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POWERS OF A CORPORATION PT. 2

Stocks
Subscription Contract (Sec. 59)

“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.”

A person may become a stockholder in a corporation by voluntarily acquiring a share. Voluntary onerous
acquisition of shares can be by purchase or through subscription.

Through PURCHASE Through SUBSCRIPTION

Time entered into Can be made ONLY after incorporation Can be made before or after incorporation
Purchaser, under a deed of absolute
Non-agreement on
sale, must fully pay the purchase price Subscriber need not pay unless there is a call
time of payment
at the time the shares are transferred
The stockholder who sells his shares
Subscriber cannot be released from his
Obligation to pay can condone the obligation to pay the
obligation to pay the subscription price
purchase price.
Applied to purchase if the price is not
Statute of frauds Not applied to subscription contracts
less than P500

Nature of Subscription Contracts

The subscribed shares need not be paid in full in order that the subscription may be valid. The subscription
contract is a consensual contract that is perfected upon the meeting of the minds of the parties. The name of
the subscriber is recorded in the stock and transfer book, and from that time, such subscriber becomes a
stockholder of record entitled to all the rights of a stockholder. Until the stocks are fully paid, it continues to be
a subsisting liability that is legally enforceable. A person cannot be recognized as a stockholder by mere
presentation of dividend coupons if his ownership is not recorded.

Original subscribers. They become shareholders from the time of the issuance of the Certificate of
Incorporation by Securities and Exchange Commission (SEC). Even if the Corporate Secretary failed to reflect
such fact in the Stock and Transfer Book, the original subscribers whose names appear in the Articles of
Incorporation are already stockholders who are entitled to all the rights as such.

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.
Warrant
A type of security which entitles the holder the right to subscribe to, the unissued capital stock of a corporation
or to purchase issued shares in the future, evidenced by a Warrant Certificate, whether detachable or not,
which may be sold or offered for sale to the public.
Types of warrants as defined by SEC:
Subscription Warrant – It entitles the holder to the right to subscribe to a pre-determined number of shares
out of the unissued capital stock of the issuer.

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Covered Warrant – It entitles the holder to the right to purchase from the issuer a pre-determined number of
shares that are already issued.
Warrant Certificate – It is a certificate representing the right to a warrant, which may be detachable or not,
duly issued by the issuer to the warrant holder.
Warrant Instrument – It is a written document or deed containing the terms and conditions of the issue and
exercise of a warrant, which terms and conditions shall include:
(a) The maximum underlying shares that can be purchased upon exercise;
(b) The exercise period; and
(c) Such other terms and conditions as the SC may require.
Detachable Warrant – It is a warrant that may be sold, transferred or assigned to any person by the warrant
holder separate from, and independent of, the corresponding beneficiary securities.
Nondetachable Warrant – It is a warrant that may not be sold, transferred or assigned to any person by the
warrant holder separate from, and independent of the beneficiary securities.
Beneficiary Securities – These are shares of stock and other securities of the issuer, which form the basis of
the entitlement of the warrant.
Underlying Shares – These are unissued shares of a corporation that may be purchased by the warrant holder
upon the exercise of the right granted under the warrant.
Trust Fund Doctrine
Under the trust fund doctrine, the subscribed capital stock of the corporation is a trust fund for the payment of
debts of the corporation which the creditors have the right to look up to satisfy their credits. The corporation may
not dissipate this, and the creditors may sue stockholders directly for the unpaid subscription.
The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock but also
other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. All
assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or
in the possession of the stockholders, regardless of full payment of their subscriptions may be reached by the
creditor in satisfaction of its claim.
Violation of the Trust Fund Doctrine
(1) When the corporation releases or condones payment of the unpaid subscription and the stockholder has
no right to demand the refund of his investment;
(2) When there is payment of dividends without unrestricted retained earnings;
(3) When properties are transferred in fraud of creditors;
(4) When properties are disposed, or undue preference is given to some creditors even if the corporation is
insolvent; and
(5) When the capital stock is decreased which has the effect of relieving the stockholders of the obligation to
pay their respective subscription.
Pre-Incorporation Subscription Agreements (PISA) (Sec. 60)
Subscription of shares of stock of a corporation still to be formed shall be irrevocable for at least six (6) months
from date of subscription, unless:
1. All of the other subscribers consent to the revocation;
2. The incorporation of said corporation fails to materialize with said period or within a longer period as may
be stipulated in the contract of subscription; provided that no pre-incorporation subscription may be revoked
after the submission of the articles of incorporation to the SEC.
Despite the non-existence of the corporation, the subscription contract before incorporation is valid and binding.
Sec. 61 provides that it is valid, binding, and irrevocable for six (6) months. In addition, even if the six-month

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period had already expired, the pre-incorporation subscription contract is also irrevocable after the filing of the
Articles of Incorporation with the SEC.
The pre-incorporation subscription is irrevocable for a limited period prior to submission of the Articles of
Incorporation with the SEC to prevent injustice that may be inflicted on subscribers who already exerted effort
to organize the corporation and who already committed financial resources therefor.
Revocation of Pre-Incorporation Subscription Agreement
(1) If all other subscribers consent to the revocation before the expiration of the six (6) month period; and
(2) Upon the expiration of the six-month period (but before the filing of the Articles with the SEC) even
without the consent of the other subscribers or within a longer period as may be stipulated in the
subscription agreement.
Valid Considerations in Subscription Agreement (Sec. 61)
1. Cash actually received;
2. Property, tangible or intangible, actually received AND necessary or convenient for its use and lawful
purposes;
Requisites:
a. It must be subject to fair valuation equal to the par or issued value of the stock issued;
b. The property is actually received by the corporation;
c. The valuation thereof shall be initially determined by the incorporators or the board of directors;
d. The valuation is subject to the approval by SEC; and
e. The property is necessary or convenient for its use and lawful purposes.

3. Labor or services actually rendered to the corporation;

4. Previously incurred corporate indebtedness;
5. Amounts transferred from unrestricted retained earnings to stated capital,
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
7. Shares of stock in another corporation; and/or
8. Other generally accepted forms of consideration.
Prohibited Consideration
Shares of stock shall not be issued in exchange for promissory notes or future services; however, there is no
prohibition on the use of checks, bills or notes in payment of the “cash” consideration.
Amount of Consideration
Stocks shall not be issued for a consideration less than the par or issued price thereof fixed in the Articles of
Incorporation, except for treasury shares so long as the price is reasonable.
Quasi-Negotiable Certificate of Stock
Stock certificates are quasi-negotiable because they can be transferred by indorsement coupled with delivery.
Nevertheless, the transferee of the stock certificate takes it subject to such rights or defenses as the registered
owner or transferor’s creditors may have under the law except insofar as such rights or defenses are subject to
limitations imposed by the principles governing estoppel.
How the Transfer is Made
Voluntary transfer of a share that is represented by a certificate must strictly comply with the following
conditions to be considered binding on the corporation:
(1) There must be delivery of the certificate;
(2) The share must be indorsed by the owner or his agent; and
(3) To be valid to the corporation and third parties, the transfer must be recorded in the books of the
corporation.

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Certificate of Stock
A certificate of stock is the paper representation or tangible evidence of the share, but it is not the share itself.
The certificate is not the stock in the corporation but is merely evidence of the holder’s interest and status in the
corporation. It is the evidence of the shareholder’s ownership of the share represented thereby but it is not in
the law equivalent of that ownership. It expresses the contract between the corporation and the stockholder, but
it is not essential to the existence of a share or the creation of the relation of shareholder to the corporation.
Requirements for Issuance
The stock certificate is not validly issued if it does not comply with the prescribed form and other conditions
imposed by Sections 62 and 63. Thus, a certificate of stock can be issued only upon compliance with these
requisites:
(1) The certificate must be signed by the president or vice-president, countersigned by the secretary or
assistant secretary;
(2) The certificate must be sealed with the seal of the corporation;
(3) The certificate must be delivered;
(4) The par value as to par value shares or full subscription as to no par value shares must first be fully paid;
and
(5) The original certificate must be surrendered where the person requesting the issuance of a certificate is
a transferee from a stockholder.
Remedies for Non-Issuance
The remedies of the shareholder if the corporation unduly refused to issue a certificate are as follows:
(1) Action for specific performance;
(2) Action for damages if specific performance is not available;
(3) Petition for mandamus for the issuance of the certificate; and
(4) Rescind the subscription agreement with the consequent mutual restitution.
A forged certificate is a void certificate. If the officers specified in Section 62 – President or Vice-President and
Secretary or Assistant Secretary – do not sign the certificate or if the signatures of the same officers are forged,
the certificate is not valid even if the present holder is a holder in good faith and for value.
Liability of Directors for Watered Stocks (Sec. 64)
Watered stocks are stocks that are issued for a consideration less than the par or issued price thereof.
A director or officer shall be liable to the corporation or its creditors, solidarily with the stockholder concerned
for the difference between the value received at the time of issuance of the stock and the par or issued value of
the same, in the following circumstances:
1. He consents to the issuance of stocks for a consideration less than its par or issued value;
2. He consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair
value; and
3. He has knowledge of the insufficient consideration, and does not file a written objection with the
corporate secretary.
Interest Unpaid Subscriptions (Sec. 65)
A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much
bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand
payment is no less uncontestable.
Subscribers to stocks shall be liable to the corporation for interest on all unpaid subscriptions from the date of
subscription, if so required at the following rates:
1. At the rate of interest fixed in the subscription contract; and/or
2. If no rate of interest is fixed in the subscription contract, the prevailing legal rate shall apply.

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Payment of Balance of Subscription (Sec. 66)

The board of directors may, at any time, declare due and payable to the corporation unpaid subscriptions and
may collect the same or such percentage thereof, in either case, with accrued interest, if any, as it may deem
necessary.
Effect of failure to pay subscription (Sec. 66)
1. If the subscription contract fixes the date for payment, failure to pay on such date shall render the entire
balance due and payable with interest. Thirty (30) days therefrom, if still unpaid, the share becomes
delinquent, as of the due date, and subject to sale, unless the board of directors orders otherwise; and

2. If no date is fixed in the subscription contract, the board can make the call for payment, and specify the
due date. The notice of call is necessary. A mere demand is insufficient. The failure to pay on such date
shall render the entire balance due and payable with interest. Thirty (30) days therefrom, if still unpaid,
the share becomes delinquent, as of the due date, and subject to sale, unless the board of directors
orders otherwise.
Call
It is the resolution or formal declaration of the board that the unpaid subscriptions are due and payable. The
unpaid subscription is not due and payable without the call. A corporation cannot file an action to recover the
unpaid price if the action is not preceded by a call; until a call is made, no cause of action accrues.
A call is not necessary in two (2) cases:
(1) When the date of payment is specified in the subscription agreement; and
(2) When the corporation becomes insolvent.
Exception:
When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid
stock subscriptions become payable on demand and are at once recoverable in action instituted by the
assignee or receiver appointed by the court.
No Set-Off. A corporation cannot deduct from any amount due to an employee, the latter’s unpaid
subscription of shares. There can be no set-off if there is no notice or call for the payment of unpaid
subscription. In the absence of a notice or call for payment, the subscription price is not demandable.
Payment without call
A stockholder can pay his subscribe shares of stock even if there is no call for their payment. The corporation,
as creditor, cannot refuse a valid tender of payment offered to it (SEC Opinion, September 12, 1989).
Delinquency Sale and Court Action (Sec. 67, 68, & 69)
Procedure for delinquency sale
(1) Resolution – The board of directors shall issue resolution ordering the sale of delinquent stock; it must
contain the following:
a. The amount due on each subscription
b. All accrued interest
c. The date, time, and place of the sale

(2) Notice – Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder
either personally or by registered mail;

(3) Publication – The notice shall furthermore be published once a week for two (2) consecutive weeks in
a newspaper of general circulation in the province or city where the principal office of the corporation is
located;

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(4) Sale – The delinquent stock shall be sold at public auction to be held not less than 30 days nor more
than 60 days from the date the stocks become delinquent;

(5) Transfer – The stock so purchased shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor; and

(6) Credit of Remainder – The remaining shares, if any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the issuance of a certificate of stock covering the same.
Highest bidder in a delinquency sale
(1) The person participating in the delinquency sale who offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement, and expenses of sale for the smallest
number of shares or fraction of a share.
(2) If there is no bidder as mentioned above, the corporation may bid for the same, and the total amount due
shall be credited as paid in full in the books of the corporation. Such shares shall be considered as treasury
shares.
Note: The board is not bound to accept the highest bidder unless the contrary appears.
Reason: In a public sale, the bidder is the one making the offer to purchase which the corporation is free
to accept or reject it.
When sale may be questioned (Sec. 68)
1. The action is filed on the ground of irregularity or defect in the notice of sale, or in the sale of delinquent
stock;
2. The party seeking to maintain such action first pays or tenders to the party holding the stock the sum
for which the same was sold with interest from the date of the sale at the legal rate; and
3. The complaint was filed within six (6) months from the date of sale.
Note: Nothing in this Code shall prevent the corporation from collecting through court action, the amount
due on any unpaid subscription, with accrued interest, costs, and expenses (Sec. 69).
Effect of delinquency (Sec. 70)
A. Upon the stockholder
1. Accelerates the entire amount of the unpaid subscription;
2. Subjects the shares to interest, expenses, and costs;
3. Disenfranchises the shares from any right that inheres to a shareholder, except the right to dividends
(but which shall be applied to any amount due on said shares or, in the case of stock dividends, to be
withheld by the corporation until full payment of the delinquent shares); and
4. Stockholder not included in the determination of quorum because he is not entitled to vote

B. Upon the director owning delinquent shares

1. He can continue serving in that capacity unless and until said shares are totally bidded away, he
continues to be the owner thereof and in the interim he is not disqualified; and
2. A delinquent stockholder seeking to be elected as director may not be a candidate for, nor be duly
elected to, the board.
Rights of unpaid shares, nondelinquent (Sec 71)
Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.
Lost and Destroyed Certificate of Stock
Section 72 is designed to protect not only the real owner but he corporation as well. The real owner is protected
against improvident issuance of another certificate and at the same time, this section provides some sort of a
shield to the corporation and its officers to prevent them from being made liable.

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Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be
brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure of this section.
General rule: This section applied only if the certificates are lost, stolen or destroyed. This does not apply to
certificates that are available but just work out.
Procedure for issuance of New Certificate of Stock in lieu of lost, stolen or destroyed certificates
1. Affidavit. The registered owner shall execute and file an affidavit regarding the share and the circumstances
regarding its loss.
2. Verification. The corporation shall verify the affidavit and other information and evidence with the books of
the corporation.
3. Publication. The corporation shall publish a notice in a newspaper of general circulation published in the
place where the corporation has its principal office, once a week for three consecutive weeks at the expense
of the registered owner of the certificate of stock which has been lost, stolen or destroyed.
4. One (1) year waiting period. There shall be waiting period of one (1) year from the date of the last
publication during which a contest can be interposed.
5. Contest. If the contest has been presented to the corporation or if an action is pending in court regarding
the ownership of the certificate of stock which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the court renders a final decision regarding the
ownership of the certificate of stock which has been lost, stolen or destroyed.
6. Replacement. If no contest within the one-year period, the corporation shall then replace the certificate.
The replacement of share can only be made before the expiration of the one-year period if a bond is posted.
Rights of Shareholders or Members
Basic Rights
The shareholder has the following rights even if he has not yet fully paid his shares:
(1) Direct or indirect participation in management;
(2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 27);
(4) Proprietary rights
(a) Right to dividends;
(b) Appraisal right (Sec. 80);
(c) Right to issuance of stock certificate for fully paid shares (Sec. 63);
(d) Proportionate participation in the distribution of assets in liquidation (Sec. 134-135);
(e) Right to transfer of stocks in corporate books (Sec. 62);
(f) Pre-emptive right (Sec. 38);
(5) Right to inspect books and records (Sec. 73);
(6) Right to be furnished of the most recent financial statement/financial report (Sec. 73-74);
(7) Right to recover stocks unlawfully sold for delinquent payment of subscription (Sec 69); and
(8) Right to file individual suit, representative suit, and derivative suit.
Obligations
Being a shareholder has concomitant obligations to the corporation, to the other subscribers as well as to
third persons in proper cases. The obligations of a stockholder include the following:
(1) Liability to the corporation for unpaid subscription (Sec. 67-70);
(2) Liability to the corporation for interest on unpaid subscription if so required by the by-laws (Sec. 66);
(3) Liability to the creditors of the corporation for unpaid subscription (Sec. 60);
(4) Liability for watered stock (Sec. 65); and
(5) Liability for dividends unlawfully paid (Sec. 43).

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Suits by Stockholder/Members
A. Derivative Action
Suits brought by one or more stockholders/members in the name and on behalf of the corporation to
redress wrongs committed against it, or to protect or vindicate corporate rights whenever the officials of
the corporation refuse to sue, or the ones to be sued, or has control of the corporation. Derivative actions
are not expressly provided for in the Corporation Code although the same is implicit from the rights of
shareholder.
General rule: Where a corporation is an injured party, its power to sue is lodged with its board of directors
or trustees.
Requisites:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred
and the time the action was filed; He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the Articles of Incorporation, By-
laws, laws or rules governing the corporation or partnership to obtain the relief he desires;
(2) No appraisal rights are available for the acts or acts complained of; and
(3) The suit is not a nuisance of harassment suit.
A derivative action is proper if the action is principally for damages resulting from alleged mismanagement
of the affairs of the corporation by its directors/officers, if it is alleged that the acts of mismanagement are
detrimental to the interests of the corporation. Thus, the injury complained of primarily pertains to the
corporation so that the suit for relief should be by the corporation.
A derivative action is also proper when the action is based on the devices and schemes employed by the
Board of Directors that amounts to mismanagement, misrepresentation, fraud, and bad faith.
B. Individual Action
These are actions brought by the shareholder in his own name against the corporation when a wrong is
directly inflicted against him personally and to determine his individual right. The cause of action pertains
to the shareholder and the action is meant directly to protect his interests.
General rule: A stockholder may file an individual action or suit against another stockholder or even
against the corporation itself if he has sufficient cause of action.
C. Representative Action
These are actions brought by the stockholder in behalf of himself and all other stockholders similarly
situated when a wrong is committed against a group of stockholders.
Pre-emptive Right
It is the right of a shareholder to subscribe to all issues or disposition of shares of any class, in proportion to his
respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto.
The purpose of which is to enable the shareholder to retain their proportionate control in the corporation and to
retain his equity in the surplus.
Pre-emptive right is NOT available in the following:
1. Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the
public;
2. Shares issued in good faith in exchange for property needed for corporate purposes;
3. Shares issued in payment of previously contracted debts;
4. In case the right is denied in the Articles of Incorporation; and
5. If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not
entitled to purchase the corresponding shares of the shareholder who declined. But if nobody purchased
the same and later on the board re-issued the shares, the pre-emptive right applies.

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Right to Vote
A. Stockholder’s meeting
A stockholder is given the right to participate in the corporate affairs by giving him the right to attend
meetings after due notice and the right to vote thereat in person or through proxy or trustee.

KIND OF MEETING DATE OF MEETING REQUIRED NOTICE

Regular Meeting of 1. The date in the By-laws; or
Stockholders 2. If there is no date in the By-laws,
any date after April 15 as
determined by the board.
Special Meeting of 1. Any time deemed necessary; or
Stockholders 2. As provided in the By-laws.
1. Within the period provided in the
by-laws; or
2. In the absence of provision in the
By-laws, at least 21 days prior to
the meeting.
1. Within the period provided in the
By-laws; or
2. In the absence of provision in
the By-laws, one (1) week prior
to the meeting.

Quorum of meeting of stockholders and members - Stockholders representing a majority of the

outstanding capital stock or a majority of the members.

Excluded from the computation of quorum

a. Delinquent shares or members; and
b. Non-voting shares or members.
Who will call special meeting of stockholders
1. Officer designated in the Articles or By-laws;
2. Board of Directors or Trustees if nobody is designated to call in the Articles or By-laws; or
3. SEC, if there is no person authorized or the person authorized refuses to call a meeting.
Place of meeting - Principal office of the corporation as set forth in the articles of incorporation, or, if not
practicable, in the city or municipality where the principal office of the corporation is located.
B. Manner of Voting
1. Stockholders and members may vote in person or by proxy in all meetings of stockholders or
members.
2. When so authorized in the by-laws or by a majority of the board of directors, the stockholders or
members of corporations may also vote through remote communication or in absentia:

Requirements:
a. The votes are received before the corporation finishes the tally of votes.
b. A stockholder or member who participates through remote communication or in absentia, shall
be deemed present for purposes of quorum.
Proxy Form - In writing, signed and filed, by the stockholder or member, in any form authorized in the by-
laws and received by the corporate secretary within a reasonable time before the scheduled meeting.
Period of Validity - Unless otherwise provided in the proxy form, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one
time.
C. Voting Trust
One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring
upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any time.

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However, if the voting trust specifically required as a condition in a loan agreement, said voting trust may
be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan (Sec.58).

D. Limitations on right to vote

1. Where the articles of incorporation provide for classification of shares pursuant to Section 6, non-voting
shares are not entitled to vote except as provided for in Section 6;
2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the
Code (Sec. 6);
3. Fractional shares of stock cannot be voted unless they constitute at least one full share;
4. Treasury shares shall have no voting right as long as such shares remain in the Treasury (Sec. 56);
5. Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled
to vote or a representation at any stockholder’s meeting;
6. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the
corporation; and
7. A stockholder is still entitled to vote even if the shares are mortgaged or pledged unless he authorizes
the creditor in writing to vote (SEC Opinion, April 7, 1987).
Appraisal Right
It refers to the right of a stockholder to withdraw from the corporation and demand payment of the fair value of
his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure.
Upon demand, all rights accruing to the shares shall be suspended.
Instances where appraisal right may be exercised:
1. Extension or reduction of corporate term;
2. Change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict
the right of any stockholders;
3. Corporation decides to sell or dispose of all or substantially all assets of corporation; and
4. Merger or consolidation.
Rules for exercise of appraisal right:
1. The stockholder must be a dissenting stockholder – he voted against the proposed action;
2. The stockholder must make a written demand on the corporation within 30 days after the vote was
taken;
3. The price to be paid is the fair value of the shares on the date before the vote was taken;
4. The fair value shall be deemed agreed upon but in case there is no agreement within 60 days from the
date the vote was taken, the fair value shall be determined by a majority of the three (3) disinterested
persons one of whom shall be named by the stockholder, another by the corporation and the third by
the two who were chosen; and
5. The right of appraisal is extinguished when:
i. He withdraws the demand with the corporation’s consent;
ii. The proposed action is abandoned; or
iii. SEC disapproves the action.

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By-laws
By-laws are rules of action adopted by a corporation for its internal government and for the regulation of conduct
and prescribe the rights and duties of its stockholders or members towards itself and among themselves in
reference to the management of its affairs.
Functions:
a. Supplement the Articles of Incorporation;
b. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members
towards the corporation and among themselves; and
c. Regulate business transactions of the corporation in a particularly.

By-laws in relation to Articles of Incorporation

1. By-laws are subordinate to the articles of incorporation as well as to the Corporation Code and related
statutes. (Loyola Grand Villas Homeowners Assoc. vs. CA GR. No. 117188, August 7, 1997)
2. By-laws can neither enlarge the rights and powers conferred by the charter nor restrict the duties and
liabilities imposed thereby, and in case it attempts to do so, the charter will prevail. (Leeds vs. Harrison, 15
N.J. Super, 82, 1951)

ARTICLES OF INCORPORATION BY-LAWS

Condition precedent in the acquisition of corporate
existence
Essentially a contract between the corporation and
the stockholders/members; between the
stockholders/member inter se, and between the
corporation and the state
Executed before incorporation
Amended by a majority of the directors/trustees and
stockholders representing 2/3 of the outstanding
capital stock, or 2/3 of the members in case of non-
stock corporations
Power to amend/repeal articles cannot be delegated
by the stockholders/members to the board of
directors/trustees
Condition subsequent; its absence merely furnishes
a ground for the revocation of the franchise
For the internal government of the corporation but
has the force of a contract between the corporation
and the stockholders/members, and between the
stockholders and members
May be executed after incorporation. Section 46
allows the filling of the by-laws simultaneously with
the Articles of Incorporation
May be amended by a majority vote of the BOD and
majority vote of outstanding capital stock or a majority
of the member in non-stock corporation
Power to amend or repeal by-laws or adopt new by-
laws may be delegated by the 2/3 of the outstanding
capital stock or 2/3 of the members in the case of
non-stock corporation

Validity of the By-laws

a. Must not be contrary to law
The by-laws may be necessary for the “government” of the corporation, but these are subordinate to the
Corporation Code and related statutes. For example, a provision in the by-laws creating a permanent seat
in the Board of Directors is contrary to the provisions of the Corporate Code because the Code requires
election of directors.
b. Must be consistent with the Articles of Incorporation
The Articles of Incorporation should be given more weight than the By-laws. This is reflected in Section 46
that provides that the contents of the by-laws are subject to the provisions of the Articles of Incorporation.

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c. Must not be contrary to morals or public policy

Consequently, the provisions must be reasonable and must not be discriminatory, arbitrary, or oppressive
upon the shareholders. For example, while additional qualifications can be provided for in the by-laws, the
same should be applicable to all shareholders and not merely on a group of shareholders.
d. Must not disturb vested rights
For example, in Thomson vs. Court of Appeals, the Supreme Court disallowed the absolute restriction
imposed on the right to transfer shares of stock or proprietary membership in a corporation.
In Salafranca vs. Philamlife (Pamplona), the Court declared that amended by-laws should not undermine
the security of tenure of an employee by declaring non-existent an employee’s position. In the said case,
the provisions of the by-laws were amended to provide that the position of the complainant was coextensive
with that of directors. The Supreme Court said that the same cannot affect the rights of the complainant,
who was a regular employee who is entitled to security of tenure.

Adoption of By-Laws
Required votes:
1. If it is adopted prior to incorporation – The by-laws must be approved and signed by all the incorporators
and submitted to SEC, together with the articles of incorporation.
2. If it is adopted and filed after incorporation – The affirmative vote of the stockholders representing at least
a majority of the outstanding capital stock, or of at least a majority of the members in case of nonstock
corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for
them.
The Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance company, public utility, educational
institution, or other special corporations governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or amendments are in accordance with law.
Effectivity
Upon the issuance by the Commission of a certification that the by-laws are in accordance with this Code.
Contents of By-laws (Sec. 46)
A private corporation may provide the following in its by-laws:
a) The time, place, and manner of calling and conducting regular or special meetings of the directors or
trustees;
b) The time and manner of calling and conducting regular or special meetings and mode of notifying the
stockholders or members thereof;
c) The required quorum in meetings of stockholders or members and the manner of voting therein;
d) The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes;
e) The form for proxies of stockholders and members and the manner of voting them;
f) The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the
compensation of directors or trustees and officers, and the maximum number of other board representations
that an independent director or trustee may have which shall, in no case, be more than the number
prescribed by the Commission;
g) The time for holding the annual election of directors or trustees and the mode or manner of giving notice
thereof;
h) The manner of election or appointment and the term of office of all officers other than directors or trustees;
i) The penalties for violation of the by-laws;
j) In the case of stock corporations, the manner of issuing stock certificates; and
k) Such other matters as may be necessary for the proper or convenient transaction of its corporate affairs for
the promotion of good governance and anti-graft and corruption measures.

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Amendments to By-laws (Sec. 47)

Two (2) ways to amend the by-laws:
(1) Amendment by the Board and Stockholders
General rule: Amendments must be done by the board of directors or trustees, by a majority of vote thereof,
and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members
of a non-stock corporation, at a regular or special meeting duly called for the purpose.
In the absence of an express provision denying the right to vote by proxy in the Articles of Incorporation or
By-laws, proxies may validly amend the corporation’s By-laws.
(2) Delegation to the Board
The board alone can amend the By-laws if there was prior delegation of such power by the stockholders.
The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-
stock corporation may delegate to the board of directors or trustees the power to amend or repeal the by-
laws or to adopt new By-laws.
Binding effect:
1. As to members and corporation
a. They have the force of contract between the members themselves.
b. They are binding only upon the corporation and on its members and those having direction,
management, and control of its affairs.

2. As to third persons
They are not bound to know the by-laws which are merely provisions for the government of a corporation
and notice to them will not be presumed.
Reason: By-laws have no extra corporate force and are not in the nature of legislative enactments so far as
third persons are concerned.
3. As to Corporate Directors and its Officers
a. They are bound by and must comply with them unless and until they are changed.
b. Subordinate employees without actual knowledge of the by-laws are not bound.

REFERENCES:
Aquino, T.B. (2014). Philippine corporate law compendium. Quezon City: Rex Printing Company, Inc.
De Leon, H.S. & De Leon, H.M. (2013). The corporation code of the Philippines. Quezon City: Rex Printing
Company, Inc.

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