Section 39. Power to deny pre-emptive right.
– assets and may be sold either to the
All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues
or disposition of shares of any class, in
proportion to their respective shareholdings,
unless such right is denied by the articles of
incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt.
Notes:
Right of pre-emption of stockholders.
 It is based on the principle that a stockholder in
subscribing to shares of stock, does so under
the understanding that his equity is fixed by the
relation which the number of shares he
subscribes bears to the authorized capital stock,
issued or unissued, subscribed or unsubscribed,
at the time of his subscription as shown in the
AOI and should therefore not be diluted by the
issuance of additional shares without giving him
opportunity to subscribe to such shares in
proportion to his shareholdings
 The purchaser acquires, as an incident to the
stock, the same right of preference in
subscribing for or purchasing the new stock as
right of preference in subscribing for or
purchasing the new stock as was possessed by
the transferor.
 This principle however does not apply to
transfers where the assignors have previously
exercised their pre-emptive rights to subscribe
to new issues
 Reason for the grant of right: To protect from
impairment and dilution the basic rights of the
existing stockholders in the corporation, i.e., to
voting control, to dividend payments, and to the
net assets of the corporation. However, a
stockholder may waive such right.
 A stockholder whose pre-emptive right is
violated may maintain an action to compel the
corporation to give him that right. If the denial is
by an amendment to the articles of
incorporation, he may exercise his appraisal
right under Section 81(1).
 A corporation is not permitted to dispose its
stock for a legally inadequate price at least
where there is objection.
 A shareholder's pre-emptive right is his option
to subscribe to allotment of shares, in
proportion to his holdings of outstanding
shares, before new shares are offered to others.
 The subscriber cannot claim dilution of interest
in case additional issues of originally authorized
shares are purchased by others.
 The shareholders’ pre-emptive rights do not
generally apply where the shares belong to the
original or increased capital stock of the
corporation unsubscribed or undisposed of,
inasmuch as such shares constitute a part of the
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
stockholders or to the strangers as the
corporation may deem best even without notice
to stockholders. They are not new issues.
Sec. 40. Sale or other disposition of assets. —
Subject to the provisions of existing laws on
illegal combinations and monopolies, a
corporation may, by a majority vote of its board
of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets,
including its goodwill, upon such terms and
conditions and for such consideration, which
may be money, stocks, bonds or other
instruments for the payment of money or other
property or consideration, as its board of
directors or trustees may deem expedient, when
authorized by the vote of the stockholders or
representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-
stock corporation, by the vote of at least two-
thirds (2/3) of the members, in a stockholders'
or members' meeting duly called for the
purpose. Written notice of the proposed action
and of the time and place of the meeting shall
be addressed to each stockholder or member at
his place of residence as shown on the books of
the corporation and deposited to the addressee
in the post office with 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.
Notes:
 A corporation by the action of its board of
directors or trustees supported by the vote of
shareholders or members may sell, lease,
exchange, mortgage, pledge, or otherwise
dispose of all or substantially all of its
property, and assets including its goodwill.
 Requisites for the validity of such sale, etc.:
1. The sale, etc., must be approved by the
board of directors or trustees;
2. The action of the board of directors or
trustees must be authorized by the vote
of stockholders representing 2/3 of the
outstanding capital stock including
holders of nonvoting shares or 2 / 3 of
the members, as the case may be; and
3. The authorization must be done at a
stockholders' or members' meeting duly
called for that purpose after written
notice.
 If such sale is made to another corporation and
there is no intent to combine, the selling
corporation may continue in a state of
suspended animation, subject to the effect of
non-use of corporate powers and continued
inoperation of a corporation provided in Section
1
Yssa’s Notes
 22.
 The only way the transfer can proceed without
prejudice to the creditor is to make the
assignee assume the liabilities of the assignor,
unless the creditors who did not consent to the
transfer choose to rescind the transfer on the
ground of fraud.
 Important: Generally, where onecorporation
sells or otherwise transfers all of its assets to
anothercorporation, the latter is not liable for
the debts and liabilities ofthe transferor,
provided the latter acted in good faith and
paidadequate consideration for such assets,
except where any of thefollowing circumstances
is present:
(a) Where the purchaser expressly or impliedly
agrees toassume such debts;
(b) Where the transaction amounts to a
consolidation ormerger of the corporations;
(c) Where the purchasing corporation is merely
a continuationof the selling corporation
(d) Where the transaction is entered into
fraudulently in order to escape liability for such
debts.
 Any disposition which does not involve all or
substantially all of the corporate assets as
defined above, made in the ordinary course of
business, does not require the approval of the
stockholders or members as set forth in Section
40 and would not entitle any dissenting
stockholder to exercise his appraisal right.
Sec. 41. Power to acquire own shares. — A stock
corporation shall have the power to purchase or
acquire its own shares for a legitimate
corporate purpose or purposes, including but
not limited to the following cases: Provided, that
the corporation has unrestricted retained
earnings in its books to cover the shares to be
purchased or acquired:
(1) To eliminate fractional shares arising out of
stock dividends;
(2) To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and
(3) To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code.
Notes:
 Fractional share - share which is less than 1
corporation share.
 Power of the corporation to acquire its own
shares is not limited to the cases enumerated in
Section 41.
(a) It may also be exercised under Section 9
(treasury shares);
(b) With respect to redeemable shares, they
may be purchased by the corporation
regardless of the existence of unrestricted
retained earnings in the books of the
corporation (Sec. 8.);
(c) Shares may also be reacquired to effect a
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
decrease in the capital stock of a
corporation (Sec. 38.) Where a corporation
reacquires its own shares, it does not
thereby become a subscriber thereof; and
(d) In close corporation, where there is a
deadlock respecting the management of its
business, the SEC may order the purchase
at their fair value of shares of any
stockholder by the corporation regardless
of the availability of unrestricted retained
earnings in its books.
 The right and power of a corporation to acquire
or purchase its own shares is not absolute, but
depends upon the contingency of the condition
of its affairs and its relation to creditors at the
time of the purchase.
 It is subject to the following limitations:
(1) That its capital is not thereby impaired;
(2) That it be for a legitimate and proper
corporate purpose;
(3) That there shall be unrestricted retained
earnings (Sec. 43.) to purchase the same and its
capital is not thereby impaired;
(4) That the corporation acts in good faith and
without prejudice to the rights of creditors and
stockholders; and
(5) That the conditions of corporate affairs
warrant it.
 Trust Fund Doctrine - the assets of the
corporation as represented by its capital stock
are "trust funds" to be maintained unimpaired
and to be used to pay corporate creditors in the
sense that there can be no distribution of such
assets among the stockholders without
provision being first made for the payment of
corporate debts and that any such disposition
of it is a fraud on the creditors of the
corporation who extend credit to the
corporation on the faith of its outstanding
capital stock and, therefore, void.
 A corporation must have unrestricted retained
earnings before it may acquire its own shares,
based on the trust fund doctrine that the capital
stock, property and other assets of a
corporation are regarded as equally in trust for
thepayment of corporate creditors.
Exception: The corporation is not prohibited to
use its assets for purposes of its business.
 Effects of purchase on corporate creditors - If
the corporation is solvent, the current creditors
can enforce their claims. But the long-term
creditors take the risk of future insolvency as
they await maturity of their claims.
 Effects of purchase on remaining stockholders -
injures remaining shareholders' rights; where
capital is to be paid off or to be cancelled as
lost or unrepresented by any available assets,
or where the liability of unpaid capital is to be
reduced or extinguished, the same percentage
should be reduced in each share. This ratable
reduction would leave each shareholder the
same proportionate interest and rights which
he had before.
 Effects in the shares in dividends -
o If the shares are purchased at a price above
the actual value of the shares, the
remaining members' share in the undivided
2
Yssa’s Notes
 surplus is impaired and money is actually affirmative vote of thestockholders (or
being taken from the pockets of the members), may be ratified.
remaining members for thebenefit of the
retiring shareholders. Sec. 43. Power to declare dividends. — The
o If the purchase is made at a price board ofdirectors of a stock corporation may
commensurate with the actual value of the declare dividendsout of the unrestricted
shares, the surplus which would ordinarily retained earnings which shall bepayable in cash,
be devoted to dividends is instead tied up in property, or in stock to all stockholderson the
to effect either an indirect and unauthorized basis of outstanding stock held by them;
reduction in capital, or else the possibility Provided,That any cash dividends due on
of dividends is postponed until such time as delinquent stock shallfirst be applied to the
the treasury stock can be and is resold at an unpaid balance on the subscriptionplus costs
adequate price. and expenses, while stock dividends shallbe
o Even when the price paid is less than their withheld from the delinquent stockholder until
intrinsic value and a profit is later realized hisunpaid subscription is fully paid; Provided,
when they are reissued at a higher price, further, Thatno stock dividend shall be issued
the distribution ofthe surplus as dividends without the approval ofstockholders
has still been postponed. representing not less than two-thirds (2/3)of the
 Effect in relation to shares in possible losses - outstanding capital stock at a regular or
increased inasmuch as partof the working specialmeeting duly called for the purpose.
capital disappears
 Effect as to voting shares - By reducing the Stock corporations are prohibited from
number of shares, it affects voting control, if retainingsurplus profits in excess of one
the shares purchased are voting shares. hundred percent (100%)of their paid-in capital
stock, except: (1) when justifiedby definite
corporate expansion projects or
Sec. 42. Power to invest corporate funds in programsapproved by the board of directors; or
anothercorporation or business or for any other (2) when thecorporation is prohibited under any
purpose. — Subject to the provisions of this loan agreement withany financial institution or
Code, a private corporation may invest its funds creditor, whether local or foreignfrom declaring
in any other corporation or business or for any dividends without its/his consent, and
purpose other than the primary purpose for suchconsent has not yet been secured; or (3)
which it was organized when approved by a when it can beclearly shown that such retention
majority of the board of directors or trustees is necessary underspecial circumstances
and ratified by the stockholders representing at obtaining in the corporation, suchas when there
least two-thirds (2/3) of the outstanding capital is a need for special reserve for probable
stock, or by at least two-thirds (2/3) of the contingencies.
members in the case of non-stock corporations,
at a stockholders' or members' meeting duly Notes:
called for the purpose. Written notice of the  Dividend - part or portion of the profits of a
proposed investment and the time and placeof corporation set aside, declared and ordered by
the meeting shall be addressed to each the directors to be paid ratably to the
stockholder or member at his place of residence stockholders on demand or at a fixed time.
as shown on the books of the corporation and
 There must be a surplus or profits to be
deposited to the addressee in the post office divided.
with postage prepaid, or served personally:  Profits - return to capital rather than earnings
Provided, That any dissenting stockholder shall from labor performed or services rendered;
have appraisal right as provided in this Code: excess of value over cost, acquisition beyond
Provided, however, That where the investment expenditures, gain or advance; excess of
by the corporation is reasonably necessary to receipts over expenditures,that is, net earnings.
accomplish its primary purpose as stated in the  Dividends v. Profits
articles of incorporation, the approval of the
Dividends Profits
stockholders or members shall not be necessary. Come from profits Source of dividends
Corporate Not dividends until
Notes: earningsarising so declared or set
 A non-stock, non-profit foundation may invest fromcorporateinvestment aside
its funds in or subscribe to shares of another by the corporation
domestic corporation. The term "funds," as Part of theassets of
used in Section 42, include "donations" received the corporation and
byte corporation from other entities. However, do not belong to
its power to invest is limited by its articles of the stockholders
incorporation. individually
 Ratification of defective investment - A  A corporation may declare stock dividends to
corporate transaction or contract which is both holders of founders and common shares,
within the corporate powers, but which is since there is no prohibition on the matter
defective from a purported failure to observe in either in the Code or jurisprudence, provided
its execution the requirement of Section 42 that the stockholders affected will agree to
the investment must be authorized by the suchdeclaration.

Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures

3
Yssa’s Notes
 The capital or capital stock which may not be
impaired or depleted by dividends is not
theentire net assets of the corporation, rather,
it is the legal capital of the corporation in the
strict sense, referring to that portion of the net
assets directly or indirectly contributed by the
stockholders as consideration for the stocks
issued to them upon the basis of their par or
issued value.
 With respect to no par value shares, the entire
consideration (including paid-in surplus)
received from the same shall be treated as
capital and shall not beavailable for distribution
as dividends.
 Retained earnings - the difference between the
total present value of its assets after deducting
lossesand liabilities and the amount of its
capital stock.
Retained earnings = Assets - liabilities and legal
capital
 The difference between the total assets and
liabilities of a corporation represents its net
worth or net assets or the stockholders' equity
consisting of the capital invested and the
retained earnings.
 Such retained earnings or portion thereof are
said to be unrestricted and, therefore, free for
dividend distribution to stockholders, if they
have not been reserved or set aside by the
board of directors for some corporate purpose
or for some other purpose in accordance with
managerial, legal, or contractual requirements.
 Items affecting unrestricted retained earnings:
1. Nominal or temporary or income
statement accounts closed to income
and expense summary at the end of the
period to determine actual results of
operations during the period andfurther
closed to retained earnings account;
2. Effects of changes in accounting policy;
3. Foreign exchange gains and losses;
4. Actuarial gains or losses;
5. Share in the net income of
associates/joint ventures accountedfor
under equity method of accounting;
6. Dividend declarations during the period;
7. Appropriations of retained earnings
during the period;
8. Reversals of appropriations;
9. Effects of prior period adjustments; and
10. Treasury shares.
 To justify the declaration of dividends, there
must be an actual bona fide surplus profits or
earned surplus over and above alldebts and
liabilities of the corporation.
 Paid-in or premium surplus (difference between
the par value and the higher price for which
stock is sold by the corporation) cannot be
declared as cash dividends under Section 16 or
even as stock dividends because Section 43
provides that dividends can be declared only
from the unrestricted retained earnings.
Reason: The entire proceeds of sales of a
corporation of its own stock, even when sold
for more than par value, are part of its capital
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
stock and, therefore, cannot be profits earned
through the conduct of its business out of
which dividends may be paid.
 Distribution of revaluation surplusas dividends.
General Rule: An increase in the value of
fixed assetssuch as land as a result of mere
valuation cannot be counted inthe
computation of a surplus as basis for a
dividend declaration.
Exception: When SEC allows certain
exceptionsmaking revaluation increment or
reappraisal surplus available for cash and
stock dividend.
 Important: Conditions for the declaration of
dividends -
1. The existence of "unrestricted retained
earnings" outof which the dividends may
be declared and paid; and
2. A corporate resolution of the board of
directors declaring the payment of a
portion or all of such earnings tothe
stockholders.
 No court has the power to compel them to
make the distribution in the absence of bad
faith or clear abuse of discretion, or such
arbitrary or unreasonable conduct as amounts
to a breach oftrust.
 So long as the board of directors acts in good
faith, it is at liberty to distribute or not to
distribute at all any dividendsubject to the
prohibition in the second paragraph of Section
43.
 Action to enforce declarationof dividends
General Rule: Since a stockholder has no
individual interest in the profitsof a corporation
until a dividend has been declared, the
generalrule is that, prior to the declaration of a
dividend, a stockholdercannot maintain an
action at law to recover his share of the
accumulatedprofits. Thus, mandamusis not a
proper remedy in such a case.
Exceptions: An action at law may be maintained
where it is allegedthat sufficient net profits
have been earned to obligate thecorporation to
pay the amount agreed.
Provided that, itmust appear that the
complaining stockholder has made
applicationto the directors of the corporation
for the relief sought.
Where, however, it appears that the directors of
a corporationhave wantonly violated their duty,
and that an application by astockholder to them
for relief would be inefficacious, such
applicationneed not be made. In such an action,
the corporation isa necessary party defendant.
 Time for declaration of dividends
General Rule: At the end of the year —
Acorporation has a fiscal year inorder to
determine the results of its operation during
the year— whether it earned profits or incurred
4
Yssa’s Notes
 losses. subscriptions. The corporationmay use
the cash dividends to pay off
Note: If the company earned profits during the stockholders'subscriptions but which
past year, it may declare the same as dividends, have not been declared delinquentonly
but if it does not, theprofits are carried over to if the stockholders concerned give their
the next fiscal year. consent thereto.
3. From stock dividends - Not allowed; a
Ifthe company incurred losses during the past stockholder's indebtedness to a
year, its bookswill record such loss and no corporation under a subscription
profits, unless it accumulatedearnings during agreement cannot be compensated with
the previous years which have not been the amount of his shares in the same
distributed as dividends. corporation, there being no relation of
creditor and debtor with regard to such
Therefore, a corporation should not declare shares.
dividends out of profits earned during an  Liability of stockholders and directorsfor
interim period or before the end of the fiscal illegally received dividends
year, considering that profits earned during 1. Stockholders who received them can be
say, the first half of the year may be wiped out held liable to refund them to the
by losses incurred during the latter part of the corporation or its creditors. It is
same year. immaterial that the dividendswere
mistakenly paid out or were received in
Exception: A corporation may declaredividends good faith.
even before the end of the fiscal year, provided 2. Where corporation insolvent at time of
it hassufficiently earned surplus for the purpose wrongful payment, the rule above is also
which will not be impairedby losses, whether applicable in this case, BUT innocent
expected or not, during the remainingperiod of stockholders can recover damages from
the fiscal year. the guilty directors.
3. Directors who acted in good faith and
 The validity of dividend is determinedat time of without negligence are not liable to the
declaration. corporation or to creditors for declaring
 If net or surplus profits existed at that time, the and paying dividends when they should
payment of the dividend is not rendered not have done so, and thereby
unlawful by the subsequent insolvency of the diminishing the capital stock. But if they
corporation, and if the assets of a corporation have been guilty of a fraudulent breach
are valued honestly and fairly in view of all the of trust, or of gross negligence, in
facts known at the time of the declaration, a paying dividends when they had noright
dividend is not rendered unlawful by the fact to pay them/they are personally liable to
that such assets subsequently prove to be creditors.
worthless than the valuationplaced upon them.  Important: Persons entitled to dividends
 Mere ignorance of facts showing the true Situation Person/s entitled
condition of the assets of a corporation which As a general rule Stockholders
could have been ascertained by reasonable ofrecord as of the
inquiry and examination is not sufficient to date of the
validatea dividend which has been paid out of declaration of
capital. dividends or holders
 Important: Validity or invalidity of payment of of record on a certain
future date.
subscription from dividends -
Between parties Creator of the trust
1. From dividends to be declared. — It has
respectively entitled
been held that astipulation to the effect to capital and to
that the subscription is "payable income of stock held
fromthe first dividends declared on any in trust
and all shares of said comparty owned Transfer of shares Transferor - but
by me at the time dividends are which is not recorded considered trustee of
declared until the full amount of the in the books of the the real owner of the
subscription has been paid" is illegal for corporation dividends
it "obligates the subscriber to pay If an unregistered Pledgor - as against
nothing for the shares except as pledge earns the corporation, in
dividends may accrue upon the stock." dividends the absence of notice
In the contingency thatdividends are not of the pledge
paid, there is no liability at all. Pledge is recorded in Pledgee- with the
2. From cash dividends - The rule depends the books of obligation
the corporation tocompensate what
on whether the stockholderis delinquent
he receives with the
or not.
debt
Cash dividends cannot be withheld from of the pledgor
the subscriberswho have not fully paid
their subscriptions unlessthey are
delinquent on their unpaid

Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures

5
Yssa’s Notes
 Share subscriptions No entitlement as to 12. Non-participating dividends
not yet recorded in the dividends 13. Ordinary dividends- those paid out of
the stock andtransfer current earnings of a corporation
book on the date of according to some fixed plan or
dividend declaration scheme, usually at regular intervals and
 As a rule, dividends among stockholders of the sometimes limited to a substantially
same class must always be pro rata, equal and fixed rate of return to the shareholder
without discrimination and regardless of the 14. Extraordinary dividends - cash or stock,
time when the shares were acquired. which usually represent an accumulated
 As applied to any form of dividend declaration, excess of earnings over normal return
on capital invested and constitute a
the participation of each stockholder in the
distribution or a capitalization of
earnings or profits of the corporation is based
surplus profits remaining after
on his total subscriptionand not on the amount distribution of ordinary dividends
paid by him in account thereof.  Cash Dividend v. Stock Dividend
 Exception - Only in cases where a stockholder is Cash Dividend Stock Dividend
delinquent in the payment of his unpaid Involves a Does not involve any
subscription that he loses his privilege in a disbursement to the disbursement
corporation where he has holdings, except his stockholder of
right to receive cash dividends, which, however, accumulated
shall first be applied to his unpaid balance on earnings
the subscription pluscost and expenses. Becomes the Still part of corporate
 Classes of dividends absoluteproperty of property, may be
1. Cash dividend. —dividend payable in the stockholder and reachedby corporate
cash cannot be reached by creditors
thecreditors of the
2. Property dividend — dividend
corporation in the
distributed to the stockholders in the
absence of fraud
form of property, real or personal.
Declared only by the Declared by the
3. Stock dividend —dividend payable in
board of directors board withthe
unissued or increased or additional
concurrence of the
shares of the corporation instead of in
stockholders
cash or in property out of the
representing at least
unrestricted retained earnings of the
2/3of the
corporation; may be declared only to the
outstanding capital
extent of the maximum number of
stock at a regular or
shares authorized in thearticles of
special meetingcalled
incorporation.
for the purpose
4. Optional dividend — dividend which
gives the stockholderan option to Does not increase the Increase the
receive cash or stock dividend. corporate capital corporate capital
5. Composite dividend —dividend which is Declaration creates a No debt from the
partly in cash and partly in stocks. Here, debt from corporation to the
there is no option involved. thecorporation to stockholders is
6. Preferred or preferential dividend — each of its created, except in the
dividend which is payable, by virtue of stockholders who sense thatcapital
contract, to one class of stockholders then hold such stock stock constitutes a
inpriority to that to be paid to another liability.
class.  Stock split - merely a dividing up of the
7. Cumulative dividend —dividend which is outstanding shares of a corporation into a
contracted to be paid at a certain rate at greater number of units, without disturbing the
stated times and, if net earnings at any stockholder's original proportional
dividend period are insufficient to pay participatinginterest in the corporation.
the contract dividend, it is to be made  Reverse stock split - involves the reduction of
out of subsequent net earnings. the outstanding shares into a smaller number
8. Scrip dividend. —dividend in the form of of shares and this is done when it is felt that a
a writing or certificate issued to a higher price for theshares will be advantageous
stockholder entitling him to the to the corporation.
payment of money, stock or other
benefit at some future time inasmuch as Sec. 44. Power to enter into management
the corporation at the time such contract. — Nocorporation shall conclude a
dividends are declared has profits not in management contract withanother corporation
cash or has no sufficient cash, or has unless such contract shall have beenapproved by
the cash butwishes to reserve it for the board of directors57 and by
some corporate purposes. stockholdersowning at least the majority of the
9. Bond dividend —dividend distributed in outstanding capitalstock, or by at least the
bonds Ofthe Corporation to the majority of the outstanding capitalstock, or by
stockholders. at least a majority of the members in thecase of
10. Liquidating dividends — dividends a non-stock corporation, of both the
which areactually distributions of the managingand managed corporation, at a
assets of the corporation upon meeting duly called forthe purpose: Provided,
dissolution or winding up of the same. That (1) where a stockholder orstockholders
11. Participating dividends representing the same interest of both

Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures

6
Yssa’s Notes
themanaging and the managed corporations always be subject to the superior
own or controlmore than one-third (1/3) of the power of the board to give specific
total outstanding capitalstock entitled to vote of directionsfrom time to time or to
the managing corporation; or (2)where a recall the delegation of managerial
majority of the members of the board of power.
directorsof the managing corporation also
constitute a majorityof the members of the
Sec. 45. Ultra vires acts of corporations. — No
board of directors of the managedcorporation,
corporationunder this Code shall possess or
then the management contract must beapproved
by the stockholders of the managed exercise any corporatepowers except those
corporationowning at least two-thirds (2/3) of conferred by this Code or by itsarticles of
the total outstandingcapital stock entitled to incorporation and except such as are
vote, or by at least two-thirds (2/3)of the necessaryor incidental to the exercise of the
members in the case of a non-stock powers so conferred.
corporation.No management contract shall be
entered into for a periodlonger than five years Notes:
for any one term.  Ultra vires act - one not within the express,
implied, and incidental powers of the
The provisions of the next preceding paragraph corporation conferred by the Corporation Code
shallapply to any contract whereby a
or articles of incorporation. It is an act which is
corporation undertakes tomanage or operate all
not positively forbidden, but impliedly
or substantially all of the businessof another
corporation, whether such contracts are forbidden because not expressly or impliedly
calledservice contracts, operating agreements authorized or necessary or incidental in the
or otherwise:Provided, however, That such exercise of the powers so conferred.
service contracts or operatingagreements which  Intra vires - acts or transactions within the
relate to the exploration, legitimate powers of a corporation or are
development,exploitation or utilization of related to its purposes
natural resources may beentered into for such  Ultra vires acts by itself, an ultra vires act is not
periods as may be provided by thepertinent laws necessarily illegal
or regulations.
Where the Where the contract or
Notes: contract or act is act is not illegal per se
 Management contract - any contract whereby a illegal per se but merely beyond the
corporation undertakes to manage or operate power of a corporation,
all or substantially all of the business of Wholly void or Merely voidable and may
another corporation, whether such contracts inexistent. It be enforced by
arecalled service contracts, operating cannot be ratified performance, ratification,
agreements or otherwise. or validated. The or estoppel, or on
doctrine of equitable grounds.
It is an agreement under which a estoppel cannot
corporationdelegates the management of its operate to give
affairs to another corporationfor a certain effect to an act
period of time. which is null and
void.
 Limitations on the power under a management
contract:  Effects of ultra vires acts
1. Ratification of the contract. — The Situation of ultra Effect
contract must beapproved by a vires contract
majority of the quorum of the board While executory on Cannot be enforced
of directorsor trustees and ratified both sides by either party
by the prescribed vote of the thereto
outstandingcapital stock entitled to Fully performed Neither party can
vote or of themembers on both sides maintain an action to
2. Period of the contract. — The period set aside the
transaction or to
must not be longer than five (5)
recover what has
years for any one term except those
been parted with
contracts which relate to the Performed on one Contract is
exploration, development, side and the other unenforceable but
exploitation or utilization of natural has received benefits compel the party
resources that may be entered into by reason of such who has received the
for such periods asmay be provided performance benefits of
by pertinent laws or regulations; and performance to
3. Managerial power under the return what he has
contract. — A management contract received or, failing to
cannot delegate entire supervision do that, to pay its
and control over the officers and reasonable value
business of a corporation to another
as this will contravene Section 23.
4. The management contract must

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7
Yssa’s Notes
 Contracts ultra vires If the contract is The Securities and Exchange Commission shall
in part only separable, it may be not accept for filing the by-laws or any
sustained and amendment thereto of any bank, banking
enforcedas to the institution, building and loan association, trust
part not ultra vires, company, insurance company, public utility,
and held invalid as to educational institution or other special
the part ultravires. corporations governed by special laws, unless
accompanied by a certificate of the appropriate
 Acts presumed to be within corporate powers
government agency to the effect that such by-
1. Where private rights only are involved
laws or amendments are in accordance with law.
2. Where act clearly beneficial to the
corporation
Notes:
 Who may invoke ultra vires
 By-laws - rules of action adopted by a
1. State
corporation (or association) for its internal
2. Stockholders
government and for the government of its
However, a stockholder may be precluded
stockholders or members and those having the
from attacking an act as ultra vires, by his
direction, management and control of its affairs
laches
in their relationto the corporation and as
3. Strangers
among themselves.
4. Competitors in business
 Even holders of non-voting shares or non-voting
5. Creditors
members, are entitled to vote on the adoption
Note: For items 3-5, there must be a showing
of bylaws.
of injury as a result of the ultra vires act
 Functions:
1. Supplement the articles of incorporation
TITLE V
2. Define the rights and duties of corporate
BY-LAWS
officers and directors or trustees, and of
stockholders or members
Sec. 46. Adoption of by-laws — Every
3. Source of authority for corporate officers
corporation formed under this Code, must,
andagents of the corporation
within one (1) month after receipt of official
 Elements of valid bylaws:
notice of the issuance of its certificate of
(1) They must not be contrary to existing law
incorporation by the Securities and Exchange
and inconsistentwith the Code
Commission, adopt a code of by-laws for its
(2) They must not be contrary to morals and
government not inconsistent with this Code. For
public policy
the adoption of by-laws by the corporation, the
(3) They must not impair obligations of
affirmative vote of the stockholders
contract
representing at least a majority of the
(4) They must be general and uniform in their
outstanding capital stock, or of at least a
operation andnot directed against particular
majority of the members, in the case of non-
individuals i.e., not discriminatory;
stock corporations, shall be necessary. The by-
(5) They must be consistent with the charter or
laws shall be signed by the stockholders or
articles ofincorporation; and
members voting for them and shall be kept in
(6) They must be reasonable.
the principal office of the corporation, subject to
the stockholders or members voting for them
 Binding effects of by-laws
and shall be kept in the principal office of the
As to the corporation Corporation and its
corporation, subject to the inspection of the
and its officers directors (or
stockholders or members during office hours; trustees) and
and a copy thereof, duly certified to by a officers are boundby
majority of the directors or trustees and and mustcomply
counter-signed by the secretary of the with them unless
corporation, shall be filed with the Securities and until theyare
and Exchange Commission which shall be changed, amended,
attached to the original articles of or repealed in
incorporation. accordance with
Section 48.
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed But subordinate
employeeswithout
prior to incorporation; in such case, such by-
actual knowledge of
laws shall be approved and signed by all the the bylawsare not
incorporators and submitted to the Securities bound.
and Exchange Commission, together with the As to stockholders or Presumed to
articles of incorporation. members knowthe provisions
of the corporation's
In all cases, by-laws shall be effective only upon by-laws;
the issuance by the Securities and Exchange Cannot, therefore,
Commission of a certification that the by-laws claim lack of notice
are not inconsistent with this Code. or knowledge.

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8
Yssa’s Notes
 As to third persons Not bound by the
by-laws of a directorsor trustees the power to amend or
corporation since
the by-lawsoperate
merely as internal
rules among the
stockholders.
Exception: When the
third person has
knowledge of its
provisionseither
actually or
constructively at the
time the
transactionin
question was
entered into.
Sec. 47. Contents of by-laws. — Subject to the
provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a
private corporation may provide in its by-laws
for:
(1) The time, place and manner of calling and
conductingregular or special meetings of the
directors or trustees;
(2) The time and manner of calling and
conductingregular or special meetings of the
stockholders or members;
(3) The required quorum in meetings of
stockholdersor members and the manner of
voting therein;
(4) The form for proxies of stockholders and
membersand the manner of voting them;
(5) The qualifications, duties and compensation
ofdirectors or trustees, officers and employees;
(6) The time for holding the annual election of
directorsor trustees and the mode or manner of
giving noticethereof;
(7) The manner of election or appointment and
theterm 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
ofissuing certificates; and
(10) Such other matters as may be necessary for
theproper or convenient transaction of its
corporate business and affairs.
Notes:
 The enumeration contained in Section 47 is
merely directory. Failure of the corporation to
make provision for the matters therein
contained will not affect the validity of the by-
laws norof the corporate act.
Sec. 48. Amendments to by-laws. — The board of
directorsor trustees, by a majority vote thereof,
and the ownersof at least a majority of the
outstanding capital stock, orat least a majority
of the members of a non-stock corporation, at a
regular or special meeting duly called for
thepurpose, may amend or repeal any by-laws
or adopt newby-laws. The owners of two-thirds
(2/3) of the outstandingcapital stock or two-
thirds (2/3) of the members in a non-stock
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
corporation may delegate to the board of
repeal any by-laws oradopt new by-laws:
Provided, That any power delegatedto the board
of directors or trustees to amend or repealany
by-laws or adopt new by-laws shall be
considered asrevoked whenever stockholders
owning or representing amajority of the
outstanding capital stock or a majority ofthe
members in a non-stock corporation, shall so
vote at aregular or special meeting.
Whenever any amendment or new by-laws are
adopted, such amendment or new by-laws shall
be attached to theoriginal by-laws in the office
of the corporation, and acopy thereof, duly
certified under oath by the corporatesecretary
and a majority of the directors or trustees,
shallbe filed with the Securities and Exchange
Commission, thesame to be attached to the
original articles of incorporationand original by-
laws.
The amended or new by-laws shall only be
effectiveupon the issuance by the Securities and
Exchange Commissionof a certification that the
same are not inconsistentwith this Code.
Notes:
 The power to make by-laws implies the power
to alter or repeal them and enact new ones, but
the power to alter by-laws or adopt new by-laws
has the same limits as the power to make them
in the first instance.
 Amendments to or repeal of by-laws cannot be
done in a "referendum."
 Rationale for the requirement of a meeting is to
give the stockholders/members a chance to
deliberate on the amendments or repeal to be
voted upon.
 A by-law is impliedly repealed by a subsequent
by-law inconsistent with it.
 Non-delegable power — the power to amend
the articles of incorporation lies with the
stockholders or members and cannot be
delegated to the board of directors or trustees.
Neither can the power to adopt the original (not
new) by-laws bedelegated.
 Articles of Incorporation v. By laws
Articles of By laws
Incorporation
constitutes merely rules and
thecharter regulationsadopted
orfundamental law by the corporation
ofthe corporation
executed before executed usually
incorporation by the after incorporationby
incorporators thestockholders or
members
filing is a condition filing is a condition
precedent to subsequent.
corporate
existence
 Resolutions v. By-laws
Resolutions By-laws
9
Yssa’s Notes
 Merely adeclaration A permanent rule of stockholder or member, and on theshowing of
of the will of the action (except only good cause therefor, may issue an order tothe
corporation in a insofaras it may be petitioning stockholder or member directing him
given matter and in repealed or tocall a meeting of the corporation by giving
the nature of a amended) of the proper notice required by this Code or by the by-
ministerial act conduct of laws. The petitioningstockholder or member
corporateaffairs shall preside thereat until at leasta majority of
Ordinarily limited in In effect, the
the stockholders or members present
the corporation’s Corporation’s
havechosen one of their number as presiding
operation,applying constitution, and will
usually to a single act prevail over a officer.
or transaction of the resolution ofthe
corporationor to board of Notes:
some specific person, directors/trustees.  Reason for a meeting: Protection to the
situation or occasion stockholders (or members) by notice and the
Subject to the Do not need SEC’s opportunity to attend, discuss, and vote at a
approval of the SEC approval, unless they meeting. Individual assents, however, given by
involve matters the shareholders separately, may preclude or
wherethe law estop those who assentfrom complaining of
requires such what they have consented to.
approval  Directors or trustees can only exercise their
powers as a board, not individually
 Filing of the amended or newby-laws - A orseparately.
certificate of the appropriategovernment  Requisites for a valid meeting:
agency that the amendments are in (1) It must be held at the proper place
accordance withlaw is required in case of (2) It must be held at the stated date and at
amended by-laws of any the appointedtime or at a reasonable time
corporationgoverned by special laws. thereafter
Without such certificate, the SEC shall not (3) It must be called by the proper person
accept them for filing. (4) There must be a previous notice
 Filing of original by-laws - Amended or new (5) There must be a quorum
by-laws shall only be effective upon the  Electronic notice is allowed
issuance by the SEC of acertification that  Q: If there are unavailable members and there
the same are not inconsistent with the is no elected members yet, what is the remedy
Code. available to the interested persons?
A: Petition to SEC
TITLE VI Here, the petitioner shall act in an interim
MEETINGS capacity as the presiding officer

Sec. 49. Kinds of meetings. — Meetings of
directors, trustees, stockholders, or members
may be regular or special.
Sec. 50. Regular and special meetings of
stockholders ormembers. — Regular meetings of
stockholders or membersshall 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
determinedby the board of directors or trustees:
Provided, That written notice of regular
meetings shall be sent to allstockholders or
members of record at least two (2) weeksprior
to the meeting, unless a different period is
requiredby the by-laws.
Special meetings of stockholders or members
shall beheld at any time deemed necessary or as
provided in the by-laws: Provided, however, that
at least one (1) week writtennotice 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
authorizedto call a meeting, the Securities and
Exchange Commission,upon petition of a
Sec. 51. Place and time of meetings of
stockholders or members. — Stockholders' or
members' meetings, whether regular or special,
shall be held in the city or municipality where
the principal office of the corporation is located,
and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall,
for the purposes of 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.
Notes:
 Proper persons to call meeting:
a. Person or persons designated in the by-laws
b. Director or trustee or by an officer
entrusted with the management of the
corporation
c. Stockholder or member may make the call
on order of the SEC whenever for any cause,
there is no person authorized to call a

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10
Yssa’s Notes
 meeting
d. Special meeting for the removal of directors
or trustees may be called by the secretary of
the corporation or by a stockholder or
member
 Notice
a. As to regular meetings - no notice need be
given other than that contained in the by-
laws when the time and place of such
meeting are specially designated therein.
Except: When required by the law or by the
by-laws
b. As to special meetings - notice must be
given.
 Requisites of notice of meeting
(1) It must be issued by one who has authority
to issue it
(2) It must be in writing
(3) It must state the date, time, and place of
the meeting unless otherwise provided in
the by-laws
(4) It must state the business to be transacted
thereat
(5) It must be sent at a certain time before the
scheduled meeting as fixed by law, unless a
different period is required by the by-laws
(6) Further, the notice must comply with any
other requirements prescribed by the law or
by the by-laws of the corporation.
 If general and special statutory provisions
relating to notice are conflicting, the special
statutes control
 When is the statement of purpose of meeting
required in the notice
1. Election of directors or trustees
2. Removal of directors or trustees
3. Filing of vacancies in the office of
director or trustee
4. Ratification of contract of the
corporation with a director or trustee
5. Extension or reduction of corporate
term
6. Increase or decrease of capital stock
7. Creation or increase of bonded
indebtedness
8. Sale or other disposition of all or
substantially all of the corporate assets
9. Investment of corporate funds in
another corporation or business or for
any other purpose
10. Declaration of stock dividends
11. Entering into a management contract
with another corporation
12. Amendment to or repeal of any bylaws
or adoption of new bylaws
13. Fixing the issued price of no par value
shares
14. Plan of merger or consolidation
15. Amendment of the articles of
incorporation of a close corporation
16. Voluntary dissolution of the corporation
where no creditors are affected
17. Voluntary dissolution of the corporation
where creditors are affected
18. Dissolution by shortening corporate
terms
 The objection that no notice was given or that
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
the notice given was defective, cannot be raised
by third persons who have not been injured.
 Effect of failure to comply with requisites for
meeting:
(1) Proceedings are valid - if it complies
with these 2 requisites:
a. That the proceedings had and
the business transacted
arewithin the power or authority
of the corporation, that is, they
arenot ultra vires
b. That all the stockholders or
members of the corporationare
present or duly represented at
the meeting.
(2) Proceedings are invalid - If the 2
requisites are not present
 Without the signature of the secretary of the
meeting, an alleged minute taken by a mere
clerk has neither probative value nor credibility
 Q: Can a Corp decide and deviate the law for
the place of the meeting depending on their
convenience?
A: No
 Improperly held or called meetings may be
considered valid when there is a 100%
attendance of both the stockholders and
members (cures the defect), provided that none
of them raises such improperly held or called
meeting
Sec. 52. Quorum in meetings. — Unless
otherwise provided for in this Code or in the by-
laws, a quorum shall consist of the stockholders
representing a majority of the outstanding
capital stock or a majority of the members in
the case of non-stock corporations.
Notes:
 In the absence of a quorum, no action can be
taken except to adjourn. In those cases,
however, in which the law determines the
number of shareholders or members whose
concurring votes are necessary to make their
action binding on the corporation, not less than
such number is necessary to constitute a
quorum at a meeting called to transact such
business. In such cases, the by-laws may
provide for a greater quorum.
 Where there is an unsuccessful attempt by the
corporation or if it would be impossiblefor the
corporation to get the required quorum of
stockholders necessary to transactbusiness, the
corporation may petition the SEC for the
appointment of a managementcommittee,
board or body to undertake the management of
the corporation.
 For non-stock corporations, the basis for
determining the quorum is the total number
ofregistered members. Only those who are
actual, living memberswith voting rights shall
be counted in determining the existenceof a
quorum during members' meetings. Dead
members shall not be counted.
 The best evidence of who are the present
members of a non-stock corporation is the
"membership book." In the case of a stock
11
Yssa’s Notes
 corporation, it is the stock and transfer book. to incur, create or majority of the board of
 On the death of a shareholder, the executor or increase bonded directors and 2 / 3 of the
administrator duly appointed by the Court is indebtedness outstandingcapital stock
vested with the legal title to thestock and to sell, lease, majority of the board of
entitled to vote it. exchange, directors or trustees and 2
 Membership inand all rights arising from a non- mortgage, pledge / 3 of theoutstanding
stock corporation are personaland non- or otherwise capital stock or of the
dispose of all or members
transferable, unless the articles of
substantially all of
incorporation or theby-laws of the corporation
the corporate
provide otherwise. assets
 The determination of whether or not "dead to invest majority of the board of
members" areentitled to exercise their voting corporate funds in directors or trustees and 2
rights (through their executor or administrator), another / 3 of the
depends on those articles of incorporation or corporation or outstandingcapital stock
bylaws. business or for or of the members
 Where the date of the annual meetingis fixed in any purpose other
the by-laws of the corporation, the board of than the primary
directorsor trustees cannot change the date so purpose
as to lengthen their termof office. to issue stock majority of the quorum
 Where the annualmeeting cannot be held on the dividends ofthe board of directors
date fixed by the by-laws for somevalid reason, and 2 / 3 of the
outstanding capital stock
such as an erroneous date for holding the
to enter into a majority of thequorum of
meetingstated in the notice sent out to
management the board of directors or
members. In such case, the annual meeting contract trustees and a majority of
may be postponed to a date later than that the
fixed by the by-laws, provided proper notice of outstanding capital stock
the change of date is given to the members. or of the members of both
 Payment of compensation for attendance the managingand the
atstockholders' or members' meetings - managed corporations,
compensation of directors or trustees, officers, and in some cases, 2 / 3
and employees, excludes stockholders and of thetotal outstanding
members in the enumeration, and this simply capital stock entitled to
underscores the fact that stockholders or vote or of the members
members, as such, do not render service but with respect to the
managed corporation
exercise rights personal tothemselves in the
to adopt by-laws majority of the
corporation
outstanding capitalstock
 Matters in which the law requires or of the members
minimumnumber of votes: to amend or majority of the board of
to amend the majority of the board of repeal the by-laws directors or trustees and
articles of directors or trustees and or adopt new by- of the outstandingcapital
incorporation vote or written assent of 2 laws stock or of the members
/3 of the outstanding to delegate to the 2 / 3 of the outstanding
capital stock or of the board of directors capital stock or of the
members or trustees the members
to elect directors majority of the power to amend
or trustees outstanding capital stock or repeal the by-
or of the members entitled laws or adopt new
to vote by-laws
to remove 2 /3 of the outstanding to revoke the majority of the
directors or capital stock or of the preceding power outstanding capital stock
trustees members entitled to vote delegated to the or of the members
to call a special majority of the board of directors
meeting to outstanding capital stock or trustees
remove directors or of the membersentitled to fix the issued majorityof the quorum of
or trustees to vote price of no par the board of directors if
to ratify a contract 2 /3 of the outstanding value shares authorized by thearticles
of a director capital stock or of of incorporation or in the
/trustee or officer themembers absence of such authority,
with the by amajority of the
corporation outstanding capital stock
to extend or majority of theboard of to effect or amend majority of the board of
shorten corporate directors or trustees and 2 a plan of merger directors or trustees and
term /3 of the outstanding or consolidation 2/3 of the outstanding
capitalstock or of the capital stock or of the
members members of
to increase or majority ofthe board of theconstituentcorporations
decrease the directors and 2 /3 of the
capital stock outstanding capitalstock

Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures

12
Yssa’s Notes
 to dissolve the majority vote of theboard
corporation of directors or trustees
and 2/3 of the
outstanding capitalstock
or of the members
to adopt a plan of majority vote of the board
distribution of of trustees and 2/3 ofthe
assets of a non- members having voting
stock corporation rights
 Greater voting requirement - A corporation may
prescribe a greater voting requirement forthe
approval of any of the above corporate acts in
its articles of incorporation and/or by-laws
 If for example, one stockholder holds 75% of
stocks, the required quorum for instance is a
simple majority, then the meeting will be valid
even if he is the sole attendee.
 Remember: proxy is only valid in stockholders’
or members’ meeting and not in board
meetings
Sec. 53. Regular and special meetings of
directors or trustees. — 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
one (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.
Notes:
 Courts may take judicial notice that business
transactions may be made through
teleconferencing among people in two or more
locations through an electronic medium.
 A meeting held in the absence of some of the
directors (or trustees) and without any notice to
them is illegal the action at such meeting
although by a majority of the directors, is
invalid unless subsequently ratified or waived,
expressly or impliedly, by the absent directors
or unless rights have been acquired by innocent
third persons, as against whom the corporation
must be held estopped to set up the failure to
observe formalities.
 All the resolutions and acts approved in said
meeting cannot be considered valid and may be
questioned by any objecting director or
stockholder
 Quorum required: Majority of the director or
trustees at the meeting unless the law or the
bylaws provide otherwise
Sec. 54. Who shall preside at meetings — the
president shall preside at all meetings of the
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
directors or trustees as well as of the
stockholders or members, unless the bylaws
provide otherwise.
Notes:
 The by-laws may provide that the chairman,
instead of the president, shall preside at board
meetings
 Where the officer entitled to preside is not
present at the time for a meeting to convene, it
has been recognized that a stockholder or
member who takes the floor may temporarily
preside at the meeting of stockholders or
members pending the selection of the presiding
officer
 Unless the contrary is provided by the bylaws,
the presiding officer may be selected by viva
voce vote of the stockholders or members
present
 The fact that a director is at the same time the
presiding officer of the meeting does not
deprive him of the right to vote as such
director. He cannot be deprived of the right by
a majority vote of its board without his consent.
Sec. 55. Right to vote of pledgors, mortgagors,
and administrators — In case of pledged or
mortgaged shares in stock corporations, the
pledgor or mortgagor shall havethe right to
attend and vote at meetings of stockholders,
unless the pledgee or mortgagee is expressly
given suchright in writing which is recorded on
the appropriate corporate books by the pledgor
or mortgagor.
Executors, administrators, receivers, and other
legalrepresentatives duly appointed by the court
may attendand vote in behalf of the
stockholders or members withoutneed of any
written proxy.
Notes:
 The vote is based on the number of shares
represented and not on the number of
stockholders present which shares must always
be a part of the outstanding capital stock
 A transferee of stock cannot vote upon it if his
transfer is not registered in the books of the
corporation.
 GR: The government may not vote the shares
and elect the members of the board of
directors. It cannot perform acts of ownership
of sequestered property as it does not become
the stockholder of record by virtue of such
sequestration. It is a mere conservator.
Exceptions
1) where government shares are taken over by
private persons or entities who/ which
registered them in their own names; and
2) where the capitalization or shares that were
acquired with public funds somehow landed in
private hands.
 Holders of stock declared delinquent by the
board of directors for unpaid subscriptions are
not entitled to vote or to representation at any
stockholders' meeting. But they may act as
proxies for stockholders whose shares are not
13
Yssa’s Notes
 delinquent.
 The encumbrance must be registered to the
corporate books because it is the operative act
which binds the corporation
 Mortgagor or pledger can still attend meeting
but his presence shall be deemed suspended
for such meeting
 Manner of voting:
(1) directly (in person), or
(2) indirectly, through a representative —
(a) by means of a proxy
(b) by a trustee under a voting trust
agreement or
(c) by executors, administrators, receivers,
or other legal representatives duly
appointed by the court
 Administrator or executor should present proof
or evidence of his judicial appointment. Thus,
in the absence of a judicial appointment, a
person has no right to vote as proxy
 Where the estate of a deceased stockholder is
still undivided and there is no administrator or
other legal representative duly appointed by the
court nor an executor designated in a will to
administer said estate, no person can vote the
shares of the deceased since nobody can legally
represent his estate
 Even if the estate has already a plan of
distribution, the executor or administrator still
has the authority to represent the deceased or
estate, unless the estate has already been
distributed
Sec. 56. Voting in case of joint ownership of
stock. — 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.
Sec. 57. Voting right for treasury shares. —
Treasuryshares shall have no voting right as
long as such stock remains in the Treasury.
Sec. 58. Proxies. — Stockholders and members
mayvote in person or by proxy in all meetings of
stockholdersor members. Proxies shall be in
writing, signed by thestockholder or member
and filed before the scheduledmeeting with the
corporate secretary. Unless otherwiseprovided
in the proxy, it shall be valid only for the
meetingfor which it is intended. No proxy shall
be valid andeffective for a period longer than
five (5) years at any onetime.
Notes:
 Proxy - designates the formal written authority
given by the owner or holder of the stock, who
has a right to vote it, or by a member, as
principal, to another person, as agent, to
exercise the voting rights of the former.
 It is also used to apply to the holder of the
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
authority or person authorized by an absent
stockholder or member to vote for him at a
stockholders' or members' meeting.
 Also applied to refer to the instrument which
evidences the authority of the agent.
 A proxy is a special form of agency. The proxy
holder is an agent and as such a fiduciary.
Sec. 59. Voting trusts. — One or more
stockholdersof a stock corporation may create a
voting trust for thepurpose of conferring upon a
trustee or trustees theright to vote and other
rights pertaining to the sharesfor a period not
exceeding five (5) years at any one time:
Provided, That in the case of a voting trust
specificallyrequired as a condition in a loan
agreement, said voting trust may be for a
period exceeding five (5) years but
shallautomatically expire upon full payment of
the loan. A votingtrust agreement must be in
writing and notarized, and shallspecify the
terms and conditions thereof. A certified copyof
such agreement shall be filed with the
corporation andwith the Securities and
Exchange Commission; otherwise, said
agreement is ineffective and unenforceable.
Thecertificate or certificates of stock covered by
the votingtrust agreement shall be cancelled and
new ones shall beissued 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 thename of the trustee or trustees is made
pursuant to saidvoting trust agreement.
The trustee or trustees shall execute and deliver
to thetransferors voting trust certificates, which
shall be transferablein the same manner and
with the same effect ascertificates of stock.
The voting trust agreement filed with the
corporationshall 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
thetrustee or trustees may exercise the right of
inspection ofall corporate books and records in
accordance with theprovisions of this Code.
Notes:
 Principal control devices:
(a) voting agreements;
(b) voting trusts;
(c) the classification of common shares into
voting and non-voting, with the voting
power vested in a small class of
"management stock";
(d) management contracts, often with a
parent or affiliated corporation; and
(e) pyramiding
 Principal purpose of voting trusts — Such an
agreement as that authorized by our law makes
possible a unified control of the affairs of the
corporation and a consistent policy by binding
stockholders to vote as a unit.
 Where consideration for pooling agreement
gives private benefit to stockholder -
considered invalid - typical cases involves:
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Yssa’s Notes
 1. agreement by defendant to vote in
certain manner in consideration of
promise to cancel his promissory note
2. agreement by creditor to give
shareholder part of amount he expected
to receive as creditor after sale of
corporate assets, if shareholder would
withdraw his opposition to the sale
3. agreement by property owner to pay
shareholder a commission if by vote of
himself and others he caused
corporation to purchase the property
4. agreement to give defendants control of
corporation in consideration of their
agreement to vote for directors who
would secure to one of plaintiffs a
corporate office at a stated salary.
 Status of voting trustee. —A voting trust
agreement transfers only voting or other rights
pertaining to the shares subject of the
agreement, or control over the stock, not the
properties or assets of the corporation
 Status of transferring stockholder — By its very
nature, a voting trust agreement results in the
separation of the voting rights of a stockholder
from his other rights
 In such agreement, the transferring stockholder
of a stock corporation parts with the voting
power only but retains the equitable or
beneficial ownership of the stock
 A voting trustee is only a share owner vested
with colourable and fictitious title for the sole
purpose of voting upon stocks that he does not
own
 The transferring stockholder, although he has
ceased to be a stockholder of record, retains
the right of inspection of corporate books
which he can exercise concurrently with the
voting trustee, to receive the dividends when
they are collected by the trustee, and to recover
his stock at the expiration of the trust and
other rights a stockholder may be entitled until
the liquidation of the corporation.
 A subsequent purchaser of stock with full
knowledge of the agreement takes it impressed
with the trust and is bound thereby
TITLE VII
STOCKS AND STOCKHOLDERS
Sec. 60. Subscription contract — Any contract
for the acquisition of unissued stock in an
existing corporation or a corporation still to be
formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or
some other contract.
 In considering petitions for the issuance of stock
Notes:
 In a stock corporation, a person may become a
shareholder:
(a) by subscription contract with an existing
corporation for the acquisition of unissued
shares;
(b) by purchase from the corporation of
treasury shares; or
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
(c) by transfer from a previous stockholder of
the outstanding shares or existing subscription
to shares.
 In a non-stock corporation, membership is
acquired by contract with the corporation, the
modes of entering into which vary according to
the charter and by-laws of the particular
corporation.
 Absence of express contract — A person who
accepts a certificate of stock from a corporation
or who acts as stockholder by participating in
stockholders' meetings, making payment, or
otherwise, thereby becomes a stockholder, and
liable as such not only to creditors, but also to
the corporation although there may have been
no express contract of subscription.
 There is no law prohibiting subscriptions under
several contracts
 Subscription - an offer to acquire a specified
number of unissued shares of an existing
corporation or one still to be formed
 Kinds of subscription
1. Pre-incorporation subscription - one
entered into before incorporation
2. Post incorporation subscription - one
entered into after the incorporation for
the acquisition of unissued stock
3. Conditional subscription - one which is
subject to a condition, which may be a
past event unknown to the parties or a
future, uncertain event, that is, an event
which may or may not happen
4. Absolute subscription - one which is not
subject to any condition and, therefore,
the subscriber becomes liable on the
subscription and acquires the rights of a
stockholder from the time it is accepted
5. Subscription with a special term - one
where the corporation agrees to do
something, the fulfilment of which not
being a condition precedent to the
accrual of liability of the subscriber or
the acquisition of the rights of a
stockholder
 Unless the subscription agreement otherwise
provides, or when there is a constitutional,
statutory, or charter provision to the contrary,
or except in instances of increase in authorized
capital stock
 Stock option - a privilege granted to a party to
subscribe to a certain portion of the unissued
capital stock of a corporation within a certain
period and under the terms and conditions of
the grant exercisable by the grantee at any time
within the period granted.
 Before a corporation shall grant or issue any
stock option, it must first secure the approval
thereof from the SEC
options, the SEC shall be guided by the
following:
(1) Stock options granted to stockholders ratably
in proportion to their shareholdings may be
allowed
(2) Stock options granted to employees or
officials who are not members of the board may
also be allowed after a review of the scheme
15
Yssa’s Notes
 (3) Stock options granted to persons who are not
stockholders may be granted only upon a
showing that the board has been duly
authorized to grant the same by its charter or by
a resolution of the stockholders
(4) Stock options granted to directors or
managing groups and its officers must be
approved in a stockholders' meeting
(5) Exercise of options must be done within a
period of three (3) years from approval thereof
unless sooner terminated by the Commission.
(6) No transfer of the right to an option shall be
made without the approval of the Commission;
and
(7) In cases of grants under numbers (2), (3),
and (4), the Commission shall determine the
reasonableness of the plan, scheme,
compensation, or consideration.
 In consonance with the trust fund doctrine,
stock subscriptions are in the nature of a trust
fund in the sense that they are to be maintained
unimpaired for the protection of corporate
creditors. Subscribers who have not paid in full,
unless they have been validly released from their
undertaking, are the debtors of the corporation
for the balance, and if the corporation does not
enforce the liability, its creditors may do so.
 A corporate creditor must first exhaust his legal
remedies against the corporation except where
the corporation is insolvent
 The liability of a subscriber for unpaid
subscription cannot be compensated or set-off
with the value of his shares nor can stock
dividends declared be applied as payment for
the same.
Reason: There is no relationship of debtor and
creditor between a stockholder and the
corporation with respect to his shares of stock.
 A stock corporation has no power to release an
original subscriber from paying for his shares
without valuable consideration for such release
or without the unanimous consent of the
stockholders and except upon a showing that
creditors of the corporation would not be
prejudiced
 Subscription commitments cannot be condoned
or remitted nor can the corporation buy its own
shares using the subscribed capital as the
consideration therefor
 An action for rescission for alleged breach of
contract is not one of the remedies or instances
allowed by the Corporation Code for the
distribution of capital assets and property of the
corporation since it will violate the Trust Fund
Doctrine
 A subscriber who was induced to take
subscription through fraudulent
misrepresentation as to vitiate his consent
thereto is entitled to annul his subscription, as
where, prior to his subscription, the authorized
capital stock has been increased without notice
to him for the increase would dilute his
proportionate interest and influence in the
corporation without his consent
 A subscription agreement whereby the
subscriber shall pay the shares subscribed by
him from the dividends that may be declared
Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures
thereon until the full amount of the subscription
has been paid is invalid
 Refund of subscription payments in excess of
that stated in call - A subscriber remains a
debtor to the corporation for the unpaid balance
of his subscription and continues to be charged
with the obligation of remitting payment
thereon, either voluntarily or upon call until the
full payment of his subscription is satisfied
 A stockholder who voluntarily remits an amount
in excess of that stated in the call is estopped
from claiming such excess because once
payment is accepted by the corporation, it
becomes a part of the assets of the corporation
and any reduction thereof would necessarily
constitute a violation of the third paragraph of
Section 122. Nor has the corporation the power
to grant such refund
Sec. 61. Pre-incorporation subscription — A
subscription for shares of stock of a corporation
still to be formed shall be irrevocable for a
period of at least six (6) months from the date of
subscription, unless all of the other subscribers
consent to the revocation, or unless the
incorporation of said corporation fails to
materialize within said period or within a longer
period as may be stipulated in the contract of
subscription: Provided, That no pre-
incorporation subscription may be revoked after
the submission of the articles of incorporation to
the Securities and Exchange Commission.
Notes:
 The irrevocability of pre-incorporation
subscription contracts prevents a subscriber
from speculating on the stocks of a proposed
corporation. Furthermore, it is the rule that
protects the corporation from financially
irresponsible subscribers.
Sec. 62. Consideration for stocks— Stocks shall
not be issued for a consideration less than the
par or issued price thereof. Consideration for
the issuance of stock may be any or a
combination of any two or more of the
following:
(1) Actual cash paid to the corporation;
(2) Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purposes at a
fair valuation equal to the par or issued value of
the stock issued;
(3) Labor performed for or services actually
rendered to the corporation;
(4) Previously incurred indebtedness by the
corporation;
(5) Amounts transferred from unrestricted
retained earnings to stated capital; and
(6) Outstanding shares exchanged for stocks in
the event of reclassification or conversion.
Where the consideration is other than actual
cash, or consists of intangible property such as
patents or copyrights, the valuation thereof
shall initially be determined by the
incorporators or the board of directors, subject
16
Yssa’s Notes
to approval by the Securities and Exchange stock subscription even though it has
Commission. received the benefit thereof.
 Nature of property which may be taken for
Shares of stock shall not be issued in exchange stock
for promissory notes or future services. The 1. Necessary or proper in carrying on the
same consideration as provided for in this corporate business
section, insofar as they may be applicable, may 2. Possesses ascertainable pecuniary value
be used for the issuance of bonds by the 3. Capable of being transferred and
corporation. applied to payment of debts
 Issuance of stock to offset corporation's
The issued price of no-par value shares may be indebtedness - set-off is in effect a payment by
fixed in the articles of incorporation or by the the creditor for shares of stock of the debtor-
board of directors pursuant to authority corporation in the form of property at the
conferred upon it by the articles of option of the corporation; and it is legally
incorporation or the by-laws, or in the absence feasible to issue stock in favor of a subscriber
thereof by the stockholders at a meeting duly who paid the obligations of the corporation to a
called for the purpose representing at least a third party.
majority of the outstanding capital stock.  Issuance of stocks in consideration of profits -
If stocks are issued in consideration of profits
Notes: earned by the corporation, but not distributed
 Equity securities - represent ownership rights among the stockholders, such issue is called
which, in varying degrees, depending upon the stock dividends. Such consideration is
type of the stock, entitle the holder to a right to permitted. Once declared and issued, stock
participate in the earnings of the corporation dividends are fully paid; hence, any sale or
and upon dissolution, those assets which transfer thereafter is no longer an original issue
remain after all corporate debts have been paid and may be disposed of at a price below par
 Corporate bond - a written promise by a value.
corporation to pay a definite sum of money at
some future date, at a fixed rate of interest,
given in return for money or its equivalent
received by the corporation, sometimes secured
and sometimes not.
 Consideration for issue of stocks
1. Property service or corporate
indebtedness - value must be worth the
value of the stocks issued
2. Negotiable instruments - can be used in
payment of stocks but they shall
produce the effect of payment only
when they have been cashed or when
through the fault of the creditor they
have been impaired
3. Stock dividends - additional stocks are
paid for by the stockholders in cash or
property out of the portion of the
corporate earnings so capitalized
4. Outstanding shares - a holder of
preferred shares with conversion
privilege may give his convertible
preferred shares as a consideration for
the issuance of a certain number of
common shares
5. Receivables - Conditions to be
considered as payment:
a. SEC is able to verify the existence
and collectability of the receivables
b. The shares to be issued will be
held in escrow until actual payment
or collection
1. Services - Compensation payable for
services actually rendered to the
corporation is credit which is property
and whose value is ascertainable. An
agreement to issue stock for services
before the same is rendered is void and
the corporation is not estopped to deny
the services constituted payment of the

Corporation Law - Summary of De Leon Book supplemented by Atty. Faurillo’s Lectures

17
Yssa’s Notes