CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Parties
Introduction of the Subject
Note: This part contains Atty. Espedido’s first day lecture where he
attempted to summarize the entire Corporation Code in 1.5 hours. In
other words, this is our Corporation Law 101 crash course. Some parts
here will be discussed more in detail later.
1. Incorporators – persons who start the corporation. They do not
execute immediately the articles of incorporation. First, they hire
the promoters.
For your guidance.
2. Promoters – those who would simply solicit investment from
other people. They explain the idea and promote the business.
Once the promoters are able to convince, then there will be
stockholders or investors.
This reviewer follows the sequence of the codal provisions. Each
yellow bar represents a Section of the Corporation Code.
History of the Corporation Code
History of the Code
Philippine legislators copied the law from the US, who in turn copied
the same from Spain. Having been under the US for 14 years, we were
not compelled to copy the law but it was enforced on us by the
American government. For a long while, it was a verbatim copy of the
American form of Corporation Law, but a little later, the Philippines
came out with their own revisions which is now called the ‘Corporation
Code of the Philippines.’
Sir: The Corporation Code is a special law. We do not expect good
organization of the law. It may seem that the authors of the law were
not synchronized.
Corporation and Incorporators
The Genesis story
Adam – Sole proprietorship
Adam and Eve – Partnership
Adam, Eve and Children – Corporation
3. Investors – not all investors are incorporators but all
incorporators must be investors because they will have to
subscribe.
Articles of Incorporation
Articles of Incorporation
The moment the subscribers would indicate that they now have
enough capital, then they will have to execute and formalize the
Articles of Incorporation, which is the basic contract or the formal
agreement among the incorporators and the stockholders.
Contents
1. Name of the corporation
Unlike in partnership, there is no more need to include the names
of any person but only the proposed corporate name so long as
the nature of the business that you intend to pursue is indicated.
Example: If you intend to pursue wellness or therapeutic
massages called “Haplos-Haplos Corporation” then you could
form your corporation. It could also be a corporation that offers
botox or enhancement of certain parts of the bod.
Incorporators
They are the very persons who organized the corporation. They are
those who incorporate and who actually signed the Articles of
Incorporation. They will forever remain the same. If one later comes
and subscribes as a stockholder, he can never claim to be an
incorporator because incorporation of a corporation is a one-time
event.
Illustration: Seals in Corporations, “Incorporated in 1915”
TN: The law requires that there must at least be 5 incorporators.
2. Term
Maximum of 50 years, renewable for another 50 years.
3. Address
A corporation will be a juridical person. The address must be
indicated for the SEC to know where the corporation is located; to
where notices will be served like fines or penalties for noncompliance
with
certain
requirements—documentary
or
reportorial.
Corporation v. Partnership
Example: “Somewhere in the interlands of Aloguinsan” – Not a
Corporation
Partnership
Must not be less than 5 and not
more than 15 incorporators.
At least 2 partners
would be enough.
Sir: In some countries, a sole incorporator is allowed. The purpose is
for the corporation to have a separate juridical personality from the
incorporator, so that the incorporator’s liability is limited to the
corporation assets. This form of corporation is still proposed in our
laws, not yet actual. (Single Incorporation)
1|U N I V E R S I T Y O F S A N C A R L O S
valid address. You have to be specific.
4. Purpose of the business
What business one intends to pursue or carry out. The
corporation must offer specific and concrete products or services.
Examples:
1. Manufacture, Reparation, Promotion, or Marketing of certain
products
2. “Joy, fun and happiness” cannot be offered since it is not
specific.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Kinds of purpose:
3. Paid-Up Capital Stock (PCS)
1. Primary purpose
The stock that is actually paid for by the stockholders.
2. Secondary purpose– may refer to incidental or related
products or activities.
Important: The law requires that at least 25% of the
Subscribed Capital Stock should be paid initially or “paid-up”.
Thus, if a corporation has P100M ACS and P25M SCS, at
least P6.25M must be paid-up.
Examples:
(a) Flour Manufacturing is the primary purpose.
Secondary purpose: Marketing, production and sale of
instant noodles. If the flour is not sold out, noodles
can be prepared out of it.
(b) Bakeshop of doughnuts as the primary purpose. If not
sold out, the bakeshop can make Waray-waray
(Bahug2x) out of the unsold doughnuts.
5. People Involved
Q. What happens when a corporation is a stock corporation?
ANS:
1. Divide the capital stocks into shares of stocks
2. Then assign a value of that share (Par Value)
Example:
P100 M divided into 100 million shares of stocks. So each share will be
P1. P1 per share is now the par value.
Temporary set of directors pending approval of the corporation.
Temporarily, in an acting capacity, the organizers will have to
agree among themselves who will be the “interim directors”.
Unlike in partnership where management will be vested in some
or all of the partners, in a corporation, management is vested in
the Board of Directors (BOD).
The names, nationalities and residences of these interim directors
must be indicated in the Articles until the first regular directors or
trustees are duly elected and qualified in accordance with the
Code.
6. Capital Structure of the Corporation
A capital structure is required for a business enterprise, unless
you are a non-stock corporation.
TN: Corporations formed or organized under this Code may be
stock or non-stock corporations. Corporations which have capital
stock divided into shares and are authorized to distribute to the
holders of such shares dividends or allotments of the surplus
profits on the basis of the shares held are stock corporations. All
other corporations are non-stock corporations.
Three levels of capital structure:
1. Authorized Capital Stock (ACS)
The maximum amount or ceiling of investments that
corporation could gather, or would be allowed to invest in
business. If you want to go higher, then you would have to
amend your articles of incorporation.
2. Subscribed Capita Stock (SCS)
The committed investment of the stockholder. It already
forms part of the capital of the corporation. Hence, third
party creditors can go after the subscribed even if it was not
yet paid up.
Important: The law requires that 25% of the Authorized
Capital Stock must be subscribed. Thus, if a corporation has
P100M ACS, at least P25M must be subscribed.
2|U N I V E R S I T Y O F S A N C A R L O S
Trust Fund Doctrine
Trust Fund Doctrine
The subscriptions of the stockholders cannot generally be withdrawn
by them as these are kept in trust for third party creditors. This is the
trust fund doctrine, one which gives third party creditors a right to be
entitled to the Subscribed Capital Stock, or in the example given
above, the entire P25 Million.
Important: If there is dissolution, and it is found that the corporation
can no longer pay its obligations, then third party creditors can go
after the unpaid subscription (the unpaid subscriptions form part of the
legal capital of the corporation as these represent the amounts which
the stockholders committed to invest)
Sir: This is why the ACS, the names of the stockholders and their
respective subscriptions, and paid up capital stock will have to be
indicated in the Articles of Incorporation. The unpaid subscriptions
would be considered an obligation on the part of the stockholders.
Time of payment of unpaid subscriptions
It depends.
1. If there is an agreement on a specific date, then it would be on
that date.
2. If there is no such agreement, then it depends on the Board.
Application with the SEC
TN: The SEC checks everything, like if the amount paid up actually
exists.
Requisites:
1. Make a deposit in the bank
2. Present a bank certificate of deposit to convince the SEC that
there is such deposit
3. The application must be companied by a Treasurer’s Affidavit,
claiming under oath that indeed he received the amount in
deposit
4. Authorize the SEC’s representative and give him the authority to
verify the deposit in the bank which issued the certificat
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
By-laws of the Corporation
Content
A. All the necessary procedures
B. How many boards and officers will be elected
C. Term of office
D. Functions and Powers
E. Meetings and Quorum
F. Manner of election
G. How are vacancies created, and how should it be filled up
H. When will the stockholders and/ or board meet
I. The definition of various types of shares, which may be:
(a) Common shares
(b) Treasury shares
(c) Redeemable shares
(d) Founder shares
TN: When the Articles and By-laws are prepared, a corporation is now
ready to submit it to the SEC for approval. However, if the by-laws are
yet to be ready, a corporation may opt to submit such a little later.
Usually, though, the practice is that they are submitted together.
Certificate of Incorporation
The birth certificate of your corporation. This is given by the SEC after
all the documents required in registration are satisfied, which include
among others:
1. Articles of Incorporation
2. By-laws
3. Deposit of paid up capital in the bank (for stock corporations)
TN: The official date the corporation is is duly incorporated, organized
and existing under the laws of the Philippines. With the certificate of
incorporation, you can now exist as a corporation.
Important: Any act entered into before that date does not bind the
corporation for lack of legal personality to act as a corporation.
Steps after birth of the Corporation
1. Organization meeting of the stockholders
The purpose is to elect the members of the Board. The manner of
election is usually cumulative voting.
Cumulative voting – The number of votes will be determined by
multiplying your number of shares with the number of directors to
be elected.
Ex: If you have to elect 10 directors and you have 500 shares,
you have 5000 votes and you may use the 5000, distribute them
among the candidates that you want or focus them to one to be
sure that he will win.
Important: Nobody will be allowed to participate in the
discussion unless you are a member of the board. A proxy is not
allowed because you have been elected because of your
qualification to be a good member of the board. The right of the
board of director to participate in a meeting is personal, you
cannot delegate that right.
Election of officers
The first agenda of the Board meeting is the election of officers.
As per the by-laws, they will elect the Chairman, Vice-President,
CEO, COO everything depending upon the by-laws.
‘Business Judgment Rule’
The power to manage the corporation is vested with the Board.
Their decisions are thus final, as a general rule. The stockholders
do not have the authority to determine how the Board will decide
and cannot therefore interfere with the Board’s decisions, except
for some acts which are subject to the ratification of the
stockholders. In fact, even the courts cannot interfere with the
Board’s decisions.
This is because the power to manage the corporation of Board is
not delegated to them by the stockholders, but by the law. The
only power of the stockholders is to elect the members of the
board.
Sir: The powers of the Board and individual officers are defined in
the by-laws while the powers of the corporation are defined by
law.
Ultra Vires Acts v. Unauthorized or Unofficial Acts
 Ultra vires acts – acts beyond the powers of the corporation
 Unauthorized or unofficial acts – acts beyond the powers of
the Board or individual officers
3. Increase in Capitalization
Along the way there might be a need to require additional capital.
Options of the Corporation:
1. Get additional subscriptions
The Corporation may offer the remaining shares to anyone
who may be interested. That’s why other investors may
subscribe for new shares or the existing shareholders
themselves may be interested to subscribe for more so that
additional subscriptions may be offered so long as they are
still within the Authorized Capital Stock.
2. Increase Authorized Capital Stock
Once the ACS is exhausted and should there be a need to
have more capitalization, they could always increase the
ACS by amending the Articles of Incorporation.
2. Meeting of BOD, Election of Officers
Once the Board of Directors are elected, they could adjourn the
stockholders meeting and the directors themselves will now hold
its first meeting as a board.
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3. Mergers and Acquisitions or Consolidation
Other than inviting more subscriptions, the corporation
might decide to get married and look for partners and
potential investors.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Objectives of Merger: Produce
revenues, and reach wider market.
more
products
and
Partnership v. Corporation
Partnership
Corporation
Because of the
principle of trust and
confidence, only those
chosen may invest and
be a partner.
Capitalization is limited
to the contribution of
the partners and loans
from creditors.
The corporation can
acquire more investments
since there are unlimited
opportunities for the
increase in capitalization.
Consequently, this makes
it feasible for the
corporation to engage in
bigger business.
Liability can extend to
personal assets
A (general) partner is
personally liable for the
liabilities incurred by
the partnership.
Limited liability.
Stockholder is not
personally liable. His
liability is only limited to
the extent of his
investment in the
corporation.
Management
Every partner is an
agent of the
partnership.
Management of the
business is vested with
the BOD.
Transferability
of interest
Transfer of partner’s
interest requires
consent of all partners
because they have the
right to select their
partners.
Shares of stocks can be
transferred even without
the consent of the other
stockholders.
Examples:
1. If a person has a Bank in Manila and wanted to
extend his banking business in Mindanao, he may
have the option to merge its bank with another bank
in Mindanao who would like to extend also its bank in
Luzon.
Capitalization
2. If the owner of Noodle Manufacturing Company does
not want to continue his business because he is of old
age already and no family members would like to
succeed in his business, he may have the option to
sell all his assets to the Flour Manufacturing Company.
In return, he will become a shareholder of the Flour
Company corresponding to the value of his assets sold
and wait for the dividends.
Liability
Advantages and Disadvantages of a Corporation
Advantages of a Corporation
1. More capitalization
2. Limited liability
3. Easier management
4. Transferability of interest
5. Right of Succession
Disadvantages of a Corporation
1. Relatively complication in terms of formation and management.
2. Entails high cost of formation and operations.
3. Its credit is weakened by the limited liability of the stockholders.
4. There is ordinarily lack of personal element in view of the
transferability of shares.
5. There is greater degree of governmental control and supervision
than in any other forms of business organization.
6. In large corporations, management and control are separated
from ownership.
7. Stockholders’ voting rights have become theoretical particularly in
large corporations because of the use of proxies and widespread
ownership.
8. Stockholders can not directly participate in the management
9. Greater tax imposed in corporations
 Corporate income tax – tax on the income of the corporation
 Income tax – tax on the income of the stockholders
(dividends distributed to them)1
Succession
There is no right of
succession
Death of (general)
partner dissolves the
partnership.
There is right of
succession. Heirs will
succeed the rights of the
stockholder in case of the
latter’s death. This adds
stability to the corporation
because this results in the
continuity of the
corporation’s existence.
Stockholders’ Limited Participation in Management
Illustration: The Corporation has an income of 100M. The 100M is subject to corporate
income tax. If out of the 100M, the corporation will decide to distribute 500K to the
stockholders by way of dividends and there are five stockholders with equal shares, each of
the stockholders will have 100K each. This 100k will be subject again to income tax to be paid
by the stockholders individually. The same amount is taxed again. In this sense, it is a
disadvantage.
1
4|U N I V E R S I T Y O F S A N C A R L O S

Partnership – the partner is an agent of the partnership. As a
matter of fact, if no partner is designated, all partners are
managing partners.

Corporation – stockholders do not directly participate. The
stockholders are only the ones who choose the members of the
board of directors. They participate indirectly by exercising their
right to vote.
(a) In a non-stock corporation – they elect one set to serve for 1
year and another set for 2 years and another set for 3 years
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
and every year thereafter they will now be serving three
years.
General Provisions
Sec. 2. Corporation defined
(b) In a stock corporation – only one-year term.
Reason: The intention is to give the stockholders the
opportunity to retain that limited participation in
management. The moment that they do not like the manner
by which the board is making decisions, then they will have
to wait for the stockholders meeting for the new election.
General Rule: Stockholders do not have direct participation in the
management of the Corporation since the power is vested with the
Board, pursuant to the ‘Business Judgment Rule’.
Exceptions: (Matters where decisions of the Board are subject to the
ratification by the stockholders)
1. Amendment of the Articles of Incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property
4. Incurring, creating or increasing bonded indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with another
corporation or other corporations
7. Investment of corporate funds in another corporation or
business in accordance with this Code
8. Dissolution of the corporation.
Important: All these constitute a change in their fundamental
agreement, thus, ratification by the stockholders is required.
Situation:
Because of the problems in the incorporation, these
stockholders might not be able to get their Certificate of
Incorporation. The SEC may not approve. They have the
intention to engage in business but the only problem is, they
were not able to secure the Certificate of Incorporation. Could
they be at least considered as partners in a partnership since
they were not able to form a corporation?
ANS: No. A defective incorporation does not result into a Partnership.
In a Partnership, intention is controlling. Here, there was no intent on
the other parties to enter into a partnership. The intention was to form
a corporation.
Important: As partners, there must an express intention to establish
a partnership, otherwise a partnership cannot exist. Thus, if two
owners enter into an apartment and decided to pay their rentals, they
are not necessarily partners—only co-owners.
Section 2. Corporation defined
A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
Elements:
1. An artificial being
2. Created by operation of law
3. Has right of succession
4. Has powers attributes and properties expressly authorized by law
or incident to its existence.
Corporation is an artificial being
A corporation is an artificial being
Under the law, it is granted a separate and distinct personality from
that of its owners or stockholders.
TN: An artificial being is created by law, while a natural being is
created by God.
Q. What happens when a juridical person is created?
ANS: That juridical person acquires the rights, properties and
attributes as expressly authorized by law or incident to its existence.
Important: An artificial person has a separate set of rights from that
of natural persons. Artificial persons enjoy certain rights that natural
persons also enjoy, but not all.
Q. Why are corporations granted some constitutional rights of
natural persons?
ANS: Because behind the corporate veil are natural persons. The
creation of corporation is merely a legal fiction. When a juridical
person is created by law, it covers the natural persons by the veil of
corporate fiction.
The fact that they have decided to gather together as a corporation
does not deprive them of their constitutional rights. Hence, these
rights are derived by the corporation from the people who constituted
them.
Corporations should enjoy these rights “as far as practicable”
“As far as practicable” means there are some rights that cannot be
exercised by an artificial person, such as:
1.
2.
3.
Political rights (e.g. right to vote, right to run for public office)
Right to liberty – a corporation is not a corporal being or it has
no physical existence which can be detained unlike a natural
person. A corporation cannot move and therefore it is
impractical to send the corporation to jail.
Right to Life – granted only personality in accordance to law.
Constitutional rights of a corporation that natural persons also
enjoy
1. Right to sue and be sued
2. Right to due process of law and equal protection of rights
3. Right against unreasonable searches and seizure
4. Right against non-impairment of contracts
5|U N I V E R S I T Y O F S A N C A R L O S
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
TN: Fines are not civil obligations, but are penalties
5. Right to own and acquire property
6. Right to enter into contracts
3. Under Anti-Money Laundering Act (AMLA)
A corporation enjoys the right to due process.
The law states that a juridical being may be held liable if the act
is committed by corporation.
Sec. 1, Art. 3, Constitution. “No person shall be deprived of life, liberty
or property without due process of law, nor shall any person be denied
the equal protection of the law.”
Important: The Constitution gives this right only to natural persons.
In Constitutional Law, we are never taught that the term "person" in
the Constitution also includes juridical persons. However, most of the
authors agreed that juridical persons should also be afforded with
these rights although not all of those under the Bill of Rights.
Reason: A corporation is composed of natural persons. The mere fact
that they are natural persons, they should not be deprived of their
basic constitutional rights.
Penalties in AMLA include:
(a) Suspension
(b) Revocation of license
(c) Fine
Effects of being an artificial being
It has a separate and distinct juridical personality from the persons
who constituted the corporation. There is a ‘corporation fiction.’ Once
the said fiction is created, the veil hides the natural persons behind it.
Thus, in so far the law is concerned, you deal with the corporation and
not the natural persons.
A corporation enjoys the right against self-incrimination
A corporation can have a representative who can invoke such right
whenever the latter’s statement will incriminate the corporation.2
Criminal liability of corporations
General Rule: A corporation cannot be criminally liable under the
Revised Penal Code.
Reason: Crimes under RPC has the element of intent which
corporations are not capable of as it has no mind of its own. However,
a corporation can still be civilly liable as it is capable of entering into
contracts.
Exceptions:
Piercing the corporate veil
General rule: In terms of liability, only the corporation can be held
liable. It does not become the liability of the officers.
Exceptions:
1. Corporation defeats public convenience by evading liabilities
2. Use the corporation to perpetrate fraud
3. Corporation is merely used as an alter ego
Situations:
Corp owes supplier 1 million, and corporation cannot pay.
Who can be held liable?
ANS:
1. Under Special Penal Laws penalizing corporations
The law must specify that the corporation could be liable for
certain penalties. Although a corporation has no mind of its own
and therefore without intent, the officers who made the decision
to commit will be liable.
The criminal law system requires proof beyond reasonable doubt.
No officers of the corporation should be sent to jail because
criminal law system requires proof beyond reasonable doubt.
Therefore, these officers cannot be punished by imprisonment if
there is no law punishing them.
Important: To be able to punish the officers, the law should
specify specifically that in case the corporation becomes liable,
the officers directly punishable for the commission of the act must
suffer the penalty of imprisonment. Without that, there is a
doubt.
2. When penalty imposed is a fine
It is not practicable to send a corporation to jail. Since in criminal
law, penalties can be either imprisonment, fines, or both; a
corporation can be made liable criminally by paying a fine.
2
It is of Atty E’s opinion that this is a right enjoyed by a corporation, although the book did
not state it.
6|U N I V E R S I T Y O F S A N C A R L O S
The corporation is liable. The supplier cannot go after the
officers. The veil will remain.
Corp A incurred 1M liability. Creditor filed case. Once Corp A
knew of this case, it created Corp B by making it appear that
its assets were sold to Corp B. Should the creditor win in the
case, can it go after Corp B’s assets?
ANS: Yes. The corporate veil may be lifted because the transfer of
assets from Corporation A to Corporation B was intended to defraud
the creditors.
Corporation is created by operation of law
A corporation is created by operation of law
It was the law that granted them the privilege to exist. Accordingly,
the corporation has to follow the law that gave them their existence.
Right of Succession
Succession
If a stockholder or a member dies, withdraws, is insolvent or suffers
incapacity, the corporation will still continue and not be dissolved.
Important: The heirs will succeed. Death of a stockholder does not
dissolve the corporation. Even so, in an extreme possibility that all of
the stockholders will die, still, there is a right of succession. The heirs
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
of all the stockholders, themselves, become the stockholders. And they
will now assume the rights of the stockholders.
Succession takes effect at the moment of death. There is no gap as
there is an automatic new stockholder. In fact, stockholdings are
transferrable. If you own a share, you can transfer or assign it.
Situation
A group of young, newly married persons decided to organize
a corporation. After a year of existence it was able to realize
huge profits so they wanted to celebrate and spend their
Christmas outside the Philippines. They also decided to hold
their board meeting aboard a cruise ship. So the stockholders
went together with their wives. The children were left behind.
Unfortunately, the vessel got lost in a typhoon and all
passengers perished. They left behind their children with an
average of 3 years old. What happens to the corporation?
ANS: The corporation remains to exist and will not be dissolved. The
interests of the stockholders will be transferred to their respective
heirs. This is the right of succession of a corporation. So during a
stockholders meeting, since the heirs are children, then they have to
be represented by their guardians or by the respective executor or
administrator as the case may be.
Powers of a Corporation
“The powers, attributes and properties expressly authorized by law or
incident to its existence.”
1. Express powers
of
2. Incidental powers
Powers which are necessary to carry out the express powers or
for furtherance of the purpose of the corporation itself.
Important: The acts of the corporation shall be within it powers.
Otherwise, if it goes beyond its powers, it shall be considered an ultra
vires act.
Ultra vires act
Acts of the corporation which
are beyond the powers of the
corporation
Section 3. Classes of Corporation
Corporations formed or organized under this Code may be stock or
non-stock corporations. Corporations which have capital stock divided
into shares and are authorized to distribute to the holders of such
shares dividends or allotments of the surplus profits on the basis of the
shares held are stock corporations. All other corporations are nonstock corporations.
Classifications of Corporation
1. As to whether membership is represented by shares or stocks
A. Stock corporation
B. Non-stock corporation
2. As to their legal right or corporate existence
A.
B.
C.
D.
De jure corporation
De facto corporation
Corporation by prescription
Corporation by estoppel
3. As to whether they are open to the public or not
A. Close corporation
B. Open corporation
Powers of a Corporation
Those found in the Corporation Code, the articles
incorporation, and other laws regarding corporations.
Sec. 3. Classes of Corporation
4. As to their relation to one another
A. Parent or Holding corporation
B. Subsidiary corporation
5. As to purpose
A. Public corporation
B. Private corporation
6. As to composition
A. Corporation aggregate
B. Corporation sole
Public v. Private Corporations
Distinction
Unauthorized act
Public Corporation
Private Corporation
Acts of officers done
beyond the powers granted to
them
Formed by the government for
the common good and public
welfare. It is instituted to
govern a portion of the State.
Organized for private purpose,
benefit or profit.
Example of Unauthorized Act: The board of directors decided to
borrow money from a bank to finance a particular project. If expressly
authorized or if within the by-laws, then the act of the board is valid.
The act of borrowing is also part of the power of the corporation.
However, if it was discovered that the resolution is only signed by the
president and not by the board, then it can be considered an
unauthorized act.
7|U N I V E R S I T Y O F S A N C A R L O S
Public corporations
Those formed or organized to govern a portion of the State and for the
general good and welfare.
Examples:
1. City Government of Cebu – created to govern the City of Cebu
which is a portion of the state.
2. Pardo – it governs a portion of Cebu City and it elects its own
barangay officials.
3. Province of Cebu – it governs a portion of the state which is the
province of Cebu.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Non-example:
TN: The Philippine Stock Exchange (PSE) provides for this report.
1. Region 7 – it is only for the purpose of clustering the provinces
forming part of that region and there is no election of regional
representatives.
Important: Do not confuse instrumentalities of the government (gov’t
agencies)
with
public
corporations.
They
are
different.
Instrumentalities of the government are not corporations.
Government agency
Public Corporation
Carries out the functions of a
particular branch of the
government.
Governs a portion of the State
Examples:
1. Department of Health
2. RTC (carries out the
functions of the judiciary)
Holding or Parent and Subsidiary Corporations
Distinction
Holding or Parent
Subsidiary
A corporation which holds
ownership of various
corporations, thereby having
control over such corporations.
A corporation which is owned and
controlled by another corporation
Important: Holding corporation and subsidiary are related which is
why they are called Affiliates.
Illustration
The Holding Corporation wants to engage in banking so it will create
Corp A. It also wants to engage in shipping, so it will organize Corp B.
It also wants to engage in farming, so it will organize Corp C. So, the
holding corporation controls Corporations A, B, and C.
Private corporations
Those formed for some private purpose, benefit or end. Private
corporations may either be:
A. Quasi-public corporations – private corporations which perform
public service, i.e. VECO (not owner nor controlled by the gov’t)
B. Government owned and controlled corps (GOCCs) – created or
organized by the government or of which the government is the
majority stockholder.
Important: These GOCCs are private corporations but they are
not covered by the Corporation Code because they have their
own charters. Their functions, powers, management,
appointment of officers, and territorial limits are all defined by
their charters. The Corporation code applies suppletorily. We do
not take them up in this course.
Examples of GOCCs:
1.
2.
3.
4.
5.
GSIS and SSS
PNB
Landbank
Cebu Port Authority
MCWD
Publicly listed Corporations
This is a list of private corporations offered and open to the public. If
an individual wants to be a shareholder, he can buy shares of stocks
from these private corporations any time of the day.
Examples:
1. San Miguel Corporation
2. Ayala Land Incorporated
Important: These corporations are not public corporations, but
corporations that are listed publicly in the stock exchange. There is a
daily list of the movement of prices of their shares of stocks:
(a) Gainers – shares of stocks that realized gain during that day
(b) Losers – those shares decreases in value during the same day
8|U N I V E R S I T Y O F S A N C A R L O S
Holding Corporation
Corporation C
(Farming or
Agriculture)
Corporation B
(Shipping)
Corporation A
(Banking)
Q. How does the Holding Corporation control Corporations A,
B, and C?
ANS: By owning the majority of shares in all three corporations. The
ownership can perhaps be 75%. With that percentage, the holding
corporation will have complete control. Sometimes, majority is enough.
But there are occasions when the law requires a qualified majority. It
could be 3/4. So, the safest measure would be owning 75%.
Q. How is control implemented?
ANS: With the shares of stocks owned, the holding corporation will be
able to elect the directors in each of the three corporations. If the
holding corporation has control over the directors, it can control the
management and its decisions. The directors will consult the holding
corporation in every major decision. This will allow the latter to dictate
how the three corporations should be managed or how business
should be carried out.
Important: In the illustration, the Banking, Shipping and Farming
Corporations are the Subsidiaries of the Holding or Parent Corporation,
and all of these corporations are Affiliates.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Sec. 4. Special Corporations
Stock or Non-Stock Corporations
Distinction
Stock
Non-Stock
Has capital stocks divided into
shares and are authorized to
distribute dividends to the
holders of such shares
All other corporations which do
not fall under stock corporations
In stock corporations, the
shareholders expect a return
through dividends
In non-stock corporations, its
members are not entitled for
profits. There is no distribution of
profits. The profits are used to
improve its facilities, service or
hire more people.
Q. What is the purpose of dividing capital into shares of
stocks?
Section 4. Corporations created by special laws or charters
Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them
or applicable to them, supplemented by the provisions of this Code,
insofar as they are applicable.
Important: The Corporation Code covers only those corporations
formalized under the Code. For special corporations, they shall be
governed by the laws creating them. The Corporation Code applies
only suppletorily.
Sec. 5. Corporators, Incorporators, etc.
Section 5. Corporators, incorporators, stockholders, members
Corporators are those who compose a corporation, whether as
stockholders or as members. Incorporators are those stockholders or
members mentioned in the articles of incorporation as originally
forming and composing the corporation and who are signatories
thereof.
ANS: The purpose of dividing the capital into shares of stocks in a
stock corporation is to measure dividends.
Corporators in a stock corporation are called stockholders. Corporators
in a non-stock corporation are called members.
Example: If a stockholder owns 25% shares of stocks, upon
Incorporators
Those stockholders or members mentioned in the Articles of
Incorporation as originally forming and composing the corporation and
who are signatories thereof.
distribution of dividends, he will be entitled to 25% of the total
dividends.
Important: Dividends are relevant only in stock corporations. This is
because there is no distribution of profits in non-stock corporations.
However, it is not accurate to say that non-stock corporations do not
earn profit. In fact, they do, only that they are not distributed as
dividends but rather plowed back to the company to improve its
facilities, service, etc.
Close and Open Corporation
Distinction
Close
Open
Limited to selected persons or
members of the family
Open to any person who may
wish to become a shareholder
TN: They must be natural persons because they have to sign the
Articles. Also, they must be at least 5, but not more than 15.
Corporators
Those who compose a corporation, whether as stockholders or as
members.
A. Stockholders – in a stock corporation
B. Members – in a non-stock corporation
Important: Only incorporators are required to be natural persons.
Thus, artificial persons can be stockholders.
Secs. 6-9. Classification of Shares
Classification of shares:
See Sections 6-9.
Q. Why would some prefer a close corporation?
ANS: This usually happens in a family corporation, they would prefer a
close corporation because they want the business to be run solely by
family members. They want complete control only by the family.
Q. How do we keep this corporation close?
ANS: Through the right of first refusal. Once shares are issued, they
cannot be sold directly to the public. The corporation must first offer it
to the current stockholders and must state it in the Articles.
Important: The right of first refusal does not limit one’s right of
ownership because it is not an absolute prohibition, but only qualified
(relative or limited). An absolute prohibition is what violates one’s right
of ownership. Here, the prohibition only applies to first offer. After
that, you may sell it to other interested buyers.
9|U N I V E R S I T Y O F S A N C A R L O S
1.
2.
3.
4.
5.
6.
7.
Par value v. Non-par value shares
Voting v. Non-voting shares
Common v. Preferred shares
Convertible shares
Founder’s shares
Redeemable shares
Treasury shares
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Common v. Preferred shares
Par value v. Non-par value shares
Section 6
xxx Any or all of the shares or series of shares may have a par value
or have no par value as may be provided for in the articles of
incorporation: Provided, however, that banks, trust companies,
insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares of
stock. xxx
Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto: Provided
that shares without par value may not be issued for a consideration
less than the value of five (P5.00) pesos per share. Provided further,
that the entire consideration received by the corporation for its no-par
value shares shall be treated as capital and shall not be available for
distribution as dividends.
Distinction
Par value shares
Non-par value shares
Value stated in the Articles of
incorporation and Certificate of
Stock
Value not stated in the articles or
certificate of stock
Q. What is the purpose of indicating the par value in the
certificate?
Section 6
xxx Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code.
Provided, that preferred shares of stock may be issued only with a
stated par value. The board of directors, where authorized in the
articles of incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof. xxx
Distinction
Common shares
Preferred shares
Basic classification of shares
Shares which enjoy certain types
of preferences either in (a)
payment of dividends, or (b) in
liquidation
Q. Who decides the classification of shares?
ANS: The incorporators initially decide what type of shares to issue.
However, later on, the Board may decide to issue additional classes of
shares by amending the Articles.
ANS: It fixes the minimum price of each share. That’s the price you
Important: They may further classify the shares into different subclassifications such as Common A Shares, Common B Shares etc.
have to pay if you want to subscribe. It does not indicate any
relationship to the assets.
Example: For better monitoring of the nationalized corporations’
compliance with the constitutional requirement of 60-40% ownership.
Q. Do non-par value shares have no value at all?
ANS: No. A non-par value share has an issued value, which must be
Nationalized activities
not less than P5.00 according to the law. The issued value is the
amount you have to pay if you want to subscribe in non-par value
shares. It is a fixed amount that you have to pay but not indicated in
the articles of incorporation.
This refers to businesses which are offered only to Filipinos, i.e.
Exploitation of natural resources, operation of public utilities, opening
of schools, media etc. These are reserved for Filipinos or by
corporations at least 60% of which are owned by Filipinos.
Important: Because you are investing, that non-par value shares
represent your investment in relation to the assets of the corporation.
It represents an aliquot part of the assets of the corporation.
We can monitor this by checking the General Information Sheet (GIS)
which is filed annually with the SEC. There we can find the citizenship
of every stockholder and how much each owns.
Illustration:
Corporation assets are worth 10M. Out of the 100 shares, you are a
holder of 10 non-par value shares. During liquidation, what is the value
of your 10 non-par value shares?
ANS: P1M.
During liquidation, what is the value of your 1 share, if suppose you
only have 1 share?
ANS: P100,000.
Important: Even if you have non-par value shares, the total number
of shares in relation to what you have, that’s you aliquot part of the
assets of the corporation
10 | U N I V E R S I T Y O F S A N C A R L O S
Q. What could be the best way in order to check whether the
corporation complies with the 60-40 shareholding with regard
to nationalized activities?
ANS:
Sub classify the common shares such that there will be a
particular class of common shares which are only available to
foreigners.
Voting v. Non-voting shares
Section 6
The shares of stock of stock corporations may be divided into classes
or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the
articles of incorporation.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Provided, that no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code. Provided, further, that there shall
always be a class or series of shares which have complete voting
rights.
Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters: xxx
Distinction
Voting shares
Non-voting shares
Shares which possess the right
to vote on any issue.
Shares with no right to vote,
subject to 8 exceptions.
Non-voting shares
Q. Why do you think these shares are issued?
ANS: These are issued to the organizers because they were the ones
who had the vision for the corporation and who had the plan on how
to carry it out. So, they are given by law the privilege to stay in the
management for at least 5 years, which the law considers to be
enough for the corporation to be able to stand on its own feet.
Redeemable shares
Section 8
Redeemable shares may be issued by the corporation when expressly
so provided in the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions as
may be stated in the articles of incorporation, which terms and
conditions must also be stated in the certificate of stock representing
said shares.
General Rule: Have no right to vote
Redeemable shares
Exceptions:
1. Amendment of the Articles of Incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property
4. Incurring, creating or increasing bonded indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with another
corporation or other corporations
7. Investment of corporate funds in another corporation or
business in accordance with this Code
8. Dissolution of the corporation.
Those shares which are issued by the corporation to the public but can
be redeemed at a fixed date or at the option of the corporation or the
stockholder.
Important: All these constitute a change in their fundamental
agreement, thus, even holders of non-voting shares may vote.
Convertible shares
Purpose of issuing redeemable shares: To attract more investments.
Q. When the corporation needs additional capital, what are
the options of that corporation?
ANS:
1.
2.
3.
4.
Borrow money from the bank
Issue more shares
Ask existing stockholders to subscribe more shares
Issue redeemable shares
Borrow money from the banks
But interest can be very costly.
Convertible shares
Issue more shares
Those shares which can be changed from one classification to another.
But others might not be interested, unless there are profits. Because
once they invest, their money will be there forever and they will have
to wait until the corporation is liquidated or perhaps, they could
transfer or sell their shares to someone else.
Example: Preferred share to a common share (if allowed in the
Articles)
Founders’ Shares
Section 7
Founders’ shares classified as such in the articles of incorporation may
be given certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years subject to the approval of the
Securities and Exchange Commission (SEC). The five-year period shall
commence from the date of the aforesaid approval by the SEC.
Ask existing stockholders to subscribe more shares
During the organization stage, stockholders are only mandated to
subscribe the 25% of the ACS. Hence, 75% are unsubscribed
authorized shares. The corporation may ask the existing stockholders
to subscribe or invest more and such additional investment will be
taken out of the remaining 75% unsubscribed authorized shares.
Issue Redeemable shares
When a corporation issues redeemable shares, it will be considered as
an instrument and additional capital.
Founders’ shares
Shares issued to the organizers and promoters as an incentive for
incorporating the corporation. For a period of 5 years, the holders
thereof have an exclusive right to vote and be voted for.
11 | U N I V E R S I T Y O F S A N C A R L O S
Sir: Like borrowing from a bank, you are required to sign a promissory
note. The corporation must pay the bank the amount of the loan plus
interest on due date, as stipulated in the promissory note, otherwise
there will be penalties for late payment. The issuance of redeemable
share has the same tenor as a promissory note.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
In redeemable shares, the corporation will tell you to subscribe to this
type of share for a certain period, example for 2 years. Then at the
end of the period, the corporation will buy back (redeem) the said
shares plus premium.
Example:
Date of issue: November 24, 2016
Amount of share: Php 2,000,000
Premium: Php 500,000
Period: 2 years
Incorporation and Organization
Secs. 10. Number and Qualifications of Incorporators
Section 10. Number and qualifications of incorporators
Any number of natural persons not less than five (5) but not more
than fifteen (15), all of legal age and a majority of whom are residents
of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of a stock corporation
must own or be a subscriber to at least one (1) share of the capital
stock of the corporation.
After two years, the corporation will redeem the said share from the
shareholder for Php 2,500,000.
Q. May all incorporators be foreigners?
Bank v. Redeemable shareholder
ANS: Yes. Citizenship is not important, but residence. Even if all are
The difference between the bank and redeemable shareholder, is that
the bank is merely a creditor, while a redeemable shareholder is both a
creditor and investor. Thus, he is also entitled to profits in the form of
dividends during the 2-year period.
Example: Japanese can incorporate here in the Phils. so long as they
TN: The better option is not to borrow from the bank, but issue
redeemable shares.
Q. After two years, can you compel the corporation to
redeem?
ANS: Yes, except if the corporation becomes insolvent.
The shareholder cannot compel the corporation to redeem during the
period of insolvency. However, once it is no longer insolvent, the
corporation can be compelled to redeem again.
Important: It does not require that the corporation should realize
profit. Once the corporation is solvent, it can be compelled to redeem.
Treasury Shares
Section 9
Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful means.
Such shares may again be disposed of for a reasonable price fixed by
the board of directors.
foreigners, they can incorporate here in the Philippines.
are residents of the Philippines.
Important: However, there are Nationalized Enterprises.
Nationalized enterprises - There are enterprises which the Constitution
requires that they should either:
1. Be solely owned by Filipinos, or
2. 60% of the stockholdings is owned by Filipinos
Q. There’s difficulty in monitoring ownership of foreigners and
Filipinos. How do we know that the stockholdings of Filipinos
remain at 60%?
ANS: There are options.
1. Examine the general information sheet submitted to the SEC
since they must indicate the total foreigner stockholdings and
Filipino stockholdings and indicate the percentages.
2. To know from time to time the foreigner stockholdings, we can
sub-classify.
Example: Foreign shares are sub-classified as common share B.
Primary Franchise vs Secondary Franchise
Treasury shares
Primary franchise
These are shares that were lawfully issued by the corporation and fully
paid for and later reacquired by it either by purchase, redemption,
donation, forfeiture or other lawful means.
When we apply for accreditation or registration with the SEC, we are
referring to the primary franchise. The moment we are issued the
certificate of incorporation, we are given in effect the privilege to exist
as a corporation and that privilege is considered as the primary
franchise. It is the basic authority to exist.
Secondary franchise
There are some activities that require separate franchises and this is
your secondary franchise.
Examples:
1. Transportation Business – you must secure a franchise for every
unit you use to carry out the business.
12 | U N I V E R S I T Y O F S A N C A R L O S
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
[Before you are issued permit to operate, you have to file a
petition for every unit and that petition is docketed in the
LTFRB so there is a case number. (LTFRB Case No. XXXX)]
2. Shipping Company – when you run a vessel, each vessel must
have a separate franchise so you have to file for a petition for
every vessel.
TN: There are occasions when there could be oppositions especially
when the route is already filled up.
Example: If you want to operate a boat from Cebu City to Bohol or
any port in Northern Mindanao, existing operators may find that the
route is already congested. So that if another franchise will be added
in such route, it will lead already to disastrous competition. Here, there
can be an argument. For new operators, they will have to prove that
there are still passengers and/or cargoes not served. For old operators,
they will have also to prove that the route is already full. Here, the
government must maintain the balance between supply and demand in
order for the public not to pay high charges.
Important: The franchise which the government grants to every unit
is now what we called Secondary Franchise.
Secs. 11. Corporate Term
Section 11. Corporate term.
A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said
period is extended. The corporate term as originally stated in the
articles of incorporation may be extended for periods not exceeding
fifty (50) years in any single instance by an amendment of the articles
of incorporation, in accordance with this Code; Provided, That no
extension can be made earlier than five (5) years prior to the original
or subsequent expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Securities and
Exchange Commission.
Secs. 12-13. Capitalization
Types of Capital Stock
1. Authorized Capital Stock
2. Subscribed Capital Stock
3. Paid-up Capital Stock
Authorized Capital Stock
Section 12. Minimum capital stock required
Stock corporations incorporated under this Code shall not be required
to have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions of
the following section.
Subscribed Capital Stock and Paid-up Capital Stock
Section 13. Amount of capital stock to be subscribed and paid
for the purposes of incorporation.
At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total
subscription must be paid upon subscription, the balance to be payable
on a date or dates fixed in the contract of subscription without need of
call, or in the absence of a fixed date or dates, upon call for payment
by the board of directors: Provided, however, That in no case shall the
paid-up capital be less than five Thousand (P5,000.00) pesos.
Q. What is the difference between Subscribed Capital Stock
and Mere Capital?
ANS:
1. Subscribed Capital Stock
This is considered the legal capital. This is the actual capital of
the corporation. It is also referred to as the Outstanding Capital
because it is out already. It cannot be subscribed by anyone
anymore.
Q: What is the term of the corporation?
Important: Legal capital is fixed. This is because SCS is fixed. It
never fluctuates. It is the commitment by the subscribed
investors. Although they are not required to pay everything at
once, it is still the commitment.
ANS: The corporation shall exist for a period not exceeding fifty years
from the date of incorporation. It can be extended for periods not
exceeding 50 years in every single instance of amendment of Articles
of Incorporation.
2. Mere Capital
Refers to the assets of the corporation, which may fluctuate.
Sometimes the assets may go up, thus there are profits. If it goes
down, only when the assets depreciates or they are reduced.
Q. What are the value of shares?
ANS:
1. Par Value - Pre-determined value, the result of the total number
of shares to be issued divided into the number of shares that the
incorporators have
Example: ACS of 100m, divide to 100m share, par value is P
1.00/share and that is fixed
2. Market Value - The value that the buyers in the market are willing
to buy and shareholders are willing to sell. Increases if business
13 | U N I V E R S I T Y O F S A N C A R L O S
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
of the corporation is good. Decreases if business is doing badly.
May be higher or lower than par value.
Example: If the share you bought for 1.00, it may go up. The
public may be willing to buy it for 2.00 if they see that the
business of the corporation is good. P 2.00 is the market value.
Its value, in the market
3. Book Value - Assets/Number of Shares
Example: If the assets of the corporation is 200k and the issued
shares are 100k. Then the book value is P2.00
Secs. 14-15 Contents of Articles of Incorporation
Section. 14. Contents of the articles of incorporation.
Please see codals. Too long.
Section. 15. Forms of Articles of Incorporation.
Please see codals. Too long.
Q. What are the important contents of the Articles of
Incorporation?
ANS:
Purpose
Apply Rules on liberality of contracts
Parties can agree on any purpose as long as it is not contrary to law,
morals, public order and public policy.
Purpose must be specific
Example: If the purpose is to offer, deal and promote to the public
joy, fun, and happiness, that will not be allowed.
Purpose must not be intended to mislead the public
The objective of defining the purpose of the corporation is strictly to
guide the public, SEC and the State on whether or not a corporation is
performing within the limits of its purpose. If it goes beyond the
purpose, that is called an ultra vires act.
When the SEC or the State approved the corporation, it was agreed
that this is the purpose of the corporation, and that it will exist to
perform this purpose and nothing else.
Importance of the purpose
Later, there might be some conflicts and the acts of the corporation
might be questioned when the corporation engages in some activities
which is not within its purpose. People or even the stockholders
themselves could say that such activities are not within the
corporation’s purpose and therefore, they should not be bound.
1. Name
2. Purpose
3. Principal place of business
Name
Name
Any name can be used, but the incorporators must justify if
complicated names are used.
Example: RPA Corporation. The incorporators must justify that it is
Ronulo, Pearl Andion.
Important: In using the name of Corporation, the incorporators must
also comply under certain limitations. Under the Intellectual Property
Law, there is a prohibition on Identical nor Similarly Confusing names.
The SEC requires that the incorporators must give reservation on the
name of the corporation just in case the same name was being used
already by another corporation.
There are some corporations that are confusingly similar with other.
Examples:
1. “Planter’s Corporation” using the same color-coding, font, size as
“Grower’s Corporation.”
2. “Efficient” with “Efficacent Oil” which was already existing as a
brand. It is not allowed because the public might be misled to
believe that the product of Efficient Corporation is the same with
Efficacent Corporation.
TN: These are existing cases although not Corporations but products.
It is intended to define the powers of the corporation. If you go
beyond its powers, it is now an ultra vires act which will not bind the
corporation anymore. However, if the corporation was able to benefit
because from such transaction it entered into, then it might still be
compelled to comply.
An ultra vires act cannot bind the corporation unless the
corporation benefited from it.
The corporation cannot say that it cannot be liable to this particular
transaction because it is not within its purpose. In other words, the
corporation cannot take advantage for its own folly (defn of folly: lack
of good sense). If it was crazy enough performing the transaction, it
cannot benefit by saying that it will not assume any liability because
that transaction is not within its power, that transaction is ultra vires.
Ultra Vires Acts vs. Unauthorized Acts
Unauthorized acts – There are instances when the board or the
officers perform an act in behalf of the corporation, but that act was
not authorized by the corporation itself.
Situation
The president was authorized to borrow 10M, but he instead
borrowed 15M. Can the corporation be compelled later on to
pay 15M?
ANS: If the reason for refusal is:
1. Ultra vires act – Corporation cannot refuse to pay since it is not
an ultra vires act
2. Unauthorized act – it can then refuse to pay as this is valid reason
for the refusal.
14 | U N I V E R S I T Y O F S A N C A R L O S
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Q. May the corporation be a partner in a partnership?
ANS: No, because the basic consideration in a partnership is trust,
which does not exist in a corporation. So long as anyone wants to
subscribe, he may subscribe. If he wants to buy, he may buy,
regardless if he is known or trusted by the other stockholders.
There may be a 1000 stockholders, that’s possible - it’s impossible for
you to know each other.
Procedure in amending the Articles:
1. The proposed amendment must be initiated by the board itself
and must be approved by the majority of the members of the
board.
2. Once approved, it must be submitted to the stockholders for
approval.
Important: There should be a written assent. This cannot be
considered approved unless voted or assented in writing by the
stockholders representing at least 2/3 of the outstanding capital
stock, without prejudice to the appraisal right of dissenting
stockholders.
Q. May a corporation enter into joint venture agreements?
ANS: Yes. A joint venture agreement is not a partnership, and it’s not
a corporation. But it is very close to a partnership. In a joint venture,
you just agree to pursue a particular business.
Example: You own a land, I own a development company and I have
tractors and equipment. We tell you that we will develop your land as
we have the equipment to develop that land and I have the expertise,
and then once developed, we share: 60-40%. We give you 40% of the
developed land to sell it as a subdivision. I could repay my 60%, and I
could also sell my 60%. After selling all of them, we disperse. Our joint
venture agreement is terminated.
TN: Also, in a joint venture, it could be an agreement between the
partnership and a corporation but that is not a corporation.
3. Submitted for approval with SEC – it may be approved through:
(a) Approved by SEC
(b) Approved by inaction
(c) Rejected by SEC
Q. When will the amendment take effect?
ANS: It will take effect upon approval by the SEC.
Q. What is the remedy if not approved by SEC?
Ans: File a petition for review
Sec. 16. Amendment of Articles of Incorporation
Section 16. Amendment of Articles of Incorporation.
Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written
assent of at least two-thirds (2/3) of the members if it be a non-stock
corporation.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation.
Such articles, as amended shall be indicated by underscoring the
change or changes made, and a copy thereof duly certified under oath
by the corporate secretary and a majority of the directors or trustees
stating the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall
be submitted to the Securities and Exchange
Commission.
The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with the
said Commission if not acted upon within six (6) months from the date
of filing for a cause not attributable to the corporation.
Q. What is Approval by Inaction in SEC?
ANS: If not acted within 6 months, it is considered approved from the
date of the filing.
Q. How is amendment indicated?
ANS: For easy review by SEC, when you file your amended articles,
you indicate the amended portions by underscoring it and indicating in
parenthesis, “as amended per meeting on XXXX.”
Once amendment is approved, you can now pursue the business of the
corporation in accordance with the amended portions.
Q. How much vote is required for the amendment?
ANS:
For the approval of the board: majority;
For the approval of the SH: 2/3 of the SH or members
Important: Amendment does not require simple majority but 2/3 of
the outstanding capital stock or of the members if it be a non-stock
corporation.
TN: In amendment, we cannot expect that everyone will agree. There
will always be dissenting SH, that’s why only 2/3 is required.
Q. What can a dissenting SH do?
ANS: Dissenting stockholders may exercise the appraisal right
Appraisal right
This is the right of a dissenting stockholder to leave the corporation by
determining the value of their shares and demanding the value of
those shares provided that there is unrestricted retained earnings due
to Trust Fund Doctrine.
15 | U N I V E R S I T Y O F S A N C A R L O S
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Trust Fund Doctrine
All the subscriptions of the stockholders are kept in trust for third party
creditors and the stockholders cannot just withdraw the amount of
their subscription. While the investment belongs to the stockholders, it
is there to protect third party creditors. The purpose of this doctrine is
to protect third party creditors.
insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved
by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
Nationalized Corporations
Sir: So therefore the rule is “We either sink or swim.” We suffer
together, we share success together.
Important: In the Trust Fund Doctrine, the subscribed capital stock
forms part of this doctrine and not just the paid up capital stock
because it is the amount which the stockholders committed to invest.
Unfortunately, you can only demand once there are Unrestricted
Retained Earnings.
Otherwise, if allowed just any time, SHs may easily withdraw their
shares, and there may come a time that the creditors can no longer go
after any assets. The corporation will jeopardize the rights of creditors.
Unrestricted Retained Earnings
Unrestricted or surplus means that they are not allocated for anything.
They are absolutely free and there are no restrictions nor
appropriation.
Sir: The fourth ground is important especially for National Corporations
which Filipino ownership must be protected.
Nationalized Corporations
There are businesses or enterprises that are nationalized, therefore
require special endorsements from appropriate/concerned government
agencies.
Important: Before filing with the SEC, the corporation needs to
secure a favorable endorsement from the appropriate or concerned
government agencies.
Examples:
1. If school – DEPED
2. If telecommunications – DOTC
3. If transportation – LTFRB
Petition for Review
Important: If you are the stockholder, although you have the right to
demand for the return of your investment as a dissenting stockholder
exercising the appraisal right, that may not be easy because you have
to wait when there are Unrestricted Retained Earnings.
The corporation can always say that it will allocate the profits for
expansion because their competitors are expanding. It may say that
only when it no longer has other projects can they have unrestricted
retained earnings. If you have friends from the Board, the Board could
understand your situation and help you.
Sec. 17. Grounds for Rejection/Disapproved of AOI
Section 17. Grounds when articles of incorporation or
amendment may be rejected or disapproved.
The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not
in compliance with the requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable time within
which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or
disapproval:
1. That the articles of incorporation or any amendment thereto is
not substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government
rules and regulations;
4. That the Treasurer's Affidavit concerning the amount of capital
stock subscribed and/or paid if false;
5. That the percentage of ownership of the capital stock to be
owned by citizens of the Philippines has not been complied with
as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan
associations, trust companies and other financial intermediaries,
16 | U N I V E R S I T Y O F S A N C A R L O S
In case of disapproval by the SEC, the corporation may file a petition
for review.
TN: Sometimes, that would be an uphill drive. Because most of our
courts do not have the appropriate technical background of
corporation and SEC is in a better position to review this matter. The
most practical thing to do is to talk and discuss with the SEC the
matters for review.
Sec. 18. Corporate Name
Section 18. Corporate Name.
No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of
incorporation under the amended name.
Purpose of a name
It is with that name that the Corporation transacts its business with
others. The purpose of the name is to identify yourself.
Important: It must not be identical or confusingly similar with other
existing corporate names.
The idea is to be able to identify who you really are. When you apply
for a name even before you submit your Articles of Incorporation, you
will have to reserve—go online and apply for that name. SEC will reply
a day or a week after to confirm if indeed the name you are proposing
is acceptable because nobody is using that name.
Example: A Shangri-la carenderia stands along Edsa where Shangri-la
Hotel is also located. Shangri-la opposed the use of their names. The
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
moment there is food poisoning, headlined in newspaper, the incident
will damage the good name of Shangri-la.
Important: These three requisites are important, unless you comply
with all of the requisites, you could never be considered as a de facto
corporation.
Situation
One wanted produce Jollibee ballpens (not burgers). Can this
be done?
Effect of being a de facto corporation
ANS: No. The law is very strict on names. Some names carry with it
It enjoys the same privileges of a de jure corporation, however its
existence can be directly attacked by the state in a quo warranto
proceeding.
the goodwill who many may take advantage of the name for a
different product. If allowed, the public could be misled that it is the
same fastfood company now producing ballpens. In case something
goes wrong with the ballpens, it could destroy the goodwill of Jollibee.
TN: This is important because a de facto corporation enjoys the same
privileges as a de jure corporation. Absence of any one of the
requirements, you cannot claim to be a de facto corporation. Here the
Sec. 19. Commencement of Corporate Existence
Section 19. Commencement of corporate existence.
A private corporation formed or organized under this Code
commences to have corporate existence and juridical personality and is
deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal;
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the
name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation is
sooner dissolved in accordance with law.
Certificate of Incorporation
The birth certificate of the corporation. Corporation starts to exist once
SEC issues this certificate.
Q. What is the importance of COI?
ANS: This is the best evidence to prove the corporation’s existence.
Everything written in your birth certificate (referring by analogy to
Certificate of Incorporation) is to prove who and what you are.
Sec. 20. De Facto Corporations
Section 20. De facto corporations.
The due incorporation of any corporation claiming in good faith to be a
corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to
which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.
De Facto Corporation
A de facto corporation is one which actually exists for all practical
purposes as a corporation but which has no legal right to corporate
existence as against the State.
Requisites to be a de facto corporation
1. A valid law under which a corporation with powers assumed
might be incorporated.
2. A bona fide attempt to organize a corporation under such law;
and
3. Actual exercise in good faith of corporate powers conferred upon
it by law.
17 | U N I V E R S I T Y O F S A N C A R L O S
law gives you an extraordinary privileges, that is why all three
requisites must be present, otherwise, there is no point of complying
with the requirements to be corporation, because you can always claim
that you are a de facto corporation, hence, having the same privileges
as a de jure corporation. The law gives this privileges to a de facto
corporation because of equity.
Situation
A group of individuals complied with the three requisites, so
they can be called a de facto corporation. They are engaged in
the business of supplying construction materials. A de jure
corp (Y) ordered materials from a de facto corp (X).
Y failed to pay. X filed a collection case. Y files a motion to
dismiss on the ground that X is not a proper property for lack
of juridical existence, because when Y demanded for a COI
from X, the latter was not able to give one. Decide.
ANS: The motion to dismiss should be denied. The filing of a motion to
dismiss on the ground that X corp. was not a proper party for not
being a juridical entity is considered a collateral attack, and such
attack is invalid in questioning the existence of a de facto corporation.
The only time that the existence of a de facto corporation may be
questioned is through a direct attack or quo warranto proceeding by
the State.
Important: You cannot deny the existence of a de facto corporation.
De facto corporations are protected by law.
Sec. 21. Corporation by Estoppel
Section 21. Corporation by estoppel.
All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its
lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact
no corporation.
Corporation by Estoppel
All persons who assume to act as a corporation knowing it to be
without authority to do so will be considered as Corporation by
Estoppel.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Situation
Here is another corporation, 5 individuals who went to
corporation Y (engaged also in construction materials). Corp Y
bought materials from this group, who claimed to be a
corporation as XYZ Corporation (corporation by estoppel).
They misrepresented themselves as a corporation. In this
case, Corp Y did not pay. Can this group file a collection case
against Corp Y?
ANS: Yes.
Q. Can Y now raise the ground that it is not liable to pay XYZ
corporation, because it is not a corporation?
Important: The difference between estoppel and a de facto
corporation is that in a de facto corporation, the privilege is given as a
corporation. You cannot attack the existence of the corporation; it
must be treated as a corporation.
While in a corporation by estoppel, the issue is equity. Regardless of
whether or not we will give him the existence of a corporation, that is
immaterial. So long as there is a need for equity, that relation between
the two should be honored. That liability must be settled. In other
words, in a corporation by estoppel the consideration is that
relationship must be limited to the transacting parties, the buyer and
seller, and there is an issue for damages. Hence, when one suffers
damages, equity requires that one must compensate for the damages.
ANS: Corporation Y cannot raise that ground. Because XYZ is a
corporation by estoppel, they exist as a corporation between the
parties. Y is estopped to claim that XYZ is not a corporation. Y
corporation should pay XYZ corporation.
Corporations by estoppel exist as a corporation between the parties.
Situation
Corp Y (de jure corp) is now the seller, and Z Corporation is
the buyer (corp by estoppel). Corp Z did not pay. Can corp Y
demand payment?
ANS: Yes, corporation Z should pay Corp Y. Z is estopped from
claiming that they are not a corporation.
Important: A corporation by estoppel cannot deny its existence just
to avoid the liability. In the same manner that the other party who
transacts with the corporation by estoppel cannot deny the existence
of the corporation by estoppel to avoid liability.
Corporation by estoppel v. de facto corporation
Corporation by estoppel
De facto corporation
Misrepresented themselves as a
corporation without complying
with any requirements provided
by law to become a corporation.
Colorable compliance with the
requirements set by law. They
did not substantially comply with
the requirements provided by law
to become a corporation.
The State and third parties can
attack them collaterally since the
law did not recognize their
existence.
Note: Corporation by estoppel
exists only between the
contracting parties with regard to
a particular transaction.
There is no privilege given by the
law, but because of equity, the
contracting parties are bound to
perform their obligations.
The Principle of unjust
enrichment applies.
Sec. 22. Effects on non-use of corporate charter, etc.
Section 22. Effects on non-use of corporate charter and
continuous inoperation of a corporation.
If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within 2
years from the date of its incorporation, its corporate powers cease
and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at least
5 years, the same shall be a ground for the suspension or revocation
of its corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.
Important: Once you get the approval of the SEC, you now have
your certificate of incorporation, you now exist as a juridical person.
However, it is not a guarantee that you will forever exist as a juridical
person. Along the way something may happen. In other words, your
certificate of incorporation proves that you now exist.
Q. Does it give you any right to exist?
ANS: No, the corporation has no right. It only has a privilege. As a
privilege granted by the state, it has a right to take it back.
Q. What are the instances when the SEC can revoke the
Certificate of Incorporation?
Only the state can attack its
existence in a direct action
(quo warranto)
Privilege is given as a corporation
They are treated as a
corporation.
18 | U N I V E R S I T Y O F S A N C A R L O S
ANS:
1. If a corporation has commenced the transaction of its business
but subsequently becomes continuously inoperative for a period
of at least five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or certificate
of incorporation. (Corporation Code, Section 22)
2. The corporation is guilty of some unlawful activities, fraud or
misrepresentation, i.e. when the entries of the articles of
incorporation are false.
3.
Failure to submit reportorial requirements to the SEC
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Jurisdiction over Corporate Conflicts
Jurisdiction over corporate conflict
Before, under PD 902-A, all corporate conflicts are under the
jurisdiction of the SEC. Today, it is now the regular courts who has
jurisdiction over it in order to avoid any abuse from the Executive
Branch. However, the SEC still retains some powers over corporations
which are administrative in nature such as the suspension or
revocation of franchises.
director alone can go to the bank and borrow money because of the
resolution up to 10M.
Situation
If Pita borrows 15 Million instead of the 10 million, will it bind
the Corporation? When he talked to the President he said
“lend me 15 Million, let’s divide the 5 Million.” So the
president approved.
ANS: No. The law says only the Board can exercise the power of the
Board of Directors, Trustees or Officers
Sec. 23. Board of Directors or Trustees
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof.
a majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
Board of Directors or Trustees
The body vested with the powers of the corporation where all the
property of the corporation is being held and controlled.
Term of Office
They shall hold office for one year.
Powers of the Board
Classifications of BOD functions
1. Conduct the business of the corporation- The BOD determines
how the business will be carried out. It decides the policies to be
adopted in carrying out the business.
2. Administer the properties - BOD has to protect the assets of the
corporation.
3. To exercise corporate powers - No one else can act or decide in
behalf of the corporation except the BOD.
Situation
If the Corporation borrows 10 Million, should all of the 10
Directors of the BOD go to the bank?
ANS: No need. Although the board exercises the power of the
Corporation, it does not mean that each of them will have to deal.
Rather, the board could authorize anyone by coming up with a board
resolution
Example: Resolution No. 330 “For so to authorize and empower Mr.
Pita as a Director of the Corporation to represent the Corporation in
borrowing money from the bank up to the sum of 10 Million.” The
19 | U N I V E R S I T Y O F S A N C A R L O S
Corporation, not Pita, even if he is the President, unless he has the
authority of the Board.
Important: Corporation will not be bound by unauthorized acts of the
Officers.Only the board can exercise the power of the corporation.
Even if one is the President, unless he has the authority of the board,
the authority of the board is necessary for the president to act in
behalf of the corporation.
Business Judgment Rule
Situation
The corporation wanted to borrow 10M. The SH learned of the
board decision. The SH then conducted a meeting to review
the decision of the board. SH only wanted to borrow only 5M.
ANS: This cannot be done. Even of the SH elected the board, it is still
the board’s decision which shall prevail under the business judgment
rule.
General Rule: Business Judgment Rule
Power to manage corporation lies in the board. It is not subject to
review by the stockholders, not even by the courts.
The power and authority of the board to manage the corporation was
granted to them directly by law—not by the stockholders. Once they
are elected, they are no longer under the control of the board.
Important: Power of the board is original granted by the law. The
power is not delegated to the SH. Nor do the SH delegate any power
to the Board. They merely elected the board.
TN: For the law, it is the judgment of the board, the decision, and we
have to respect the wisdom of that judgment. Otherwise, if somebody
will question every decision of the board, the corporation will not have
any focus in its decision and will not be able to pursue the business of
the corporation.
Once the board is constituted, the board decides.
Exceptions: When The BOD Decision is reviewable
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and
8. Dissolution of the corporation.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Important: Generally, anything which involves change in the
fundamental agreement of the parties.
Q. So to all intents and purposes, during the existence of the
trust agreement, Who is the owner?
Limitations of the powers of the Board
ANS: The trustee is the owner.
(Even with the existence of the Business Judgment Rule)
1. Statutes
2. By laws
3. Articles of Incorporation
TN: So that, in a stock certificate, the trustee’s name appears as the
stock owner. But the true owner, is the trustor.
Q. In a stockholder’s meeting, who has the right to vote?
Important: If you exceed those, that decision cannot be a valid
decision. You cannot invoke the business judgment rule, since they
must be in accordance with the law, the AOI, or the by laws.
ANS: The trustee. Because right to vote is given to the trustee. For all
intents and purposes, the trustee is the shareholder.
Voting Trust Agreement
Qualifications of the Board of Directors
Qualifications of members of the board
1. Owns at least 1 share of stock
2. Natural person
3. Legal capacity
An agreement in writing whereby one or more stockholders of a stock
corporation transfer their shares to any person or persons or to a
corporation having authority to act as trustee for the purpose of
vesting in such person or persons or corporation as trustee or trustees
voting or other rights pertaining to the shares for a certain period not
exceeding that fixed by the Code and upon terms and conditions
stated in the agreement
Member of the Board must own at least 1 share of stock.
The moment you no longer have at least one share, you cease to
become a member. This results to a vacancy.
Pledge
In a pledge, the pledgee (subsequent holder) is not considered the
owner of the thing pledged, he merely holds it as a security. It is still
the original owner who remains to be the owner.
Important: The stockholder remains the holder of the stocks but he
has surrendered his right to vote. It is the trustee who may exercise
the right to vote, because in so far as the corporation is concerned, he
is the stockholder although the beneficial ownership is retained by the
original stockholder or the trustor
Delegation of the Powers of the Board of Directors
General Rule
Important: If a stock is pledged, the true owner retains the right to
vote in a meeting.
Pledge v. Mortgage
It cannot be delegated considering that the stockholders had reposed
their trust and confidence to them.
Exceptions
Pledge
Mortgage
Accessory contract for security
involving personal properties only
May involve real (real estate
mortgage) or a personal (chattel
mortgage) properties.
There is transfer of possession of
the thing pledged
There is no transfer of possession
of the thing mortgaged.
TN: Your proof of ownership of shares of stocks is the certificate of
stocks.
Situation
You as a stockholder, wanted to borrow money from the bank.
You offered the certificate of stocks as collateral/ pledge/
mortgage to secure the payment of the loan. Since it is the
bank who now holds the certificate of stocks, who can now
vote in the SH meeting?
ANS: still the stockholder, not the bank.
Trust
A trust is an agreement by the owner of the thing and the trustee. It
transfers temporarily ownership of the thing to the trustee. And the
trustee has the obligation upon demand of the owner to return.
20 | U N I V E R S I T Y O F S A N C A R L O S
1. Those which affect the day-to-day business of the corporation
2. Ministerial functions
3. Those delegated powers which do not constitute an absolute
delegation of powers/functions
Situation
Pita is among the directors of the corporation. Can the board
ask Pita to borrow money in such amount as he may find?
ANS: No. The authority to determine the amount of the loan cannot be
delegated because it is a matter which should be deliberated upon by
the board.
TN: Such delegation constitutes an abandonment by the board of its
duty to protect the assets of the corporation. Allowing someone to
borrow money without ascertaining the amount is no longer protecting
the assets of the corporation.
Number of Board of Directors/Trustees
Number of Directors/Trustees
1. Stock corporations – at least 5 but not more than 15 directors.
2. Non-stock corporations – at least 5 and can be more than 15
trustees.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Sec. 24-25. Election of BOD, Quorum, Officers
F
50 + 15 = 65
G
50 + 15 = 65
Section 24. Election of directors or trustees.
Please see codals.
Sir: Apparently, not all 5 will be directors since A still has 100 votes.
Section 25. Corporate officers, quorum.
Please see codals.
Q. What do you do once the certificate of the Incorporation is
issued?
First thing to do is to convene all the stockholders for the purpose of
electing the board. Thereafter, the board itself will have its own
organizational meeting for the purpose of electing the officers.
Election
Q. How is an election conducted?
They need to get more than that if they don’t want A to be part of the
board. They may sacrifice one but just the same, A will still be a
director. The highest number of vote required is 100. This is the effect
of cumulative voting.
Purpose of cumulative voting
To protect the minority stockholder and giving the minority
stockholders representation in the board of director. However,
cumulative voting applies only to stock corporations.
Voting in A Non-Stock Corporation
Members of non-stock corporations may cast as many votes as there
are trustees to be elected but may not cast more than one vote per
candidate.
ANS:
1. There must be a meeting
2. The stock holders representing the majority of the outstanding
capital stock should be there if it is a stock corporation;
3. and majority of the members if a non-stock corporation
TN: This is the manner of voting in non-stock corporations unless
otherwise provided in the articles of incorporation (Section 89). Once
the Board of Directors are organized, the board themselves will elect
the officers of the corporation.
Situation
Board meeting; Quorum
There were 6 stockholders and the number of directors to be
elected will be 5. How do we determine the number of votes
for each stockholder?
ANS: Determine first the number of shares for each stockholder then
multiply it with the number of directors to be elected.
Quorum
The number of stockholders or members sufficient to conduct a valid
meeting
Situation
If there are 100 stockholders and 1000 shareholdings, and 2
stockholders own 506 shares, can the two already meet?
Situation
Stockholder
Stockholdings
A
B
C
D
E
F
G
Total
20
15
15
20
10
10
10
100
Number of votes
(Stockholdings X 5
directors to be elected)
100
75
75
100
50
50
50
500
ANS: Yes, because they represent the majority of the outstanding
capital stock.
Situation
If there are 10 members of the Board, how many can
constitute a quorum?
ANS: The majority usually, but if the by-laws say that fewer can
constitute a quorum, it can be done.
Q. Can the corporation stipulate in the by-laws that 3 could be
a quorum even if there are 10 members of the board?
Situation
ANS: Yes, it can be done. Although usually, when we talk of a quorum
Stockholders B to G agreed that C, D, E, F, and G, will be the 5
directors to be elected and that A should never become a
director. How many votes should each one (C-G) need to be
directors? Or what should they do so that C, D, E, F, and G will
be directors?
it is always the majority.
ANS: B can distribute his 75 shares to C, D, E, F, and G, giving each of
them 15 shares. So,
C
75 + 15 = 90
D
100 + 15 = 115
E
50 + 15 = 65
21 | U N I V E R S I T Y O F S A N C A R L O S
Kinds of majority
1. Simple Majority - The traditional kind : 50 +1
2. Qualified Majority - What is stated in the by- laws of the Articles
of Incorporation. So it can be more than the simple majority.
Important: Qualified majority can never be lower than the simple
majority. It must be higher than simple majority. Corporations can
determine by themselves what would constitute a quorum. There can
be instances where the quorum can be lower than the majority. In a
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
corporation with 10 board members, they can stipulate that 3 would
be the quorum. SO, that is allowed.
Plurality of votes
In contrast to majority. Plurality of votes pertains to the highest
number of votes for a candidate to win.
Important: Plurality could be lower or higher than the majority.
All of you were busy, all of you were not able to attend the
meeting, just the same the president passed around a
resolution requiring you to sign. Can you object to such
resolution?
ANS: Yes, you can object in such resolution for there was no valid
meeting conducted.
No proxy Rule
Situation
Q. In a group of 10, what could be the simple majority?
ANS: 6
Q. What could be the plurality?
ANS: If 5 voted out of 10, he who gets 3 has the plurality of votes. He
wins.
Important: Plurality is not the same as majority as it could be less
than majority. Qualified majority can never be lower than simple
majority. Plurality can be lower than the simple majority.
Importance of Board Meeting
General Rule
Without a board meeting, the act is unauthorized. There must be an
actual meeting and therefore passing around a prepared resolution for
every board member to sign is NOT ALLOWED. There should be a
meeting.
Purpose/Objectives of the Meeting
1.
2.
3.
4.
Situation
For the board to exchange ideas
Raise objections
Give explanations
Justify their positions.
Situation
One of the directors was your boss and he received a notice of
the meeting indicating the agenda. One of the agendas was
the revision or the amendment of the by-laws of the
corporation. Since your boss is not even a high school
graduate, he would never be able to participate. Even with his
presence, there will not be much that he can contribute in the
deliberations. So, your boss decided to send you to represent
him in the meeting since you are a lawyer and you studied
corporation law. You asked her then to sign a “proxy”
document to authorize you to go to the meeting and
intelligently participate in the discussion. Allowed?
ANS: No. That is not allowed because the law provides that no proxy is
allowed in the meeting of the board. Moreover, we must take note that
the position occupied by the board is one of trust so it is by reason of
such trust and confidence and the personal skills of the director that
he is placed in the board.
Important: No proxy is allowed in the meeting of the board. You are
there as member of the board because you are duly elected by the SH
and that authority as a duly elected director cannot be delegated to
anyone. The trust was given by the stockholders to you alone
regardless of how much you know of the topic. What is important is
that you enjoy the trust of the SH.
Corporate Officers
TN: For the best interest of the corporation, there must be a
deliberation.
Exceptions
1.
2.
3.
4.
5.
6.
7.
8.
If the directors are the stockholders themselves
If the stockholders ratified
Apparent authority (held out to public that officer had the power)
Inherent authority
Matter of general practice, custom and policy
Creation of executive committee
Management agreement
Closed corporations
1. President – must be a director of the corporation and owns at
least one share of stock.
2. Secretary –must be a resident and a citizen of the Philippines.
3. Treasurer – may or may not be a director of the corporation.
4. Vice President – At the time of election of the vice-president,
there is no need for him to own at least one share because the
law does not even require a vice-president, however, the moment
he assumes the office of the president, he must be a director of
the corporation and at least own one share.
Situation
Jennica was a member of the board. Because she was so busy
at that time she could not be present in the board meeting.
Because of this she agreed that despite her absence, she will
accept any decision of the board. When she was informed of
the decision, she objected. Can she validly object?
ANS: In such a case, when there was a quorum in the meeting, and
the resolution was approved by the majority, whether you object or
not, majority has decided. That decision could no longer be
questioned.
22 | U N I V E R S I T Y O F S A N C A R L O S
Purpose of Vice President
To succeed the president in case of the latter’s death, resignation,
incapacity or in case of vacancy in the office of the president.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Frequency of Meetings
Q. How often should the Board of Directors/Trustees meet?
ANS:
1. Regular meeting – once a month
2. Special meeting – As often as the exigencies may require/as often
as needed. Especially when there are special matters which
cannot wait for the next regular meeting.
Q. How often should the Stockholders meet?
ANS:
2.
3.
4.
5.
6.
7.
8.
Death
Disqualification
Incapacity
Resignation
Expiration of term
Removal by stock holders (Section 28)
Increase in the number of Directors (Positions)
Abandonment
Where a director (or trustee) in a corporation accepts a position in
which his duties are incompatible with those as such director.
Resignation
1. Regular Meeting - At least once a year
Important: The usual agenda is to elect the Board in the regular
meeting since the term of the Board is only one (1) year. The
reason for the term of one year is to assess the performance of
the Board so that the stockholders may elect eligible directors for
the job.
2. Special Meeting - When exigencies may arise
Sec. 26. Report of Election
Section 26. Report of election of directors, officers, etc.
Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange Commission,
the names, nationalities and residences of the directors, trustees, and
officers elected. Should a director, trustee or officer die, resign or in
any manner cease to hold office, his heirs in case of his death, the
secretary, or any other officer of the corporation, or the director,
trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission.
Sec. 27. Disqualification
Section 27. Disqualification of directors, trustees or officers.
No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the date of his election
or appointment, shall qualify as a director, trustee or officer of any
corporation.
Disqualifications of a director, trustee or officer
If within 5 years prior to the date of his election or appointment, he is:
1. Convicted by final judgment for an offense punishable by
imprisonment exceeding 6 years,
2. Convicted of a violation of this Code
Sec. 28-29. Vacancies and Filling Up of Vacancies
Section 28. Removal of directors or trustees. (
When he leaves his office and no longer performs the duties
incumbent upon him.
Disqualification
When he fails to qualify for the position.
Example: A director who no longer holds at least one share
Expiration of term
Example: A director’s term is 1 year – He ceases to become a director
after a year.
Incapacity
When he can no longer discharge the duties of being a director due to
either physical or mental incapacity.
Resignation
Effect of resignation
It creates a vacancy.
Situation
Corp 1 decided to cease the operations of the corporation.
With the consent of all shareholders, they sold the entire
corporation to Corp 2. The sale took place after six (6) months
of the last stockholder’s meeting of Corp 1. After the sale, the
new Board conducted a meeting in the company board room,
only to find out that the old Board was also there to conduct a
meeting. What are the possible arguments of each Party?
ANS:
Argument of the Old Board of Directors: They stay as the Board of
Directors because their term is for a year and only 6 months lapsed.
Argument of the New Board of Directors: The Old Board of Directors
ceases to be such because to remain as a Director, one must be a
holder or an owner of at least 1 share. Since they sold everything, they
are no longer stockholders with no business coming there.
Please see codals.
TN: If the lawyer presiding over the transfer is not a good one, this
Section 29. Vacancies in the office of director or trustee.
confusion will arise.
Please see codals.
Q. Who should be now the Board?
Q. How are vacancies created?
ANS: The new Board. The old Board has no share of stock already
ANS:
since they sold all of their shares. Under the law, a director of the
Board should have at least one share of stock.
1. Abandonment
23 | U N I V E R S I T Y O F S A N C A R L O S
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
TN: It is a change in the fundamental agreement of the parties. They
sold the entire shares. Thus, every stockholder, even assuming there
were others aside from the old Board of Directors, agreed to the sale.
Important: The new corporation is now the owner since it acquired
all the shares. The shareholders of that corporation will be the one to
lawfully elect the members of the Board of Directors.
Q. If you were the lawyer who presided over the sale, what
could you have done to avoid this conflict?
ANS:
1. Set a meeting with the SH prior to the sale
2. Explain to each party the consequence of the sale and whatever
is agreed upon is put into writing
3. As to the old BOD, require them to resign as the best (and nicer)
way to have them step down from office.
4. Prepare the necessary documents. When the buyers pay,
together with the deed of sale will be the document containing
the resignation of the board. This will cause less tension between
the old stock holders and the new ones.
Filling up of Vacancies
Q. How vacancies are filled up?
ANS: Vacancies may be filled up either by the BOD or the stockholders,
3. Any stockholder or member of the corporation signing the
demand
TN: The law anticipates the situation when the president would not
ask for the removal, if in case the president were to be removed.
(that’s why option 2 and 3 are recognized)
Important: The notice to the stockholders/members must indicate
that the special meeting is for the purpose of removing a
director/trustee. Hence, there can be no removal of directors/trustees
if the secretary sends a notice that the special meeting is for Christmas
party.
Since there is a vacancy, it can be filled in the same meeting. They can
put in the agenda: Removal, voting for removal, then election.
Q. How many votes required?
ANS: The vote required is the vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding capital stock,
or if the corporation be a non-stock corporation, by a vote of at least
two-thirds (2/3) of the members entitled to vote.
Votes for removal v. Votes for election
Votes required for removal
Votes required for election
2/3
Majority
depending on the cause of the vacancy.
Reason for the difference
1. By the stockholders
Cause for vacancy: Removal, expiration of term and increase in
number of the board of directors.
The law assures one year term of office for the directors that’s why it
is stricter to remove a director than to elect one.
Term of newly-elected director
2. By the Board
Cause for vacancy: Other than removal, expiration of term and
increase in the number of board of directors. Provided that they
still constitute a quorum.
Summary
By the board
By the stockholders
Death
1. Incapacity
2. Abandonment of office
3. Resignation
(provided there is still quorum)
How?
Vote of at least majority of the
remaining board
1. Expiration of term
2. Removal by the SH (Sec 28)
3. Increase in the number of
directors
How?
By the vote of at least majority of
the remaining stockholders
Removal of Director or Trustee
Removal of director/ trustee
A special meeting for the removal of directors/trustees is called by
either:
1. The secretary on order of the president
2. The secretary on the written demand of the stockholders
representing or holding at least a majority of the outstanding
capital stock, or, if it be a non-stock corporation, on the written
demand of a majority of the members entitled to vote
24 | U N I V E R S I T Y O F S A N C A R L O S
Only the unexpired term because the one-year term is provided only
during regular elections.
Sec. 30. Compensation of Directors
Section 30. Compensation of directors.
In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as
such directors, except for reasonable pre diems: Provided, however,
That any such compensation other than per diems may be granted to
directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding
year.
The BOD shall not receive any compensation, only reasonable
per diems.
This is because they are already stockholders and, thus, receive their
share of the dividends. Members of the Board are there to promote the
interest of the corporation, not themselves.
Exceptions
1. If the by-laws of the corporation fixes their compensation.
2. If granted by a vote of stockholders representing at least majority
of the outstanding capital stock.
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Provided that in both instances, the compensation shall not exceed
10% of the net income before income tax of the corporation during
the preceding year.
Sec. 31. Compensation of Directors
Section 31. Liability of directors, trustees or officers.
Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect
of any matter which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding capital stock or of at least
2/3 of the members in a meeting called for the purpose: Provided,
That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.
Self-dealing director
The director can deal or transact with the corporation
Situation
You are a supplier of makeup kits and you are also a director
of the corporation. The corporation is planning to participate
in Sinulog and there were 100 dancers and you offered to
supply their makeup. As director, can you deal with the
corporation?
ANS: Yes. But contract is deemed voidable unless the following
Situation
You were member of the board. One of the items decided by
the board was the termination of 50 employees. The board
was aware that there was no proper ground for termination.
But nevertheless, the board decided to terminate. The
termination was considered illegal. Now the stockholders
wanted to complain why the company is being required to pay
back wages, interests and penalties because of the board’s
decision. Is there any liability on the part of the board?
ANS: There is a liability on the part of directors because of gross
negligence.
Situation
It was found out later that the 50 employees were replaced by
50 employees of a manpower agency owned by the BOD. Any
liability?
ANS: Yes, because the board members were guilty of conflict of
interest.
Important: If a director is found guilty of conflict of interest, he can
be held liable for damages.
Sec. 32. Self-Dealing Directors
Section 32. Dealings of directors, trustees or officers with
the corporation.
A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not necessary to
constitute a quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for
the approval of the contract;
3. That the contract is fair and reasonable under the circumstances;
and
25 | U N I V E R S I T Y O F S A N C A R L O S
conditions are present:
1. Her presence in the meeting is not required to constitute a
quorum;
2. Her vote is not required for approval; and
3. The contract is fair and reasonable.
Illustration of the second requisite:
There are 5 directors, if 4 directors voted for approval of the contract
and one of those who voted was the self-dealing director, the contract
would still be valid, because even if the self-dealing director did not
vote there would still be a quorum and valid number of votes for
approval, provided, that the contract is fair and reasonable, and his act
is authorized by the BOD
Important: When any of the first two requisites is absent, in the
case of a contract with a director or trustee, such contract may be
ratified by the vote of the stockholders, representing at least twothird’s of the OCS or 2/3 of the members in a meeting called for that
purpose. Provided, that full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting. Provided,
however, that the contract is fair and reasonable under the
circumstances
Sec. 33. Interlocking Directors
Sec 33. Contracts between corps with interlocking directors.
Except in cases of fraud, and provided the contract is fair and
reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other
corporation or corporations is merely nominal, he shall be subject to
the provisions of the preceding section insofar as the latter corporation
or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Interlocking director
An interlocking director is a director of two or more corporations
General Rule: There is no prohibition at all to be an interlocking
director.
Exception: When the director has substantial interest in 1 corporation
and nominal interest in the other corporation, and both businesses are
doing business with each other.
Important: A director is considered to have substantial interest in a
corporation when he has stockholdings exceeding 20% percent of the
outstanding capital stock.
Effect of exception
When this happens, the contract is voidable, unless:
1. The presence of such interlocking director is not necessary to
constitute a quorum.
2. The vote of such interlocking director is not necessary to approve
a contract.
3. When contract is fair and reasonable under the circumstances
given.
Situation
Ms. Cadampong is the interlocking director of a Wellness
Corporation (provides make up) and a Customer Corporation
(in need of make up). She has substantial interest in the
Wellness Corporation and nominal interest in the Customer
Corporation. She is trying to influence the Customer
Corporation to buy make up with Wellness Corporation where
she has substantial interest. Which corporation can claim that
the contract is a voidable contract?
ANS: The customer corporation, being the company where she holds
nominal interest. In this case, the Customer Corporation may complain
and treat the contract as voidable unless the three requisites are
complied with.
TN: Cadampog’s defense would be to invoke the validity of the
contract, proving the presence of all requisites under sec 32.
Sec. 34. Disloyalty of a Director
Section 34. Disloyalty of a director.
Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he must account to the
latter for all such profits by refunding the same, unless his act has
been ratified by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This provision
shall be applicable, notwithstanding the fact that the director risked his
own funds in the venture.
Situation
Regencia is a member of the board of X Corp. The Corporation
is planning to open a branch in Bacolod. They were able to
identify a place in Bacolod where the price of the land was
discussed. The Corporation then decided to acquire the
property. Suddenly, Regencia flew to Bacolod to inquire about
the property and talk to the owner. What can Regencia
possibly talk about with the owner?
26 | U N I V E R S I T Y O F S A N C A R L O S
ANS: If he is a good director, he will talk about any discounts or any
reason to make the deal advantageous for the Corporation. If he were
a bad director, he would take advantage of the situation for personal
interest by buying the land personally to the prejudice of the
Corporation.
Situation
The seller was willing to sell a parcel of land it for 30,000 per
square meter. The director heard that the corporation is
willing to pay 25, 000/ sqm, but he bought it for 26,000/ sqm
for himself. It was now under his name as the sale was
consummated. Later on the corporation sent their broker and
the seller told the former that it was already sold. What will
happen?
ANS: The Director is a Disloyal Director
Q. What can the corporation do to the disloyal director?
ANS: The Director is supposed to give the profit to the corporation. But
in this case there is no profit. So the corporation may tell the director
that the property be transferred to them, they will pay for the 25, 000.
The Director will bear the loss of 1,000 since he paid 26, 000 in total
for the land.
Important: The disloyal director is supposed to return the profit to
the corporation unless the act shall be later ratified by the stockholders
holding 2/3 of the outstanding capital stock.
Sec. 35. Executive Committee
Section 35. Executive committee.
The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be
appointed by the board. Said committee may act, by majority vote of
all its members, on such specific matters within the competence of the
board, as may be delegated to it in the by-laws or on a majority vote
of the board, except with respect to: (1) approval of any action for
which shareholders' approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or repeal of by-laws or the
adoption of new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express terms is not so amendable
or repealable; and (5) a distribution of cash dividends to the
shareholders
Executive Committee
An executive committee shall be created if it is provided under the bylaws of the corporation.
Purpose: For faster and easier decision making process. No need to
gather all the 15 board of directors just to decide matters which
although given to the board but are not exclusively exercised by the
board.
Composition of the executive committee
It shall be composed of at least 3 members of the board.
However, this shall not preclude the corporation, as stipulated under
the by-laws, to add non-members of the board in addition to the 3.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
An exception to non- delegation of the board’s powers
Situation
The execomm shall do acts not exclusively vested to the board of
directors. In other words, they can act in behalf of the board. Although
as a general rule the Board cannot delegate its powers which are not
ministerial powers, the creation of the executive committee is an
exception to the said general rule as in effect, the board delegates its
power to the smaller group.
An airline company wants to bring their passengers to
Bantayan Island. So they use pumpboats to transport the
passengers. Can they do that?
Q. Can the executive committee propose amendments to the
Articles of Incorporation?
ANS: No, it does not include matters which require the ratification or
ANS: No. This is because such activity is not within the incidental,
implied, nor inherent powers of the corporation. The corporation here
is an airline company. The use of pumpboats for transportation is not
in any way related to its main purpose.
TN: The remedy here of the airline company is to create another
conformity of the stockholders.
corporation whose
pumpboats.
Powers that can not be decided by the Executive Committee
Sir: This situation illustrates the significance of specifying the powers
1. Approval of any action which shareholders' approval is also
required
2. Filing of vacancies in the board
3. Amendment or repeal of by-laws or the adoption of new by-laws
4. The amendment or repeal of any resolution of the board which by
its express terms is not so amendable or repealable; and
5. Distribution of cash dividends to the shareholders.
Powers of the Corporation
purpose
is
to
transport
passengers
using
of a corporation.
Situation
We once operated the first luxury vessel in the Phils
(Mabuhay) with route Manila-Boracay-Palawan-Manila. The
expected market were seminars and conventions. The vessel
was very big, it could not dock. We had to engage/contract
with pump boat operators to bring them to the beach. Do you
think we exercised a proper corporate power?
Situation
ANS: Yes. This falls as an implied power of the corporation.
A company is organized to sell all types of powder. They
decided to sell shabu (a type of powder). Is it valid?
TN: They can’t operate pumpboats because it does not fall under the
express powers of the coropration. However, we can hire pumpboats.
ANS: No. This is neither an express, implied or incidental power.
This is even an illegal act
TN: Their engagement in business is limited by law. Even though their
purpose is to sell all kinds of powder, shabu is illegal. Since selling of
shabu is prohibited by law, they cannot sell it.
Kinds of Powers of the Corporation
1. Express powers – those expressly stipulated in the Articles of
Incorporation and the by-laws
2. Implied Powers – powers that are necessary to carry out the
express powers
3. Incidental or Inherent Powers – powers that can be exercised by
the fact that the corporation exists
Situation
In a railroad company, what are its inherent powers? What do
you need?
ANS: We need to construct railroads. In doing this we need to buy
parcels of land where we can lay the railroad tracks.
Q. How about the people that do not want to sell their land,
can we compel them to sell their land?
ANS: Yes, we can compel them to sell by exercising the power of
expropriation. Otherwise no railroad company can exist without this
power. This power can be exercised by quasi-public corporations such
as VECO, PLDT etc. (quasi-public corporations are private corporations
that are performing or exercising public functions)
27 | U N I V E R S I T Y O F S A N C A R L O S
Classification of powers of a corporation
Express
Powers
directly and
expressly
conferred by
law
Implied
Incidental
Inherent
Powers that
are reasonably
necessary to
carry out the
express
powers
Powers that
are necessary
to the
existence and
operation of
the
corporation
Powers
enjoyed by
the
corporation by
reason of its
existence as a
corporation
Sec. 36. Powers of the Corp under the Corporation Code
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued
2. Of succession by its corporate name
3. To adopt and use a corporate seal
4. To amend its articles of incorporation
5. To adopt by-laws, amend or repeal the same
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell stocks to subscribers, etc.
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
and personal property xxx
8. To enter into merger or consolidation
9. To make reasonable donations, except in aid of any
political party or candidate or for purposes of partisan
politics
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
11. To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of
incorporation.
In addition to these powers:
Sec. 38. Power to Increase or Decrease Capital Stock
Section 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness.
Please see codals
1. Power to extend or shorten corporate term (Section 37)
2. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness (Section 38)
3. Power to deny pre-emptive right (Section 39)
4. Power to acquire own shares (Section 41)
5. Power to invest corporate funds in another corporation or
business or for any other purpose (Section 42)
6. Power to declare dividends (Section 43)
7. Power to enter into management contract (Section 44)
Power to enter into merger or consolidation
Merger
A form of business
combination wherein an entity
is acquired by another
corporation and there is only
one surviving entity.
Consolidation
A form of business combination
wherein two or more
corporations would combine and
they are forming an entirely new
corporation or entity.
Hence, A + B = A or B
Hence, A + B = C
Power of Succession by its Corporate Name
This means that despite the fact that the stockholders die, the
corporation can still continue to operate under its corporate name
Requisites:
1. Done in a stockholder’s meeting duly called for the purpose
2. There must be a written notice of the proposed increase or
diminution of the capital stock
3. There must be majority vote of the board of directors
4. There must be 2/3 vote of the stockholders representing the
outstanding capital stock
5. A certificate signed by a majority of the directors and
countersigned by the chairman and the secretary of the
stockholders’ meeting
6. Accompanied by the sworn statement of the treasurer showing
that at least 25% of such increased capital stock has been
subscribed and that at least 25% of the amount subscribed has
been paid
7. Submitted to and approved by the SEC
Power to issue shares of stocks
A corporation cannot issue treasury shares because treasury shares
are shares that had already been issued but are just reacquired by the
corporation. Hence, it is not proper to say that a corporation can issue
it since it had already been issued already in the past. However, the
corporation can sell or dispose treasury shares.
Sec. 39. Power to Deny Pre-emptive Right
Sec. 37. Power to Increase/Decrease Corporation Term
Section 37. Power to extend or shorten corporate term.
A private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the
board of directors or trustees and ratified at a meeting by the
stockholders representing at 2/3 of the outstanding capital stock or by
at least 2/3 of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served
personally: Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right under the
conditions provided in this code.
Power to extend or shorten corporate name
A. Approval by the Board – majority vote
B. Ratification by the stockholders – 2/3 of the outstanding capital
stock
Important: In case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right.
Section 39. Power to deny pre-emptive right.
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.
Right of pre-emption of stockholders
Whenever the capital stock of a corporation is increased and new
shares of stock are issued, the new issue must be offered first to the
existing stockholders, in proportion to their existing shareholdings and
on equal terms with other holders of the original stocks before
subscription are received from the general public.
Important: The right of pre-emption does not cover Treasury shares.
because it is not considered as new issuance and sale of treasury
share does not dilute the stockholders present stockholdings.
The importance of pre-emptive right
The rule aims to safeguard the right of a stockholder to preserve his
proportionate influence and interest in the corporation and the relative
value of his holdings. In other words, the purpose of the right is to
protect impairment and dilution the basic rights of the stockholder in
the corporation. However, the stockholder may waive such right.
28 | U N I V E R S I T Y O F S A N C A R L O S
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Illustration
To understand the table. Continue reading the situations below.
A
B
C
D
E
Total
Old
200k (20%)
200k (20%)
200k (20%)
200k (20%)
200k (20%)
1 million
New
200k (10%)
200k (10%)
200k (10%)
700k (35%)
700k (35%)
2 million
There are 1 million shares. 5 Shareholders, A, B, C, D and E with 200K
shares each, each SH each having 20% control. Should there be an
issue to resolve that needs the approval of the stockholders, A, B, and
C could easily agree to vote together since they have a total of 60%
share collectively and that they will always prevail.
Situation 1: No application of Pre-emptive right
D then proposed to increase the capital stock to 2 million. C and D
acquired the entire increase (500k)
If there is now a new issue, A B and C will only have 30%, as
compared to before where they had 60%. D and E will now have a
combined 70%, hence in this situation, the new majority will be D and
E combined.
This is because we did not apply their right of pre-emption; hence, any
increase will dilute their present stockholdings, unless the articles of
incorporation or any amendment deny such right thereto.
Important: Unless there is no express denial in the articles of
incorporation, the presumption would be that each stockholder has a
pre-emptive right.
Situation 2: Appraisal Right for dissenting SH
Q. A, B, and C still hold 60% of the shares. Under allowable
circumstances, A dissented in certain issues, and because he
dissented, what can happen to him?
ANS: He can exercise his right of appraisal, provided there are
unrestricted retained earnings.
Q. So what happens to A’s shares?
ANS: They become part of the treasury shares.
Q. What can the company do with these treasury shares?
ANS:
1. Stay there - not do anything
2. Distribute as property dividends
3. Sell back to anyone interested
Q. If the company decides to sell, does it have the obligation
to offer first to existing shareholders?
Important: Treasury Shares are not covered by the preemptive right.
They only apply to freshly issued shares, or the virgin shares, the
shares untouched.
Instances when pre-emptive right does not apply
1. The right is denied under AOI
2. Shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public
3. Shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the OCS in
exchange for property needed for corporate purposes.
4. Shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the OCS in payment
of a previously contracted debt.
In compliance with laws requiring minimum stock ownership
by the public
The IPO under the Securities Code requires that a certain percentage
of your issuance should be allocated for a certain group. More
particularly for your employees.
TN: This concept is based on the belief that if your employees are
stockholders, they will be induced to work harder, so the company will
be more profitable. In turn, they will be gaining more. So that here,
when a corporation decides to go IPO, a certain percentage of 10%
(according to sir’s past experience) of the shares of the corporation are
to be offered to the employees.
If you go public, you are expected to induce the public to buy your
shares of stock, and the more shares which are sold, the bigger capital
you will have. You can expand more and make most profit.
If you go public, the stock exchange commission and the SEC will see
to it that you are worth publishing in the stock exchange. They do not
allow just any corporation to sell their shares. They must make sure
that those who decide to sell their shares in the Stock Market are Class
A corporations, corporations with the best potential. They will
investigate into such class A status by examining everything, like
operations, market shares, to facilities, to assets. The corporation has
to disclose everything and built up the image of the corporation.
Procedure: Prepare a brochure, introduce the management, (i.e.
President’s educational attainment) and introduce Legal Counsel.
Shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the OCS in
exchange for property needed for corporate purposes.
Example: The usual example is when someone owes money from the
corporation but he cannot pay. Instead, he offers his parcel of land as
payment. If the corporation is convinced that the parcel is needed by
the corporation for some corporate purpose, then the corporation will
issue shares of stock when the corporation has no cash in exchange
for the property by way of exemption under pre-emptive right.
ANS: No, because pre-emptive right only applies to issue of shares
Q. If shares of A were sold to X (who now holds 20%), does
this dilute the shares of B to E?
Shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the OCS in
payment of a previously contracted debt.
ANS: No. Their shares remain the same. So denial of the pre- emptive
Example: The corporation may offer shares of stock in payment of a
right over the treasury shares is not a violation.
29 | U N I V E R S I T Y O F S A N C A R L O S
previously contracted debt to the creditor. If accepted, it is an
exemption under pre-emptive right of the stockholder.
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
TN: It’s hard to compute ¼ share, ¾ share. Another option is for
Sec. 40. Power to Sell its Assets
them to offer the fractional share to the stockholder holding the
said share to just buy the remaining fraction or sell the same to
others.
Sec. 40. Sale or other disposition of assets.
Please see codals.
2. Satisfy delinquent shares
General Rule: Corporation can dispose its assets
Exceptions: If disposition of all or substantially all assets of the
corporation, the following requisites must be present
1. Vote of majority of the Board
2. Authorized by the stockholders
outstanding capital stock
When a stockholder who has unpaid subscriptions, and it is
already due, the corporation for it to collect, instead of waiting for
the payment, ought to just purchase.
TN: Because when you subscribe, you are not supposed to pay
representing
2/3
of
the
Q. When is it disposition of substantially all the assets?
ANS: The current interpretation of the Supreme Court is disposition of
at least 80% of the assets.
immediately everything, you pay at least 25%. The remaining
75% may be paid once the call is made; meaning, once the board
makes that call setting the duty to pay the unpaid subscriptions.
If payment was due and no payment was forthcoming, the
corporation will have to get it back.
3. Pay dissenting stockholders
Situation
This is a result of appraisal right of the dissenting stockholders.
Company had 10 buses travelling from Santander to
Daanbantayan. If we sell 3 buses/5 buses/6 buses, is that
substantially all?
Important: The abovementioned exceptions shall only be taken
from the unrestricted retained earnings.
ANS: No, still continue business. It will only be substantially all if 8
buses or more were sold which constitutes 80% or more.
Sec. 41. Power to Acquire Own Shares
Section 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.
Q. May a corporation acquire back its own shares?
Author’s notes: A company may only acquire its own shares if:
1. Taken from Unrestricted Retained Earnings
2. For a legitimate purpose
a. Eliminate fractional shares
b. Repurchase delinquent shares
c. Pay dissenting SH
d. Redemption of redeemable shares (from spectra)
Situation
Would you be happy if other stockholders already got back
their shares? For example there are 8 stockholders and 3
already got their shares. Is it advantageous or
disadvantageous to the remaining stockholders?
ANS: It depends. It has advantages and disadvantages. For the
remaining stockholders, it is advantageous when the company is
expected to earn profits, they would have bigger dividends because
only few stockholders would be sharing in the profits. However, it is
disadvantageous when the company is expecting losses because only
few would be sharing the losses which is prejudicial on their part.
ANS: No, except in three instances.
General rule: No, a corporation may not acquire back its own shares.
It would be tantamount to distributing capital and it will be to the
prejudice of the creditors by virtue of the trust fund doctrine.
This can also lead to the dissolution of the corporation, to the
prejudice of the remaining stockholders and of the creditors, if one
day, all the stockholders will be able to get back all their investments.
There will no longer be any investments for the corporation to
continue to operate.
When a corporation acquires back its own shares, there is partial
liquidation of its assets without the participation of the creditors.
Hence, you are not allowed to buy back your own shares.
Exceptions: When a corporation may acquire its own shares
1. To prevent fractional shares
30 | U N I V E R S I T Y O F S A N C A R L O S
Sec. 42. Power to Invest Funds in Another Corporation
Section 42. Power to invest corporate funds in another
corporation or business or for any other purpose.
Subject to the provisions of this Code, a private corporation may invest
its funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized when approved
by a majority of the board of directors or trustees and ratified by the
stockholders representing at least 2/3 of the outstanding capital stock,
or by at least 2/3 of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called for
the purpose. xxx
CORPORATION LAW l Midterm Reviewer l Atty. Espedido l For the exclusive use of EH 404
Sec. 43. Power to Declare Dividends
Section 43. Power to declare dividends.
The board of directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on
the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not
less than 2/3 of the outstanding capital stock at a regular or special
meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs
approved by the board of directors; or (2) when the corporation is
prohibited under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends without
its/his consent, and such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies
Dividends
These are portions of the profits of the corporation which are allowed
to be distributed to the stockholders depending on the number of their
shares.
TN: In short, these are share of profits. These are civil fruits.
Q. Can the stockholders demand for the declaration of
dividends?
ANS: Generally, no. The decision to declare dividends lies on the
Board. The Board has the power to manage the corporation. Hence,
when the corporation has profits, it is the Board who decides what to
do with it. The Board, in its discretion, may not declare it as dividends
but rather use it for business expansion projects.
Exception: When there is improper accumulation of profits.
This happens when the corporation retains surplus profits in excess of
100% of its paid-in capital stock. In which case, the stockholders can
demand for the declaration of dividends.
Situation
You are a SH and in April of a taxable year, you heard that the
BOD intends to declare dividends. As per your computation,
your tax for the year would be high, excluding the taxes that
you would soon incur upon receiving the dividends. Would you
be happy that the BOD would declare dividends?
ANS: No. You would tell the BOD not to declare dividends because of
the additional taxes that you would incur.
Q: Can you compel the Corporation to declare dividends if the
retained earnings has not reached more than 100% of the
paid up capital?
ANS: No.
31 | U N I V E R S I T Y O F S A N C A R L O S
Corporate Practice of Accumulating Earnings
When the corporation acquires income it will be subject to corporate
income tax then when it is distributed to SH as cash dividends it will
also be income of the SH and such are taxable income of the SH, in
effect there will be double taxation. The BOD will hesitate to declare
dividends and so even if the corporation has cash it will find ways and
make it appear that it was an expense of the company to avoid taxes.
Illustration:
The SH would be attending a seminar abroad to observe the latest
trends of the business and all expenses were paid by the corporation.
It was equivalent to the SH dividends, but instead of declaring
dividends they made it appear that it was an expense of the company
to finance the SH seminar abroad. It will not be considered as income
on the part of the SH, hence no tax.
Amendment of NIRC to address IAE
However, the BIR discovered this scheme. They came up with the
amendment to the NIRC to impose improperly accumulated earnings
tax (IAET) as penalty for erring corporations. The corporation shall be
liable for IAET when its undistributed profits will exceed 100% of the
paid up capital.
Exception to the Exception: When accumulated earnings are
allowed
1. When justified by definite corporate expansion projects or
programs;
2. When the corporation is prohibited under any loan agreement
with any financial institution or creditor from declaring cash
dividends without securing its/his consent; or
3. When it can be clearly shown that such retention is necessary
under special circumstances, such as when there is a need for
special reserve for probable contingencies. (i.e. typhoons)
4. Issue stock dividends
Types of dividends
1.
2.
3.
4.
Stock dividends
Property dividends
Cash dividends
Composite dividends – when part cash and part stock
Situation
If your subscription has not been paid and declared due by the
Board, can you say “just charge my unpaid subscription to
future dividends”. Can he refuse to pay by saying that?
ANS: No because we are not sure whether indeed dividends will be
declared in the future, or how soon. If the subscription is due, it has to
be paid. Otherwise, you will be declared a delinquent shareholder.
Q. However, if dividends were declared and you still have
unpaid subscription?
ANS: Apply first the dividends to the unpaid subscription.