms
of business affected with a public interest must be had pursuant
to the general laws applicable to those particular classes of
business. The manifest purpose of excepting such corporations
from the general incorporation law is that they should be
restrained by strict requirements securing the safe conduct and
correct administration of their affairs. (18 Am. Jur. 2d 580.)
Subject to the limitation mentioned, the secondary purposes need not be allied to each other or to the primary purpose provided they are not contrary to law. But a non-stock
corporation, including educational and religious corporations,
may not include a purpose which would change or contradict its
nature as such (Sec. 14[2]; see Titles XI, XIII.), although it may be
organized for any combination of purposes mentioned in Section
88. The Securities and Exchange Commission may reject the
articles of incorporation of a non-stock corporation if its purpose
is to engage in election campaign or partisan political activity.
(SEC Opinion, April 10,1983.)
R e a s o n s for s t a t e m e n t of p u r p o s e
or p u r p o s e s .

"The law requires the statement of the purpose or the purposes for which a corporation is formed in order that:
(1) A person who intends to invest his money in the business
corporation will know where and in what kind of business or
activity his money will be invested;
(2) The directors and the officers of the corporation will
know within what scope of business they are authorized to act;
and lastly;
(3) A third person who has dealings with the corporation
may know by perusal of the articles whether the transaction or
dealing he has with the corporation is within the authority of the
corporation or not.
In other words, the main reason for stating the purpose of
the corporation is to deteirnine whether the acts performed by

164

THE CORPORATION CODE OF THE PHILIPPINES

Sees. 14-15

the corporation are authorized or beyond its powers. In the latter


case, they will be known as ultra vires acts." (C.G. Alvendia, op.
cit., p. 80.) Thus, the purpose clause of the articles of incorporation indicates the extent as well as the limitations of the powers
which a corporation may exercise, (see Sees. 2, 36[11], 45.)
Effect where primary purpose/secondary
purposes unauthorized.

(1) If the primary purpose of the corporation as stated in the


articles of incorporation is an unauthorized one, the corporation
has no legal existence even though other secondary lawful purposes are included.
(2) If, on the other hand, a principal lawful purpose is specified, but the articles or certificate assumes for the corporation the
existence of powers which it is not permitted to exercise, then
this additional and unauthorized assumption may be treated as
surplusage and the corporation regarded as entitled to exercise
the lawful powers only. (18 Am. Jur. 2d 585.)
Effect w h e r e corporation e n g a g e s in its s e c o n d a r y
instead of its primary p u r p o s e .

Generally, the primary purpose of a corporation as indicated


in the articles of incorporation determines its classification.
However, where the corporation actually engages in one of
its secondary purposes instead of its primary purpose, the same
may be classified in accordance with said secondary purpose.
Thus, a corporation organized for the primary purpose of engaging in mining and whose secondary purpose is agriculture is a
mining corporation. In case such corporation engages in agriculture instead of mining, the same may be classified as organized
for the purpose of engaging in agriculture. (SEC Opinions, Nov.
8,1972 and March 22,1974.)
Place w h e re principal office
of corporation located.
(1) City or municipality within the Philippines. The articles

of incorporation must state the "place where the principal office

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

165

of the corporation is to be established or located, which place


must be within the Philippines." (Sec. 14[3].) The purpose of the
requirement is to fix the residence of a corporation in a definite
place, instead of allowing it to be ambulatory (Young Auto Supply Co. vs. Court of Appeals, 223 SCRA 670 [1993].) for effective
regulation and supervision of the corporation. The place to be
designated is the city or municipality (not merely the province)
where the principal office is to be located.
It is now required by the Securities and Exchange Commission that all corporations and partnerships applying for registration should state in their Articles of Incorporation or Articles
of Partnership the "(i) specific address of their principal office,
which shall include, if feasible, the strict number, street name,
barangay, city or municipality; and (ii) specific residence address
of each incorporator, stockholder, director, trustee, or partner,"
in line with the "full disclosure" requirement of existing laws.
"Metro Manila" is no longer allowed as address of the principal
office. (SEC Circ. No. 3, Series of 2006.)
(2) Place where its books and records are ordinarily kept and meet-

ings held. The "place of the principal office" does not necessarily mean the place where the business of the corporation is
transacted but the place where its books and records are ordinarily kept and its officers usually meet for the purpose of managing the affairs and transacting the business of the corporation. (1
Fletcher, p. 478, citing Harris vs. McGregor, 20 Cal. 124; Sec. 74.)
Therefore, the principal office may be located at one place and
the place of business at another.
(3) Residence at place where its principal office is located. A

corporation has no residence in the same sense in which this


term is applied to a natural person. But for practical purposes,
a corporation is in a metaphysical sense a resident of the place
where its principal office is located as stated in its articles of incorporation (Ibid.; Cohen vs. Benguet Commercial Co., Ltd., 34
Phil. 526 [1916]; Clavecilla Radio System vs. Antillon, 19 SCRA
379 [1967].) filed with the Securities and Exchange Commission.
The place where the principal office of the corporation is located
determines its residence and the venue in an action by or against
it.

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Sees. 14-15

A corporation has only one residence at a time. The fact that


it maintains branch offices in some parts of the country does
not mean it can be sued in any of these places, for to allow such
action to be instituted would create confusion and work untold
inconvenience to the corporation. (Clavecilla Radio System vs.
Antillon, supra.) By the same token, a corporation cannot be
allowed to file personal actions in a place other than its principal
place of business unless such place is also the residence of a coplaintiff or a defendant. (Young Auto Supply Co. vs. Court of
Appeals, supra.)

(4) Change of address. In case of change of address involving a change of city or municipality, an amended articles of
incorporation stating the new address must be filed with the
Securities and Exchange Commission. (Sec. 16.) If the new
address is located within the same city or municipality, no
corporate document is required to be filed with the Securities
and Exchange Commission except a notice regarding the change
of address. (SEC Opinion, Feb. 16,1973.)
Incorporating directors or t r u s t e e s .

The incorporating directors or trustees are those chosen by


the incorporators (Sec. 5.) and named in the articles of incorporation. The term "trustees" is used to refer to members of the board
of a non-stock corporation.
(1) Matters to be specified in articles of incorporation. The

articles of incorporation must specify the names, nationalities,


and residences of the incorporators and must show that at least
a majority of the incorporators are residents of the Philippines.
(Sees. 14[15], 10, 23, par. 2.) The statement of the nationalities of
the incorporators will enable the Securities and Exchange Commission to determine prima facie compliance with constitutional
or legal requirements regarding ownership by Filipino citizens
of certain percentage of the capital stock of certain corporations.
It is also necessary that the articles of incorporation specify the
names, nationalities, and residences of the persons who will be
the first directors or trustees of the corporation, (see Sec. 6, par. 4;
Sec. 14[5, 7]; Sec. 15[4th, 5th, 11th]; Sec. 17[4].)

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

167

(2) Number. Under Section 14(6), the number of the incorporating directors or trustees is determined by the incorporators
but such number "shall not be less than five (5) nor more than the
fifteen (15)." (see Sec. 10.) Section 92, however, provides that the
board of trustees of a non-stock corporation "may be more than
fifteen (15) in number as may be fixed in their articles of incorporation or by-laws." There is an irreconcilable conflict between
the two (2) provisions. Being the subsequent provision, Section
92 must prevail on the theory that it is the latest expression of the
legislative will.
(3) Term of office. The incorporating directors or trustees
shall hold office until their successors are duly elected and qualified. (Ibid., [7].) They are intended to be replaced by the regularly
elected directors or trustees (see Sec. 24.) who shall hold office
for one (1) year (Sees. 23,24.), when the corporation is organized
by the adoption of by-laws (see Sec. 46.) at the first meeting of
stockholders or members, (see Sec. 50.)
(4) Subscribers to stock. Under Section 23 (par. 2.), "every
director must own at least one (1) share of the capital stock of the
corporation of which he is director." This requirement applies to
the directors elected after incorporation, as well as to incorporating directors who must "be a subscriber to at least one (1) share
of the capital stock of the corporation." (see Sec. 10.) It follows
that in a stock corporation, there must be at least five (5) stockholders.
Capital stock/capital an d subscribers/
contributors.
(1) Stock corporations. The articles of incorporation of a

stock corporation under Section 14(8) must state the following:


(a) The amount of its authorized capital stock in pesos;

27

(b) The number of shares into which it is divided;


^ . S . dollars representing the payment on subscription of a proposed corporation
should be duly converted in Philippine peso so that the same may be treated as "cash;"
otherwise, the U.S. dollars shall be considered payment by way of property, in which
event the payment shall be subject to the requirements of Section 62. (SEC Opinion, July
28,1986.)

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Sees. 14-15

(c) The par value in pesos of each share;


(d) The names, nationalities, and residences of the original subscribers;
(e) The amount of capital stock subscribed and paid by
each on his subscription; and
(f) If some or all of the shares are without par value, such
fact.
(2) Non-stock corporations. If the corporation is a non-stock

corporation, the articles of incorporation must state:


(a) The amount of its capital or money contributed or
donated by specified persons;
(b) The names, nationalities, and residences of the donors
or contributors; and
(c) The respective amount contributed by each. (Sec.
14[9].)
W h e r e shares with par value.

Where the shares issued by a corporation have only one


par value, the authorized capital stock would be the number of
shares multiplied by the par value. If a corporation is authorized
to issue different classes of shares with different par values, the
authorized capital stock would be the total of the products of
the number of shares in each class multiplied by the par value of
such class of shares.
Thus, where the number of shares authorized to be issued
is 1,000,000 with a par value of PI .00 per share, the authorized
capital stock is P1,000,000.00. If, for example, 600,000 of the
shares are classified into Class "A" with a par value of PI.00 and
400,000 of the shares, into Class " B " with a par value of PI.50, the
authorized capital stock is Pl,200,000.00, the total of the products
of 600,000 multiplied by PI.00, or P600,000.00, and of 400,000
multiplied by PI.50, or P600,000.00.
W h e r e shares without par value.

In case the capital stock consists of shares without par value,


the articles of incorporation need only state such fact, together

Sees. 14-15

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

169

with the number of shares into which said capital stock is divided.
If the shares have par value, the amount of the authorized
capital stock in pesos is specified in the articles, but if they
have no par value, no amount of capital stock is specified in the
articles which need only state the number of shares into which
said capital stock is divided, (see Sec. 14[seventh].) The reason is
that the price of no par value shares vary from time to time (see
Sec. 62, last par.) and, therefore, the total amount of the capital
stock cannot be known until all the shares are issued.
W h e r e s h a r e s with par v a l u e
a n d w i t h o u t par v a l u e .

In case some of the shares of the capital stock have par value
and some are without par value, the articles of incorporation
must state such fact, the number of shares into which the capital
stock is divided, the number of shares with par value and their
par value, and the number of shares without par value. (Sec.
15[seventh].)
W h e r e b u s i n e s s o f corporation reserved
for Filipino citizens.

Corporations which will engage in any business or activity


reserved for Filipino citizens shall provide in their articles of
incorporation the restriction against the "transfer of stock or
interest which will reduce the ownership of Filipino citizens to
less than the required percentage of the capital stock as provided
by existing laws" x x x. (Ibid, [eleventh].)
If the required percentage of ownership has not been complied with, the articles of incorporation will not be accepted by
the Securities and Exchange Commission. (Sec. 17[3].) In determining the nationality of corporations with foreign equity, the
Commission has adopted the "control test" rule, (see Sec. 123.)
A c k n o w l e d g m e n t , signature,
and verification.

In order to become a corporation de jure (see Sec. 20.), the provisions requiring the incorporation papers to be acknowledged

170

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Sec. 16

as well as signed must be complied with. Each of the signatories


must acknowledge his signature to the articles and there is no
corporation de jure unless acknowledged by the minimum number required by law. However, unless otherwise provided by the
statute, the acknowledgment of the signatures of the incorporators is not a part of the articles of incorporation.
The purpose of the law in requiring acknowledgment under
oath is to secure the State and all concerned against the possibility
of any fictitious names being subscribed to the articles, and to
furnish proof of the genuineness of the signatures, (see 1 Fletcher,
p. 506; 18 C.J.S. 440.)
Sec. 16. Amendment of Articles of Incorporation. Unless
otherwise prescribed by this Code or by special law, and
for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code, or the vote
or written assent of two-thirds (2/3) of the members if it be
a non-stock corporation.
The original and amended articles 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 said amendment or
amendments have been duly approved by the required
vote of the stockholders or members, shall be submitted
to the Securities and Exchange Commission.
The amendment shall take effect upon its approval
by the Securities and Exchange Commission or from the
date of filing with the said Commission if not acted upon
within six (6) months from the date of filing for a cause not
attributable to the corporation. (18a)

Sec. 16

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

171

M e a n i n g of c o r p o r a t e charter.

A charter" is an instrument or authority from the sovereign


power bestowing the right or privilege to be and act as a corporation. (Humphrey and Peues, 16 Wall. [U.S.] 244, 21 L. ed. 326.)
With regard to corporations, the term is correctly used in its
limited sense only with reference to special incorporation by act
of the legislature. In the case of a corporation organized under a
general law, however, the corporation's charter is not limited to
its articles of incorporation, (see 18 Am. Jur. 2d 622.)
Distinguished f r o m f r a n c h i s e.

The term is sometimes loosely used in the sense of "franchise."


Properly speaking, corporate or primary franchise is the right
and privilege itself of being a corporation, (see Sec. 10.)
On the other hand, corporate charter applies to the instrument bestowing such right and privilege.
C o m p o n e n t s of corporat e charter.

A charter represents the complete grant of authority; hence,


the complete charter of a corporation does not rest only upon one
instrument.
(1) As to corporations formed under the general incorporation law,
the charter consists of:

(a) The law under which it is organized (B.P. Big. 68.);


(b) Articles of incorporation;
(c) By-laws; and
(d) All applicable provisions of the Constitution and the
general laws of the State in force at the time the corporation
is incorporated which are as much a part of its charter as
though expressly written therein. (7 Fletcher, pp. 760-761.)
(2) As to corporations created by special laws, the charter consists
of

(a) The special law which creates the corporation;

"See note 1 under Sees. 14-15.

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THE CORPORATION CODE OF THE PHILIPPINES

(b) Executive Orders of the President;

Sec. 16

15

(c) Rules and regulations applicable to such corporations; and


(d) All laws applicable thereto, including the Corporation Code the provisions of which apply suppletorily. (see
Sec. 4.)
Nature of corporate charter.

Frequently, a corporate charter is described as a contract of


a three-fold nature, that is, a contract between the State and the
corporation, a contract between the corporation and its stockholders (or members), and a contract between the stockholders
inter se. (18 Am. Jur. 2d 625-626.)
(1) A contract between the State and the corporation. It is com-

monly said that corporations are created by an act of the sovereign by an act of the Legislature and in a sense, this is true.
But it is not to be understood from this that the Legislature can
bring a private corporation into existence of its own accord, and
without the consent of the members who compose it. The charter
of a private corporation has been regarded as a contract between
the corporation and the State. For this reason, courts apply to the
formation of a private corporation the principles governing offer
and acceptance in the formation of contracts. (Clark on Corporations, p. 55.)
The consideration for the grant of powers and privileges by
the State is found in the liabilities and duties which the incorporators assume by accepting the terms specified in the charter. (18
Am. Jur. 2d 626.)
(a) Acceptance of original charter.

1) If persons apply to the Legislature for a charter,


this is sufficient evidence of consent on their part and

"E.g., the Uniform Charter for Government Corporations. (Executive Order No. 399,
Jan. 5,1951.) See Presidential Decree No. 2029 and Letter of Instructions No. 1520 which
apply to government-owned or -controlled corporations, whether chartered by special
law or organized under the Corporation Code, and Administrative Code of 1987 (Exec.
Order No. 292), Book IV, Chapter 9, Section 42.

Sec. 16

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

173

when the charter is granted, no acceptance of it by them,


other than will be implied from their previous application, need be shown. Indeed, they may be considered as
having made an offer, and the State as having accepted it.
2) If, however, without such application, the Legislature offers a charter, either to particular persons by a
special act, or to persons or a class of persons generally
by a general law, an acceptance must be shown. Until
acceptance, the offer of a charter, either by a general or
a special law, can have no effect whatever. An act of the
Legislature authorizing persons to become a corporate
body by complying with certain terms and conditions is,
until accepted by the persons authorized, nothing but an
offer on the part of the State, which may be withdrawn
by it at any time; and it is withdrawn, so as to be no
longer open for acceptance, by a repeal of the act by
the Legislature, or by the adoption of a constitutional
provision rendering such an act void.
(b) Acceptance of amendment to existing charter. The

rule that a charter must be accepted before it can have any


effect applies to acts amending existing charters under a
right reserved to the State when the charter was granted; for
though the State may reserve the right to amend the charter of
a private corporation, it cannot compel the members to accept
the charter as amended, any more than it could compel them
to accept the original charter. If they do not choose to adopt
the amendment, they may give up their charter altogether.
The acceptance of an amendment, like the acceptance of
an original charter, may be implied from the conduct of
the corporation or its members and it will be conclusively
presumed if the powers conferred by the amendatory act are
exercised. (Clark on Corporations, p. 55.)
(2) A contract between the corporation and the stockholders. It

is generally held that a corporate charter constitutes a contract


between the corporation and its stockholders. The stockholders
are presumed to have entered into such a contract with knowledge of the provisions thereof, are bound thereby, and their rights
as stockholders are defined and limited by the charter. (18 Am.

174

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 16

Jur. 2d 626.) The articles of incorporation or the corporate charter


being considered a contract, the corporation is bound to observe
all the provisions thereof. (SEC Opinion, Jan. 22,1986.)
(3) A contract between the stockholders inter se. The charter of

a corporation constitutes a contract also between the stockholders which is entitled to protection as against attempted action
by the corporation, though authorized by law and the majority
of the stockholders, insofar as the interests of dissenting stockholders are concerned. Thus, there is contractual obligation on
the corporation with respect to its stockholders and on the stockholders with respect to each other that no fundamental, radical,
or material changes on the purposes of the corporation shall be
made, at least in the absence of express or implied consent of the
stockholders thereto. (Ibid.; see Sec. 81.)
Reserved power of State to a m e n d
corporate charter.
(1) Constitutional and statutory authority. The certificate of

incorporation is a contract primarily between the State and the


corporation. (Dartmouth College vs. Woodward, 4 Wheat. [U.S.]
518.) Hence, it can be amended only by or under constitutional
or statutory authority.
(a) The constitutional authority of Congress to change or
amend the charter of a private corporation for the operation
of a public utility is expressly reserved by Section 11, Article
XII of the Constitution which provides that:
"Neither shall any such franchise or right [for the operation of a public utility] be granted except under the condition
that it shall be subject to amendment, alteration or repeal by
the Congress when the common good so requires."
(b) The statutory authority of Congress to alter or amend
the corporate charter is impliedly reserved by Section 145
of the Code subject to the limitation therein provided with
respect to vested rights that have accrued at the time of the
enactment of the amendatory law and the prohibition of the
Constitution (Art. Ill, Sec. 10 thereof.) against laws impairing
the obligation of contracts.

Sec. 16

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

175

(c) Under the reserved power to repeal the corporate


charter, the legislature may terminate corporate existence
(18 Am. Jur. 2d 633.)
(2) Exercise of power. The reservation of the power is an
incident of the contract between the State and the incorporators.
The dissolution of a corporation without cause is void as impairing the obligation of a contract between the incorporators and
the State. Note, however, that with respect to the franchise of a
public utility, the only limitation is that the power can be exercised only "when the common good requires."
Power of stockholders or members to
amend articles of incorporation.
(1) Power expressly granted. The authority of stockholders
or members to amend the articles of incorporation which forms
part of the corporate charter is conferred by Sections 16, 37,
and 38. Section 37 refers to the extension or shortening of the
corporate term; Section 38, to increase or decrease of the capital
stock; and Section 16, to amendments in general, i.e., to matters
other than the foregoing, including a change in the corporate
name. (Sec. 18.) The power to amend is also expressly granted by
Section 36(4).
The amendment must also be approved by a majority of the
board of directors or trustees.
(2) Matters not subject to amendment. Certain provisions or
matters stated in the articles of incorporation cannot be amended.
(a) The portion of the articles of incorporation stating
the names of the incorporators and the first set of directors/
trustees (see Sec. 15 [fifth and sixth].) cannot be amended by
substituting for the name of an incorporator the name of another, for the reason that the same states an accomplished
fact, just as the place and date of the execution of the articles
and the original subscriptions of the incorporators cannot
be changed or amended. Furthermore, such an amendment
would go against the meaning and concept of the word "incorporators" as defined in Section 5 as those "mentioned in

176

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 16

the articles of incorporation as originally forming and composing the corporation and who are signatories thereof."
(b) Similarly, the names, etc. of the subscribers, the treasurer of the corporation elected by the subscribers (Ibid.
[eighth, ninth, tenth].), and the witnesses cannot be amended
except to correct mistakes.
Necessity of stockholders' or m e m b e r s '
meeting for a m e n d m e n t .

It must be noted that under the first paragraph of Section


16, the amendment may also be effected by the "written assent"
of the stockholders representing at least 2 / 3 of the outstanding
capital stock of the corporation or 2 / 3 of its members, meaning
that such action need not be taken at a meeting and upon a vote.
Even holders of non-voting shares or non-voting members, as
the case may be, are entitled to vote on the amendment, (see Sec.
6, par. 6[1].)
(1) If the amendment consists in extending or shortening the
corporate term (Sec. 37.), or increasing or decreasing the capital
stock (Sec. 38.), a meeting of the stockholders or members is necessary.
(2) In a close corporation, if the amendment of the articles of
incorporation refers to any of the matters mentioned in Section
103, the same shall not be valid or effective unless approved by
the required vote of the stockholders at a meeting duly called for
the purpose. A mere written assent would not also be sufficient.
In cases where written consent assent is allowed, the same
number of votes shall be observed, and nothing can be done by
proxy. (SEC Memo. Cir. No. 4, Series of 2004; see Art. 58.)
Limitations on p o w e r of corporatio n
to a m e n d .

Section 16 imposes limitations on the power of a corporation


to amend its articles of incorporation. They are as follows:
(1) The amendment of any provision or matters stated in the
articles of incorporation is not allowed when it will be contrary
to any provision or requirement prescribed by the Code or by

Sec. 16

TITLE n. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

177

special law, or change any provision in the articles of incorporation stating an accomplished fact (supra.);
(2) It must be "for legitimate purposes." (see Sec. 81[1].) The
power of amendment must not be exercised in such a manner
as to work injustice. The majority stockholders owe a duty to
at least act fairly to the minority interest, and they cannot avoid
that duty merely because the amendment is legally authorized
(In the Matter of Ayala Corporation, SEC En Banc Decision, Sept.
1,1989.);
(3) It must be approved by the required vote of the board of
directors or trustees and the stockholders or members;
(4) The original articles and amended articles together must
contain all provisions required by law to be set out in the articles
of incorporation;
(5) Such articles, as amended, must 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 that the amendment or amendments have been duly approved by the required vote of the
stockholders or members must be submitted to the Securities
and Exchange Commission. Filing fees must be paid;
(6) The amendments shall take effect only upon their
approval by the Securities and Exchange Commission. They are
deemed approved by the Commission from the date of filing if not
acted upon within six (6) months from said date for a cause not
attributable to the corporation, assuming that the amendments
are not illegal. In other words, a subsequent approval is made
to relate back to the date of filing of the amendments with the
Commission. If the delay is attributable to the corporation, the
amendment cannot take effect without approval thereof by the
Commission. The provision on automatic approval in Section 16
does not apply to the dissolution of corporations in the light of
Section 120 (SEC Opinion, March 30,1982.); and
(7) If the corporation is governed by a special law such as
banks, banking and quasi-banking institutions, insurance companies, etc., the amendments must be accompanied by a favorable recommendation of the appropriate government agency to

178

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 17

the effect that such amendments are in accordance with law. (Sec.
17, par. 2.)
In the case of foreign corporations authorized to transact
business in the Philippines, they are merely required to file, within sixty (60) days after the amendment to the articles of incorporation (or by-laws) becomes effective, with the Securities and
Exchange Commission and in proper cases, with the appropriate
government agency, a duly authenticated copy of the articles of
incorporation (or by-laws) for record purposes. The filing thereof, however, shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized under its license
to transact business in the Philippines, (see Sees. 130,125.)
Such portion of the articles of incorporation which states an
established or accomplished fact at the time of incorporation,
e.g., the portion stating the names of the original subscribers or
incorporators (Sec. 5.), cannot be changed or amended.
Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. The Securities and
Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same
is not in compliance with the requirements of this Code:
Provided, That the Commission shall give the incorporators reasonable time within which to correct or modify the
objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
(1) That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
(2) That the purpose or purposes of the corporation
are patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
(3) That the Treasurer's Affidavit concerning the
amount of capital stock subscribed and/or paid is false;
(4) That the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws or
the Constitution.

Sec. 17

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

179

No articles of incorporation or amendment to articles


of incorporation of banks, banking and quasi-banking
institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other
corporation governed by special law shall be accepted or
approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in
accordance with law. (n)

Grounds for rejection of articles of incorporation


or amendment thereto.
Section 17 enumerates the grounds for the rejection of the
articles of incorporation or disapproval of any amendment
thereto. The grounds are not exclusive.
30

(1) The Securities and Exchange Commission is required to


give the incorporators reasonable time within which to correct
or modify the objectionable portions of the articles of incorporation or amendment when the same is rejected or disapproved for
non-compliance with the requirements of the Code, (see Sees. 14,
15 and 16.)
(2) Any decision of the Commission rejecting the articles
of incorporation or disapproving any amendment thereto is
appealable by petition for review in accordance with the pertinent
provisions of the Rules of Court. (Pres. Decree No. 902-A, Sec. 6,
last sentence.)
(3) In case of corporations governed by special laws such as
banks, insurance companies, and educational institutions, the
articles of incorporation or amendment shall not be accepted or
approved by the Securities and Exchange Commission unless
accompanied by a favorable recommendation of the appropriate
government agency (e.g., Monetary Board of the Central Bank,
with respect to banking institutions) that such articles or
amendments is in accordance with law. (see Sec. 107.)

"See note 3 under Sees. 14-15.

THE CORPORATION CODE OF THE PHILIPPINES

180

Sec. 17

(4) Before a foreign corporation can lawfully transact


business in the Philippines, it must first obtain a license to
transact business in the country in accordance with the Code
and a certificate of authority from the appropriate government
authority. (Sec. 23.) These requirements insure compliance by
the registrant corporation, whether domestic or foreign, with the
policies or regulations of the government agency concerned.
(5) The Securities and Exchange Commission shall not also
accept the articles of incorporation of any stock corporation
unless accompanied by a sworn statement of the treasurer
elected by the subscribers showing the amount of the capital
stock subscribed and paid. (Sec. 14, last par.)
(6) The action of the Commission in approving or rejecting
the articles of incorporation or any amendment thereto is not a
ministerial function but involves the exercise of discretionary
power, (see Sees. 14-15.)
Suspension or revocation of certificate
of registration of corporations.
1. Grounds. Under Presidential Decree No. 902-A, the
Securities and Exchange Commission may suspend or revoke,
after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships, or associations upon
any of the grounds provided by law, including the following:
31

(a) Fraud in procuring its certificate of incorporation


(such as making it appear that it has cash paid-up capital
when actually it has none, the money being in fact merely
borrowed and returned to the lender after the incorporation);
(b) Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of, or damage to, the
general public;
(c) Refusal to comply with or defiance of a lawful order

It reorganized the SEC with additional powers and placed the said agency under
the administrative supervision of the Office of the President. This Decree is superseded
by the Securities Regulation Code. (Appendix "A.") The grounds provided by Presidential Decree No. 902-A are still applicable, (see Sec. 5[m], SRC.)
31

Sec. 17

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

181

of the Commission restraining the commission of acts which


would amount to a grave violation of its franchise;
(d) Continuous inoperation for a period of at least five (5)
years (see Sec. 22, infra.);

(e) Failure to file by-laws within the required period; and


(f) Failure to file required reports in appropriate forms
as determined by the Commission within the prescribed
period. (Pres. Decree No. 902-A, Sec. 6[1].)
The authority of the Commission to suspend, cancel or revoke
corporate franchise or registration also emanates from Sections
121 and 144*
(2) Ejfectivity. A SEC order of revocation is immediately
effective. Once the revocation order is issued, the subject
corporation's existence is terminated at that very instant and is
deemed terminated until the particular revocation order is lifted.
It may not continue to operate its business (see Sec. 122.) and
issue shares. It may, however, sell its assets pursuant to Section
122 but it may only purchase property if such purchase will be
consistent with liquidation. It may sue for purposes of recovering
its property. (SEC Opinion No. 09-24, July 28,2009.) The capacity
of a corporation to institute an ejectment suit is not affected
by the subsequent suspension and revocation of certificate of
registration. (Paredes vs. Don Luis Dison Realty, Inc., 548 SCRA
273 [2008].)
A corporation whose existence is deemed terminated may
not allege in its complaint in court that it is a corporation duly
organized and existing under Philippine laws. (Clemente vs.
Court of Appeals, 242 SCRA 717 [1995].)
(3) Lifting of Order of Revocation. The lifting restores the cor-

poration to its original status as if there was no revocation order


issued against it, with the capacity to exercise all the powers of
a duly registered corporation under the Corporation Code. (SEC
Opinion No. 09-29, Nov. 11, 2009.)
SEC Memo. Cir. No. 15 (Sept. 5, 2009) extends by one (1) year from the date of
revocation the period within which corporations whose certificates of registration were
revoked by non-compliance with reportorial requirements to file a petition to lift the order of revocation.
32

182

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 18

Sec. 18. Corporate name. No corporate name may be


allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in
the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the
amended name, (n)
Limitations upon use of corporate n a m e .
(1) Similarity with another trade name. The incorporators

may choose and use any name they may see fit, provided it is one
not identical with or prejudicially similar to a name which was
previously adopted and which is being used by another existing
corporation or unincorporated association or a natural person
as trade name (Bender vs. Bendor Store, 178 III. App. 203.), or
is contrary to existing law. A corporation acquires its name by
choice and need not select a name identical with or similar to
one already appropriated by a senior corporation while an individual's name is thrust upon him. It can no more use a corporate
33

^Incorporation gives protection to the name of the corporation. Before the Securities and Exchange Commission registers any articles of incorporation, the records are
checked to make sure that the proposed name is not identical with or closely similar to
the name of an entity previously registered with it. Moreover, the registrant is required to
submit a written undertaking that the corporation will change its name in the event that
another person, firm or entity has acquired a prior right to the use of the same name or
one similar to it. (SEC Opinion, May 26, 1968.) Such entity may be a foreign corporation
whose trade name, being a property right, a right in rem, is entitled to protection even in
countries where it does not transact any business. (Western Equipment & Supply Co. vs.
Reyes, 51 Phil. 115 [1927].) A corporation need not register with the Department of Trade
and Industry the SEC-approved corporate name if it does not have any intention to use
another business name. (SEC Opinion No. 04-21, April 2, 2004.)
Neither the Corporation Code nor the Guidelines contains any provision restricting
the use of the words "United States" or the initials "U.S." as part of the corporate name.
Hence, for as long as they would not be deceptive in the light of the purposes for which
the corporation is organized, the use of such words may be allowed, without prejudice
to the provision of any existing international agreement to the contrary. (SEC Opinioa
April 12,1988.)
The Securities and Exchange Commission has prohibited domestic corporations
from using the names of multinational corporations unless they are set up as subsidiaries or affiliates of these multinational corporations to prevent misimpressions created by
new corporations organized by obscure investors.

Sec. 18

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

183

name in violation of the rights of others than an individual can


use his name legally acquired so as to mislead the public and injure another. (Philips Export B.V. vs. Court of Appeals, 206 SCRA
457 [1992].) For as long as a corporation is existing regardless of
whether or not it is in operation, its corporate name cannot be
used by any other group. (SEC Opinion, Sept. 2,1993.)
If any corporation could adopt at pleasure the name of
another corporation, the practice would cause confusion and
unfair and fraudulent competitions, open the door to frauds upon
the public, promote the evasion of legal obligations and duties,
and result in difficulties of administration and supervision over
corporations. (Wycott vs. Howe Scale Co., 122 Fed. 348; Red Line
Transportation vs. Rural Transit, 30 Phil. 549 [1915]; Industrial
Refractories Corporation of the Philippines vs. Court of Appeals,
390 SCRA 252 [2002].)
(2) Test of infringement. The right to the exlusive use of a

corporate name with freedom from infringement is determined


by priority of adoption. In determining the existence of confusing
similarity in corporate names, the test is whether the similarity is
such as to mislead a person using ordinary care and discrimination and the court must look to the record as well as the names
themselves. It is settled, however, that proof of actual confusion
need not be shown. It suffices that confusion is probably or likely
to occur. (Philips Export B.V. vs. Court of Appeals, supra.)
(3) Part of name. The corporate name shall contain the
word "Corporation" or "Incorporated," or the abbreviations
"Corp." or "Inc.," respectively. The corporate name of a foundation shall use the word "Foundation." (SEC Memo. Circ. No. 5,
Series of 2008.)
At the time of registration, the corporation through its
authorized representative must submit an affidavit containing
an unqualified undertaking to change the corporate name in the
event that another person, firm or entity has acquired a prior right
to the use of said name or one similar to it, signed by at least two
(2) incorporators. In case of amendment of the corporate name of
an existing company, the affidavit shall be signed by any of the
directors. (Ibid.)

184

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Sec. 18

ILLUSTRATIONS:
(1) "House of Investments, Inc.," a corporation engaged
in investments, protested the adoption of the name "House of
Insurance, Inc." by a proposed corporation which shall engage
in insurance. Is there a similarity between the two names as
to cause confusion in the minds of the public regarding the
identities of said corporations?
None. The two corporations have different main objectives
and both cater generally to people of means who, as a rule,
exercise careful scrutiny of the identity of the corporation with
which they deal and are interested not only in the entity but
in the officials thereof as well. Furthermore, only the word
"House" appears in both names but as this word is generic or
one of general application, it cannot be exclusively appropriated
as a corporate name. (SEC Opinion, May 24,1960.)
(2) A proposed corporation seeks to adopt "Garcia &
Co., Inc." as its corporate name. May the proposed name be
permitted?
No. The reason for the rule against the adoption of a name
similar to the name of an existing entity is to avoid confusion
in the minds of the general public. For the same reason, the
proposed name should not be approved.
A different rule would apply if persons with the surname
"Garcia" registered a corporation under the name "Garcia &
Co., Inc." and subsequent to said registration, transferred their
shares to others, none of whom bear the surname "Garcia." In
such event, the transferees of the shares of stock may continue
the business of the corporation under its registered corporate
name. (SEC Opinion, Aug. 22,1960.)
(3) "Universal Textile Mills, Inc." petitioned to have the
"Universal Mills Corporation" change its name on the ground
that such name is "confusingly and deceptively similar" to
that of the former. The Securities and Exchange Commission
granted the petition which order was affirmed by the Supreme
Court.
Though not identical, the names are so similar to cause
confusion to the general public, particularly where the latter
included the manufacture, dyeing and selling of fabrics of all
kinds in which the former had been engaged for more than a

Sec. 18

TITLE n. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

decade ahead of the latter, enjoying well-earned patronage and


goodwill. (Universal Mills Corporation vs. Textile Mills, Inc.,
77 SCRA 62 [1977]; see Ang mga Kaanib sa Iglesia ng Dios Kay
Kristo Jesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng
Dios kay Cristo Jesus, 372 SCRA 173 [2001].)
(4) Is the corporate name "Tropiflora, Inc." confusingly
similar to "Tropical Flora (Philippines)" considering that the
two entities are engaged in the same line of business?
Yes. "Tropiflora" is derived from the words "tropical
flora," meaning "of, in or characteristic of the tropics, very
hot." Tropic is either of two circles of the celestial sphere
parallel to the equator. Flora refers to the plants of a specified
region or time. "Tropiflora" is nothing but a contraction of the
words "Tropical Flora." The former is merely a combination
of the latter. The similarity between the two names is too
obvious to be overlooked. (Benedict Investment Realty Corp.
vs. Tropiflora, Inc., SEC Case No. 2570, Jan. 10,1985.)
(5) There is a basic similarity between the trade names
"Universal Converse and Device" and "Converse Rubber
Corporation" as in both names, "Converse" is the dominant
word which identified the latter from corporations engaged in
similar business. Appropriation by another of the dominant
part of a corporate name is an infringement. (Converse Rubber
Corp. vs. Universal Rubber Product, Inc., 147 SCRA 154 [1987].)
(6) The corporate names of private respondent educational
entities all carry the word "Lyceum" but it has been held
that confusion and deception are effectively precluded by
the appending of geographic names to the word "Lyceum."
Thus, we do not believe that the "Lyceum of Aparri" cannot
be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word
for the Greek lykeion which, in turn, referred to a locality on
the river Illisius in ancient Athens "comprising an enclosure
dedicated to Apollo adorned with fountains and buildings
erected by Pisistratus, Pericles and Lycurgus frequented by
the youth for exercise and by the philosopher Aristotle and his
followers for teaching." In time, the word "Lyceum" became
associated with schools and other institutions providing public
lectures and concerts and public discussions. Thus, today, the

185

186

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 18

word "Lyceum" generally refers to a school or an institution of


learning. While the Latin word "lyceum" has been incorporated
into the English language, the word is also found in Spanish
(liceo) and in French (lycee).
Roman Catholic schools frequently use the term, e.g.,
"Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate),
"Liceo de Masbate," "Liceo de Albay." "Lyceum" is in fact as
generic in character as the word "university." In other places,
however, "Lyceum," or "Liceo" or "Lycee" frequently denotes
a secondary school or a college. It may be that the use of the
word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number
of educational institutions have adopted "Lyceum" or "Liceo"
as part of their corporate names. Since "Lyceum" or "Liceo"
denotes a school or institution of learning, it is not unnatural
to use this word to designate an entity which is organized
and operating as an educational institution. (Lyceum of the
Philippines, Inc. vs. Court of Appeals, 219 SCRA 610 [1993].)
(7) Respondent RCP was incorporated on October 13,
1976 and since then has been using the corporate name
"Refractories Corp. of the Philippines." Meanwhile, petitioner
was incorporated on August 23,1979 originally under the name
"Synclaire Manufacturing Corporation." It only started using
the name "Industrial Refractories Corp. of the Philippines"
when it amended its Articles of Incorporation on August 23,
1985, or nine (9) years after respondent RCP started using its
name. Thus, being the prior registrant, respondent RCP has
acquired the right to use the word "Refractories" as part of its
corporate name.
Petitioner's corporate name is "Industrial Refractories
Corp. of the Phils." while respondent's is "Refractories Corp of
the Phils." Obviously, both names contain the identical words
"Refractories," "Corporation" and "Philippines." The only
word that distinguishes petitioner from respondent RCP is
the word "Industrial" which merely identifies a corporation's
general field of activities or operations. These two corporate
names are patently similar that even with reasonable care and
observation, confusion might arise. Furthermore, both cater to
the same clientele, i.e., the steel industry. (Industrial Refractories
Corporation of the Philippines vs. Court of Appeals, 390 SCRA
252 [2002].)

Sec. 18

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

187

(4) Prohibited use of certain words. In addition to the limi-

tation provided by Section 18, special laws prohibit the use of


certain words as part of the corporate name such as those which
imply that a corporation is engaged in an activity in which it is
not allowed by law to engage in. Thus:
(a) It shall be unlawful for any person, association or corporation to use whether directly or indirectly, the emblem,
official seal, and name of the United Nations, both in its full
or abbreviated form, for commercial or business purpose.
(Sec. 1, R.A. No. 226.)
(b) It shall be unlawful to use the word "bonded," in part
or in whole, as a trade name or business name, or business
name of those operating or maintaining any warehouse not
licensed under Act No. 3893 (General Bonded Warehouse
Act.) or established under Sections 1302 and 1304 of the
Revised Administrative Code. (Sec. 3, R.A. No. 247.)
(c) No person, association or corporation unless duly
authorized to engage in the business of a bank, quasi-bank,
trust entity, or savings or loan association, shall advertise or
hold itself out as being engaged in the business of such bank,
etc., or use in connection with its business title the word or
words "bank," "banking," "banker," "quasi-bank," "quasibanking," "quasi-banker," "savings and loan association,"
"trust corporation" "trust company," or words of similar import or transact in any manner the business of any such bank,
corporation or association. (Sec. 64, R.A. No. 8791.)
(d) No bank, person, association, or corporation doing
the business of banking but not authorized under the Rural
Banks Act, shall use the words "Rural Bank," as part of its
name or title. (Sec. 28, R.A. No. 7353.)
(e) It shall be unlawful for any person, association,
partnership, or corporation to use the term "savings and
loan association" unless it is organized under the Savings
and Loan Association Act (Sec. 7, R.A. No. 3779.), or the term
"development bank" unless it is organized under the Private
Development Banks Act. (Sec. 16, R.A. No. 4093.)
(f) All banks other than the Philippine National Bank
and such other banks now licensed to do business in the Phil-

188

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 18

ippines whose name already includes the word "National"


are prohibited from using the word "National" as a portion
of their name or title. (Sec. 35, Pres. Decree No. 694, The 1975
Revised Charter of the Philippine National Bank.)
(g) The use of "UN," "Olympic," and "Bureau" in full
or abbreviated form for commercial or business purposes is
prohibited. (Sec. 1, R.A. No. 226.)
(h) The use of "Financing Company," or "Finance Company," or "Finance and Leasing Company" "Investment
Company" or "Investment Risk" unless organized as a financing investment company is prohibited. (Sec. 14, R.A. No.
5980, as amended by R.A. No. 8556.)
(i) The use of "Lending Company" and "Lending Investor" except by lending companies. (Sec. 12[2, c], R.A. No.
9474.), or "Pawnshop" except by entities authorized to operate pawnshop. (Sec. 11, Pres. Decree No. 114.)
(j) The practice of a profession regulated by special law
which among others, provides for the permissible use of the
profession name in a firm, partnership or association shall
govern the use of the same, e.g., "Engineer" or "Engineering"
(Sec. 24, R.A. No. 544, as amended by R.A. No. 1582.), "Architect" (Sec. 25, R.A. No. 9266.) or "Geodetic Engineer" (Sec. 24,
R.A. No. 8560.)
(k) The corporation which is a subsidiary of a foreign
firm may carry the name of the principal company with the
word "(Phil.)" or "(Philippines)" affixed to the firm name.
The written consent of the mother company as regards the
use of the firm name must be submitted.
(1) The name of an internationally known foreign corporation or one similar to it may not be used by a domestic
corporation unless it is a subsidiary and the parent company
has consented to such use.
(m) If the full name of a person forms part of the corporate name, the consent of such person or his heir(s) must be
obtained.
(n) Unless otherwise authorized by the Commission,
"National," "Bureau," "Commission," "State," and other

Sec. 18

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

189

words, acronyms, and abbreviations that have been given


acceptance in the Philippines as being used only by entities
that perform governmental functions. (SEC Memo. Circ. No.
5, Series of 2008.)
(5) Use of generic, geographical, and descriptive terms and

names. Certain words, terms, or names are regarded by law


as incapable of exclusive appropriation. Of this class are generic
terms and geographical names and terms which are merely
descriptive of the goods, services, places where made, the
character of the business, or the name of the maker. (Columbia
Mill Co. vs. Alcorn, 150 U.S. 460.)
The general rule is that a corporation cannot acquire such a
right in such names, words or terms as to have their use by others
enjoined (General Industries Co. vs. Wacker Drive Building Corp.,
57 F. Sup 573.) unless such words have acquired a secondary
meaning or have become distinctive so as to distinguish not only
the product of a particular service and its quality but also the
name of the producer of the service. (Wyoming National Bank of
Casper vs. Security Bank & Trust Co., 472 2d 1120.) Thus, the use,
for example, of the words "La Union" which is a geographical
name, and "provincial" which is merely descriptive as business
trade names including the use of the same in the transportation
business, may not be enjoined. (SEC Opinion, July 16,1991.)
(6) Use of trade name of another corporation. The SEC Guide-

lines, specifically requires that: (a) a corporate name shall not be


identical, misleading or confusingly similar to one already registered by another corporation with the Commission; and (b) if
the name applied for is similar to the name of a registered firm,
the applicant shall at least contain one or more distinctive words
to the proposed name to remove the similarity or differentiate it
from the registered name. This guideline does not apply where
34

35

"SEC Memo. Cir. No. 5, Series of 2008.


^However, the addition of one or more distinctive words shall not be allowed if the
registered name is coined or unique unless the board of directors of the subject corporation gives its consent to the applied name. Production marks, spaces, signs, symbols,
and other similar characters shall be acceptable for purposes of differentiating a proposal
name from a registered name. A name that consist solely of special symbols, punctuation
marks or specially designed characters shall not be registered. A tradename or trademark

190

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 18

the questioned word happens to be the valid trademark or trade


name of another corporation, in which case, the latter shall have
the exclusive right to its use as registered owner. (Philips Export
B.V. vs. Court of Appeals,* 206 SCRA 457 [1992].)
(7) Use of a person 'sfull name or surname. It may be used in a

corporate name if he/she is a stockholder of the corporation and


has consented to such use. If the person is already deceased, the
consent shall be given by his/her estate. The Commission may
require a registrant to explain to its satisfaction the reason for the
use of a person's name. The meaning of initials used in a name
shall be stated by the registration the articles of incorporation or
in a separate document signed by an incorporator or director.
(SEC Memo. Circ. No. 5, Series of 2008.)
(8) Doctrine of secondary meaning. This doctrine originated

in the field of trademark law. Its application has, however, been


extended to corporate names since the right to use a corporate
name to the exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or trade
name. In Philippine Nut Industry, Inc. vs. Standard Brands, Inc. (65

SCRA 575 [1975].), the doctrine of secondary meaning was elaborated in the following terms: "x x x a word or phrase originally
incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive,
might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has come to
mean that the article was his product."
In Lyceum of the Philippines vs. Court of Appeals (supra.), the

question which arose was whether or not the use by petitioner

registered with the Intellectual Property Office may be used as part of the corporate name
of a party other than its owner if the latter gives its consent to such use. (Ibid.)
In case a company has more than one business or trade name, the SEC requires that
business or trade name which is different from corporate or partnership name should be
indicated in the Articles of Incorporation. (Ibid.; as amended by SEC Memo. Circ. No. 12.)
*In this case, the SEC, in allowing private respondent the continued use of its corporate name "Standard Philips Corporation," maintains that the corporate names of petitioners "Philips Electrical Lamps, Inc. and "Philips Industrial Development, Inc." contains at least two words different from that of the corporate name of respondent.

Sec. 18

TITLE II. INCORPORATION AND ORGANIZATION


OF PRTVATE CORPORATIONS

191

of "Lyceum" in its corporate name has been for such length of time
and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general
public (or at least that portion of the general public which has to
do with schools). The Supreme Court ruled:
"The number alone of the private respondents in the case
at bar suggests strongly that petitioner's use of the word
'Lyceum' has not been attended with the exclusivity essential
for applicability of the doctrine of secondary meaning. It may
be noted also that at least one of the private respondents, i.e.,
the Western Pangasinan Lyceum, Inc., used the term 'Lyceum'
seventeen (17) years before the petitioner registered its own
corporate name with the SEC and began using the word
'Lyceum.' It follows that if any institution had acquired an
exclusive right to the word Lyceum, that institution would
have been the Western Pangasinan Lyceum, Inc. rather than
the petitioner institution, x x x We conclude and so hold that
petitioner institution is not entitled to a legally enforceable
exclusive right to use the word 'Lyceum' in its corporate
name and that other institutions may use 'Lyceum' as part
of their own corporate names. To determine whether a given
corporate name is 'identical' or 'confusingly or deceptively
similar' with another entity's corporate name, it is not
enough to ascertain the presence of 'Lyceum' or 'Liceo' in
both names. One must evaluate corporate names in their
entirety and when the name of petitioner is juxtaposed with
the names of private respondents, they are not reasonably
regarded as 'identical' or 'confusingly or deceptively similar'
with each other."
(8) Where business of junior corporation different or noncompet-

ing. The protection to which the prior user of a corporate name


is entitled is not limited to guarding its goods or business from
actual market competition with identical or similar products of
the parties but extends to all cases in which the use by the junior
appropriator of the name is likely to lead to a confusion of source,
as where prospective purchasers would be misled into thinking
that the complaining corporation has extended its business into

THE CORPORATION CODE OF THE PHILIPPINES

192

Sec. 18

the field, or is in any way connected with the activities of the


infringer; or when it forestalls the normal potential expansion of
its business, (see Sta. Ana vs. Maluwat, 24 SCRA 1018 [1968].)
Remedy of corporation w h o s e n a m e
has been adopted by another.

(1) Injunction. A corporation has an exclusive right to the


use of its name, which may be protected by injunction upon a
principle similar to that upon which persons are protected in the
use of trademarks and trade names.
37

(a) Fraud upon the aggrieved corporation. The use of a

name similar to one adopted by another corporation, whether


a business or a non-profit organization, if misleading or likely
to injure in the exercise of its corporate functions, regardless
of intent, may be prevented by the corporation having a prior
right, by a suit for injunction against the new corporation to
prevent the use of the name. (Philips Export B.V. vs. Court of
Appeals, 206 SCRA 457 [1992]; Ang mga Kaanib sa Iglesia ng
Dios Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs.
Iglesia ng Dios Kay Crista Jesus, 372 SCRA 171 [2001].)
Such principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that name
and perhaps carried on its business thereunder, that another
should attempt to use the same name, or the same name with
slight variation in such a way as to induce persons to deal
with it in the belief that they are dealing with the corporation
which has given a reputation to the name. (Philips Export
B.V. vs. Court of Appeals, supra.)
(b) Interference with its business. Broadly speaking, the

general rule is that the right of one corporation to enjoin the


use of the name of a similar name by another depends upon
whether such use has interfered with the former's business
whatever it may be and without regard to whether it is comA trade name is any individual name or surname, firm name, device or work used
by manufacturers, industrialists, merchants and others to identify their businesses, vocations, or occupations. It refers to the business and its goodwill while trademark refers to
the goods. (Converse Rubber Corp. vs. Universal Rubber Products, supra.)
37

Sec. 18

TITLE n. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

193

mercial, trading or otherwise. Thus, not only are corporations


organized for pecuniary profit entitled to protect their names
by injunction, but it has also been held that an injunction may
issue to protect the name of a benevolent fraternal society,
a patriotic society, a social club, or a charitable religious society, (see 6 Fletcher, pp. 26-47; 18 C.J.S. 579-580.)
(2) De-registration. To restrain the wrongful assumption
of a name by a corporation is not to annul the corporation by
depriving it of a name. If restrained from using a name chosen,
it may choose another name. (18 Am. Jur. 2d 684.) Section 18 empowers the Securities and Exchange Commission to de-register
a corporate name deceptively similar to that already used by an
existing corporation not only for the protection of the complaining corporation but more so for the protection of the public. (Ang
mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios Kay Cristo Jesus, supra.)
Change of corporate name.
(1) Compliance with formalities. A corporate name is an artificial name and is selected with an object, and may be changed
and a new one taken. (9-A Words and Phrases 391.)
A corporation can change the name originally selected by it
after complying with the formalities prescribed by law, to wit:
amendment of the articles of incorporation and filing of the
amendment with the Securities and Exchange Commission. (Sec.
16.) Hence, the mere approval by the stockholders of the amendment of the articles of incorporation changing the corporate
name does not automatically change the name of the corporation
as of that date. (Phil. First Ins. Co., Inc. vs. Hartigan, 34 SCRA 252
[1970].)
(2) Effectivity. When a change of name is approved, it is
required that the Commission must issue an amended certificate
of incorporation under the amended name. (Sec. 18.)
The change of name is deemed effective as of the date of
the Commission's approval of the amended articles or from the
date of filing with it if not acted upon within six (6) months from
the date of filing for a cause not attributable to the corporation.

194

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Sec. 18

(Sec. 16, last par.) Said change impliedly amends the corporate
name as appearing in the by-laws; hence, the corporation need
not amend its by-laws in order to reflect its new corporate name.
(SEC Opinion, Oct. 2,1986.)
(3) Effect. An authorized change in the name of the corporation, whether effected by a special act or under a general
law, has no more effect upon its identity as a corporation than a
change of name of natural person upon his identity.
The change of name does not affect the property, rights, or
liabilities of the corporation, nor lessen or add to its obligations.
After a corporation has effected a change in its name, it should
sue and be sued in its new name. (18 Am. Jur. 2d 682-683.) It is
in no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name
and its character is in no respect changed. As a general rule,
officers and directors who acted in their capacity as agents of
the corporation under the old corporate name, bear no personal
liability for acts done or contracts entered into by them, if duly
authorized. (Republic Planters Bank vs. Court of Appeals, 216
SCRA 738 [1992]; PC. Javier & Sons, Inc. vs. Court of Appeals,
462 SCRA 36 [2005].)
Use of c h a n g e d or a b a n d o n e d
corporate n a m e s .
(1) Former name of same corporation. The mere fact that the

former name is indicated in the certificate of filing of amended


articles of incorporation would militate against anyone using
said name and, therefore, said previous name cannot be appropriated or used by any other person for a certain period {e.g., 5
years) to avoid confusion, not to mention infringement of goodwill, where said name has continued to be associated with the
corporation. (SEC Opinion, Aug. 3,1988.)
(2) Name(s) of merged or consolidated corporations. In case

the change of the corporate name is due to merger or consolidation, the corporate name(s) of the merged or consolidated corporations may not be used by another corporation, without the
consent of the surviving corporation although there is a dissolution of the absorbed corporation in view of Section 80(4).

Sec. 18

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

195

(3) Name of dissolved corporation or whose registration has been

revoked. It shall not be used by another corporation within


three (3) years from the approval of the dissolution or six (6)
years from the date of revocation unless its use has been allowed
at the time of the dissolution or revocation by the stockholders
or members who represent a majority of the outstanding capital
stock or membership of the corporation. (SEC Memo. Circ. No. 5,
Series of 2008.)
(4) Name of dissolved corporation acquired by new corporation.

A new corporation which has acquired the property and name


of a dissolved corporation is in the same position as the original
corporation would have been had it continued to exist and may,
therefore, in a proper case, enjoin the use of such name by another. (SEC Opinion, Aug. 22,1985, citing 6 Fletcher, pp. 10, 52.)
(5) Name of corporation dissolved through expiration of term.

But when the corporate name is abandoned due to the dissolution of the corporation through expiration of its corporate life,
such corporate name may be used by another corporation. (Ibid.)
Misnomer of a corporation.
The general rule is that the mere misnomer of a corporation
in a bond, note, or other deed or contract does not render the
same invalid or inoperative but the corporation may sue or be
sued thereon in its true name with proper allegation and proof
that it is the corporation intended; and its identity may be established by parol evidence. Nor will a grant or conveyance to or
by a corporation be avoided because of a misnomer. (18 C.J.S.
572-574; 1 Fletcher, pp. 742-743.) This rule has also been applied
in case of subscription to the stock of a corporation. (18 Am. Jur.
2d 680.)
Generally speaking, a corporation if sued by the wrong
name is bound if duly served. (21 R.C.L. 599.) If there is enough
expressed to show that there is such an artificial being and to
distinguish it from all others, the body corporate is well named
although there is a variation of words and syllables. (Moultrie
Country vs. Fairfield, 105 U.S. 370, 26 L. ed. 945.)

THE CORPORATION CODE OF THE PHILIPPINES

196

Sec. 19

Sec. 19. Commencement of corporate existence. A


private corporation formed or organized under this Code
commences to have corporate existence and juridical
personality and is deemed incorporate from the date the
Securities and Exchange Commission issues a certificate
of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the
name stated in the articles of incorporation for the period
of time mentioned therein, unless said period is extended
or the corporation is sooner dissolved in accordance with
law. (11)
Acquisition of juridical personality.
(1) Issuance of certificate of incorporation. A corporation

commences to have juridical personality and legal existence


only from the moment the Securities and Exchange Commission
issues to the incorporators a certificate of incorporation under its
official seal.
39

(a) Such certificate is a final determination of the corporation's right and competence to transact business or enter into
contracts in its name, (see, however, Sec. 61.) An entity without the necessary corporate legal personality has the status of
an "unregistered" association and the members themselves
shall be held personally liable for their acts or contracts, and
not the association.
(b) It is the certificate of incorporation that not only gives
juridical personality to a corporation but places it under
the jurisdiction of the Commission. This jurisdiction is not
affected even if the authority to operate a certain specialized
activity is withdrawn by the appropriate regulatory body
other than the Commission. (Filipinas Loan Company, Inc.
vs. Securities and Exchange Commission, 356 SCRA 193
[2001].)

An unregistered organization cannot exercise the powers, rights and privileges


expressly granted by the Corporation Code to registered corporations. Its status is that of
an ordinary association which has no separate juridical personality. (SEC Opinion, Aug.
39

Sec. 20

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

197

(c) The issuance of the certificate calls the corporation


into being but it is not really ready to do business until it is
organized. The corporation must 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
or, otherwise, its corporate powers shall cease and it shall be
deemed dissolved. (Sec. 22.) The law under which the corporation is organized may require a separate permit or license
to operate from other government agencies.
(2) Filing of articles of incorporation. In the case of religious

corporations, the Code does not require the Securities and


Exchange Commission to issue a certificate of incorporation, (see
Sees. 112,117.) In fact, Section 112 clearly states that from and after
the filing with the Commission of the articles of incorporation,
the chief archbishop, etc. shall become a corporation sole. (par.
2.)
(3) Registration of cooperative. A cooperative acquires

juridical personality upon registration with the Cooperatives


Development Authority. (R.A. No. 6938, Sec. 16.) It need not be
registered again with the Securities and Exchange Commission.
The methods or causes of dissolution of corporations are discussed under Title XIV.
Sec. 20. De facto corporations. The due incorporation
of any corporation claiming in good faith to be a corporation
under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto
proceeding, (n)
De jure corporation/de facto
corporation defined.

(1) A de jure* corporation is one created in strict or substantial


conformity with the mandatory statutory requirements for incor-

'According to law.'

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198

Sec. 20

poration and the right of which to exist as a corporation cannot


be successfully attacked or questioned by any party even in a
direct proceeding for that purpose by the State.
(2) A de facto corporation is one which actually exists for all
practical purposes as a corporation but which has no legal right
to corporate existence as against the State. (8 Fletcher, pp. 62-63.)
It is a corporation from the fact of its acting as such, though not
in law or right a corporation. (18 Am. Jur. 2d 593-594.)
40

It is one which has not complied with all the requirements


necessary to be a dejure corporation but has complied sufficiently
to be accorded corporate status as against third parties although
not against the State.
Requisites of a de facto corporation .

It is essential to the existence of a de facto corporation that


there be:
(1) A valid law under which a corporation with powers
assumed might be incorporated;
(2) A bona fide attempt to organize a corporation under such
law; and
(3) Actual user or exercise in good faith of corporate powers
conferred upon it by law.
Stockholders of a de facto corporation enjoy exemption from
personal liability for corporate obligations as do stockholders of
de jure corporations.
Existence of law.

In order that there can be a de facto corporation, there must be


a law authorizing it to be a corporation de jure for there cannot
be a corporation de facto when there cannot be one de jure, even
though there may have been an assumption of corporate powers.
(1) Accordingly, there cannot be a corporation de facto under
an unconstitutional statute for such statute is void and a void law
is no law. (Clark vs. American Cannal Coal Co., 73 N.E. 1083.) A
"Tn fact.

Sec. 20

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OF PRIVATE CORPORATIONS

199

statute, however, is presumed valid until it has been judicially


declared otherwise.
(2) Similarly, a corporation cannot be recognized as having a
de facto existence when its purpose is prohibited by law or contrary to public policy. (Art. 1409, Civil Code.)
(3) Neither can there be a corporation for the practice of a
learned profession in the absence of a law expressly permitting
the organization of such corporations. (1 Fletcher, p. 339.)
B o n a fide a t t e m p t to incorporate.

When there has been no attempt in good faith to create a


corporation de jure, there can be no de facto corporation. Any
other rule might well open the door to fraud upon the public.
Mere intent is not sufficient. In addition, there must be a bona fide
attempt to comply with the requirements of the law (8 Fletcher,
pp. 102-103.), which goes far enough to amount to "colorable
compliance" with the law. (Ballantine, p. 77.)
(1) Creation of corporation precluded. The following are

examples of defects which will preclude the creation of even a de


facto corporation:

(a) Absence of articles of incorporation;


(b) Failure to file articles of incorporation with the Securities and Exchange Commission (Cagayan Fishing Dev. Co.
vs. Sandiko, 60 Phil. 223 [1934].); and
(c) Lack of certificate of incorporation from the Securities
and Exchange Commission.
In all the above cases, the omissions would be fatal to de facto
corporate existence for even its stockholders may not probably
claim good faith in being a corporation. The filing of articles of
incorporation and the issuance of certificate of incorporation
may, therefore, be considered essential for the existence of a de
facto corporation. (Hall vs. Piccio, 86 Phil. 603 [1950]; see Albert
vs. University Publishing Co., Inc., 13 SCRA 84 [1965].)
(2) Creation of de facto corporation results. The following are

examples of defects which do not preclude the creation of a de


facto corporation:

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THE CORPORATION CODE OF THE PHILIPPINES

Sec. 20

(a) The articles of incorporation fails to state all the


matters required by the Code to be stated, or state some of
them incorrectly;
(b) The name of the corporation closely resembles that
of a pre-existing corporation that it will tend to deceive the
public;
(c) The incorporators or a certain number of them are not
residents of the Philippines;
(d) The acknowledgment of the articles of incorporation
or certificate of incorporation is insufficient or defective in
form, or it was acknowledged before the wrong officer (see 8
Fletcher, pp. 108-113.);
(e) The percentage of Filipino ownership of the capital
stock required for the business is less than that prescribed by
law;
(f) The minimum paid-up capital stock has not been
paid to and received by the corporate treasurer contrary to
his affidavit; and
(g) The failure to submit its by-laws on time. (Sawadjaen
vs. Court of Appeals, 459 SCRA 516 [2005].)
The above may be considered as inadvertent or minor defects
or errors which can be excused to prevent injustice.
Colorable compliance with the law.

To constitute a corporation de facto, there must be, it is true,


a colorable compliance with the statute, but there need not be
a substantial compliance. A substantial compliance makes the
body a corporation de jure. (Clark on Corporations, p. 107.)
There is no fixed rule on how far the proceedings must go or
what steps are sufficient to amount to this colorable compliance.
It will depend on the situation and knowledge of the parties.
The mere naked claim and assumption of corporate name and
capacity will not be sufficient to give a pretended corporation the
de facto status. It is not enough to show that the associates have
intended to incorporate and have agreed among themselves to
act and have acted as if they were a corporation. The efforts to

Sec. 20

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

201

incorporate must give an appearance of sufficiency of compliance


with statutory requirements, so that the associates may in good
faith suppose that they have actually become incorporated.
(Ballantine, pp. 77-78.)
User of corporate powers in good
faith.
To create a corporation de facto, it is not sufficient to show the
existence of a law under which a corporation might be formed
and an honest attempt to comply with the requirements thereof,
but it is also necessary to show an actual user or exercise of corporate powers or franchise.
(1) User contemplated. In substance, user consists in an
enjoyment and exercise (although not rightful) of such corporate
franchises and powers as would be given by the law to an
association if the attempted organization had been perfected.
The acts relied upon as showing user must be corporate acts as
distinguished from acts which might as well be performed by
an incorporated association, or from acts of individuals which
would not be corporate acts if there were a charter. But if the
business is such that it can only be carried on by a corporation,
then the carrying on of such business is enough since its members
must of necessity act as a corporation, if they act at all. (8 Fletcher,
pp. 149-159.)
41

42

(2) Duty to correct defect if discovered. Furthermore, it is

essential that the corporation must act in good faith in claiming


to be a corporation and exercising corporate powers. (Sec. 20.)
Therefore, if after incorporation, the incorporators discovered
that they have not complied substantially with the law and still
continued transacting business as a corporation, without doing

"This element seems to be a factor of minor significance. (Ballantine, p. 77.)


t a k i n g subscriptions to and issuing shares of stock, electing directors and officers,
adopting by-laws and buying a lot and constructing and leasing a building upon it, are
sufficient acts of user of corporate powers to constitute a corporation de facto. It is doubtful, however, whether the mere organization of a corporation by the election of officers
and adoption of a board resolution authorizing a contract preliminary to the actual doing
of business with third parties will constitute "acts of user." (Ballantine, pp. 81-82.)

202

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Sec. 20

anything to correct the defect, the privilege of de facto existence


can no longer be invoked.
Basis of de facto doctrine.

The recognition of de facto existence has been found necessary


to promote the security of business transactions and to eliminate
quibbling over irregularities.
(1) A third person dealing with a corporation will rarely be
prejudiced if the company is recognized as a corporation in spite
of minor defects in its formation.
(2) Seldom would it be just to allow a wrongdoer to quibble
over such objections to escape liability for wrongdoing.
(3) Equally, it would be unjust to allow a claimant against a
supposed company to assert the individual liability of innocent
passive investors on the ground of flaws in the formal steps of
incorporation, when they have attempted in good faith to comply with statutory requirements and the objecting party is not
prejudiced. (Ballantine, p. 87.)
Questioning validity of c o r p o r a t e
existence.

The well-settled rule is that assuming that a de facto corporation


actually exists, its existence as a corporation cannot be collaterally
attacked either by the State or by private individuals.
(1) The State must bring a direct proceeding (quo warranto)
against the corporation to oust it from the exercise of corporate
powers usurped by it and to have it dissolved. So far as the State
is concerned, the distinction between a corporation de jure and a
corporation de facto is that one can successfully resist a suit by the
State, brought directly to test the rightfulness of its existence, and
the other cannot.
(2) As to individuals dealing with it as a corporation, there
is no essential distinction. The stockholders or members of both
are alike protected from individual liability for debts except to
the extent provided by the charter or act of incorporation. (9-A
Words and Phrases 96.)

Sec. 20

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

203

Direct attack/collateral attack of corporate


existence defined.

(1) Direct attack is one whereby the State, in a proceeding


brought for that purpose, attacks the existence of an association
claiming to be a corporation. A direct attack can only be instituted by the government through the Solicitor General by quo
warranto proceedings. (Sec. 20; see Sec. 121.)

(2) A collateral attack is one whereby corporate existence is


questioned in some incidental proceedings not provided by law
for the express purpose of attacking the corporate existence.
ILLUSTRATION:
Upon failure of A to pay his debt, X Corporation sued A.
Can A interpose the defense that X, being a de facto corporation,
has no right to exist as a corporation and, therefore, has
no capacity to enter into any contract and to sue in its own
name?
No, because A is attacking the existence of X collaterally.
The defense of A is merely an incident to the main action or
principal case the purpose of which is to enforce the contract
of X with A. The right of X to exist as a corporation can only
be inquired into directly in a quo warranto proceeding which is
brought precisely for the purpose and this proceeding can only
be instituted by the Government through the Solicitor General
(Sec. 20.) and not by A.
Rule against collateral attack.

(1) Rationale. The general rule against collateral attack


upon corporate existence is based upon the ground, not of
equitable estoppel (see Sec. 21.), but of public policy.
(a) Individual right is not invaded; it is the State's right
and authority which are invaded and usurped. If the State,
which alone grants the authority to incorporate, remains
silent, an individual would not be allowed and permitted to
raise the inquiry.
(b) It would produce endless confusion and hardship
and probably destroy the corporation if the legality of its
existence could be questioned in every suit to which it is a

204

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 20

party, for then no judgment could be rendered which would


finally settle the question. (18 Am. Jur. 2d 606.)
(c) Likewise, the rule is in the interest of the public and is
essential to the validity of business transactions with corporations. (Ibid., 594.)

(2) When rule not applicable. The rule that collateral attack
on the organic entity or existence of a corporation will not be
permitted does not apply, however, when the lack of right or the
wrongdoing of the corporation is in issue because in violation
of public policy or of express or implied statutory requirement,
such as denial of its right to enforce contracts entered into without compliance with prohibitions of express or implied statutory
or public policy. (Ibid., 605.) Thus, the defendant may question
the personality of a foreign corporation transacting business in
the Philippines to maintain a suit on the ground that it is not
duly licensed to do business in our country, (see Sec. 133.)
W h e r e organization not e v e n a de f a c t o
corporation.

If there has been a bona fide attempt to incorporate, under


a law authorizing incorporation, and the law has been so far
complied with as to make the association what is called a
corporation de facto, the only way in which its corporate existence
can be questioned is in a direct proceeding by the State, brought
for that purpose. Private individuals cannot raise the objection in
such a case, either directly or indirectly, and nobody can raise the
objection collaterally.
(1) Direct or collateral attack. If failure to comply with

conditions precedent prevents the coming into existence of any


corporation either de jure or de facto, then, on principle and in
reason, the question may be raised collaterally as well as directly,
and by private individuals as well as by the State, unless there is
something to operate as an estoppel. When a private individual,
therefore, raises the objection that conditions precedent have not
been complied with, the question, in the absence of elements of
estoppel, is whether or not there is a corporation de facto. If there
is, he cannot object; otherwise, he can.

Sec. 20

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OF PRIVATE CORPORATIONS

205

(2) Capacity to sue or be sued. If a party is not either dejure or

de facto, it has no legal capacity to sue or be sued. And it follows


that where the corporate existence of the plaintiff suing as a
corporation is defined, the burden is on it to prove its corporate
existence either de jure or de facto, or at least to show an estoppel
on the part of the defendant to deny such existence.
(3) Liability as partners. If neither a de jure nor a de facto

corporation results, the incorporators should be held liable as


partners together with stockholders who subscribed to stocks
knowing the failure of the attempted incorporation of the
business. (Sec. 21.) It is the regular courts, not the Securities and
Exchange Commission, that have jurisdiction over disputes or
controversies among them.
(4) Es toppel as a defense. Where there is not even a corporation
de facto, a private person may, according to many cases, be barred
from raising the objection on the ground that he is estopped by
his conduct, as by having dealt with the pretended corporation
as a corporation, or by having held it out to the public as a legally
constituted corporation. (Ibid.; Clark on Corporations, pp. 65-66.)
Proof of corporate existence.
(1) Proof of de jure existence. The sufficiency of the proof of

corporate existence will depend to a great extent upon the nature


of the proceeding in which the question is raised and the circumstances of the particular case. In quo warranto proceedings by the
State to test the right of an alleged corporation to exercise corporate powers, corporate existence de jure must be shown; and
to show this, it must be made to appear that there is a valid law
creating or authorizing such a corporation, that there was a valid
organization under it and a substantial compliance with all conditions precedent.
(2) Proof of de facto existence. On the other hand, as has

been stated, if the question of corporate existence is raised


collaterally, it is sufficient if a de facto existence be shown. Such
proof is admissible whenever the question comes up collaterally
as in a criminal prosecution for forgery or any other crime
against an alleged corporation, or in any civil proceeding, other

THE CORPORATION CODE OF THE PHILIPPINES

206

Sec. 20

than proceedings by the State to test the existence of the alleged


corporation. It is only necessary, in order to prove de facto corporate
existence, to show a law under which the alleged corporation
might have been formed, a colorable bona fide compliance with
that law, and an assumption or user of corporate powers.
(3) Proof of facts operating as an estoppel. Again, there are

many cases in which a party may, by his conduct, as by dealing with or holding out a body as a corporation, be estopped to
deny its existence as a corporate body. Here, it is not necessary to
prove even a de facto corporate existence. All that is necessary is
to show the facts that will operate as an estoppel, (see Sec. 21.)
Where a person has contracted or dealt with an association
as a corporation, proof of that fact alone is prima facie evidence of
the corporate existence of the body as against him, as in action
by the alleged corporation on a subscription to its stock. (Clark
on Corporations, Sec. 40.) Thus, an indorsee for a note payable to
a corporation need not prove the corporate capacity of the payee
since the maker "engages that he will pay it according to its tenor,
and admits the existence of the payee and his then capacity to
indorse." (Act No. 2031 [Negotiable Instruments Law], Sec. 60.)
Powers a n d liabilities of a de facto
corporation.

(1) In general. Such a corporation is practically as good as


a de jure corporation. It is deemed to have a substantial legal existence and ordinarily, in its relation with all persons except the
State, has the same powers and is subject to the same liabilities,
duties and responsibilities, as a corporation dejure, and is bound
by all such acts as it might rightfully perform if it were a corporation de jure.

In other words, so long as the State acquiesces in its existence


and its exercise of corporate functions, it is under the protection
of the same law and governed by the same legal principles as de
jure corporations, and may legally do and perform every act and
thing which the same entity could do or perform were it a dejure
corporation. As to all the world except the paramount authority under which it acts and from which it receives its charter, it

Sec. 20

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OF PRIVATE CORPORATIONS

207

occupies the same position as though in all respects valid, and


even as against the State, except in direct proceedings to arrest its
usurpation of power, its acts are to be treated as efficacious.
(2) Liability to taxation. So, the property of a de facto corpo-

ration is subject to taxation in the same manner as though it were


a de jure corporation and under the statutes relative to the taxation of corporations of the latter class. (1 Fletcher, pp. 627-628.)
(3) Binding effect of contracts. Similarly, a transfer of prop-

erty to or by a corporation de facto is valid and binding against all


persons except the State; bonds, deeds, and mortgage executed
by such a corporation are valid, not only as against the corporation itself, but also as against anyone making a claim against its
assets, whether as a creditor directly of the corporation or as a
creditor of its creditors or stockholders.
(4) Protection against unauthorized acts. Whether a corpora-

tion is de facto or dejure, it is entitled to protect itself from unauthorized acts. (26 Am. Jur. 2d 583-584.)
Liabilities of officers a n d m e m b e r s
of a de facto corporation .

(1) In general. The officers and directors (or trustees) of a


de facto corporation are subject to all the liabilities and penalties
attending to officers and directors duly chosen by a corporation
de jure, including liability under the criminal law, and their acts
are binding when such acts would be within the power of such
officers if the corporation were one de jure. (Ibid., p. 655.)
(2) Liability as partners to third persons. The members of a de

facto corporation cannot be held liable as partners by third persons who deal with them in their supposed corporate capacity,
merely on account of a technical defect in the formation of the
corporation. This is especially true where the stockholders had
no knowledge of the defects and had no intent to become partners and the ostensible corporation is apparent to third persons.
On the other hand, where an attempt to organize a corporation
fails by omission of some substantial step or proceeding required
by the law, its members or stockholders are liable as partners.

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Sec. 21

The decisive question is always whether what has been done


toward incorporation and organization is sufficient to constitute
a corporation dejure or de facto. (Ibid., 600-601.)
(3) Liability among themselves. In actions among the mem-

bers themselves, however, for advances, commissions, etc., the


test of whether the corporation is de jure or de facto has been disregarded. When persons associate together and do business as a
corporation and the latter is defectively organized, their rights,
duties, and liabilities, as between themselves, should be determined and governed by the express or implied terms, conditions, and limitations contemplated by their agreement. They are
not partners unless they have agreed to be such.
The result thus obtained is the same as that reached on the
theory of estoppel. (Ibid., 601.)
Sec. 21. Corporation by estoppel. All persons who
assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for
all debts, liabilities and damages incurred or arising as
a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation, (n)
Estoppel to deny corporate existence.

An unincorporated association which represented itself to


be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality
to be sued to evade its responsibility for a contract it entered into
and by virtue of which it received advantages and benefits. (Lim
Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA
728 [1999].)
(1) Principles as to de facto corporation not applicable. In cer-

tain circumstances, an organization may not be a corporation de

Sec. 21

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OF PRIVATE CORPORATIONS

209

jure or perhaps not even de facto may, so far as the parties to a given transaction are concerned, be regarded practically
as a corporation, being recognized as such by the parties themselves. Actually, an organization which has not complied with
the conditions precedent to even de facto existence is not, for any
purpose, a corporation. Nevertheless, the incidents of a corporate existence may exist as between the parties by virtue of an
estoppel. Thus, besides corporation de jure and de facto, there is
sometimes a recognition of a third class known as corporation by
estoppel, also known as ostensible corporation.

It is generally conceded that corporations by estoppel are


not based upon the same principles as are corporations de facto.
The doctrine of de facto corporation has nothing to do with the
principle of estoppel. A corporation de facto cannot be created
by estoppel, the only effect of an estoppel being to prevent the
raising of the question as to the existence of a corporation. (18
Am. Jur. 2d 615.)
(2) Jurisdictional requirements not subject to estoppel. The

doctrine of corporation by estoppel cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to
agreement of the parties. Thus, it cannot be acquired through,
or waived, enlarged or diminished by any act or omission of the
parties; neither can it be conferred by the acquiescence of the
court or SEC. (Lozano vs. De los Santos, 274 SCRA 452 [1997].)
(3) Foundation of and reason behind doctrine. Corporation by

estoppel is founded on principles of equity and is designed to


prevent injustice and unfairness. It applies when persons assume
to form a corporation and exercise corporate functions and enter
into business relations with third persons. Where there is no
third person involved and the conflict arises only among those
assuming the form of a corporation who, therefore, know that
it has not been registered, there is no corporation by estoppel.
(Ibid.) The application of the doctrine applies to a third party only
when he tries to escape liability on a contract from which he has
benefited on the irrelevant ground of defective incorporation.
(International Express Travel & Tour Services, Inc. vs. Court of
Appeals, 343 SCRA 674 [2000].)

THE CORPORATION CODE OF THE PHILIPPINES

210

Sec. 21

The reason behind this doctrine is obvious an unincorporated association has no personality and would be incompetent
to act and appropriate for itself the power and attributes of a
corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act
or purport to act as its representatives or agents do so without
authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority
or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent. (Lim Tong Lim
vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 [1999];
International Express Travel & Tour Services, Inc. vs. Court of
Appeals, supra.)
Corporation by estoppel w i t h o u t
de facto existence.

In some jurisdictions, the rule is that a corporation must have


at least a de facto existence before there can be an estoppel to deny
its existence; but this is not the universal rule. (Ibid.)
The better doctrine seems to be that the estoppel prevails,
notwithstanding that not all the three requisites necessary to
constitute as association of persons a de facto corporation are
present. In other words, corporation by estoppel may arise even
if no de facto corporation exists.
43

A corporation by estoppel has no real existence in law. It is


neither a de jure nor a de facto corporation, but is a "mere fiction
existing for the particular case, and vanishing where the element
of estoppel is absent." (8 Fletcher, p. 219.) It exists only between
the persons who misrepresented their status and the parties who
The doctrine of estoppel supplements the de facto doctrine in case of serious defects
and applies to the third party as well as to the purported corporation. (Ballantine, p.
88.) Thus, if a party deals with a corporation as though it were validly formed, he may
later be estopped from questioning the validity of the formation or the existence of the
enterprises.
43

Sec. 21

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

211

relied on the misrepresentation. Its existence may be attacked by


any third party except where the attacking party is estopped to
treat the entity other than as a corporation.
ILLUSTRATION:
Where a group of persons represented that their
organization called X & Co. is a corporation, when it is not,
to Y who recognized it as such, and on this representation,
entered into a contract with Y, and without assuming to act
as a corporation entered into another contract with Z, in an
action against them on such contracts, they are estopped from
denying the corporate existence of X & Co. as against Y but not
as against Z. Neither is Y allowed to question or challenge the
validity of the organization or formation of X & Co. in an action
by the latter against the former.
If not all the associates participated or consented to the
representation, as to them, the doctrine of estoppel will not
apply.
If the group of persons (would-be corporation) does not
qualify as a corporation, whether dejure, de facto, or by estoppel,
there is no corporation and the stockholders are individually
liable.
Estoppel of persons dealing
with a corporation.
Even if the ostensible corporation is proven to be legally nonexistent, a party may be estopped from denying its corporate
existence.
(1) The stockholders or members of a pretended or ostensible
corporation who participated in holding it out as a corporation
are generally estopped or precluded to deny its existence against
creditors for the purpose of escaping liability for corporate debts
or for unpaid part of a subscription to stock. (8 Fletcher, pp.
275-278.) A corporation which continues its business instead of
liquidating its affairs after the expiration of its corporate term,
is a corporation by estoppel for the purpose of being sued on its
contracts, not a corporation de facto because it no longer exists in
fact and in law as a body corporate, except only for purposes of
liquidating its affairs, (see Sec. 122.)

212

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 21

The doctrine of estoppel to deny corporate existence applies


to domestic as well as to foreign corporations.
(2) So, also are the third persons who deal with such a corporation recognizing it as such and the pretended corporation
itself, estopped from denying its corporate existence and raising
the defense of its lack of corporate personality for the purpose
of defeating a liability growing out of the contractual relation
between them and such entity (Compania Agricola de Ultramar
vs. Reyes, 4 Phil. 2 [1904].), or any tort committed by it as such
(Sec. 21.), or later taking advantage of their non-compliance with
the law, chiefly in cases where such persons have received the
benefits of the contract. (Merrill Lynch Futures, Inc. vs. Court of
Appeals, 211 SCRA 824 [1992].) Thus, where a mortgage, promissory note, or other instrument is given to a corporation, as such,
the party giving it in effect admits and is thereby estopped to
deny its existence as a corporate body involving such contract
or dealing unless its existence is attacked for causes which have
arisen, since making the contract or dealing relied on as an estoppel. (Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil.
222 [1909]; Asia Banking Corporation vs. Standard Products Co.,
46 Phil. 145 [1924].)
In order for one to be estopped to deny the corporate
existence of an organization, he must have contracted or dealt
with it as a corporation. Thus, if one deals with the members of a
corporation as a partnership, he is not estopped to show this fact
or hold such individuals liable as partners. (18 Am. Jur. 2d 618.)
But one who is induced to deal with an apparent corporation by
fraud will not be estopped to deny the corporate existence. (Ibid.,
617-618.)
(3) All persons not stockholders or members 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.
44

"The pertinent provisions of the Civil Code are:


Art. 1816. All partners, including industrial ones, shall be liable pro rata with all
their property and after all the partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership contract, (n)

Sec. 21

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

213

P e r s o n s liable as g e n e r a l partners.

The Code makes liable as general partners "all persons who


assume to act as a corporation," and they include persons who
attempt, but fail, to form a corporation and who carry on business under the corporate name. A de facto partnership among
them is created.
Are both active and inactive members of an unsuccessfully
attempted corporation, neither de facto nor de jure, liable as partners?

Art. 1817. Any stipulation against the liability laid down in the preceding article
shall be void, except as among the partners, (n)
Art. 1822. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to the same extent as the partner so
acting or omitting to act. (n)
Art. 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent authority receives
money or property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property
of a third person and the money or property so received is misapplied by any partner
while it is in the custody of the partnership, (n)
Art. 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823. (n)
Art. 1825. When a person, by words spoken or written or by conduct, represents
himself, or consents to another representing him to anyone, as a partner in an existing
partnership or with one or more persons not actual partners, he is liable to any such
persons to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such
representation or consented to its being made in a public manner he is liable to such
person, whether the representation has or has not been made or communicated to such
person so giving credit by or with the knowledge of the apparent partner making the
representation or consenting to its being made.
(1) When a partnership liability results, he is liable as though he were an actual
member of the partnership;
(2) When no partnership liability results, he is liable pro rata with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise
separately.
When a person has been thus represented to be a partner in an existing partnership,
or with one or more persons not actual partners, he is an agent of the persons consenting
to such representation to bind them to the same extent and in the same manner as though
he were a partner in fact, with respect to persons who rely upon the representation. When
all the members of the existing partnership consent to the representation, a partnership
act or obligation results; but in all other cases, it is the joint act or obligation of the person
acting and the persons consenting to the representation, (n)

214

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 21

The general rule under American law is that active managerial


stockholders are liable personally as partners, upon failure of the
attempted incorporation, both de jure and de facto, (see Bacon vs.
Christian, 184 Ind. 517.) Thus, it has been held that the managing
stockholders were personally liable as partners, but that the
subscribers to the stock of the supposed corporation were not
personally liable. (Baker vs. Bates Street Shirt Co., 7 Fed. [2d] 854.)
The creditors of the supposed corporation could recover from
subscribers to stock and inactive members of the corporation
to the extent only of their unpaid subscription. (Stevens vs.
Episcopal Church History Co., 140 N.Y. Appl. Div. 570.)
This rule is criticized. The emphasis, it is said, should be laid
upon the reaping of profits by the owners of a business, rather
upon the management of the business, (see L. Teller, Law of Partnership, 1949 ed., pp. 18-19.)
In a local case, the Supreme Court ruled that while
"stockholders" of a defectively incorporated association become,
in legal effect, partners inter se, such a relation does not necessarily
exist, for ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their purpose
is that no partnership shall exist; it should be implied only when
necessary to do justice between the parties. Thus, one who takes
no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with
other subscribers who engage in business under the name of the
pretended corporation, as to be liable as such in an action for
settlement of the alleged partnership and contribution. (Pioneer
Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668
[1989], citing American cases.)
On the other hand, a third party who, knowing an association to
he unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence
in a suit brought against the alleged corporation. In such case, all

those who benefited from the transaction made by the ostensible


corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage
of. It is immaterial that a party did not directly act on behalf of a
non-existent corporation and his name did not appear on any of

Sec. 22

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

215

the contracts entered by it. Under the law on estoppel, those acting in behalf of a corporation and those benefited by it, knowing
it to be without valid existence, are held liable as partners. (Lim
Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA
728 [1999].)
Sec. 22. Effects of non-use of corporate charter and continuous inoperation of a corporation. If a corporation does
not formally organize and commence the transaction of its
business or the construction of its works within two (2)
years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved.
However, if a corporation has commenced the transaction
of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same
shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (19a)
This provision shall not apply if the failure to organize
and commence the transaction of its business or the
construction of its works, or to continuously operate is due
to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.

Statutory requirements before


and after incorporation.
The right of exemption from personal liability resulting from
incorporation, being entirely statutory, can be acquired only
on the terms specified by the statute. (18 Am. Jur. 2d 578.) Our
corporation law contains various requirements and conditions
which must be complied with in order that persons desiring to
be so may become a body corporate. The courts have established
between mandatory and directory conditions.
The rule is that as to provisions of the statute which are mandatory, non-compliance with its terms will prevent the creation
of a de jure corporation but as to those provisions which are merely directory, a departure will not have this consequence. Strict
compliance with the terms of the statute is not required. The law
requires only substantial compliance, (see Sec. 14, par. 1; Sec. 15,
par. 1; Sec. 17[i].)

216

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 22

Of course, what constitutes substantial compliance is a question to be determined in each case. It does not follow, however,
that because a substantial compliance is sufficient, any positive
statutory requirement may be omitted on the ground that it is
unimportant. There are conditions that cannot be dispensed
with, (see 18 Am. Jur. 2d 578.)
Mandatory and directory provisions
explained.

Whether a particular provision is mandatory or merely


directory must be determined by ascertaining the intention of
the legislature, to be gathered from the statute and its purpose.
(Clark on Corporations, p. 62.)
Generally, mandatory provisions prescribe formalities for
incorporation which are designed to protect the public. When
a provision is construed as directory, it is regarded as relatively
inconsequential so that failure to comply with a directory
provision will not be fatal to a valid incorporation. (Stevens on
Corporations, pp. 112-114.)
Mandatory conditions may be either conditions precedent or
conditions subsequent.
Conditions precedent e x p l a i n e d .

Conditions precedent are those conditions non-compliance


with which will prevent the legal existence of a corporation.
Examples are:
(1) Filing of the articles of incorporation with the Securities
and Exchange Commission as required by Section 14;
(2) The issuance of the certificate of incorporation by the
Securities and Exchange Commission under Section 19;
(3) The minimum number of five (5) incorporators required
by Section 10; and
(4) The legal requirements under Section 13 that 25% of the
authorized capital stock must be subscribed and 25% thereof
paid.

Sec. 22

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

217

Conditions s u b s e q u e n t e x p l a i n e d .

Conditions subsequent are conditions to be complied with after


acquiring corporate existence in order that a corporation may
legally continue as such.
(1) Under Section 22, the two required acts of organization
and commencement of its business operations are conditions
subsequent, failure to comply with which, it has been held, will
result in the automatic cessation of corporate powers and the dissolution of the corporation. (Perez vs. Balmaceda, [C.A.] 40 O.G.
No. 9, Suppl. 194, Aug. 30,1941.) Such a corporation is not even
a de facto corporation and, therefore, its legal existence may be
collaterally attacked. (Sec. 20.) Any attempted organization and
commencement of business after the expiration of the period
fixed will not give it even a de facto existence. The corporation
may be treated as a corporation by estoppel (Sec. 21.) for the protection of those with whom it contracted.
The Securities and Exchange Commission has opined,
however, that the dissolution contemplated by Section 22 is
not automatic. The corporation continues to exist as such,
notwithstanding its non-operational status until dissolution
or revocation has been lawfully declared by the Commission
after due notice and hearing. (SEC Opinion, Oct. 4, 1989.) The
Commission will take action on the non-operational status of
a corporation only after the lapse of the two (2)-year period as
prescribed under Section 22. (SEC Opinion, May 22,1998.) Note
that under the second paragraph of Section 22, which provision
is not found in Section 19 of the former Corporation Law, the
corporation is given a chance to show that its failure to organize
and commence business is due to causes beyond its control.
(2) Non-compliance with a condition subsequent which is
mandatory may not affect corporate existence although it can be
a ground for proceedings by the State to forfeit its charter. An example is the keeping of books and records required by Section 74.
Formal organization an d c o m m e n c e m e n t
of business.

A corporation achieves legal existence from the date the Securities and Exchange Commission issues a certificate of incor-

218

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 22

poration under its official seal (Sec. 19.) but formal organization
brings the corporation to life.
(1) Acts constituting formal organization. Formal organi-

zation of a corporation is the process of structuring the


corporation so that it can carry out the purposes for which it
has been incorporated. It would include the adoption of bylaws, the filing of the same with the Securities and Exchange
Commission (Sec. 46.), the election of the board of directors (or
trustees) and of the officers by the board pursuant to the by-laws
(Sec. 25.), establishment of the principal office, providing for the
subscription and payment of the capital stock, and the taking of
such other steps as are necessary to enable the corporation to
transact the legitimate business or accomplish the purpose for
which it was created, (see Benguet Consolidated Mining Co. vs.
Pineda, 98 Phil. 711 [1956]; SEC Rules, Dec. 29,1992.)
(2) Substantial compliance sufficient. Strict compliance with

this condition subsequent is not required. Thus, in a case, a corporation was deemed to have formally organized, it appearing
that from the very day of its formation, the corporation had a
governing board which directed its affairs, as well as a treasurer
and a clerk, and that through these instrumentalities, it actually
functioned and engaged in the business for which it was organized, and, therefore, it could not be held to have forfeited its
charter simply because it had not specifically shown that it also
had a president and a secretary. (Perez vs. Balmaceda, supra.)
(3) Acts constituting commencement of business. Acorporation

shall be considered to have commenced the transaction of its


business when it has performed preparatory acts geared toward
the fulfillment of the purposes for which it was established such
as but not limited to the following: entering into contracts or
negotiation for lease or sale of properties to be used as business or
factory site; making plans for and the construction of the factory;
and taking steps to expedite the construction of the corporation's
working equipment. (SEC Rules, Dec. 29,1992.)
(4) Effect of subsequent continuous inoperation. Where the

corporation has commenced the transaction of its business but


subsequently becomes continuously inoperative for a period
of at least five (5) years, such continuous inoperation shall be a

Sec. 22

TITLE II. INCORPORATION AND ORGANIZATION


OF PRIVATE CORPORATIONS

219

ground for the suspension or revocation of its corporate franchise


or certificate of incorporation but notice and hearing in such
case are required as provided in Presidential Decree No. 902-A.
(supra.) The corporation continues to exist, notwithstanding its
non-operational status, until the revocation or cancellation of its
certificate of registration has been lawfully declared by the Securities and Exchange Commission or it is dissolved in accordance
with law. CSEC Opinion, May 22,1998.)

If the non-use of corporate charter or continuous inoperation


of a corporation is due to causes beyond its control as found
by the Commission, the effects mentioned shall not take place.
(Sec. 22.) Thus, where a corporation after its registration or
incorporation elected its board of directors and its officers, and in
accordance with its corporate purpose and in order to commence
business operations made presentations to prospective investors
but due to the shift in the government's privatization policy,
failed to entice investors and was not able to continue with its
business although it still intends to pursue its business when
the conditions are appropriate, there is no ground, given these
conditions, to revoke or suspends its registration and, therefore,
it cannot be deemed dissolved. (SEC Opinion No. 07-23, Dec. 4,
2007.)
oOo

Title III
BOARD OF DIRECTORS/TRUSTEES/
OFFICERS
Sec. 23. The board of directors or trustees. Unless
otherwise provided in this Code, the corporate powers
of all corporations formed under this Code 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 corporation, who shall hold office for one (1) year and
until their successors are elected and qualified. (28a, 29a)
Every director must own at least one (1) share of the
capital stock of the corporation of which he is a director,
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at
least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director.
Trustees of non-stock corporations must be members
thereof. A majority of the directors or trustees of all
corporations organized under this Code must be residents
of the Philippines. (30a)
Structure of the corporate
organization.
(1) Binding effects of acts or contracts. Action proposed to be

taken by a corporation involves two basic questions:


First, in order to bind the corporation, who within the organization must act on its behalf?
Second, what is the result if the statutory requirements are not
complied with and the proper parties do not act?
220

Sec. 23

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

221

(2) Tri-level structure. The standard operating procedure


for corporations, frequently referred to as a corporate norm,
might be described as pyramidal in form.
At the base are the shareholders (or members) whose
vote is required to elect the board of directors (or trustees)
and to pass on other major corporate actions.
The next level is represented by directors who constitute
the policy-making body of the corporation and select the
officers annually, as a rule. The keystone of corporate
procedure is the provision common to most corporate laws
that the business of a corporation shall be managed by its
board of directors.
Finally, at the top of the pyramid are the officers who
have some discretion but in general deemed to execute policies formulated by the board.
The board of directors and corporate officers are frequently
referred to as management. In its strict sense, the term refers to the
corporate officers given the authority to implement the policies
determined by the board of directors as the governing body of
the corporation.
1

(3) Respective powers and functions. In the light of this tri-

level structure, the question then arises: What are the respective
functions and powers of officers, directors, and shareholders
within the corporate organization? (WL. Cary, Cases and
Materials on Corporations, 1969 ed., pp. 151-152.) Corporate
powers may be directly conferred upon corporate officers or
agents by statute, the articles of incorporation, the by-laws, or by
resolution or other act of the board of directors. (Citibank, N.A.
vs. Chua, 220 SCRA 75 [1993].)

The Bangko Sentral ng Pilipinas (BSP), the Insurance Commission, and the Securities and Exchange Commission have all issued circulars and/or memoranda requiring
corporations to have at least two (2) independent directors, i.e., BSP Circular No. 296, IC
Circular Letter 31-2005, and SEC Memorandum Circular No. 6, respectively, over which
they exercise supervision. SEC Memorandum Circular No. 6 (June 29, 2009) is the Revised Code of Corporate Governance. (Appendix "K.") It superseded SEC Memorandum
Circular No. 2 (April 5, 2002).

THE CORPORATION CODE OF THE PHILIPPINES

222

Sec. 23

Corporate powers exercised by board


of directors or trustees.

All corporations being invisible, existing only in contemplation of law, can only act and contract through the aid and by
means of individuals. Such individuals may be those holding
corporate offices or agents properly appointed by such officers.
The same general principles of law which govern the relation
of agency for a natural person govern the officer or agent of a
corporation in respect to his power or authority to act for the
corporation.
(1) Governing body of the corporation. It is well established

in corporation law that the corporation can act only through its
board of directors in the case of stock corporations, or board of
trustees in the case of non-stock corporations.
Section 23 provides that "unless otherwise provided in this
Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property
of such corporations controlled and held by the board of directors
or trustees." The board of directors or trustees, therefore, is the
governing body of the corporation chosen by the stockholders or
members. Thus, contracts or acts of a corporation must be made
either by the board of directors or trustees or by a corporate
officer duly authorized by the board. The general rule is that in
the absence of authority or valid delegation from the board of
directors or trustees, no person, not even its officers, can validly
bind a corporation.
2

(2) Binding effect of stockholders'action. The stockholders or

members elect a board of directors (or trustees) to oversee the


management and operation of the corporation. They are not the
agents of the corporation and cannot bind it by their acts. They
have only indirect control of the corporation through their votes.
With the exception only of some powers reserved by law to
stockholders (or members), the directors (or trustees) have sole
impliedly, it is not necessary for the stockholders (or members) to ratify the acts
of the board save the instances wherein the Corporation Code or the by-laws provides
otherwise, e.g., investment of corporate funds (Sec. 42.), declaration of stock dividends
(Sec. 43.), and other acts where approval or consent of stockholders (or members) is
necessary. (SEC Opinion, May 21,1982.)

Sec. 23

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

223

authority to determine policy, enter into contracts, and conduct


the ordinary business of the corporation (in all matters which do
not require the consent or approval of the stockholders) within
the scope of its charter, i.e., its articles of incorporation, by-laws,
and relevant provisions of law.
(a) The law is settled that contracts between a corporation
and third persons must be made by or under the authority of
its board of directors (or trustees) and not by its stockholders
(or members). Hence, the action of the stockholders in such
matters is only advisory or recommendatory and not in any
wise binding on the corporation. (Barreto vs. La Previsora
Filipina, 57 Phil. 649 [1932].)
3

(b) For the same reason that a corporation can act only
through the board of directors, a resolution adopted at a
meeting of stockholders refusing to recognize a corporate
contract effected with the approval of the board of directors
or repudiating it, is without effect. (Ramirez vs. Orientalist,
38 Phil. 634 [1918].)
4

(c) Stockholders entrust their investments in the


corporate business to the management of the board of
directors, thus establishing a fiduciary relationship between
them. Accordingly, it is the prerogative and discretion of the
board of directors of a parent or holding corporation to choose
its nominees in the board of directors of its subsidiaries.
The stockholders of the parent or holding company cannot
demand proportionate representation in the board of
directors of its subsidiaries. (SEC Opinion, Aug. 8,1995.)
(3) Extent of judicial review. As long as the directors (or

trustees) act honestly and their acts or contracts do not disregard


the rights of the minority, the courts will not interfere. They are
not liable for losses if the cause is merely error in business judgment, not amounting to bad faith or negligence.
Visayan vs. National Labor Relations Commission, 196 SCRA 410 (1991), citing DE
LEON, The Corporation Code of the Philippines, 1989 ed., p. 168.
It may weU be recognized, however, that where the stockholders unanimously vote
that certain actions be taken, this should control the discretion of the directors. Directors
have no personal interest as such in their official acts. If the real parties in interest unanimously agree on lawful corporate acts, their voice should control. (Ballantine, p. 123.)
3

224

Sec. 23

THE CORPORATION CODE OF THE PHILIPPINES

(a) The well-known "business judgment" rule is that


courts cannot undertake to control the discretion of the
board of directors about administrative matters as to which
they have the 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. As
long as it acts in good faith, its orders are not reviewable by
the courts. (Gov't, vs. El Hogar Filipino, 50 Phil. 399 [1927];
Gamboa vs. Victoriano, 90 SCRA 40 [1979]; Ingersoll vs.
Malabon Sugar Co., 53 Phil. 745 [1929]; Estacio vs. Pampanga
Electric Cooperative, Inc., 596 SCRA 542 [2009].)
5

(b) Whether the business of a corporation should be


operated at a loss during depression, or closed down at
a smaller loss, is a purely business and economic problem
to be determined by the directors and not by the court. A
corporation is but an association of individuals, allowed
to transact under an assumed corporate name, and with a
distinct legal personality. As to its corporate and management
decisions, the State will generally not interfere with the same.
Questions of policy or of management are left solely to the
honest decision of the board as the business manager of the
corporation, and the court is without authority to substitute
its judgment for that of the board, and as long as it acts in good
faith and in the exercise of honest judgment in the interest of
the corporation, its orders are not reviewable by the courts.

'This rule must be qualified with respect to the power to declare dividends since its
exercise is governed by specific rules provided by law. (see Sec. 43.)
'The reason for the rule is aptly explained thus: "Courts and other tribunals are
wont to override the business judgment of the board mainly because courts are not in
the business of business, and the laissez faire rule or the free enterprise system prevailing
in our social and economic set-up dictates that it is better for the State and its organs to
leave business to the businessmen; especially so, when courts are ill-equipped to make
business decisions. More importantly, the social contract in the corporate family to decide
the course of the corporate business has been vested in the board and not with courts."
(Ong Yong vs. Tiu, 405 SCRA 1 [2003], citing Cesar L. Villanueva, Philippine Corporate
Law, 1998, Ed., p. 228.) It has been held that while the Securities and Exchange Commission is without authority to substitute its judgment for that of the corporations board of
directors on business matters so long as the board acts in good faith, it has the power to
enjoin an association of stock transfer agents' plan to increase the transfer processing fees

Sec. 23

TITLE ffl. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

225

(see Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA


36 [1962]; Sales vs. Securities and Exchange Commission, 169
SCRA 109 [1989]; Philippine Stock Exchange, Inc. vs. Court of
Appeals, 281 SCRA 232 [1997]; Filipinas Port Services, Inc. vs.
Go, 518 SCRA 453 [2007].) Its acts or contracts are presumed
to be valid and regular.
(c) Any corporate act which does not fall under any
of the transactions requiring stockholders' or members'
approval (see note 5.) can be carried out by mere board resolution although the activities or transactions involved may
span beyond the term of the directors or trustees and entail
obligations to be borne by succeeding boards as long as the
action was done in good faith and for the best interest of the
corporation. (SEC Opinion, Feb. 21,1994.)
(d) The minority directors or stockholders cannot come
into court upon allegations of a want of judgment or lack of
efficiency on the part of the majority and change the course of
administration. Corporate elections furnish the only remedy
for internal dissensions, as the majority must rule so long as it
keeps within the powers conferred by the corporate charter.
(Flynn vs. Brooklyn City R. Co., 53 N.E. 520.)
Reason for the rule.
The theory of every corporate organization is that the stockholders may have all the profits but shall turn over to a small and
compact body the board of directors the exclusive authority
to manage and control the transaction of its business and the use
of its assets, the power of the stockholders being limited to a few
specified matters concerning its internal affairs.
This concentration of the power of control of the business
and of appointing of officers and managers in the board of directors (or trustees) is deemed necessary to efficiency especially in a
large organization. It is clearly impractical and unwise to entrust
the administration of corporate management. Stockholders are
too numerous and scattered and unfamiliar with the business of
after it had determined that such act if pursued may cause grave or irreparable injury
prejudice to the investing public. (Phil. Assoc. of Transfer and Registry Agencies, Inc. i
Court of Appeals, 536 SCRA 61 [2007].)

226

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 23

a corporation to conduct its business directly. It is accordingly


the plan of corporate organization that the stockholders shall
choose the directors who shall control and supervise the conduct
of the corporate business, (see Ballantine, pp. 121-122; Ramirez
vs. Orientalist, 38 Phil. 634 [1918]; Filipinas Port Services, Inc. vs.
Go, 518 SCRA 483 [2007].) If they are not satisfied with the policies or management of the board of directors, the remedy of the
stockholders is to replace them, (see Sec. 28.)
In a close corporation, however, the articles of incorporation may provide that the business of the corporation shall be
managed by the stockholders of the corporation rather than by a
board of directors. (Sec. 97, par. 2.)
Nature of powers of board of directors
or trustees.

(1) The powers of the board of directors or trustees are, in a


very important sense, original and undelegated. The stockholders
or members do not confer, nor can they revoke, those powers.
They are derivative only in the sense of being received from the
State in the act of incorporation. Obviously, they cannot exercise
powers which the corporation does not possess, nor is their action
valid when inconsistent with valid by-laws. Neither can they
perform constituent acts, that is, acts which involve fundamental
changes in the constitution of the corporation, and which can be
done only by the stockholders or members as constituting the
corporation. (14-A C.J. 82.)
In other words, acts of management pertain to the board, and
those of ownership to the stockholders or members. In the latter
case, the board cannot act alone, but must seek approval of the
stockholders or members. (Tan vs. Sycip, 499 SCRA 216 [2006],
citing J. Campos, Jr. & M.C. Campos, The Corporation Code,
1990, Vol. 1, p. 490.)
(2) The other view favors the delegation theory, which holds
that the directors are the officers and agents of the corporation,
representing the interests of that abstract legal entity and of those
who own shares of stock (see Mead vs. McCullough, 21 Phil. 95
[1911]; Angeles vs. Santos, 64 Phil. 697 [1937].), and as such, they
can bind the corporation provided they act within the scope of
their authority.

Sec. 23

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

227

(3) Actually, the powers of the board of directors or


trustees are directly conferred by statute and, as a general rule, the

stockholders or members cannot control their actions or exercise


of judgment vested in them by virtue of their office. Once the
directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board as provided by law. In
certain corporate acts, however, the approval or authorization of
the stockholders or members is necessary for their validity.
Limitations o n p o w e r s o f b o a r d
of directors or trustees .

Broad as it is, the managerial authority of the board of directors or trustees is thus subject to Sections 31-34 of the Corporation Code and to at least three (3) limitations. They are as follows:
(1) Limitations or restrictions imposed by the Constitution,
statutes, articles of incorporation, or by-laws of the corporation;
(2) It cannot perform constituent acts, that is, acts involving fundamental or major changes in the corporation (such
as amendment of the articles of incorporation under Sec. 16.),
which require the approval or ratification of the stockholders or
members; and
7

(3) It cannot exercise powers not possessed by the corporation, (see Clark on Corporations, Sec. 192.)
The corporate powers conferred upon the board of directors
usually refer only to the ordinary business transactions of the

corporation and does not extend beyond the management of


ordinary corporate affairs nor beyond the limits of its authority.
(SEC Opinion, May 2, 1994.) There are powers which are
reserved to the stockholders/members and, therefore, cannot be
exercised solely by the directors/trustees until they are ratified
or approved by the stockholders/members. It has been held that
the power of the board of directors to control the corporation's
property and business does not empower them to provide
themselves compensation. The law is well-settled that directors
of a corporation presumptively serve without compensation
and in the absence of express agreement or resolution in relation
7

See "Matters in which the law requires specific number of votes/' under Section

228

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 23

thereto, no claim can be asserted therefor. (Central Cooperative


Exchange Co., Inc. vs. Tibe, Jr., 33 SCRA 593 [1970]; see Sec. 30.)
Powers exercised by board of directors
or trustees as a board.

The board of directors or trustees must act together as a body


in a lawful meeting, not individually or separately, in order to
bind the corporation by their acts. In other words, to exercise
their powers, they must meet as directors or trustees and act "at
a meeting at which there is quorum." (see Sec. 25 as to requisites
for board meetings.) If they act or give their consent separately or
if they act at a meeting which is not a legal meeting, their action
is not that of the corporation, although all may consent, and the
corporation is not bound.
There are recognized exceptions to the rule that a corporation
cannot act except by authority of the board of directors or trustees
in a meeting duly convened, (infra.)
Reasons for the rule.

The general rule that the directors or trustees can bind the
corporation only by action taken at a board meeting seems to rest
upon two reasons:
(1) A meeting is necessary in order that any action may be
deliberately adopted, after opportunity for discussion and an
interchange of views; and
(2) As agents of the corporation managing its affairs,
directors (or trustees) have no power to act other than as a board.
(Ballantine, p. 124.)
Unlike its officers (Sec. 25.), directors are not the agents of the
corporation per se and they have no power acting individually to
bind the corporation.
Exceptions to the rule.

The requirement that the directors or trustees must act as a


body and personally (see Sec. 25.) to bind the corporation is not
without any exception. This is true where there are extraordinary
situations or conditions to justify the act of stockholders or cor-

Sec. 23

TITLE HI. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

porate officers as to make a board action as nothing more than a


mere formality.
(1) It has been held that a contract entered into by the
directors without a meeting of the board is binding upon the
corporation where the directors happen to be the sole stockholders.

(Zamboanga Transportation Co. vs. Bachrach Motor Co., 52 Phil.


244 [1928].)
(2) The corporation is similarly bound by a contract entered
into by a corporate officer such as the general manager, authorized
by the board of directors either expressly or impliedly, to bind it by
contract. (Acufia vs. Batac Producers Cooperative Assoc., Inc., 20
SCRA 526 [1967].) Settled jurisprudence has it that where similar
acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the
company without formal authorization of the board of directors.
In varying language, existence of such authority is established
by proof of the course of business, the usages and practices of
the company, and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. (Board
of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].)
(3) The corporation is also bound by a particular transaction
ratified in a subsequent board meeting (Ramirez vs. Orientalist Co.,

38 Phil. 634 [1918].); the ratification may be express by a formal


affirmative vote or resolution of the board or it may be implied
and if implied, it may take diverse forms such as by silence or
acquiescence, by acts showing approval or adoption of the contract or by acceptance and retention of benefits flowing therefrom (Acufia vs. Batac Producers Cooperative Assoc., Inc., supra.)
and such ratification relates back to the time of the contract and is
equivalent to original authority. (Board of Liquidators vs. Heirs
of Maximo Kalaw, supra.)
(4) The corporation is likewise bound by the acts of one of its
directors or agents held out by the corporation to the public as possess-

ing power to do those acts. (Yu Chuck vs. Kong Li Po, 46 Phil. 608
[1924].) The authority to act for and bind the corporation may be
presumed from acts of recognition in other instances, wherein
the power was in fact exercised without any objection from its

230

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 23

board or stockholders. (People's Aircargo & Warehousing, Co.,


Inc. vs. Court of Appeals, 297 SCRA 170 [1998].) The rule that the
members of the board have authority to act only when convened
in a board meeting, is for the benefit of the shareholders which
they are authorized to waive. The stockholders are the residuary
owners, and the rule requiring directors' meetings to authorize
acts is for their benefit. (Merchants & F. Bank vs. Harris Lumber
Co., 103 Ark. 283.)
(5) Where the stockholders, by acquiescence, invest the
executive officers of the corporation with powers of the directors
as the usual method of doing business, the board being inactive, the
acts of such officers will bind the corporation according to some
courts although not authorized by any vote either of stockholders
or directors. (Ballantine, p. 126.)
(6) The stockholders may waive the necessity for a meeting of

the board of directors, and without such meeting may authorize


acts to be done by agents of the corporation or ratify acts already
done and bind the corporation. Again, the shareholders are the
residuary owners, and the rule requiring directors' meetings to
authorize acts is for their benefit. (Ballantine, pp. 125-126.)
(7) Under exceptional situations, stockholders' agreement though

it provides for the exercise of management ordinarily delegated


to the board, is valid and enforceable, where no creditors,
minority stockholders, or other persons of the public are affected.
However, mere lack of quorum in the board alone where the
body is not inactive would not justify stockholders' action. (SEC
Opinion, Dec. 15,1987; March 21,1990.)
(8) The by-laws of a corporation may create an executive com-

mittee with authority to act on such specific matters within the


competence of the board, as may be delegated to it in the by-laws
of the corporation, or on a majority vote of the board, except on
certain matters specified in Section 35.
(9) A corporation is expressly allowed, subject to certain
limitations provided in Section 44, to enter into a management

contract under which it delegates the management of its affairs to


another corporation for a certain period of time.
(10) In a close corporation, any action by the directors without
a meeting or at a meeting improperly held, shall, unless the by-

Sec. 23

TITLE m. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

231

laws otherwise provide, be deemed valid or ratified in the cases


mentioned in Section 101.
P o w e r of directors or trustees
to delegate authority.

(1) General rule. The general rule is that, in the absence of


authority from the board of directors, no persons, not even its officers, can validly bind a corporation.
The power to bind the corporation by contracts rests in its
board of directors or trustees, but the power may be delegated
either expressly or impliedly to other officers or agents of the
corporation appointed by it. (Yu Chuck vs. Kong Li Po, 46 Phil.
608 [1924]; Visayan vs. National Labor Relations Commission,
196 SCRA 410 [1991].) The authority of such individuals to bind
the corporation is generally derived from laws, the by-laws,
or authorization from the board impliedly by habit, custom
or acquiescence in the general course of business. (People's
Aircargo & Warehousing Co., Inc. vs. Court of Appeals, 287
SCRA 170 [1998]; Associated Bank vs. Pronstroller, 558 SCRA
113 [2008]; Cebu Mactan Members Center, Inc. vs. Tsukahara,
593 SCRA 172 [2009].) Although it cannot completely abdicate
its power and responsibility to act for the juridical entity, the
board may expressly delegate specific powers to the President or
any of its officers (Prime White Cement Corp. vs. Intermediate
Appellate Court, 220 SCRA 103 [1993].), particularly with respect
to employment of lower level personnel.
The directors or trustees do not themselves exercise delegated authority so as to be precluded from delegating power by the
maxim, delegata potestas non potest delegare.

(a) It is stated broadly that they may delegate to agents of


their own appointment the performance of any act what they
themselves can legally perform. Certainly, as the governing
body of the corporation vested with the management of its
corporate affairs (Sec. 23.), it has the power and authority
to adopt a resolution appointing one of its members, or an
executive committee, or a particular officer or agent the
power to perform purely ministerial acts. (19 C.J.S. 100.)
(b) The same is true even in matters involving the exercise
of judgment and discretion. Their authority in the matter, to a

232

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 23

large extent, must be implied from necessity and usage for the
directors or trustees cannot attend to the details and current
business of the corporation. (2 Fletcher, p. 495.) Whatever
authority the officers or agents of a corporation may have is
derived from the board of directors or other governing body,
unless conferred by the charter of the corporation. (Vicente
vs. Geraldez, 52 SCRA 210 [1973].)
(c) The delegation of corporate powers, except for the
executive committee, must be for specific purposes. Such
delegation to officers make the latter agents of the corporation;
accordingly, the general rules of agency as to the binding
effects of their act would apply. (ABS-CBN Broadcasting vs.
Court of Appeals, 301 SCRA 572 [1999].)
(2) Exceptions. The rule recognizing the power of the board
to delegate authority is not without limitations.
(a) It has been held that discretionary powers which, by
provisions of law (e.g., to declare dividends, Sec. 43.) or the
by-laws or by the vote of the stockholders, are vested exclusively in the board of directors or are especially delegated to
them, cannot be delegated to subordinate officers and agents.
(Bliss vs. Kaweah Canal, etc., 65 Cal. 502; see Sec. 25, re other
officers and agents.)
(b) There is a limit, even to the power of the directors or
trustees to delegate authority. As their authority to delegate
is implied from the necessities in the management of the
corporation and from the usage, so also, it is limited by the
same considerations. They cannot delegate entire supervision
and control of the corporation to others for this is not only
unnecessary and contrary to usage, but it is inconsistent with
Section 23, which requires that "the corporate powers x x x
shall be exercised, all business conducted and all property of
such corporation controlled and held by its board of directors
or trustees." (see 2 Fletcher, pp. 378-379.)
(c) Neither can the board delegate special powers especially conferred upon it by a resolution of the stockholders or
members of the corporation. Unquestionably, it may delegate
purely ministerial duties. (2 Fletcher, p. 537.) It is quite clear
that the power of the board to delegate authority is subject to
restrictions as may be provided in the by-laws.

Sec. 23

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

233

Term of office of directors


or trustees.

(1) One year. As a general rule, the directors or trustees/


officers of a corporation shall serve only for the term as fixed
in the by-laws. The word "term," in a legal sense, means the
fixed and definite period of time which the law prescribes that
an officer may hold office and a hold-over does not change the
length of the term but results in shortening the period served
by his successor. It is now expressly provided that the board of
directors or trustees to be elected "shall hold office for one (1)
year (i.e., term expires one year after election to the office) and
until their successors are elected and qualified." (Sec. 23, par. 1;
see Sec. 25, par. 1.)
8

(2) Hold-over. This principle is sanctioned by the above


provision of Section 23. 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, (see Sec. 24, last
sentence.) The failure to elect does not terminate the terms of
incumbent officers nor dissolve the corporation.
(a) To "hold over" when applied to an office implies
that the office has a fixed term which has expired, and the
incumbent is holding the succeeding term. (19 Words and
Phrases 576.) Although the members of the board are holdover directors or trustees, they still possess the powers of
bona fide members until their successors are duly elected and
9

'Being a fixed period, it cannot be split into two or more terms so as to consider the
remaining period as another term. Thus, a director (previously elected in the immediately
preceding election) who merely served the remaining period of the original term of a
resigned director (subsequently elected) is not covered by the prohibition in the by-laws
against serving more than two consecutive terms unless the clear intention is to cover
such a situation. (SEC Opinion, Feb. 8, 1993.) Term is distinguished from tenure in that
the latter represents the period during which the incumbent actually holds office. Thus,
tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent. The holder-over period that time from the lapse
of one year from a member's election to the board and until his successor's election and
qualification is not part of the director's original term of office, nor is it a new term.
(Valle Verde Country Club, Inc. vs. Africa, 598 SCRA 200 [2009].)
""'Election" is the choice of one man among a number to fill a certain office. In a holdover, an officer is merely allowed to continue functioning as such. He is not chosen over
other contenders for the position he occupies.

234

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 23

qualified. Thus, a hold-over board has the power to declare


the position of the President vacant and elect another. (SEC
Opinion, Aug. 3,1976.)
(b) The rule that where the articles of incorporation or
by-laws of a corporation provide for the annual election of
directors and no election is held, the former directors hold
over until their successors are elected and qualified, applies
to a going concern where there is no break in the exercise of
duties of directors. (2 Fletcher Cy Corp., p. 138 [1982 ed.].)
(c) It must be noted that hold-over is a situation that arises when no successor is elected due to valid and justifiable
reason (e.g., pending election protest on the outcome of the
annual election), in which case the incumbent holds over and
continues to function until another officer is chosen and qualified. (SEC Opinion, June 24, 1998.) The corporation should,
as soon as possible, call a special meeting for such purpose
with proper notice given to all stockholders or members.
(d) The hold over doctrine has a purpose which is at
once legal as it is practical. It accords validity to what would
otherwise be deemed as dubious corporate acts and gives
continuity to a corporate enterprise in its relation to outsiders.
The old holdover officer is a de facto officer and by fiction
of law, his acts as such are considered valid and effective.
(Seneres vs. Commission on Elections, 585 SCRA 557 [2009].)
(e) Where the reason for hold-over is not for failure to
elect but to give the incumbents more time to learn, or for
reasons of economy and the uncertainty that a quorum can
be secured, the hold-over is in violation of the provision requiring an annual election of the directors or trustees (SEC
Opinions, July 3, 1989 and May 18, 1993.), and this is especially true where the hold-over extends beyond the one-year
term. (SEC Opinion, March 1, 1988.) The regular election of
directors as stated in the by-laws cannot be dispensed with
by the board in order to extend the term of the incumbents.
(SEC Opinion, Feb. 3,1994.)
(3) Modification of term. Unlike in the case of non-stock
corporations (see Sec. 92.) and educational corporations (see Sec.
108.), stock corporations under the general provisions of Title III
are not authorized to divide the members of its board of directors

Sec. 23

TITLE m. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

235

into groups with each group having a different term of office


(SEC Opinion, Feb. 4,1971.)
Their term of office being fixed by law, the same cannot be
shortened or extended by agreement of the parties or by those
interested in the position. (SEC Opinion, Jan. 15, 1975.) "An
annual meeting required and stated for each year cannot be
dispensed with and the directors cannot so change the date of the
annual election so as to continue themselves in office for more
than a year," unless the reason is justifiable and proper notice of
the postponement is given. (SEC Opinion, Jan. 5, 1981, citing 5
Fletcher, p. 22.)
Number of directors or trustees
to be elected.
(1) Under the Code, the number of directors in a stock
corporation must "not be less than five (5) nor more than fifteen
(15)" (Sec. 14[6].), except as otherwise provided by the Code
or by special law. Since the members of the board are required
to be stockholders of record of the corporation, it follows that
there must be at least five (5) stockholders in a corporation. (SEC
Opinion, Jan. 28,1985.)
(2) In ordinary non-stock corporations, the boards of trustees,
unless otherwise provided in the articles of incorporation or the
by-laws, "may be more than fifteen (15) in number," with the
term of office of 1 / 3 of their number expiring every year (see Sec.
92, par. 1.) but the number must not be less than five (5).
(3) In a close corporation, the articles of incorporation may
provide that the business of the corporation shall be managed by
its stockholders rather than by a board of directors in which case
no meeting of stockholders need be held to elect directors, (see
Sec. 97, par. 2.)
(4) Trustees of non-stock educational corporation "shall not be
less than five (5) nor more than fifteen (15)," provided that the
number "shall be in multiples of five (5)," with the term of office
of 1/5 of their number expiring every year, (see Sec. 108, pars. 1,
2.)
(5) In a corporation sole, there is no board of directors or
trustees as it consists of one member or corporator only.

THE CORPORATION CODE OF THE PHILIPPINES

236

Sec. 23

(6) The board of trustees of religious societies shall also "be not
less than five (5) nor more than fifteen (15)." (see Sec. 116[6].)
Election of less than the required number.

The limitation as to the number of directors or trustees seeks


to give ample representation to stockholders or members of a
corporation to its board while at the same time avoiding that it
will be too unwieldy.
The failure of the stockholders or members to elect the
required number of directors or trustees provided for by statute
or its articles of incorporation does not invalidate the title of
those elected as long as they constitute a quorum. An election of
less number of directors than the number which the meeting was
called to elect is valid. Thus, the stockholders of a corporation
may opt to elect only three (3) directors instead of five (5) at
the annual stockholders' meeting. Such act would not violate
the provisions of the Corporation Code, specifically Section
14(6), for such situation merely gives rise to vacancies of two
(2) seats in the board which may be filled up in a subsequent
special stockholders' meeting duly called for the purpose. (SEC
Opinions, Feb. 2,1987 and June 10,1992.)
Qualifications of directors
or trustees.
(1) Stock corporations. The qualifications

10

of directors of

stock corporations are as follows:


The Code does not state whether or not the members of the board of a corporation,
whether stock or non-stock, must be of legal age at the time of their election as such. In the
light of Articles 18 and 339 of the Civil Code, emancipated minors may become members
of the board. However, their vote will not be counted in approving any act or contract involving the borrowing of money, or the alienation or encumbrance of real property of the
corporation, or the filing of suits by the company. The powers of a corporate officer who
is an emancipated minor will be similarly restricted. Since the management of corporate
affairs is vested in the board of directors or trustees which as a body will enter into legal
relations with third persons, it is extremely unwise and not in keeping with sound corporate practice for the board to have as members, persons whose capacity to act is restricted.
Be that as it may, Article 18 of the Civil Code expressly provides that "in matters
which are governed by the Code of Commerce and special laws, the deficiency shall be
supplied by the provisions of the Code." Both Articles 38 and 39 of the Civil Code provide
that minority restricts or limits the capacity to act while Article 1327 states that unemancipated minors cannot give consent to a contract. (SEC Opinions, May 17, 1967, Dec. 28,
1967 and Feb. 2, 1981.)
But a minor cannot be an incorporator, (see Sec. 10.) Article 339 of the Civil Code is
now Article 236 of the Family Code, (see note 4 under Title II.)
10

Sec. 23

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

237

(a) Every director (including an incorporating director)


must own at least one share of the capital stock (see Detective
& Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255 [1968].);
(b) The share of stock held by the director must be registered in his name on the books of the corporation;"
(c) Every director must continuously own at least a share
of stock during his term; otherwise, he shall automatically
cease to be a director; and
(d) A majority of the directors must be residents of the
Philippines.
(2) Non-stock corporations. Trustees of non-stock corporations must be members in good standing thereof and like
in stock corporations, a majority of them must be residents of
the Philippines. The phrase "residents of the Philippines," as
contemplated in Section 23 (and Section 25.), refers to "legal
residence (animus manendi) from which a person could or might
depart or be absent temporarily for a certain purpose and to
which he always intended to return" (King vs. Republic, 89 Phil.
4 [1951].), not merely the place.
12

A person who has the disqualification mentioned in Section


27 is not qualified to hold the position of director or trustee.
Natural p e r s o n s c o n t e m p l a t e d by law.

It is clearly deducible from Section 23 that only natural persons


can be elected as directors or trustees (infra.) and they must be
elected from among the stockholders or members.
However, a corporation which owns shares of stock or is
a corporate member in another corporation can designate by
"The election of a person to the board of directors of a corporation does not
necessarily mean that he has paid for the shares recorded in his name. In most cases,
nominee directors do not pay for the qualifying shares assigned to them. (Baguio vs.
Court of Appeals, 226 SCRA 366 [1993].)
It is, however, difficult to define in precise language what constitutes a residence or
what makes one a resident of a place. Much depends upon the circumstances surrounding the person, upon the character of the work to be performed, upon whether he has a
family or a home in another place, and largely upon his present intention. Suffice it to
say that the term "resident," as used in the law, imports more than a temporary stay in
a place for the performance of a single piece of job or work. (37 Words and Phrases 424.)
,2

238

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 23

board resolution its officer or representative to sit in the latter's


board and thus qualifying him to be elected as director or trustee.
A contrary rule would create a situation where there would be no
board as where all the stockholders or members are corporations
or juridical persons. The appointment must be recorded in the
corporate books. (SEC Opinion No. 05-06, June 8, 2005.)
Citizenship requirement.

There is no citizenship requirement demanded of the members of the board of directors.


(1) In corporations not organized under the Code, citizenship requirements are established. Thus, in case of domestic
banks, the General Banking Law of 2000 allows non-Filipino citizens to become members of the board of directors to the extent
of the foreign participation in the equity of said bank. (Sec. 15,
R.A. No. 8791.) For rural banks (Sec. 5, R.A. No. 7353.), registered
investment companies (Sec. 15, R.A. No. 2029.), and private development banks (Sec. 4, R.A. No. 4093.), all the members of the
board of directors must be citizens of the Philippines.
(2) Under the Constitution, aliens may not be elected as
directors or officers of corporations engaged in business or
industries which are totally or partially nationalized business or
industries, (see Sec. 12.)
Stock ownershi p requirement.

(1) Holder of legal title. The general rule is that the person
who holds the legal title to the stock as shown by the books of the
corporation is qualified although some other person may be the
beneficial owner of the stock recorded in his name, (see Sec. 63.)
The old Corporation Code required that "every director must
own in his own right at least one share of the capital stock of the
corporation." (Sec. 30 thereof.) Thus, under the former law, the
eligibility of director, strictly speaking, could not be adversely
affected by the simple act of such a director being a party to a
voting trust agreement (see Sec. 59.) inasmuch as he remained
owner (although beneficial or equitable only) of the shares subject of the agreement. (Lee vs. Court of Appeals, 205 SCRA 752
[1992].) The phrase "in his own right" is deleted in Section 23. A

Sec. 23

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

239

mere proxy who is not a stockholder cannot be elected as a member of a corporation's board of directors or trustees.
(2) Voting trustee. Whatever doubt may have existed
before, a voting trustee may now be considered as the legal
owner of the shares transferred to him by virtue of a voting trust
agreement and, therefore, eligible to office of director. With the
omission of the phrase "in his own right," the election of trustees
and other persons who, in fact, are not the beneficial owners of the
shares registered in their names on the books of the corporations
becomes formally legalized. Consequently, the transferors who
cease to own at least one (1) share standing in their names on the
books of the corporation as required under Section 23 also cease
to be directors. (Lee vs. Court of Appeals, supra.)
(3) Transferee of qualifying share. A person to whom one

share of stock has been transferred for the express purpose of


qualifying him as a director is eligible. Ownership of the qualifying share need only be in a nominal capacity, with the beneficial
title remaining in the transferor who or which actually owns the
share. It is sufficient that the title to the stock, as it appears in the
books of the corporation, is in the director. (SEC Opinion, Jan. 25,
1985.) The transfer need not comply with the restrictions in the
articles of incorporation such as giving the corporation the right
of first refusal thereon or prohibiting the transfer of founders'
shares. To rule otherwise would create an injustice to corporate
stockholders who, under the law, have the right to be represented
in the Board." (SEC Opinions, Dec. 15,1987 and March 2,1988.)
(4) Pledgee/pledgor of shares. The legal title is what counts.
Hence, a person to whom shares have been transferred on the
books of the corporations as pledgee is not qualified to be a
director because he holds the shares merely as security and not as

The transfer is not violative of the transfer restriction clause in the articles of incorporation, as it would be more of a "trust" and not a transfer of "ownership." The transferee should be described in the deed of assignment, corporate books, and certificate of
stock merely as a qualifying stockholder or nominee of the transferor or assignor. Such
description serves as notice to the corporation and third parties that the holder thereof
does not hold the share in his own right, but only as nominee for the benefit of the real
owner. Any unpaid balance of the subscription to the qualifying share transferred would
remain the liability of the transferor-beneficial owner. (SEC Opinion, Aug. 4, 1995.)
13

240

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 23

owner. Upon like principle, a director is not disqualified when he


merely pledged his shares or entered into an executory contract
to sell the same.
(5) Subscriber of shares held in escrow. A subscriber to shares

held in escrow cannot be eligible as a director since the holder


does not become the owner of said shares until the conditions for
their release are fully met. (see comments under Sec. 6.)
(6) Transferee of shares he previously sold. Where a director

makes a valid and effective transfer of all his stockholdings, he


ceases to be a director and the subsequent purchase by him of
shares does not reinvest him with title to his former position.
(SEC Opinion, June 6,1971.)
(7) Transferee at time of assumption of office. It is not essential

to the validity of the election of one as a director that he be a


legal owner of stock at the time of the election. His subsequent
acquisition of stock before entering the duties of his office has the
effect of validating his election as director. (SEC Opinion, April 5,
1990.)
(8) Co-owners of shares. Where the system of absolute
community governs the property relations between husband
and wife, the provisions on co-ownership shall apply to the
community of property, (see Arts. 75, 90, Family Code.) Accordingly, the husband or wife who desires to be elected as a member
of the board must secure standing by having their shares recorded
in the corporate books as co-owned by them, in which case either
of them, not both, may be voted for as director for purposes of
voting said shares. Section 56 of the Corporation Code shall
apply. As co-owners of the shares, the husband and wife shall be
considered as one stockholder. (SEC Opinion, Sept. 4,1990.)
Reason for the requirement.

The reason for requiring a director to own stock in the corporation is simple enough. It is commonly felt that a man with a
financial interest at stake will devote more attention to the business.
Today, however, management is chosen for its professional
competence rather than its financial contribution. In any event,

Sec. 23

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

if the financial contribution of management is very small, it is


hardly an incentive to the individual director to be more careful
or a deterrent to carelessness. On the other hand, to require a
director that he invest substantially all of his fortune to the company of which he is a director would mean losing many valuable
men. (Bonneville, Dewey, and Kelley, Organizing and Financing
Business, 6th ed., p. 85.)
A d d i t i o n a l qualifications in t h e by-laws.

The qualifications of directors or trustees of the corporation,


i.e., qualifications in addition to those specified in Section 23 (par.
1.), may be prescribed by the by-laws (Sec. 47[5].) but their qualifications may not be modified if such modification would be in
conflict with the requirements prescribed by the corporation law.
(1) For instance, the by-laws may not provide that a director
need not be owner of stock. Such provision in the by-laws would
be invalid. But the by-laws may provide that no person may be
elected as director unless he owns two or more shares of stock.
This is not inconsistent with the law because "at least one share"
means one or more shares. The requirement, while in the form of
disqualification, is really a qualification expressed in a negative
way.
(2) A provision in the corporate by-law requiring that
persons elected to the board of directors must be holders of shares
of the paid-up value of a specified amount which shall be held
as security for their action, was held valid on the ground that
Section 21 (now Sec. 47.) of the Corporation Law expressly gives
the power to the corporation to provide in its by-laws for the
qualifications of directors and such provision "is highly prudent
and in conformity with good practice." (Gov't, vs. El Hogar, 50
Phil. 399 [1927].)
(3) Similarly, an amendment to the by-laws to the effect "that
no person shall qualify or be eligible for nomination or election
to the Board of Directors if he is engaged in any business (as an
officer, manager, or controlling person of, or the owner of at least
10% of any of the outstanding class of shares of a competing
corporation) which competes with or is antagonistic to that of
the corporation" was sustained as valid, upon the principle that

242

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 24

where the director is so employed in the service of a rival company, he cannot serve both but must betray one or the other.
"Sound principles of corporate management counsel
against sharing sensitive information with a director whose
fiduciary duty to loyalty may well require that he disclose
this information to a competitive rival. These dangers are
enhanced considerably where the common director is a
controlling stockholder of two of the competing corporations.
It would seem manifest that in such situations, the director
has an economic incentive to appropriate for the benefit of
his own corporation the corporate plans and policies of the
corporation where he sits as director." (Gokongwei, Jr. vs.
Securities and Exchange Commission, 89 SCRA 336 [1979].)
Additional qualifications of directors or trustees cannot be
enforced unless approved by the stockholders or members and
contained in the by-laws of the corporation. (SEC Opinion, July
13,1966.)
Effect of wan t of eligibility.

Votes cast for a person who is not eligible as a director cannot elect him. In any event, one not eligible as director because
not owning any stock is not a de facto director where he never
accepted the office, nor performed any act as director, nor ever
held himself out as director in any way.
It does not follow, however, that ineligibility of a person who
has been elected as an officer will invalidate his acts as such.
Persons dealing with a corporation are not required to ascertain
whether the directors or other officers of the corporation have
the qualifications prescribed by the by-laws. Acts of a director
or other officers are, therefore, valid so far as third persons
are concerned, although he may not possess the qualifications
prescribed, if he has been elected or appointed by the corporation
and permitted to act for it. (2 Fletcher, p. 98.)
Sec. 24. Election of directors or trustees. At all elections
of directors or trustees, there must be present, either in
person or by representative authorized to act by written
proxy, the owners of the majority of the capital stock, or if

Sec. 24

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

243

there be no capital stock a majority of the members entitled


to vote. The election must be by ballot if requested by any
voting stockholder or member. In stock corporations,
every stockholder entitled to vote shall have the right to
vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name
on the stock books of the corporation, or where the by-laws
are silent, at the time of the election; and said 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: 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: Provided, however,
That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws,
members of corporation which have no capital stock may
cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall
be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to
day or from time to time but not sine die or indefinitely if, for
any reason, no election is held, or if there are not present
or represented by proxy, at the meeting, the owners of a
majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote.
(31a)
Election of directors or trustees.

The following limitations or conditions are imposed in the


election of directors or trustees:
14

The Securities and Exchange Commission has "original and exclusive jurisdiction
to hear and decide cases involving x x x controversies in the election or appointment of
directors, trustees, officers, or managers of such corporations, partnerships, or associations." (Pres. Decree No. 902-A, Sec. 5[a].) Thus, in a labor case, the claim for unpaid salaries filed with the Ministry (now Department) of Labor and Employment by complainant
14

THE CORPORATION CODE OF THE PHILIPPINES

244

Sec. 24

(1) At any meeting of stockholders or members called for the


election of directors or trustees, there must be present in person or
by representative authorized to act by written proxy, the owners
of the majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote.
15

(a) In determining the presence of stockholders representing "the majority of the outstanding capital stock" (see
Sec. 137.), non-voting stocks are to be taken into account
although they are not entitled to vote.
(b) Voting is on the bases of the number of shares (one
share-one vote) and not on the number of stockholders present in the stockholders' meeting.
(c) The law prescribes who shall be entitled to vote for
directors or trustees of corporation. Hence, creditors of the
corporation cannot be given the right to vote at the meetings
for election of directors or trustees, or on other questions
either by a by-law of the corporation or by contract, even
with the consent of all the stockholders or members;
(2) The election must be by ballot if requested by any voting
stockholder or member. This means that voting by ballot is the
exception rather than the rule. Hence, voting by viva voce or roll
call (raising of hands) is valid except when there is a request that
the election be by ballot in which case such voting is mandatory;
(3) A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the
methods of voting in the election of directors;
(4) No stock delinquent for unpaid subscription shall be
voted. A delinquent stock is not entitled to vote or be represented
for any corporate purpose whatsoever;
who was one of the controlling stockholders and the general manager of a corporation
who was suspended by its board of directors was properly dismissed, as this question
should be left to the Securities and Exchange Commission to decide in conjunction with
the case pending with the SEC brought by complainant assailing the validity of his suspension. (Palma vs. Cost Plus Furniture, Inc., NLRC Case No. RB-PV 20858-78, 3rd Division, June 30,1980; see Phil. School of Business Administration vs. Leano, 127 SCRA 778
[1984].)
The election can only be held at a meeting of stockholders or members because Section 24 requires presence either in person or proxy, (see, however, Sec. 89, last par.)
15

Sec. 24

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

245

(5) If a quorum is present, the candidates receiving the highest number of votes shall be declared elected. ' The law requires
only plurality, and not majority of the votes cast at the election.
Delinquent stock is not included in determining the existence of
the required quorum;
1

(6) In case of failure to hold an election for any reason, the


meeting may be adjourned from day to day or time to time but it
cannot be adjourned sine die or ^definitely; and
(7) The requisite notice must be given, (see Sec. 50, par. 1.)
For one to be elected as director/trusteee or officer, it is not
required that he must be physically present at the meeting at
the time of his nomination and election, unless it is otherwise
provided by the by-laws, (see Sec. 47[5].) But a director or trustee
cannot attend or vote by proxy at board meetings. (Sec. 25, last
par.)
Where directors or trustees
merely designated.
Section 23 is very clear that the corporate powers of all corporations shall be exercised by the elected members of the board of
directors or trustees.
Therefore, mere designation by the stockholders or by
a corporate officer empowered by the stockholders without
election of the directors in the manner as provided in the by-laws
or applicable provisions of the Corporation Code will not be
sufficient. Election of directors cannot be the subject of a contract
or agreement among the stockholders. (SEC Opinions, March 18,
1981 and March 28, 1985.)

'Deadlock in corporate elections may be decided by the drawing of lots (which is


a common practice) among the candidates concerned in the absence of any provision in
the by-laws on the matter. If they do not agree on drawing of lots, the stockholders or
members may vote again and elect among them the remaining members of the board.
This matter cannot be left for decision to the old board or to the newly elected directors.
Pending resolution of the deadlock, it is proper for the elected directors to convene and
organize and elect the officers of the corporation provided that the vote requirements of
Section 25 are complied with. (SEC Opinion, April 14,1981.)

246

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 24

Time of annual election.

Since Section 23 fixes the tenure of directors or trustees at one


(1) year, their election must be held substantially once in each
year. The Code does not provide when the first election of directors or trustees shall be held. It, however, authorizes the corporation to provide in its by-laws "the time for holding the annual
election of directors or trustees." (Sec. 47[6].)
Incidentally, the Code deleted Section 29 of the former Corporation Law providing, among others, that the first election of
directors shall be held "at the meeting for the adoption of the
original by-laws, or at such subsequent meeting as may be then
determined."
Postponement of the election.

The board of directors cannot change the date of the annual


meeting prescribed in the by-laws of the corporation so as to
lengthen their terms of office unless the reason is justifiable {e.g.,
lack of quorum) and proper notice of the postponement is given
to the stockholders or members. (SEC Opinion, April 23,1987.)
The meeting must be held within a reasonable time from the
date it has been postponed, with proper notice of the change of
date given to all the stockholders of record. (SEC Opinion, April
17,1986.)
Methods of voting.

Every stockholder entitled to vote shall have the right to vote


in person or by proxy the numbers of shares of stock standing,
at the time fixed in the by-laws (e.g., as of 10 days before the
election), in his own name on the stock books of the corporation
(see Sec. 55.) or, where the by-laws are silent, at the time of the
election, and said stockholders may vote his shares in any of the
ways mentioned below.

17

The stockholder of record (as of the cut-off date fixed in the by-laws, or where the
by-laws are silent, as of the day of the election) entitled to vote may no longer be a shareholder at the time of the election by reason of the transfer of his shares before the meeting,
(see Sec. 63.) The buyer, however, has the right to compel the record owner to give him
proxy to vote the stock sold.

Sec. 24

TITLE ni. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

247

(1) Straight voting. By this voting method, every stockholder "may vote such number of shares for as many persons as
there are directors" to be elected.
ILLUSTRATION:
A owns 100 shares of stock in a corporation. If there are
five directors to be chosen, A is entitled to 500 votes obtained
by multiplying 100 by 5. He may give to the five candidates he
wants to be elected 100 votes each.
Under this method, the votes are distributed equally
among the five candidates without preference.
(2) Cumulative voting for one candidate. By this method, 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." Needless to
say, straight voting does not benefit minority stockholders for
they would not be able to elect any director over the objection
of the stockholder or stockholders who own at least 51% of the
capital stock.
(a) The privilege of cumulative voting is accorded for the
purpose of giving minority stockholders representation in
the board of directors by electing one or more directors but
such a provision has been held not to insure minority stockholders of proportional representation or of representation in
that board of directors under all circumstances.
(b) The effectiveness of cumulative voting varies with
the number of directors to be chosen, the number of shares
represented at the meeting, their distribution among minority stockholders (19 Am. Jur. 2d 169.), and the number of
shares held by the minority stockholders. Indeed, it is possible for minority stockholders to obtain greater representation than it is entitled to if the group controlling the majority
of the shares does not cumulate its votes or cumulates them
improperly.
(c) A director elected because of the vote of minority
stockholders who united in cumulative voting cannot be
removed without cause. (Sec. 28, last sentence.)

248

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 24

(d) Minority stockholders cannot demand as a matter of


right for proportionate representation in the board of directors
of its subsidiaries. It is the sole prerogative and discretion of
the board of directors of a parent or holding corporation to
choose its nominees in the board of directors of its subsidiary.
However, the dealings of the parent company and its directors
with the subsidiary will be subjected to vigorous scrutiny,
and where their interests are adverse, they must be under
a burden to prove not only the good faith of the transaction
but also its fairness. The fiduciary obligation is designed not
only for the protection of the minority stockholders but for
the creditors as well. But the fiduciary thereof will not be
employed merely to enable a minority to dictate corporate
policies. (SEC Opinion, March 1 3 , 1 9 9 1 , citing Ballantine, pp.
326-328.)
ILLUSTRATIONS:
(1) If A owns 200 shares of stock and there are five directors
to be elected, he is entitled to 1,000 votes all of which he may
cast in favor of any one candidate.
(2) Suppose that out of a total of 1,000 shares, A and B
(representing a group of stockholders) own 800 shares while C,
D, E and F (representing another group of stockholders) own
200 shares.
If there are five directors to be elected, A and B are entitled
to 4,000 votes and C, D, E and F, to 1,000 votes. The highest
number of votes that A and B can give each of their four
candidates is 1,000. Hence, by cumulating their 1,000 votes in
favor of a candidate, C, stockholders D, E and F would be able
to secure representation in the board of directors.
(3) If the majority group owns 501 shares and the minority
group, 499 shares, the former would have a total of 2,505 (501
x 5) votes, and the latter 2,495 (499 x 5) votes. By cumulating
its votes, the minority could elect two (2) candidates (one
receiving 1,248 and the other, 1,247 votes). Under straight
voting, the majority could always elect all its five candidates,
giving them 501 votes each, since the minority group could cast
only a maximum of 499 for each of its candidates.
Now assume that the majority group cast 501 votes each
for five candidates, and the minority group distributes its votes

Sec.

24

TITLE HI. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

249

(infra.) to four candidates (e.g., one receiving 623 votes, and the
other three, 624 votes), the minority would have control of the
board. The same is true if the minority group concentrates its
votes, 831, 832, and 832 respectively, while the majority group
cumulates its votes also on three candidates, giving them 830,
835, and 840 votes, respectively, the minority will have three
candidates elected to the board.
(3) 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.
In electing directors by cumulative voting, "the total number
of votes cast by a [stockholder] 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."
ILLUSTRATIONS:
(1) With 100 shares of stock, A is entitled to 500 votes if there
are five directors to be elected. A may distribute his votes to candidates W, X, and Y, giving W, 100 votes, X, 150 and Y, 250. A may
cast his votes in any combination desired by him provided that
the total number of votes cast by him does not exceed 500, which
is the number of shares owned by him multiplied by the total
number of directors to be elected.
(2) Suppose the total number of outstanding shares entitled
to vote in a corporation is 50,000 and the total number of directors to be elected is 11. The total number of votes that can be cast
for the 11 directors is 550,000 (50,000 x 11). What is the minimum
number of shares necessary to elect six directors? What is the
minimum number of votes required to elect six directors?
Under the cumulative voting system, the number may be
calculated by using the following formula:

THE CORPORATION CODE OF THE PHILIPPINES

250

Sec. 24

Where:
A = Total number of outstanding shares entitled to vote (at
meeting);
B = Number of directors desired to be elected;
C = Total number of directors to be elected;
D = Number of shares necessary to elect desired number of
directors; and
E = Number of votes required to elect desired number of
directors.
Thus:
A. Total no. of outstanding shares
entitled to vote

50,000

x6

Multiplied by:
B. No. of directors desired
to be elected
Divided by: Sum of:
C. Total no. of directors
to be elected +1(11 + 1)

300,000

+12
25,000

Plus 1

+1

25,001

D. = No. of shares necessary to


elect desired no. of directors
Multiplied by:
C. = Total no. of directors
to be elected

x 11
E. = No. of votes required to
elect desired no. of directors

275,011
Thus, the 275,011 votes may be distributed equally to six
candidates for directors, five of whom will receive 45,835 votes
and the sixth, 45,836 votes. If the remaining 24,999 shares are
controlled by another group, it can only elect a maximum
of five directors with its 274,989 (24,999 x 11) votes which, if
distributed equally to six candidates, will give each of them
only less than 45,835 votes.
(3) X, a stockholder, is a candidate to a nine-man board.
He expects that out of 3,000 outstanding shares, only 2,000

Sec. 24

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 251

shares will be represented at the meeting. How many of the


2,000 shares does X need to get elected?
By applying the formula, X will need 200 of the 2,000
shares to be elected. Now, if X seeks control of the corporation
and desires to elect five directors, then, he will need 1,001 (or
simply 5 / 1 0 [ B / C + 1] A + 1) shares to elect the five.
(4) Assume: 18,825 total outstanding shares; 13
numbers of directors to be elected; all shares (244,725) will vote.
(a) to elect 13 directors:
1) 18,825(A) x 13(B) = 244,725 + 1 4 (13 + 1) = 17,480.35
+ 1 = 17,482 (D; rounded off) x 13(C) = 227,266(E)
2) 17,481 x 13 = 227,253. This number of shares is
sufficient.
3) 244,725 - 227,266 = 17,459. This number of shares
cannot elect one (1) director.
4) 244,725 - 227,253 = 17,472. This number of shares
cannot also elect one (1) director.
(b) to elect 12 directors:
1) 18,825 x 12(B) = 225,900 - 14 = 16,135.71 + 1 =
16,137 (rounded off) x 13 = 209,781
2)

244,725 - 209,781 = 34,944 -H 2 = 17,472

34,944 shares cannot elect two (2) directors, only one (1).
3)

209,781^-12 = 17,481

(c) to elect 11 directors:


1) 18,825 x 11 = 207,075 + 14 = 14,791 + 1 = 14,792 x 13 =
192,296
2) 244,725 - 192,296 = 52,429. This number of shares
cannot elect three (3) directors, only two (2).
192,296 H- 11 = 17,481
52,429 + 3 = 17,476
(d) to elect 10 directors:
1) 18,825 x 10 = 188,250 + 14 = 13,446 + 1 = 13,447 x 13
= 174,811
2) 244,725 - 174,811 = 69,914. This number of shares
cannot elect four (4) directors, only three (3).

THE CORPORATION CODE OF THE PHILIPPINES

252

Sec. 24

174,811 + 10 = 17,481
69,914 + 4 = 17,478
(e) to elect three (3) directors:
1) 18,825 x 3 = 56,475 - 14 = 4,034 + 1 = 4,035 x 13 =
52,445
2) 244,725 - 52,445 = 192,280. This number of shares
cannot elect 11 directors, only 10.
192,280 -s-11 = 17,480
52,445 + 3 = 17,481
(f) to elect two (2) directors:
1)
34,970

18,825 x 2 = 37,650 + 14 = 2,689 + 1 = 2,690 x 13 =

2) 244,725 - 34,970 = 209,755. This number of shares


cannot elect 12 directors, only 11.
209,755 + 12 = 17,479
34,970 T 2 = 17,485
(g) to elect one (1) director:
1) 18,825 x 1 = 18,825 * 14 = 1,345 + 1 = 1,346 x 13 =
17,498
2) 244,725 - 17,498 = 227,227. This number of shares
cannot elect 13 directors, only 12.
227,227 -s-13 = 17,479
17,498 + 1 = 17,498
Right of stockholder to use
cumulative voting.
Cumulative voting being a statutory right, a corporation
is without power to deprive the stockholders of its use (SEC
Opinion, Oct. 2 0 , 1 9 6 4 . ) or even to restrict the right to vote to only
one way or method. A stockholder may or may not exercise the
right as "he shall see fit." (Sec. 24.) He may contract with other
stockholders with reference to his stock or such right, (see Sees.
59, 100.)
Cumulative voting may not be used as a device to achieve
stealthily or indirectly what the law does not allow such as to

Sec. 24

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

253

undermine the local majority "ownership in industries where


constitutional and legal requirements reserve controlling ownership to Filipino citizens by the election, through the combined
cumulative votes of a group of foreign investors, of more than
the number of directors which the group is entitled to elect under
a joint venture agreement." (Aurbach vs. Sanitary Wares Manufacturing Corp., 180 SCRA 130 [1989].)
Situations involving cumulative voting.
In a study of proxy fights, situations involving cumulative
voting were found to be generally of six (6) types:
(1) Cases growing out of conspicuous management or board
failures;
(2) Situations grounded in conflicts of important business
interests among stockholders, or between stockholders and
management;
(3) Where stockholders became convinced on rather general
grounds that the board of directors was unrepresentative of, and
generally insensitive to, stockholders' interest;
(4) Instances involving clashes of strong personalities;
(5) Struggles for control of the corporation in which
representation through cumulative voting was an intermediate
objective; and
(6) Cases of "anglers" opposition leaders who appeared
to seek board membership in order to push narrow and selfish
interests of their own. (W.L. Cary, Cases and Materials on
Corporations, 1969 ed., p. 285, citing C M . Williams, Cumulative
Voting, 33 Harv. Bus. Rev. 108, at 113 [May-June, 1955].)
Arguments for cumulative voting.
They have been summarized as follows:
(1) Perhaps, foremost of the varied arguments made by
proponents of cumulative voting is that it is basically fair. They
argue that it is only equitable that stockholders with a large stake
in the corporation have the opportunity to gain representation
on the board of directors, in proportion to their holdings;

254

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Sec. 24

(2) Minority representation under cumulative voting does


not constitute a breakdown of the principle of majority rule since
the number of directors elected by each group will vary with its
proportions of ownership;
18

(3) Significant conflicts of interest can develop between the


stockholder groups (or the stockholders in general) and management and the board of directors. Unless minority groups can gain
representation on the board, they may fail to get an adequate
voice in policy (Illustration of conflict: dividend policy or majority shareholders taking out profits in salaries);
(4) In the case of many larger corporations, proponents of
cumulative voting argue that the management virtually controls
the typical board of directors the stockholders merely ratify
the selections. Thus, cumulative voting represents potential
power to assert stockholders' points of view;
(5) The position of the management and the controlling
interests is generally very strong; the balance of power lies
heavily with the "ins" who hold great advantages in the event of
a proxy fight; and
(6) Minority representation on the board can be helpful
in protecting or advancing the interests of minority groups. If
boards are composed of men who think essentially alike, and
operations are conducted in a private club atmosphere as does
happen too often an intelligent gadfly can prove useful. (Ibid.,
pp. 287-288.)
A r g u m e n t s against cumulative v o t i n g .

They have been summarized as follows:


(1) A basic argument against cumulative voting is that it
means the election of directors who are, by their nature, partisans of particular interest groups; and the role of a partisan on
the board of directors is inherently inconsistent with the proper
function of a director, which is to represent all interest groups in
the corporation;

'Thus, cumulative voting cannot be considered undemocratic.

Sec. 24

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

255

(2) The board of directors is an integral part of the management team;


(3) Disharmony in the board can dissipate and destroy the
energy of management and lead to an atmosphere of uncertainty
and inaction at the top level. Officers susceptible to unfriendly
criticism are likely to avoid action which might result in failure
and hostility, even when such drastic and risky action is appropriate and necessary;
(4) A director who cannot be trusted may leak such information to the harm of the corporation;
(5) Too frequently, cumulative voting tends to be used in
practice by persons who are motivated by narrow selfish interests
rather than by the broader interests of the stockholders (which
they may profess to represent); and
(6) Not infrequently, opposition groups use cumulative voting to secure a toe-hold in a long-run fight for control of the company. The result is that each board meeting becomes a skirmish
in a continuing battle. Each group keeps trying to get something
on the other group that can be used in the next proxy fight. The
board neglects its real functions, top management is demoralized, and serious harm is done to the corporation. (Ibid., p. 288.)
Voting in a non-stoc k corporation.

Members of non-stock corporations may cast as many votes


as there are trustees to be elected but may not cast more than one
vote for one candidate. This is the manner of voting in non-stock
corporations unless otherwise provided in the articles of incorporation or in the by-laws, (see Sec. 89.)
ILLUSTRATION:
If A is a member of a non-stock corporation and there are
five directors to be elected, he is entitled only to five votes. He
may give one vote to each of the five candidates he wants to be
elected.
If he has only one candidate, he can cast only one vote
for said candidate unless cumulative voting is authorized in
the articles of incorporation or in the by-laws. Thus, where

256

THE CORPORATION CODE OF T H E PHILIPPINES

Sec. 25

cumulative voting exists, and there are nine trustees to be


elected, a member is entitled to cast nine votes for one candidate
or to distribute the same among as many candidates as he shall
see fit.
Separate voting by zone s or regions
not allowed.

It is clear from Section 24 that in the election of the trustees of


a non-stock corporation, it is necessary that at least "a majority
of the members entitled to vote" must be present at the meeting
held for the purpose. It follows that trustees cannot be elected by
zones or regions, each zone or region electing independently and
separately a member of the board of trustees of the corporation,
such method being violative of Section 24. (SEC Opinions, Jan.
30, 1969 andApril 1,1981.)
This opinion applies as well to the election of directors of
stock corporations where there must be present the owners of at
least "the majority of the outstanding capital stock." However,
the by-laws of a non-stock corporation can validly provide in its
by-laws for the election of trustees by category (e.g., age bracket,
regional area), a practice followed by most corporations with
nationwide membership. (SEC Opinion, Feb. 22,1972.)
For purposes of electing directors or trustees, the by-laws
may divide the members into groups, with each group entitled
to nominate qualified members coming from said group, but
the nominated members shall be elected not by the group itself
but by the entire members of the corporation in accordance with
Sections 23 and 24. (see SEC Opinion, Sept. 4,1989.)
Sec. 25. Corporate officers, quorum. Immediately after
their election, the directors of a corporation must formally
organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director,
a secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided
for in the by-laws. Any two (2) or more positions may be
held concurrently by the same person, except that no one
shall act as president and secretary or as president and
treasurer at the same time.

Sec. 25

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

257

The directors or trustees and officers to be elected


shall perform the duties enjoined on them by law and
by the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority,
a majority of the number of directors or trustees as fixed in
the articles of incorporation shall constitute a quorum for
the transaction of corporate business, and every decision
of at least a majority of the directors or trustees present
at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which
shall require the vote of a majority of all the members of
the board.
Directors or trustees cannot attend or vote by proxy at
board meetings. (33a)

Corporate officers.
The board of directors or trustees, as we have seen, formulates
the broad policy of the corporation and directs the conduct of its
business operations. (Sec. 23.) But the task of actual management
and carrying on the details of business operations and corporate
policy are delegated to the officers elected by it and over whom
it exercises supervision.
The only officers of a corporation are those who are given
that character either by the Code (Sees. 24, 25.) or the charter or
by-laws; the rest can be considered merely as employees or subordinate officials. (Gurrea vs. Lezama, 103 Phil. 553 [1958].)
In most cases the "by-laws may and usually do provide for
such other officers" and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws
of a corporation, the board of directors may also be empowered
under the by-laws to create additional officers as may be necessary. (Nacpil vs. Intercontinental Broadcasting Corporation, 379
SCRA 653 [2002].) Thus:
(1) Although the intention of the board of trustees of a corporation is to make the "General Financial Secretary" an officer
thereof, he cannot be classified as such where the by-laws of the
corporation discloses that the position is not one of the offices
provided therein. (SEC Opinion, May 15, 1969.) The by-laws
must first be amended.

258

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 25

(2) The scope of the term "officers" in the phrase "and such
other officers as may be provided for in the by-laws" (Sec. 25,
par. 1.), would naturally depend much on the provisions of the
by-laws of the corporation. (SEC Opinion, Dec. 4, 1991.) The
president, vice-president, treasurer and secretary are commonly
regarded as the principal or executive officers of a corporation.
(Tabang vs. National Labor Relations Commission, 266 SCRA
462 [1997].) However, if the by-laws enumerate the officers to be
elected by the board, the provision is conclusive, and the board
is without power to create new offices without amending the bylaws (SEC Opinion, Oct. 19,1971.) except where it is empowered
by the by-laws to create additional officers as may be necessary.
(3) The board may create appointive positions other than
positions of corporate officers but the persons occupying such
positions are not considered as corporate officers within the
meaning of Section 25 and are not empowered to exercise the
functions of the corporate officers, except those functions
lawfully delegated to them. Their functions and duties are to
be determined by the board. (SEC Opinion, Nov. 25, 1993.) If,
for example, the general manager of a corporation is not listed
as an officer, he is to be classified as an employee although he
has always been considered as one of the principal officers of
a corporation. But a Superintendent /Administrator /Manager/
Assistant to the President who is included in the by-laws of an
association in its roster of corporate officers is an officer of said
corporation and not a mere employee. (Ongkingco vs. National
Labor Relations Commission, 270 SCRA 613 [1997]; Union
Motors Corporation vs. National Labor Relations Commission,
314 SCRA 531 [1999].)
(4) Where the by-laws of the corporation provides "and for
such other officers as the board of directors may from time to
time does fit to provide for" and "said officers shall be elected by
majority vote of the board of directors," a comptroller appointed
by the general manager which appointment was subsequently
approved by the board of directors, said comptroller is a corporate
officer, not an employee, although the position is not expressly
mentioned among the officers of the corporation in the by-laws.
(Nacpil vs. Intercontinental Broadcasting Corporation, supra.)

Sec. 25

TITLE ni. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

259

Corporate e m p l o y e e s .

Actually, all officers of the corporation are its employees,


although in common usage the term "officers" is meant to refer to
those elected by the board or stockholders/members, occupying
positions involving the exercise of authority and power in the
management of corporate affairs, while the term "employees,"
to those whose duties are of a clerical or manual nature.
(1) An "office" has been defined as a creation of the charter
of a corporation. An employee is appointed, not elected, unless
he is also a corporate officer. He usually occupies no office and
is generally employed not by the action of the directors or stockholders but by the managing officer of the corporation who also
determines the compensation to be paid to such employee. (Alldritt vs. Kansas Central Global Exposition, Inc., 371 P 2d 818;
Nacpil vs. Intercontinental Broadcasting Corporation, 379 SCRA
653 [2002]; Uy vs. Villanueva, 526 SCRA 73 [2007].)
(2) When the President, for example, acts only as such, performing its regular executive duties pertaining to his office, he is
not considered an employee. However, a corporation may hire
its President to perform services under circumstances which
will make him an employee. (SEC Opinion, May 9,1989, citing 2
Fletcher, Chap. II, Sec. 266.1.)
Election of officers by the b o a r d .

The directors or trustees of the corporation are elected to


their office by the stockholders or members to represent them
in the affairs of the corporation at the stockholders' or members'
meeting. (Sec. 24.)
(1) The election of the administrative officers, such as the
president, treasurer, secretary, and "such other officers as may be
provided for in the by-laws" is, in turn, entrusted to the board of
directors or trustees." Thus, pursuant to the by-laws, the board
"See note 5; Where W Corporation obtained a loan from X Corporation and Y
Corporation, guaranteed by Z Corporation, the condition in the guaranty agreement
between W and X requiring all appointments to executive positions in W should be made
only with the approval of X's management, though intended to protect the interest of
X, denies W's board of directors of prerogative to elect corporate officers and violates
Section 25. The appointment of officers by the directors cannot be the subject of a valid
contract between the directors and persons seeking such appointment. (SEC Opinion,
March 18,1981.)

260

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 25

by a vote of majority of all or entire number of its members


may elect a vice-president, a general manager, an auditor, and
such other officers as the needs and nature of the business may
demand.
In a case, the board of directors, at its regular meeting declared
vacant all corporate positions in order to effect a reorganization,
and at the ensuing election of officers, the respondent was not
re-elected as Executive Vice-President. It was held that the
controversy was fundamentally intra-corporate in nature and not
a case of dismissal. An intra-corporate controversy would call for
SEC (now regional trial court) jurisdiction; a labor dispute, that of
the National Labor Relations Commission. The matter of whom
to elect is a prerogative that belongs to the board, and involves
the exercise of deliberate choice and the faculty of discriminative
selection. Generally speaking, the relationship of a person to a
corporation, whether as officer or as agent or employee, is not
determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist. (Phil. School
of Business Administration vs. Leafio, 127 SCRA 778 [1984].)
(2) The articles of incorporation of a close corporation may
provide, however, that all officers or employees or that specified officers or employees shall be elected by the stockholders,
instead of the board of directors. (Sec. 97, last par.)
(3) In a non-stock corporation, the officers may be directly
elected by the members unless otherwise provided for in the
articles of incorporation or the by-laws. (Sec. 92, last par.)
(4) In firms engaged in wholly or partially nationalized
activities, aliens are banned from being appointed to management
positions such as president, vice-president, treasurer, auditor,
etc. although they can be elected directors in proportion to their
allowable participation or share in the capital of such activities in
accordance with the Anti-Dummy Law. (see Sec. 2, C.A. No. 108,
as amended by P.D. No. 715.)
(5) The Code requires that the President must be a director.
(Sec. 25, par. 1.) Other officers may be elected or appointed
although they do not own shares of stock of the corporation.
(6) Section 25 clearly requires an election of a new set of officers
immediately after the election of the newly elected members of

Sec. 25

TITLE III. BOARD OF DIRECTORS /TRUSTEES / OFFICERS

261

the board which is, therefore, not bound by the choice of the
previous board. Accordingly, a resolution of the stockholders
and the board of directors of a corporation amending the bylaws of the corporation which would provide that the incumbent
vice-chairman of the board of directors shall automatically be the
chairman of the succeeding board if he is elected as a member
of the said board, is invalid as it would deny the newly elected
board the prerogative to elect the new chairman. (SEC Opinion,
Aug. 4,1995.)
(7) There is no prohibition as to the right of any elected board
member who is also a stockholder to participate in the election
of president or any other officer of a corporation. There is no
conflict of interest considering that a stockholder has the right to
vote and be voted upon in the corporate election process. (SEC
Opinion No. 04-37, June 28, 2004.)
Compensation, terms of office, and removal.
(1) It is within the power of the board to fix the salaries of
corporate officers whom it appoints, for the power to employ
must necessarily include the power to grant compensation. It
may likewise grant bonuses to them subject to the test of reasonableness.
(2) The terms of office of these officers may be fixed in the
by-laws; otherwise, they shall be deemed for one (1) year and
until their successors shall have been elected by the board.
(a) It would seem that under Section 25 (par. 1.), the term
of the officers of the corporation cannot extend beyond that
of the directors which under Section 23 is only one (1) year
(par. 1 thereof.), since they shall be elected immediately after
the election of the board of directors. Section 47(7), however,
permits a corporation to provide in its by-laws a term longer
than one (1) year for its corporate officers, other than directors or trustees.
(b) In the case of the President, since he must also be a
director, his term of office as such would necessarily be coterminous with his term as director.
(c) It has been a long standing policy of the SEC not to
allow a provision in the articles of incorporation or by-laws

262

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 25

providing for a lifetime term of office of corporate officers


to avoid possible abuse of persons in power. Contracts of
employment for life or indefinite period of officers and other
key personnel are generally invalid because they bind the
hands of future board of directors. They also deprive other
members of the corporation of the opportunity to become
officers of the corporation. (SEC Opinion, Dec. 16,1991.)
(d) The Securities and Exchange Commission has ruled
on several occasions that hold over of incumbent corporate
officers whose term has already expired is allowable when
no successors are elected due to justifiable or valid reasons.
(SEC Opinion, April 5, 1995.) Non-holding of the annual
meeting for the election of the board of directors/trustees
and officers without justifiable reason is subject to the SEC
Rules Governing the Filing of Information Sheet by Domestic
Corporations. (Appendix " E " ) Violations of said rules carry
with it the corresponding penalty prescribed therein. (SEC
Opinion, Oct. 16,1995.)
(3) The power to remove an officer for cause inheres in every
corporation as part of its existence. The power to elect or appoint
corporate officers being vested with the board, the power of
removal must necessarily be exercised by it as an incident to its
power of appointment. However, in non-stock corporations, if
the officers are elected by the members, as allowed under Section
92, the power to remove them is also vested directly in the latter.
(a) In instances where the term of an officer is not fixed
by contract or in the by-laws, he may be removed at any time
with or without cause at the pleasure of said body. But the
power must not be exercised in bad faith or in such a manner
as to work injustice.
(b) Where the term of an officer as fixed in the by-laws
or in a contract of employment is for more than one (1) year,
he has to be re-elected by the board until the expiration of
the term; otherwise, the corporation may be held liable for
damages.
(c) The election of successors to corporate officers after
the expiration of their term does not constitute their dismissal. The matter of whom to elect is a prerogative that belongs

Sec. 25

TITLE III. BOARD OF DIRECTORS /TRUSTEES /OFFICERS

to the board and involves the exercise of deliberate choice


and the faculty of discriminate selection. Generally speaking, the relationship of a person to a corporation, whether
as officer or as agent or employee, is not determined by the
nature of the services performed, but by the incidents of the
relationship as they actually exist. (Phil. School of Business
Administration vs. Leafio, 127 SCRA 778 [1984].)
Positions c o n c u r r e n t l y held
by same person.

The directors or trustees and officers elected shall perform


the duties enjoined on them by law and by the by-laws of the
corporation. Any two (2) or more positions may be held concurrently by the same person except as provided in Section 25. The
positions of president and secretary or treasurer are considered
by law as incompatible with each other due to the very nature
appertaining to each office. The rationale behind the provision is
to ensure the effective monitoring of each officer's separate functions. (Ong Yong vs. Tiu, 401 SCRA 1 [2003].)
20

There is no prohibition in the law against a stockholder being


a director or officer of two or more corporations.
The Corporation Code does not prohibit a corporate officer
from occupying the same position in another corporation organized for the same purpose. However, such a situation may be
prohibited by special law, the articles of corporation, or the bylaws of the corporation.
A c c e p t a n c e of office a n d taking
of oath of office.

(1) To make one an officer of a corporation, his consent, as


well as an appointment or election, is necessary.
(a) A person who is appointed/elected without his
knowledge, and who does not accept the office, or act as an

"In American law, directors who are also officers of a corporation are called inside
directors. Too many inside directors create the danger of the board being under the control
of officers.

264

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 25

officer, is not an officer, although he may have received stock


after his election.
(b) No formal acceptance is necessary. If a person enters
upon the duties of an office after his election or appointment,
it is a sufficient acceptance or, rather, efficient ground for
implying acceptance, in the absence of proof to the contrary.
Indeed, acceptance of an office may be presumed without
any act, in the absence of evidence to the contrary. (2 Fletcher,
pp. 99-100; 19 C.J.S. 64.)
(2) There is no provision in the Corporation Code which
requires the taking of an oath of office to qualify the elected
directors and officers. Oath of office constitutes no part of the
office itself. Acceptance of the office will suffice unless the taking
of an oath is required by the corporate by-laws in which case
they are not de jure but de facto officers (infra.) until they have
taken the oath. (SEC Opinion, Jan. 21,1986.)
Sources of p o w e rs or authority
of corporate officers.

An officer's authority to act for the corporation in a particular matter is determined by his actual office and not by the
description he may use in acting for the corporation.
This authority may be derived from (1) some provision of
statute or (2) the articles or incorporation. It may be contained in
(3) a by-law, assuming that the by-law is deemed not to violate
some rules of law such as the provision of the Code vesting
powers of management in the board of directors or trustees.
Authority may also be conferred on an officer by (4) a resolution
of the board of directors or trustees, provided that the resolution
does not attempt to delegate non-delegable powers. (W.L. Cary,
op. ext., pp. 190-191.)
Corporate officers shall perform the duties and functions
enjoined by them by law and the by-laws of the corporation.
However, powers of corporate officers under the by-laws are
always subject to the rule in Section 23 that the board of directors
or trustees is the governing body of the corporation. By virtue of
Section 23, the board may in its best judgment and for the best
interest of the corporation, appoint or authorize the President or

Sec. 25

TITLE III. BOARD OF DIRECTORS /TRUSTEES /OFFICERS

265

another officer or agent to act for and in behalf of the corporation,


but in all cases such officers shall be under the ultimate direction
of the board. (SEC Opinion, Jan. 18,1995.) One may be an agent
of a private domestic corporation although he is not an officer
thereof. (Aboitiz International Forwarders, Inc. vs. Court of
Appeals, 488 SCRA492 [2006].) It has been held that where the real
party-in-interest is a body corporate, neither the administrator of
the agency or a project manager could sign the certificate against
forum shopping without being duly authorized by resolution of
the board of the corporation. (Eslaban, Jr. vs. Onorio, 360 SCRA
230 [2001].)
Extent of p o w e r s or authority
of c o r p o r a t e officers.
(1) Determination of authority. The full extent of the

powers or authority of any particular officer of a corporation is


to be determined by inquiring into: (a) the authority which he
has by virtue of his office; (b) the authority which is expressly
conferred upon him or is incidental to the effecrualness of such
express authority; and (c) as to third persons dealing with him
without notice of any restriction thereof, the authority which the
corporation holds the officer out as possessing or is estopped
to deny. In the determination of the authority which certain
officers may exercise by virtue of their office, (d) the nature of
the corporate business must also be taken into consideration.
In addition to the foregoing, (e) the act of an officer though
originally unauthorized, may become binding upon the corporation by a subsequent ratification. (13 Am. Jur. 875.)
(2) Exemption from liability. Officers of a corporation who

acted for and in behalf of the corporation within the scope of


their authority and in good faith do not become liable with the
corporation, whether civilly or otherwise, for the consequences
of their acts. Those acts are properly attributed to the corporation
alone and no personal liability is incurred by such officers.
(Benguet Electric Cooperative, Inc. vs. National Labor Relations
Commission, 209 SCRA 55 [1992]; Mindanao Motor Line, Inc.
vs. Court of Industrial Relations, 6 SCRA 710 [1962].) When they
exceed their authority, the corporation is not bound unless it has

THE CORPORATION CODE OF THE PHILIPPINES

266

Sec. 25

ratified them expressly or tacitly, (see Art. 1910, Civil Code.) or it


may be held in estoppel, (infra.)
(3) Authority to bind by contract. The lack of authority of a

corporate officer to bind the corporation by contract executed in


its name, is a defense which should be especially pleaded by the
corporation. (Lao vs. Court of Appeals, 325 SCRA 694 [2000].)
It should first prove by clear evidence that its corporate officer
is not in fact authorized to act in its behalf before the burden of
evidence shifts to the other party to prove, for example, that, by
previous specific acts, an officer was cloaked by the corporation
with apparent authority. (Westmont Bank vs. Inland Construction and Development Corp., 582 SCRA 230 [2009].)
The general rule is that a contract, to be binding on the parties thereto, need not be in writing, unless the law requires that
such contract be in some form in order that it may be valid or
enforceable or that it be executed in a certain form, (see Art. 1356,
Civil Code.) Indeed, corporate policies need not be in writing.
But a verbal promise made by the corporation, through its chairman and president, obligating itself, as a matter of policy, to
grant petitioner (who retired as general manager, after 36 years
of service) the cash value of his vacation and sick leave credits
cannot bind the corporation in the absence of a board resolution
to that effect. (Kuok vs. Phil. Carpet Manufacturing Corp., 457
SCRA 465 [2005].)
Classification of p o w e r s or authority
of corporate officers.

The general principles of agency applicable to agents of individuals govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or
relevant provisions of law. (San Juan Structural & Steel Fabrica21

The elements of agency are: (a) consent of the parties to establish the relationship;
(b) the object is execution of a juridical act in relation to a third person; (c) the agent acts
as a representative and not for himself; and (d) the agent acts within the scope of his
authority. (Yu Eng Cho vs. Pan American World Airways, Inc., 308 SCRA 7175 [2005].)
The mere fact that an entity may be a 100% subsidiary corporation of another corporation
does not necessarily mean that the former is a duly authorized agent of the latter, because
for a contract of agency to exist, it is essential that the principal consents that the other
party, the agent, shall act on its behalf and the agent consents so as to act. (Apex Mining
Co., Inc. vs. Southeast Mindanao Gold Mining Corp., 492 SCRA 355 [2006].)
2I

Sec. 25

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

267

tors, Inc. vs. Court of Appeals, 293 SCRA 631 [1998]; Litonjua, Jr.
vs. Eternal Corporation, 490 SCRA 204 [2006]; Philippine Rabbit
Bus Lines, Inc. vs. Aladdin Transit Corp., 493 SCRA 358 [2006].)
(1) The inherent authority or power of an officer or agent is

taken to mean that authority to act and bind the corporation


which the officer has by reason of his office, although it may not
be sanctioned by express authority. (Ibid.)
(2) The express authority of an officer or agent includes every
power or authority expressly conferred upon him by law and the
by-laws of the corporation.
(3) The implied authority of an officer or agent of a corporation includes all such incidental authority as is necessary, usual,
and proper to effectuate the main authority expressly conferred.
(a) A corporate officer entrusted with the general
management and control of the corporate business has the
implied authority to act or contract for the corporation which
may be necessary or appropriate to conduct the ordinary
business. If the act or contract comes within corporate powers
but it is done without any express or implied authority
therefor from the by-laws, board resolution or corporate
practices, such unauthorized act or contract does not bind
the corporation unless ratified by the board of directors or the
corporation may be held in estoppel (infra.) from denying as
against innocent third persons the authority of the corporate
officer. (Rural Bank of Milaos vs. Ocfemia, 325 SCRA 99
[2000].)
(b) An officer of a corporation who is authorized to
purchase the stock of another corporation has the implied
power to perform all other obligations arising therefrom such
as payment of the shares of stock. (Inter-Asia Investments
Industries, Inc. vs. Court of Appeals, 403 SCRA 452 [2003].)
(4) When in the usual course of business of the corporation,
an officer or agent is held out by such corporation, or has been
permitted to act for it in such way as to justify third persons who
deal with him in assuming that he is doing an act or making
a contract within the scope of his authority, the corporation is
bound thereby even though such officer or agent does not have

268

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 25

the actual authority to do such act or make such contract. This


authority is known as apparent or ostensible authority. It is essen-

tially a question of fact.


(5) Apparent authority is naturally the same as and based
upon the same principle as authority by estoppel.
(a) Stating the rule in terms of estoppel, a corporation,
which by its voluntary act, places an officer or agent in such
a position or situation that persons of ordinary prudence are
justified in assuming that he has authority to perform the act
in question, is estopped as against such persons from denying
the officer's or agent's authority. (13 Am. Jur. 869-871; BPI
Family Savings Bank, Inc. vs. First Metro Investment Corp.,
429 SCRA 30 [2004]; Hydro Resources Corp. vs. National
Irrigation Administration, 441 SCRA 614 [2004]; Development
Bank of the Phils, vs. Ong, 460 SCRA 170 [2005].)
Thus, in a case where the board secretary sent to VF a
telegram purportedly signed by the general manager of
the GSIS accepting VF's offer to liquidate his daughter's
mortgage indebtedness and pursuant to such telegram VF
paid P30,000.00 for which a receipt was issued by the GSIS
and subsequently, GSIS claimed that the telegram should be
disregarded in view of its failure to express accurately the
contents of the board's resolution due to the error of its minor
employees and that the board secretary sent the telegram
without the knowledge of the general manager, it was held
that GSIS could not evade the binding effect produced by the
telegram which was within the general manager's apparent
authority. Corporate transactions would speedily come to
a standstill where every person dealing with a corporation
held duty bound to disbelieve every act of its responsible
officers no matter how regular they should appear on their
face. (Francisco vs. GSIS, 7 SCRA 577 [1963]; see Maharlika
Publishing Corporation vs. Tagle, 142 SCRA 553 [1986]; First
Phil. International Bank vs. Court of Appeals, 252 SCRA 257,
259 [1996].)
(b) The authority of a corporate officer to act for and bind
the corporation may be presumed from acts of recognition
in other instances where the power was in fact exercised. It

Sec. 25

TITLE m. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

269

is well-settled in jurisprudence that where similar acts have


even approved by the board of directors as a matter of general
practice, custom, and policy, a corporate officer may bind the

company without formal authorization of the board.


Thus, where the practice of the corporation had been to
allow its general manager to negotiate and execute contracts
in its copra trading activities for and in the corporation's
behalf without prior board approval, it was held that the
board itself, by its acts and through acquiescence, practically
laid aside the by-laws' requirement of prior approval. (Board
of Liquidators vs. Heirs of Maximo M. Kalaw, 20 SCRA 987
[1967]; see Lipat vs. Pacific Banking Corporation, 402 SCRA
399 [2003].)
(c) Apparent authority is derived not merely from
corporate practice (defined as frequent or customary action).
Its existence may be ascertained through: 1) the general
manner in which the corporation holds out an officer or agent
as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or 2) the
acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond
the scope of his ordinary powers. It requires presentation of
similar act(s) executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which establishes
apparent authority but the vesting of a corporate officer with
the power to bind the corporation. (People's Aircargo &
Warehousing, Co., Inc. vs. Court of Appeals, 297 SCRA 170
[1998].)
(d) Where a power is one which would otherwise be
possessed by an officer, it is generally held that a by-law
(or a board resolution or articles of incorporation provision)
restricting his authority is not effective against an outsider
who has no actual notice. Thus, a corporation was held
bound by a note signed by the president and secretary where
they had signed numerous other notes which had been paid,
although there was no evidence that the plaintiff knew of this
fact, notwithstanding a provision of its by-laws requiring
checks or notes to be signed by the president and treasurer.

270

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Sec. 25

(Ibid., citing Produce Exchange Trust Co. vs. Bierberbach, 176


Mass'. 58 N.E. 167 [1900].)
Extent of authority of particular officers.

(1) Chairman of the Board. The concept of board chairman


and his functions as an executive vary so widely in different
companies as to be indefinable. There is no settled practice. (2
Fletcher, p. 541; Ballantine, p. 142 [1946 ed.].)
(a) The typical pattern of executive duties is that the
president or the chairman of the board is designated usually
by the by-laws but sometimes, in board resolutions, as the
general manager or chief executive officer of the corporation.
If the chairman of the board is so designated, the president
is frequently designated the chief administrative or chief
operating officer, or may simply be the officer who succeeds
to the chairman's executive duties in his absence or disability.
(Ballantine & Sterling, p. 42 [1982 ed.].) In such a given
situation, an alien cannot qualify as chairman of the board
of directors in enterprises where aliens are banned by law or
the Constitution from management positions. (SEC Opinion,
May 15,1985.)
(b) Where the president is the chief executive officer,
typically, the duties of the chairman relate to presiding at
meetings of the board and of committees of which he is a
member, and of stockholders or members, and carrying out
such other duties as the board shall assign. The duty of the
chairman of the board as presiding officer is not an executive
one. Thus, where the functions of the chairman of the board
as provided in the by-laws consists merely of presiding at
the meetings of the board or of committees of which he is
a member, an alien may qualify as chairman of the board
in such enterprises. (SEC Opinion, May 15, 1985, citing 2
Fletcher, p. 542 and Ballantine & Sterling, supra.)
(c) If a vice-chairman is appointed, he presides at the
meetings in the absence of the chairman. He shall exercise
such powers and perform such duties and functions as the
board may, from time to time, assign to him.

Sec. 25

TITLE ni. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

271

(2) President. The president of a corporation must be a


director or trustee (see Sec. 87, par. 2.) of the corporation, but
he cannot act as president and secretary or as president and
treasurer at the same time. (Sec. 25.) The president is the only
officer required by law to be a member of the board of directors.
Upon the expiration of his term as member of the board, he
automatically ceases to be president for lack of qualification.
(Sec. 23, par. 2.)
(a) The powers of the president of the corporation are
such only as are conferred upon him by the board of directors
or trustees or vested in him by the by-laws. If there is nothing
in the by-laws conferring any particular authority upon him,
he has from his office and alone no more power over the
corporate property and business than has any other director.
(Fisher, op. cit., p. 357.) It is the board of directors or trustees,
not the President, that exercises corporate powers. (Safic
Alcan & Cie vs. Imperial Vegetable Oil Co., Inc., 355 SCRA
559 [2001].) However, according to the view taken by many
authorities, regard must be had to the fact that presidents of
corporations are often given general supervision and control
of the business as chief executive officers from which is to be
inferred that contracts or acts made or done by the president
in the ordinary course of business are presumed to be duly
authorized unless the contrary appears. (2 Fletcher, p. 443.)
Even in the absence of express delegation by the board
or implied authority by ratification, unless there is a charter
or by-law provision to the contrary, the President, as such,
may, as a general rule, bind the corporation by a contract
in the ordinary course of business, provided that the same
is reasonable under the circumstances, (see Prime White
Cement Corp. vs. Intermediate Appellate Court, 220 SCRA
103 [1993].) Furthermore, a person dealing with the President
of a corporation is entitled to assume that he has the authority
to enter, on behalf of the corporation, into contracts that are
within the scope of the powers of the corporation. (People's
Aircargo & Warehousing, Co., Inc. vs. Court of Appeals, 297
SCRA 170 [1998].)
(b) On the other hand, where the president acts in matters
not within the scope of his authority although they may

272

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 25

relate to the company's business as where he acts in matters


within the exclusive province of the board of directors, the
corporation cannot be bound; or where he performs an act
not incidental to the business of the corporation, it must, as
a general rule, be shown that he was duly authorized by the
board of directors. (19 C.J.S. 1001.) In the absence of a special
power in favor or a president of a corporation, no valid
mortgage on the corporation's property can be executed by
him. Such a mortgage is void and cannot be ratified. (Yasuma
vs. Heirs of C.S. de Villa, 499 SCRA 466 [2006]; see Art. 1878,
Civil Code.)
A contract entered into by the president who was also
the chairman of the Board, in behalf of the corporation, was
held void in the absence of any provision in the by-laws conferring upon him the authority to enter into such contracts
independently of the Board of Directors, particularly in view
of the fact that the corporation had a general manager who,
under its by-laws, was given the active management of the
corporation, there being no evidence adduced to show that
the corporation clothed him with apparent power to act for
it. (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763
[1992].)
(c) In the absence of specific provisions governing the
situation and where circumstances of an emergency nature
arise which necessitate the exercise of discretion, the rule on
agency may be applied. (SEC Opinion, June 11,1974.) Article
1881 provides: "The agent must act within the scope of the
agency. He may do such acts as may be conducive to the
accomplishment of the purpose of the agency."
The unauthorized act of an agent is subject to ratification.
(Art. 1910.) Such ratification is implied from the acceptance
of benefits as where a corporation deposited in its current
account the proceeds of a loan obtained by its president,
allegedly without authority, retained and disbursed the same
for corporate purposes. Indeed, such use may be taken as
evidence to belie the claim of lack of authority. (De Asis &
Co. vs. Court of Appeals, 136 SCRA 599 [1985].)

Sec. 25

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

273

(d) By law, 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 otherwise (Sec. 54.) or
in the absence of the chairman or vice-chairman.
(e) The president of a corporation, by the authority of his
office alone, has no power to delegate the powers and duties
of his position as president to any member of the board of
directors or trustees. Should he become incapacitated to perform his functions, what should be done, in the absence of a
vice-president or any specific provision in the by-laws on the
matter, is for the board to temporarily elect an acting president. Nevertheless, if the director, who was allowed to discharge the duties of president, performed his functions and
presided over board meetings without objection on the part
fifiof the other members of the board, it would seem that as
long as no irregularity has been committed by him, his past
actuations need not be the subject of further inquiry. (SEC
Opinion, May 21,1971.)
(f) In some corporations, the chairman is made the chief
executive officer with most of the important and substantial
powers and duties ordinarily given to the president, with the
latter as chief operating officer in charge of daily operations
and carrying out the policies and instructions laid down by
the board of directors.
(g) A public officer's effort to make a distinction between
his being the head of a government agency (Chairman of the
Securities and Exchange Commission) and the president of a
building condominium corporation (a sustantial portion of
the building being owned and occupied by SEC) is vacuous
where his being president is inseparable and completely
appendant to his title as head of the agency, that is, he cannot
be the president of the corporation unless he is the head or at
least an officer of the agency. Differently stated, his standing
as president of the corporation arises from or is the necessary
effect of his being the head of the government agency and not
because of anything else, and therefore, his acts as president
must also be viewed in the light of his powers and functions
as head of the government agency. (Yasay, Jr. vs. Desierto, 300
SCRA 494 [1998].)

THE CORPORATION CODE OF THE PHILIPPINES

274

Sec. 25

(3) Vice-President. The vice-president has always been considered as an officer next-in-rank to the president.
(a) He is commonly referred to as a "fifth wheel," i.e.,
a conditional officer who acts as president in case of death,
absence, or inability of the president to act. "Prima facie, it
would seem that the only function of the vice-president, as
his title indicates, is to replace the president in case of the
latter's death, incapacity, etc." (SEC Opinion, May 20, 1975,
citing 2 Fletcher, p. 774.) He has no authority by virtue of his
office alone to enter into contracts in behalf of the corporation.
However, it is frequently the case that the vice-president of a
corporation is given certain executive duties by the board of
directors or by-laws of the corporation. (American Exh. Nat.
Bk. vs. Ward, III, F, 782, 55 L.R.A. 356.)
(b) Where the by-laws provide that it shall be the duty of
the vice-president to take the place of the president during
the absence of the latter, the vice-president should likewise
be a director. (SEC Opinion, Feb. 5, 1962.) If the vice-president is also a secretary or a treasurer, he cannot act as president at the same time. (Sec. 25.) There may be more than one
(1) vice-president, including an executive vice-president.
(4) Secretary. The secretary must be a resident and a citizen
of the Philippines. The assumption is that the secretary, being
the custodian of corporate records, should at all times be available in the regular conduct and operations of the corporation.
He is not allowed to act as president and secretary at the same
time. (Sec. 25.) He need not be a director unless required by the
by-laws.
22

(a) It is generally the duty of the secretary of a corporation


to make and keep its records and to make proper entries of

citizenship requirement is imposed by the Code with respect to other corporate


officers. However, in enterprises or industries which are totally or partially reserved for
Filipino citizens, the election of aliens as officers and/or members of the board of directors is prohibited or restricted under specific provisions of the Constitution and special
laws, (see Sec. 13.) Where an officer is required to be a Filipino citizen, a Filipino with
dual citizenship may be elected provided that prior to such election he/she shall have
complied with the requirements under the "Citizenship Retention and Re-Acquisition
Act of 2003 (R.A. No. 9225.) and its implementing rules and regulations."
2 2 N o

Sec. 25

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

275

the votes, resolutions and proceedings of the shareholders (or


members) and directors (or trustees) in the management of
the corporation and all other matters required to be entered
on the records. (Ballantine, p. 142.) As custodian of corporate
records, corollarily, he keeps the stock and transfer book and
makes proper and necessary entries therein. (Torres, Jr. vs.
Court of Appeals, 278 SCRA 793 [1997].)
(b) He issues notices of meetings and has custody of the
corporate seal which he uses when attesting the signatures
of the officers to important documents. The secretary may
perform other functions.
Where the corporate by-laws state, among others, that the
secretary shall also "send notices of all regular and special
meetings of the members and of the board of directors,"
this connotes that the principal signatory to such notices is
the corporate secretary. The term "to send" may be deemed
synonymous with "issuance" of the notices, in accordance
with sound corporate practices, supported by jurisprudence.
(SEC Opinion, Oct. 1,1981.)
(c) A secretary is not obligated to include everything that
is said in the minutes as long as he accurately transcribes
what has taken place. The minutes, however, should clearly
record the proceedings as they actually occurred and should
positively show what action was taken by the corporation. (5
Fletcher, Sec. 2190.)
(d) A corporate secretary's certification, when regular
on its face, is sufficient for a third party to rely on. It need
not investigate the truth of the facts contained in such
certification. Otherwise, business transactions of corporations
would become tortuously slow and unnecessarily hampered.
(Esguerra vs. Court of Appeals, 267 SCRA 380 [1997].)
(e) The secretary is a ministerial officer who cannot bind
the corporation unless he is especially authorized to do so.
(Ballantine, p. 142.) There may be an assistant secretary.
(5) Treasurer. The treasurer may not hold at the same time
the position of president. Unlike with respect to the corporate
secretary, the law does not require that the treasurer shall be a
resident and a citizen of the Philippines. (Sec. 25, par. 1.)

276

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Sec. 25

(a) The treasurer of the corporation is the proper officer


entrusted with the authority to receive and keep the money
of the corporation and to disburse them as he may be authorized.
(b) The view is taken that he has no inherent power to
bind the corporation by contracts or to borrow money in
behalf of the corporation. (Ballantine, p. 143; 13 Am. Jur. 886.)
There may be an assistant treasurer.
Except where otherwise provided by the Constitution or
existing laws, a corporate officer need not be a resident or
citizen. It has been opined, however, that there is all the more
reason for the treasurer to also possess the same qualifications
as the secretary. Being the holder of the purse, the treasurer
is entrusted with the authority to receive, keep, and disburse
funds of the corporation. Furthermore, there is a need to
provide to local investors ample protection from the danger
of getting victimized by foreign nationals. Thus, while the
Corporation Code does not impose Philippine residency
requirement, nevertheless, considering the nature of his
functions, good corporate practice dictates that the treasurer
must be a resident of the Philippines. (SEC Opinions, April
13, 1989 and Jan. 30,1990.)
The Securities and Exchange Commission has adopted as
a matter of policy to require the treasurer of a private corporation to be a resident of the Philippines. This policy would
prevent the possibility on the part of a non-resident treasurer
to effect the transfer of corporate funds out of the country, for,
in view of his status as a non-resident, he can easily leave the
country and escape. (SEC Opinion, May 27,1991.)
A comptroller is different from a treasurer. The former is
said to be an officer appointed to control accounts and to
check expenditures. By virtue of his office, the authority of
a comptroller is restricted to doing those things which are
usual and necessary in the performance of his duties. (19 Am.
Jur. 2d 599.)
(6) General Manager. At the present time, the general business of corporations is frequently entrusted to the management

Sec. 25

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

277

of a general manager or managing officer who has power to bind


the corporation by acts within the scope of his apparent authority. Accordingly the general manager or managing officer has
very broad powers, especially as far as third persons are concerned.
(a) He has been deemed by numerous authorities to be
the principal officer of the corporation, having general charge
of those business matters for the carrying on of which the
company was incorporated, and he has the implied or ostensible power to do any act which is usual or necessary in the
ordinary transaction of the company's business. This power
has been broadly described as being co-extensive with the
powers of the corporation itself unless specifically restricted.
(b) He has implied authority to make any contract or do
any other act which is necessary or appropriate to the conduct
of the ordinary business of the corporation, including the
authority to institute proceedings against all accountable
persons in order to protect and preserve the assets of the
corporation and to prevent their dissipation. This authority,
however, is generally qualified as not extending to matters
which are not properly incidental to the management of the
corporate business nor to matters over which the stockholders
alone have control, (see 19 Am. Jur. 2d 599-560; see Board of
Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967];
Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706
[1988].)
In a case, the general manager of a company terminated the
services of certain employees. There was no evidence on record
that he acted maliciously or in bad faith. It was held that he could
not be made personally liable for damages as his act was within
the scope of his authority and was a corporate act. (Sunio vs.
National Labor Relations Commission, 127 SCRA 390 [1984].)
Requisites for board meeting.

Under Section 25, the validity of a corporate act is predicated


on the presence of the following requisites:
(1) Meeting of the directors or trustees duly assembled as a
board, i.e., as a body in a lawful meeting;

THE CORPORATION CODE OF THE PHILIPPINES

278

Sec. 25

(2) Presence of the required quorum;


(3) Decision of the majority of the quorum or, in other cases,
a majority of the entire board; and
(4) Meeting at the place (see Sec. 51, par. 1.), time, and manner provided in the by-laws, (see Sees. 47[12], 53,101.)
The board of directors or trustees may adopt its own internal
rules in the conduct of its meetings provided that the same
will not run counter to the provisions of the Code, the articles
of incorporation, and by-laws of the corporation. Whether an
individual director may have a lawyer, accountant, or adviser
present, a meeting of the board is a matter of internal corporate
management upon which the courts properly decline to rule.
(SEC Opinion, Jan. 25, 1990.)
Quorum.

Quorum is such number of the membership of a collective


body as is competent to transact its business or do any other corporate act.
(1) Number required for presence of quorum. Section 25

provides that "unless the articles of incorporation or the bylaws provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business."
The majority means the number greater than half or more than
half of any total. It would be at least one-half plus one of the
number of directors as fixed in the articles and such quorum
remains the same even though there may be vacancies.
A director who is disqualified by reason of personal interest
(see Sees. 32, 33.) in the matter before a director's meeting, loses,
pro hac vice, his capacity as a director and he cannot be counted
for the purpose of making a quorum, nor can the vote of such
director be counted for the purpose of determining whether
passed by a majority vote. (SEC Opinion, July 21,1994.)
(2) Number required for approval of corporate acts. As a gen-

eral rule, a majority of the quorum of the board (as distinguished


from majority of the fuel board) will be sufficient to adopt a proposal where the Code requires approval of certain corporate acts

Sec. 25

TITLE in. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

279

such as the declaration of dividends (Sec. 43.), or entering into a


management contract (Sec. 44.) without stating that it shall be by
majority vote of the board, but if the word "majority" is used, the
number of votes required to approve such acts shall be at least
one-half plus one of the entire membership.
(3) Number provided greater than majority. Unlike the old

law which sets the quorum at "a majority of directors" without


giving the corporation the power to provide otherwise, the Code
gives the corporation the power to require a number greater than
the majority of the board members to constitute the quorum necessary to transact business. So that, given a corporation with nine
(9) directors, the presence of five (5) members will be sufficient
to hold a board meeting and a vote of three (3) will be enough to
pass a board resolution. However, the same corporation can provide in its articles of incorporation or by-laws, that the required
quorum shall be seven (7) members. In this case, a vote of at least
four (4) members is necessary for the approval of any board resolution. But the vote of a majority of all the members of the board
or at least five (5) members of the board with nine (9) directors
shall be required for the election of officers, (see Sec. 97, par. 1[3].)
Less than the number to constitute the required quorum cannot meet and bind the corporation by any act or resolution. All
that the directors or trustees present can do is to adjourn. (Ballantine, p. 130.)
ILLUSTRATIONS:
(1) The by-laws of X Corporation provide for 11 directors.
Only nine directors were elected with two seats remaining
vacant. During a special meeting of the board where only
five directors were present (no quorum), the board passed a
resolution.
Under the law, the required quorum of the board is a
majority of the entire board as it would be constituted if all
the vacancies were rilled, i.e., six directors. Consequently, the
resolution is irregular.
Suppose the absent director subsequently signed the
minutes of the meeting. Will the signature cure the defect of
the first meeting? No.

THE CORPORATION CODE OF THE PHILIPPINES

260

Sec. 25

But if the board subsequently met with six directors present


and all of them voted unanimously to approve and ratify said
resolution, such action would have the effect of curing the
defect and giving effect to the resolution.
(2) The by-laws of X Corporation provide for seven (7)
directors and that the required number of directors to constitute
a quorum as well as to carry a vote or approve any resolution in
all its meetings shall be at least 3/4 of all the directors.
Is the presence of five (5) directors sufficient compliance
with the by-laws?
Yes. By mathematical computation, 3/4 of all the directors
would require the presence and concurrent votes of at least 5.25
directors. Under the rule on rounding numbers, the decimal
figure or figures to the right are dropped after increasing the
final remaining figure by 1, if the first digit is 0.5 or greater, (see
Webster, 3rd Int. Dictionary, p. 1979 [1976].) Considering that
0.25 cannot be rounded off into one, the same should be treated
as negligible and need not be considered in the computation
of the required number to constitute a quorum. Hence, five (5)
directors would substantially comply with the by-laws, (see
SEC Opinion, Nov. 7,1989.)
In short, 0.5 or greater is considered 1, and 0.49 or less is
disregarded.
Proxy and constructive p r e s e n c e
not allowed.

(1) On account of their responsibility to the corporation (see


Sec. 23.) and their being voted into office presumably because of
their personal qualifications, directors or trustees cannot validly
act by proxy, (as to meaning of "proxy," see comments under Sec.
58.)
They must attend the meetings of the board of directors or
trustees and act in person (Sec. 25, last par.) and as a body. Each
23

A by-law provision allowing the director, who happens to be elected as the chairman of the board or presiding officer, to vote only in case of tie or to create one would
defeat the very purpose for which a director is elected. A director cannot be deprived of
the right to vote as he is elected as such purposely to participate in the management of
the corporation. He will not be able to participate in major corporate decisions unless he
is given the right to vote. (SEC Opinion, Aug. 4,1995.)
23

Sec. 25

TITLE in. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

281

director or trustee is required by law to exercise his personal


judgment and discretion in running the affairs of the corporation
and he cannot delegate his powers or assign his duties to another
director, or to a corporate officer, or to any person.
24

(2) Section 25 says "every decision of at least a majority


of the directors or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act. x x x." (par. 2.)
Constructive or electronic presence (including telephone) is not
a substitute for actual presence required under Section 25, which
does not mention the same. Furthermore, participation or voting
by electronic presence is quite hard to prove by admissible
evidence because electronic voices and messages can easily be
dissimulated. (SEC Opinions, March 25,1981 and Sept. 10,1993.)
A n o t h e r corporation a s director
or trustee.

(1) General rule. A corporation is not qualified to occupy


the position of director (or trustee) because, being a juridical person, it cannot act by itself but only through its officers and agents
and such being the case, it cannot attend personally board meetings as a director and whoever represents it as a director is doing
so in his capacity as the "proxy" of the director or trustee. (SEC
Opinion, June 26,1969, citing 19 C.J.S. 96.)
(2) Through a receiver. Where the corporation is under
receivership, the appointment of a receiver for a corporation
"The members of the board of directors are required to exercise their judgment
and discretion in running the affairs of the corporation and they cannot be substituted
by others. No one can be elected to take the place of an incumbent director, even as an
alternate in the absence of any vacancy. To allow such alternate would be to have two
directors for the same position, one permanent and the other temporary, a situation that
the law does not permit. (SEC Opinion, May 27,1970.)
Unless allowed by statute, the by-laws cannot provide for the position of "ex-officio
director." The term means a person who becomes a director of the corporation because of
his title to an office, and not because of an election by the stockholders or members. The
Corporation Code does not provide for the office. Since an "ex-officio director" will have
the rights and privileges of a director except the manner of coming to office, such position
cannot be provided for in the by-laws. (SEC Opinioa Sept. 1, 1987.) The Commission,
however, allows as an exception, a provision in the by-laws appointing an "ex-officio"
member of the board, provided there is an express provision that the appointee shall have
no voting right. The status of an "ex-officio" member of the board, therefore, is only for
an honorary member whose role would be to act as adviser during board meetings. (SEC
Opinion, Dec. 19,1994.)

THE CORPORATION CODE OF THE PHILIPPINES

282

Sec. 26

terminates at least, for the most part, the powers of the corporate
officers as to the property in possession of the receiver where the
receivership is a general one, and not merely for the preservation
of the company's property pending a suit in reference to it.
A general receiver succeeds to all the rights of the board of
directors and officers of the corporation. Where a corporation is
under a general receivership, it may be represented in the board
of directors/trustees of another corporation through its receiver.
(3) Through an authorized representative. Only members of a

non-stock corporation can be elected to sit in its board. (Sec. 23,


par. 2; Sec. 92, par. 2.) A candidate should meet the qualification
for membership of the corporation as prescribed in its by-laws.
While a corporation is not qualified to occupy the position
of a trustee, its authorized representative may be elected as a
member of the board if, under the by-laws, such representative
is also considered as a member of the corporation for purposes of
qualifying him as a trustee. (SEC Opinion, Sept. 2,1991.) In such
case, the trustee is not the corporation but the representative.
Sec. 26. Report of election of directors, trustees and
officers. Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall
submit to the Securities and Exchange Commission,
the names, nationalities and residences of the directors,
trustees and officers elected. Should a director, trustee or
officer die, resign or in any manner cease to hold office,
his heirs in case of his death, the secretary, or any other
officer of the corporation or the director, trustee or officer
himself, shall immediately report such fact to the Securities
and Exchange Commission, (n)
Report of elections a n d v a c a n c i e s .

Section 2D requires the following:


25

The Securities and Exchange Commission has issued the following rules:
(1) All domestic corporations shall keep proper books of the minutes of the elections of the members of the board of directors and officers showing the date of the election, the names of the stockholders or members present and the number of shares owned
or represented who have voted therein, and in case of the election of officers, the names
of the directors who were present and have voted.
25

Sec. 26

TITLE HI. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

283

(1) The secretary or any other officer of the corporation shall


submit to the Securities and Exchange Commission the names,
nationalities, and residences of the directors /trustees (see Sec.
14[7].) and officers elected, which must be done within 30 days
after the meeting in which they were elected; and
(2) The heirs of the director /trustee or officer in case of the
latter's death, the secretary, or any other officer of the corporation, or the director/trustee or officer himself, shall immediately
report to the Commission any death, resignation, or cessation in
any manner of holding office of a director/trustee or officer.
The objective sought to be achieved by Section 26 is to give
the public information, under sanction of oath of responsible
officers, of the nature of the business, financial condition, and
operational status of the corporation together with information
on its key officers or managers so that those dealing with it and
those who intend to do business with it may know or have the
means of knowing facts concerning the corporation's financial
resources and business responsibility. (Premium Marble
Resources, Inc. vs. Court of Appeals, 264 SCRA 1 [1996]; Monfort
Hermanos Agricultural Development Corp. vs. Monfort III, 434
SCRA27 [2004].)
(2) A general information sheet shall be filed with the Commission within thirty
(30) days following the date of the annual stockholders' meeting. No extension of said
period shall be allowed, except for very justifiable reasons stated in writing by the president, secretary, treasurer or other officers, upon which the Commission may grant an
extension for not more than ten (10) days.
The general information sheet shall state, among others, the names of the elected
directors and officers, together with their corresponding position, title, and capital structure of the corporation, its line of business, business address and telephone number, if
any, and such other data as the Commission, in a form, may prescribe.
(3) Should a director, trustee or officer die, resign or in any manner, cease to hold
office, the corporation shall report such fact to the Commission within fifteen (15) days
after such death, resignation or cessation of office.
(4) If for any justifiable reason the annual meeting has to be postponed, the company should notify the Commission in writing of such postponement within ten (10)
days from date of such postponement.
Corporations which have ceased to operate although still existing, are (likewise)
not required to comply with these rules provided that a signed resolution of the board of
directors stating the cessation of business has been previously filed with the Commission.
If there be no board of directors in office, a statement as to the cessation of business signed
and swom to by the president, manager, secretary, treasurer or duly authorized representative of the corporation shall be filed in lieu of the resolution of the board of directors.

284

Sec. 27

THE CORPORATION CODE OF THE PHILIPPINES

The filling of vacancies in the office of director or trustee is


governed by Section 29.
Sec. 27. Disqualification of directors, trustees or officers.
No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code, committed within five (5)
years prior to the date of his election or appointment, shall
qualify as a director, trustee or officer of any corporation,
(n)
Disqualification of directors/trustees
or officers.

The above provision disqualifies any one convicted by final


judgment of an offense punishable by imprisonment for a period
exceeding six (6) years or a violation of the Code, as a director/
trustee or officer of any corporation. The obvious purpose is to
avoid the election or appointment of unworthy officers in view
of the fiduciary character of their positions.
The offense need not involve moral turpitude. The rule
applies regardless of the nature or classification of the offense as
long as it is punishable by imprisonment for a period exceeding
six (6) years. If the disqualification is based on a violation of
the Code (see Sec. 144.), the duration of the imprisonment is
immaterial, but the commission (not conviction) of the violation
must have taken place within the five (5) years prior to the date
of the election or appointment.
26

De facto directors/trustees
or officers.

A person is an officer or director de facto where he is in


possession of the office and is exercising the duties thereof under
color or appearance of right, but is not an officer or director de
jure on account of irregularity in his election; or ineligibility; or

In the exercise of its power of suspension, regulation and control over all corporations, the Securities and Exchange Commission may require certificates of good moral
character for directors/trustees and officers of corporations.

Sec. 27

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

285

disqualification resulting from a non-residence or not being a


stockholder; or failure to take an oath of office or file a written
acceptance of the trust when required by statute or charter (19
C.J.S. 78.) or corporate by-laws.
(1) Where, for example, the directors are elected before the
amendment increasing the number of directors had become
effective upon its approval by the Securities and Exchange
Commission (see Sec. 16.) and they act as such without objection,
they are de facto directors, (see SEC Opinion, Oct. 21,1974.)
(2) Directors elected through voting by the government of
shares sequestered by it and who in good faith assumed their
duties as such are de facto officers. Only the owners of the shares
or their duly authorized representatives or proxies may vote the
sequestered shares. Sequestration does not divest the owners
of their ownership of said shares, and the election of the board
of directors is distinctly and unqualifiedly an act of ownership.
(Cojuangco, Jr. vs. Roxas, 195 SCRA 797 [1991].)
(3) Conversely, a person is not a de facto officer or director
where he is not holding office under some appearance or color
of right, or where he is not in actual possession of the office,
or where he is not exercising the functions and performing the
duties thereof generally as distinguished from the single instance
in which his authority is questioned.
While the term "de facto officer" is commonly applied to
directors and officers of a private corporation, yet, technically
speaking, it applies to a public officer only. Generally, there
cannot be a de facto office, nor can there be a de facto officer, where
there is no corresponding legally constituted office. (19 C.J.S. 78.)
Powers an d rights of de facto officers,
in general.
(1) All powers of dejure official. De facto directors and officers

may exercise all powers of dejure officials so as to bind all persons


who acquiesce in their management and direction, and they may
continue to exercise these powers in such binding manner until
they are, through proper legal steps, removed from office and
replaced by other legally constituted directors and officers. (In re

286

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 27

Pearl Coal Co., 30 F. Supp. 964 aff'd. 115 F [2d] 158; 2 Fletcher, p.
214, cited in SEC Opinions, Oct. 21,1974 and July 4,1975.)
(2) Powers or acts within the scope of corporate business. A de
facto board of directors may legally perform such acts as are within
the scope of the business of the corporation; and a de facto president

may do such acts pending a determination of who are the lawful


officers of the company, as are necessary to keep its machinery
in motion. Thus, a de facto board of directors may call a special
meeting of the stockholders to consider and act upon any matter
pertaining to the corporation, as to which, under the law, the
stockholders may act at a special meeting. If stock is registered
in one's name on the books of the corporation, de facto directors
have power to issue a certificate of such stock to the owner. A de
facto board of directors may, by the weight of authority, make a
call on unpaid subscriptions on capital stock.
(3) Right to possess office and to salary. While de facto officers

have the same powers as de jure officers, they do not have the
same rights since they may be ousted from office in a proper
proceeding and they cannot recover the salary of the office. In
the Cojuangco case (supra.), however, the Supreme Court held
that the private respondents who were declared de facto officers
in good faith "are thereby legally entitled to the emoluments of
the office including salary, fees and other compensation attached
to the office until they vacate the same" (2 Fletcher, pp. 213-214.)
or are removed in an action for quo warranto or replaced by the
election of other persons.
Validity of contracts a n d acts
of de facto officers.

(1) As to third persons. In general, the contracts and acts of


de facto officers, when acting within the scope of their authority,
are just as binding as the acts of the officers de jure, at least so far
as third persons are concerned. (Consumers Alt. Co. vs. Riggings,
208 Cal. 537, 282 Pac. 954; 2 Fletcher, p. 214.)
(a) Inasmuch as de facto officers are held out to the world
by the corporation as its representatives and the corporation
has it within its power to oust a de facto officer and prevents

Sec. 28

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

287

him from acting as its officer, it is unquestionably the rule


that a corporation is bound by the acts of its de facto officers.
(b) Furthermore, so far as third persons are concerned, the
rule that the acts of de facto officers are binding in their favor is
ordinarily merely another way of stating that the corporation
is bound; and if a contract between de facto officers and third
persons is binding on the latter, then, of course, it cannot be
attacked by the corporation as the act of de facto officers. This
rule seems to be based on the principle of estoppel. Thus, it is
no defense to the foreclosure of a corporate mortgage that the
directors authorizing the mortgage were not legally elected
as such, (see 2 Fletcher, pp. 217-220; 19 C.J.S. 76-78.)
(2) Where de facto officers ousted from office. Acts of de facto

officers cannot be collaterally attacked for it is only through direct attack (quo warranto proceedings) can the election or appointment of a de facto officer be questioned, (see Board of Directors of
the PCSO vs. Alandy, 109 Phil. 1058 [I960]; Silen vs. Vera, 64 Phil.
868 [1937]; see also Sec. 20.) And the fact that a de facto officer is
subsequently, in a direct attack, ousted from office, cannot be set
up as a defense by a corporation to escape liability for the acts of
its ostensible officer.
Sec. 28. Removal of directors or trustees. Any director
or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing two-thirds
(2/3) of the outstanding capital stock, or if the corporation
be a non-stock corporation, by a vote of two-thirds (2/3)
of the members entitled to vote: Provided, That such
removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose,
and in either case, after previous notice to stockholders
or members of the corporation of the intention to propose
such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose
of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on
the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock,
or, if it be a non-stock corporation, on the written demand

288

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 28

of a majority of the members entitled to vote. Should


the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or
if there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by
any stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as
well as of the intention to propose such removal, must be
given by publication or by written notice as prescribed in
this Code. The vacancy resulting from removal pursuant to
this section may be filed by election at the same meeting
without further notice, or at any regular or at any special
meeting called for the purpose, after giving notice as
prescribed in this Code. Removal may be with or without
cause: Provided, That removal without cause may not be
used to deprive minority stockholders or members of the
right of representation to which they may be entitled under
Section 24 of this Code. (34a)
Power of stockholders or m e m b e r s
to remove directors or trustees .

(1) Generally. The law does not specify cases for removal
of a director or trustee nor even require that removal should be
for sufficient cause or reason. The legislative policy is that the
stockholders shall be the ultimate masters, not the directors, "to
make the corporate government responsible to the owners." If
the directors have a right to continue in office to the completion
of their term, in spite of a change in controlling stockholders,
those who acquire control will have to wait or else make some
bargain with the existing directors to resign in order that they
may put in office a new board of directors representing their
views or policy. (Ballantine, pp. 434-435.)
The non-election of a director or trustee after serving for one
(1) year is not a case of dismissal or removal but expiration of his
term.
(2) Where director or trustee elected by cumulative voting. A

director or trustee may be removed by the prescribed vote without


cause subject to the limitation that a director or trustee cannot be
removed without cause if the effect of such removal is to deprive

Sec. 28

TITLE m. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

289

minority stockholders or members who united in cumulative


voting to elect such director, of right of representation to which
they may be entitled under Section 24. This proviso is necessary
to protect the minority against any abuse by the majority since
there is no cumulative voting in the removal of directors.
The rule does not apply where the removal is initiated by the
minority stockholders or members themselves.
(3) Where removal done by electing replacement. The incum-

bent directors or trustees cannot be removed merely by electing


a new set of directors or trustees.
The reason is that the directors or trustees can only be
removed by at least 2 / 3 of the outstanding capital stock or of the
members entitled to vote (Sec. 28.), while vacancies in the board,
when they exist, can be filled by mere majority (or plurality) vote.
(Sec. 24.) Furthermore, the Code requires that the removal "shall
take place either at a regular or special meeting called for the
purpose," and "after previous notice to stockholders or members
of the corporation of the intention to propose such removal at the
meeting." (Sec. 28; Roxas vs. De la Rosa, 49 Phil. 609 [1926].)
(4) Where removal done for disqualification. A director or

trustee can be removed by following the procedure set forth in


Section 28. In case of disqualification by operation of law, there is
no need to follow the said procedure. A mere declaration of such
disqualification is sufficient to remove him from office. (SEC
Opinion, Oct. 6,1994.)
(5) Where replacement elected not qualified. It has been held

that a director who has been removed by the stockholders who


elected another person in his place cannot be compelled to vacate
his office, where it is shown that the successor is not qualified
not being the owner of any share in the corporation and because
under the by-laws of said corporation, "directors shall serve until
the election and qualification of their duly qualified successors."
(Detective and Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255
[1968]; see Sec. 23.)
Under the clear provisions of Section 28, however, the
removal of a director does not depend upon the qualification of
his successors as long as the removal has been duly made.

290

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 28

Power of the board to remove


a member.

The board of directors (or trustees) has no power to remove


one of its members as director (or trustee). (Bruch vs. National
Guarantee Credit Corp., 116 A. 738.) Neither can it replace the
vacancy caused by removal effected by the stockholders or
members of the corporation.
The reason is that as officers deriving their title from the
stockholders (or members), they can be removed only by the
power that appointed them. (Ibid.) Since the law expressly
confers the authority to stockholders or members, the board
cannot indirectly usurp or disregard the same. (SEC Opinion,
May 23, 1985.)
Power of court to r e m o v e directors
or trustees.

(1) General rule. The Corporation Code does not confer


expressly upon the courts the power to remove a director or
trustee or any appointed officer of a corporation on the ground of
mismanagement of its affairs, neglect, or other cause. The power
of removal is in the corporation itself. (2 Fletcher, p. 166.) "The
reason for this rule is that if the courts were given such power
then there should be no reason why the courts should not also
be given the power to designate the one to fill the office, which
should be substituting the judgment of the court for that of the
stockholders" or members. (C.G. Alvendia, op. cit, p. 307.)
(2) Appointment of receiver. There are abundant authorities,
however, which hold that if the court has acquired jurisdiction to
appoint a receiver (see Sec. 122.) because of the mismanagement
of the directors (or trustees), these may thereafter be removed
and others appointed in their place by the court in the exercise
of its equity jurisdiction. (2 Fletcher, pp. 189-190.) But where the
properties and assets of the corporation are amply protected by
the appointment of a receiver, such removal is unnecessary and
unwarranted in view of the provisions of Section 28 prescribing
the manner of removal of directors or trustees, (see Angeles vs.
Santos, 64 Phil. 697 [1937].)

Sec. 28

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

291

(3) Institution of quo warranto proceedings. Under the Rules

of Court, a quo warranto proceeding may be brought against "a


person who usurps, intrudes into, or unlawfully holds or exercises x x x an office in a corporation created by authority of law."
(Rule 66, Sec. 1 thereof; see also Rule 66, Sec. 11.)
Requisites for r e m o v a l of directors
or trustees.

Section 28 specifies the following requisites for the removal


of directors or trustees:
(1) The removal must "take place either at a regular meeting
of the corporation or at a special meeting called for the purpose";
(2) There must be "previous notice to the stockholders or
members of the corporation of the intention to propose such
removal at the meeting"; and
(3) The removal must be "by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote
of two-thirds ( 2 / 3) of the members entitled to vote."
While a director or trustee can be removed from office as provided in Section 28, he cannot be removed as stockholder of the
corporation, depriving him of his ownership of shares of stock
therein, without due process of law.
Requirement of notice of m e e t i n g .

(1) For removal. Section 28 requires that the notice of the


meeting called for the removal of any director or trustee must
expressly state "the intention to propose such removal." A notice
of a special meeting to consider amendments of the by-laws and
"reorganization of the board of directors" cannot be considered
as a notice contemplated under Section 28 as it is couched in
general terms and, therefore, the action of the members which
passed a resolution declaring vacant all the seats in the board
and thereupon nominated and elected a new set of directors, is
not proper and may be questioned by the directors who did not
attend the meeting as this is tantamount to their unjust removal
from office. (SEC Opinion, Dec. 3,1971.)

292

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 28

"Previous notice x x x of the intention to propose such


removal" is not required where the meeting is a regular annual
meeting. There is no removal involved when a director or trustee
is re-elected, (supra.)

(2) For choosing replacements. In case of removal on the vote


of stockholders or members, as the case may be, the vacancy so
created may be filled by election at the same meeting without
further notice, or at any regular or at any special meeting called
for the purpose after giving the prescribed notice. (Sec. 28.) Thus,
the stockholders or members who have removed a director or
trustee are also given the power to choose his replacement at the
same meeting.
Resignation of directors or trustees.
(1) Right to resign at any time. The fact that the law requires

directors or trustees unless removed to continue in office until


their successors are elected and qualified (Sec. 23.) does not
prevent a director or trustee from resigning at any time. A
corporation, however, continues to exist despite the resignation
of the directors or trustees. It can be dissolved only in the manner
provided for by the Corporation Code, particularly under Title
XIV thereof.
(2) Liability for wrongful resignation. By reason, however, of

the fiduciary nature of the position they occupy, a director cannot


resign, as part of fraudulent scheme to prejudice the corporation
or its stockholders and make profit to his own advantage or at
an unreasonable time if the immediate consequence would be
to leave the interest of the corporation without proper care and
protection. (Ballantine, p. 217.) If a director quits under circumstances which occasioned a deprivation of profits to the corporation, it is but right that he should repair and make good such
loss.
(3) Form and report of resignation. In the absence of express

provision, a resignation need not be in any particular form. It


may be either oral or in writing, but it must clearly show an
intent to resign. (2 Fletcher, p. 140.)
The Code requires the resignation of a director or trustee to

Sec. 28

TITLE ID. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

293

be immediately reported to the Securities and Exchange Commission. (Sec. 26.)


(4) Effectivity of resignation. As a general rule, unless a
future date of acceptance by the corporation is required by the
by-laws, the resignation of a corporate official becomes complete
and his office becomes vacant the moment the resignation is
made to the proper officer or body, and it is not necessary that
the resignation be accepted, or that someone be elected to take
his place, in order to make the resignation effective. This is the
rule, notwithstanding a provision in the statute, charter, or bylaws that the officers shall hold office until their successors are
duly elected.
The basis of the rule is that where a director (or trustee) thus
resigns, the inaction or refusal of the board of directors should
not impose upon him a future liability or responsibility which he
does not undertake. (SEC Opinion, Jan. 23,1963, citing 2 Fletcher,
pp. 105-106.)
Abandonment of office and failure
to attend meetings.
(1) Acceptance of incompatible office. Where a director (or
trustee) in a corporation accepts a position in which his duties
are incompatible with those as such director (or trustee), it is
presumed that he has abandoned his office as director (or trustee)
of the corporation. (Mead vs. McCullough, 21 Phil. 95 [1991].)
(2) Absence for an unreasonable length of time. Similarly,

where a director absented himself from all meetings for nearly


a year and announced his refusal to act as an officer and
stockholder, there is an abandonment of his position as director.
(Dodge vs. Kenwood Ice Co., 204 Fed. 577.) Abandonment by a
director of all his duties for a number of years must be regarded
as an implied resignation of his office as director. (Bartholomew
vs. Bentley, 1 Ohio St. 37.)
(3) Mere absence or continued failure to attend meetings.

However, mere absence of a director from the country, or


continued failure to attend meetings, etc. where there has been
no resignation, does not have the effect of vacating his seat or

THE CORPORATION CODE OF THE PHILIPPINES

294

Sec. 29

terminating his term of office unless there is some express


provision to such effect. (2 Fletcher, p. 132.)
(4) Specified number of unjustified absences as ground for automatic disqualification. Where the general authority to remove

directors or trustees rests with the stockholders or members, a


corporation, to protect its interests, is empowered to prescribe
in the by-laws (see Sec. 47[5].) attendance in board meetings as a
qualification device, such that a specified number of unjustified
absences may be a ground for automatic disqualification which
need not be approved again by the stockholders or members as
required under Section 28. The by-laws are, in effect, written into
the charter of the corporation and the corporation, directors/
trustees, officers, and stockholders/members are bound by and
must comply with them. (SEC Opinion, May 19,1992.)
Sec. 29. Vacancies in the office of director or trustee.
Any vacancy occurring in the board of directors or trustees
other than by removal by the stockholders or members or
by expiration of term, may be filled by the vote of at least
a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to
fill a vacancy shall be elected only for the unexpired term
of his predecessor in office.
27

Any directorship or trusteeship to be filled by reason


of an increase in the number of directors or trustees shall
be filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the
purpose, or in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the
meeting, (n)
Vacancies in the office of director
or trustee.
(1) Grounds for replacement during term. A director or

trustee can only be replaced during his term upon his resignation
or removal (see Sec. 28.) or when his position is otherwise law27

or members.

Sec. 29

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

295

fully vacated. Temporary absence does not result in vacancy as


contemplated in Section 29. (SEC Opinion, April 25,1985.)
(2) Tenure of successor. The person elected to fill a vacancy
holds office only for the unexpired term of his predecessor. (SEC
Opinion, Oct. 5,1960.)
(3) Prohibition against election of alternate in case of temporary

vacancy. In the absence of a vacancy, no one can be elected,


even as an alternate, to take the place of an incumbent director
who is temporarily absent only. To allow such an alternate would
be to have two directors for the same position, one permanent
and the other temporary, a situation that finds no sanction in the
law and is irregular. (Ibid.)
Filling of v a c a n c i e s .
(1) By the stockholders or members. In a vacancy in the office

of director or trustee may be filled by the stockholders or members


in any of the following cases:
(a) If the vacancy results from the removal by the stockholders or members or the expiration of term;
(b) If the vacancy occurs other than by removal or by
expiration of term (see Sec. 23, par. 1.), such as death, resignation, abandonment, or disqualification, if the remaining
directors or trustees do not constitute a quorum for the
purpose of filling the vacancy;
(c) If the vacancy may be filled by the remaining directors or trustees (infra.) but the board refers the matter to the
stockholders or members; or
(d) If the vacancy is created by reason of an increase in
the number of directors or trustees.
(2) By the members of the board. 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.
(a) Allowing the remaining directors or trustees to fill up
vacancies avoid the expenses and inconveniences attending
the calling of stockholders' or members' meeting, especially
where there are many of them. (SEC Opinion Jan. 3,1986.)

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 29

(b) The power of the board of directors or trustees is not


suspended by vacancies in the board unless the number is
reduced below a quorum.
(c) The board has no power to fill any directorship or
trusteeship by reason of an increase in the number of directors or trustees. The amendment increasing the number of directors or trustees which results in a vacancy becomes effective upon its approval. This is deducible from the last clause
of Section 29 which authorizes the filling of the vacancy "in
the same meeting authorizing the increase of directors or
trustees in the notice of meeting."
ILLUSTRATION:
If four (4) of nine (9) directors died, the remaining five (5)
directors still constitute a quorum, and a majority of the five
(5) or three (3) may fill the four (4) vacancies. But if five (5) of
the directors died, the vacancies will have to be filled by the
stockholders in a regular or special meeting duly called for the
purpose.
28

(d) The phrase "may be filled" in Section 29 indicates that


the filling of vacancies in the board by the remaining directors constituting a quorum is merely permissive. Corporations may choose how vacancies in their boards may be filled
up, either by the remaining directors or trustees constituting
a quorum or by all stockholderes or members in a meeting
called for the purpose. However, if the by-laws prescribe the
specific mode of filling up existing vacancies, the provisions
of the by-laws should be followed. It is well-settled that the
by-laws are part of the fundamental law of the corporation
and its directors, officers, and members are bound to comply
with them, (see Sec. 46.)
(3) Where vacancy caused by resignation of a holdover director.

The stockholders, and not the remaining members of the board,


have the power to elect a director to fill the vacancy. The hold-

Note that the election of corporate officers other than directors or trustees requires
the vote of majority of all the members of the board. (Sec. 25, par. 2.) Such election may be
made after the vacancies in the board have been filled.

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297

over period that time from the lapse of one year after a member's election to the board and until his successor's election and
qualification is not a part of the director's original term of office, nor is it a new term.
The theory of delegated power of the board of directors
explains why, under Section 29, in cases where the vacancy in the
corporation's board of directors is caused not by the expiration
of a member's term, the successor so elected to fill a vacancy
shall be elected only for the unexpired term of his predecessor
in office. The law has authorized the remaining members of the
board to fill a vacancy only in specified instances, so as not to
retard or impair the corporation's operations; yet, in recognition
of the stockholders' right to elect the members of the board, it
limited the period during which the successor shall serve only to
the unexpired term of his predecessor in office.
The vacancy referred to in Section 29 contemplates a vacancy
occurring within the director's term of office. When a vacancy is
created by the expiration of a term, there is no more unexpired
term to speak of. Hence, Section 29 declares that it shall be the
corporation's stockholders who shall possess the authority to fill
a vacancy caused by the expiration of a member's term. (Valle
Verde Country Club, Inc. vs. Africa, 598 SCRA 202 [2009].)
Sec. 30. Compensation of directors. In the absence
of any provision in the by-laws fixing their compensation,
the directors shall not receive any compensation, as such
directors, except for reasonable per diems: Provided,
however, That any such compensation (otherthan perdiems)
may be granted to directors by the vote of the stockholder
representing at least a majority of the outstanding capital
stock at a regular or special stockholders' meeting. In no
case shall the total yearly compensation of directors, as
such directors, exceed ten percent (10%) of the net income
before income tax of the corporation during the preceding
year, (n)
Compensation of directors or trustees.

Under the law, a private corporation is authorized to provide


in its by-laws for the compensation of directors or trustees. (Sec.

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298

Sec. 30

47[5].) In the absence of any provision in the by-laws fixing


their compensation, the directors or trustees, as such, shall not
receive any compensation, unless authorized by a vote of the
stockholders representing at least a majority of the outstanding
capital stock or a majority of the members entitled to vote. Any
compensation to the officers of a corporation without proper
authorization in the by-laws or by the vote of the stockholders
may be recovered in a stockholders' suit.
The amount of compensation of directors must be fixed either
in the by-laws or in the resolution of the stockholders; hence,
the stockholders cannot delegate to the board of directors the
authority to fix the amount of their own compensation.
Section 30 also applies to non-stock corporations, (see Sec. 87,
par. 2.)
Directors without authority to grant
themselves c o m p e n s a t i o n .

(1) The directors have no authority to grant compensation to


themselves.
29

(a) For usual and ordinary services as such. As a general

rule, when directors perform nothing more than the usual


and ordinary duties of their office, they are not entitled to
salary or other compensation. The reason is that directors
render services gratuitously and that the return upon their
shares adequately furnishes the motives for services without
compensation. (SEC Opinion, Sept. 8,1975.)
(b) For services outside their regular duties. In view of the

clear wording of Section 30, it is doubtful whether a direc-

"There is a radical difference when a stockholder is voting strictly as a stockholder


and when voting as a director. When voting as a stockholder he has the legal right to vote
with a view of his own benefits and is representing himself only; but a director represents
all the stockholders in the capacity of trustee for them and he cannot use his office as a
director for his personal benefit at the expense of the stockholders. (Haldeman vs. Haldeman, 176 Ky. 635,197 S.W. 376 [1917], cited in Sulpicio Guevara, The Phil. Corp. Law,
1967 ed., p. 145.)
A stockholder attending a corporate meeting as such is not entitled to per diems for
such attendance; he is acting for himself as an owner of stocks of the corporation. (SEC
Opinion, September 1971.)

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TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

299

tor may be entitled to compensation even when they render


extraordinary or unusual services, i.e., services which are not
properly incidental to their office and are rendered outside
of their regular duties, (see SEC Opinion, June 10, 1974.) Corporate directors presumptively serve without compensation.
While they may assign themselves additional duties, they are
without power to vote for themselves compensation for such
additional duties. (Central Cooperative Exchange, Inc. vs.
Enciso, 162 SCRA 706 [1978].)
(2) A stockholders' resolution or agreement for the payment
of compensation for such services would be valid. (SEC Opinion,
Dec. 29, 1975.) But the stockholders cannot ratify a board of
directors' action fixing their own salaries. Such action being
contrary to law, cannot be ratified. The stockholders themselves,
by the requisite vote, must fix the compensation, (supra.)
Limit to c o m p e n s a t i o n .

Where compensation is granted either in the by-laws or by


the vote of stockholders, the total yearly compensation of directors, as such, shall in no case exceed 10% of the net income before
income tax of the corporation during the preceding year. This
limitation seeks to curb the practice particularly of close corporations to grant excessive bonuses to their directors to reduce the
taxable income of such corporations. It is also intended for the
protection of the stockholders as well as the corporate creditors
and prospective investors.
The Insurance Code (Pres. Decree No. 1460.) does not contain
any prohibition as against the board of directors of a corporation
securing insurance policy on the life of its members and making
the directors the beneficiaries instead of the corporation.
However, the premium paid thereon is analogous to a continuing
bonus and gift and thus falls within the context of additional
compensation. A corporation may not be used by its officers or
stockholders as a means of diverting profits or proceeds to the
payment of premium on insurance policies to the enrichment
of its beneficiaries at the expense of, or to the detriment of, its
creditors. (SEC Opinion, Dec. 8,1987.)

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300

Sec. 30

Per diems of directors.

The power of the board of directors to fix per diems*> for themselves is conferred by the law itself.
(1) Whether or not authorized by the by-laws or by the stockholders, directors are entitled to receive reasonable per diems. In
view of the real distinction between per diems and compensation,
the per diems granted to directors should not be included in their
total yearly compensation for purposes of the 10% limitation.
31

(2) The phrase "as such directors" in Section 30 is not without


significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their
capacity as directors or trustees. The implication is that members
of the board may receive compensation in addition to reasonable per diems, when they render services to the corporation in a
capacity other than as directors or trustees. (Western Institute of
Technology vs. Salas, 278 SCRA 216 [1997].)
(3) Section 30 does not specify, however, who is to set the
amount of the per diems and what amounts shall be considered
"reasonable" under the circumstances. If normal corporate
practice were to be followed, the matter shall be decided by
the directors themselves. Thus, they may easily circumvent the
10% limitation. The stockholders, however, may review a board
resolution fixing or increasing the per diems of its members to
inquire into its reasonableness.
(4) Per diems received without proper authorization or found
to be unreasonably excessive may ordinarily be recoverable in a
stockholders' or members' suit.

I t is a daily allowance "given for each day an officer or employee was away from his
home base or permanent station." (Lexal Laboratories vs. National Industries Workers'
Union-PAFLU, 25 SCRA 668 [1968].) It is limited to pay for a day's service. (32 Words
and Phrases 17.) Per diems are paid per attendance in board meetings. Other benefits and
emoluments of directors fall within the term "compensation."
It is any remuneration given for services rendered, like salary which is a compensation paid regularly, as by the month. It does not imply an immediate payment, or
direct return, nor the payment of cash fare or its equivalent. (15 C.J.S. 652.) Compensation
and salary are used interchangeably. While salary connotes a fixed compensation, per
diem relates to expense reimbursement. (SEC Opinion, June 13,1991.) Fare refers to money
paid for transportation of persons or goods.
w

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301

C o m p e n s a t i o n of corporate officers.
(1) Corporate officers who are not directors. The reason for

the general rule that directors of a corporation are not entitled to


compensation does not apply to corporate officers who are not
directors. Such officers, not being directors and having no control
over the funds and property of the corporation, even though
they may be stockholders, do not occupy the relation of trustees
to the corporation. (Cheeney vs. Lafayette, B.O.R. Co., 61 111. 570.)
Accordingly, if they are elected or appointed to perform valuable
services for the corporation under circumstances indicating an
intention and expectation of payment, there arises an implied
promise on the part of the corporation to pay a reasonable
compensation for services rendered, even in the absence of an
express contract. (5 Fletcher, p. 378.)
This principle applies as well to employees hired by the corporation.
(2) Corporate officers who are directors. Directors who are

also corporate officers are entitled, in addition to reasonable per


diems as directors, to compensation as such corporate officers,
and the amount thereof may be fixed by mere board resolution
in the absence of provision to the contrary in the by-laws and
subject to the provision of Section 32. (infra.) It must appear that
the intention is to give them salaries as such officers. Considering
that the board of directors and officers have different functions,
the 10% limitation excludes salaries for services rendered by
officers. (SEC Opinion, Aug. 19,1992.)
Compensation may take the form of salary and fringe
benefits, such as housing, membership in clubs, company cars,
stock options, etc. Needless to say, the compensation must not be
excessive.
ILLUSTRATION:
The by-laws of the corporation are silent as to the salary
of the president. While resolutions of the incorporators and
stockholders provide salaries for the general manager, secretary,
treasurer, and other employees, there was no provision for the
President's salary.
On the other hand, other resolutions provide for per diems
to be paid to the President and the directors for each meeting
attended. This leads to the conclusion that the president and the

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302

Sec. 31

board of directors were expected to serve without salary, and


that the per diems paid to them were sufficient compensation
for their services. (Lingayen Gulf Electric Power Co., Inc. vs.
Baltazar, 93 Phil. 404 [1953].)
Sec. 31. Liability of directors, trustees, or officers.
Directors or trustees who willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation,
its stockholders or members and other persons.
When a director, trustee, or officer attempts to acquire
or acquires, in violation of his duty, any interest adverse
to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes
a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the
corporation, (n)
Nature of directors'/trustees' position.
(1) Agents or trustees for the corporation. The directors of

a corporation are its agents. They also occupy a fiduciary relation to the corporation. By numerous authorities they have been
called "trustees" (McEwen vs. Kelly, 79 S.E. 777.), with certain
powers and subject to certain duties in the management of its
property, and each stockholder a cestui que trust according to his

interest and shares. In the performance of their official duties,


they are under obligations of trust and confidence to the corporation

and its stockholders and must act in good faith and for the interest
of the corporation or its stockholders with due care and diligence
and within the scope of their authority. (Jackson vs. Ludeling,
21 Wall. [U.S.] 616.) It is settled that in the absence of malice, bad
32

Art. 1173. x x x If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good father of a family shall be
required.
32

Art. 1887. In the execution of the agency, the agent shall act in accordance with the
instructions of the principal.
In default thereof, he shall do all that a good father of a family would do, as required
by the nature of the business. (Civil Code)

Sec. 31

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

303

faith, or specific provision of law, a director or officer of a corporation cannot be made personally liable for corporate liabilities.
(Lowe, Inc. vs. Court of Appeals, 596 SCRA 140 [2009].)
The ordinary trust relationship of directors of a corporation
and stockholders is not a matter of statutory or technical law. It
springs from the fact that directors have the control and guidance of corporate affairs and property and, hence, of the property
interest of the stockholders. Equity recognizes that stockholders
are the proprietors of the corporate interest and are ultimately
the only beneficiaries thereof. (Gokongwei, Jr. vs. Securities and
Exchange Commission, 89 SCRA 336 [1979], citing Ashaman vs.
Miller, 101 Fed. 2d 85.)
The standard of fiduciary obligation of the directors of corporations has been emphatically restated, thus:
"A director is a fiduciary, x x x Their powers are powers in
trust. He who is in such fiduciary position cannot serve himself
first and his cestuis second, x x x 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, x x x He cannot utilize his inside
information and strategic position for his own preferment.
He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it
may not be exercised for the aggrandizement, preference, or
advantage of the fiduciary to the exclusion or detriment of
the cestuis." (Ibid., citing Pepper vs. Litton, 308 U.S. 309, 84 L.
ed. 281, 289-291.)
"The law will not tolerate the passive attitude . . . without
active and conscientious participation in the managerial functions

of the company. As directors, it is their duty to control and


supervise the day-to-day business activities of the company
or to promulgate definite policies and rules of guidance with

304

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 31

vigilant eye toward seeing to it that these policies are carried


out. It is only then that directors may be said to have fulfilled
their duty of fealty to the corporation." (Gokongwei, Jr. vs.
Securities and Exchange Commission, supra, citing Olek,
Modern Corp. Law, Vol. 2, Sec. 960.)
Thus, in the cited case, the Supreme Court held that "the offer and assurance of petitioner," a candidate for board membership in San Miguel Corporation, under whose by-laws he was
disqualified for being engaged in any business which competes
with or is antagonistic to that of the corporation, "that to avoid
any possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed,
would not detract from the validity and reasonableness of the
by-laws here involved. Apart from the impractical results that
would ensue from such arrangement, it would be inconsistent
with petitioner's primary motive in running for board membership which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would
be against all accepted principles underlying a director's duty of
fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management."
(2) Agents or trustees for the stockholders or members/creditors.

So long as a purely private corporation remain solvent, its directors are agents or trustees for the stockholders or members.
They owe no duties to others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and
must manage its property and assets with strict regard to their
interest and if they are themselves creditors while the insolvent
corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate property
or otherwise acquiring any personal advantage over other creditors. (Mead vs. McCullough, 21 Phil. 952 [1911].)
Cases w h e n directors/trustees or officers
liable for d a m a g e s .

The general rule is that officers of a corporation are not personally liable for their official acts unless it is shown that they

Sec. 31

TITLE m. BOARD OF DIRECTORS /TRUSTEES / OFFICERS

305

exceeded their authority. Section 31 enumerates the occasions


when a director or trustee may be held liable for damages and
thus, the veil of corporate fiction may be pierced, as follows:
(1) He willfully and knowingly votes or assents to patently
unlawful acts of the corporation;
(2) He is guilty of gross negligence (not mere "want of ordinary prudence" as held in Steinberg vs. Veloso, supra.) or bad
faith in directing the affairs of the corporation; and
(3) He acquires any personal or pecuniary interest in conflict
with his duty as such director or trustee.
In the above instances, the erring board members or officers
shall be held jointly and severally (or solidarily) liable for all
damages resulting therefrom suffered by the corporation, its
stockholders or members, or other persons, (see Sec. 65.)
33

Personal liability of a corporate director/trustee or officer along (although not necessarily) with the corporation may
also validly attach, as a rule, when he consents to the issuance
of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection
thereto (see Sec. 65.); when he is made, by a specific provision of
law, to personally answer for his corporate action (see Sec. 144;
Pres. Decree No. 115 [Trust Receipts Law], Sec. 13.); and when
he agrees to hold himself personally and solidarily liable with
the corporation. (Tramat Mercantile, Inc. vs. Court of Appeals,
238 SCRA 14 [1994]; Santos vs. National Labor Relations Commission, 20 SCRA 987 [1967]; National Food Authority vs. Court
of Appeals, 311 SCRA 700 [1999]; FCY Corporation Group, Inc.
vs. Court of Appeals, 323 SCRA 270 [2000]; Malayang Samahan
vs. Ramos, 357 SCRA 77 [2001]; Doroton Conglomerate, Inc. vs.
Agcolicol, 400 SCRA 523 [2003].)
In a case, the treasurer of a corporation who was authorized
to issue checks for the corporation was held negligent for signing

"Art. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall not be
an obstacle to those which may subsequently be directed against the others, so long as the
debt has not been fully collected. (Civil Code)

306

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Sec. 31

the confirmations letter requested by the indorsee and the payee


(indorser) of four (4) crossed checks issued by said treasurer in
favor of the payee for the rediscounting of the crossed checks
when the treasurer was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be
further negotiated, and made personally liable to the resulting
damage to the corporation. (Atrium Management Corporation
vs. Court of Appeals, 353 SCRA 23 [2001].)
Liability of directors/trustees or officers
for bad faith or gross negligence.

(1) Directors or trustees are personally liable for any wrongful disposition of corporate assets and for any loss or injury to
the corporation arising from their gross negligence or unauthorized acts or violation of their duties, (see Steinberg vs. Velasco,
52 Phil. 953 [1929].) But they are not liable for business losses
incurred because of honest bad judgment not amounting to bad
faith or gross negligence, (see Ballantine, p. 160; see also Board
of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].)
No one can guarantee the success of a business because there is
always that element of risk. The officers of a corporation are not
insurers of its success.
(2) Neither can a corporate officer be made personally liable
for the money claims of discharged corporate employees where
no malice or bad faith can be attributed to him in terminating
their employment. (Midas Touch Food Corp. vs. National Labor
Relations Commission, 259 SCRA 652 [1996].) Corporate directors and officers are solidarily liable with the corporation for the
termination of employment of employees if the termination is
done with malice or in bad faith. (Progress Homes vs. National
Labor Relations Commission, 269 SCRA 274 [1997]; Mandaue
Dinghow Dimsum House Co., Inc. vs. National Labor Relations
Commission, 547 SCRA 402 [2008].)
Bad faith or negligence is, of course, a question of fact. It has
been said that "bad faith does not simply mean bad judgment or
negligence; it imparts a dishonest purpose or some moral obliquity and conscious doing of wrong. It means breach of a known

Sec. 32

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

307

duty through some motive or interest or ill-will; it partakes of the


nature of fraud." (Ibid.) It is never presumed. In order to pierce
the veil of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the
corporation, such negligence must be gross. (Magalang vs. Ong,
562 SCRA 152 [2008].)
Liability of directors/trustees or officers
for secret profits.

Furthermore, in the case mentioned in the second paragraph,


the director /trustee or officer guilty of violation of duty shall be
held accountable for the profits which otherwise would have accrued to the corporation. Private or secret profits obtained must
be accounted for, even though the transaction on which they are
made is advantageous or is not harmful to the corporation, or
even though the director/trustee or officer acted without intent
to injure the corporation. The fact that the agreement whereby
a person is to receive a secret profit is made prior to the time he
becomes an officer does not change the rule. And the fact that the
profits were derived from transactions ultra vires (see Sec. 45.)
does not relieve the director/trustee or officer from liability. (19
Am. Jur. 2d 688-689.)
Similarly, a director guilty of disloyal act against the corporation is required by Section 34 to account to the corporation for
the profits obtained by him from a business opportunity which
should belong to the corporation.
Sec. 32. Dealings of directors, trustees or officers with the
corporation. A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;

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308

Sec. 32

3. That the contract is fair and reasonable under the


circumstances; and
4. That in the case of an officer, the contract with the
officer has been previously authorized by the board of
directors.
34

Where any of the first two conditions set forth in the


preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified
by the vote of the stockholders representing at least twothirds (273) of the outstanding capital stock or of two-thirds
(2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable
under the circumstances, (n)
Self-dealing directors/trustees
or officers.
(1) Generally, contract void. Section 32 renders voidable

at the option of the corporation a contract of such corporation


with one or more of its directors/trustees or officers. Being its
agents and entrusted with the management of its affairs, the
directors or trustees and other officers of a corporation occupy a
fiduciary relation towards it, and cannot be allowed to contract
with the corporation, directly or indirectly, or to sell property
to it, or purchase property from it, where they act both for the
corporation and for themselves. (3 Fletcher, p. 387.)
Section 32 does not require that the corporation suffers injury
or damage as a result of the contract.
(2) Exceptions. In any of the following cases, the contract

shall be valid and cannot be set aside merely because of the relationship of the parties:
(a) All the conditions enumerated in Section 32 are present;

"or trustees.

Sec. 33

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

309

(b) Not all the conditions set forth are present but the
corporation (through the board) elects not to question the
validity of the contract without prejudice to the liability of the
consenting directors or trustees for damages under Section
31. In such case, a dissenting stockholder or member may file
a derivative suit in behalf of the corporation (see comments
under Sec. 64.); or
(c) In the case of a contract with a director or trustee,
only the third condition is present, i.e., the contract is fair and
reasonable under the circumstances, if the contract is ratified by the required vote of the stockholders or members in a
meeting called for the purpose, provided that full disclosure
of the adverse interest of the directors or trustees involved is
made at such meeting. If the contract is with an officer of the
corporation, it must have been previously authorized by the
board, i.e., there is a prior board resolution authorizing the
contract.
Section 32 fails to specify whether the vote of the self-dealing
director or trustee shall be counted in the meeting for the ratification of the contract.
Sec. 33. Contracts between corporations with interlocking
directors. Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances,
a contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the interlocking director in one corporation or corporations is
merely nominal, he shall be subject to the provisions of
the preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial
for purposes of interlocking directors, (n)
Contracts between corporations
with interlocking directors.

(1) Section 33 recognizes as valid a contract between two or


more corporations which have interlocking directors (i.e., one,

310

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Sec. 33

some, or all of the directors in one corporation is / are also director /


directors in another corporation) as long as there is no fraud and
the contract is fair and reasonable under the circumstances, (see
Sec. 44.) However, if the interest of the interlocking director in
one corporation is substantial, i.e., his stockholdings exceed 20%
of the outstanding capital stock and in the other merely nominal,
i.e., his stockholdings do not exceed 20%, the rules of Section 32 on
self-dealing directors shall apply insofar as the latter corporation
is concerned.
(2) Section 32 pertains to transactions between corporations
with interlocking directors resulting in the prejudice to one of the
corporations. It does not apply where the corporation allegedly
prejudiced is a third party, not one of the corporations with
interlocking directors. (Development Bank of the Phils, vs. Court
of Appeals, 363 SCRA 307 [2001].)
ILLUSTRATION:
X Corporation sold a parcel of land worth P500,000.00 to Y
Corporation for only P300,000.00. Z is a board member of both
corporations.
Evidently, the contract is not fair and reasonable and is,
therefore, voidable on that ground. But if the contract is fair
and reasonable under the circumstances and Z's interest
in X Corporation is merely nominal and in Y Corporation
substantial, the conditions in Section 32 must be present insofar
as X Corporation is concerned, on the theory that the contract
of X Corporation is with Z.
However, if Z's interest in both corporations is nominal or
is substantial, the provisions of Section 32 do not apply but the
contract shall be valid only if there is no fraud and the contract
is fair and reasonable under the circumstances. The corporation
which seeks to uphold the contract has the burden to show that
it is fair and reasonable.
Evils of interlocking directorates.
(1) Validity of by-laws prohibiting interlocking directorates.

By-laws which prohibit a director of a corporation from serving


at the same time as a director of a competing corporation, have

Sec. 33

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

311

been upheld as valid and reasonable. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) The reason
has been aptly explained, thus:
"The argument for prohibiting competing corporations
from sharing even one director is that the interlock permits
the coordination of policies between nominally independent
firms to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example, is
to be faithful to both corporations, some accommodation
may result. Suppose X is a director of both Corporation A
and Corporation B. X could hardly vote for a policy by A that
would injure B without violating his duty of loyalty to B; at
the same time he could hardly abstain from voting without
depriving A of his best judgment. If the firms really do
compete in the sense of vying for economic advantage at
the expense of the other there can hardly be any reason for
an interlock between competitors other than the suppression
of competition." (Ibid., citing Travers, Interlock in Corporate
Management and the Anti-Trust Law, 46 L. Rev., 819, 840
[1968].)
According to the Report of the House Judiciary Committee
of the U.S. Congress on Section 9 of the Clayton Act, it was
established that "By means of the interlocking directorates one
man or group of men have been able to dominate and control a
great number of corporations . . . to the detriment of the small
ones dependent upon them and to the injury of the public." (Ibid.,
citing 51 Cong. Rec. 9091.) Where two competing firms control a
substantial segment of the market, this could lead to collusion and
combination in restraint of trade. Reason and experience show
that the inherent tendency of interlocking directorates between
companies that are related to each other as competitors is to
blunt the edge of rivalry between the corporations, to seek out
ways of compromising opposing interests, and thus, eliminate
competition. (Ibid.)
(2) No absolute prohibition of interlocking directorates. Be it

noted that under Section 33, contracts between corporations having directors in common are not rendered void or voidable on

THE CORPORATION CODE OF THE PHILIPPINES

312

Sec. 34

that ground alone. The law recognizes that interlocking directorates are very common in today's business world and to absolutely prohibit such contracts would be impractical and unwise.
But transactions between such corporations should be "subjected to close judicial scrutiny to determine the absence or presence
of fraud or unfairness." For example, where the circumstances
show that the transaction would be of great advantage to one
corporation at the expense of the other, especially where, in addition to this, the personal interests of the directors or any of them
would be enhanced at the expense of the stockholders, the transaction is voidable by the stockholders within a reasonable time
after discovery of the fraud. (19 Am. Jur. 2d 714.)
35

An individual may be a stockholder in different corporations


and it is not unusual to find a director or corporate officer
occupying the same position in another corporation not only
because he has investments therein but also because his services
may have been proven to be valuable. However, while such
situation is allowable, dealings of interlocking directors are
subject to Sections 31, 33, and 34. (SEC Opinion, May 4,1994.)
Sec. 34. Disloyalty of a director. Where a director,
by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding
the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds
(2/3) of the outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the director
risked his own funds in the venture, (n)
Doctrine of "corporate opportunity."

Under this doctrine, a director who, by virtue of his office,


acquires for himself a business opportunity which should belong
These transactions usually occur in a parent-subsidiary relationship between corporations. Hence, in some cases, the contract between two corporations may require
representatives of one corporation to sit in the board of the other. To prohibit business
transactions of one corporation with another corporation controlled by the former would
discourage formation of business subsidiaries and investments and thus, hamper capital
market formation in the country. (SEC Opinion, Dec. 21,1992.)
35

Sec. 34

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

313

to the corporation, thereby obtaining profits to the prejudice of


such corporation, is guilty of disloyalty and should, therefore,
account to the latter for all such profits by refunding the same,
notwithstanding that he risked his funds in the venture. This
doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection. (Paulman vs. Kritzer, 291
N.E. 2d 541.) And, if, in such circumstances, the interests of the
corporation are betrayed, the corporation may elect to claim all of
the benefits of the transaction for itself and the law will impress
a trust in favor of the corporation upon the property interest and
profits acquired. (Guth vs. Loft, Inc., 23 Del. Ch. 255; Ontjes vs.
MacNilan, 5 N.W. 2d 860.)
(1) In a case where the directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's
products and after establishing a rival business the directors
entered into a new contract themselves with the foreign firm
for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless
fiduciary may not reap the fruits of his misconduct to the exclusion
of his principal." (Gokongwei, Jr. vs. Securities and Exchange
Commission, 89 SCRA 336 [1979], citing Silakot Importing Corp.
vs. Berlin, 68 N.E. 2d 501, 503.)
(2) An amendment to the by-laws of a corporation requiring
that a director shall not be an officer, manager or controlling
person of, or the owner (either of record or beneficially) of
10% or more of any outstanding class of shares, of any other
corporation or entity engaged in any line of business competitive
or antagonistic to that of the former, was sustained as valid
and reasonable, as "it is obviously to prevent the creation of an
opportunity for an officer or director of San Miguel Corporation,
who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director
to promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders. Certainly, where
two corporations are competitive in a substantial sense, it would

314

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 34

seem improbable, if not impossible, for the director, if he were


to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties
above his personal concerns." (Gokongwei, Jr. vs. Securities and
Exchange Commission, supra.)
Section 34 applies to directors. If the disloyalty is committed
by an officer, he is liable under the second paragraph of Section
31.
When doctrine not applicable.
A "corporate opportunity" of which corporate directors
cannot take advantage for their personal benefit is a business
opportunity which has an inherent aptitude of being integrated
into the existing business of the corporation.
(1) The doctrine which is but one phase of the rule of
undivided loyalty on the part of corporate fiduciaries does not
preclude a director from engaging in a distinct enterprise of the
same general class of business as that which his corporation is
engaged in, so long as he acts in good faith.
(2) Neither is the doctrine applicable where the opportunity
is one which is not essential to the corporation's business, or
where the director or officer does not exploit opportunity by
employment of company's resources, or where the director or
officer embracing opportunity personally is not brought into
direct competition with the corporation, (see 9-A Words and
Phrases 393-394.) Note that under Section 34, the profits must
have been obtained by the director to the prejudice of the
corporation.
(3) The doctrine is pursuant to jurisprudence which rules that
one who occupies a fiduciary relationship to a corporation may
not acquire, in opposition to the corporation, property in which
the corporation has an interest or tangible expectancy or which
is essential to its existence. (SEC Opinion, March 4,1982, citing 11
Fletcher, Cy. Corp. 227.) However, this property or business opportunity ceases to be a "corporate opportunity" and transforms
into a "personal opportunity" where the corporation is definitely
no longer able to avail itself of the opportunity, which may "arise
from financial insolvency, or from legal restrictions, or from any

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

315

other factor which prevents it from acting upon the opportunity


for its own advantage." (Ibid., citing 11 Fletcher, p. 241.)
Ratification by s t o c k h o l d e r s
of disloyal act.
Under Section 34, the guilty director will only be exempt from
liability to the corporation to account for the profits he realized if
his disloyal act is ratified by the vote of the stockholders owning
or representing at least 2 / 3 of the outstanding capital stock.
There is no similar provision in Section 31.
Section 34 is silent on whether the disloyal director shall be
allowed to vote his shares in ratification of his act.
ILLUSTRATIONS:
(1) A is a director of both X Corporation and Y Corporation
which have similar lines of business. If A delivers a "corporate
opportunity" to X and not to Y, considering that Y's chances of
gain from said business opportunity are dim, A cannot be said
guilty of disloyalty to Y. (Ibid.)
(2) In the same illustration above, suppose that a business opportunity is presented to A, to whom does it belong? It
belongs to both X and Y, and if A takes advantage of that business opportunity to the prejudice of either X or Y or to both,
then, he has to account to either one or both for the profits that
have been obtained by him to the prejudice of the corporation.
If A presents to X, he would be disloyal as far as Y is
concerned and vice versa. However, if A did not profit because
he gave it to either X or Y, he does not come under one or both
for the profits that have been obtained by him to the prejudice
of the corporation of which he is a director. Of course, A will
ultimately profit from the opportunity, being a director and
stockholder of the corporation to which it was given. But in
such case, it is not a profit that accrues to A as an individual
person who happens to be a director of both corporations. It is
a profit that accrues to the entire corporation.
Section 34 applies only where a business opportunity
belongs to the corporation and the director takes advantage
of that business opportunity for his own profit, (see Ibid.,
citing Proceedings of the Batasang Pambansa on the proposed
Corporation Code, Dec. 11,1979.)

316

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 35

Sec. 35. Executive committee. The by-laws of a


corporation may create an executive committee, composed of not less than three members of the board to
be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated
to it in the by-laws or on a majority vote of the board,
except with respect to: (1) approval of any action for which
shareholders' approval is also required; (2) the filling of
vacancies in the board; (3) the amendment or repeal of
by-laws or the adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and (5) a
distribution of cash dividends to the shareholders.
Executive committee.
(1) Need for an executive committee. Section 35 recognizes

an already existing corporate practice in the Philippines dictated


by necessity owing to the growing complexities of modern
business, whereby the board of directors delegates to an executive
committee composed of some members of the board corporate
powers to assure prompt and speedy action and solution
to important matters without the need for a board meeting,
especially where such meetings cannot readily be held. Thus, the
committee directly manages the operations of the corporation
between meetings of the board, thereby reducing the work load
of the latter.
(2) Express provision in the by-laws. Under Section 35, the

executive committee must be provided for in the by-laws and


composed of not less than three (3) members of the board. Where
the by-laws contain an express provision creating an executive
committee, the same may be properly vested by resolution of the
board of directors. (SEC Opinion, Aug. 19,1980.) The board cannot create or appoint an "executive committee" to perform some
of its functions in the absence of authority in the by-laws. In such
case, the principle on de facto officers may be applied insofar as
third persons are concerned. However, insofar as the corporation
is concerned, the unauthorized act of appointment of an executive committee may be subject to Section 144, which provides for

Sec. 35

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

317

penalties in case of violation of any of the provisions of the Code.


(SEC Opinion, Sept. 21,1993.)
(3) Committee contemplated. The "executive committee"

referred to in Section 35 should be distinguished from other


committees which are within the competence of the board to
create at any time and whose actions require confirmation by the
board itself. It is as powerful as the board, as it actually performs
certain duties of the board, and, in effect, it is acting for the
board itself. And so, because of the nature of the functions of the
executive committee, the authority to appoint such body should
be expressly provided in the by-laws, and a provision in the
by-laws which states that "authorizing the board to create such
committees as the board may deem necessary," is not a sufficient
reason for its creation and appointment. (SEC Opinion, Sept. 27,
1993; Filipinas Port Services, Inc. vs. Go, 518 SCRA 453 [2007].)
36

(4) Matters excepted from delegation by board. The committee

may act on specific matters within the competence of the board,


as may be delegated to it by the board or in the by-laws, including
those involving the exercise of judgment and discretion, except
those matters enumerated with respect to which only the
board duly called and assembled as such can act upon. Thus,
the executive committee can function as the board itself in
all matters delegated to it other than the excepted matters.
However, the board cannot validly delegate to the executive
committee blanket or general authority to act for the board if the
delegation constitutes in effect an abdication of the corporate
powers and duties vested in it by law. The board cannot delegate
entire supervision and control of the corporation to an executive
committee for this will be violative of Section 23.
(5) Enlargement by board of restrictions. The restrictions on

the power of the executive committee as provided in Section 35


may be enlarged by the board to cover other matters. Note that
"The board of directors may create an advisory committee under a provision of
the corporate by-laws authorizing it "from time to time to create special committees for
special purposes" but the functions thereof should be purely advisory and should not
in any manner be granted authority to participate in the management and control of
the affairs of the corporation since these powers belong exclusively to the board. (SEC
Opinion, July 7, 1988.)

318

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 35

under No. (4), the executive committee may amend or repeal any
resolution of the board unless "by its express terms [it] is not so
amendable or repealable."
(6) Authority to function as the board itself As a matter of

business practice, the use of an executive committee in many


companies may reduce the directors to little more than a
supervising and ratifying body. (SEC Opinion, July 29, 1985, citing

Ballantine, p. 135.) Subject to the statutory limitations, a properly


constituted committee composed of directors has all the authority
of the board to the extent provided in the resolution of the board
or by-laws. (SEC Opinion, Sept. 16, 1986.)
(7) Membership. Non-members of the board may be
appointed as members of the executive committee provided
that there are at least three (3) members of the board who are
members of the committee. (Ibid.)
An earlier opinion of the Securities and Exchange Commission states that all members of an executive committee must
be directors of the corporation. However, if all the acts of the
committee will be merely recommendatory in nature and shall
not be carried out without the formal approval of the board of
directors acting through a majority of the quorum, alternate
representation may be allowed in the committee such that some
members thereof may not be directors of the corporation. (SEC
Opinion, July 5,1974.)
(8) Ultimate control by the board. Where the committee

is made up of, or includes persons who are not directors,


such committee shall be subject to the normal restrictions and
requirements relating to undue abdication of authority by the
board. Thus, while the executive committee may manage the day
to day operation of the business of the corporation, the business
affairs thereof shall be controlled and all corporate powers
shall be exercised under the ultimate discretion of the board as
provided in Section 23. (SEC Opinion, Aug. 29,1988.)
(9) Quorum and voting. The general rule for quorum
requirements is the same as that for board of directors. A majority
of the committee members (regardless of the classification
of membership into directors/members or non-directors/
members) constitute a quorum.

Sec. 35

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

319

To bind the corporation, it is essential that the executive committee acts "by a majority vote of all its members." From this, it
can be inferred that the committee cannot delegate its authority
even to one of its number, (see 18 Am. Jur. 2d 588.)
(10) Membership of a foreigner. While "foreigners" are disqualified from being elected / appointed as "corporate officers"
in wholly or partially nationalized business activities, they are
allowed representation in the "board of directors" or "governing
body" of said entities in proportion to their shareholdings. (Sec.
2-A, Anti-Dummy Law; Sec. 11, Art. XII, Constitution.)

The reason for the exception is that the board of directors/


governing body performs specific duties as a "body." Unlike
corporate officers, each member of the board of directors/governing body has no individual power or authority to perform
management functions. The powers delegated to the board of
directors/governing body can only be exercised by it acting as a
body when a quorum is present. Hence, there can be no intervention in the management, operation, administration, and control
of the corporation by the members thereof in their individual capacity.
An "Executive Committee" is a "governing body" which
functions as the board itself. Thus, membership therein shall be
governed by the same law/rules applicable to the board of directors as provided in Section 35. (SEC Opinion, June 3,1998.)

oOo

Title IV
POWERS OF CORPORATION
Sec. 36. Corporate powers and capacity. Every corporation incorporated under this Code has the power and
capacity:
1.

To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period


of time stated in the articles of incorporation and the certificate of incorporation;
3.

To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance


with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members to
the corporation if it be a non-stock corporation;
1

7. To purchase, receive, take or grant, hold, convey,


sell, lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and
the Constitution;
8. To enter into with other corporations merger or
consolidation as provided In this Code;
9. To make reasonable donations, including those
for the public welfare or for hospital, charitable, cultural,
'See Section 60.
320

Sec. 36

TITLE IV. POWERS OF CORPORATION

321

scientific, civic, or similar purposes: Provided, That no


corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated
in its articles of incorporation. (13a)
M e a n i n g of p o w e r s of a c o r p o r a t i o n .

The term powers of a corporation has reference to the corporation's capacity or right under its charter and laws to do certain
things. (6 Fletcher, p. 230.)
Distinguished f r o m its franchis e
a n d objects.

(1) The powers of a corporation must be distinguished from


its primary franchise, which is its right to exist as an entity for
the purpose of doing the things embraced within its powers and
from its secondary franchise, which is the right granted to an
existing corporation to use public property for a public use, but
with private profit. (6-A Fletcher, p. 431.)
(2) Neither must its powers be confused with its objects or
business. A corporation exercises its powers for the purpose
of attaining its objects. Thus, for example, the power to issue
promissory notes, being obviously consistent with and reasonably
conducive to the furtherance of the objects of the corporation, is
a mere power and not an object or business of the corporation. (6
Fletcher, p. 231.)
Relative powers of natural persons/partnerships
and corporations.

(1) Any act not prohibited. An individual has absolute right


to fully use, enjoy and dispose of his properties, to perform all
acts and to make all contracts without any control except when
they are forbidden by the law. The same is true of an ordinary
partnership. Since a natural person and an ordinary partnership

322

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 36

do not owe their existence to the State, they can perform any act
not prohibited by law.
(2) Only powers granted. On the other hand, the civil rights
of a corporation are widely different. Under the doctrine of limited
capacity adopted by our corporation law (Sec. 2.), a corporation
has only such powers as are expressly granted and those that
are necessarily implied from those expressly granted or those
which are incidental to its existence. It is, therefore, not correct to
say that a corporation has the power to do all acts not expressly
or impliedly prohibited. In other words, the enumeration of
corporate powers implies the exclusion of all other powers
except when they are incidental or implied in conformity with the
generally accepted principle of statutory construction "expressio
unius est exclusio alterius."

The reason for the doctrine is that a corporation owes its


existence to the State and, therefore, it has only such powers as
are expressly and impliedly granted by law. A corporation, as an
artificial person, created by or under authority of law, is without
natural rights, (see also Sees. 36[1], 45.)
Classification of corporate p o w e r s .

The three classes of powers of a corporation are:


(1) Those expressly granted or authorized by law (Sec. 2.),
i.e., those conferred by the Corporation Code and its articles of
incorporation (Sec. 45.);
(2) Those that are necessary to the exercise of the express or
incidental powers (Sees. 236[11], 45.); and
(3) Those incidental to its existence. (Sees. 2, 45.)
The powers of a corporation, however, frequently cut across
lines of the above classification.
A corporation exercises its powers through its board of directors (or trustees) and /or its duly authorized officers and agents.
Physical acts, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. The
certificate of non-forum shopping may be signed for and on behalf
of a corporation by a lawyer who must be "specifically autho-

Sec. 36

TITLE TV. POWERS OF CORPORATION

323

rized" by the board of directors in order to validly sign the certification. (BA Savings Bank vs. Sia, 336 SCRA 484 [2000]; Shipside Incorporated vs. Court of Appeals, 352 SCRA 334 [2001];
BPI Leasing Corp. vs. Court of Appeals, 416 SCRA 4 [2003]; San
Pablo Manufacturing Corp. vs. Comm. of Internal Revenue, 492
SCRA 192 [2006]; Athena Computers, Inc. vs. Reyes, 532 SCRA
343 [2007].) The requirement for signing the certificate applies
even to corporations. The mandatory directions of the Rules of
Court make no distinction between natural and juridical persons.
(Zulueta vs. Asia Brewery, Inc., 354 SCRA 100 [2001].) Note that
Section 36 speaks of "every corporation incorporated under this
Code." Acts or contracts of a corporation outside the scope of its
express, implied, and incidental powers are ultra vires, (see Sec.
45.) An ordinary association cannot exercise the powers, rights,
and privileges granted by the Corporation Code to organizations
registered with the Securities and Exchange Commission.
D e t e r m i n i n g w h e t h e r an act or contract
within s c o p e of corporat e p o w e r s .

(1) Sources of powers. In determining whether a corporation has power to do an act, it is necessary to:
(a) first, refer to its special charter or its articles of incorporation to see whether it is within the express, implied, or
incidental powers conferred;
(b) then, to examine the statutes relating to corporations
to see if the act is prohibited (see Sec. 16.); and
(c) then, in some cases, to consult the general statutes to
see if the act is illegal even in case of natural persons, (see 6
Fletcher, pp. 233-246; also Clark on Corporations, p. 412.)
(2) Express or implied grant of powers. Unless the power to

carry on a particular business is either expressly or impliedly


conferred thereby, it does not exist. It is illegal for a corporation
to apply either its capital or profits to business for purposes not
contemplated by its charter. (SEC Opinions, Jan. 13 and 25,1988.)
Thus, it is important that the corporation's intended purposes
are stated with sufficient clarity in the articles of incorporation so
as to define with certainty the scope of its business.

324

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 36

Express powers explained.

Express powers are the powers expressly conferred upon the


corporation by law. These powers can be ascertained from the
special law creating the corporation, or in case the corporation
is formed under the general incorporation law, from such law,
the general laws of the land applicable to corporations, and its
articles of incorporation.
Section 36 contains an enumeration of powers expressly given
to corporations created under the general incorporation law. The
express powers may be exercised by the corporation whether or
not any such powers are stated in the articles of incorporation
or by-laws, for they are deemed vested in any corporation
organized under the Code. Unless otherwise provided by the
Code, the general powers conferred by Section 36 are to be
exercised by the board of directors, (see Sec. 23.) Other express
powers of the corporation are specifically provided in Sections
37 to 44, which also lay down the conditions under which they
are to be exercised.
The express powers mentioned in Nos. (2), (4), (5), (6), and (8)
of Section 36 are discussed under Sections 11 and 37, 16, 46-48,
62, and 76-81, respectively.
Implied powers explained .

Implied powers are those powers which are reasonably necessary to execute the express powers and to accomplish or carry
out the purposes for which the corporation was formed. These
implied powers are expressly recognized by Section 36(11).
Powers merely convenient or useful (e.g., giving of interestfree loans) are not implied if they are not essential, having in
view the purposes or objects of the corporation. The purpose or
purposes for which the corporation was created, as stated in its
articles of incorporation, by defining the scope of corporate business or enterprise, in effect, delimit its implied powers.
Implied powers classified.

Sometimes it is difficult to determine whether a certain activity is an implied power or not. However, the following rough
classification embraces most of the implied powers:

Sec. 36

TITLE TV. POWERS OF CORPORATION

325

(1) Acts in the usual course of business. This includes such

acts as borrowing money; making ordinary contracts; executing


promissory notes, checks or bills of exchange; taking notes or
other securities; acquiring personal property for use in connection with the business; acquiring lands and buildings to be used
as places of business or in connection therewith; and selling, leasing, mortgaging or other transfers of property of the corporation
in connection with the mnning of the business. It is evident that
all of such acts, under ordinary circumstances, are necessary in
order to run a business;
(2) Acts to protect debts owing to a corporation. If a corpora-

tion is a creditor, it may do such acts as may be necessary to protect its right as such creditor. Thus, a corporation may purchase
property, act as a guarantor or sometimes even run a business
temporarily to collect a debt, where otherwise it would have no
power to do so;
(3) Embarking in different business. A corporation may not

engage in a business different from that for which it was created


as a regular and a permanent part of its business, (see, however,
Sec. 42.) This is especially true with respect to those particular
kinds of corporate activities which are governed by special laws,
(see comments under Sec. 14[2].) Thus, a corporation not organized for that purpose cannot go into the banking or insurance
business but it may do any isolated act of banking or insurance
in connection with some express power. So, it is generally held
that a corporation may temporarily conduct an outside business
to collect a debt out of its profits;
2

(4) Acts in part or wholly to protect or aid employees. While

the cases are divided, the better view favors such acts as building homes, places of amusement, hospitals, etc. for employees, as
within the corporate powers, (see Sec. 36[10].)

Under Section 36(11), a corporation, when necessary in the pursuit of its business,
may borrow money. In corporations other than those formed to engage in the business of
loaning money, this activity is but incidental, and cannot be extended to purposes foreign
to the business and objects for which the corporation was related. However, they may
temporarily loan corporate funds provided certain conditions are complied with. (SEC
Opinion, Jan. 22,1991; see note 2 under Sec. 42.)
2

326

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 36

In a case where the opening of a post office branch of


the Bureau of Posts at a mining camp of a corporation was
undertaken at the request of the corporation to promote the
convenience and benefit of its employees and their families who
have settled at the mining camp, and after a resolution of the
board of directors was passed wherein the corporation assumed
full responsibility for all cash received by the Postmaster, it was
held that the resolution adopted by the board is not an ultra vires
act (see Sec. 45.), although it is outside the object for which the
corporation was created since the resolution covers a subject
which concerns the benefit, convenience, and welfare of the
corporation's employees and their families (Republic vs. Acoje
Mining Co., Inc., 7 SCRA 361 [1963].); and
(5) Acts to increase business. Thus, a corporation may con-

duct contests or sponsor radio or television programs, or promote fairs and other gatherings to advertise and increase its business, (see 6 Fletcher, pp. 276-277.)
No fixed rules, however, can be laid down which could be
applied mechanically in determining cases of implied powers.
The question must necessarily depend upon the facts and circumstances of each case.
For other illustrations of implied powers, see Section 2.
Express powers distinguished
from implied p o w e r s .

(1) The express powers have to do largely with the main


business, objects and purposes of the corporation; the implied
powers, largely with the means and methods of attaining those
objects and purposes.
(2) The former are determined once and for all by the
language of the corporate charter and the applicable law; the
latter may change according to time, place, and surrounding
circumstances.
(3) The test of the former is whether they are found in the
words of the charter or the law; the test of the latter is whether
they are fairly incidental to the former and reasonably necessary

Sec. 36

TITLE IV. POWERS OF CORPORATION

327

to carry them out (6 Fletcher, p. 234.) in furtherance of the corporation's business.


Incidental or inherent p o w e r s e x p l a i n e d .
Incidental or inherent powers are powers which a corporation

can exercise by the mere fact of its being a corporation or


powers which are necessary to corporate existence and are,
therefore, impliedly granted. (Sec. 36[11].) As powers inherent
in the corporation as a legal entity, they exist independently of
the express powers, (see Sec. 45.) These incidental powers are
expressly recognized by Sections 2 and 45.
Some of the powers enumerated in Section 36 are incidental
powers which can be exercised by a corporation even in the
absence of an express grant.
Examples of incidental powers are: the power of succession;
to sue and be sued; to have a corporate name; to purchase and
hold real and personal property; to adopt and use a corporate
seal; to contract; to make by-laws; etc. Every corporation has the
implied or incidental power to establish branch offices here or
abroad as the need or exigency of the business of the corporation
may require. (SEC Opinion, May 17, 1990.) If "fund raising
activity" is not embodied among the corporation's authorized
purposes in its articles of incorporation or is neither necessary
nor incidental in the furtherance of its corporate objectives, the
same cannot legally be undertaken by the corporation. (SEC
Opinion, Jan. 17,1995.)
Construction of p o w e rs granted.

(1) In construing charters to determine the powers of corporations, it is well-settled, as in other cases of legislative grants,
that they are to be construed strictly; any ambiguity in the terms of
the corporate charter must operate against the corporation and
in favor of the public.
(2) In the determination of what powers have been conferred,
the whole instrument is to be taken together, including provisos as

expressing the final intention and purposes of the parties.


(3) On the other hand, since grants of corporate franchises
are intended not only for the purposes of private gain but also

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Sec. 36

to subserve public interest, they should be so construed as not


to defeat the purpose of their creation. The intention of the legisla-

ture should always control, it being the general rule that a thing
which is within the intention of the legislature is as much within
the statute as if it were within the letter.
(4) Charters are also to be construed in view of the circumstances, usages, and practices existing at the time they were granted and it

is not the province of the court to enlarge the powers of a corporation beyond its charter limitations because circumstances have
changed.
(5) If the charter is susceptible of two meanings, the one
restricting and the other extending the powers of the corporation,
that construction is to he adopted which works the least harm to the
State.
(6) The provisions of a general incorporation law may apply to

corporations operating under special statutes with respect to the


conduct or government of such corporations as to which no specific provision has been made. (19 Am. Jur. 2d 433-434.)
Ratification of corporate acts.

(1) By stockholders (or members). They may ratify and render valid acts done or authorized by the board of directors (or
trustees) but which were beyond the powers of the directors, or
acts done or authorized by the directors at an illegal meeting, or
unauthorized acts of others than the directors, provided the acts
done are such as may be done or authorized by the stockholders.
(2 Fletcher, p. 1103.)
(2) By board of directors (or trustees). Similarly, a transaction,

if within the powers of a corporation, may be consented to,


ratified, or acquiesced in by the board of directors (or trustees)
if it could be authorized by them. If it is consented to or ratified
with full knowledge of the facts, it is finally and absolutely
binding, and neither the corporation nor individual stockholders
(or members) nor strangers can afterwards sue to set it aside or
otherwise attack its validity. (3 Fletcher, p. 361.)
Donations for political purposes are beyond the power of a
corporation and cannot be ratified, as they are expressly prohi-

bited by the law. (Sec. 36[9]; see Sec. 92[c], National Internal
Revenue Code [R.A. No. 1158, as amended].)
Effect of ratification retroactive.

Except as to intervening rights of strangers, ratification by a


corporation of an unauthorized act or contract by its officers or
others relates back to the time of the act or contract ratified, and
is equivalent to original authority. Omnis ratihabitio retrotrahitur

(2 Fletcher, pp. 1185-1188.)


Thus, assuming that a corporation has been empowered, as a
secondary purpose, to purchase stocks in other corporations by
its articles of incorporation, although the investment was made
sans the prior consent and imprimatur of the stockholders pursuant to Section 42 of the Code, this legal infirmity is cured by the
subsequent ratification of the required vote of the board of directors and stockholders. (SEC Opinion, Dec. 5,1963.)
M o d e o f exercising p o w e r s .
(1) No particular mode prescribed by charter. If the charter

of a corporation prescribes no particular mode for the exercise


of its powers, they may be exercised in any mode, provided it is
not contrary to law, which the stockholders or officers may deem
best. So it has been well said that corporations "may exercise all
the powers within the fair intent and purpose of their creation,
which are reasonably proper to give effect to powers expressly
granted. In doing this, they must have a choice of means adapted
to ends, and are not to be confined to any one mode of operation."
(2) Particular mode prescribed by charter. It the charter

requires its powers to be exercised in any particular way by


officers or agents, they cannot be properly exercised in any other
way, for the powers of a corporation are measured by its charter,
not only as to the things which it may lawfully do, but also as to
the mode of doing them. However, as will be noticed in treating
of the effect of ultra vires transactions, the fact that a corporation
exercises a power in a mode different from that prescribed by
its charter will not necessarily prevent it from acquiring rights
or incurring liabilities by reason thereof, (see 6 Fletcher, pp. 284286.)

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Sec. 36

(3) Corporation organized under a special law. Where a cor-

poration is organized under a special law, the rules governing


corporations organized under the general law have no application where the special statutes provide methods for the regulation and control of said corporation. (19 Am. Jur. 2d 439.)
Power to sue and be s u e d .

This power (Sec. 36[1].) is an incident to corporate existence.


As a rule, suits are to be brought by or against the corporation in
its own name.
(1) Dissolved corporation. Corporations de facto (Sec. 20.)

may sue or be sued but a corporation which has been dissolved


after the expiration of the three (3)-year winding-up period (Sec.
122.) ceases to exist de jure or de facto.

(2) Unregistered corporation. A corporation not duly registered in accordance with law has no legal capacity to sue as such.
(3) Foreign corporation. Neither can a foreign corporation
which transacts business in the Philippines without the necessary license from the Securities and Exchange Commission sue
in the Philippine courts. (Sec. 133.)
(4) Right to claim moral damages. Obviously, an artificial

person like a corporation cannot experience physical suffering, mental anguish, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury, (see Art. 2217,
Civil Code.) Nevertheless, a corporation may have a good reputation or business standing which, if besmirched or debased,
may be a ground for the award of moral damages (Mambulao vs.
Phil. National Bank, 22 SCRA 359 [1968].) under the Civil Code.
(Art. 2217 thereof.) But in such case, it is imperative for the claimant to present proof to justisfy the award by showing the existence of the factual basis of the damage and its causal relation to
the defendant's acts. (Development Bank of the Phils, vs. Court
of Appeals, 403 SCRA 460 [2005]; Manila Electric Co. vs. TEAM
Electronics Corp., 540 SCRA 62 [2007].)
(5) Real party in interest. - As a general rule, the right and

power of a corporation to sue in any court must be brought by


the board of directors or trustees that exercises its corporate

Sec. 36

TITLE IV. POWERS OF CORPORATION

331

powers (Sec. 23.) on behalf of the corporation or by any of its duly


authorized officer or agent. (see Premium Marble Resources, Inc.
vs. Court of Appeals, 264 SCRA 11 [1996]; Shipside Incorporated
vs. Court of Appeals, 352 SCRA 334 [2001]; Philippine Rabbit
Bus Lines, Inc. vs. Aladdin Transit Corp., 493 SCRA 358 [2006];
Munoz vs. People, 548 SCRA 473 [2008].)
3

(a) Under Section 36(1), read in relation to Section 23,


it is clear that where a corporation is the injured party, its
power to sue is lodged with its board of directors or trustees.
A minority stockholder and member of the board of directors
has no such power or authority to sue on the corporations
behalf. (Tana Wing Tak vs. Makasiar, 350 SCRA 475 [2001].)
(b) Under Section 3, Rule 46 of the Rules of Court, a
petitioner is required to submit together with the petition,
a sworn certification of non-forum shopping and failure to
comply with the requirement is sufficient ground for dismissal of the petition. The requirement applies even to corporations, the Rules of Court making no distinction between
natural and juridical persons. A certification not signed by a
person not duly authorized by board resolution renders the
petition subject to dismissal. (Gonzales vs. Climax Mining
Ltd., 452 SCRA 607 [2005]; MC Engineering, Inc. vs. National
Labor Relations Commission, 360 SCRA 183 [2001].)
(c) Since the signing of verifications and certifications
against forum shopping is not integral to the act of filing cases
in behalf of a corporation, the signing may not be deemed as
necessarily included in an authorization merely to file cases.
There must be a specific authorization to sign the verification
and certification in behalf of the corporation. (Metropolitan
Cebu Water District vs. Adala, 562 SCRA 465 [2007].) The
Supreme Court, however, has held that the following officials

In a case, the corporate officer initially failed to show that she had the capacity to
sign the verification and institute the ejectment case on behalf of the lessor company. It
was held that "her act of immediately presenting the Secretary's Certificate confirming
her authority to represent the company may be considered as substantial compliance
and call for the relaxation of the rules of procedure in the interest of justice. (Parichia vs.
Don Luis Dison Realty, Inc., 548 SCRA 273 [2008]; see Asean Pacific Planners vs. City of
Urdaneta, 566 SCRA 219 [2008].)
3

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Sec. 36

or employees of the company can sign the verification


and certification without need of a board resolution: 1)
Chairperson of the Board of Directors; 2) President of the
Corporation; 3) General Manager or Acting General Manager;
4) Personnel Officer; and 5) an Employment Specialist in a
labor case. The above cases do not provide a complete listing,
the determination of the sufficiency of the authority being on
a case to case basis. The rationale for justifying the authority
of the above corporate officers or representatives to sign the
verification or certificate against forum shopping is that they
are "in a position to verify the truthfulness and correctness of
the allegations in the petition." (Cagayan Valley Drug Corp.
vs. Comm. of Internal Revenue, 545 SCRA 10 [2008].)
(d) A government-owned or -controlled corporation, can
act only through its duly authorized representatives. In a
case in view of the absence of a board resolution authorizing
petitioner's Officer-in-Charge to represent it in the petition
for review, the Supreme Court ruled the verification of nonforum shopping executed by said officer failed to satisfy the
requirement of the Rules of Court. (Public Estates Authority
vs. Uy, 372 SCRA 180 [2001].) Where the corporate officer's
power as an agent of the corporation did not derive from
such a resolution, it would nonetheless be necessary to show
a clear source of authority from the charter, the by-laws, or
the implied acts of the governing body. (Premium Marble
Resources vs. Court of Appeals, supra; Social Security System
vs. Commission on Audit, 384 SCRA 548 [2002].)
(e) Applying the rule that every action must be brought
or defended in the name of the real party-in-interest (Rules
of Court, Rule 3, Sec. 2.), where a voting trust agreement was
executed by certain stockholders of a corporation which was
not a signatory thereto, the corporation is not the real partyin-interest in the suit to enforce the agreement. The action
should be filed by the stockholders. (National Investment &
Development Corporation vs. Aquino, 163 SCRA 153 [1988].)
(f) In a derivative suit, however, the minority stockholder or stockholders may bring an action against erring corporate officers in the name of the corporation with the corpora-

Sec. 36

TITLE IV. POWERS OF CORPORATION

333

tion as the real party in interest, (see Comments under Sec.


64.)
(g) While it is true that a criminal case can only be filed
against the officers of a corporation and not against the corporation itself, it does not follow from this, however, that the
corporation cannot be a real party-in-interest for the purpose
of bringing a civil action for malicious prosecution. (Cometa
vs. Court of Appeals, 301 SCRA 459 [1999].)
(h) While the power to sue and be sued is lodged with the
board of directors, the physical acts of the corporation like
the signing of documents can be performed only by natural
persons duly authorized for the purpose by corporate bylaws or by a specific act of the board of directors. (Shipside
Incorporated vs. Court of Appeals, supra.; United Paragon
Mining Corp. vs. Court of Appeals, 497 SCRA 638 [2006].)
A resolution of the board of directors may authorize a particular officer to represent the corporation in all suits brought
for or against it. (Grand Boulevard Hotel vs. Genuine Labor
Organization, 406 SCRA 688 [2003].)
The Supreme Court has ruled that the subsequent submission of proof of authority to act on behalf a corporation
justifies the relaxation of the Rules for the purpose of allowing
its petition for review on certiorari to be given due course.
(Pascual and Santos, Inc. vs. Members of Tramo Wakas
Neighborhood Assoc., Inc., 442 SCRA 438 [2004].)
(i) Where piercing the veil of corporate entity is justified,
a stockholder or corporate officer may be sued along with the
corporation, (see Comments under Sec. 2.)
(6) Right of shareholders to intervene. Shareholders are, in

no legal sense, the owners of corporate property which is owned


by the corporation as a distinct legal person, their interest being
inchoate or beneficial in nature, not direct and immediate in
character (see Rules of Court, Rule 12, Sec. 2.); hence, they have
no right to intervene in an action for or against a corporation.
(Saw vs. Court of Appeals, 195 SCRA 740 [1991].)
In a case, however, a stockholder who was one of the largest
individual stockholders of the corporation and was, until it was

334

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Sec. 36

placed under receivership, exercising control of the company, and


was the one who asked for the appointment of the receiver and
pledged his own property to the extent of P4,000,000 (in 1927)
to assist in the rehabilitation of the corporation was allowed to
intervene in an action by a creditor to foreclose the mortgage
executed by its officers, for "he is injuriously affected by the
mortgage" and "is more virtually interested in the outcome of
this case than [the corporation]." (Phil. National Bank vs. Phil.
Vegetable Oil Co., 49 Phil. 857 [1927].)
(7) Service of summons. The rationale of all rules with
respect to service of summons on a corporation is that such
service must be to an agent or a representative, in contemplation
of Rule 14, Rules of Court, so integrated with the corporation
sued as to make it, a priori supposable that he will realize his
responsibilities and know what he should do with any legal
papers served on him; one who performs vital functions in the
corporation that it would be reasonable to presume that he would
be able to discuss the importance of paper delivered to him, and
be responsible enough to transmit the same to the corporation.
(Villa Rey Transit, Inc. vs. Rapacon, 81 SCRA 298 [1978]; Vlason
Enterprises Corp. vs. Court of Appeals, 310 SCRA 26 [1999].)
The job of a bookkeeper is so integrated with the corporation
that his regular recording of the corporations' "business accounts"
and "essential facts about the transaction of a business or enterprise" safeguards the corporation from possible fraud being
committed adverse to its own corporate interest. The rules on
service of process make service on an "agent" sufficient whether
the agent be general or special. As such, it does not necessarily
connote an officer of the corporation and may include employees
but not those whose duties are not so integrated to the business
that their absence or presence will not toll the entire operation of
the business. Thus, service of summons was held properly made
to a corporation through a bookkeeper or a clerk who was not
even authorized to receive the same on behalf of the corporation,
since what is of paramount importance is that the purpose of
the rule on summons has been attained, thereby, the interest of
speedy justice has been sub-served. (Pabon vs. National Labor
Relations Commission, 296 SCRA 7 [1998].)

Sec. 36

TITLE IV. POWERS OF CORPORATION

335

Similarly, summons was held properly served on a corporation through a claim employee who does not belong to the managerial staff, but whose role in the corporation is that of a representative in relation to cases involving it, i.e., regularly indorsing
summons and complaints against the corporation, following-up,
and attending cases filed by and against it. (Weena Express, Inc.
vs. Rapacon, 534 SCRA 288 [2007].)
P o w e r to a d o pt a n d u s e a corporate s e a l .

A seal is a device (as an emblem, symbol, or word) used to


identify or replace the signature of an individual or organization
and to authenticate (as under common law) written matter purportedly emanating from such individual or organization. It may
refer also to the impression of such a device on documents like
certificates of stocks, (see Webster's 3rd New Int. Diet., p. 2046.)
4

(1) Any seal adopted and used by the corporation (Sec. 36[4].)
may be altered by it at pleasure. Where a corporation adopts a
seal for a special occasion, different from its corporate seal, the
seal adopted is the corporate seal only for that time and occasion.
(9-A Words and Phrases 407.)
(2) A seal is not required for the validity of any corporate act.
Under Section 63, certificates of stock issued by corporations are
required to be sealed with the seal of the corporation. Nevertheless, the use of a corporate seal in certificates of stock must be
deemed merely directory rather than mandatory, (see Sec. 22.) A
corporation may exist even without a seal.
(3) At common law, the rule prevailed for sometime that a
corporation could not make a parol contract and could speak and
act only by its common seal. This technical rule of the common
law soon gave way, however, and today in the transaction of its
business, a seal is no more necessary to render valid the acts and
contracts of a purely business corporation than of an individual,

But a "corporate seal" is not the same thing as a signature nor is it equivalent to a
signature, but the seal forms a part of the formality of execution, and where an affidavit
is filed on behalf of a corporation denying its signature on a note, under seal, the execution of the note is not admitted and the plaintiff is put to formal proof of execution. (9-A
Words and Phrases 407.)
4

336

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Sec. 36

and in all such cases where a natural person will be bound without a seal, a corporation will also be bound.
But although it may not be necessary, the reason it is desirable to attest all contracts and other acts of the corporation with
its seal, when this is possible, is that the presence of such seal
establishes, prima facie, that the instrument to which it is affixed
is the act of the corporation. (18 Am. Jur. 2d 689-698.)
Power to acquire a n d c o n v e y property.
(1) As an incident to every corporation. This power (Sec.

36[7].) which is also expressly conferred under the law has always
been regarded as an incident to every corporation. A corporation
needs properties or assets to carry on its business.
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 vs. Bukal Enterprises & Dev.
Corp., 414 SCRA 190 [2003].)
It has been held by the Supreme Court: "The owning of a
business lot upon which to construct and maintain its offices is
reasonably necessary to a corporation which has developed to
such an extent that its prospects of the future are such as to justify its directors in making such acquisition. A different rule would
compel important enterprises to conduct their business exclusively in leased offices a result which would retard industrial
growth and be inimical to the best interests of society. The corporation acquiring such property is entitled to the full beneficial
use thereof. Thus, a corporation whose business may acquire an
appropriate lot and construct thereon an edifice with facilities in
excess of its own immediate requirement. If it has the power to
acquire such lot, construct an edifice and hold it beneficially, the
beneficial administration by it of such parts of the building as
are let to others must necessarily be lawful." (Government vs. El
Hogar Filipino, 50 Phil. 399 [1927].)
(2) As necessary to the transaction of its lawful business. The

power under Section 36(7) is qualified by the phrase "as the


transaction of the lawful business of the corporation may reasonably and necessarily require."

Sec. 36

TITLE IV. POWERS OF CORPORATION

337

(a) Property obtained by a corporation which is foreign


to the purposes for which it was organized is an unlawful acquisition. For example, it is not within the power of a
corporation engaged in general shipping business to buy a
provincial parcel of land purposely for redistribution to its
stockholders, as the acquisition is neither necessary nor incidental to the furtherance of its business. (SEC Opinion, Aug.
1,1989.) A corporation may not validly purchase, sell, mortgage, etc. assets if it is not in the legitimate furtherance of its
purposes. Accordingly, the exercise of such power cannot be
validated thru the inclusion of such purpose in the articles of
incorporation if the corporation has no interest whatsoever
in the subject transaction. (SEC Opinion, Sept. 25,1991.)
(b) A corporation can legally enter into or form a joint
venture corporation to be owned by it and others as stockholders. An act is held within corporate powers, if possible,
where it is clearly beneficial to the company, as where the act
leads to increase its business. (SEC Opinion, Nov. 11,1987.)
5

(c) The transfer or sale of shares owned by a corporation in another corporation requires approval by the board
of directors of the seller corporation (Sec. 25.) and while a
corporation is expressly empowered by Section 36(7) to dispose corporate assets, such power is subject to the provisions
of Section 40. (SEC Opinion, Aug. 21, 1995.) In the ordinary
course of business, a corporation can borrow funds or dispose
of assets of the corporation only on authority of the board of
directors which normally designates one or more corporate
officers to sign loan documents or deeds of assignment for
the corporation. (Great Asian Sales Center Corporation vs.
Court of Appeals, 381 SCRA 557 [2002].)
(d) To enable a corporation to engage in any of its secondary purposes, Section 42 must be complied with. Similarly, if the act has the effect of incurring, creating, or increasing
bonded indebtedness under Section 38, or involves the selling or disposition of all or substantially all the property and

See note 8 under Section 2.

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Sec. 36

assets of the corporation under Section 40, the corporation


must comply with the requirements prescribed.
(3) As subject to limitations or restrictions. The right or

power of private corporations to deal in real as well as personal


property is also subject to limitations or restrictions prescribed
by special laws and the Constitution. Thus:
(a) Under the Constitution, no private corporation or
association may hold alienable lands of the public domain
except by lease for a period not exceeding 25 years, renewable
for not more than 25 years, and not to exceed 1,000 hectares
in area, (see Art. XII, Sec. 3 thereof.) Natural resources such
as coal, petroleum and other mineral oils belong to the State
and cannot be alienated. Their exploration, development and
utilization shall be under the full control and supervision of
the State. (Ibid., Sec. 2 thereof.)
(b) Under the General Banking Law of 2000, any real
property acquired by a bank by way of satisfaction of claims
under the circumstances enumerated in the law shall be disposed of by it within a period of five (5) years or as may be
prescribed by the Monetary Board. The bank may, after said
period, continue to hold the property for its own use, subject
to limitations with respect to ceiling on investments in certain assets, (see Sees. 51, 52, R.A. No. 8791.)
Power to acquire shares
or securities.
(1) Shares of other corporations. Section 36(7) authorizes a

private corporation to acquire shares or securities of other corporations.


(a) Such an act does not need the approval of the stockholders if done in pursuance of the purpose or purposes of
the corporation as stated in its articles of incorporation but
when the purpose is done solely for investment, the approval of the stockholders as required by Section 42 is necessary.
(De la Rama vs. Ma-ao Sugar Central Co., Inc., 27 SCRA 247
[1969].) The prevailing view is that a corporation has no power to purchase or hold stock in another corporation unless it

Sec. 36

TITLE IV. POWERS OF CORPORATION

339

is one of the activities permitted by its articles of incorporation. (7 R.C.L. Corp., par. 535; see SEC Opinion, Nov. 20,
1961.)
(b) In any case, the power to acquire shares in other corporations is subject to specific limitations established by the
Code, special laws, and the Constitution. The shares must be
limited to shares of existing corporations because only natural persons can be incorporators. (Sec. 10.) The exercise of the
power is also subject to the provisions of Section 140. Under
the new Civil Code (Art. 2112.), the pledgee may appropriate
the thing pledged only if, after the second auction, the thing
pledged is not sold.
(c) When a corporation subscribes to the capital stock of
another corporation, it is required, as a rule, to pay its subscription in full. This is based upon the fact that while a corporation has an unlimited capacity to contract obligations,
it has only a limited capacity to pay. (SEC Opinion, July 13,
1961.)
(2) Shares of the acquiring corporation. The Corporation

Code expressly authorizes a corporation subject to limitations


stated therein to acquire its own stocks, (see Sees. 40, 41, 42, 68,
last par., 77, 81,105.) A corporation may purchase its own stock,
however, only when it has "unrestricted retained earnings" to
cover the shares to be purchased or acquired, (see Sec. 41.)
Corporation as stockholder or member.

The Corporation Code contains no express provision prohibiting the organization of a corporation composed of other corporations. Our statutes are silent on this point and our courts
have not as yet passed upon the matter. However, the decided
weight of authority in the United States supports the view that a
corporation may become a member of another corporation. (SEC
Opinion, Oct. 12,1970.)
(1) A private corporation may, either by original subscription
or by purchase, become a stockholder and member of another
corporation with all the rights and liabilities attaching to such
relation, either when it is expressly authorized by statute or its
charter to do so, or when such subscription or purchase is within

340

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Sec. 36

its implied powers as a necessary or proper means of exercising


the other powers conferred on it. (Ibid., citing 18 C.J.S., Sec. 35.)
(2) Under the older statutes, corporations were composed
entirely of persons, but it is true now in most States that a
corporation need not be composed entirely of natural persons,
but other corporations may be either incorporators (in practical
effect) or stockholders. The most notable examples are the great
universities of Oxford and Cambridge which are themselves
distinct and separate corporations. (Ibid., citing Oleck, Modern
Corporation Law, Sec. 226.)
Thus, it is legally feasible to organize an incorporated national
federation of distinct corporations or associations. (SEC Opinion,
Oct. 23,1970.)
Power to contribute to charity.
(1) Existence of power formerly unsettled. Section 36(9)

expressly vests in business corporations the authority to


contribute for purely charitable purposes. Before, the existence
of such authority was not settled. While donations to charities
by business corporations have been sustained by various courts
in the United States, they were justified by the presence of some
benefit or advantage accruing to the corporations. The reason
for this judicial attitude against such power is most strongly
6

'The uncertainty resulted from the absence of any provision in the former Corporation Law vesting the power, although such authority was impliedly recognized by the
National Internal Revenue Code of 1939 (C.A. No. 466, as amended.) in Section 30(h),
thereof which provision is also found in the National Internal Revenue Code of 1986.
(Pres. Decree No. 1158, as amended.) Said Section 30(h) allows deduction of: "Charitable
and other contributions. Contributions or gifts actually paid or made within the taxable
year to or for the use of the Government of the Philippines or any political subdivision
thereof for exclusively public purposes, or to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, cultural, or
educational purposes or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the
benefit of any private stockholder or individual to an amount not in excess of six per
centum in the case of an individual and three per centum in the case of a corporation, of
the taxpayer's taxable income as computed without the benefit of this paragraph, x x x."
Still, it was not clear whether purely charitable gifts, unconnected with the corporation's business, could be considered valid as constituting a proper use of corporate funds
if made without stockholders' authorization. Section 30(h) is now Section 34(H) of the
National Internal Revenue Code of 1997. (Pres. Decree No. 1158, as amended by R.A.
No. 8424.)

Sec. 36

TITLE IV. POWERS OF CORPORATION

341

expressed in a case as follows: "A business corporation is


organized and carried on primarily for the profit of stockholders.
The powers of the directors are to be employed for that end. The
discretion of directors is to be exercised in the choice of means to
attain that end and does not extend to a change in the end itself,
to the reduction of or to the non-distribution of profits among
stockholders in order to devote them to other purposes." (Dodge
vs. Ford Motor Co., 204 Mich. 459, 507, cited by Emiliano R.
Navarro, "Corporate authority to contribute to charity," 26 Phil.
Law Journal 188-189 [Oct. 1951].)
(2) Basis of power now expressly granted. Section 36(9) gives

recognition to the growing tendency to regard charitable gifts as


within the scope of corporate authority. It is based on the modern
view that business corporations are not organized solely as profitmaking enterprises but also as economic and social institutions
with corresponding public responsibility to aid in the betterment
of economic and social conditions in the community in which
such corporations are doing business. As has been better stated:
"Many business have advocated social responsibility
of business corporations. This is important if business corporations and capitalistic society are to survive, x x x. The
inability of business corporations to contribute to purely
charitable purposes may not only impair their public patronage, but may create an unfavorable reaction against private
enterprise. In the last analysis, corporate donations, unless
amounting to piracy of the corporate treasury, redound to the
benefit of the corporation, the shareholder, the creditors, and
the public." (E.R. Navarro, op. cit, supra, pp. 191-192.)
"As business is chiefly conducted through the medium of
corporations, it is the corporation, its shareholders, directors,
and officers, who are being made to realize their social
obligations to employees and customers. Consistent with
this development is the changing attitude toward corporate
contributions to charities
In times when so much wealth
is concentrated in the hands of incorporated associations, it
is clearly in the public interest to permit such associations to
make contributions to charity." (Ibid., p. 191, citing Stevens
on Corporations [1949], p. 252.)

342

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 36

(3) Limitations on power. Under the Code, the only


limitations imposed on the authority of a corporation to make
donations are: (a) the amount thereof must be reasonable; and
(b) the donations must not be in aid of any political party or
candidate or for purposes of partisan political activity, (see Sec.
95, B.P. Big. 881 [Omnibus Election Code].) It is not required by
law that the donation should inure to the direct financial benefit
of the corporation, nor that the donation be taken from corporate
earnings as long as it is "reasonable" under the circumstances,
taking into account the corporation's financial condition; hence,
it may be paid out of capital, although stockholders and creditors
who may feel aggrieved are not denied the right to question the
exercise of the power, and if found excessive, to seek adequate
relief therefrom.
The limitation that the donations must be "reasonable" provides a check against scheming directors and officers who may
use the authority as a screen to appropriate corporate funds for
personal ends.
Power to establish p e n s i o n , retirement
and other plans.
(1) Such plans promote corporate purpose or purposes. The

authority granted to every corporation by Section 36(10) to


establish pension, retirement, and other plans for the benefit
of its officers and employees is a statutory recognition that
disbursement of corporate funds in pursuance of such plans
likewise promotes the purpose or purposes for which the
corporation was formed. Courts have been liberal in finding as a
responsibility of business the comfort, health, and well-being of
its employees. Thus, it has been repeatedly held that the granting
of bonus, gratuity, and incentive compensation to employees as
a reward for work is within the implied powers of a corporation.
Indeed, it is a well-established practice of corporations. The
implied power to build houses, schools, churches, and libraries
for the use of employees has also been sustained, (see Wyatt &
Wyatt, Business Law: Principles and Cases [1963], p. 708; Lopez
Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].)

Sec. 36

TITLE IV. POWERS OF CORPORATION

343

(2) Such plans promote better relations with corporate employees.

For a corporation, like an individual employer, is not limited


to payment of wages to its employees but may extend to them
other benefits, such as paid vacations, sick benefits and medical treatment, and pensions, which are not necessarily charitable
acts but actually part of the employment contract. Contributions
by a corporation to programs directly benefiting employees apart
from the benefits granted under the Social Security Act (R.A. No.
1161, as amended.) are expressly permitted by the Code on the
theory that such activities promote better relations between the
corporation and its employees. (19 Am. Jur. 2d 508-509.)
Under the National Internal Revenue Code (Pres. Decree
No. 1158, as amended.), such contributions to pension trusts are
deductible from gross income (Sec. 34Q] thereof.) and all income
of the funds of such trusts are exempt from income tax, including
the retirement benefits granted thereunder. (Sec. 60[B] thereof.)
Power to act as guarantor.
(1) Power generally withheld. The general rule is that no
corporation has the power, by any form of contract or endorsement, to become a guarantor or surety or otherwise lend its
credit to another person or corporation. A corporation is without
implied power to guarantee for accommodation the contract
of its customers with third persons on the ground that it may
thus stimulate its own business. Such use of its credit is clearly
beyond the power of an ordinary business corporation. (Brinson
vs. Mill Supply Co., Inc., 14 S.E. 2d 505.)
(2) Where corporate business will be advanced. However,

the general rule will not apply and the court will allow an
accommodation indorsement under an implied authorization
where the guarantee "tends directly to promote the business
authorized by its articles" or "is an appropriate means by which
it may reasonably be expected that the business in which the
corporation is engaged will be advanced." (Woods Lumber Co.
vs. Moore, 191 P. 905.) Thus, a corporation which acquired the
bonds of another corporation in the legitimate transaction of its
business (i.e., payment of debt due it) may sell them, and to make
them more readily marketable, guarantee their payment. (Carlos
vs. Mindoro Sugar Co., 57 Phil. 343 [1932].)

344

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 37

(3) Where risk considerable and benefit remote or disproportionate.

Xhe issue is whether the legitimate business activities of the


corporation guarantor were so enhanced as to create an implied
power under the charter. But even where there is a possible
benefit to the corporation (e.g., a guarantee to third persons of
the raw material commitments of the corporate guarantor's
supplier), the risk can be considerable and the benefit can be
remote, intangible, and difficult to evaluate. Where they have
been sufficiently remote and incidental or disproportionate to
the risks, courts have held the guarantee unenforceable. (W.L.
Cary, Cases and Materials on Corporations, pp. 59-60 [1969 ed.].)
7

Sec. 37. Power to extend or shorten corporate term.


A private corporation may extend or shorten its term as
stated in the articles of incorporation when approved by
a majority vote of the board of directors or trustees and
ratified at a meeting by the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or by
at least two-thirds (2/3) of the members in case of nonstock
corporations. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to
each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or
served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise
his appraisal right under the conditions provided in this
Code, (n)

'The SEC has allowed mortgage of corporate assets to secure obligations of another
corporation (a) when the mortgage is in furtherance of the interest of the corporation,
and in the usual and regular course of business, or (b) when it is made to secure the
debt of a subsidiary. (SEC Opinion, April 15, 1987.) Even if the third party mortgage
does not fall under either of the two instances, the mortgage may be allowed, subject
to the strict observance of certain conditions, to wit: (a) there is no express restriction in
the articles of incorporation or by-laws; (b) the purpose of the mortgage is not illegal;
(c) the consent of all corporate creditors and stockholders has been secured; (d) the
transaction is not used as a scheme to defraud or prejudice corporate creditors or result
in the infringement of the Trust Fund Doctrine; (e) the mortgage will not hamper the
continuous business operations of the corporation; and (f) the accumulated third party
involved in the mortgage is financially solvent and capable of paying the mortgagee/
creditor. (SEC Opinion, Dec. 10,1991.)

Sec. 37

TITLE IV. POWERS OF CORPORATION

345

P o w e r to e x t e n d or s h o r t e n corporate
term.

The corporate term of a private corporation may be extended


or shortened by an amendment of the articles of incorporation
approved by the majority vote of the board of directors or trustees and ratified at a meeting of the stockholders representing at
least 2 / 3 of the outstanding capital stock or by at least 2 / 3 of the
members in case of non-stock corporations.
(1) Unlike in Section 16 which governs the amendment in
general of articles of incorporation, the amendment under Section
37 must be taken at a meeting of the stockholders or members
and upon a vote. "Mere written assent" would not be sufficient.
However, the formal requirements in the second paragraph of
Section 16 must be complied with.
(2) The provision on the taking effect of the amendment in
the third paragraph of Section 16 upon its approval by the Securities and Exchange Commission is not applicable because the
date of approval by the Commission may be before the effectivity date of the extension or reduction of the corporate term. The
effectivity of the amendment relates back to the date of its filing
with the Commission in case the latter fails to act within six (6)
months from such date for a cause not attributable to the corporation.
(3) A voluntary dissolution of a corporation may be effected
by amending the articles of incorporation to shorten the corporate term. (Sec. 120.)
(4) The extension of the corporate term as originally stated in
the articles of incorporation is subject to the limitations or conditions provided in Section 11.
Appraisal right of dissenting stockholders.

Section 37 grants appraisal right to a dissenting stockholder


(right of stockholder in the cases provided by law to demand
payment of the fair value of his shares) "in case of extension of
corporate term." Such right should also be available to a dissenting stockholder if the corporate term is shortened as it is expressly recognized in Section 81(1).

346

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 38

Note that the appraisal right applies only to a stockholder of


a stock corporation.
Sec. 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. No corporation
shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholders' meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the
time and place of the stockholders' meeting at which the
proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to
be considered, must be addressed to each stockholder
at his place of residences as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority
of the directors of the corporation and countersigned by
the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock thereof
actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital
stock or number of shares of no-par stock subscribed by
each, and the amount paid by each on his subscription in
cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stockholder if
such increase is for the purpose of making effective stock
dividend therefor authorized;

Sec. 38

TITLE IV. POWERS OF CORPORATION

(4) Any bonded indebtedness to be incurred, created


or increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and
Exchange Commission.
One of the duplicate certificates shall be kept on file
in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and
attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased
and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate,
showing that at least twenty-five percent (25%) of such
increased capital stock has been subscribed and that at
least twenty-five percent (25%) of the amount subscribed
has been paid either in actual cash to the corporation or
that there has been transferred to the corporation property
the valuation of which is equal to twenty-five percent (25%)
of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission, if
its effect shall prejudice the rights of corporate creditors.
Nonstock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least twothirds (2/3) of the members in a meeting duly called for the
purpose.

347

348

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 38

Bonds issued by a corporation shall be registered


with the Securities and Exchange Commission which shall
have the authority to determine the sufficiency of the terms
thereof. (17a)
Power to increase or decrease
capital stock.

An increase or reduction in the capital stock of the corporation is a fundamental change in the corporation. The authority of
the corporation to take such action is not to be implied but exists
only when expressly conferred. (Peck vs. Elliot, 79 F. 10; 38 L.R. A.
616; 44 A.L.R. 1315.) The power is expressly granted by Section
38.
Section 38 prescribes the procedure to be complied with to
effect a legal increase or decrease of the capital stock (not capital)
which is now subject to prior approval of the Securities and
Exchange Commission. (par. 4.) Even holders of non-voting
shares are entitled to vote on the matter, (see Sec. 6, par. 6[5].)
6

The notice requirement (par. 1.) is mandatory and is obviously


designed to protect the interests of minority stockholders.
The Corporation Code contains no prohibition for a corporation to increase its authorized capital stock even if the same has
not yet been fully subscribed.
Limitations on the power.

(1) As a general rale, a corporation cannot lawfully decrease


its capital stock if such decrease will have the effect of relieving
existing subscribers from the obligation of paying for their
unpaid subscriptions without a valuable consideration for such
release, as such an act of the corporation constitutes an attempted
withdrawal of so much capital upon which corporate creditors
are entitled to rely. (Phil. Trust Co. vs. Rivera, 44 Phil. 649 [1923].)

"An amended articles of incorporation is not required to be filed with the SEC to
reflect an increase in the contributed capital of a non-stock/non-profit corporation. Such
requirement applies only to stock corporations. It is sufficient for purposes of updating
the SEC records, that such fact is reflected in the financial statements. (SEC Opinion, April
2,1998.)
V

Sec. 38

TITLE IV. POWERS OF CORPORATION

349

The corporation must submit proof to the SEC that such decrease
will not prejudice the rights of creditors. (SEC Opinion No. 05-10
July 12, 2005.)
(2) A corporation cannot issue stock in excess of the amount
limited by its articles of incorporation; such issue is ultra vires
and the stock so issued is void even in the hands of a bona fide
purchaser for value; and
(3) A reduction or increase of the capital stock can take place
only in the manner and under the conditions prescribed by law.
(see Sec. 38.)
The Corporation Code contains no prohibition for a corporation to increase its authorized capital stocks even if the same has
not yet been fully subscribed.
Necessity for increasing capital stock.
(1) Increase of corporate assets. An increase of the amount of
the capital stock may be for the purpose of effecting an increase
in the corporate assets by authorizing:
(a) the creation of new shares to be offered and issued at
a fixed valuation; or
(b) the increase of the par value shares authorized to be
issued.
(2) Issuance of stock dividends. The capital stock may also be
increased without any corresponding increase in the corporate
assets by the issuance of stock dividends. (18 Am. Jur. 2d 753755.)
9

I t is considered as a cardinal rule in accounting that any business entity has to


reflect at all times the actual business transactions and/or events in its books as they
happen. For this reason, the corporation can already enter the increase in its authorized
capital stock as well as the stock dividends declared in its books as soon as the same has
been approved by the stockholders of the corporation. As to the increase of its authorized
capital stock, however, such increase becomes effective only after its approval and issuance of the certificate of filing of the increase by the Securities and Exchange Commission,
and it retroacts to the day of the approval of such increase by the Commission thereby
making valid the entries made in the books. The stock certificates corresponding to the
stock dividends should bear the date of actual issuance, which must be after the increase
in the authorized capital stock has been approved by the Commission. (SEC Opinion,
July 28,1972.)

350

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 38

Necessity of new subscription


for increase.

(1) An increase in the authorized capital stock cannot be


lawfully accomplished without an actual increase in the assets of
the corporation and additional subscriptions except when such
increase is for the purpose of effecting a stock dividend (Sec. 38, par.

2[3]; see Sec. 43.) previously authorized.


If the actual capital is increased by accumulated profits and
such profits are distributed to the stockholders in the form of
stock dividends, the capital stock is increased, for the profits are
reinvested in the corporation by transferring the same from surplus account to a capital account. The amount corresponding to
the stock dividends declared may be used to cover the required
25% subscription to increase the authorized capital stock and, if
sufficient, will obviate the necessity of taking in new subscription.
(2) If the increase of the authorized capital stock is not for the
purpose of making effective stock dividends previously authorized, the

law requires to be stated in the certificate the matters mentioned


in paragraph 2(3). It is, therefore, clear that stock dividends once
declared and issued are fully paid, and this rule admits of no
exception. (SEC Opinion, Sept. 9,1977.)
Effectivity of increase or d e c r e a s e .
(1) From and after approval by SEC. Under Section 38

(par. 4.), the capital stock of a corporation stands increased or


decreased only from and after approval and the issuance by the
Securities and Exchange Commission of its certificate of filing of
increase or decrease of capital stock. Before the issuance of the
certificate of filing of increase of capital stock, the subscribers to
the proposed increase cannot be considered as stockholders and
be accorded the rights as such for the shares subscribed by each.
(2) Use of amount of increase during pendency of application.

Where the corporation, however, is already a going concern,


"in need of steady supply of funds for its business operations,"
it is the policy of the Securities and Exchange Commission to
allow the use of the amount representing the paid-up capital
received on account of the proposed increase of capital stock so

as not to disrupt its operations even during the pendency of the


application for increase of the capital stock with the Commission.
(SEC Opinion, Jan. 30, 1975.) The funds must be utilized purely
for business operations and duly accounted for or recorded in the
books of the corporation, and further, no loans or cash advances
must be extended to any of the subscribers to the proposed
increase in the capital stock. (SEC Opinion, Dec. 9,1981.)
O v e r - i s s u e of s h a r e s .

(1) An issue of stock by a corporation in excess of the amount


prescribed or limited by its articles of incorporation is ultra vires
and the stock so issued is void even in the hands of a bona fide
purchaser for value. (18 Am. Jur. 2d 757.) An over-issued stock is
also known as spurious stock.

(2) An over-issue of stock does not avoid the original issue.


Moreover, where the corporation is permitted by law to increase
its capital stock, mere irregularities in effecting such increase will
not necessarily invalidate the increased issue. (Ibid., 758.)
(3) There is no over-issue where shares have been surrendered and new shares issued in their stead. The new issue in
such case merely takes the place of the shares surrendered nor
is there an over-issue where the corporate structure provides for
conversion of one class of stock into another at the option of a
stockholder, or where stock is issued to replace certificates which
have been lost. (Ibid.)
Unauthorized increase of capital
stock.

An attempted unauthorized increase of capital stock amounts


to an over-issue and such stock is, therefore, absolutely void and
cannot be validated by application of the doctrine of estoppel.
The same is true, as a rule, of an increase which is, in effect,
wholly unauthorized because attempted under such conditions
or in such a manner that is not within statutory authority to make
the increase.
It necessarily follows that:
(1) Subscriptions for such stock are likewise void both on the
ground of illegality and for want of consideration;

352

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 38

(2) Subscribers for or purchasers of such stock acquire none


of the rights of stockholders, although bona fide purchasers
of certificates therefor may have a right of action against the
corporation for damages;
(3) Subscribers for or purchasers of such shares do not
become liable to creditors of the corporation or on a winding up
as stockholders for unpaid subscriptions, and are not subject to a
statutory liability to creditors imposed upon stockholders; and
(4) Subscribers for or purchasers of such shares from the
corporation may recover from it money paid to it under their
subscription or purchase as upon a failure of consideration, or
breach of warranty of the existence of the thing sold, unless they
are precluded from such relief as parties in pari delicto.
Failure to make a specific offer to return dividends received
has no material bearing upon the subscriber's right of action.
Where the corporation cancels the illegal shares and repays to
the subscribers the money paid by them therefor, they are not
liable to or for creditors for the amount so repaid. (18 C.J.S. 750.)
Subscription r e q u i r e m e n t in case

of increase of capital stock.


(1) Subscriptions and payments based on capital stock as increased.

A recognized authority gave the opinion that the proviso in


Section 17 (par. 4.) in the old law (now Sec. 38 [par. 4].) "requires
subscriptions and payments on account of subscriptions to the
increased capital of the corporation in the same proportion to the
new authorized capital or new non-par shares as such subscriptions and payments must bear to the original authorized capital
or shares. So, before the Securities and Exchange Commission
files [accepts] any amendment increasing the capital stock, the
treasurer of the corporation must file an affidavit showing that at
least 20% [now 25%] of the increase in capital stock is subscribed
and 25% of the subscription is paid.
10

'"Where the stockholders authorized the increase of the capital stock of a corporation but the minimum legal requirement of 25% subscription and 25% payment could
not be met so that no certificate of increase in capital stock was filed with the Securities
and Exchange Commission, the board of directors, acting in good faith, may authorize
the refund to the subscribers of subscription payments to the proposed increase. (SEC
Opinion, Feb. 3,1971, p. 262.)

(a) New subscriptions necessary. Thus, if the corporation

has an authorized capital stock of P20,000.00 and it is proposed to increase it to P50,000.00, an increase of P30,000.00,
subscriptions must be obtained for not less than P6,000.00
[now P7,500.00] and payments in cash or in property amounting to not less than Pl,500.00 [now Pl,875.00] must be made
on account of such subscriptions. (Fisher, op. cit, p. 61.) This
assumes that the total subscriptions and payments to the
original capital stock are in the same proportion.
(b) No new subscriptions necessary. Without the proviso,

it is quite clear that the pre-incorporation subscription


requirements under Section 13 can easily be circumvented.
But where at the time of the increase, in the same example,
at least P12,500.00 worth of shares, which represent 25% of
P50,000.00, the amount of the capital stock as increased, had
already been subscribed and P3,125.00 (now minimum of
P5,000.00) or 25% thereof paid, it would seem that no new
subscriptions are necessary. In such case, the reason for
requiring new subscriptions no longer exists. It is to be noted
that Section 38 (par. 4.) requires "at least twenty-five percent
(25%) of such increased capital stock has been subscribed x x x,"

or, in other words, "such capital stock as increased," and not


"such increase in capital stock."
(2) Subscriptions and payments based on additional amount
by which capital stock is increased. The SEC has construed the

phrase to mean the additional amount by which the capital stock


is increased. A contrary rule may defeat the intention to infuse
capital. Furthermore, the proceedings of the Batasang Pambansa
[now Congress] show that the intention is to require at least 25%
of the proposed increase. (SEC Opinion, July 29, 1993.) Subsequently, it opined that the phrase "of such increased capital
stock" refers to the total subscription (not to individual subscriptions) and regardless of class. Thus, when the corporation has
several classes of shares, the 25% subscription requirement may
11

"Where the increase in capital stock consists of two (2) or more classes of shares, the
SEC allows either of the following ways of applying the 25%-25% rule: to be applied on
each of the classes of shares representing the increase in capital stock; or to be applied on
the total amount representing the increase in capital stock. (SEC Opinion, Aug. 4,1992.)

354

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 38

be applied only to one class of shares or it may distribute it to all


classes of shares, equally or unevenly. (SEC Opinion, April 11,
1995.)
No treasurer's affidavit is required to be attached in case of
decrease of capital stock.
Ways of increasing (decreasing)
authorized capital stock.

There are at least three (3) ways by which the authorized


capital stock may be increased (decreased):
(1) By increasing (decreasing) the number of shares authorized to be issued without increasing (decreasing) the par value
thereof;
(2) By increasing (decreasing) the par value of each share
without increasing (decreasing) the number thereof; and
(3) By increasing (decreasing) both the number of shares
authorized to be issued and the par value thereof.
ILLUSTRATION:

Assume that the authorized capital stock of X Corporation


is fixed at P1,000,000.00 divided into 100,000 shares with a par
value of P10.00 per share. The capital stock may be increased
(or decreased) as follows:
The number of shares is increased (decreased) to 150,000
(75,000) shares with the same par value of P10.00 each share; or
the par value per share is increased (decreased) to P15.00 (P5.00)
without increasing (decreasing) the number of authorized
shares; or the number of shares is increased (decreased) to
150,000 (75,000) and at the same time increasing (decreasing)
the par value of each share to P15.00 (P5.00).
Increase by w a y of stock d i v i d e n d s.

Stock dividends (see Sec. 43.) are ordinarily declared out of


the authorized but unissued shares of the corporation.
A corporation, however, may also increase its capital stock
by way of stock dividends without touching its unissued
shares as long as there are sufficient retained earnings to cover

Sec. 38

TITLE IV. POWERS OF CORPORATION

355

the increase, (see Sec. 62[5].) If the proposed stock dividend


would result in the issuance of shares of stock in excess of the
corporation's authorized capital stock, the over-issue is null and
void. Such dividend declaration may be validly done provided
that the corporation simultaneously increases its capital stock
and applies the proposed stock dividends as full payment of the
subscriptions to the capital stock increase. (SEC Opinion, July 30,
1969.)
Par v a l u e or no par v a l u e s h a r e s
for t h e authorized increase.

Under the authority granted under Section 38 and under


Section 6, the increased capital stock may be divided into par
value shares and no par value shares. In other words, the increase
in capital stock could belong to any of these two classes of shares
or to both.
The issue of no par value shares for the authorized increase
affords a means by which the corporation may attract investors.
In the course of its business, the corporation may meet reverses.
Its assets are thereby reduced and the true money value of the
issued shares may be below their par value. Under the prohibition contained in Section 62 (par. 1.), the unissued shares cannot
be sold for less than their par value. Buyers, however, will be
reluctant to pay par value because the outstanding shares have a
book value or actual value which is below par. All the while the
corporation is in need of more capital. So in this particular case,
it may decide to issue no-par value shares, the selling price of
which may be fixed in the manner provided for in Section 62 (last
par.) of the Code. (C.G. Alvendia, op. ext., p. 199.)
Reduction of capital stock.
(1) By decrease of number of authorized shares. When a corpo-

ration is authorized to reduce its capital stock, it may do so also


by redeeming redeemable shares (see Sec. 8.) or purchasing its
snares (see Sec. 41.) and cancelling or retiring the same, including treasury shares, (see Sec. 9.) Or it may accept a surrender of
shares and give the holders in exchange therefor a proportionate
amount of its assets, provided no rights of creditors are involved,

356

THE CORPORATION CODE OF THE PHILIPPINES

Sec. 38

or issue bonds for that purpose or exchange another class of stock


for that retired, or exchange its outstanding shares for a smaller
number of shares. Or it may do so by cancelling shares which
have not yet been issued.
A statute providing that a corporation, "at any meeting called
for the purpose, may increase or reduce its capital stock and the
number of shares therein," does not authorize a corporation to
reduce its capital stock by purchasing the shares of a particular
stockholder, unless all consent. In order that such reduction may
operate justly to all the stockholders, each stockholder should be
allowed to surrender such proportion of his stock as the amount
of the proposed reduction bears to the whole amount of the capital stock. (6-A Fletcher, p. 385.)
(2) By decrease of par value of authorized shares. When a

corporation lawfully reduces its capital stock pursuant to Section


38, the shares which are retired or reduced no longer exist for any
purpose. If the shares acquired are not retired or cancelled, no
decrease in capital stock is effected, for the shares exist as treasury
shares, (see Sec. 9.) The capital stock may be decreased, however,
without decreasing the number of authorized shares into which
it is divided as indicated in the articles of incorporation by
decreasing the par value of such shares. The par value of shares
of stocks of a corporation may be reduced for the purpose of
eliminating its deficit.
The reduction or decrease surplus or surplus arising from the

reduction of capital stock pursuant to Section 38 in excess of the


deficit may only be declared as stock dividends since it partakes
of the nature of paid-in capital in excess of par value, (see SEC
Opinion, Aug. 8,1991; see Sec. 122.)
Effect of reduction on liability
for unpaid subscription.
(1) As against corporate creditors. 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 can take place only in the manner
and under the conditions prescribed by the statute. (18 C.J.S.

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357

746, 873-874.) Under Section 38 (par. 4.), it is expressly provided


"that no decrease of the capital stock shall be approved by the
Commission, if its effect shall prejudice the rights of corporate
creditors."
Hence, "a resolution adopted at a meeting of stockholders
to the effect that the capital should be reduced by 50% and the
subscribers released from their obligation to pay the unpaid
balance of their subscription in excess of 50% of the same, was
an attempted withdrawal of so much capital from the fund
which the company's creditors were entitled ultimately to rely
and having been effected without complying with the statutory
requirements, was wholly ineffective." (Phil. Trust Co. vs. Rivera,
44 Phil. 470 [1925].)
(2) As between the corporation and the stockholders. One object

of requiring capital stock to be diminished only at corporate


meetings formally called is to insure publicity and to warn the
public dealing with the corporation of the intended change.
This is incompatible with secret arrangements and contrivances
reducing capital stock by buying in the shares or by other devices,
so as to release stockholders from their obligations to creditors.
But failure to give the prescribed notice will not invalidate the
reduction, if it is otherwise valid as between the corporation and
the stockholders where all the stockholders consent (18 C.J.S.
747.), subject to the rights of corporate creditors.
Distribution of surplus on reduction.
(1) Where there is no impairment of capital. Upon a reduction

of capital stock, if capital has not been impaired by losses, there


necessarily occurs a surplus of assets to the extent of the reduction. Unless the rights of creditors will be affected or the capital
impaired, the directors may make an equitable distribution of
such surplus or so much thereof as may not be required in carrying on the business for the best interests of the stockholders.
(2) Where reduction is made to meet impairment. In other

words, there can be a distribution of only those assets over and


above the amount equal to the par value of the outstanding
reduced capital and the amount necessary to discharge the
existing corporate indebtedness. Thus, as a general rule, where
capital stock is impaired and a reduction is made merely to meet

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Sec. 38

that impairment, there will be no distribution of assets among


the shareholders. (18 Am. Jur. 2d 764-765.)
(3) Distribution not mandatory. The distribution to stockholders of surplus remaining after a reduction of capital stock is
authorized by the Code (Sec. 122, last par.) but cannot be compelled. It must be borne in mind that the funds resulting from
such reduction represent capital and not profits.
ILLUSTRATIONS:
(1) X Corporation has an authorized capital stock of
P1,000,000.00 divided into 100,000 shares with a par value of
P10.00 each. Only 60,000 shares with a par value of P600,000.00
were subscribed and fully paid for. X Corporation can reduce
its authorized capital stock only after complying with the
formalities prescribed by Section 38.
If X Corporation reduces its authorized capital stock to
P600,000.00, the unissued 40,000 shares are considered retired
and no longer exist for any purpose. Here, there is no reduction
of the legal capital of P600,000.00.
(2) If, in the same example, there is an unpaid subscription
of P100,000.00 representing 10,000 shares, X Corporation can
reduce its authorized capital stock provided that it does not
work to prejudice the right of corporate creditors, (par. 4.)
The reduction of capital stock to, say, P500,000.00 will, in
effect, release the subscribers from liability on their unpaid
subscriptions. It will also reduce the legal capital by P100,000.00.
If the net assets of X Corporation are less than P500,000.00, the
corporation cannot reduce its capital stock to said amount if it
will adversely affect corporate creditors.
(3) Suppose all the 100,000 shares were subscribed and
fully paid for. If the authorized capital stock is reduced to
P600,000.00, the surplus of P400,000.00 may be distributed
unless the rights of corporate creditors are affected. Thus, if at
the time of reduction, the net assets of the corporation amount
only to P700,000.00, then only the reduction surplus of P100,000.00
may be distributed. It is in the nature of a liquidating dividend.
12

(4) Suppose, in the preceding example, the authorized


capital stock was reduced to P700,000.00 or to 70,000 shares
,2

See definition under Section 6.

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TITLE IV. POWERS OF CORPORATION

359

merely to meet the impairment of the corporation's capital.


In this case, no distribution of assets can be made among the
stockholders.
P e r s o n s entitled to q u e s t i o n increase
or d e c r e a s e of capital stock.

(1) An unauthorized increase or reduction of capital


stock may be attacked and avoided by the corporation itself
or by dissenting stockholders in the absence of an estoppel;
or by creditors of the corporation, or by a receiver or assignee
representing them, insofar as the transaction affects their rights.
(2) And, as we have seen, an unauthorized increase of stock
may be attacked by subscribers for or purchasers of such stock in
avoidance of their subscriptions, or for the purpose of recovering what they have paid, unless precluded as being in pari delicto.
(18 C.J.S. 753; see National Exchange Co. vs. Dexter, 51 Phil. 610
[1928]; Salmon Dexter Co. vs. Unson, 47 Phil. 649 [1925].)
P o w e r to incur, create, or increase
bonded indebtedness.

A corporate bond is an obligation to pay a definite sum of money at a future time at fixed rate of interest.
The power of a corporation to incur, create, or increase bonded indebtedness or indebtedness secured by its notes or bonds is
likewise expressly conferred by Section 38. But it is also a power
implied from the express powers.
(1) Stock and non-stock corporation. A business corporation,

in the absence of restriction, 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. (19 Am.
Jur. 2d 496.) Under Section 38 (par. 5.), non-stock corporations
are now expressly authorized to incur, create, or increase bonded
indebtedness.
(2) Procedure and formalities. The procedure prescribed in

Section 38 for incurring bonded indebtedness is the same as the


procedure for increasing or decreasing the capital stock except
that the certificate need not state the matters set forth in Nos. (2)
and (3) and is not required to be accompanied by the sworn state-

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Sec. 38

ment of the treasurer of the corporation concerning the amount


of the increased capital stock subscribed and paid. The prescription of the formalities with respect to "bonded indebtedness"
only, implies of necessity a distinction between debts which are
"bonded" and all other debts. (Fisher, op. cit., p. 312.)
(3) Shares and members entitled to vote. Even holders of non-

voting shares or non-voting members, as the case may be, are


entitled to vote on the matter. (Sec. 6, par. 6[4].)
(4) Prior approval of, and registration of bonds with, SEC. Any

incurring, creating, or increasing by the corporation of any bonded indebtedness is subject to prior approval of the Securities and
Exchange Commission. (Sec. 38, par. 4.) The bonds issued by the
corporation have to be registered with the Commission which
is given the authority to determine the sufficiency of the terms
thereof. (Ibid., last par.) The same considerations for stocks as
provided in Section 62 insofar as they may be applicable may be
used for the issuance of bonds by a corporation. (Sec. 62, par. 3.)
W h e n obligations constitute b o n d e d
indebtedness.

(1) Notes and bonds. When a corporation borrows money,


its indebtedness may be evidenced by notes or bonds as its primary security.
(a) If the amount borrowed is small and if it is borrowed
in a single sum, or from a few persons, or for a short time,
notes are usually given.
(b) If, however, the amount is large and obtained from
a number of people and extends over a period of years, the
corporate obligation is preferably and usually evidenced by
bonds.
(2) Distinctions. The difference between a corporate note
and a bond is not always clearly marked. Both are promises to
pay money.
(a) The phrasing of the bond is usually more formal than
that of the note.
(b) Also, payment of bonds is usually, though not invariably, secured as to both principal and interest by certain

Sec. 38

TITLE IV. POWERS OF CORPORATION

361

specified property held for the purpose under a formal deed


or trust.
(c) A bond issue consists of a number of bonds which,
while they may vary as to denomination, some may be registered and some unregistered, are all of like general tenor and,
if secured, are all secured.
(3) Other characteristics of bonds. The two principal

elements of distinction are time duration and the division of


the whole debt into like aliquot part units of round number
denominations, represented by negotiable or assignable
certificates of indebtedness.
(a) Such certificates are generally called "bonds," the
purpose being to enable the corporation to make use of the
borrowed money for long period of years, to obtain it from
a large number of people, and to facilitate the transfer of the
certificate of indebtedness from hand to hand during the
term of the collective obligation.
(b) Such bond issues are usually secured by the transfer
to a trustee of specific property to secure payment of the debt.
(c) The bonds usually, but not necessarily, run to bearer
and are transferable by delivery.
(d) The effect of the creation and issuance of such obligations is a borrowing from the general public.
Whenever a corporation resorts to this method of borrowing
funds, the resulting obligations constitute a "bonded indebtedness," subject to the requirements of Section 38 of the Corporation Code as to creation or increase. (H.C. Bentley, Corporation
Finance and Accounting, cited in Fisher, pp. 315-316.) Other
bonds issued by a corporation against its general credit are not
covered by the provisions of Section 38, but the SEC Rules require their submission to the Commission for approval before
they can be issued to the public. (SEC Opinion, April 6,1990.)
ILLUSTRATIONS:
(1) A Mortgage Trust Indenture was executed by X Corporation under the following facts: X Corporation will obtain
credit/loan accommodations from three of four creditors, each
evidenced by a promissory note. As security for the payment of

362

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Sec. 38

the promissory note, X Corporation constituted a mortgage on


its fixed assets. Instead of constituting individual mortgage in
favor of each creditor, Z, a bank, was appointed by X Corporation with the consent of the creditors as common Trustee-Mortgagee. The mortgage is covered by an agreement denominated
as Mortgage Trust Indenture executed by X Corporation to Z.
In addition to the mortgage contract, Mortgage Participation
Certificates (MPC) were issued by Z to creditors to evidence
the extent of their interest in the mortgaged property. As each
promissory note or amortization is paid, the corresponding
MPC covering the same is cancelled. This process enables X
Corporation to borrow again, using the same mortgaged
property via MPC as security with the same or a new creditor
protected by a first lien on the mortgaged property to the extent
of his interest.
Is the issuance of the MPC subject to the requirements of
bonded indebtedness under Section 38?
No. When a corporation secures its indebtedness whether
by notes or bonds, such notes or bonds, being the primary
security on the principal obligations, are created under Section
38. From the features of the MPC, it is clear, however, that they
are issued by Z (trustee-mortgagee) merely to evidence the
undivided interests of the creditors in the mortgaged property
covered by the Mortgage Trust Indenture. They strengthen the
claim of the creditors to the mortgaged property and in case of
default of X Corporation (debtor-trustor), the creditor will have
recourse to the mortgaged property in the hands of Z. (SEC
Opinion, Sept. 6,1977.)
(2) X Corporation will borrow from a few lenders the
amount of P50 million to be evidenced by interest-bearing
promissory notes, for the purpose of financing its subdivision/
housing development projects. The credit transaction will be for
a term of ten (10) years payable in periodic installments and the
principal, interest and premium due on outstanding balance,
will be secured by a guaranty to be executed by Y Corporation,
in its capacity as parent company of X Corporation, and a real
estate mortgage over certain properties of Y Corporation.
Z Corporation, an affiliate of X Corporation, will underwrite
the mortgage note issue for X Corporation.
Is the mortgage note issue an ordinary term loan or a bond
issue?

Sec. 38

TITLE IV. POWERS OF CORPORATION

363

The features of the transaction characterize a term loan, as


distinguished from a bond issue. (SEC Opinion, Nov. 18,1977.)
T h e corporate b o n d contract.

(1) Parties. There are three (3) parties to a corporation


bond contract: the borrowing corporation, the bondholders, and
the trustee. The trustee is a bank or trust company, which is chosen and paid by the corporation but serves mainly to protect the
bondholders.
(2) Trustee's functions. They usually include:
(a) countersigning the bonds to assure authenticity;
(b) collecting interest and principal payments from the
debtor-corporation and distributing them to those entitled;
(c) acting as mortgagee or collateral holder if the bonds
are secured;
(d) verifying the performance of the debtor corporation's
promises on behalf of the bondholders; and
(e) taking legal action on behalf of the bondholders if
necessary.
Obviously, the bondholders cannot usually be parties to the
framing of the bond contract, but they adopt its provisions when
they choose to acquire bonds.
(3) Bond indenture. The contract itself, known as the "bond
indenture," is a complete, lengthy legal document which constitutes the agreement between the parties. The bonds themselves
are certificates of participation in their contract. In the indenture,
the corporation promises to pay principal and interest, promises
to pay the trustee, promises to pay its taxes and other debts, and
promises to maintain its property and conduct its business prudently.
(4) Usual provisions. The bond indenture will contain
many other provisions, including:
(a) the total amount of the bonds authorized to be
issued under the indenture or a statement that the amount is
unlimited;

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Sec. 38

(b) a statement that additional bonds may be issued in


the future (open indenture) or that the first issue will be the
only one permitted (closed indenture);

(c) statement of the purposes for which additional bonds


may be issued, such as for construction or acquisition of
property;
(d) stipulation that all bonds must be identical in terms
or that a series of issues, possibly having different interest
rates, maturity dates, and call prices, may be sold under the
basic indenture (in the latter case, each series would have a
supplemental indenture detailing its special features);
(e) details of the collate