NOTES
CORPORATIONS
* CC – Corporation Code
* RCC – Revised Corporation Code (RA 11232)
CLASSIFICATIONS OF A CORPORATION
The following are the classes of corporation:
1. As to whether they are for public or private purpose:
a. PUBLIC - formed or organized for the government of a portion of a state and
for the purpose of serving the general good and welfare. (Ex.: Bangko
Sentral ng Pilipinas)
Note:
- Provinces, municipalities, cities, and barangays are considered as public
corporations.
b. PRIVATE - one formed for some private purpose, benefit or end. It may
either be a stock or non-stock corporation.
Note:
- Private corporations include:
b.1. Government-owned and controlled corporations (GOCCs)
– corporations where the government owns at least a majority
of its outstanding voting capital stock. They may be performing
governmental or proprietary function (a function that a private
entity can perform.
GOCCs are not public corporations because
they are not established for the government of a
portion of a state.
Ex.: GSIS, NAPOCOR, PNR
b.2. Quasi-public Corporations – these are private corporations
which have accepted from the State the grant of a franchise or
contract involving the performance of public duties but which
are organized for profit.
Private corporations for public purpose.
Ex.: Electric and water companies
2. As to whether their membership is represented by shares of stock or not:
a. STOCK - one which has:
a.1. Capital stock divided into shares; and
a.2. Are authorized to distribute to the holders of such shares,
dividends or allotments or the surplus profits on the basis of the
shares held (Sec. 3, RCC).
b. NON-STOCK – is one which:
b.1. Does not issue shares; and
b.2. Is created not for profit but for public good and welfare and where
no part of its income is distributable as dividends to its members,
trustees, or officers. (Sec. 3, RCC)
3. As to whether they are open to the public or not:
a. OPEN ‐ open to any person who may wish to become a stockholder or
member thereto.
b. CLOSE ‐ limited to selected persons or members of the family. *Check
Title XII, Secs. 95-14 of the RCC
4. As to state or country under or by whose laws they have been created:
a. DOMESTIC ‐ incorporated under the laws of the Philippines.
b. FOREIGN ‐ formed, organized, or existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
5. As to the number of persons who compose them:
a. CORPORATION AGGREGATE - corporation consisting of more than one
member or corporator.
Note:
- The CC requires that these corporations must be formed by “not less
than 5 persons” (Sec. 10, CC).
- However, under the RCC, there can be a corporation with only one
stockholder, other than a corporation sole, in the form of a ONE
PERSON
CORPORATION.
* Check Title XIII, Chapter III of the RCC
b. ONE PERSON CORPORATION – a corporation with a single stockholder.
Only a natural person, trust or an estate may form this kind of corporation.
Note:
- A natural person who is licensed to exercise a profession MAY NOT
organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.
- Banks and quasi-banks, preneed, trust, insurance, public and
publiclylisted companies, and non-chartered government-owned and controlled corporations MAY NOT incorporate as One Person
Corporations.
c. CORPORATION SOLE ‐ religious corporation which consists of one
member or corporator only and his successor.
6. As to whether they are for religious purpose or not:
a. ECCLESIASTICAL CORPORATION ‐ one organized for religious
purpose.
b. LAY CORPORATION ‐ one organized for a purpose other than for
religion.
7. As to whether they are for charitable purpose or not:
a. ELEEMOSYNARY ‐ one established for charitable purposes or those
supported by charity.
b. CIVIL ‐ one established for business or profit.
8. As to their legal right to corporate existence:
a. DE JURE CORPORATION ‐ existing both in fact and in law.
b. DE FACTO CORPORATION ‐ existing in fact but not in law. One which
actually exists for all practical purposes as a corporation but which has no
legal right to corporate existence as against the State.
It has been defectively created but there is an exercise of corporate
rights.
Requisites:
b.1. Organized under a valid law;
b.2. Colorable Compliance - Attempt in good faith to form a
corporation according to the requirements of the law; and
b.3. Actual User - Use of corporate powers. The corporation
must have performed the acts which are peculiar to a
corporation like entering into a subscription agreement,
adopting by-laws, and electing directors.
It has been defectively created but there is an exercise of corporate
rights.
Example of defects:
- Articles of incorporation fails to state all the matters required
by the Code to be stated, or state some of them incorrectly; and
- Failure to submit by-laws on time.
9. As to their relation to another corporation:
a. PARENT OR HOLDING ‐ related to another corporation that it has the
power either, directly or indirectly to, elect the majority of the director of
such other corporation.
b. SUBSIDIARY ‐ so related to another corporation that the majority of its
directors can be elected either, directly or indirectly, by such other
corporation
10. As to whether they are corporations in a true sense or only in a limited sense:
a. TRUE ‐ exists by statutory authority.
b. QUASI ‐ exist without formal legislative grant:
b.1. Corporation by prescription ‐ has exercised corporate powers for
an indefinite period without interference on the part of the
sovereign power and which, by fiction of law, is given the status of
a corporation; and
b.2. Corporation by estoppel ‐ in reality is not a corporation, either de
jure or de facto, because it is so defectively formed, but is considered
a corporation in relation to those only who, by reason of theirs acts
or admissions, are precluded from asserting that it is not a
corporation (Sec. 20, RCC).
11. EDUCATIONAL CORPORATION (Secs. 105 & 106, RCC) – a stock or non-stock
corporation organized to provide facilities for teaching or instruction.
FORMATION OF A CORPORATION
STAGES IN THE FORMATION OF A CORPORATION:
1. PROMOTION – this is the stage before the actual formation of a corporation. It is
considered as the stage wherein the formation of a corporation is prepared. It can
include the steps necessary to:
- Procure necessary legislation;
- Get the incorporators together; and
- Get people to subscribe to the stocks of the corporation.
Promoters – a person who discovers a prospective business and brings persons
interested to invest in it through the formation of a corporation. A promoter
will take the initiative in founding the corporation and receives a consideration
for such.
Contracts entered into during this stage are considered as Pre-Incorporation
Contracts. These contracts are entered into by the promoter and “would-be”
investors or subscribers.
Expectation during this period: that a corporation will be formed.
Principal right of a promoter: to be paid a compensation.
However, a corporation does not always need promoters for it to be formed.
Promoter’s liability on contracts – a promoter is personally liable for
contracts made for the benefit of the proposed corporation.
When will the corporation be liable for such contracts?
- The corporation will only be liable upon its incorporation.
How will the corporation be liable?
- Liability for pre-incorporation contracts is not automatic.
- The corporation will only become liable by:
a. By express
acknowledgment
or
ratification by
the corporation.
- The corporation must pass a resolution formally
adopting the contract.
b. Implied Ratification
-
-
When the corporation accepted benefits or gain
from promotional contracts.
Having knowledge of these contracts, the
corporation failed to deny its liability either by
silence or acquiescence, AND a third person will
be damaged.
Without ratification, the contract is VOID as
against the corporation. Thus, it will become the
personal liability of the promoters.
Illustration:
Ana and Bea are the promoters of a corporation to be formed. It will be called X
Corporation and will be a stock corporation organized for the purpose of operating
restaurants. As promoters, Ana and Bea persuaded Carlo and Dana to invest in the
corporation. Carlo and Dana agreed and they became subscribers of the corporation.
Ana and Bea also persuaded Ejay to invest and become a stockholder. Ejay agreed but
as a condition, Ana and Bea should enter into an agreement with him. In this
agreement, Ejay will provide all the raw materials for the restaurants of X Corporation.
Ana and Bea agreed to the condition and they made a contract.
What do we call the contract entered into by Ana, Bea and Ejay? Pre-Incorporation
Contract
What happens to their contract if X Corporation was not formed? Ana and Bea will
become personally liable to Ejay for damages caused due to the non-formation of the
corporation.
If X Corporation was formed after, will it be bound by the contract entered into
by Ana, Bea and Ejay? It will be bound by the contract only through express or implied
ratification. If no ratification was done, Ana and Bea will become personally liable.
2. INCORPORATION - It is the performance of conditions, acts, deeds, and writings by
incorporators, and the official acts, certification or records, which give the corporation
its existence.
This includes the drafting of the Articles of Incorporation and the filing with
the SEC of the necessary requirements.
Acquiring the necessary favorable recommendation from the necessary
government agencies, if necessary.
Payment of filing fees and publication fees.
Issuance of a Certificate of Incorporation (CI) by the SEC.
Note: The life of a corporation commences from the issuance of the CI by the SEC.
3. FORMAL
ORGANIZATION
BUSINESS
OPERATIONS
AND COMMENCEMENT
OF
Sec. 18, RCC: “A private corporation organized under this Code commences its corporate existence
and juridical personality from the date the Commission issues the certificate of
incorporation under its official seal thereupon the incorporators, stockholders/members and their
successors shall
constitute a body 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.”
Here, even if a corporation is considered as incorporated because of the
issuance of its CI, it still needs to formally organize and commence its business.
Formal organization includes the formation of a Board of Directors and the
election of its members.
Under the CC, a corporation must formally organize and commence its
business within 2 years from the date of incorporation. However, under the
RCC, it is already 5 years from the date of incorporation, this will be the one
that will be followed. (Sec. 21, RCC)
If the corporation fails to do so within 5 years from the date of its incorporation,
its certificate of incorporation shall be deemed revoked as of the day following
the end of the five (5)-year period. (Non-User of Charter)
If a corporation has commenced its business but subsequently becomes
inoperative for a period of at least 5 consecutive years, the corporation will
be placed under delinquent status. (Continuous Inoperation)
- A delinquent corporation shall have a period of 2 years to resume
operations and comply with all requirements.
- Upon the compliance by the corporation, an order lifting the delinquent
status will be issued.
- Failure to comply with the requirements and resume operations within
the period given shall cause the revocation of the corporation's
certificate of incorporation.
*Non-User of Charter – 5 years
*Continuous Inoperation – 5 years
*Period given to delinquent corporation to resume operation – 2 years
Illustration:
1. X Corporation was issued its CI on January 5, 2021. As such, X Corporation
must formally organize and begin its business operations within 5 years
from January 5, 2021 or until January 5, 2026.
If X Corporation did not formally organize and commence its business
within the 5-year period, the CI will be deemed revoked as of January 6,
2026. This is the Non-User of Charter
2. Let’s say X Corporation was able to formally organize and commence its
business within the 5-year period. However, on March 20, 2024 the CEO
died. Due to his death, the corporation became a mess and becomes
inoperative for a continuous period of more than 5 years. What will happen
now?
For its continuous inoperation for at least 5 years, the corporation will be
declared as a delinquent corporation. The declaration was done on January
4, 2030.
Upon its declaration as a delinquent corporation on January 4, 2030, X
Corporation will have a two-year period to resume operations or until
January 4, 2032.
Q: What happens if X Corporation resumes business within the 2-year
period? A: An order lifting the delinquent status will be issued.
Q: What happens if X Corporation failed to resume business within the 2year period?
A: Its CI will be revoked.
FRANCHISES OF A CORPORATION:
1. PRIMARY FRANCHISE – the right or privilege granted by the State to individuals to
exist and act as a corporation after its incorporation,
This is the Certificate of Incorporation issued by the SEC.
2. SECONDARY FRANCHISE – this is the “special” right or privilege conferred upon
an existing corporation to the business for which it was created.
This is the Certificate of Authority from the proper government agency.
This must be submitted together with the CI to the SEC.
Ex.: From the BSP for banks or from the Insurance Commission for Insurance
Corporations
Not all corporations need this.
COMPONENTS OF A CORPORATION
1. Corporators – Those who compose a corporation, whether as stockholders or
members.
2. Incorporators –Those mentioned in the Articles of Incorporation as originally forming
and composing the corporation and who are signatories thereof.
3. Directors and Trustees – The Board of Directors is the governing body in a stock
corporation while the Board of Trustees is the governing body in a non-stock
corporation.
4. Corporate Officers – Officers who are identified as such in the Corporation Code, the
Articles of Incorporation, or the By-laws of the corporation.
5. Stockholders – Owners of shares of stock in a stock corporation.
6. Members – Corporators of a corporation which has no capital stock (non-stock
corporations). They are not owners of shares of stocks, and their membership depends
on terms provided in the articles of incorporation or by-laws.
7. Promoter – A person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor.
8. Subscribers – persons who have agreed to take and pay for original, unissued shares of
a corporation formed or to be formed.
The persons who were the first ones to buy the stocks of a corporation are
called subscribers.
Their names are found in the articles of incorporation.
Illustration:
Ana, Bea, Carlo, Dana, Ejay and Feliza decided to form X Corporation. They are the
incorporators and they will also sign the articles of incorporation.
As incorporators, they made an offer to other persons to invest in their corporation.
Glaiza, Hannah, Iris, and Jake agreed to buy their shares of stocks. They will be
considered as subscribers because they bought original and unissued stocks of the
corporation. Their names will also be seen in the articles of incorporation.
As incorporators, Ana, Bea, Carlo, Dana, Ejay and Feliza are required to own at least
1 share of stock. As such, they are also considered as subscribers and their names
will also appear in the articles of incorporation.
Aside from the above, Ana, Bea, Carlo, Dana, Ejay, Feliza, Glaiza, Hannah, Iris, and
Jake are also considered as stockholders since they own shares of stocks of X
Corporation.
When X Corporation was incorporated, Hannah decided to sell her shares to Kara
and Lin. Having no shares to own, Hannah is no longer a stockholder because it
will now be Kara and Lin who will become the stockholders. However, Kara and
Lin are not considered as subscribers because they did not buy original and
unissued shares.
ARTICLES OF INCORPORATION
The ARTICLES OF INCORPORATION (AOI) is one that defines the charter of the
corporation and the contractual relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its stockholders.
*Check Section 14, RCC for the form of the AOI.
All corporations organized under the CC shall file with the SEC an AOI in any of the
official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters (Sec. 13, RCC):
a. The name of corporation;
b. The specific purpose or purposes for which the corporation is being formed.
Where a corporation has more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and the secondary
purpose or purposes.
A nonstock corporation may not include a purpose which would change or
contradict its nature as such.
c. The place where the principal office of the corporation is to be located, which must
be within the Philippines;
d. The term for which the corporation is to exist, if the corporation has not elected
perpetual existence;
e. The names, nationalities, and residence addresses of the incorporators;
f. The number of directors, which shall not be more than fifteen (15) or the number
of trustees which may be more than fifteen (15);
g. The names, nationalities, and residence addresses of persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected
and qualified in accordance with this Code;
h. If it be a stock corporation:
The amount of its authorized capital stock;
Number of shares into which it is divided;
The par value of each;
Names, nationalities, and subscribers;
Amount subscribed and paid by each on the subscription; and
A statement that some or all of the shares are without par value, if
applicable
i. If it be a nonstock corporation:
The amount of its capital;
The names, nationalities, and residence addresses of the contributors, and
amount contributed by each
j. Such other matters consistent with law and which the incorporators may deem
necessary and convenient.
CORPORATE NAME (Sec. 17, RCC)
A corporation acquires juridical personality under the name stated in the AOI.
It identifies and distinguishes it from other corporations.
Verification must be done with the SEC for the name to be used.
No corporate name shall be allowed if the proposed name is:
1. Not distinguishable from that already reserved or registered for the use of
another corporation; or
2. If such name is already protected by law, rules and regulations.
A Verification Certificate will be issued authorizing the use by the proposed
corporation of the name stated therein. This will be submitted together with the AOI.
An Undertaking to change name must also be included in the AOI. This is an
undertaking to change name if it is similar to the name of another corporation or the
use of such name is prohibited.
PURPOSE/PURPOSES
This determines the core business or the nature of the corporation.
Requisites:
1. It must be lawful.
2. It must be definitely stated.
3. If the corporation has more than one purpose, the primary purpose must be
stated separately from the secondary purpose.
4. The purposes, if there are several, must be capable of being lawfully combined.
- Illegal combinations of purposes:
a. Banking + Insurance
b. Life Insurance + Non-life Insurance
c. Two or more forms of public transportation
d. Stock Dealership + Stock Brokerage
e. Radio/TV + Print
PRINCIPAL OFFICE
- It must be within the Philippines.
- It must be a definite place.
- It must be stated specifically, including the street, city or municipality, and province.
CORPORATE TERM (Sec. 11, RCC)
General Rule: A corporation shall have perpetual existence.
Exception: If its articles of incorporation provides otherwise. (Ex.: If the AOI provides
that it shall exist for a period of 10 years.)
Under the CC, a corporation can only exist for a term not exceeding 50 years. However,
the RCC has removed this limit. A corporation can exist for how long the members
wish it to exist.
Under the RCC, a corporation whose term has expired is also not ipso facto dissolved
but may apply for a revival of its corporate existence.
- Upon approval by the SEC, the corporation shall be deemed revived and a
certificate of revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival provides otherwise.
A corporate term for a specific period may be extended or shortened by amending
the articles of incorporation.
- No extension may be made earlier than 3 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 Commission.
- Such extension of the corporate term shall take effect only on the day
following the original or subsequent expiry date(s).
Illustration:
X Corporation, under its AOI, shall exist for a term of 10 years or until
July 10, 2030.
Before the expiry of its term, the members of the corporation wanted to
extend their term to 50 years.
Q: When can they do this?
A: They can only extend the term during the 3-year period prior to the date
that the 10 years will expire or the 3-year period prior to July 10, 2030.
INCORPORATORS (Sec. 10, RCC)
Any person, partnership, association or corporation, singly or jointly with others but
not more than fifteen (15) in number, may organize a corporation for any lawful
purpose or purposes.
- Unlike the CC, which required incorporators to be natural persons
numbering not less than five, the RCC allows partnership, association or
corporation to organize a corporation without any minimum number of
incorporators.
- There is no minimum number of incorporators, thus, a One-Person
Corporation was allowed under the RCC.
- Maximum: 15 incorporators
Incorporators who are natural persons must be of legal age.
Each incorporator of a stock corporation must own or be a subscriber to at least one
(1) share of the capital stock.
The RCC likewise eliminated the residency requirement for incorporators. As such,
the only requirements that remained are the legal age requirement for natural persons
and the ownership of at least one share of stock of the corporation.
INCORPORATING DIRECTORS/TRUSTEES
These are the persons who shall act as directors/trustees until the first regular
directors/trustees are duly elected and qualified.
Must not be more than 15 persons.
The names, nationalities, and residence addresses must be indicated.
Under the RCC, there is no longer any residence requirement for the members of the
Board.
-
Under the CC, majority of the directors must be residents of the
Philippines. This rule, however, was removed by the RCC.
AUTHORIZED CAPITAL STOCK (Sec. 12, RCC)
Stock corporations shall not be required to have minimum capital stock, except as
otherwise specially provided by special law.
- This means that the incorporators can decide on how much ACS they want.
However, there are corporations where the law requires a specific ACS. If
there is such requirement, the corporation must comply with such.
- For example, a law can require that the minimum ACS for insurance
companies must be Php20 Million.
Authorized Capital Stock (ACS) – the amount fixed in the AOI to be subscribed and
paid for by the stockholders.
Subscribed Capital – the portion of the ACS that is covered by subscription
agreements, whether fully paid or not.
Paid-up Capital – the portion of the ACS which has been subscribed and actually paid
for.
Outstanding Capital Stock – the total shares of stocks issued to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares.
Capital – properties and assets of the corporation that are used for its business or
operation.
The RCC dispensed with the minimum subscription and minimum paid-up capital
requirement.
- However, the said requirement can still be imposed by a special law.
- Under the CC, there was a 25-25 requirement.
- Here, at least 25% of the ACS must be subscribed at the time of
incorporation and at least 25% of the total subscription must be paid upon
subscription but must not be less than Php5,000.00
- This requirement was removed by the RCC.
After incorporation, however, in case of increase of capital stock, at least 25% of the
increase in capital stock must be subscribed and at least 25% of the amount subscribed
should be paid in cash or property, the valuation of which is equivalent to at least 25%
of the subscription.
Illustration:
(Stock Corporation - With par value)
That the authorized capital stock of the corporation is ONE MILLION PESOS
(₱1,000,000.00), divided into 10,000 shares with the par value of ONE HUNDRED
PESOS
(₱100.00) per share.
Subscribers:
Ana
Bea
Carlo
Nationalities:
Filipino
Filipino
Filipino
Amount Subscribed:
₱100,000.00 (1,000 shares)
₱150,000.00 (1,500 shares)
₱10,000.00 (100 shares)
Amount Paid:
₱100,000.00
₱100,000.00
₱5,000.00
Dana
Ejay
Filipino
Filipino
₱10,000.00 (100 shares)
₱10,000.00 (100 shares)
₱10,000.00
₱8,000.00
(Stock Corporation - Without par value)
That the capital stock of the corporation is 10,000 shares without par value.
(Stock Corporation – Mixed with par value and without par value)
That the capital stock of said corporation consists of 10,000 shares, of which 5,000
shares have a par value of ONE HUNDRED PESOS (₱100.00) per share, and of which
5,000 shares are without par value.
(Non-Stock Corporation)
That the capital of the corporation is ONE MILLION PESOS (₱1,000,000.00).
SPECIAL PROVISIONS/CLAUSES
1. TREASURER-IN-TRUST
The person elected by the subscribers as the Treasurer of the corporation at the
time of its incorporation, who is named as such in the AOI.
The one authorized to:
a. Receive in the name and for the benefit of the corporation, all
subscriptions, contributions or donations paid or given by the
subscribers or members; and
b. Certify that the information set forth in the seventh (ACS) and eighth
(Subscribers) clauses of the AOI, and that the paid-up portion of the
subscription in cash and/or property for the benefit and credit of the
corporation has been duly received.
Under the CC, a Treasurer’s Affidavit was required to be included with the
AOI. However, no such requirement is seen under the RCC. The only
requirement is that the Treasurer must certify his/her receipt of the paid-up
portion of subscription.
Under Section 14 of the RCC, the treasurer is also required to sign the AOI.
2. UNDERTAKING TO CHANGE NAME
This is an undertaking to change name if it is similar to the name of another
corporation or the use of such name is prohibited.
3. NO TRANSFER CLAUSE
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less
than the required percentage of capital stock as provided by existing laws shall be allowed or
permitted to be recorder in the proper books of the corporation, and this restriction shall be
indicated in all stock certificates issued by the corporation."
Corporations which will engage in any business or activity reserved for Filipino
citizens shall include this in the AOI.
4. SIGNATURES
The AOI must be duly signed by the incorporators and the treasurer-in-trust.
Illustration:
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation,
this ______ day of _____, 20___ in the City/Municipality of _________________, Province of
________________, Republic of the Philippines.
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
(Names and signatures of the incorporators)
____________________________
(Name and signature of Treasurer)
5. NOTARIAL ACKNOWLEDGMENT
The signatories must acknowledge his signature.
This is not really a part of the AOI.
Purpose: to secure the State and all concerned against the possibility of
fictitious names in the AOI.
This must be notarized by a notary public.
Illustration:
ACKNOWLEDGEMENT
REPUBLIC OF THE PHILIPPINES)
____________________________) S.S.
BEFORE ME, a Notary Public, for and in _________________, this ____day of _________, 20___, personally
appeared the following persons:
Name
TIN/ID/Passport No.
Date & Place Issued
known to me and to me known to be the same persons who executed the foregoing Articles of
Partnership constituting of _____pages, including this page where the acknowledgement is written, and
they acknowledged to me that the same is their free and voluntary act and deed.
WITNESS MY HAND AND SEAL on the date and place above written.
Doc. No. ______;
Page No. ______;
Book No. ______;
Series of 2020.
(NOTARY PUBLIC)
AMENDMENTS TO THE AOI
The amendment must be for legitimate purposes and must not be contrary to other
provisions of the RCC and special laws.
How (Stock Corporation): By a majority vote of the board of directors AND the vote
or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock.
- The amendment must first be decided by a majority of the board and
after such, the amendment must also be approved by at least 2/3 of the
outstanding capital stock.
- This is without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of the RCC.
How (Non-Stock Corporation): By the vote or written assent of majority of the
trustees AND at least two-thirds (2/3) of the members.
The original and amended articles together shall contain all provisions required by law
to be set out in the articles of incorporation.
Amendments to the articles shall be indicated by underscoring the change or changes
made.
A copy of the amended AOI, duly certified under oath by the corporate secretary and a
majority of the directors or trustees, with a statement that the amendments have been
duly approved by the required vote of the stockholders or members, shall be submitted
to the SEC.
When will the amendments take effect:
1. Upon their approval by the SEC; or
2. From the date of filing with the SEC, if not acted upon within six (6) months from
the date of filing for a cause not attributable to the corporation.
Additional requirement for banks, banking and quasi-banking institutions, preneed,
insurance and trust companies, NSSLAS, pawnshops, and other financial
intermediaries:
- The amendment must be accompanied by a favorable recommendation
of the appropriate government agency to the effect that such articles
or amendment is in accordance with law.
Non-amendable items in the AOI:
- Those matters referring to accomplished facts, except to correct mistakes,
such as:
1. Names of incorporators;
2. Names of original subscribers to the capital stock of the
corporation and their subscribed and paid-up capital;
3. Names of the original directors;
4. Treasurer elected by the original subscribers;
5. Members who contributed to the initial capital of the non‐
stock corporation; or
6. Witnesses to and acknowledgment with AOI.
GROUNDS FOR DISAPPROVAL OF THE AOI OR ITS AMENDMENT
The SEC may disapprove the articles of incorporation or any amendment thereto if the
same is not compliant with the requirements of the RCC.
The SEC shall give the incorporators, directors, trustees, or officers a reasonable time
from receipt of the disapproval within which to modify the objectionable portions of
the articles or amendment.
The following are grounds for such disapproval:
1. The articles of incorporation or any amendment thereto is not substantially
in accordance with the form prescribed herein;
2. The purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral or contrary to government rules and regulations;
3. The certification concerning the amount of capital stock subscribed and/or
paid is false; and
4. The required percentage of Filipino ownership of the capital stock under
existing laws or the Constitution has not been complied with.
References:
1. Sundiang, Sr. and Aquino. 2017. “Reviewer on Commercial Law.”
2. Soriano. 2011. “Notes on Business Law.”
3. Divina. “Highlights of the Revised Corporation Code.”
4. Comparative Matrix of the Corporation Code and the Revised Corporation Code
(https://www.sec.gov.ph/wpcontent/uploads/2019/11/2019Legislation_RevisedCorporation-Code-ComparativeMatrix_as-of-March-22-2019.pdf)
5. UST Golden Notes. 2018. Mercantile Law Reviewer
6. Divina. “Highlights of the Revised Corporation Code.” 7. RA 11232
NOTES
CORPORATIONS
* CC – Corporation Code
* RCC – Revised Corporation Code (RA 11232)
SHARES OF STOCK
One of the units in which the capital stock is divided.
It represents the interest or
right which the owner has:
1. In the management of the corporation in which he takes part through his right
to vote (if voting rights are permitted for that class of stock by the AOI);
2. In a portion of the corporate earnings, if and when segregated in the form of
dividends; and
3. Upon its dissolution land winding up, in the property and assets of the
corporation remaining after the payment of corporate debts and liabilities to
creditors.
The ownership of share of stock confers no immediate legal right or title to any of the
property of the corporation.
Each share merely represents a distinct undivided share
or interest in the common property of the corporation.
Shares of stock constitute a property distinct from the capital or tangible property of
the corporation.
Certificate of Stock/Stock Certificate – a written acknowledgment by the
corporation of the interest, right, and participation of a person in the management, profits
and assets of the corporation. Owners of shares are entitled to receive dividends.
Dividends represent the stockholders’ share of the profits of the corporation.
CLASSES OF SHARES OF STOCK
1. COMMON and PREFERRED SHARES
a. Common Shares - These are ordinarily and usually issued stocks without
extraordinary rights and privileges.
These shares entitle the shareholder to a pro rata division of profits.
They can either be par value shares or no par value shares.
The holders of this kind of share have complete voting rights and
they cannot be deprived of the said rights, except as provided by
law.
b. Preferred Shares - These entitle the shareholder to some priority on
distribution of dividends and assets over those holders of common
shares.
Preferred shares may be issued only with a stated par value.
Kinds of preferred shares:
b.1. Preferred shares as to assets –gives the holder preference in
the distribution of the assets of the corporation in case of
liquidation.
b.2. Participating preferred shares – Entitled to participate
with the common shares in excess distribution.
b.3. Non-participating preferred shares – Not entitled to
participate with the common shares in excess distribution.
b.4.Preferred shares as to dividends–entitled to receive
dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock.
b.5. Cumulative preferred shares – Share which entitles the
holder thereof not only the payment of current dividends but
also to dividends in arrears.
- Dividends in arrears: dividends that were unpaid at
the expected date.
- If a dividend is omitted in any year, it must be made
up in a later year before any dividend may be paid on
the common shares in the later year.
b.6. Non-cumulative preferred shares – There is no need to
make up for dividends in arrears. Payment is only as to
current dividends.
2. PAR VALUE and NO PAR VALUE SHARES
a. PAR VALUE SHARES - Shares with a value fixed in the articles of incorporation
and the certificates of stock.
The par value fixes the minimum issue price of the shares.
General Rule: A corporation cannot issue shares at less than its par
value.
Exception: The prohibition applies only to original issuance of
shares and not to the subsequent sale of treasury shares and sale of
shares made by stockholders.
Illustration: X Corporation has an authorized capital stock of
₱1,000,000.00, divided into 10,000 shares with the par value of
₱100.00 per share.
- The shares of X Corporation are considered as par value
shares, with a value of ₱100.00 per share.
b. NO PAR VALUE SHARES - These are shares having no stated value in AOI.
These shares have no stated value in the AOI but they will always
have an issue value.
Issue Value – the consideration/value of the share fixed by the
corporation for its issuance.
Illustration: X Corporation has a capital stock of 10,000 shares
without par value.
- However, upon its issuance the value of the said shares can be
determined by the corporation.
No-par value shares must be issued for a consideration of at least
Five pesos (P5.00) per share
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.
They CANNOT be issued as preferred stocks.
They CANNOT be issued by:
b.1. Banks;
b.2. Trust, Insurance, and Preneed Companies;
b.3. Public Utilities;
b.4.Building and Loan Associations; and
b.5. Other corporations authorized to obtain or access funds
from the public, whether publicly listed or not. Note: This
list has been updated by the RCC.
Once issued, they are 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.
3. VOTING and NON-VOTING SHARES
a. VOTING SHARES - Shares with a right to vote.
If the stock is originally issued as voting stock, it may not thereafter
be deprived of the right to vote without the consent of the holder.
Whenever a vote is necessary to approve a particular corporate act,
such vote refers only to shares with voting rights.
b. NON-VOTING SHARES - Shares without right to vote.
Only redeemable shares and preferred shares may be deprived of
voting rights, provided that there shall always be a class or series of
shares which have complete voting rights.
Instances when holders of non-voting shares are allowed to vote:
b.1. Amendment of the articles of incorporation;
b.2. Adoption and amendment of bylaws;
b.3. Sale, lease, exchange, mortgage, pledge, or other disposition
of all or substantially all of the corporate property;
b.4.Incurring, creating, or increasing bonded indebtedness;
b.5. Increase or decrease of authorized capital stock;
b.6. Merger or consolidation of the corporation with another
corporation or other corporations;
b.7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
b.8. Dissolution of the corporation.
4. FOUNDERS’ SHARES (Sec. 7, RCC)
Shares classified as such in the articles of incorporation and which may be given
special preference in voting rights and dividend payments.
Founders’ shares may be given certain rights and privileges not enjoyed by the
owners of other stocks.
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 from the date
of incorporation.
- That such exclusive right shall not be allowed if its exercise will violate:
a. Commonwealth Act No. 108, otherwise known as the “AntiDummy Law”;
b. Republic Act No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and
c. Other pertinent laws.
5. REDEEMABLE SHARES (Sec. 8, RCC)
- Redeemable shares may be issued by the corporation when expressly
provided in the articles of incorporation.
- They are shares which may be purchased by the corporation from the holders
of such shares upon the expiration of a fixed period.
The purchase may happen regardless of the existence of unrestricted
retained earnings in the books of the corporation.
Illustration:
X Corporation issued 1,000 redeemable shares to Dana at Php5,000.00 per share.
The total amount of subscription is Php5,000,000.00.
They agreed that the maturity date of the shares will be after 5 years.
As such, after 5 years, X Corporation may purchase back the said shares from
Dana. Upon purchase, the shares will become Treasury Shares.
6. TREASURY SHARES (Sec. 9, RCC)
These are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation through purchase,
redemption, donation, or some other lawful means.
Such shares may again be disposed of for a reasonable price fixed by the board
of directors.
These shares have no voting rights and have no right to dividends.
References:
1. Sundiang, Sr. and Aquino. 2017. “Reviewer on Commercial Law.”
2. Soriano. 2011. “Notes on Business Law.”
3. Divina. “Highlights of the Revised Corporation Code.”
4. Comparative Matrix of the Corporation Code and the Revised Corporation Code
(https://www.sec.gov.ph/wpcontent/uploads/2019/11/2019Legislation_RevisedCorporation-Code-ComparativeMatrix_as-of-March-22-2019.pdf)
5. UST Golden Notes. 2018. Mercantile Law Reviewer
6. Divina. “Highlights of the Revised Corporation Code.” 7. RA 11232
NOTES
CORPORATIONS
* CC – Corporation Code
* RCC – Revised Corporation Code (RA 11232)
BOARD OF DIRECTORS (TITLE III, RCC)
The board of directors/trustees (BOD/BOT) is the governing body of a corporation.
Since a corporation is an artificial being, it can only act through individuals. However,
these individuals must act as a body. They cannot, on their own, bind the corporation.
The board of directors or trustees shall:
1. Exercise the corporate powers;
2. Conduct all business; and
3. Control all properties of the corporation. (Sec. 22, RCC)
DOCTRINE OF CENTRALIZED MANAGEMENT
General Rule: The Doctrine of Centralized Management states that all corporate
powers are exercised by the BOD or BOT.
Exception: The doctrine is not applicable to the following instances:
1. In case of delegation to the Executive Committee duly authorized in the
bylaws;
2. Authorization pursuant to a contracted manager which may be an
individual, a partnership, or another corporation; and
3. In case of close corporations, the stockholders may manage the business of
the corporation instead of a board of directors, if the articles of
incorporation so provide
BUSINESS JUDGMENT RULE
Questions of policy or management are left solely to the honest decision of officers and
directors of a corporation.
As such, the courts are without authority to substitute their judgment for the judgment
of the board of directors.
The board is the business manager of the corporation and so long as it acts in good
faith, its orders are not reviewable by the courts or the SEC.
The directors are also not liable to the stockholders in performing such acts.
If the cause of the losses is merely error in business judgment, not amounting to bad
faith or negligence, directors and/or officers are not liable.
INDEPENDENT DIRECTOR
An “independent director” shall mean a person other than an officer or employee of
the corporation, its parent or subsidiaries, or any other individual having a relationship
with the corporation, which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
The board of the following corporations vested with public interest shall have
independent directors constituting at least twenty percent (20%) of such board (Sec.
22, RCC):
1. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise
known as “The Securities Regulation Code”; - Namely those:
a. Whose securities are registered with the SEC;
b. Corporations listed with an exchange or with assets of at least
Fifty million pesos (P50,000,000.00); and
c. Those having two hundred (200) or more holders of shares, each
holding at least one hundred (100) shares of a class of its equity
shares;
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in
money service business, pre-need, trust and insurance companies, and other
financial intermediaries; and
3. Other corporations engaged in business vested with public interest similar
to the above, as may be determined by the SEC.
TENURE OF OFFICE
BOD: They shall be elected for a term of 1 year.
BOT: They shall be elected for a term not exceeding three (3) years.
Under the CC, the term for trustees is 1 year.
If no election is held, the directors and officers will continue to occupy position even
after the lapse of their term under a Hold-Over Capacity until their successors are
elected and qualified.
QUALIFICATIONS
The following are the qualifications of directors/trustees:
1. For stock corporations, he must be the owner of at least 1 share of stock
which shall stand in his name on the books of the corporation.
- Any director who ceases to be the owner of at least 1 share of stock
shall also cease to be a director.
2. For non-stock corporations, he must be a member of the corporation.
3. Must not have been convicted by final judgment of an offense punishable
by imprisonment for period exceeding 6 years or a violation of the
Corporation Code, committed within 5 years prior to the date of his
election.
4. Must be of legal age.
5. Other qualifications as may be prescribed in special laws or regulations or
in the by-laws of the corporation.
Note: The RCC removed the residency requirement as to the BOD/BOT
General Rule: There is no citizenship requirement demanded of the members of the
BOD/BOT.
Exception: Such requirement may be provided by other laws for corporations not
organized under the RCC.
Example: For domestic banks, under the General Banking Act, at least 2/3 of the board
must be citizens of the Philippines.
DISQUALIFICATIONS (Sec. 26, RCC)
A person shall be disqualified from being a director, trustee, or officer of any
corporation if, within five (5) years prior to the election or appointment as such, the
person was:
1. Convicted by final judgment:
a. Of an offense punishable by imprisonment for a period exceeding six
(6) years;
b. For violating the RCC; and
c. For violating Republic Act No. 8799, otherwise known as “The
Securities Regulation Code;”
2. Found administratively liable for any offense involving fraudulent acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts,
violations or misconduct similar to those enumerated in paragraphs (1) and
(2) above.
ELECTION (Sec. 23, RCC)
Each stockholder or member shall have the right to nominate any director or trustee
who possesses all of the qualifications and none of the disqualifications set forth in the
RCC.
This is subject to the exclusive right reserved for holders of founders’
shares. They are elected at a meeting called for that purpose.
At all elections of directors or trustees, there must be present, the owners of majority
of the outstanding capital stock (Quorum), or if there be no capital stock, a majority
of the members entitled to vote.
- They can be present either:
1. In person; or
2. Through a representative authorized to act by written proxy,
- When so authorized in the bylaws or by a majority of the board of directors,
the stockholders or members may also vote through remote
communication or in absentia.
The election must be by ballot if requested by any voting stockholder or member. - If
there is no such request, the manner for the election as provided for in the by-laws will
be followed.
The candidates receiving the highest number of votes shall be declared elected.
No delinquent stock shall be voted.
- A stock becomes delinquent upon failure of the holder to pay the unpaid
subscription or balance.
Methods of Voting:
1. Stock Corporation - stockholders entitled to vote shall have the right to
vote the number of shares of stock standing in their own names in the
stock books.
- The said stockholder may:
a. Straight Voting - Vote such number of shares for as many
persons as there are directors to be elected.
- Here, you multiply the number of shares owned by
the number of directors to be elected.
- Number of Share x Number of Directors
Illustration: Carlo owns 100 shares in X Corporation. If
there are 5 directors to be elected, X is entitled to 500 votes.
Q: How did we get 500?
A: 100 shares x 5 directors to be elected
Here, he can choose from the candidates, the 5 that he wants
to be elected and he can give them 100 votes each. Under this
method, the votes are distributed among the 5 without
preference.
Let’s say there are 20 candidates, but Carlo only chose Ana,
Bea, Ejay, Niko and Angelo as the candidates he wanted to be
elected. Thus, under straight voting, he can give them 100
votes each.
b. Cumulative voting for one candidate – a stockholder is
allowed to concentrate his votes and give one candidate as
many votes as he is entitled to.
Illustration: Carlo is entitled to 500 votes. Under this
method, Carlo can give all his votes to a single candidate. So
he can all his 500 votes to Ana or he can give all the 500 to
Angelo.
c. Cumulative voting by distribution – a stockholder may
cumulate his shares by distributing the same among as many
candidates as he shall see fit.
Illustration: Carlo is entitled to 500 votes. Under this
method, he can give: Ana=50 votes, Bea=150 votes, Ejay=100
votes, and Niko=200 votes.
Here, Carlo is allowed any combination provided the total
number of votes cast by him does not exceed 500.
-
The right to cumulative voting is a statutory right. It is provided
for by the RCC. (Sec. 23, RCC)
As such, the corporation cannot restrict the use of such right.
Minority stockholders can use cumulative voting so as to have a
representation in the board. Here, they can cumulate their votes in a
single candidate so he/she can represent them in the board of
directors.
2. Non-Stock Corporation - members of nonstock corporations may cast as
many votes as there are trustees to be elected but may not cast more than 1
vote for 1 candidate.
- Nominees for directors or trustees receiving the highest number of
votes shall be declared elected.
Illustration: Carlo is a member of X Corporation, a non-stock
corporation. There are 5 trustees to be elected. As such, he is only
entitled to 5 votes.
Here, he can give the said votes to the 5 candidates he wishes to be
elected. Thus, he can give Ana, Bea, Ejay, Niko and Angelo 1 vote
each. Carlo cannot give 2 votes to Ana or Angelo.
Q: What happens after the election is held?
A: The names, nationalities, shareholdings, and residence addresses of the directors,
trustees, and officers elected shall be submitted to the SEC.
- When? Within thirty (30) days after the election.
- Who will submit? The secretary or any other officer of the corporation.
Q: What happens if no election is held, or the owners of majority of the outstanding
capital stock or majority of the members entitled to vote are not present?
A: The meeting for the election may be adjourned.
- The non-holding of elections and the reasons therefor shall be reported to
the SEC.
- When shall it be reported? Within thirty (30) days after the date of the
scheduled election.
- The report shall specify a new date for the election, which shall not be later
than sixty (60) days from the scheduled date.
- Q: What happens if no new date has been designated, or if the
rescheduled election is likewise not held?
A: The SEC, upon the application of a stockholder, member, director or
trustee, and after verification of the unjustified non-holding of the election,
may summarily order that an election be held.
REMOVAL OF DIRECTORS/TRUSTEES (Sec. 27, RCC)
Requisites for Removal:
1. It must take place either at a regular meeting of the corporation or at a
special meeting called for the purpose.
- For the special meeting, it must be:
a. Called by the secretary on order of the president; or
b. Upon written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock, or a
majority of the members entitled to vote.
- Q: What is the remedy if there is no secretary, or if the secretary,
despite demand, fails or refuses to call the special meeting or to give
notice thereof?
A: The stockholder or member of the corporation signing the
demand may call for the meeting by directly addressing the
stockholders or members.
2. There must be previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting.
- Notice of the time and place of such meeting, as well as of the intention
to propose such removal, must be given by publication or by
written notice.
3. Vote required:
- Stock corporation: a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding capital
stock.
- Non-stock corporation: a vote of at least two-thirds (2/3) of the
members entitled to vote.
4. The removal may be with or without cause.
- Exception: That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to
which they may be entitled.
Under the RCC, the SEC may order the removal of a director/trustee.
- The SEC can do so motu proprio (on its own) or upon verified complaint.
- It must be after due notice and hearing.
VACANCIES (Sec. 28,
RCC)
Vacancy is
created by:
1. Expiration of term;
2. Removal; and
3. Increase in the number of directors or trustees; and
4. Grounds other than #s 1-3, such as death, resignation, withdrawal, or
disqualification.
How are vacancies filled:
1. Expiration of term, Removal and Increase in the number of directors or
trustees: must be filled by the stockholders or members in a regular or
special meeting called for that purpose.
- When should they hold the election:
a. Expiration of term - no later than the day of such expiration
at a meeting called for that purpose
b.Removal - on the same day of the meeting authorizing the
removal and this fact must be so stated in the agenda and
notice of said meeting.
2. Other grounds: may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum.
- If there is no longer any quorum, the vacancy shall be filled through
a regular or special meeting called for that purpose.
-
The election shall be held no later than forty-five (45) days from
the time the vacancy arose.
A director or trustee elected to fill a vacancy shall be referred to as replacement
director or trustee and shall serve only for the unexpired term of the predecessor in
office.
Under the RCC, the concept of an Emergency Board, in case of vacancies, was
introduced. - Requisites:
1. The vacancy prevents the remaining directors from constituting a
quorum;
2. Emergency action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation;
3. The vacancy may be temporarily filled from among the officers of the
corporation;
4. The appointment must be made by unanimous vote of the
remaining directors or trustees; and,
5. The action by the designated director or trustee shall be limited to
the emergency action necessary, and the term shall cease within a
reasonable time from the termination of the emergency or upon
election of the replacement director or trustee, whichever comes
earlier.
- The corporation must notify the SEC within three (3) days from the creation
of the emergency board, stating therein the reason for its creation.
COMPENSATION (Sec. 29, RCC)
General Rule: the directors or trustees shall not receive any compensation in their
capacity as such, except for reasonable per diems.
Exception:
1. If there is a provision in their by-laws providing for their compensation; or
2. If the stockholders representing at least a majority of the outstanding
capital stock or majority of the members may grant directors or trustees
with compensation and approve the amount thereof at a regular or special
meeting.
Limitation: In no case shall the total yearly compensation of directors exceed ten
(10%) percent of the net income before income tax of the corporation during the
preceding year.
Directors or trustees shall not participate in the determination of their own per diems
or compensation.
Corporations vested with public interest shall submit to their shareholders and the
Commission, an annual report of the total compensation of each of their directors or
trustees.
CORPORATE OFFICERS (Sec. 24, RCC)
Immediately after their election, the directors of a corporation must formally organize
and elect:
1. A president, who must be a director;
2. A treasurer, who must be a resident of the Philippines;
3. A secretary, who must be a citizen and resident of the Philippines; and 4.
Such other officers as may be provided in the bylaws.
THREE-FOLD DUTIES OF DRECTORS/TRUSTEES and THEIR LIABILITIES
The directors’ character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned.
- As agents entrusted with the management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary relation, and in this
sense the relation is one of trust.
The following are the three-fold duties of a director/trustee:
1. Duty of Obedience;
2. Duty of Diligence; and 3. Duty of Loyalty.
Liability of directors/trustees for official acts:
- General Rule: The officers of a corporation are not personally liable for their
official acts.
- Exceptions:
1. Instances under Sec. 30, RCC;
2. If they assent to or vote for the issuance of watered stocks, or failed to
object in writing;
3. Expressly or impliedly assumed the liability of the corporation; and 4.
Express provision of law.
Duty of Obedience – the directors/trustees to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation.
- They cannot exceed the powers and authority given to them by law, their AOI
and by-laws, otherwise, they shall be held liable.
Duty of Diligence – Directors/trustees who:
1. Willfully and knowingly vote for or assent to patently unlawful acts of the
corporation;
2. Are guilty of gross negligence; or
3. Are guilty of bad faith in directing the affairs of the corporation,
Shall be liable solidarily for all the damages resulting therefrom suffered by
the corporation, its stockholders and other persons.
Duty of Loyalty - A director, trustee, or officer shall not attempt to acquire, or acquire
any interest adverse to the corporation in respect of any matter which has been
reposed in them in confidence, and upon which, equity imposes a disability upon
themselves to deal in their own behalf.
- Otherwise, the said director, trustee, or officer shall be liable as a trustee for
the corporation and must account for the profits which otherwise would have
accrued to the corporation. (Sec. 30, par. 2, RCC) - Instances of Conflict of
Interes:
1.
Self-dealing directors;
2.
Fixing their own compensation;
3.
Interlocking directors;
4.
Seizing corporate opportunity; and 5. Using inside information.
SELF DEALING DIRECTORS (Sec. 31, RCC)
These are directors who personally enter into a contract with the corporation.
This involves a contract of the corporation with (1) one or more of its directors, trustees,
officers or their spouses and relatives within the fourth civil degree of consanguinity or
affinity.
- The RCC expanded the coverage of self-dealing provision to spouses and
relatives within the fourth civil degree of consanguinity or affinity of the
directors, trustees, officers.
- Illustration: Ana is a director of X Corporation. X Corporation is engaged
in the restaurant business. Ana is also the owner of a vegetable dealership
business, who delivers fresh vegetables to restaurants.
Ana becomes a self-dealing director if X Corporation enters into an
agreement with her business for the delivery of vegetables to the
restaurants owned by X Corporation.
These contracts are VOIDABLE, at the option of the corporation, unless the following
conditions are present:
1. The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
2. The vote of such director or trustee was not necessary for the approval of
the contract;
3. The contract is fair and reasonable under the circumstances;
4. In case of corporations vested with public interest, material contracts are
approved by at least two-thirds (2/3) of the entire membership of the board,
with at least a majority of the independent directors voting to approve the
material contract; and
5. In case of an officer, the contract has been previously authorized by the
board of directors.
Where any of the first three (3) conditions is absent, in the case of a contract with a
director or trustee, such contract may be ratified by:
- (Stock) The vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock; or
- (Non-Stock) The vote of at least two-thirds (2/3) of the members in a
meeting called for the purpose.
- Full disclosure of the adverse interest of the directors or trustees involved is
made at such meeting and the contract is fair and reasonable under the
circumstances.
INTERLOCKING DIRECTORS (Sec. 32, RCC)
This happens when one, some, or all of the directors of a corporation, are also directors
of another corporation.
Illustration: Ana and Feliza are both directors of X Corporation and Y Corporation.
Here, they are considered as interlocking directors of X Corporation and Y
Corporation.
A contract between two (2) or more corporations having interlocking directors are
considered as VALID and shall not be invalidated on that ground alone.
However, if the interest of the interlocking director in one (1) corporation is substantial
and the interest in the other corporation or corporations is merely nominal, the contract
shall be subject to the provisions on self-dealing directors (Sec. 31, RCC) as to the
corporation where the share of the interlocking director is merely nominal.
- Stockholdings exceeding twenty (20%) percent of the outstanding capital
stock shall be considered substantial for purposes of interlocking directors.
Illustration:
X Corporation and Y Corporation entered into a contract with each other.
Ana is a director in both corporations; thus, Ana is considered as an
interlocking director.
Here, the contract between X Corporation and Y Corporation is valid and
cannot be voided based on the presence of an interlocking director alone.
However, let us say that Ana owns 35% of shares in X Corporation while
she owns only 10% shares in Y Corporation.
Q: Will the rules under self-dealing directors apply?
A: Yes, because the interest of Ana in X Corporation is substantial
(exceeded 20%) while her interest in Y Corporation is merely nominal (did
not exceed 20%).
Q: What will happen now?
A: We follow the rules under Sec. 31, RCC.
- These contracts are VOIDABLE, at the option of the corporation,
unless the following conditions are present:
1. The presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to
constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for the
approval of the contract;
3. The contract is fair and reasonable under the circumstances;
4. In case of corporations vested with public interest, material
contracts are approved by at least two-thirds (2/3) of the entire
membership of the board, with at least a majority of the
independent directors voting to approve the material contract;
and
5. In case of an officer, the contract has been previously authorized
by the board of directors.
- Where any of the first three (3) conditions is absent, in the case of a
contract with a director or trustee, such contract may be ratified by:
1. (Stock) The vote of the stockholders representing at least
twothirds (2/3) of the outstanding capital stock; or
-
2. (Non-Stock) The vote of at least two-thirds (2/3) of the
members in a meeting called for the purpose.
Full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting and the contract is fair and
reasonable under the circumstances.
DISLOYALTY OF A DIRECTOR (Sec. 33, RCC)
A director is disloyal where, by virtue of such office, the director acquires a business
opportunity which should belong to the corporation, thereby obtaining profits to
the prejudice of such corporation. (Doctrine of Corporate Opportunity)
Effect: the director must account for and refund to the latter all such profits. Exception: If the act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock, there is no
need to account and refund.
This provision shall be applicable, notwithstanding the fact that the director risked
one’s own funds in the venture.
EXECUTIVE COMMITTEE (Sec. 34, RCC)
A body created by the by-laws and composed of at least three (3) members directors
which, subject to the statutory limitations, has all the authority of the board to the
extent provided in the board resolution or by-laws.
The BOD can create such as long as the by-laws of the corporation allows it to do so.
They may act on matters as may be delegated to it in the by-laws or as delegated by the
BOD by majority vote.
Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, except with respect to the:
1. Approval of any action for which shareholders’ approval is also required;
2. Filling of vacancies in the board;
3. Amendment or repeal of bylaws or the adoption of new by-laws;
4. Amendment or repeal of any resolution of the board which by its express
terms is not amendable or repealable; and
5. Distribution of cash dividends to the shareholders.
QUORUM (Sec. 52, RCC)
Majority of the directors or trustees as stated in the articles of incorporation shall
constitute a quorum to transact corporate business.
Every decision reached by at least a majority of the directors or trustees constituting a
quorum, except for the election of officers which shall require the vote of a majority of
all the members of the board, shall be valid as a corporate act.
MEETINGS OF DIRECTORS (Sec. 52, RCC)
Regular meetings of the board of directors or trustees of every corporation shall be
held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon
the call of the president or as provided in the by-laws.
Where: Meetings of directors or trustees of corporations may be held anywhere in or
outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least two (2) days prior to the scheduled
meeting, unless a longer time is provided in the by-laws.
A director or trustee may waive this requirement, either expressly or
impliedly.
Directors or trustees who cannot physically attend or vote at board meetings can
participate and vote through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them
reasonable opportunities to participate.
Directors or trustees cannot attend or vote by proxy at board meetings.
A director or trustee who has a potential interest in any related party transaction must
refuse from voting on the approval of the related party transaction without prejudice
to compliance with the requirements of Section 31 of the RCC.
Who presides:
1. The chairman; or
2. In the chairman’s absence, the president shall preside at all meetings of the
directors or trustees as well as of the stockholders or members, unless the
bylaws provide otherwise.
References:
1. Sundiang, Sr. and Aquino. 2017. “Reviewer on Commercial Law.”
2. Soriano. 2011. “Notes on Business Law.”
3. Divina. “Highlights of the Revised Corporation Code.”
4. Comparative Matrix of the Corporation Code and the Revised Corporation Code
(https://www.sec.gov.ph/wpcontent/uploads/2019/11/2019Legislation_RevisedCorporation-Code-ComparativeMatrix_as-of-March-22-2019.pdf)
5. UST Golden Notes. 2018. Mercantile Law Reviewer
6. Divina. “Highlights of the Revised Corporation Code.” 7. RA 11232