Mercantile Law Codal
A corporation is a legal or juridical person
CORPO - A corporation is an artificial being
created by operation of law, having the right
of succession and the powers, attributes
properties expressly authorized by law or
incident to its existence.”
GOCC private corporation with regard to
function and in the meantime a public
corporation with regard to ownership;
created by special charter.
Twin Conditions must be present in
forming a GOCC: 1) Interest in the common
good
2) Subject to the test of economic viability
Attributes of a Corporation
1) Artificial Being - It exist by fiction of law
only
2) Right of Succession
3) 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.
Doctrine of Entity/Doctrine Personality -
with a personality separate and apart from
its individual stockholders or members and
from any other legal entities to which it may
be connected
Consequences/Implications:
1) entitled to own properties in its own
name; 2) It can incur obligations
3) rights belonging to the corporation cannot
be invoked by the stockholders, directors
and officers and vice versa.
4) entitled to certain constitutional rights
5) It is liable for tort. - the act was committed
by the officer or agent under express
direction or authority from the stockholders
or members acting as a body or generally
from the directors as the governing body.
6) the corporation is considered a national
of the country where it was incorporated
(Place of 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,
*Criminal liability falls upon to responsible
officers. *Responsible officers cannot invoke
the doctrine of separate personality.
*Corporations cannot be incarcerated.
8) Moral damages cannot be awarded in
favor of corporations because they do not
have feelings and mental state. Exception:
If the corporation has a good reputation and
such reputation was destroyed.
-can claim damages such as actual,
compensatory, exemplary, loss of earning
capacity.
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)
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;
complete dominion not only of finances but
of policy and business
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.
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.
CLASS of PC
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)
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
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)
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.
*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
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
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 corporation’s juridical
personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto
one.
B. 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. Treasurer’s 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.
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.
Doctrine of Secondary Meaning – a word
or phrase originally incapable of exclusive
appropriation with reference to an article on
the market, because geographically or
otherwise descriptive, might nevertheless
have been used so long and so exclusively
by one producer with reference to his article
that in that trade and to that branch of the
purchasing public, the word or phrase has
come to mean that the article was his
product.
Requisites: 1. Period of use;
2. The use must be exclusive.
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 corporation’s term.
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
- not necessary to own a share unlike as a
corporator.
- 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 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 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.
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 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 founder’s 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 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.
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
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.
 Treasurer’s 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 Treasurer’s 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 there’s no Treasurer’s 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 Treasurer’s 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
articles or amendment is in accordance with
law.
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.
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
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
CORPORATION:
Levels of Corporate Control
1. By Stockholders/Shareholders; 2. By
Corporate Officers;
3. By Directors/Trustees
1)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 – 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 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 decisions 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
*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. *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.
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.
*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.”
*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 of Incorporation.
*The corporation can modify the number by
providing a different provision in the articles
of 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 Requisites:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. There must be previous notice to the
stockholders or member of the intention to
remove;
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 members or by
expiration of term, may be filled by the vote
of at least a majority of the remaining
directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or
special meeting called for that purpose. A
director or trustee so elected to fill a
vacancy shall be elected only 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
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.
Corporate Officers
Concept of Corporate Officers - 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 agent’s authority.
Cases: People’s Aircargo; Inter-Asia;
Lapu-Lapu
*Requires good faith on the part of third
person.
Liability of Directors, Trustees and
Officers
Instances when Corporate
Officers/Directors are held Solidarily
Liable
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
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/Officersdirectors/officers who
transact business with their own
corporation.
- This is not prohibited by law.
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: A’s presence in the board meeting
might affect the status of the contract.
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.
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.
*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 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.
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 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.
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.
Classes of Corporate Powers  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.
Statutory Powers of a Corporation and
the Limitations on their Exercise
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,
Amendment of Articles of Incorporation
*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, 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 corporation’s existence.
Mercantile Law Doctrines
Corpo-Doctrines:
Magsaysay-Labrador v CA; Sulo ng
Bayan v Araneta The interest of the
stockholders over the properties of the
corporation is merely inchoate. *Merely
inchoate because there are still condition
precedents before the shareholders get
their share,
Francisco v CA can incur obligations and
its obligations are not the obligations of its
stockholders, directors and officers.
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 – used as a shield to perpetuate
fraud, to defeat public convenience, justify
wrong, or defend crime, this fiction shall be
disregarded and the individuals composing
it will be treated identically.
Times Transportation Co. v Santos
Sotelo; Concept Builders v NLRC - The
doctrine of piercing the veil of corporate
entity 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)
Hall v Piccio; Seventh Adventist v also does not extinguish the corporate
Northeastern Mindanao Mission *The filing liability.
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.

*In both corporations, there must be a

certificate of registration issued.

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

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.

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