Law on Partnerships and Private Corporations
Final Examination
Please answer the questions. You have until January 31 to submit your answers.
1. What is a Corporation?
• As defined in the General Provision, Part II: Private Corporations—The Corporation
Code of The Philippines, Section 2, 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.
2. Please cite the 4 attributes of a Corporation.
• 1. An Artificial Being
i. Cited in the attributes of a corporation of the General Provision, as an artificial
being, a corporation is a juridical entity that exists apart from its stockholders.
Hence, as provided by the law, it has its own set of rights and obligations.
Technically, it has no physical existence although it occupies a principal place
of business. Being only a juridical entity, the physical acts of the corporation,
like the signing of documents, can be performed only by natural persons duly
authorized for such purpose by corporate bylaws or by a special act of the
Board of Directors (BOD). [Swedish Match Philippines, Inc. v. Treasurer of the
City of Manila, G.R. No. 181277 (2013)]
• 2. Created by Operation of Law
i. Since a corporation is created by the operation of law, the State must give its
consent either through a special law (in case of government corporations) or a
general law (i.e., Revised Corporation Code in case of private corporations) for
mere consent of the parties to form a corporation is not sufficient. A
corporation therefore must come into existence upon the issuance of the
certificate of incorporation. Then, and only then, will it acquire juridical
personality to sue and be sued, enter into contracts, hold or convey property
or perform any legal act in its own name.
• 3. Has the Right of Succession
i. The existence of a corporation is limited only by the Articles of Incorporation
(AOI), may be subject to Quo Warranto proceedings (Rule 66 of the Rules of
Court), and may be shortened by dissolution (Title XIV). And since one of the
attributes of a corporation is that it is an artificial being with a distinct
personality, the corporation’s existence is unaffected by a change in the
composition of stockholders.
• 4. Has the Powers, Attributes and Properties Expressly Authorized by Law or Incident
to its Existence
i. Except those expressly conferred on it by the Revised Corporation Code and by
its articles of incorporation, those which may be incidental to such conferred
powers, those that are implied from its existence, and those reasonably
necessary to accomplish its purposes, a corporation has no power. In turn, a
corporation exercises said powers through its BOD and/or its duly authorized
officers and agents. [Monfort Hermanos Agricultural Dev. Corp. v. Monfort III,
G.R. No. 152542 (2004)]
ii. Being a creature of the law, its powers are limited by: (1) The law, as cited in
Sec. 35 for general powers and Secs. 36 to 43 for specific powers; (2) By the
express terms of its AOI as well those essential or necessary to carry out its
purpose or purposes under such Articles in the last paragraph of Sec. 35; and
(3) By those necessary or incidental to its powers so conferred in Sec. 44.
3. Differentiate a Stock and Non-Stock corporation.
A Stock and a Non-Stock Corporations can be differentiated in many and these are as
follows:
• A stock corporation is organized for profit. It’s a kind of corporation which has capital
stock divided into shares and is authorized to distribute to the holders of such shares
of dividends or allotments of the surplus profits on the basis of shares held. A nonstock corporation, on the other hand, is not organized for profit. It is one where no
part of the income is distributable as dividends to its members, trustees, or officers,
subject to the provisions of the Code on dissolution;
• The governing body of a stock corporation is usually the BOD (with rightful
exemptions in certain instances), while in a non-stock corporation, the Board of
Trustees (BoT) is Its usual governing, Although, a non-stock corporation may, through
their articles of incorporation or their by-laws, designate their governing boards by
any name other than as board of trustees;
• In a stock Corporation, Stockholders’ meetings must be in the principal office as set
forth in the AOI or, if not practicable, in the city or municipality where the principal
office is located, whereas in a non-stock corporation, it may be anywhere within
Philippine territory as provided by BL.
• There is free transfer of shares in a stock corporation and membership is not personal
to the stockholder. However, in a non-stock corporation, membership is personal and
so the transfer of membership cannot be made without consent of the corporation.
• Upon transfer of share, in a stock corporation, seller is no longer part of corporation
and a transfer may only be subject to restrictions noted down in AOI, BL, and stock
certificate, and must not be more onerous than the right of first refusal. Whereas in a
non-stock corporation, membership may be terminated according to causes provided
in the BL
• In stock corporations, vote by proxy may always be allowed. Meanwhile, in non-stock
corporations, vote by proxy can be denied in the AOI or BL
• As soon as the payment of creditors are received, the residual assets are to be
distributed to the stockholders upon dissolution-- in a stock corporation. Dissolution is
affected through the methods provided in the Code. However, when it comes to a
non-stock corporation, generally, members are not allowed to participate in
distribution of assets. Therefore, assets are to be distributed to such persons,
societies, organizations or corporations as may be specified in a plan of distribution.
4. What is a De facto corporation?
•
A De facto Corporation is a corporation where there exists a flaw in its incorporation.
And to classify and recognize a corporation as a de facto, the three requisites must be
present and notable: (1) There is an apparently valid statute under which the
corporation may be formed; (2) There has been colorable compliance with the legal
requirements in good faith; and (3) There has been user of corporate powers.
5. Why is there a need to determine the nationality of a Corporation?
• The nationality of a corporation is necessary because, as stated in SEC OGC Opinion
No. 22-07, it serves as a legal basis for subjecting an enterprise or its activities to the
laws, the economic and fiscal powers, and the various social and financial policies of
the State to which it is supposed to belong.
6. Please cite 5 industries wherein Control test should be applied.
• 1. Exploitation of natural resources
i. Stated in Sec. 11, Art. XII, Const., only Filipino citizens or corporations whose
capital stock is at least 60% owned by Filipinos can qualify to exploit natural
resources.
• 2. Public Utilities
i. Stated in Sec. 11, Art. XII, Const., no franchise, certificate or any other form of
authorization for the operation of a public utility shall be granted, except to
citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least 60% of whose capital is owned by such
citizens.
• 3. Mass Media (100%) –
i. In Sec. 11, Art. XVI, Const., it’s clearly cited that “The ownership and
management of mass media shall be limited to citizens of the Philippines, or to
corporations, cooperatives or associations, wholly-owned and managed by
such citizens.”
• 4. Advertising industry (70%) –
i. Stated in Sec. 11, Art. XVI, Const., “Only Filipino citizens or corporations or
associations at least seventy per centum of the capital of which is owned by
such citizens shall be allowed to engage in the advertising industry.”
• 5. Any industry or activity where foreign ownership is prohibited or restricted under
the Foreign Investment Negative List.
7. What is the Grandfather Rule?
• Stated in book of Law on Partnerships and Private Corporations by De Leon is the
definition of the Grandfather Rule, where it’s defined as a method of determining the
nationality of a corporation, which is owned in part by another corporation, by
breaking down the equity structure of the shareholder corporation. The said rule is
applied only when the 60-40 Filipino foreign equity ownership is in doubt, based on
the Control Test.
8. When will the Corporate Juridical Personality of a corporation commence?
•
Corporate existence, so as juridical personality, commences from the date the SEC
issues a certificate of incorporation under its official seal. That being said, persons
desiring to incorporate must submit to the SEC; (1) The intended corporate name for
verification; and (2) The articles of incorporation and bylaws
9. What is the Doctrine of Separate Juridical Personality?
• The Doctrine of Separate Juridical Personality is concerned with the separate and
distinct personality of a corporation from that of its stockholders and members and,
therefore, is not affected by the personal rights, obligations, and transactions of the
latter. In exception, when this legal fiction is used for ends subversive to the policy
and purpose behind its creation or which could not have been intended by law to
which it owes its being, and when the corporate entity is a mere alter ego, adjunct, or
business conduit for the sole benefit of the stockholders or of another corporate
entity—the separate juridical personality of a corporation cannot be invoked to
escape liability.
10. What is the Doctrine of Piercing the Corporate Veil?
• As a general rule, a corporation will be looked upon as a legal entity and until
sufficient reason to the contrary appears, but when the notion of legal entity is used
to defeat public convenience, justify wrong, protect fraud or defend crime, the law
will regard the corporation as an association of persons. Piercing the veil of corporate
entity is an equitable remedy developed to address situations where the separate
corporate personality of a corporation is abused or used for wrongful purposes. [PNB
v. Ritratto Group, G.R. No. 142616 (2001)]
11. What is the effect of piercing the Corporate Veil?
• The piercing of Corporate Veil will have an effect to the corporation for it will be
considered as a mere association of persons. Thus, the liability will directly attach to
the stockholders or to the other corporation. [China Banking v. DyneSem, G.R. No.
149237 (2006)] However, for the juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established, and cannot
be presumed. [Del Rosario v. NLRC, G.R. No. 85416 (1990)]
12. How many Incorporators are allowed under the Revised Corporation Code?
• The prescribed minimum number of incorporators no longer exists for it was removed
under the Revised Corporation Code. Previously, though, it was prescribed that the
incorporators must be no less than five except for special corporations. [Herbosa,
2019]
13. IS there a minimum capital requirement in the Revised Corporation Code? Explain.
• No. There is already no minimum capital requirement under the Revised Corporation
Code for the Section 13 of the Old Corporate Code has been removed. In the
aforementioned section of the Old Corporate Code, it was affirmed that at least 25%
of the authorized capital stock as stated in the AOI must be subscribed at the time of
incorporation, and at least 25% of the total subscription must be paid upon
subscription. Thus, the removal of which has also removed such minimum capital
requirements. However, the increase in capital remains subject to the 25%
subscription and 25% payment of subscription rule.
14. What is the rule on pre-incorporation subscription?
• As a general rule, pre-incorporation subscription is irrevocable for a period of at least
6 months from the date of subscription; Exceptions (1) All of the other subscriber’s
consent to the revocation, or (2) The incorporation fails to materialize within 6 months
or within a longer period as may be stipulated in the contract of subscription After the
submission of the Articles of Incorporation to the SEC. [Sec. 60]
15. Can a corporation have perpetual existence under the Revised Corporation Code? Explain.
• Yes. A corporation, under the Revised Corporation Code, as a general rule, shall have
perpetual existence for it is presumed that shareholders, when they incorporated,
assented to the perpetual character of their contract. Thus, their corporate relations
will only end upon agreement between or among the prescribed number of
shareholders or involuntarily upon the determination of the court or the Securities of
Exchange.
16. What is the exception on the rule of perpetual existence of a corporation?
• As stated in the Articles of Incorporation, existing corporations shall be deemed
amended to reflect their perpetual term. Except when the AOIs of corporations
created under the effectivity of this Code provide for a specific period.
17. What are the classifications of the shares of stock? Please enumerate.
• Preferred Shares vs. Common Shares
• Scope of Voting Rights Subject to Classification
• Founders’ Shares
• Redeemable Shares
• Treasury Shares
• Par value shares vs. No-par value shares
18. What is the Doctrine of Equality of Shares?
• The doctrine of equality of shares is each share shall be equal in all respects to every
other share, except as otherwise provided in the Articles of Incorporation and stated
in the certificate of stock.
19. What are Founders’ shares?
• Founders’ Shares are shares classified as such in the Articles of Incorporations, which
the given certain rights and privileges are not enjoyed by the owners of other stocks.
These may be given special preference in voting rights and dividend payments. Where
exclusive right to vote and be voted for in the election of directors is granted, such
right must be for a limited period not to exceed 5 years, subject to approval by SEC
The 5-year period shall commence from date of approval by SEC. In violation of the
Anti-Dummy Law and the Foreign Investment Act, founder’s shares given the exclusive
right to vote and be voted for are not allowed to exercise that right. [Sec. 7]
20. What are Redeemable Shares?
• Redeemable Shares are shares which may be purchased by the corporation, upon the
expiration of a fixed period, from the holders of such shares regardless of the
existence of unrestricted retained earnings in the books of the corporation.
21. Are treasury shares considered as retired shares?
• No. According to the Rules Governing Redeemable and Treasury Shares of the
Securities of Exchange Commission, treasury shares are not considered as retired
shares for the former do not revert to the unissued shares of the corporation, but are
regarded as property acquired by the corporation, which may be reissued or resold at
a price to be fixed by the Board of Directors.
22. Please differentiate Par value to non-par value shares.
• Par value shares are shares with a stated or fixed value set out in the Articles of
Incorporation, which remains the same regardless of the profitability of the
corporation. This gives rise to financial stability, and is the reason why banks trusts
corporations, insurance companies and building and loan associations must always be
organized with par value shares. Whereas, no par value shares are shares without a
stated value in the AOI, which are also without nominal value. They may be issued for
the amount stipulated in the AOI, or fixed by the Board. [Sec 61]
23. What are the liabilities of a promoter?
• Since promoter’s contracts are those types of contracts entered into in behalf of a
corporation which is in the process of organization and incorporation, the general rule
is that the promoter binds himself personally and assumes the responsibility of
looking to the proposed corporation for reimbursement. Once formed, the
corporation shall ratify the contract entered into in the promoter’s name. Otherwise,
the latter will be personally liable for such contract in the event that corporation does
not ratify.
24. In relation to question number 23, what are the exceptions?
• There are only two exceptions: (1) Express or implied agreement to the contrary; and
(2) It must be a novation, not merely adoption or ratification, of the contract
25. What are the liabilities of a Corporation for Promoter’s Acts? Also, please cite the exceptions.
• The general rule is that, the corporation is not bound by the contract. It has no life nor
legal existence until it’s officially organized. And, it could not have had an agent [the
promoter] who could legally bind it.
•
As an exception, a corporation may be bound by the contract if it makes the contract
its own by: (1) Adoption or ratification of the entire contract after incorporation.
Where (a) novation or the intent to novate, the original contract is required to adopt
or ratify the pre-incorporation contract; and (b) The Court’s ruling in Cagayan Fishing
v. Teodoro Sandiko, that “a corporation should have a full and complete organization
and existence as an entity before it can enter into any kind of a contract or transact
any business”, is not absolute. Also, one of the exceptions recognized by American
courts is that “a contract made by the promoters of a corporation on its behalf may be
adopted, accepted or ratified by the corporation when organized”. [Rizal Light v. PSC
and Morong Electric (1968)]; (2) Acceptance of benefits under the contract with
knowledge of the terms thereof; Lastly, (3) Performance of its obligation under the
contract.
26. Kindly cite the types of consideration for the issuance of stock.
• Consideration for the issuance of stock may be: (1) Actual cash paid to the
corporation; (2) Property, tangible or intangible, which must be: (a) Actually, received
by the corporation; (b) Necessary or convenient for its use and lawful purposes; and
(c) At a fair valuation equal to the par or issued value of the stock issued; (3) Labor
performed for or services actually rendered to the corporation; (4) Previously incurred
indebtedness of the corporation; (5) Amounts transferred from unrestricted retained
earnings to stated capital; (6) Outstanding shares exchanged for stocks in the event of
reclassification or conversion; (7) Shares of stock in another corporation; and/or (h)
Other generally accepted form of consideration. [Sec. 61]
• There are also invalid considerations where in accordance-as, it would not be in
consonance with the trust fund doctrine to consider the subscription contract void.
[Villanueva] That being said, the following cannot be exchanged for the issuance of
shares of stock: (1) Promissory notes (2) Future service In case a subscription contract
contemplates unlawful consideration exchanged for shares of stock: (a) The
subscription contract would be valid and binding on both the corporation and
subscriber; and (b)But the provision on such unlawful consideration is deemed void,
such that the subscription agreement would be construed to be for cash, and the
unpaid amount treated as part of subscription receivables
27. What are the Articles of Incorporation?
The AOI is a basic contract document, defining the charter of the corporation, and
serves as the basis by which to judge whether it exists for legal purposes. According to
Section 13-- For the issuance of the Certificate of Incorporation, the AOI must be filed
with the SEC and its amendments can be filed electronically.
28. Please cite the contents of the Articles of Incorporation.
The Articles of Incorporation must contain:
• (a) Corporate Name;
• (b) Purpose Clause;
•
•
•
•
•
•
•
(c) Principal Office;
(d) Corporate Term if the corporation has not elected perpetual existence;
(e) Incorporators;
(f) Trustees/Directors;
(g) For stock corporations:
i. 1. The authorized capital stock; (2) Number of shares into which it is divided;
(3) The par value of each share; (4) Names, nationalities, and residence
addresses of the original subscriber; (5) Amount subscribed and paid by each
on the subscription; and (6) A statement that some or all of the shares are
without par value, if applicable.
(h) For nonstock corporations:
i.
(1) Amount of its capital; (2) The names, nationalities; (3) Residence addresses
of the contributors; and (4) Amount contributed by each
(i) Other matters (including arbitration agreement pursuant to Sec. 181). [Sec. 13]
29. What is the residence of a corporation?
• As stated in its Articles of Incorporation, the residence of a corporation is the setting
where its principal office is located. Thus, the proper venue is not the actual principal
office but that stated in its Articles of Incorporation. A corporation has no residence in
the same sense in which the term is applied to a natural person. [Hyatt Elevators v.
Goldstar Elevators, G.R. No. 161026 (2005)]
30. Please cite the grounds for the disapproval of the Articles of Incorporation.
Clearly stated on Section 16 are the grounds for disapproving the AOI and these are as
follows:
• a. Does not substantially comply with form prescribed
• b. Purpose is patently unconstitutional, illegal, immoral, contrary to government rules
and regulations
• c. The certification concerning the amount of capital stock subscribed and/or paid is
false
• d. Required percentage of ownership of Filipino citizens has not been complied with
when required by existing laws or the Constitution.
31. Is voting via remote communication allowed?
• Yes, the stockholders or members may also vote through remote communication or in
absentia: (a) By a resolution of the majority of the board of directors-- provided, that
the resolution shall only be applicable for a particular meeting; and (b)
Notwithstanding the absence of a provision in the bylaws of the corporation [SEC
Memorandum Circular No. 6, s. 20]
• In Section 23-- the right to vote through such modes may be exercised in corporations
vested with public interest, notwithstanding the absence of a provision in the bylaws
of such corporations.
•
Also, a stockholder or member who participates through remote communication or in
absentia, shall be deemed present for purposes of quorum. Not to mention, the
election must be by ballot if requested by any voting stockholder or member.
32. Who are the Corporate Officers?
In Sec. 24, the Corporate Officers are specifically defined:
• (a) President – must be a director
• (b) Treasurer – may or may not be a director; must be a resident
• (c) Secretary – need not be a director unless required by the by-laws; must be a citizen
and resident of the Philippines
• (d) Other officers as may be provided in the bylaws.
• (e) Compliance officer – only for corporations vested with public interest.
33. What are a By-laws?
• By-laws are regulations, ordinances, rules or laws adopted by an association or
corporation for its internal governance, including rules for routine matters such as
calling meetings. [SMC v. Mandaue, G.R. No. 152356 (2005)] By nature, by-laws are
products of agreement of the stockholders or members. [Campos] In function, by-laws
establish the rules for internal government of the corporation [Campos]. It also
regulates the affairs and relationship between and among stockholders, BOD and
corporation. [Lopez] These by-laws can be created either prior to incorporation or
after incorporation.
34. What is the effect of Failure to Organize?
• Within five years from the date of its incorporation and a corporation does not still
formally organize and commence its business, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five-year period as cited in Sec.
21.
35. What is the effect of Continuous Inoperation?
• In Sec. 21, if a corporation has commenced its business but subsequently becomes
inoperative for a period of at least five consecutive years, the Commission may, after
due notice and hearing, place the corporation under delinquent status. A delinquent
corporation shall have a period of two years to resume operations and comply with all
requirements that the Commission shall prescribe. Upon compliance by the
corporation, the Commission shall issue an order lifting the delinquent status. Failure
to comply with the requirements and resume operations within the period given by
the Commission shall cause the revocation of the corporation’s certificate of
incorporation.
36. What are the general powers of a corporation?
In Theory of General Capacity under Sec. 25, as the general powers of every
corporation, it has the power and capacity:
•
•
•
•
•
•
•
•
•
•
•
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence;
i. unless the certificate of incorporation provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the provisions of this
Code;
(e) To adopt bylaws, and to amend or repeal the same in accordance with this Code;
i. Must not contrary to law, morals or public policy
(f) In case of stock corporations: To issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and in case of nonstock corporations: To admit members to the corporation;
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal property, including securities and bonds of
other corporations;
i. As the transaction of the lawful business of the corporation may reasonably
and necessarily require
ii. Subject to the limitations prescribed by law and the Constitution
(h) To enter, with natural and juridical persons, into a:
i. Partnership, (Note: New in the RCC)
ii. Joint venture, (Note: New in the RCC)
iii. Merger
iv. Consolidation, or
v. Any other commercial agreement
(i) To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes:
i. Provided, that no foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
ii. Note: Under OLD Corporation Code, both domestic and foreign corporations
were prohibited from giving donations in aid of any political party or
candidate or for purposes of partisan political activity.
(j) To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees; and
(k) 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.
37. What are the specific powers of a corporation?
The Theory of Specific Capacity [Secs. 36-43, 15] states that unless it’s expressly or
impliedly given, the corporation cannot exercise its powers. And under which the
specific powers of a corporation are as follows:
• (a) Power to extend or shorten corporate term.
• (b) Power to increase or decrease capital stock, or incur, create, increase bonded
indebtedness.
• (c) Power to deny pre-emptive rights.
• (d) Power to sell or dispose corporate assets.
•
•
•
•
•
(e) Power to acquire own shares.
(f) Power to invest corporate funds in another corporation or business, or for any
other purpose.
(g) Power to declare dividends.
(h) Power to enter into management contract.
(i) Power to amend AOI.
38. Please differentiate Theory of General Capacity vs Theory of Specific Capacity.
• The Theory of General Capacity states that, as long as the general law allows, a
corporation is said to hold such power. With the Theory of Specific Capacity, on the
other hand, it’s stated that the corporation cannot exercise powers unless it’s
expressly/impliedly given.
39. What is a Pre-emptive right?
• Pre-emptive right n option or privilege of an existing stockholder to subscribe to a
proportionate part of shares subsequently issued by the corporation before the same
can be disposed of in favor of others. This right includes all issues and disposition of
such shares any class. It is a common law right and may be exercised by stockholders
even without legal provision.
40. When can the pre-emptive right be denied?
Pre-emptive right can be denied when the Articles of Incorporations affirmed so. It
may also be denied when circumstances call for its denial, specifically when:
• Shares to be issued are to comply with laws requiring stock offerings or minimum
stock ownership by the public; [Sec. 38]
• Shares to be issued are in good faith with the approval of the stockholders
representing 2/3 of the OCS in exchange for property needed for corporate purposes;
[Sec. 38]
• Shares to be issued are issued in payment of previously contracted debts; [Sec. 38]
• In case the right is denied in the AOI;
• Waiver of the right by the stockholder.
41. Can a corporation acquire its own shares? Explain.
• Yes, it can. A stock corporation shall have the power to purchase or acquire its own
shares so long as it’s for a legitimate corporate purpose or purposes. That’s mainly
because corporate power does not need shareholder’s approval. Discretion solely
rests on the board, subject to the existence of unrestricted retained earnings (URE)
and for a legitimate corporate purpose/s as fairly cited In Sec. 40. Thus, the
corporation may only acquire its own stocks in the presence of URE.
42. What are the forms of dividends?
• 1. Cash - Any cash dividend due on plus cost and expenses delinquent stock shall first
be applied to the unpaid balance on the subscription plus cost and expenses.
•
•
2. Stock - Stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid; Stock dividends cannot be issued to a person who is
not a stockholder in payment of services rendered.
3. Property - Stockholders are entitled to dividends pro-rata based on the total
number of shares and not on the amount paid on shares
43. Please differentiate Cash dividends vs Stock dividends.
• Any cash dividend due on plus cost and expenses delinquent stock shall first be
applied to the unpaid balance on the subscription plus cost and expenses. While, stock
dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid; Stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered.
• For the voting requirements for issuance for cash dividends involves only the Board of
Directors. Whereas, for stock dividends are the Board of Directors plus two or three of
stockholders.
44. What is Management Contract?
• Management Contract is any contract whereby a corporation undertakes to manage
or operate all or substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise. This refers
only to a management contract with another corporation and does not apply to
management contracts entered into by a corporation with natural persons. Corollary
to this, management contract with a natural person need not comply with the
requisites of Sec. 43.
45. What are Ultra Vires Acts?
• Ultra Vires Acts are those acts which a corporation is not empowered to do or perform
because they are outside or beyond the express and implied powers conferred by its
Articles of Incorporation or by the Revised Corporation Code, or not necessary or
incidental to the exercise of the powers so conferred.
46. What is a Trust Fund Doctrine?
• The Trust Fund Doctrine states that the capital stock, properties and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors.
i. All funds received by the corporation in payment of the shares of stock shall
be held in trust for the corporate creditors and other stockholders of the
corporation.
ii. No fund shall be used to buy back the issued shares of stock except only in
instances specifically allowed by the Corporation Code.
47. Cite the effects of trust fund doctrine.
•
•
•
(1) Dividends must never impair the subscribed capital stock and must only be
declared out of unrestricted retained earnings (URE). [Philippine Trust Co. v. Rivera,
G.R. No. L-19761 (1923)]
(2) Subscription commitments cannot be condoned or remitted.
(3) The general rule is that the corporation cannot buy its own shares using the
subscribed capital as the consideration therefore. [NTC v. CA. G.R. No. 127937 (1999)]
48. How are corporate powers exercised by the shareholders?
• Corporate Acts Requiring All (Voting and Non-Voting) Shareholders’ Approval General
Rule:
• As a general rule, vote is necessary to approve a particular corporate act as provided
in this Code shall be deemed to refer only to stocks with voting rights as cited in Sec.
6. But there are exceptions to this rule: Voting and non-voting shares shall be entitled
to vote in (a) Amendment of Articles of Incorporation; (b) Adoption, Amendment and
Repeal of By-laws; (c) Sale, Lease, Mortgage or Other Disposition of Substantially all
corporate assets; (d) Incurring, Creating or Increasing Bonded Indebtedness; € Increase
or Decrease of Capital Stock; (f) Merger and Consolidation; (g) Investment of funds in
another corporation or business or for any purpose other than the primary purpose
for which it was organized; and (h) Dissolution of the Corporation.
49. How are corporate powers exercised by the Board of Directors?
• For the Board of Directors, unless otherwise provided in this Code, the board of
directors or trustees shall exercise the corporate powers, conduct all business, and
control all properties of the corporation. Majority vote of the Board is needed in the
exercise of the following powers: (1) Filling of vacancies in the board, except when it is
due to removal by the stockholders or members or by expiration of term; (2)
Extension or shortening of the corporate term; (3) Increase or decrease of capital
stock or the creation of bonded indebtedness; (4) Sale or other disposition of all or
substantially all assets; (5) Acquisition of its own shares; (6) Investment of corporate
funds in any corporation or business or for any purpose other than its primary
purpose; (7) Declaration of cash, property, and stock dividends; (8) Entering into
management contracts; (9) Amendment of AOI; (10) Amendment of the by-laws; (11)
Approval of the plan of merger or consolidation; and (12) Dissolution of the
corporation
50. What is the Doctrine of Apparent Authority?
• Doctrine of Apparent Authority Corporate officers have apparent authority to bind the
corporation on matters that are generally within the domain of corporate business,
and the scope of their usual duties. If a corporation knowingly permits one of its
officers, or any other agent, to act within the scope of an apparent authority, it holds
him out to the public as possessing the power to do those acts; the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped
from denying the agent’s authority.
51. What are the Fundamental Rights of a Stockholder?
•
•
•
•
•
•
•
•
(1) Direct or indirect participation in management [Sec. 6]
(2) Voting rights [Sec. 6]
(3) Right to remove directors [Sec. 27]
(4) Proprietary rights
(a) Right to dividends [Sec. 42 and 70]
(b) Appraisal rights [Sec. 80]
(c) Right to issuance of stock certificate for fully paid shares [Sec. 63]
(d) Proportionate participation in the distribution of assets in liquidation [Sec.
139]
(e) Right to transfer of stocks in corporate books [Sec. 62] (f) Pre-emptive right
[Sec. 38]
(5) Right to inspect books and records [Sec. 73]
(6) Right to be furnished with the most recent financial statements/reports [Sec. 73]
(7) Right to recover stocks unlawfully sold for delinquent payment of subscription
[Sec. 68]
(8) Right to file individual suit, representative suit and derivative suits.
52. Can a stockholder vote by proxy?
• Yes. Stockholders and members may vote in person or by proxy in all meetings as
cited in Sec. 57. When so authorized in the by-laws or by a majority of the board of
directors, the stockholders or members of corporations may also vote through remote
communication or in absentia: Provided, That the votes are received before the
corporation finishes the tally of votes.
53. What is a proxy?
• The word “proxy” may be understood in two ways: (1) First, it may refer to the person
duly authorized by a stockholder to vote in his behalf in a stockholder’s meeting; (2)
Secondly, it may refer to the document which evidences this authority.
54. What is the period of effectivity of proxy?
• Voting trust agreements, as a general rule, shall not exceed five years at any one time.
Except when it is specifically required as a condition in a loan agreement, voting trust
agreements may be for a period exceeding five years. This envisions a situation where
a corporation obtains a loan from a bank, but as a condition of the loan, the majority
stockholders would be required to execute voting trust agreements to ensure that the
lending institution would have a controlling interest in the corporate votes to be taken
that may affect the ability of the borrowing corporation to pay. The voting trust
agreement therefore constitutes further security to the lending institution. Such
voting trust agreement conditioned upon a loan agreement, however, shall
automatically expire upon full payment of the loan. Thus, unless the agreement is
expressly renewed, all rights granted in the agreement shall automatically expire at
the end of the agreed period.
55. What is the voting requirement (Board of Directors and Stockholders/Members for the following
Corporate Acts?
• Extension /Shortening of Corporate Term
i. It requires approval by a majority vote of the BOD/BOT and approval by at
least 2/3 of the outstanding capital stock or of its members.
• Sale or disposition of other assets
i. It requires the majority vote of BOD/BOT, and the ratification by the
stockholders representing 2/3 outstanding capital stock or of its members. The
power to sell assets in the ordinary course of business only requires board
approval.
• Entering into management contract
i. It requires the approval of: (1) BOD of both managing and managed
corporation; and (2) Majority of outstanding shares or members of both
managed and managing corporation. However, 2/3 of the votes from the
outstanding stock/members of managed corporation is necessary in the
following: (1) A stockholder/s representing the same interest of both the
managing and managed corporations own more than 1/3 of the total
outstanding capital stock; or; and (2) Where majority of directors in both
corporations are the same
• Declaration of dividend
i. For cash and property dividends, only a resolution by the board is required for
cash and property dividends. Whereas, stock dividends have an additional
requirement for stock dividends, and that’s the approval of stockholders
representing not less than 2/3 of the outstanding capital stock.
• Voluntary dissolution where no creditors are affected
i. It requires majority of the vote of the board of directors or trustees, and the
ratification by the stockholders representing at least 2/3 of the outstanding
capital stock, or of the members. The power to sell assets in the ordinary
course of business only requires board approval.
56. What are Unrestricted retained earnings?
• This is defined as the amount which is:
i. (1) The accumulated profits and gains realized out of the normal and
continuous operations of the company AFTER deducting therefrom: a.
Distributions to stockholders and b. Transfers to capital stock or other
accounts, and (2) NOT appropriated by its Board of Directors for corporate
expansion projects or programs: (3) NOT covered by a restriction for dividend
declaration under a loan agreement; and (4) NOT required to be retained
under special circumstances obtaining in the corporation such as when there is
a need for a special reserve for probable contingencies as stated in Securities
of Exchange Commissions, Memorandum Circular No. 11-08, (December 5,
2008)
57. Please distinguish retained earnings, restricted retained earnings and unrestricted retained
earnings.
• Retained Earnings represents the accumulation of net profits of the corporation over
the years and likewise losses sustained, as well as deductions made upon previous
dividends declared.
• Restricted Retained Earnings is that portion of the retained earnings specifically
earmarked or set aside for specific purposes.
• Unrestricted Retained Earnings is the portion which is free and can be declared as
dividends to stockholders.
58. What is an appraisal right?
• An appraisal right is the right to withdraw from the corporation and demand payment
of the fair value of the shares after dissenting from certain corporate acts involving
fundamental changes in corporate structure.
59. When is an appraisal right available?
• (1) If amendment of AOI results in: Changing or restricting the rights of any
stockholder or class of shares; Authorizing preferences in any respect superior to
those of outstanding share of any class;
• (2) Extension of the term of corporate existence, including Voluntary Dissolution (by
Petition or by shortening corporate term);
• (3) Note: Section 80 (a) however provides that appraisal right may be exercised in
both extension and shortening of corporate term, which is an error carried over from
the old Corporation Code.
• (4) Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets;
• (5) Merger or consolidation;
• (6) Investment of corporate funds for any purpose other than the primary purpose of
the corporation;
• (7) Increasing or decreasing capital stock, or incurring, creating, increasing bonded
indebtedness;
• (8) Note: Can be exercised only if the increase of capital stock results in or has the
effect of changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of any
class.; and
• (9) Denial of pre-emptive rights through an amendment of AOI.
60. Please distinguish pre-emptive right vs right of first refusal.
• A pre-emptive right grants stockholder the option to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings.
While a right of refusal grants the existing stockholders or the corporation the option
to purchase the shares of the transferring stockholder.
• All stockholders of a stock corporation shall enjoy the preemptive right to subscribe to
all issues or disposition of shares of any class, in proportion to their respective
shareholdings. Whereas in a right of first refusal, it arises only by virtue of contract
•
stipulations, by which the right is strictly construed against the right of person to
dispose or deal with their property.
A pre-emptive right is a right claimed against the corporation on unissued shares of its
capital stock, and likewise on treasury shares held by the corporation, whereas a right
of first refusal is a right exercisable against another stockholder on his shares of stock.
61. When are non-voting shares allowed to vote?
• Non-voting shares are not entitled to vote, except as provided for in par. 3 of Sec. 6.
Holders of nonvoting shares shall nevertheless be entitled to vote on the following
matters:
i. Amendment of the articles of incorporation;
ii. Adoption and amendment of bylaws;
iii. Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property
iv. Incurring, creating, or increasing bonded indebtedness;
v. Increase or decrease of authorized capital stock;
vi. Merger or consolidation of the corporation with another corporation or other
corporations;
vii. Investment of corporate funds in another corporation or business in
accordance with this Code; and
viii. Dissolution of the corporation.
• Except in the above cases, the vote necessary to approve a particular corporate act
shall be deemed to refer only to stocks with right to vote.
62. What is a Derivative Suit?
• A derivative suit is a suit brought by a stockholder for and on behalf of the corporation
for its protection from the wrongful acts committed by the directors or trustees of the
corporation, when the stockholder finds that he has no redress because the directors
or trustees, are the ones vested by law to decide whether or not to sue. It is an action
brought by minority shareholders in the name of the corporation to redress wrongs
committed against the corporation, for which the directors refuse to sue. And a
remedy designed by equity and has been the defense of minority shareholders against
abuses by the majority.
• By definition in Jurisprudence, the derivative suit is a suit by a shareholder to enforce
a corporate cause of action. It is a condition sine qua non that the corporation be
impleaded as a party because not only is the corporation an indispensable party, but it
is also the present rule that it must be served with process. The judgment must be
made binding upon the corporation in order that the corporation may get the benefit
of the suit and may not bring subsequent suit against the same defendants for the
same cause of action.
63. What is a Business Judgment Rule?
• As a general rule, when a wrong is committed against a corporation, whether to bring
the suit or not primarily lies within the discretion and exercise of business judgment of
the BOD. But where corporate directors are guilty of a breach of trust, not of mere
error of judgment or abuse of discretion, and intercorporate remedy is futile or
useless, a shareholder may institute a derivative suit in behalf of himself and other
stockholders and for the benefit of the corporation. The purpose of the suit is to bring
about a redress of the wrong inflicted directly upon the corporation and indirectly
upon the stockholders.
64. What are the requisites of derivative actions?
• (1) That the person instituting the action be a stockholder or member at the time the
acts or transactions subject of the action occurred and the time the action was filed;
• (2) That the stockholder or member exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all remedies available under the
AOI, by-laws, laws or rules governing the corporation or partnership to obtain the
relief he desires;
• (3) That there is no appraisal right available for the act(s) complained of;
• (4) That the suit is not a nuisance or harassment suit;
• (5) The action brought by the stockholder/member must be “in the name of the
corporation or association”.
• The action brought by the shareholder or member must be in the name of the
corporation or association.
65. Who has jurisdiction over derivative suits?
• Under the Proper Forum for Derivative Suits in Sec. 5.2., Securities Regulation Code,
the Regional Trial Courts exercise jurisdiction over derivative suits.
66. Please enumerate the obligations of a stockholder.
• (1) Liability to the Corporation for Unpaid Subscription.
• (2) Liability to the Corporation for Interest on Unpaid Subscription if so, Required by
the By-Laws.
• (3) Liability for Watered Stocks
• (4) Liability for Dividends Unlawfully Paid
• (5) Liability for Assuming to Act as a Corporation Knowing it to be Without Authority
67. What are the terms of Directors and Trustees?
• In Sec. 22, the directors have a one-year term from among the holders of stocks
registered in the corporation’s books; while
• The term for the trustees is not exceeding 3 years from among the members of the
corporation.
68. What is the holdover principle?
• The Holdover Principle states that, upon failure of a quorum at any meeting of the
stockholders or members called for an election, the directorate naturally holds over
and continues to function until another directorate is chosen and qualified. Each
director and trustee shall hold office until the successor is elected and qualified. The
failure to elect does not terminate the terms of incumbent officers nor dissolve the
corporation.
69. Who is an independent director?
• An independent director is a person who, apart from shareholdings and fees received
from the corporation, is independent of management and free from any business or
other relationship which could, or could reasonably be perceived to materially
interfere with the exercise of independent judgment in carrying out the
responsibilities as a director.
70. What are the three-fold liabilities of Directors and Trustees?
• In this jurisdiction, the members of the BOD have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty.
i. 1) Duty of Obedience - shall direct the affairs of the corporation only in
accordance with the purposes for which it was organized; Cause of Vacancy
Procedure number of directors or trustees’ purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the notice of the
meeting; Under this, the Directors or Trustees and Officers should direct the
affairs of the corporations only in accordance with the purposes for which it
was organized.
ii. 2) Duty of Diligence - shall not willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or act in bad faith or with gross
negligence in directing the affairs of the corporation; Here, the directors
should not willfully and knowingly vote for or assent to patently unlawful acts
of the corporation or act in bad faith or with gross negligence in directing the
affairs of the corporation.
iii. 3) Duty of Loyalty - shall not acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees. With this, where a
director, as a general rule, by virtue of such office, acquires a business
opportunity which should belong to the corporation, thereby obtaining profits
to the prejudice of such corporation, the director must account for and refund
to the latter all such profits.
71. What is Doctrine of Corporate Opportunity?
• In the Doctrine of Corporate Opportunity, unless his act is ratified, a director shall
refund to the corporation all the profits he realizes on a business opportunity which:
(a) Corporation is financially able to undertake; (b) From its nature, is in line with
corporation’s business and is of practical advantage to it; and (c) One in which the
corporation has an interest or a reasonable expectancy. The rule shall be applied
notwithstanding the fact that the director risked his own funds in the venture. By
embracing the opportunity, the self-interest of the officer or director will be brought
into conflict with that of his corporation. Hence, the law does not permit him to seize
the opportunity even if he will use his own funds in the venture.
72. What are the remedies in case of mismanagement?
• (1) Removal of directors pursuant to Sec. 27
• (2) Derivative suit or complaint filed with the RTC
• (3) Receivership
• (4) Injunction if the act has not yet been done
• (5) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General
refuses to act.
73. Who can be an Insider?
• An INSIDER means: (a) The issuer; (b) A director or officer (or any person performing
similar functions) of, or a person controlling the issuer; gives or gave him access to
material information about the issuer or the security that is not generally available to
the public; (c) A government employee, director, or officer of an exchange, clearing
agency or self-regulatory organization who access to material information about an
issuer or a security that is not generally available to the public; or (d) A person who
learns such information by a communication from any foregoing insiders.
74. What is the rule for self-dealing Directors?
• The general rule is, a contract of the corporation with one or more of its directors,
trustees, officers or their spouses and relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of such corporation. The only
exception that can make such contract valid is if all of the following conditions are
present: 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; (a)
The vote of such director or trustee was not necessary for the approval of the
contract; (b) The contract is fair and reasonable under the circumstances; and (c) In
case of corporations vested with public interest: Material contracts are approved by at
least two-thirds of the entire membership of the board, with at least a majority of the
independent directors voting to approve the material contract; and d. In case of an
officer: The contract has been previously authorized by the BOD.
75. What are the kinds of meeting?
• In Sec. 48-- meetings of directors, trustees, stockholders, or members may be regular
or special.
• (a) When and Where
i. When - Regular meetings of directors or trustees shall be held monthly, unless
the by-laws provide otherwise, whereas special meetings of the BOD or
trustees may be held at any time upon the call of the president or as provided
in the by-laws.
ii. Where - Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the by-laws provide
otherwise.
• (b) Notice
•
i. 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 days prior to
the scheduled meeting, unless a longer time is provided by the by-laws. And a
director or trustee may waive this requirement, either expressly or impliedly.
(c) Attendance in Meetings
i. In the old corporation code, directors or trustees cannot be represented or
voted by proxies at board meetings. Allowable Alternative Modes of
Attendance Directors or trustees who cannot physically attend or vote at
board meetings can participate and vote through: (1) Remote communication
such as videoconferencing, teleconferencing; or (2) Other alternative modes of
communication that allow them reasonable opportunities to participate.