Commercial Law Review

Corporation Code

Maria Zarah Villanueva - Castro

CORPORATION CODE (BP BLG 68) personality separate and apart

from its individual stockholders or
*Corporation Code is the general law on Private members and from any other legal
Corporation regarding to its creation, formation and entities to which it may be
powers. connected
Consequences/Implications of
INTRODUCTION: Separate Personality:
1. It is entitled to own properties
A. Historical Background in its own name and its
Effectivity: May 1, 1980 properties are not the
Article XII Section 16 of the 1987 properties of its stockholders,
Constitution: The Congress shall not, directors and officers.
except by general law, provide for the Cases: Magsaysay-Labrador
formation, organization, or regulation of v CA; Sulo ng Bayan v
private corporations. Government-owned or Araneta
controlled corporations may be created or *The interest of the
established by special charters in the stockholders over the
interest of the common good and subject to properties of the corporation is
the test of economic viability. merely inchoate.
*Congress has limited powers in the *Merely inchoate because
formation, creation and regulation of a there are still condition
private corporation. precedents before the
Purposes: shareholders get their share,
1. Uniformity viz, in Asset, there are
2. To avoid corruption dissolution and satisfaction of
claims; in profit-sharing, there
General Rule: Congress is prohibited to
are unrestricted retained
enact a law directly forming a private
earnings and declaration by
corporation.
the Board of Directors.
Exception: GOCC may be created by 2. It can incur obligations and its
special charter. obligations are not the
obligations of its stockholders,
*GOCC is a private corporation with regard directors and officers.
to function and in the meantime a public Case: Francisco v CA
corporation with regard to ownership. 3. The rights belonging to the
corporation cannot be invoked
Twin Conditions must be present in by the stockholders, directors
forming a GOCC: and officers and vice versa.
1. Interest in the common good 4. Corporations are entitled to
2. Subject to the test of economic viability certain constitutional rights,
- Means can survive alone in the i.e., right against unreasonable
market; can generate income searches and seizure, due
which they can use for their process clause.
operating expenses *It is not entitled to certain
constitutional right, i.e., right
CONCEPT AND ATTRIBUTES OF A against self-incrimination
CORPORATION: particularly production of
corporate documents.
A. Statutory definition of a Corporation *Right against self-
Section 2 of the Corporation Code: A incrimination is applicable only
corporation is an artificial being created by to natural persons.
operation of law, having the right of General Rule: Constitutional
succession and the powers, attributes and guarantees are applicable to
properties expressly authorized by law or corporations.
incident to its existence. Exceptions:
B. Attributes of a Corporation 1. Right against self-
Artificial Being incrimination
- It exist by fiction of law only, hence 2. Freedom to travel
it is subject to limitations that are Case: Bataan Shipyard v
inherent because of its nature PCGG
- A corporation is a juridical person 5. It is liable for tort. It is liable
which exists by process of legal when the act was committed
fiction by the officer or agent under
Doctrine of Corporate express direction or authority
Entity/Doctrine of Separate from the stockholders or
Personality - A corporation is a members acting as a body or
legal or juridical person with a

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generally from the directors as
the governing body.
6. Generally, the corporation is
considered a national of the
country where it was
incorporated (Place
incorporation test)
*Exceptions: 1. In times of war,
the nationality of a corporation
is determined by the
nationality of the controlling
stockholders; 2. Under the
Foreign Investment Act of 1991
7. Corporations are incapable of
intent, hence, they cannot
commit felonies that are
punishable under the RPC.
They cannot commit crimes
that are punishable under
special laws because crimes
are personal in nature
requiring personal
performance of overt acts. In
addition, the penalty
imprisonment cannot
imposed.
*Criminal liability falls upon to
responsible officers.
*Responsible officers cannot
invoke the doctrine of separate
personality.
*Corporations cannot
incarcerated.
8. Moral damages cannot be
awarded in favor
corporations because they do
not have feelings and mental
state.
*Corporations can claim
damages such as actual,
compensatory, exemplary, loss
of earning capacity.
General Rule: Corporation
cannot claim moral damages.
Exception: If the corporation
has a good reputation and
such reputation was destroyed.
Case: Coastal Pacific
Trading v Southern Rolling
Mills, Co.
*In Filipinas Broadcasting
Network Inc. v. Ago Medical
and Educational Center, the SC
ruled that a corporation can
recover moral damages under
Article 2219(7) if it was the
victim of defamation.
Doctrine of Piercing the Veil of Corporate
Entity The doctrine that a corporation is a legal
entity distinct from the persons composing it. It is a
theory introduced for the purposes of convenience
and to serve the ends of justice. But when the veil of
corporate fiction is used as a shield to perpetuate
fraud, to defeat public convenience, justify wrong, or
defend crime, this fiction shall be disregarded and
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
the individuals composing it will be treated
identically.
Cases: Times Transportation Co. v Santos
Sotelo; Concept Builders v NLRC
*The doctrine of piercing the veil of corporate entity
of is the exception to the doctrine of corporate entity.
*The users of this doctrine are: 1. Stockholder; 2.
Group of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation are
in effect jointly liable; 2. In case of two corporations,
they will be treated as one wherein they will be both
solidarily liable. (Instrumentality rule)
*There is no effect on the existence of each
corporation as long as their separate entity is used
for legitimate purposes.
Instrumentality Rule When one corporation is so
organized and controlled and its affairs are
conducted so that it is in fact a mere instrumentality
or adjunct of the other, the fiction of the corporate
entity to the instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
of Requisites: 1. Control, not mere majority or
be 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
be the defendant to commit fraud or wrong in
contravention of plaintiffs legal rights; 3. The
aforesaid control and breach of duty must
of proximately cause the injury or unjust loss
complained of.
Three cases of piercing the veil:
1. Fraud Cases when a corporation is used as
a cloak to cover fraud, or to do wrong;
2. Alter Ego Cases when the corporate entity
is merely a farce since the corporation is an alter
ego, business conduit or instrumentality of a
person or another corporation;
3. Equity cases when piercing the corporate
fiction is necessary to achieve justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and
equipments;
4. Engage practically in the same business; 5.
The same manner of keeping books and records.
*The probative factors of identity are not
conclusive but may be considered as strong
evidence.
Creature of Law
Article XII Section 16 of the 1987
Constitution: The Congress shall
not, except by general law, provide for
the formation, organization, or
regulation of private corporations.
Government-owned or controlled
corporations may be created or
established by special charters in the
interest of the common good and
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subject to the test of economic
viability.
Concession Theory It is a principle
in the creation of corporations, under
which a corporation is an artificial
creature without any existence until it
has received the imprimatur of the
State acting according to law, through
the SEC. The life of the corporation is a
concession made by the State.
Right of Succession
- Capacity to have continuity of
existence despite the changes on
the persons who compose it. Thus,
the personality continues despite
the change of stockholders,
members, board members or
officers; death or disability.
- Also known as Principle of
Perpetual Succession
Reason: To make the corporation more
stable
Creature of enumerated powers,
attributes and properties
Doctrine of Limited Capacity No
corporation under the Corporation
Code, shall possess or exercise any
corporate powers, except those
conferred by law, its Articles of
Incorporation, those implied from
express powers and those as are
necessary or incidental to the exercise
of the powers so conferred. The
corporations capacity is limited to such
express, implied and incidental powers.
*Corporation may be restrained from
engaging a particular transaction
because it is beyond their powers.
*General Capacity a corporation can
perform any act for as long as it is
lawful, moral and not contrary to public
policy or order.
Ultra Vires Doctrine Even if the act
is lawful, moral and not contrary to
public order or policy but such act is not
within the express, implied and
incidental powers of the corporation
such act shall be void for being ultra
vires.
*These doctrines are based on Section 2
and Section 45 of the Corporation Code.
C. Classification of Private Corporations:
1. As to existence of Stocks:
Stock Corporation 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. (Sec. 3)
Non-stock Corporation A corporation
where no part of its income is distributable
as dividends to its members, trustees, or
officers, subject to the provisions of this
Code on dissolution. (Sec. 87)
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Maria Zarah Villanueva - Castro
Q: Is it correct to say that a Non-stock
corporation cannot generate income on
their own?
A: NO
2. As to function/organizers:
Public Corporation for public purpose
and organized by the State.
Private Corporation for profit making
functions and organized by private persons
alone or with the State
3. As to laws of Incorporation (Place of
Incorporation) :
Domestic Corporation corporation
formed, organized or existing under the
Philippine Laws.
Foreign Corporation corporation formed,
organized or existing under any laws other
than those of the Philippines and whose
laws allow Filipino citizens and corporations
to do business in its own country or state.
(Sec. 123)
*License is necessary for; 1. Regulation
purposes and 2. Access to local courts.
4. As to legal status:
De Jure Corporation corporation created
in strict or substantial compliance with the
mandatory requirements for incorporation
and the right of which to exist as a
corporation cannot be successfully attacked
or questioned by any party even in a direct
proceeding for that purpose by the state.
De Facto Corporation the due
incorporation of any corporation claiming in
good faith to be a corporation under the
Corporation 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 Solicitor General in a quo
warranto proceeding. (Sec. 20)
- organized with a colourable
compliance with the requirements
of a valid law and its existence
cannot be inquired collaterally.
- There is an irregularity or defect in
the constitution or organization.
Can be compared to a voidable
contract, i.e., valid until annulled.
*Can be challenged by the State later
on.
Cases: Hall v Piccio; Seventh
Adventist v Northeastern Mindanao
Mission
*The filing of the Articles of
Incorporation and the issuance of the
certificate of registration are the
essential requisites for the existence of
a de facto corporation.
Requisites:
1. The existence of a valid law under
which it may be incorporated;
2. An attempt in good faith to
incorporate; 3. Use of corporate powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the
requirement of law.
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*In both corporations, there must be a
certificate of registration issued.
Doctrine of 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 an
result thereof: Provided, however, that when any
such ostensible corporation is sued on any
transaction entered into by it as a corporation or
on any tort committed by it as such, it shall not
B.
be allowed to use as a defense its lack or
corporate personality. (Sec. 21)
- Group of persons which holds itself
out as a corporation and enters into
a contract with a third person on
the strength of such appearance
cannot be permitted to deny its
existence in an action under said
contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited
from the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from
denying their existence by their
previous act or conduct
Holding Corporation it is one which controls
another as a subsidiary by the power to elect
management. It is one that holds stocks in other
companies for purposes of control rather than for
mere investment.
Affiliate one related to another by owning or being
owned by common management or by a long-term
lease of its properties or other control device. It may
be the controlled or controlling corporation, or under
common control.
Subsidiary Corporation 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 always controlled.
Open Corporation one which is open to any
person who may wish to become a stockholder or
member thereto.
Close Corporation those whose shares of stock
are held by limited number of persons like the family
or other closely knit group. (Sec. 96)
FORMATION AND ORGANIZATION OF A PRIVATE
CORPORATION:
A. Submission of Articles of Incorporation;
contractual significance
*The life of a corporation commences from
the issuance of the Certificate of
Registration by the SEC upon filing of the
Articles of Incorporation and other
documents.
Article of Incorporation is the charter of
the corporation, and the contractual
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Maria Zarah Villanueva - Castro
relationships between the State and the
corporation, the stockholder and the State,
and between the corporation and its
stockholders.
Contractual Significance:
1. The issuance of a certificate of
incorporation signals the birth of the
corporations juridical personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto
one.
Contents and Form of the Articles of
Incorporation (Secs. 14 and 15)
Contents of Articles of Incorporation:
1. Corporate Name;
2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
6. Directors or trustees;
7. Capitalization;
8. Shares of stock;
9. Treasurers Affidavit.
Corporate Name
Purpose: Identification
*Corporation can not adopt any name
or group of words at its pleasure
because of statutory limitation, viz.,
Sec. 18 of the Corporation Code
which provides that: No corporate
name may be allowed by the SEC 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.
SEC Guideline x x x b. In order to
prevent confusion and difficulties of
administration, supervision and control,
if the proposed name contains a word
already use as a part of the firm name
or style of a registered entity, the
proposed name must contain two other
words different and distinct from the
name of the company already
registered or protected by law. x x x
Case: Ang Mga Kaanib Ni Jesus
Cristo
*The phrase Ang Mga Kaanib are
words merely descriptive of
membership while the phrase Sa
Bansang Pilipinas are merely
descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or descriptive
word may be used as a corporate name.
Reason: public domain; can be used by
anyone; public use.
Exception: Doctrine of Secondary
Meaning a word or phrase originally
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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.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was not
satisfied by Lyceum of the Philippines.
*In case of change of name, the
corporation is not dissolve nor create a
new corporation; it also does not
extinguish the corporate liability.
*Change of name can be done by
amending the Articles of Incorporation.
Procedure:
1. Obtain approval of majority of the
Board and 2/3 stockholders;
2. Submission to the SEC for approval.
Purpose Clause
*Only one primary purpose. Primary
purpose defines the business activities
of the corporation. It is the ordinary
course of business of the corporation.
*Secondary Purpose is for future
expansion. There is no limit on the
secondary purpose.
*In case the primary purpose is not
viable then secondary purpose may be
used.
Principal Office
*The principal place of business may
determine the venue of court cases
involving corporations. It may also
determine if service of summons and
notices was properly made. It is also
important for tax purposes (local
taxation).
*The SEC requires the exact address to
be indicated in the Articles of
Incorporation.
*It is the residence of the corporation. It
is where the corporation maintains its
books and records and where normally
the bulk of its business is being
conducted or undertaken.
*For personal action, venue is the
residence.
Term of Existence
*A corporation has a maximum term of
50 years. It may be extended for a
period not exceeding 50 years in any
single instance.
As a rule, no extension can be made
earlier than 5 years prior to the
expiration of the term.
*No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
meet the corporations term.
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Maria Zarah Villanueva - Castro
Exception: If for compelling reasons,
earlier extension will be allowed.
*During the three year winding up
period, the corporation still has
personality but activities are limited to
the liquidation of the corporation affairs
and not to transact further business.
As a rule, after the term has expired,
no more extensions be allowed or
entertained by the SEC.
Reason: No more period to extend.
Exception: Doctrine of Relation
The filing and recording of a certificate
of extension after the term cannot
relate back to the date of the passage
of the resolution of the stockholders to
extend the life of the corporation.
However, the doctrine of relations
applies if the failure to file the
application for existence within the
term of the corporation is due to
neglect of the officer with whom the
certificate is required to be filed or to
wrongful refusal on is part to receive it.
*The delay in submitting the application
for extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the corporation
(insuperable intervening causes)
Incorporators
*Once an incorporator always an
incorporator. (Fait accompli an
accomplished fact which cannot be
altered)
*They are the signatories to the Articles
of Incorporation.
*They are originally forming the
corporation
Q: What is the reason behind the
phrase that an incorporator is not
always a corporator?
A: To be an incorporator it is not
necessary to own a share unlike as a
corporator.
*Number is limited to 5 to 15.
*They must have a contractual capacity.
*Juridical person cannot create another
juridical person.
*There is no citizen requirement but
special laws may require otherwise.
*Majority must be a resident of the
Philippines.
Directors and trustees
*The Board of Directors is the governing
body in a stock corporation while Board
of Trustees is the governing body in a
non-stock corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least one
(1) share of the capital stock;
2. Majority of the directors or trustees
must be residents of the Philippines.
*Any director who ceases to be the
owner of at least one share of the
capital stock of the corporation of which
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he is a director shall thereby cease to
be a director.
*Trustees of non-stock corporations
must be members thereof.
*Initial directors/trustees shall hold
office for one year until their successors
are elected and qualified.
Capitalization
Section 14(8) states that: 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
share 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.
*It is required that at least 25% of the
subscribed capital must be paid and in
no case may be paid-up capital be less
than P5,000.
Authorized Capital Stock the
amount fixed in the articles of
incorporation to be subscribed and paid
by the stockholders of the corporation.
*Shows the total number of shares
Subscribed Capital that portion of
the authorized capital stock that is
covered by subscription agreements
whether fully paid or not.
Paid-Up Capital the portion of the
authorized capital stock which has been
subscribed and actually paid.
Outstanding Capital Stock the total
shares of stock issued to subscribers or
stockholders, whether or not fully or
partially paid except treasury shares so
long as there is a binding subscription
agreement.
Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the
profits
2. expectancy on the share of assets in
case of dissolution/liquidation.
Political Value:
1. vote
2. control in the management of the
corporation.
Doctrine of Equality of Shares
Except as otherwise provided in the
articles of incorporation and stated in
the certificate of stock, each share shall
be equal in all respects to every other
share.
- Provides that where the Article of
Incorporation do not provide for any
distinction of the shares of stock, all
shares issued by the corporation are
presumed to be equal and enjoy the
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Maria Zarah Villanueva - Castro
same rights and privileges and are also
subject to the same liabilities.
Classes of Shares:
1. Par Value Share shares that
have a nominal value in the
certificate of stock.
Contractual Significance: The
minimum price at which the shares
are to be issued.
*The price is fixed. It is stated in
the Articles of Incorporation.
2. No Par Value Share those
shares which do not have nominal
value. However, they have issued
value stated in the certificate or
articles of incorporation.
*There is flexibility in the price.
*The price is determined by the
Board.
Limitations:
1. No par value shares cannot have
an issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so that
no part of it should be distributed
as dividends;
3. They cannot be used as
preferred stocks;
4. They cannot be issued by banks,
trust companies, insurance
companies, public utilities and
building and loan association
(Reason: imbued with public
interest);
5. The articles of incorporation
must state the fact that it issued no
par value shares as well as the
number of said shares;
6. Once issued, they are deemed
fully paid and non-assessable.
3. Voting Shares shares with the
right to vote. They have the right to
participate in the management of
the corporation through the
exercise of such right.
4. Non-voting Shares shares
without the right to vote.
*Has only a limited right to vote.
General Rule: Shareholder owning
non-voting shares has no right to
vote.
Exceptions:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-
laws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital
stock; 6. Merger or consolidation of
the corporation with another
corporation or other corporations;
7. Investment of corporate funds in
another corporation or business in
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accordance with the Corporation
Code; 8. Dissolution of the
corporation.
*The exceptions are exclusive; the
list is a closed list
Statutory Constraint: Sec. 6 of
the Corporation Code
*The corporation cannot provide for
shares with no voting right
General Rule: Only redeemable
and preferred shares are deprived
of voting right.
Exception: Common shares may
be denied of its voting right in the
following instances: 1. Delinquent
in paying the subscription; 2. If
there was a founders share where
it was given the right to vote
exclusively for 5 years (Sec. 7).
5. Common Shares the most
common type of shares which
enjoy no preference.
*The basic class of stock ordinarily
and usually issued without
extraordinary rights and privileges,
and the owners thereof are entitled
to a pro rata share in the profits of
the corporation and in its assets
upon dissolution and, likewise, in
the management of its affairs
without preference or advantage
whatsoever.
6. Preferred Shares- shares which
enjoy preference as to dividends or
assets upon dissolution as stated in
the Articles of Incorporation.
Reason: To attract investors.
*Preference does not give them a
lien upon the property nor make
them creditors of the corporation.
*Characterized as redeemable
shares.
Kinds:
1. Preferred shares as to assets
share which gives the holder
thereof preference in the
distribution of the assets of the
corporation in case of liquidation;
2. Preferred shares as to
dividends share which gives the
holder thereof preference in the
distribution of the dividends to the
extent agreed upon before any
dividends at all are paid to the
holders of common shares;
3. Participating preferred
shares the holders thereof are
still given the right to participate
with the common stockholders in
dividends beyond their stated
preference;
4. Non-participating preferred
shares where there is no such
participation;
5. Cumulative preferred shares
the shareholder is entitled to
recover dividends in arrears. While
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dividend declaration may not be
compelled, once it is declared, the
shareholder is entitled to the said
arrears;
6. Non-cumulative preferred
shares not entitled to arrears
only to present dividends.
7. Redeemable Shares are those
which permit the issuing
corporation to redeem or purchase
its own shares.
Limitations:
1. Redeemable shares may be
issued only when expressly
provided for in the Articles of
Incorporation;
2. The terms and conditions
affecting said shares must be
stated both in the certificate of
stock representing such share;
3. Redeemable shares may be
deprived of voting rights in the
Articles of Incorporation, unless
otherwise provided in the
Corporation Code;
4. The corporation is required to
maintain a sinking fund to answer
for redemption price if the
corporation is required to redeem;
5. The redeemable shares are
deemed retired upon redemption
unless otherwise provided in the
Articles of Incorporation;
6. Unrestricted retained earnings is
not necessary before shares can be
redeemed but there must be
sufficient assets to pay the
creditors and to answer for
operations.
8. Treasury Shares shares which
have been earlier issued as fully
paid and have thereafter been
acquired by the corporation by
purchase, donation, redemption or
through some lawful means.
- Shares which are previously
issued by the corporation but
subsequently reacquired by the
corporation.
*Retired thus can no longer be re-
issued.
*They are not entitled to dividends.
*They are not entitled to voting
rights. Rationale: to prevent
abuse by the management.
*These shares may again be
disposed of for a reasonable price
fixed by the Board of Directors.
9. 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 the limited period not
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to exceed 5 years subject to the
approval of the SEC. The 5 year
period shall commence from the
date of the approval by the SEC.
Treasurers affidavit
*The SEC shall not accept the Articles of
Incorporation of any stock corporation
unless accompanied by a sworn
statement of the Treasurer elected by
the subscribers showing that at least
25% of the authorized capital stock of
the corporation has been subscribed,
and at least 25% of the total
subscription has been fully paid to him
in actual cash and/or in property the fair
valuation of which is equal to at least
25% of the said subscription, such paid
up capital being not less than P5,000.
*If the Treasurers affidavit is false such
act is tantamount to fraud. (PD 902-A)
*Fraud on the part of the corporation is
a ground for revocation or suspension
of license depending upon the extent of
the violation committed.
*If theres no Treasurers Affidavit, the
first ground shall apply, i. e.,
noncompliance with the minimum
requirement.
General Rule: 25% must be
subscribed and 25% must be paid.
Exception: If the law provides
otherwise, i.e., special laws.
C. Grounds for rejection of the Articles of
Incorporation
1. The articles of incorporation or any
amendment thereto is not substantially
in accordance with the form prescribed
herein;
2. The purpose or purposes of the
corporation are patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulations;
3. The Treasurers Affidavit concerning the
amount of capital stock subscribed
and/or paid is false;
4. The 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.
Dual Franchise Requirement: 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 corporations
governed by special laws shall be accepted
or approved by the Commission unless
accompanied by a favourable
recommendation of the appropriate
government agency to the effect that such
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articles or amendment is in accordance with
law.
D. Commencement of Corporate Existence
Sec. 19 of the Corporation Code states
that A private corporation formed or
organized under this Code commences to
have corporate existence and juridical
personality and is deemed incorporated
from the date the SEC 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.
*For purposes of determining whether a
corporation enjoys the status of a de facto
corporation, it must have been at least
issued a certificate of registration.
E. Amendment of the Articles of Incorporation
Sec. 16 of the Corporation Code states
that: 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 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 at least 2/3 of the
members if it be a non-stock corporation.
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction.
Amendment by Inaction Upon filing with
the SEC of the amendment and the
Commission failed to act on it within 6
months from the date of filing for a cause
not attributable to the corporation.
F. Effects of Non-Use of Corporate Charter
Sec. 22 of the Corporation Code states
that: If a corporation does not formally
organize and commence the transaction of
its business or the construction of its work
within 2 years from the date of its
incorporation, its corporate powers cease
and the corporation shall be deemed
dissolved. However, if the corporation has
commenced the transaction of its business
but subsequently becomes continuously
inoperative for a period of at least 5 years,
the same shall be a ground for the
suspension or revocation of its corporate
franchise or certificate of incorporation. This
provision shall not apply if the failure to
organize, commence the transaction of its
businesses or the construction of its works,
or to continuously operate is due to causes
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beyond the control of the corporation as
may be determined by the SEC.
*The period must be counted from the
issuance of the Certificate of Incorporation.
*Automatic dissolution is not contemplated
under Section 22. (SEC Opinion).
*Section 22 must be read in conjunction
with Sec 6(1) of PD 902-A which requires
that the corporation must be given the
opportunity to be heard in compliance with
the requirement of due process before the
revocation of its license.
CONTROL AND MANAGEMENT OF A decisions
CORPORATION:
A. Levels of Corporate Control
1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees
General Powers of the Board
Sec. 23 of the Corporation Code
states 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 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 year until
their successors are elected and
qualified.
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties
of the Corporation.
*Board of Directors/Trustees is the
statutory representative of the
corporation.
General Rule: All corporate powers
emanate from the Board of
Directors/Trustees.
Exception: Unless otherwise provided
in this Code. (Limiting Clause)
The limiting clause means that there
are certain corporate matters that
cannot be done by the Board by reason
that such matters fall upon the
shareholders; or corporate matters that
cannot be resolved by the Board alone,
i.e., it must be done with the approval
of the shareholders.
Business Judgment Rule
Business Judgment Rule questions
of policy or management are left solely
to the honest decision of officers and
directors of a corporation and the courts
are without authority to substitute their
judgment for the judgment of the board
of directors; the board is the business
manager of the corporation and so long
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as it acts in good faith its orders are not
reviewable by the courts or the SEC.
- A resolution or transaction pursued
within the corporate powers and
business operations of the corporation,
and passed in good faith by the board
of directors/trustee, is valid and
binding, and generally the courts have
no authority to review the same and
substitute their own judgment, even
when the exercise of such power may
cause losses to the corporation or
decrease the profits of a department.
*Great respect is accorded to the
of the Board of
Directors/Trustees.
*The directors are not liable to the
stockholders in performing such acts.
Qualifications of the Board Members
Sec. 23 of the Corporation Code
states that: Every director must have
at least one 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 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.
*In order to be eligible as director, what
is material is the legal title to and not
beneficial title or ownership of the
stocks appearing on the books of the
corporation.
*The directors/trustees must be natural
persons.
*They must also be of legal age.
*He must possess other qualifications
as may be prescribed in the by-laws of
the corporation.
*Under Sec. 27 of the Corporation
Code: No person convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6
years, or a violation of this Code
committed within 5 years prior to the
date of his election or appointment,
shall qualify as a director, trustee or
officer of any corporation.
Reason: The position is based on trust
and confidence.
*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications.
Election of the Board Members
Sec. 24 of the Corporation Code
provides that: 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 a majority
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of the outstanding capital stock, or if
there be no capital stock, a majority of
the members entitled to vote. The
election must be by ballot if requested
by any voting stockholder or member.
In stock corporations, every stockholder
entitled to vote shall have the right to
vote in person or by proxy the number
of shares of stock standing, at the time
fixed in the by-laws, in his own name on
the stock books of the corporation, or
where the by-laws are silent at the time
of the election; and said 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 the corporations
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 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
member entitled to vote.
*It is the stockholders or corporators
who elect members of the Board of
Directors.
*The only procedure required by the
Code is through Election. There can be
no other modes.
*The election must be by ballot if
requested by any voting member or
stockholder.
*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.
*No delinquent stock shall be voted.
*It is not required that the candidate
received the majority vote, what the
law provides is only plurality of votes.
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Maria Zarah Villanueva - Castro
*Majority number is required only for
the existence of a quorum.
Not included in outstanding capital
stocks: 1. Unissued stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1. Straight Voting every stockholder
may vote such number of shares for as
many persons as there are directors to
be elected.
2. Cumulative Voting for One
Candidate a stockholder is allowed to
concentrate his votes and give one
candidate as many votes as the number
of directors to be elected multiplied by
the number of his shares shall equal.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes (10x5) available
to him. X may opt to concentrate all his
50 votes to a particular candidate.
3. Cumulative Voting by
Distribution 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.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes available to
him. X may opt to distribute the votes
to as many candidates as there are
provided that the total number of votes
does not exceed 50.
Purpose of cumulative voting: To
protect the minority stockholders.
*The elected officer must act as a body.
*In a stock corporation, cumulative
voting is a statutory right whereas in a
non-stock corporation, cumulative
voting is applicable if it is provided in
the Article of Incorporation.
Sec. 26 of the Corporation Code
provides that: Within 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 SEC,
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
SEC.
Term of Office
*The directors or trustees shall hold
office for one (1) year subject to the
hold over principle, i.e., they
continue in office until their successors
are elected and qualified.
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*The one year period does not apply to
directors initially elected for purposes of
incorporation.
Quorum Requirement in Board
Meetings
Sec. 25 of the Corporation Code
states that: 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.
Q: Is the director allowed to let a proxy
attend a board meeting in behalf for
himself?
A: NO. Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum requirement should always be
computed based on the number
specified in the Articles of Incorporation
regardless of ensuing vacancies.
*The basis is always the number
specified in the Articles
Incorporation.
*The corporation can modify the
number by providing a different
provision in the articles
incorporation, however, the law
provides that the modification must be
for a number greater than that provided
in the law. It cannot provide for a
number less than the general
requirement of the code.
*For voting purposes, majority of the
member present constituting a quorum.
Except: election of directors.
Removal of Board Members
Sec. 28 of the Corporation Code
states that: Any director or trustee of a
corporation may be removed from office
by a vote of the stockholders holding or
representing at least 2/3 of the
outstanding capital stock, or if the
corporation be a non-stock corporation,
by a vote of at least 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
corporation for the purpose of removal
of directors or trustees, or any of them,
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Maria Zarah Villanueva - Castro
must be called by the secretary on
order of the president or on the written
demand of the stockholders
representing or holding at least a
majority of the outstanding capital
stock, or, if it be a non-stock
corporation, on the written demand of a
majority of the members entitled to
vote. Should the secretary 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
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
Sec. 24 of this Code.
Requisites:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
of
purpose;
2. There must be previous notice to the
stockholders or member of the intention
to remove;
of
3. The removal must be by a vote of the
stockholders representing 2/3
outstanding capital stock or 2/3 of
members;
4. The director may be removed with or
without cause unless he was elected by
the minority, in which case, it is
required that there is cause for removal.
Reason: The functions of directors are
fiduciary in nature.
Requisites for the removal of
minority directors are:
1. Justifiable cause;
2. Satisfaction of the voting
requirements, i.e., 2/3 of OCS or
members.
*It is the secretary of the corporation
upon order of the president or in case
there is no secretary, stockholder
representing majority of the
outstanding capital stocks or member
signing the demand who may call a
meeting for the purpose of removal.
Vacancies in the Board
Sec. 29 of the Corporation Code
provides that: Any vacancy occurring in
the board of directors or trustees other
than by removal by the stockholders or
a 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;
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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 or the
unexpired term of his predecessor in
office. A 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.
General Rule: Power to elect directors
is vested in the stockholders
Exception: 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.
Compensation of Board Members
Sec. 30 of the Corporation Code
provides that: In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, that any
such compensation other than per
diems may be granted to directors by
the vote of the stockholders
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 10% of the net
income before income tax of the
corporation during the preceding year.
General Rule: Directors are not
entitled to receive compensation
Exceptions:
1. When their compensation is fixed in
the by-laws;
2. If compensation is granted to
directors by the vote of the
stockholders representing at least a
majority of the outstanding capital
stock at a regular or special
stockholders meeting.
Limitation: In no case shall the total
yearly compensation of directors
exceed 10% of the net income before
income tax of the corporation during
the preceding year.
Reason: In order to avoid temptation
on the part of directors to abuse powers
by appropriating compensation
packages since they are in control of
corporate assets.
C. Corporate Officers
Concept of Corporate Officers
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Maria Zarah Villanueva - Castro
*Corporate powers reside on the Board
of Directors; decision/policymaking
resides on them. Implementation of
rules/policy lies on the corporate
officers
Categories:
1. Statutory Corporate Officers
President (must be a stockholder);
Secretary (must be a resident and
citizen of the Philippines); Treasurer
(must be a resident and citizen of the
Philippines).
2. As provided by the By-Laws
must be clearly stated in the By-Laws
that such office is a corporate office.
3. Those designated by the
Board of Directors provided the
Board of Directors is authorized to
do so by the By-Laws.
Validity and Binding Effect of Acts of
Corporate Officers
General Rule: No one, even corporate
officers can bind the corporation. It is
only the Board of Directors who has the
authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act
is part of the function of such office;
2. If authorized by the Board of
Directors
Doctrine of Apparent Authority
Doctrine of Apparent
Authority/Doctrine of Estoppel If a
corporation, knowingly permits one of
its officers, or any other agent, to act
within the scope of an apparent
authority, it holds him out to the public
as possessing the power to do those
acts; and thus, the corporation will, as
against anyone who has in good faith
dealt with it through such agent, be
stopped from denying the agents
authority.
Cases: Peoples Aircargo; Inter-
Asia; Lapu-Lapu
*Requires good faith on the part of third
person.
D. Liability of Directors, Trustees and Officers
Instances when Corporate
Officers/Directors are held Solidarily
Liable
Sec. 31 of the Corporation Code
provides that: Directors or trustees
who wilfully 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,
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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.
General Rule:
Directors/Trustees/Officers are not
solidarily liable with the corporation.
Exceptions:
1. Wilfully and knowingly vote for
and assent to patently
unlawful acts of the
corporation (Sec. 31).
Case: Carag v NLRC
2. Guilty of gross negligence or
bad faith in directing the
affairs of the corporation (Sec.
31).
Case: David v Construction
Industry
3. Acquire any personal or
pecuniary interest in conflict of
their duty (Sec.31).
4. Consent to the issuance of
watered stocks or having
knowledge thereof, fails to file
objections with the secretary
(Sec. 65).
5. Agree or stipulate in a contract
to hold himself personally
liable with the corporation.
6. By virtue of a specific provision
of law such as BP 22; Trust
receipts Law; RA 7832 (Anti-
Electricity Pilferage Act of
1997); Securities Regulation
Code
*In Carag v NLRC, the Supreme Court
held that not any violative of law, the Code
means that violation must have a
corresponding penalty. Patently unlawful act
means that a law declares an act unlawful
and that such law provides penalty for that
unlawful act.
Self-Dealing Directors/Officers
Sec. 32 of the Corporation Code
states that: 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 of 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; 3. That the
contract is fair and reasonable under
the circumstances; and 4. That in case
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Maria Zarah Villanueva - Castro
of an officer, the contract has been
previously authorized by the board of
directors. Where any of the first two
conditions set forth in the preceding
paragraph is absent, in the case of a
contract with a director or trustee, such
contract may be ratified by the vote of
the stockholders representing at least
2/3 of the outstanding capital stock or
of at least 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.
Example:
In XYZ Corporation, A is a director. The
corporation acts through the Board of
Directors. XYZ Corporation and A
entered into a lease contract. A as the
lessor and XYZ Corporation as lessee.
The contract was approved by the
Board of Directors.
Q: What is the status of the contract?
General Rule: The contract is
voidable.
Exception: If the requisites provided in
Sec. 32 are present.
Exception to the Exception: If
requirement number 1 or 2 is absent, in
the case of a contract with a director or
trustee, such contract may be
considered valid by the ratification of at
least 2/3 of the outstanding capital
stock or 2/3 of the members.
Requisites:
1. 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. The vote of such director or trustee
was not necessary for the approval of
the contract;
3. The contract is fair and reasonable
under the circumstances;
4. In case of an officer, the contract has
been previously authorized by the
board of directors.
Reason: As presence in the board
meeting might affect the status of the
contract.
Self-Dealing Directors/Officers
directors/officers who transact business
with their own corporation.
- This is not prohibited by law.
Interlocking Directors those who
have been elected as directors in 2 or
more different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however there
are consequences.
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Contracts involving Inter-locking
Directors
Sec. 33 of the Corporation Code
provides that: 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 is substantial and his
interest in the other 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
20% of the outstanding capital stock
shall be considered substantial for
purposes of interlocking directors.
Example:
A is a director of two corporation, ABC
Corporation and XYZ Corporation. XYZ
Corporation and ABC Corporation
entered into a lease contract where ABC
Corporation is the lessor and XYZ
Corporation is the lessee.
Q: Can this contract be invalidated on
the ground that there is an interlocking
director?
A: NO.
Q: What is the status of the contract?
A: General Rule: Contracts between
two or more corporations having
interlocking directors are valid.
Exceptions:
1. Contracts are void if contracts
are fraudulent or if contracts
are unfair and unreasonable.
2. If the By-Laws prohibits
interlocking director.
Case: Gokongwei, Jr. v SEC
*The interest is nominal if his interest is
20% or less of the outstanding capital
stock. The interest is substantial if his
interest is more than 20% of the
outstanding capital stock.
*If the interlocking director has a
substantial interest in one corporation
and has a nominal interest in the other
corporation, the director must comply
with the requisites provided in Sec. 32
on self-dealing directors.
Reason: The case is analogous to that
of transactions involving self-dealing
directors because such director holds
substantial interest with the other
company.
Doctrine of Corporate Opportunity
Sec. 34 of the Corporation Code
states that: 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
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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 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.
General Rule: A director shall refund
to the corporation all the profits he
realizes on a business opportunity
which: 1. the corporation is financially
able to undertake; 2. from its nature, is
in line with corporations business and is
of practical advantage to it; and 3. the
corporation has an interest or a
reasonable expectancy.
Exception: His act has been ratified by
a vote of the stockholders owning or
representing at least 2/3 of the
outstanding capital stock.
*A business opportunity ceases to be
corporate opportunity and transforms to
personal opportunity where the
corporation refuses or is definitely no
longer able to avail itself of the
opportunity.
E. Executive Committee
Sec. 35 of the Corporation Code states
that: The by-laws of a corporation may
create an executive committee composed of
not less than 3 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 filing 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.
Keyword: BY-LAWS
*It must be stated in the By-Laws.
*Board Resolution is not sufficient if there is
no provision in the By-Laws.
*The decision of the executive committee is
considered a Board Resolution.
*The decision of the executive committee is
not subject to appeal to the board. However,
if the resolution of the Executive Committee
is invalid it may be ratified by the Board.
*The decision of the executive committee
needs no confirmation from the Board.
Case: Filipinas Port, Inc.
*The corporation may create other
committees.
Distinction: In executive committee, there
is a statutory restriction on members
14

whereas in other committee there is no such
restriction.
General Rule: The executive committee
may act on 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.
Exceptions:
1. Approval of any action for which
shareholders approval is also required;
2. The filing 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;
5. A distribution of cash dividends to the
shareholders.
CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept of
Ultra Vires Act
Sec. 45 of the Corporation Code states
that: No corporation under this Code shall
possess or exercise any corporate powers
except those conferred by this Code or by its
articles of incorporation and except such as
are necessary or incidental to the exercise
of powers so conferred.
Ultra Vires Acts an act committed
outside the object for which a corporation is
created as defined by the law of its
organization and therefore beyond the
power conferred upon it by law.
Effects of Ultra Vires Acts:
1. Executed Contract courts will not
set aside or interfere with such
contracts.
2. Executory Contract no enforcement
even at the suit of either party.
3. Partly executed and Partly
executory contract principle against
unjust enrichment shall apply.
B. Classes of Corporate Powers
1. Express
2. Implied
3. Incidental
Express those expressly authorized
by the Corporation Code and other
laws, and its Articles of Incorporation or
Charter.
Implied those that can be inferred
from or necessary for the exercise of
the express powers.
Incidental those that are incidental
to the existence of the corporation.
Doctrine of Necessary Implication those which
can be reasonably inferred from the express powers
given since they are necessary for the corporation to
perform a particular act are deemed part of such
powers.
C. Statutory Powers of a Corporation and the
Limitations on their Exercise
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
Sec. 36 of the Corporation Code states
that: 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; 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 merger or
consolidation with other corporations as
provided in this Code; 9. To make reasonable
donations, including those for the public
welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided, That no corporation, domestic or
foreign, shall give donations in aid of any
political party or candidate or for purposes
of partisan political activity; 10. To establish
pension, retirement, and other plans for the
benefit of its directors, trustees, officers and
employees; and 11. To exercise such other
powers as may be essential or necessary to
carry out its purpose or purposes as stated
in the articles of incorporation.
Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code
states that: 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 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 at
least 2/3 of the members if it be a non-
stock corporation.
*The following are excluded in counting
the outstanding capital stock: 1.
Treasury stock; 2. Unissued shares.
*Aside from the votes of majority of the
board and assent of the 2/3 of the OCS,
15

the approval of the SEC is necessary for
the amendment of the AOI.
*There is an implied approval of the
SEC, i.e., failure to act on the
application filed by the corporation
within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain the
written assent of the stockholders.
*In Tan v Sycip, the Supreme Court held
that in case of a non-stock corporation,
membership is personal and non-
transferrable unless the by-laws
provides otherwise. The deceased
member is not entitled to vote.
Four changes in Articles of Incorporation that
require the approval of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.
*Approval of Stockholders is necessary in these
changes because they are necessary for the
corporations existence.
Extension/Shortening of Corporate Term
Sec. 37 of the Corporation Code
states that: 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 2/3
of the outstanding capital stock or by at
least 2/3 of the members in case of
non-stock corporation. 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.
Increase or Decrease of Capital Stock/
Incurrence, Creation or Increase of
Bonded Indebtedness
Sec. 38 of the Corporation Code
states that: 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, 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.
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
Written notice of the proposed increase
or diminution of the capital stock or of
the incurring, creating, or increasing of
any bonded indebtedness and of the
time and place of the stockholders
meeting at which the proposed increase
or diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered , must
be addressed to each stockholder at his
place of residence as shown on the
books of the corporation and deposited
to the addressee in the post office with
postage prepaid, or served personally.
xxx.
Q: When the corporation increases its
capital stock, is the 25% requirement
necessary? How can it be computed?
A: YES. The SEC ruled that the 25%
applies to the increase amount.
*The corporation is required to maintain
a sinking fund.
Q: What does bonded indebtedness
mean?
A: Requires longer time of payment;
special burden on the corporation;
involves the important assets of the
corporation.
Denial of Pre-emptive Right
Sec. 39 of the Corporation Code
states that: All stockholders of a stock
corporation shall enjoy pre-emptive
right to subscribe to all issues or
disposition of shares of any class, in
proportion to their respective
shareholdings, unless such right is
denied by the articles of incorporation
or an amendment thereto: Provided,
That such pre-emptive right shall not
extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership
by the public; or to shares to be issued
in good faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock, in exchange
for property needed for corporate
purposes or in payment of a previously
contracted debt.
*Coming from the increased authorized
capital stock.
* Similar to Right of First Refusal
*It is not a matter of right. It can be
denied by the corporation through
denial of such right in the articles of
incorporation.
Purposes:
1. In order that the stockholder may be
able to maintain their relative
proportional voting trend and control in
the corporation; 2. To avoid dilution of
their proportionate voting and control in
the corporation.
General Rule: Pre-emptive right is
available to stockholders.
Exception: if it is denied in the Articles
of Incorporation or through amendment.
16

Exception to the Exception: Pre-
emptive right shall not extend to:
1. Shares to be issued in compliance
with laws requiring stock offerings or
minimum stock ownership by the
public;
2. Shares to be issued in good faith with
the approval of the stockholders
representing 2/3 of the outstanding
capital stock, in exchange for property
needed for corporate purposes; and
3. In payment of a previously
contracted debt.
*Pre-emptive right is satisfied as long as
the corporation gives the stockholder
the opportunity to buy the shares.
*The offer must first be made to the
stockholders.
Sale or Disposition of Assets
Sec. 40 of the Corporation Code
states that: Subject to the provisions
of existing laws on illegal combinations
and monopolies, a corporation may, by
a majority vote of its board of directors
or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose
of all or substantially all of its property
and assets, including its goodwill, upon
such terms and conditions and for such
consideration, which may be money,
stocks, bonds or other instruments for
the payment of money or other
property or consideration, as its board
of directors or trustees may deem
expedient, when authorized by the vote
of the stockholders representing at
least 2/3 of the outstanding capital
stock, or in case of non-stock
corporation by the vote of at least 2/3
of the members, in a stockholders or
members meeting duly called for the
purpose. Written notice of the proposed
action and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the
addressee in the post office with
postage prepaid, or served personally:
Provided, That any dissenting
stockholder may exercise his appraisal
right under the conditions provided in
this Code. A sale or other disposition
shall be deemed to cover substantially
all the corporate property and assets if
thereby the corporation would be
rendered incapable of continuing the
business or accomplishing the purpose
for which it was incorporated. xxx.
Q: What makes the disposition
peculiar?
A: The disposition is of all or
substantially all of the corporations
properties and assets.
Q: What kind of disposition involve?
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
Requirements:
1. Majority vote of the Board.
2. Vote of the Stockholders
representing 2/3 of the OCS.
3. The sale does not bring about the
illegal combinations and
monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test no statutory
test; pertains to the disposition of
all assets
2. Qualitative Test there is a
statutory test; pertains to the
disposition of substantially all of its
assets.
*The provision is so strict because the
law wants the corporation will reach its
expiration term.
Q: With the sale of all the assets of the
corporation, will the same result to its
dissolution?
A: NO. Possession or continued
possession of corporate properties is
not a condition for the existence of a
corporation. Corporation still exists
despite the disposition of all its
properties and assets.
Q: Will the buying corporation be made
answerable for the liabilities of the
selling corporation?
A: NO. The two corporations are two
separate personalities thus they are
separate and distinct from each other
hence the buying corporation cannot be
held liable to the obligations of the
selling corporation.
General Rule: The sale of all or
substantially all of the assets of the
corporation does not make the buyer
answerable for the obligations of the
seller.
Exceptions:
1. If the buyer expressly agrees to
assume the obligations of the
seller.
2. If sale amounts to merger or
consolidation.
3. If and when application of piercing
the veil of corporate entity doctrine
is warranted.
4. If the purchaser becomes a
continuation of the seller.
5. Sale was done in violation of the
Bulk Sales Law.
Case: PNB v Andrada
Acquisition of Corporate Shares
Sec. 41 of the Corporation Code
states that: A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate
corporate purpose or purposes,
including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
17

earnings in its books to cover the
shares to be purchased or acquired: 1.
To eliminate fractional shares arising
out of stock dividends; 2. To collect or
compromise an indebtedness to the
corporation, arising out of unpaid
subscription, in a delinquency sale, and
to purchase delinquent shares sold
during said sale; and 3. To pay
dissenting or withdrawing stockholders
entitled to payment for their shares
under the provisions of this Code.
Requisites:
1. Unrestricted Retained Earnings
2. The acquisition must be for
legitimate purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any other
purpose.
Q: What happens to reacquired shares?
A: General Rule: They are
automatically deemed retired.
Exception: The AOI provides
otherwise.
Trust Fund Doctrine The capital stock, property
and other assets of the corporation are regarded as
equity in trust for the payment of the corporate
creditors. The subscribed capital stock of the
corporation is a trust fund for the payment of debts
of the corporation which the creditors have the right
to look up to satisfy their credits. Corporation may
not dissipate this and the creditors may sue
stockholders directly for the unpaid subscription.
Investment of Corporate Funds
Sec. 42 of the Corporation Code
states that: Subject to the provisions of
this Code, a private corporation may
invest its funds in any other corporation
or business or for any purpose other
than the primary purpose for which it
was organized when approved by a
majority of the board of directors or
trustees and ratified by the
stockholders representing at least 2/3
of the outstanding capital stock, or by
at least 2/3 of the members in the case
of non-stock corporations, at a corporations.
stockholders or members meeting
duly called for the purpose. Written
notice of the proposed investment and
the time and place of the meeting shall
be addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation
and deposited to the addressee in the
post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have
appraisal right as provided in this Code:
Provided, however, That where the
investment by the corporation is
reasonably necessary to accomplish its
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
primary purpose as stated in the
articles of incorporation, the approval of
the stockholders or members shall not
be necessary.
Requisites:
1. Majority vote of the Board
2. Vote of the stockholders
representing 2/3 OCS.
Declaration of Dividends
Sec. 43 of the Corporation Code
states that: The board of directors of a
stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in stock
to all stockholders on the basis of
outstanding stock held by them:
Provided, That any cash dividends due
on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than 2/3 of the outstanding
capital stock at a regular or special
meeting duly called for the purpose.
Stock corporations are prohibited from
retaining surplus profits in excess of
100% of their paid-in capital stock,
except: 1. When justified by definite
corporate expansion projects or
programs approved by the board of
directors; or 2. When the corporation is
prohibited under any loan agreement
with any financial institution or creditor,
whether local or foreign, from declaring
dividends without its/his consent, and
such consent has not yet been secured;
or 3. When it can be clearly shown that
such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is need
for special reserve for probable
contingencies.
*This section is exclusive to stock
Dividends represents part of the
earnings of the corporation which the
board has decided to distribute among
the stockholders.
*The fact that the corporation has
surplus earning does not mean that it is
mandated to declare dividends; it is still
upon the sound discretion of the board
of directors.
Reason: Trust Fund Doctrine
*There must be a unrestricted retained
earnings before dividends may be
declared.
*The board may opt to restrict its
earnings, as the earnings may be
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allocated to legitimate business *If there is no date of record dividends

purpose. may be received by those persons who
are holders of stocks as of the
declaration.
CASH STOCK Q: When the corporation declares stock
DIVIDENDS DIVIDENDS dividends, would it likewise create a
does not require Requires creditor-debtor relationship between the
stockholders stockholders
corporation and the stockholder?
approval approval
The stockholders The stockholders A: NO. Stock dividends will not bring
receive cash receive stocks about a creditor-debtor relationship.
Creditor-debtor No creditor-debtor When it comes to shareholdings, the
relationship relationship one holding the shares are considered
investors; risk-takers.
Requisites for declaration of Q: Will legal compensation possible to
cash/property dividends: occur?
1. Board approval A: NO. The parties are not mutually
2. Unrestricted Retained Earnings creditor-debtor of each other. The
requisites under the Civil Code on legal
Requisites for declaration of stock compensation are not present.
dividends: Management Contract
1. Unrestricted Retained Earnings; Sec. 44 of the Corporation Code
2. Board approval; states that: No corporation shall
3. Ratification by the stockholders. conclude a management contract with
Q: Why stockholders ratification is another corporation unless such
necessary in the declaration of stock contract shall have been approved by
dividends? the board of directors and by
A: Because the earnings are stockholders owning at least the
capitalized. It is considered to be a majority of the outstanding capital
corporate assets. stock, or by at least a majority of the
Q: May the board be compelled to members in the case of a non-stock
declare dividends? corporation, of both the managing and
A: General Rule: NO. the managed corporation, at a meeting
Exception: Stock corporations are duly called for the purpose: Provided,
prohibited from retaining surplus profits That 1. Where a stockholder or
in excess of 100% of their paid-in stockholders representing the same
capital stock. interest of both the managing and the
Exceptions to the Exception: managed corporations own or control
1. Corporate expansion more than 1/3 of the total outstanding
2. Pursuant to loan agreement
capital stock entitled to vote of the
3. Special circumstances/contingent
managing corporation; or 2. Where a
liabilities
majority of the members of the board of
Q: Are the stock dividends considered
directors of the managing corporation
as watered stocks because the
also constitute a majority of the
stockholder concerned does not pay
members of the board of directors of
anything therefor?
the managed corporation, then the
A: NO. The unrestricted retained
management contract must be
earnings are considered to be a
approved by the stockholders of the
consideration thus dividends received
managed corporation owning at least
through stocks are not watered stocks.
2/3 of the total outstanding capital
*The source of payment is the
stock entitled to vote, or by at least 2/3
unrestricted retained earnings.
of the members in the case of a non-
Q: Are delinquent stockholders entitled
stock corporation. No management
to receive dividends?
contract shall be entered into for a
A: YES. But only in terms of cash
period longer than 5 years for any one
dividends.
term. The provisions of the next
Q: Who are entitled to receive
preceding paragraph shall apply to any
dividends?
contract whereby a corporation
A: Stockholders
undertakes to manage or operate all or
*In Nielson case, the SC held that
substantially all of the business of
dividends cannot be given to non-
another corporation, whether such
stockholders.
contracts are called service contracts,
*If there is date of record Dividends
operating agreements or otherwise:
may be received by those persons who
Provided, however, That such service
are holders of stocks as of date of
contracts or operating agreements
record.
which relate to the exploration,

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development, exploitation or utilization Sec. 46 of the Corporation Code states

of natural resources may be entered that: Every corporation formed under this
into for such periods as may be Code must, within 1 month after receipt of
provided by the pertinent laws or official notice of the issuance of its
regulations. certificate of incorporation by the SEC,
Requisite: adopt a code of By-Laws for its government
General Rule: Majority vote of the not inconsistent with this Code. For the
OCS adoption of By-Laws by the corporation the
Exception: 2/3 of the OCS
affirmative vote of the stockholders
*SECs approval is not necessary
*When the corporation enters into a representing at least a majority of the
management contract, appraisal right is outstanding capital stock, or of at least a
NOT AVAILABLE to any dissenting majority of the members in case of non-
stockholder. stock corporations, shall be necessary. The
Reason: Sound business policy dictates By-Laws shall be signed by the stockholders
that it would be better for the or members voting for them and shall be
corporation, at the inception of its kept in the principal office of the
operation, to be managed by a corporation, subject to the inspection of the
company who has been experienced in stockholders or members during office
a particular kind of business if the hours. A copy thereof, duly certified to by a
managed corporation needs the majority of the directors or trustees
technical expertise, skills, experiences, countersigned by the secretary of the
background of another entity. corporation, shall be filed with the SEC
which shall be attached to the original
CORPORATE BY-LAWS: articles of incorporation. Notwithstanding
the provisions of the preceding paragraph,
A. Concept, Use and Nature of By-Laws By-Laws may be adopted and filed prior to
By-Laws relatively permanent and incorporation; in such case, such By-Laws
continuing rules of action adopted by the shall be approved and signed by all the
corporation for its own government and that incorporators and submitted to the SEC,
of the individuals composing it and those together with the articles of incorporation. In
having the direction, management and all cases, By-Laws shall be effective only
control of its affairs, in whole or in part, in upon the issuance by the SEC of a
the management and control of its affairs certification that the By-Laws are not
and activities. inconsistent with this Code. The SEC shall
Nature: Regulates internal affairs of the not accept for filing the By-Laws or any
corporation. amendment thereto of any bank, banking
institution, building and loan association,
B. By-Laws in relation to Articles of
trust company, insurance companies, public
Incorporation
utility, educational institution or other
Distinction between By-Laws and
special corporations governed by special
Articles of Incorporation:
By-Laws is a condition subsequent. laws, unless accompanied by a certificate of
Articles of Incorporation is a condition the appropriate government agency to the
precedent. Essential for corporate existence. effect that such By-Laws or amendments are
in accordance with law.
*Submission of By-Law is not a requirement
ARTICLES OF BY-LAWS for acquisition of corporate existence,
INCORPORATION however, for the corporation to be able to
continue its corporate existence, the
External affairs Internal Affairs corporation is required to submit the
Affects the status of Does not affect the corporate By-Law.
existence of the status of the *Non-submission of the By-Laws within the
corporation existence but has prescribed period allowed by law is a ground
impact on the
for the dissolution of the corporation.
existence; failure to
*In Loyola Grandvillas Homeowners
submit is a ground
for Association v CA, the SC held that failure
disenfranchisement to adopt a set of By-Laws within the
Joint decision of the General Rule: joint prescribed period, notwithstanding the word
board and decision used in the Code, the same would not result
stockholders Exception: to automatic dissolution of the corporation.
Delegates the power The failure to file by-laws would not, by
to amend the By-
itself, amount to dissolution or
Laws to the Board
extinguishment of the corporate existence.
*Section 46 of the Corporation Code must
be read in conjunction with PD 902-A which
C. Adoption of By-Laws; Effect of Non-Filing
outlines the procedure to be followed before
within the prescribed period

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the franchise/license of a private corporation
may be suspended or revoked.
*Observance of Due Process is necessary.
*In Sawadjaan v CA, the SC held that
meanwhile when the By-Laws is not yet
submitted, the corporation, at that time, and
the very least, may be considered as a De
Facto Corporation and therefore, its right to
exist as such cannot be inquired into or
cannot be collaterally attacked in a private
suit. It is for the State to initiate a
proceeding questioning the existence, on
the ground of its non-submission of By-Laws,
within the prescribed period.
D. Contents of By-Laws; Requisites of a Valid
By-Law Provision
Sec. 47 of the Corporation Code states
that: Subject to the provisions of the
Constitution, this Code, other special laws,
and the articles of incorporation, a private
corporation may provide in its By-Laws for:
1. The time, place and manner of calling and
conducting regular or special meetings of
the directors or trustees; 2. The time and
manner of calling and conducting regular or
special meetings of the stockholders or
members; 3. The required quorum in
meetings of stockholders or members and
the manner of voting therein; 4. The form
for proxies of stockholders and members
and the manner of voting them; 5. The
qualifications, duties and compensation of
directors or trustees, officers and
employees; 6. The time for holding the
annual election of directors or trustees and
the mode or manner of giving notice
thereof; 7. The manner of election or
appointment and the term of office of all
officers other than directors or trustees; 8.
The penalties for violation of the By-Laws; 9.
In the case of stock corporations, the
manner of issuing stock certificates; and 10.
Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business and affairs.
Requisites:
1. It must be consistent with Corporation
Code, other pertinent laws and
regulations.
2. It must be consistent with the Articles of
Incorporation.
3. It must be reasonable and not arbitrary
or oppressive.
4. It must not disturb vested rights, impair
contract or property rights of
stockholders or members or create
obligations unknown to law.
E. Amendment to By-Laws
Sec. 48 of the Corporation Code
provides that: The board of directors or
trustees, by a majority vote thereof, and the
owners of at least a majority of the
outstanding capital stock, or at least a
majority of the members of a non-stock
corporation, at a regular or special meeting
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
duly called for the purpose, may amend or
repeal any By-Laws or adopt new By-Laws.
The owners of 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock
corporation may delegate to the board of
directors or trustees the power to amend or
repeal any By-Laws or adopt new By-Laws:
Provided, That any power delegated to the
board of directors or trustees to amend or
repeal any By-Laws or adopt new By-Laws
shall be considered as revoked whenever
stockholders owning or representing a
majority of the outstanding capital stock or
a majority of the members in non-stock
corporations, shall so vote at a regular or
special meeting. Whenever any amendment
or new By-Laws are adopted, such
amendment or new By-Laws shall be
attached to the original By-Laws in the office
of the corporation, and a copy thereof, duly
certified under oath by the corporate
secretary and a majority of the directors or
trustees, shall be filed with the SEC the
same to be attached to the original articles
of incorporation and original By-Laws. The
amended or new By-Laws shall only be
effective upon the issuance by the SEC of a
certification that the same are not
inconsistent with this Code.
F. By-Laws in relation to Third Parties
*In China Banking Corporation v CA, the
SC held that in the absence of evidence that
China Bank is aware of the provisions of the
By-Laws, China Bank is not bound to
observe the provisions of the By-Laws.
Hence, China Bank must be allowed to
register the shares in its name.
General Rule: Third parties are not
affected by the By-Laws.
Exception: If the third party has actual
knowledge of the provisions of the By-Laws.
CORPORATE MEETINGS:
A. Kinds of Corporate Meetings
Sec. 49 of the Corporation Code
provides that: Meetings of directors,
trustees, stockholders, or members may be
regular or special.
Kinds:
a. Stockholders/Members:
1. Regular meeting
2. Special meeting
b. Directors/Trustees:
1. Regular meeting
2. Special meeting
Sec. 50 of the Corporation Code
provides that: Regular meetings of
stockholders or members shall be held
annually on a date fixed in the by-laws, or if
not so fixed, on any date in April of every
year as determined by the board of directors
or trustees: Provided, That written notice of
regular meetings shall be sent to all
stockholders or members of record at least
2 weeks prior to the meeting, unless a
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different period is required by the by-laws.
Special meetings of stockholders or
members shall be held at any time deemed
necessary or as provided in the by-laws:
Provided, however, That at least 1 week
written notice shall be sent to all
stockholders or members, unless otherwise
provided in the by-laws. Notice of any
meeting may be waived, expressly or
impliedly, by any stockholder or member.
Whenever, for any cause, there is no person
authorized to call a meeting, the SEC, upon
petition of a stockholder or member on a
showing of good cause therefor, may issue
an order to the petitioning stockholder or
member directing him to call a meeting of
the corporation by giving proper notice
required by this Code or by the by-laws. The
petitioning stockholder or member shall
preside thereat until at least a majority of
the stockholders or members present have
been chosen one of their number as
presiding officer.
*Regular meeting of stockholders/members
shall be held annually on a date fixed in the
by-laws or if not so fixed, on any date in
April of every year. Written notice of regular
meetings shall be sent 2 weeks prior to the
meeting unless a different period is required
by the by-laws.
** Special meeting of stockholders/members
shall be held at any time deemed necessary
or as provided in the by-laws. Written notice
shall be sent to all stockholders or members
at least one week or unless otherwise
provided in the by-laws.
Sec. 53 of the Corporation Code
provides that: Regular meetings of the
board of directors or trustees of every
corporation shall be held monthly, unless
the by-laws provide otherwise. Special
meetings of the board of directors or
trustees may be held at any time upon the
call of the president or as provided in the
by-laws. Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-
laws provide otherwise. Notice of regular or
special meetings stating the date, time and
place of the meeting must be sent to every
director or trustee at least 1 day prior to the
scheduled meeting, unless otherwise
provided by the by-laws. A director or
trustee may waive this requirement, either
expressly or impliedly.
*Regular meetings of directors/trustees shall
be held monthly unless the by-laws provide
otherwise.
*Special meetings of directors/trustees may
be held at any time upon the call of the
president or as provided in the by-laws.
*Meetings of directors or trustees may be
held anywhere in or outside of the
Philippines unless the by-laws provide
otherwise.
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*Notice of regular or special meetings
stating the date, time and place of the
meeting must be sent to every director or
trustee at least 1 day prior to the scheduled
meeting unless otherwise provided by the
by-laws.
B. Requirements of a Meeting
1. It must be held at the proper place.
2. It must be held at the stated date and
at the appointed time or at a
reasonable time thereafter.
3. It must be called by the proper person.
4. There must be a previous notice.
5. There must be a quorum.
Sec. 51 of the Corporation Code
provides that: Stockholders or members
meetings, whether regular or special, shall
be held in the city or municipality where the
principal office of the corporation is located,
and if practicable in the principal office of
the corporation: Provided, That Metro Manila
shall, for purposes of this section, be
considered a city or municipality. Notice of
meetings shall be in writing, and the time
and place thereof stated therein. All
proceedings had and any business
transacted at any meeting of the
stockholders or members, if within the
powers or authority of the corporation, shall
be valid even if the meeting be improperly
held or called, provided all the stockholders
or members of the corporation are present
or duly represented at the meeting.
*Applies to both stock and non-stock
corporations.
General Rule: The meeting must be held in
the city or municipality where the principal
office is located.
Exception: Sec. 93 on non-stock
corporations, the By-Laws may provide
different venue for their meeting.
*A casual reading of section 51 would say
that a corporation cannot provide any other
place for the meeting of stockholders. But in
case of a non-stock corporation, Section 93
of the Corporation provides that the by-laws
could provide any place for the meeting of
its members provided that it is within the
Philippines and proper notice has been
given.
Q: Is there a conflict between Section 51
and Section 93?
A: YES. There is conflict but this conflict
may be reconciled. As a rule, the by-laws
may provide a different place of meeting
provided that it is within the Philippines and
notice has been given. As an exception, if
the by-laws is silent of the place of the
meeting, section 51 applies.
Sec. 52 of the Corporation Code
provides that: Unless otherwise provided
for in this Code or in the by-laws, a quorum
shall consist of the stockholders
representing a majority of the outstanding
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capital stock or a majority of the members
in the case of non-stock corporations.
General Rule: Majority of the OCS or
Majority of the members
Exception: Unless otherwise provided by
the Code or by the By-Laws.
*In Tan v Sycip, deceased member is not
entitled to vote
Sec. 54 of the Corporation Code
provides that: 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.
C. Right to Vote of Stockholders
Instances when voting right not
available
Sec. 6 of the Corporation Code
provides that: 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.
Instances when voting right is not
available:
1. Delinquent shares
2. Treasury shares
3. Fractional shares
4. Escrow shares
Rules on:
1. Delinquent Shares
Sec. 71 of the Corporation Code
provides that: No delinquent stock
shall be voted for or be entitled to
vote or to representation at any
stockholders meeting, nor shall the
holder thereof be entitled to any of
the rights of a stockholder except
the right to dividends in
accordance with the provisions of
this Code, until and unless he pays
the amount due on his subscription
with accrued interest, and the costs
and expenses of advertisement, if
any.
*Delinquency arises upon default in
payment of subscription.
Q: Are they included for quorum
and voting purposes?
A: NO.
Q: Even if there are proxies?
A: YES.
Q: Shares not yet fully paid but not
yet delinquent, are they entitled to
vote?
A: YES.
*Delinquent stock is not entitled to
vote and his presence would not be
taken for purposes of quorum.
*The only right remain is the right
to receive dividends subject to the
provision of Section 43.
2. Escrow Shares
*Escrow shares are not entitled to
vote before the fulfillment of the
condition imposed thereon.
3. Unpaid Shares
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Maria Zarah Villanueva - Castro
Sec. 72 of the Corporation Code
provides that: Holders of
subscribed shares not fully paid
which are not delinquent shall have
all the rights of a stockholder.
General Rule: The holder of
unpaid shares can exercise the
right to vote.
Exception: If it is provided in the
subscription contract that such
right cannot be exercised until the
subscription is fully paid.
4. Sequestered Shares
Q: What is the reason for
sequestration process?
A: For investigative purposes; To
avoid wastage dissipation of
assets.
Q: Is PCGG authorized to vote for
the sequestered shares?
A: General Rule: No. PCGG
cannot vote for the sequestered
shares because being a
conservator/administrator, it should
only perform acts of administration
and not acts of ownership.
Exception: If there is a strong
evidence that indeed the shares
have been purchased through
public funds.
Requisites:
1. Strong evidence or prima facie
evidence that the shares are
ill-gotten.
2. There is an imminent danger
that the shares will be
dissipated.
Case: Transmiddle East v
CA
Q: During the pendency of
sequestration process, are the
sequestered shares included for
quorum purposes?
A: General Rule: YES.
Q: Who can vote them?
A: General Rule: Stockholder of
record.
*In Republic of the Philippines v
COCOFED, the SC held that there
is a prima facie evidence that the
shares are purchased with the use
of public funds.
5. Pledgor, Mortgagor or
Administrator of Shares
Sec. 55 of the Corporation Code
provides that: In case of pledged
or mortgaged shares in stock
corporations, the pledgor or
mortgagor shall have the right to
attend and vote at meetings of
stockholders, unless the pledgee or
mortgagee is expressly given by
the pledgor or mortgagor such
right in writing which is recorded on
the appropriate corporate books.
Executors, administrators,
receivers, and other legal
representatives duly appointed by
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the court may attend and vote in
behalf of the stockholders or
members without need of any
written proxy.
Q: Can the pledgee/mortgagee
exercise the right to vote?
A: General Rule: No. The right to
vote remains to the owner thus, it
is the pledgor/mortgagor that can
exercise it.
Exception: If there is an
agreement that the
pledgee/mortgagee can exercise
the right to vote.
Case: Calapatia
*Administrator/executor/heirs have
the right to vote even without prior
proxy. But the SEC requires them to
submit letters of appointment or
documents showing that he has
been duly instituted as
executor/administrator of the
deceased.
6. Shares Jointly Owned
Sec. 56 of the Corporation Code
provides that: In case of shares of
stock owned jointly by two or more
persons, in order to vote the same,
the consent of all the co-owners
shall be necessary, unless there is
a written proxy, signed by all the
co-owners, authorizing one or some
of them or any other person to vote
such share or shares: Provided,
That when the shares are owned in
an and/or capacity by the holders
thereof, any one of the joint owners
can vote said shares or appoint a
proxy therefor.
D. Concept of Proxy and Voting Trust
Agreement
Proxy is a written authorization given by
one person to another so that the second
person can act for the first.
*Proxy is a representative.
*Relationship: Principal-Agent.
*Proxy is authorized to vote and also
authorized to be present in a meeting.
Functions: For quorum purposes; for
voting purposes.
*In Board meeting, proxy is not allowed
(Sec. 25 of the Corporation Code).
Sec. 58 of the Corporation Code
provides that: Stockholders and members
may vote in person or by proxy in all
meetings of stockholders or members.
Proxies shall be in writing, signed by the
stockholder or member and filed before the
scheduled meeting with the corporate
secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be
valid and effective for a period longer than 5
years at any one time.
Requisites:
1. Must be in writing
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Maria Zarah Villanueva - Castro
2. Filed before the scheduled meeting;
under the SEC rule, 10 days before the
scheduled meeting
*Proxy ensures presence of a quorum and
also approval of corporate acts.
General Rule: Proxy is revocable.
Exception: If proxy is coupled with interest.
Ways to revoke proxy:
1. By execution of subsequent proxy.
2. If the stockholder concerned would
appear in the scheduled meeting.
Voting Trust Agreement is an agreement
whereby one or more stockholders transfer
their shares of stocks to a trustee, who
thereby acquires for a period of time the
voting rights (and/or any other rights) over
such shares; and in return, trust certificates
are given to the stockholders, which are
transferable like stock certificates, subject
however, to the trust agreement.
PROXY VOTING TRUST
AGREEMENT
The stockholder The stockholder
remains the ceases to be a
stockholder of stockholder of record
record
Revocable Irrevocable
General Rule: 5
years
Exception: If
coupled with interest
*The transfer includes the transfer of legal
title.
Sec. 59 of the Corporation Code
provides that: One or more stockholders of
a stock corporation may create a voting
trust for the purpose of conferring upon a
trustee or trustees the right to vote and
other rights pertaining to the shares for a
period not exceeding 5 years at any time:
Provided, That in the case of a voting trust
specifically required as a condition in a loan
agreement, said voting trust may be for a
period exceeding 5 years but shall
automatically expire upon full payment of
the loan. A voting trust agreement must be
in writing and notarized, and shall specify
the terms and conditions thereof. A certified
copy of such agreement shall be filed with
the corporation and with the SEC; otherwise,
said agreement is ineffective and
unenforceable. The certificate or certificates
of stock covered by the voting trust
agreement shall be cancelled and new ones
shall be issued in the name of the trustee or
trustees stating that they are issued
pursuant to said agreement. In the books of
the corporation, it shall be noted that the
transfer in the name of the trustee or
trustees is made pursuant to said voting
trust agreement. The trustee or trustees
shall execute and deliver to the transferors
voting trust certificates, which shall be
transferable in the same manner and with
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Maria Zarah Villanueva - Castro

the same effect as certificates of stock. The
voting trust agreement filed with the
corporation shall be subject to examination
by any stockholder of the corporation in the
same manner as any other corporate book
or record: Provided, That both the transferor
and the trustee or trustees may exercise the
right of inspection of all corporate books and
records in accordance with the provisions of
this Code. Any other stockholder may
transfer his shares to the same trustee or
trustees upon the terms and conditions
stated in the voting trust agreement, and
thereupon shall be bound by all the
provisions of said agreement. No voting
trust agreement shall be entered into for the
purpose of circumventing the law against
monopolies and illegal combinations in
restraint of trade or used for purposes of
fraud. Unless expressly renewed, all rights
granted in a voting trust agreement shall
automatically expire at the end of the
agreed period, and the voting trust
certificates as well as the certificates of
stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the
name of the transferors. The voting trustee
or trustees may vote by proxy unless the
agreement provides otherwise.
Consequence: The stockholder entering
into a voting trust agreement ceases to be a
stockholder of record.
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title to
the shares so that if the stockholder is, at
the same time, a director of the corporation,
automatically he is disqualified to continue
performing the duties of a director because
the law requires each and every director to
SUBSCRIPTION CONTRACT:
have legal, not beneficial title to at least one
share.
A.
E. Derivative Suit; Concept and Requisites
Derivative Suit is a suit brought by any
stockholder, usually a minority shareholder,
to redress a wrong committed against the
corporation whenever the responsible
officers refuse to take any action thereon or
are the very person to be sued.
*This prerogative is developed through
jurisprudence.
*This is expressly mandated by Sec. 31 of
the Corporation Code.
B.
Q: Why derivative?
A: From the word derive. The one bringing
the suit derives the cause of action from the
corporation.
Q: Who brings the suit?
A: Any stockholder/member usually
minority stockholder.
Q: Whose cause of action?
A: It is the corporations cause of action.
Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
board thus when the board refuses to take
action in order to protect the corporation
derivative suit may be allowed.
Compelling Reason: Inaction of the
officers. Failure to discharge their
responsibilities. Requisites:
1. The stockholder bringing the suit must
be one of record as of the time the
cause of action accrues as well as of the
time the action is brought unless the
cause of action is a continuing offer.
*The stockholder must implead the real
party in interest, i.e. the corporation.
*In Chua v CA, the SC held that the
corporation must be impleaded since it
is the real party in interest.
2. The action must be named under the
corporations name
3. General Rule: The stockholder
bringing the suit must have exhausted
intra-corporate remedies within the
corporation.
Exception: If the very person to be
sued is the responsible officers
themselves.
**This is a condition precedent.
4. The suit is not intended to harass the
defendant, not a nuisance or
harassment suit.
5. Appraisal right must not be an available
remedy.
Individual suit is a suit filed by the
stockholder because his personal right has
been violated. The cause of action is
personal to the stockholder. The party
injured is the stockholder himself.
Representative suit is a suit filed by a
group of stockholders that suffered common
injury.
Ways to become a Stockholder of a
Corporation
1. Subscription contract with the
corporation.
2. Purchase or acquisition of shares from
existing stockholders.
3. Purchase of treasury shares from the
corporation.
*All of them involve shareholdings.
*Subscription is unique because it involves
unissued shares.
Concept of Subscription Contract
Subscription Contract is, under Sec. 60
of the Corporation Code, any contract
for the acquisition of unissued stock in an
existing corporation or a corporation still to
be formed shall be deemed a subscription
within the meaning of this Title,
notwithstanding the fact that the parties
refer to it as a purchase or some other
contract.
*This is strictly regulated by the Corporation
Code.

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C. Kinds of Subscription
1. Pre-incorporation subscription one
entered into before incorporation.
Sec. 61 of the Corporation Code
provides that: A subscription for shares
of stock of a corporation still to be
formed shall be irrevocable for a period
of at least 6 months from the date of
subscription, unless all of the other
subscribers consent to the revocation,
or unless the incorporation of said
corporation fails to materialize within
said period or within a longer period as
may be stipulated in the contract of
subscription: Provided, That no pre-
incorporation subscription may be
revoked after the submission of the
articles of incorporation to the SEC.
*Contracts between the subscribers.
2 Fold Characteristics:
a. It is a contract between
subscribers.
E.
b. May be regarded as continuing
offer on the part of the subscriber
concerned which the corporation
may accept upon acquisition of
juridical personality.
Reason: The corporation is not yet
in existence.
2. Post incorporation subscription
one entered into after the incorporation
for the acquisition of unissued stock.
*Contracts between the subscribers and
the corporation.
*Creates a creditor-debtor relationship.
D. Consideration for the Issuance of Shares
Sec. 62 of the Corporation Code
provides that: Stocks shall not be issued for
a consideration less than the par or issued
price thereof. Consideration for the issuance
of stock may be any or a combination of any
two or more of the following: 1. Actual cash
paid to the corporation; 2. Property, tangible
or intangible, actually received by the
corporation and necessary or convenient for
its use and lawful purposes at a fair
valuation equal to the par or issued value of
the stock issued; 3. Labor performed for or
services actually rendered to the
corporation; 4. Previously incurred
indebtedness of the corporation; 5. Amounts
transferred from unrestricted retained
earnings to stated capital; and 6.
Outstanding shares exchanged for stocks in
the event of reclassification of conversion.
Where the consideration is other than actual
cash, or consists of intangible property such
as patents of copyrights, the valuation
thereof shall initially be determined by the
incorporators or the board of directors,
subject to the approval by the SEC. Shares
of stock shall not be issued in exchange for
promissory notes or future service. The
same considerations provided for in this
section, insofar as they may be applicable,
may be used for the issuance of bonds by
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the corporation. The issued price of no-par
value shares may be fixed in the articles of
incorporation or by the board of directors
pursuant to authority conferred upon it by
the articles of incorporation or the by-laws,
or in the absence thereof, by the
stockholders representing at least a majority
of the outstanding capital stock at a
meeting duly called for the purpose.
Valid considerations for the
subscription agreements:
1. Cash
2. Property
3. Labor or services actually rendered to
the corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares in exchange for
stocks in the event of reclassification or
conversion.
Payment of Subscription
Q When payment of the subscription is
made?
A: Look into the subscription agreement. If
subscription agreement is silent as to when
the amount of subscription to be paid, the
board of directors may call on all the unpaid
subscribers to pay the remaining balance of
their subscription.
Remedies to enforce payment of
subscription
1. By Extra-judicial sale at public
auction.
2. By judicial action.
3. Collection from cash dividends and
withholding of stock dividends.
When shares are considered delinquent
Sec. 67 of the Corporation Code
provides that: Subject to the provisions
of the contract of subscription, the
board of directors of any stock
corporation may at any time declare
due and payable to the corporation
unpaid subscriptions to the capital stock
and may collect the same or such
percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary. Payment of any unpaid
subscription or any percentage thereof,
together with the interest accrued, if
any, shall be made on the date
specified in the contract of subscription
or on the date stated in the call made
by the board. Failure to pay on such
date shall render the entire balance due
and payable and shall make the
stockholder liable for interest at the
legal rate on such balance, unless a
different rate of interest is provided in
the by-laws, computed from such date
until full payment. If within 30 days
from the said date no payment is made,
all stocks covered by said subscription
shall thereupon become delinquent and
shall be subject to sale as hereinafter
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provided, unless the board of directors
orders otherwise.
*If there was no date as to payment of
subscription stated in the subscription
agreement, the board may call on all
the unpaid subscribers to pay the
remaining balance of their subscription.
Failure to pay within 30 days from the
said date, all stocks covered by said
subscription shall thereupon become
delinquent and shall be subject to sale
unless the board of directors orders
otherwise.
F. Certificate of Stock
Certificate of Stock is a written evidence
of the shares of stock but it is not the share
itself.
*Does not represent credit.
Q: How important is a stock certificate?
A: It is an evidence of ownership of stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed by the
president or vice-president, countersigned
by the secretary or assistant secretary.
Q: When certificate of stock may be issued?
A: Sec. 64 of the Corporation Code
states that: No certificate of stock shall be
issued to a subscriber until the full amount
of his subscription together with interest
and expenses (in case of delinquent shares),
if any is due, has been paid.
Doctrine of Indivisibility of Subscription
Contract
Doctrine of Indivisibility of
Subscription Contract: Failure to pay
any of the installments due would
necessarily affect all the other
installments because the subscription is
to be treated as one, whole, entire,
indivisible contract. Upon default of
payment on any of the installment
results to entire subscription due and
demandable.
*The Certificate of Stock cannot be
divided into portions.
*No certificate of stock shall be issued
until the full payment of the
subscription.
*The corporation has an automatic lien
over the shares.
Q: What will happen to the payment
already made by the subscriber?
A: The payment partially made shall be
applied proportionately to all the shares
covered by the subscription.
Example:
P10 per share; payment made is P6000
covering 1000 shares. The P6000 shall
be allocated equally to all shares. P6
per share has been paid. P4 per share is
the liability.
Certificate of Stock, quasi-negotiable
Q: can the stock certificate be treated
as negotiable instrument under NIL?
A: No. The requisites are not complied
with. There is no engagement to pay in
sum certain in money.
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*Negotiable instrument represents
credit. Creditor-debtor relationship
arises.
Q: Are certificates of stock negotiable?
A: They are negotiable in certain
extent. That is why they are quasi-
negotiable.
*The title over the share can be
assigned, transferred by indorsement
and delivery.
*Due course holding is not applicable.
G. Transfer of Shares
If represented by a certificate, the
following must be strictly complied
with:
1. Delivery of the certificate;
2. Indorsement by the owner or his agent;
3. To be valid to third parties, the transfer
must be recorded in the books of the
corporation.
*If not represented by the certificate, the
shares may be transferred by means of a
deed of assignment and such is duly
recorded in the books of the corporation.
*To make the transfer binding to the
corporation and third person, the transfer
must be recorded in the stock and transfer
book of the corporation.
Q: Who is the owner of the share?
A: The stockholder of record.
H. Lost and Destroyed Certificate of Stock
Sec. 73 of the Corporation Code
provides that: The following procedure shall
be followed for the issuance by a
corporation of new certificates of stock in
lieu of those which have been lost, stolen or
destroyed: 1. The registered owner of a
certificate of stock in a corporation or his
legal representative shall file with the
corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to
how the certificate was lost, stolen or
destroyed, the number of shares
represented by such certificate, the serial
number of the certificate and the name of
the corporation which issued the same. He
shall also submit such other information and
evidence which he may deem necessary; 2.
After verifying the affidavit and other
information and evidence with the books of
the corporation, said corporation shall
publish a notice in a newspaper of general
circulation published in the place where the
corporation has its principal office, once a
week for 3 consecutive weeks at the
expense of the registered owner of the
certificate of stock which has been lost,
stolen or destroyed. The notice shall state
the name of said corporation, the name of
the registered owner and the serial number
of said certificate, and the number of shares
represented by such certificate, and that
after the expiration of 1 year from the date
of the last publication, if no contest has
been presented to said corporation
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regarding said certificate of stock, the right
to make such contest shall be barred and
said corporation shall cancel in its books the
certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof
new certificate of stock, unless the
registered owner files a bond or other
security in lieu thereof as may be required,
effective for a period of 1 year, for such
amount and in such form and with such
sureties as may be satisfactory to the board
of directors, in which case a new certificate
may be issued even before the expiration of
the 1 year period provided herein: Provided,
That if a contest has been presented to said
corporation or if an action is pending in
court regarding the ownership of said
certificate of stock which has been lost,
stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be
suspended until the final decision by the
court regarding the ownership of said
certificate of stock which has been lost,
stolen or destroyed. Except in case of fraud,
bad faith, or negligence on the part of the
corporation and its officers, no action may
be brought against any corporation which
shall have issued certificate of stock in lieu
of those lost, stolen or destroyed pursuant
to the procedure above-described.
CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a Corporation
Sec. 74 of the Corporation Code
provides that: Every corporation shall keep
and carefully preserve at its principal office
a record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in detail
the time and place of holding the meeting,
how authorized, the notice given, whether
the meeting was regular or special, if special
its object, those present and absent, and
every act done or ordered done at the
meeting. Upon the demand of any director,
trustee, stockholder or member, the time
when any director, trustee, stockholder or
member entered or left the meeting must
be noted in the minutes; and on a similar
demand, the yeas and nays must be taken
on any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on
any action or proposed action must be
recorded in full on his demand. The records
of all business transactions of the
corporation and the minutes of any
meetings shall be open to inspection by any
director, trustee, stockholder or member of
the corporation at reasonable hours on
business days and he may demand, writing,
for a copy of excerpts from said records or
minutes, at his expense. Any officer or agent
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Maria Zarah Villanueva - Castro
of the corporation who shall refuse to allow
any director, trustee, stockholder or
member of the corporation to examine and
copy excerpts from its records or minutes, in
accordance with the provisions of this Code,
shall be liable to such director, trustee,
stockholder or member for damages, and in
addition, shall be guilty of an offense which
shall be punishable under Section 144 of
this Code: Provided, That if such refusal is
made pursuant to a resolution or order of
the board of directors or trustees, the
liability under this section for such action
shall be imposed upon the directors or
trustees who voted for such refusal: and
Provided, further, That it shall be a defense
to any action under this section that the
person demanding to examine and copy
excerpts from the corporations records and
minutes has improperly used any
information secured through any prior
examination of the records or minutes of
such corporation or of any other
corporation, or was not acting in good faith
or for a legitimate purpose in making his
demand. Stock corporations must also keep
a book to be known as the stock and
transfer book, in which must be kept a
record of all stocks in the names of the
stockholders alphabetically arranged; the
installments paid and unpaid on all stock for
which subscription has been made, and the
date of payment of any installment; a
statement of every alienation, sale or
transfer of stock made, the date thereof,
and by and to whom made; and such other
entries as the by-laws may prescribe. The
stock and transfer book shall be kept in the
principal office of the corporation or in the
office of its stock transfer agent and shall be
open for inspection by any director or
stockholder of the corporation at reasonable
hours on business days. No stock transfer
agent or one engaged principally in the
business of registering transfers of stocks in
behalf of a stock corporation shall be
allowed to operate in the Philippines unless
he secures a license from the SEC and pays
a fee as may be fixed by the Commission,
which shall be renewable annually: Provided,
That a stock corporation is not precluded
from performing or making transfer of its
own stocks, in which case all the rules and
regulations imposed on stock transfer
agents, except the payment of a license fee
herein provided, shall be applicable.
*Keeping of books and records are
mandatory.
Books required to be kept:
1. Book of minutes reflects the decisions
and actions of the Board of
Directors/Stockholders.
2. Record of all business transactions
3. Stock and Transfer Book/Membership
Book
4. Books of Proceedings
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B. Right to Inspect Corporate Books
Basis and Extent of the Right of
Inspection
Q: Is the keeping of these books
mandatory?
A: YES. Section 144 of the Corporation
Code provides penalty for any violation
of the provision of the Code.
Rationale: Right of inspection would
be futile. Right of inspection would not
be exercised.
Limitations on the Right of Inspection
1. The books and records shall be
open to inspection at reasonable
hours on business days.
2. The books and records shall not be
improperly used any information
secured through any prior
examination of the books or
records.
3. The stockholders demand must be
in good faith or for a legitimate
purpose.
*Inspection can be done personally or
through agent.
Remedies to Enforce Right of Inspection
*In case of refusal to exercise the right
of inspection, the stockholder
concerned may file an action for
mandamus before the RTC.
*Can also claim damages.
MERGER AND CONSOLIDATION:
A. Concept of Merger and Consolidation
Merger is one where a corporation absorbs
the other and remains in existence while the
others are dissolved.
*There is a continuous flow of juridical
personality.
Examples:
A+B=B
A+B+C=C
A+B+C=A
A+B+C=B
Consolidation is one where a new
corporation is created, and consolidating
corporations are extinguished.
Examples:
A+B=C
A+B+C=D
A + B + C = ABC
A + B + C = XYZ
B. Requisites of and Procedure for Merger and
Consolidation
1. Approval by majority vote of the Board
of Directors of each corporation.
2. Approval of the stockholders of each
corporation representing 2/3 of the
outstanding capital stock.
3. Approval of SEC
Cases: Associated Bank v CA; Polyan v
CA
Procedure:
1. The Board of each corporation shall
draw up a plan of merger/consolidation.
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Maria Zarah Villanueva - Castro
2. The plan of merger or consolidation
shall be approved by majority vote of
each board of the concerned
corporations at separate meetings.
3. The plan of merger/consolidation shall
be approved by the majority vote of the
2/3 of the shareholders of the
outstanding capital stock or members in
case of a non-stock corporation.
4. Articles of Merger/Consolidation shall be
executed by each of the constituent
corporators, signed by the President or
Vice-President and certified by the
secretary or assistant secretary.
5. Four copies of the Articles of Merger or
Consolidation together with favorable
recommendation of a pertinent
government agency in certain cases
shall be submitted to the SEC for
approval.
6. The SEC shall issue a certificate or
merger if it is satisfied that the merger
or consolidation of the corporations
concerned is not inconsistent with the
provisions of this Code and existing
laws.
C. Effects of Merger or Consolidation
1. All property, real or personal, and all
receivables due to, and all other
interest of each constituent corporation,
shall be deemed transferred to and
vested in such surviving or consolidated
corporation without further act or deed.
2. The surviving or consolidated
corporation shall be responsible for all
the liabilities and obligations of each of
the constituent corporations.
3. Any claim, action or proceeding pending
by or against any of the constituent
corporations may be prosecuted by or
against the surviving or consolidated
corporations.
4. The rights of the creditors or lien upon
the property of any of each constituent
corporation shall not be impaired by
such merger or consolidation.
5. Dissolution of other corporation leaving
the surviving or consolidated
corporation exists.
Remedy of the dissenting stockholder:
The dissenting stockholder may exercise his
appraisal right.
RIGHT OF APPRAISAL:
A. Concept of Appraisal Right
Appraisal Right is the right to withdraw
from the corporation and demand payment
of the fair value of his shares after
dissenting from certain corporate acts
involving fundamental changes in corporate
structure.
*Demanding for the reasonable return of
investment.
*Stockholders cannot exercise this right at
his pleasure.
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Requisites:
1. The Stockholder has dissented
2. Corporate change must have been
approved by the SEC.
*Any changes that affect the
stockholders right.
*Any changes that concern the
corporations existence.
*Corporate changes that appraisal right
can be availed of.
3. There must have an unrestricted
retained earnings,
*It is not a matter of right.
Reason: If it is a matter of right it shall lead
to the diminution or depletion of corporate
assets which is violative of the Trust Fund
Doctrine.
B. Instances of Appraisal Right
Sec. 81 of the Corporation Code
provides that: Any stockholder of a
corporation shall have the right to dissent
and demand payment of the fair value of his
shares in the following instances: 1. In case
any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing preferences
in any respect superior to those of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence; 2. In case of sale,
lease, exchange, transfer, mortgage, pledge
or other disposition of all or substantially all
of the corporate property and assets as
provided in the Code; and 3. In case of
merger or consolidation.
C. Requirements for a Valid Exercise of
Appraisal Right
Sec. 82 of the Corporation Code
provides that: The appraisal right may be
exercised by any stockholder who shall have
voted against the proposed corporate
action, by making a written demand on the
corporation within 30 days after the date on
which the vote was taken for payment of the
fair value of his shares: Provided, That
failure to make the demand within such
period shall be deemed a waiver of the
appraisal right. If the proposed corporate
action is implemented or affected, the
corporation shall pay to such stockholder,
upon surrender of the certificate or
certificates of stock representing his shares,
the fair value thereof as of the day prior to
the date on which the vote was taken,
excluding any appreciation or depreciation
in anticipation of such corporate action. If
within a period of 60 days from the date the
corporate action was approved by the
stockholders, the withdrawing stockholder
and the corporation cannot agree on the fair
value of the shares, it shall be determined
and appraised by 3 disinterested persons,
one of whom shall be named by the
stockholder, another by the corporation, and
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Maria Zarah Villanueva - Castro
the third by the two thus chosen. The
findings of the majority of the appraisers
shall be final, and their award shall be paid
by the corporation within 30 days after such
award is made: Provided, That no payment
shall be made to any dissenting stockholder
unless the corporation has unrestricted
retained earnings in its books to cover such
payment: and Provided, further, That upon
payment by the corporation of the agreed or
awarded price, the stockholder shall
forthwith transfer his shares to the
corporation.
Requisites:
1. Any of the instances set forth by law
must be present.
2. Dissenting stockholder must have voted
against the proposed action.
*Abstaining stockholder cannot claim or
exercise his appraisal right.
3. Demand for payment must be made
within 30 days from the date vote is
taken thereon. Failure to make demand
shall be deemed a waiver.
4. Price must be based on fair value as of
day prior to date on which vote was
taken
5. Submission by withdrawing stockholder
of his shares to the corporation for
notation of being a dissenting
stockholder within 10 days from written
demand.
6. Payment must be made only when the
corporation has unrestricted retained
earnings in its books.
7. Stockholder must transfer his shares to
the corporation upon payment by the
corporation.
D. Effects of Exercising Appraisal Right
Sec. 83 of the Corporation Code
provides that: From the time of demand for
payment of the fair value of a stockholders
shares until either the abandonment of the
corporate action involved or the purchase of
the said shares by the corporation, all rights
accruing to such shares, including voting
and dividend rights, shall be suspended in
accordance with the provisions of this Code,
except the right of such stockholder to
receive payment of the fair value thereof:
Provided, That if the dissenting stockholder
is not paid the value of his shares within 30
days after the award, his voting and
dividend rights shall immediately be
restored.
Effects:
1. All rights accruing to such shares shall
be suspended from the time of demand
for payment of the fair value of the
shares until either the abandonment of
the corporate action.
2. The dissenting stockholder shall be
entitled to receive payment of the fair
value of his shares as agreed upon
between him and the corporation or as
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Maria Zarah Villanueva - Castro

determined by the appraisers chosen by togetherness, unity

them. and familiarity.
*Sec. 86. The dissenting stock can be sold Generally, members Election is vested
during the pendency of its payment. could directly elect upon Board of
officers. Except Directors
Remedy in case appraisal right cannot
unless AOI provides
be exercised: Dispose the shareholdings. otherwise.

NON-STOCK CORPORATIONS:
C. Membership in a Non-Stock Corporation
A. Definition and Purposes of a Non-Stock
Corporation Sec. 89 of the Corporation Code
Sec. 87 of the Corporation Code states provides that: The right of the membership
that: For the purposes of this Code, a non- of any class or classes to vote may be
stock is one where no part of its income is limited, broadened or denied to the extent
distributable as dividends to its members, specified in the articles of incorporation or
trustees, or officers, subject to the the by-laws. Unless so limited, broadened or
provisions of this Code on dissolution: denied, each member, regardless of class,
Provided, That any profit which a non-stock shall be entitled to one vote. Unless
corporation may obtain as an incident to its otherwise provided in the articles of
operations shall, whenever necessary or incorporation of the by-laws, a member may
proper, be used for the furtherance of the vote by proxy in accordance with the
purpose or purposes for which the provisions of this Code. Voting by mail or
corporation was organized, subject to the other similar means by members of non-
provisions of this Title. The provisions stock corporations may be authorized by the
governing stock corporations, when by-laws of non-stock corporations with the
pertinent, shall be applicable to non-stock approval of, and under such conditions
corporations, except as may be covered by which may be prescribed by, the SEC.
specific provisions of this Title. General Rule: Sec. 58
*Sec. 87 should be read in harmony with
Exception: Sec. 89. This provision allows
Sec. 94.
denial of proxy.
*A Non-stock corporation is not precluded
Reason: To promote camaraderie,
from engaging in profit-business related.
Sec. 88 of the Corporation Code togetherness, unity and familiarity.
provides that: Non-stock corporations may *A member is entitled to 1 vote. However,
be formed or organized for charitable, such right may be limited, broadened or
religious, educational, professional, cultural, denied in the Articles of Incorporation or By-
fraternal, literary, scientific, social, civic Laws. Thus, the By-laws of a non-stock
service, or similar purposes, like trade, corporation may provide for the desired
industry, agricultural and like chambers, or voting rights of members including the
any combination thereof, subject to the number of votes.
special provisions of this Title governing Sec. 90 of the Corporation Code
particular classes of non-stock provides that: Membership in a non-stock
corporations. corporation and all rights arising therefrom
*The purpose of a non-stock are personal and non-transferable, unless
corporation is related to public welfare. the articles of incorporation or the by-laws
otherwise provide.
B. Distinguished from Stock Corporation General Rule: Membership is non-
transferable.
Non- stock Stock Corporation Exception: If the Articles of Incorporation or
Corporation the By-laws provide otherwise.
Public welfare For profit
Sec. 91 of the Corporation Code
Board of Trustees Board of directors
provides that: Membership shall be
Generally, the term 1 year subject to
of office of trustees hold-over principle terminated in the manner and for the
is 3 years causes provided in the articles of
By-laws can provide City or municipality incorporation or the by-laws. Termination of
for a different venue where the principal membership shall have the effect of
as long as it is within office is located extinguishing all rights of a member in the
the Philippines corporation or in its property, unless
Member may be Proxy is allowed otherwise provided in the articles of
deprived of their
incorporation or the by-laws.
right to designate
proxies by provisions Rules on Place of Meeting:
in the articles of General Rule: Sec. 51
incorporation or by- Exception: Sec. 93
laws
Reason: To promote D. Rule on Distribution of Assets
camaraderie,

31

Sec. 94 of the Corporation Code
provides that: In case dissolution of a non-
stock corporation in accordance with the
provisions of this Code, its assets shall be
applied and distributed as follows: 1. All
liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or
adequate provision shall be made therefor;
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements; 3. Assets received and
held by the corporation subject to
limitations permitting their use only for
charitable, religious, benevolent,
educational or similar purposes, but not held
upon a condition requiring return, transfer or
conveyance by reason of the dissolution,
shall be transferred or conveyed to one or
more corporations, societies or
organizations engaged in activities in the
Philippines substantially similar to those of
the dissolving corporation according to a
plan of distribution adopted pursuant to this
Chapter; 4. Assets other than those
mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with
the provisions of the articles of incorporation
or the by-laws, to the extent that the articles
of incorporation or the by-laws, determine
the distributive rights of members, or any
class or classes of members, or provide for
distribution; and 5. In any other case, assets
may be distributed to such persons,
societies, organizations or corporations,
whether or not organized for profit, as may
be specified in a plan of distribution adopted
pursuant to this Chapter.
Order of distribution:
1. All its creditors shall be paid;
2. Assets held subject to return on
dissolution, shall be delivered back to
their givers;
3. Assets held for charitable, religious
purposes, etc., without a condition for
their return on dissolution, shall be
conveyed to one or more organizations
engaged in similar activities as
dissolved corporation; and
4. All other assets shall be distributed to
members, as provided for in the Articles
or By-Laws.
Sec. 95 of the Corporation Code
provides that: A plan providing for the
distribution of assets, not inconsistent with
the provisions of this Title, may be adopted
by a non-stock corporation in the process of
dissolution in the following manner: The
board of trustees shall, by majority vote,
adopt a resolution recommending a plan of
distribution and directing the submission
thereof to a vote at a regular or special
meeting of members having voting rights.
Written notice setting forth the proposed
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Maria Zarah Villanueva - Castro
plan of distribution or a summary thereof
and the date, time and place of such
meeting shall be given to each member
entitled to vote, within the time and in the
manner provided in this Code for the giving
of notice of meetings to members. Such
plan of distribution shall be adopted upon
approval of at least 2/3 of the members
having voting rights present or represented
by proxy at such meeting.
Q: Would it be possible for a non-stock
corporation to be converted into a stock
corporation by mere amendment of the
Articles of Incorporation?
A: NO. Because it would violate Section 87
of the Corporation Code which prohibits
distribution of income as dividends to
members.
Reason: Fraudulent to donors
Q: Can a stock corporation be converted to
a non-stock corporation by mere
amendment of the Articles of Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.
CLOSE CORPORATIONS:
A. Concept; Distinguished from Open
Corporations
Sec. 96 of the Corporation Code states
that: A corporation, within the meaning of
this Code, is one whose articles of
incorporation provide that: (1) All the
corporations issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number
of persons, not exceeding 20; (2) all the
issued stock of all classes shall be subject to
one or more specified restrictions on
transfer permitted by this Title; and (3) The
corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be
deemed a close corporation when at least
2/3 of its voting stock or voting rights is
owned or controlled by another corporation
which is not a close corporation within the
meaning of this Code. Any corporation may
be incorporated as a close corporation,
except mining or oil companies, stock
exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with
public interest in accordance with the
provisions of this Code. The provisions of
this Title shall primarily govern close
corporations: Provided, That the provisions
of other Titles of this Code shall apply
suppletorily except insofar as this Title
otherwise provides.
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*Whether open or close corporation redeemable shares, arbitration of an

depends on its charter. the purchase by the intracorporate
Case: San Juan Structural corporation of its deadlock by the SEC,
The following must be stated in the own stock must the corporation may
Articles of Incorporation: always be made be ordered to
1. Membership is limited to 20 from the purchase its own
2. Transfer or disposition of shares is unrestricted retained shares from the
subject to specified restrictions earnings stockholders
3. Prohibition against offering to the public regardless of the
availability of
of the shares or listing in the stock
unrestricted retained
exchange. earnings
General Rule: Any corporation may be Arbitration of Arbitration of
incorporated as close corporation. intracorporate intracorporate
Exceptions: deadlock by the SEC deadlock by the SEC
1. Mining or oil companies is not a remedy in is an available
2. Stock exchanges case the directors or remedy in case the
3. Banks stockholders are so directors or
4. Insurance companies divided respecting stockholders are so
5. Public utilities the management of divided respecting
6. Educational institutions the corporation. the management of
7. Corporations declared to be vested with the corporation.
public interest

Distinctions from Open Corporations: *In San Juan Structural Steel

Fabricators v CA, the SC held that the
Open Corporation Close Corporation circumstance that around 99.86% of the
Its articles of Its articles must total share holding of petitioner belongs to
incorporation need contain the special respondent would not justify classification of
only contain the matters prescribed
the corporation as close.
general matters by Section 97 aside
enumerated in from the general
Section 14 of the matters in Section B. Permissive Provisions in the Articles of
Corporation Code 14. Failure to do so Incorporation
precludes a de jure Sec. 97 of the Corporation Code
close corporation provides that: The articles of incorporation
status of a close corporation may provide: 1. For a
Its status as an 2/3 of its voting classification of shares or rights and the
ordinary stock stock or voting
qualifications for owning or holding the
corporation is not rights must not be
affected by the owned or controlled same and restrictions on their transfers as
ownership of its by another may be stated therein, subject to the
voting stock or corporation which is provisions of the following section; 2. For a
voting rights not a close classification of directors into one or more
corporation classes, each of whom may be voted for and
Its articles cannot Its articles may elected solely by a particular class of stock;
classify its directors classify its directors
and 3. For a greater quorum or voting
Business of the Business of the
requirements in meetings of stockholders or
corporation is corporation may be
managed by the managed by the directors than those provided in this Code.
board of directors stockholders if the The articles of incorporation of a close
articles so provide, corporation may provide that the business
but they are liable as of the corporation may provide that the
directors business of the corporation shall be
The corporate Its articles may managed by the stockholders of the
officers and provide that any or
corporation rather than by a board of
employees are all of the corporate
elected by a officers or directors. So long as this provision continues
majority vote of all employees may be in effect: 1. No meeting of stockholders
the members of the elected or appointed need be called to elect directors; 2. Unless
board of directors by the stockholders the context clearly requires otherwise, the
The pre-emptive The pre-emptive stockholders of the corporation shall be
right is subject to right is subject to no deemed to be directors for the purpose of
the exceptions found exceptions unless
applying the provisions of this Code; and 3.
in Section 39 of the denied in the articles
Corporation Code The stockholders of the corporation shall be
The appraisal right The appraisal right subject to all liabilities of directors. The
may be exercised by may be exercised articles of incorporation may likewise
a stockholder only in and compelled provide that all officers or employees or that
the cases provided against the specified officers or employees shall be
in Sections 81 and corporation by a elected or appointed by the stockholders,
42 of the stockholder for any
instead of by the board of directors.
Corporation Code reason
Except as regards In case of an

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C. Restrictions on Transfer of Shares
Sec. 98 of the Corporation Code
provides that: Restrictions on the right to
transfer shares must appear in the articles
of incorporation and in the by-laws as well
as in the certificate of stock; otherwise, the
same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall
not be more onerous than granting the
existing stockholders or the corporation the
option to purchase the shares of the
transferring stockholder with such
reasonable terms, conditions or period
stated therein. If upon the expiration of said
period, the existing stockholders or the
corporation fails to exercise the option to
purchase, the transferring stockholder may
sell his shares to any third person.
Option Restriction this restriction
provides that no disposition of shares will be
made unless the shares are offered first to
the corporation or the stockholders.
*Pre-emptive right is exercisable or
available.
*This restriction is valid and allowed.
Reason: it is the one contemplated by law.
*Restriction derogates private rights.
Consent Restriction this restriction
provides that no disposition of shares will be
made without the consent of directors.
*This restriction is not valid.
Reason: It is more onerous and
burdensome.
CORPORATE DISSOLUTION/LIQUIDATION:
A. Methods of Voluntary Corporate Dissolution
and the Requirements therefor
Dissolution refers to the extinguishment of
franchise or termination of corporate
existence.
Modes of Dissolution:
1. Voluntary dissolution
2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary dissolution where no creditors
are affected
2. Voluntary dissolution where creditors
are affected
3. Shortening of the corporate term by
amending the articles of incorporation
*Dissolution takes effect upon the
coming of the shortened term.
4. Expiration of corporate term
Voluntary dissolution where no creditors
are affected
Sec. 118 of the Corporation Code
provides that: If dissolution of a
corporation does not prejudice the
rights of any creditor having a claim
against it, the dissolution may be
effected by majority vote of the board
of directors or trustees, and by a
resolution duly adopted by the
affirmative vote of the stockholders
owning at least 2/3 of the outstanding
capital stock or of at least 2/3 of the
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Maria Zarah Villanueva - Castro
members of a meeting to be held upon
call of the directors or trustees after
publication of the notice of time, place
and object of the meeting for 3
consecutive weeks in a newspaper
published in the place where the
principal office of said corporation is
located; and if no newspaper is
published in such place, then in a
newspaper of general circulation in the
Philippines, after sending such notice to
each stockholder or member either by
registered mail or by personal delivery
at least 30 days prior to said meeting. A
copy of the resolution authorizing the
dissolution shall be certified by a
majority of the board of directors or
trustees and countersigned by the
secretary of the corporation. The SEC
shall thereupon issue the certificate of
dissolution.
Requisites:
1. A meeting must be held on the call
of the directors or trustees;
2. Notice of the meeting should be
given to the stockholders by
personal delivery or registered mail
at least 30 days prior to the
meeting;
3. The notice of meeting should also
be published for 3 consecutive
weeks in a newspaper published in
the place;
4. The resolution to dissolve must be
approved by the majority of the
directors/trustees and approved by
the stockholders representing at
least 2/3 of the outstanding capital
stock or 2/3 of members;
5. A copy of the resolution shall be
certified by the majority of the
directors or trustees and
countersigned by the secretary;
6. The signed and countersigned copy
will be filed with the SEC and the
latter will issue the certificate of
dissolution
Voluntary dissolution where creditors
are affected
Sec. 119 of the Corporation Code
provides that: Where the dissolution of
a corporation may prejudice the rights
of any creditor, the petition for
dissolution shall be filed with the
Securities and Exchange Commission.
The petition shall be signed by a
majority of its board of directors or
trustees or other officers having the
management of its affairs, verified by
its president or secretary or one of its
directors or trustees, and shall set forth
all claims and demands against it, and
that its dissolution was resolved upon
by the affirmative vote of the
stockholders representing at least two-
thirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of
the members at a meeting of its
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stockholders or members called for that
purpose. If the petition is sufficient in
form and substance, the Commission
shall, by an order reciting the purpose
of the petition, fix a date on or before
which objections thereto may be filed
by any person, which date shall not be
less than thirty (30) days nor more than
sixty (60) days after the entry of the
order. Before such date, a copy of the
order shall be published at least once a
week for three (3) consecutive weeks in
a newspaper of general circulation
published in the municipality or city
where the principal office of the
corporation is situated, or if there be no
such newspaper, then in a newspaper
of general circulation in the Philippines,
and a similar copy shall be posted for
three (3) consecutive weeks in three (3)
public places in such municipality or
city. Upon five (5) day's notice, given
after the date on which the right to file
objections as fixed in the order has
expired, the Commission shall proceed
to hear the petition and try any issue
made by the objections filed; and if no
such objection is sufficient, and the
material allegations of the petition are
true, it shall render judgment dissolving
the corporation and directing such
disposition of its assets as justice
requires, and may appoint a receiver to
collect such assets and pay the debts of
the corporation.
Requisites:
1. Approval of the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
members in a meeting called for
that purpose;
2. Filing of a Petition with the SEC
signed by majority of directors or
trustees or other officers having
the management of its affairs
verified by President or Secretary
or Director. Claims and demands
must be stated in the petition;
3. If petition is sufficient in form and
substance, the SEC shall issue an
Order fixing a hearing date for
objections;
4. A copy of the Order shall be
published at least once a week for
3 consecutive weeks in a 11. Violation of its charter
newspaper of general circulation or
if there is no newspaper in the
municipality or city of the principal
office, posting for 3 consecutive
weeks in 3 public places is
sufficient;
5. Objections must be filed no less
than 30 days nor more than 60
days after the entry of the order;
6. After the expiration of the time to
file objections, a hearing shall be
conducted upon prior 5 day notice
to hear the objections;
7. Judgment shall be rendered
dissolving the corporation and
directing the disposition of assets;
the judgment may include
appointment of a receiver.
Shortening of term of existence
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
Sec. 120 of the Corporation Code
provides that: A voluntary dissolution
may be effected by amending the
articles of incorporation to shorten the
corporate term pursuant to the
provisions of this Code. A copy of the
amended articles of incorporation shall
be submitted to the Securities and
Exchange Commission in accordance
with this Code. Upon approval of the
amended articles of incorporation of the
expiration of the shortened term, as the
case may be, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions
of this Code on liquidation.
B. Concept of Involuntary Dissolution and the
Grounds therefor
Sec. 121 of the Corporation Code
provides that: A corporation may be
dissolved by the Securities and Exchange
Commission upon filing of a verified
complaint and after proper notice and
hearing on the grounds provided by existing
laws, rules and regulations.
*This must be done with substantive and
procedural due process.
Grounds:
1. Failure to submit by-laws within the
prescribed period
2. Fraud in the procurement of Certificate
of Registration
3. Misrepresentation as to the activities
that the corporation will undertake
4. Treasurers affidavit is false
5. Continued inoperation for 5 years
6. Failure to commence business
transactions within 2 years from
issuance of certificate of registration
7. To some cases, performance of ultra
vires act since it is a violation to the
franchise but depending on the
seriousness or gravity of the offense
8. Issuance of watered stocks
9. De facto status
10. Failure to keep corporate books and
records depending on the gravity or
seriousness of the offense
C. Corporate Liquidation
Liquidation is a process by which all the
assets of the corporation are converted into
liquid assets in order to facilitate the
payment of obligations to creditors, and the
remaining balance if any is to be distributed
to the stockholders.
*Liquidation takes place after dissolution.
Sec. 122 of the Corporation Code
provides that: Every corporation whose
charter expires by its own limitation or is
annulled by forfeiture or otherwise, or
whose corporate existence for other
purposes is terminated in any other manner,
shall nevertheless be continued as a body
corporate for three (3) years after the time
when it would have been so dissolved, for
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the purpose of prosecuting and defending
suits by or against it and enabling it to settle
and close its affairs, to dispose of and
convey its property and to distribute its
assets, but not for the purpose of continuing
the business for which it was established. At
any time during said three (3) years, the
corporation is authorized and empowered to
convey all of its property to trustees for the
benefit of stockholders, members, creditors,
and other persons in interest. From and after
any such conveyance by the corporation of
its property in trust for the benefit of its
stockholders, members, creditors and others
in interest, all interest which the corporation
had in the property terminates, the legal
interest vests in the trustees, and the
beneficial interest in the stockholders,
members, creditors or other persons in
interest. Upon the winding up of the
corporate affairs, any asset distributable to
any creditor or stockholder or member who
is unknown or cannot be found shall be
escheated to the city or municipality where
such assets are located. Except by decrease
of capital stock and as otherwise allowed by
this Code, no corporation shall distribute
any of its assets or property except upon
lawful dissolution and after payment of all
its debts and liabilities.
D. Methods of Liquidation or Winding Up
1. By Board of Directors
2. Through a trustee to whom the
properties are conveyed
3. By management committee or
rehabilitation receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period, there is
no corporate existence for all purposes
subject to doctrine of relation.
Remedy: Before the expiration of the 3
year period, appoint a trustee/receiver.
Q: During the 3 year period, does the
corporation enjoy corporate existence?
A: YES. But for limited purpose only, i.e., for
liquidation purposes only. (Limited
existence)
Q: May such corporation sue during the 3
year period?
A: YES. But only when the subject matter is
related to liquidation and winding up of its
remaining affairs.
*In case trustee/receiver is appointed, he is
not bound by the 3 year period.
*In Gelano v CA, the SC held that the
lawyer of the corporation can be considered
as trustee. The term trustee must be
considered in its generic sense. Anyone who
has been designated by the corporation to
act on its behalf could be considered as
trustee for purposes of pursuing a claim for
and on behalf of the corporation. A lawyer
falls within the ambit of the word trustee.
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
*Appointment of trustee can be inferred
from the conduct of the corporation. This is
by Implication.
*If the corporation is the creditor appoint a
trustee. If the corporation is the debtor
appoint a receiver.
Q: What if the corporate properties have
already been distributed among the
shareholders without trustee/receiver?
A: Remedy: Run after the erring directors
and officers.
E. Concept of Rehabilitation; Effects of
Appointment of Management Committee or
Receiver
Rehabilitation connotes a reopening or
reorganization. Contemplates a continuance
of corporate existence in an effort to restore
the corporation to its former successful
operation.
*This is a remedy expressly allowed under
Section 6 of PD 902-A.
Purpose: To make the corporation
financially viable again.
Substantive Grounds:
1. When there is imminent danger of
dissipation or wastage of corporate
assets
2. Serious paralyzation of business which
would work to the prejudice of the
stockholders and creditors of the
corporation
*Mere misconduct of an officer is not a
ground for corporate rehabilitation.
*A corporation cannot ask for corporate
rehabilitation and at the same time
dissolution.
*With the passage of RA8799, the remedy
could now be instituted with the proper RTC.
Effect: Stay Order - stops or suspends the
enforcement of all claims for money or
otherwise whether enforcement is by court
or not, until rehabilitation proceedings are
terminated.
Cases: PAL v Garcia; Sobrejuanite;
Lingkod Manggagawa ng Rubberworld
v Rubberworld Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay
order suspends all enforcement in all stages
of the proceedings.
*In Lingkod Manggagawa sa
Rubberworld v Rubberworld
Philippines, the SC held that labor claims
are likewise affected by the Stop order.
*In RCBC v IAC, the SC held that whether
creditors are secured or not, stay order will
still affect them. The preference still remains
it is just the enforcement that is suspended.
FOREIGN CORPORATIONS:
A. Concept of Foreign Corporation
Foreign Corporation is a corporation
formed, organized or existing under any law
other than those of the Philippines, and
whose laws allow Filipino citizens and
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corporations to do business in its own
country or state.
Sec. 123 of the Corporation Code
provides that: For the purposes of this
Code, a foreign corporation is one formed,
organized or existing under any laws other
than those of the Philippines and whose
laws allow Filipino citizens and corporations
to do business in its own country or state. It
shall have the right to transact business in
the Philippines after it shall have obtained a
license to transact business in this country
in accordance with this Code and a
certificate of authority from the appropriate
government agency.
Reciprocity Clause provides that the
foreign laws allow Filipino citizens and
corporations to do business in its own
country or state.
B. Tests to Determine Nationality of a
Corporation
1. Incorporation Test when the
corporation is incorporated, organized
under the law of other country.
2. Control Test for purposes of
investment; the citizenship of a
particular corporation is to be
determined by the citizenship of the
controlling stockholders.
C. Concept of Doing Business and the
License Requirement therefor
Substance Test provides that: a foreign
corporation is doing business in the country
if it is continuing the body or substance of
the enterprise of business for which it was
organized.
Continuity Test provides that: doing
business implies a continuity of commercial
dealings and arrangements, and
contemplates to some extent the
performance of acts or works or the exercise
of some functions normally incident to and
in progressive prosecution of, the purpose
and object of its organization.
*Foreign Corporation is required to obtain
license from the SEC to enable them to do
business in the Philippines.
*The foreign corporation must appoint a
resident agent so that court may acquire
jurisdiction over the foreign corporation
*License is essential if there is an intention
to maintain main or substance of the
business in the Philippines or to continue the
same.
*Lack of license does not affect the validity
of the transaction.
*License is for regulatory purposes.
*License requirement does not prevent
performance of acts that are isolated from
the main business of the corporation and
there is no intent to continue the same in
the Philippines.
*If the foreign corporation is not licensed to
do business in the Philippines, General
Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
Rule: they have no access in Philippine
Courts
Exceptions:
1. Isolated transactions
2. Infringement of trademark
*International offense can be sued
anywhere.
Cases: Expert Travel Tours v CA; Home
Insurance v Eastern Shipping Lines
*In Expert Travel Tours v CA, the SC held
that resident agent is not with authority to
execute a certification of Forum shopping
following Sec. 23 of the Corporation Code.
*In Home Insurance v Eastern Shipping
Lines, the SC held that if at the time the
suit was brought, the suing foreign entity
already have license to do business in the
Philippines, the suit will be allowed although
at the time the transaction was made it
does not have the requisite of a license to
do so, the remedial defect is cured.
Cases: Japan Airlines v CA
*In Japan Airlines v CA, the SC held that
the selling of tickets though there is no
aircraft landing in the Philippines constitute
doing business in the Philippines.
*In Ericks v CA, the SC held that license is
necessary in order the foreign corporation
may sue. In this case, the court considered
the continuity test, they found out that the
foreign corporation has the intent to
continue business in the Philippines.
*Credit is obtained to maintain longer
transactions.
D. Effects of Being Issued a License
1. They are placed under the jurisdiction
of the Philippine courts
2. They are placed under the same footing
as domestic corporations
3. The public is protected in dealing with
foreign corporations.
E. Revocation and Withdrawal of License
Grounds for Revocation:
1. Failure to file its annual report or pay
any fees as required by the Corporation
Code
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by the Corporation Code
3. Failure, after change of its resident
agent or his address, to submit to the
SEC a statement of such change as
required by the Corporation Code
4. Failure to submit to the SEC an
authenticated copy of any amendment
to its articles of incorporation or by-laws
or of any articles of merger or
consolidation within the time prescribed
by the Corporation Code
5. A misrepresentation of any material
matter in any application, report
affidavit or other document submitted
by such corporation pursuant to the
provisions of the Corporation Code
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 Commercial Law Review

Corporation Code

Maria Zarah Villanueva - Castro

6. Failure to pay any and all taxes,

imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivision
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized
under its license
8. Transacting business in the Philippines
as agent of or acting for and in behalf of
any foreign corporation or entity not
duly licensed to do business in the
Philippines
9. Any other ground as would render it
unfit to transact business in the
Philippines.

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