Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on Private
Corporation regarding to its creation, formation and
powers.
INTRODUCTION:
A. Historical Background
Effectivity: May 1, 1980
Article XII Section 16 of the 1987 Constitution:
The Congress shall not, except by general law,
provide for the formation, organization, or
regulation
of
private
corporations.
Government-owned or controlled corporations
may be created or established by special
charters in the interest of the common good
a d su je t to the test of e o o i ia ilit .
*Congress has limited powers in the formation,
creation and regulation of a private
corporation.
Purposes:
1. Uniformity
2. To avoid corruption
General Rule: Congress is prohibited to enact a
law directly forming a private corporation.
Exception: GOCC may be created by special
charter.
*GOCC is a private corporation with regard to
function and in the meantime a public
corporation with regard to ownership.
Twin Conditions must be present in forming a
GOCC:
1. Interest in the common good
2. Subject to the test of economic viability
- Means can survive alone in the market;
can generate income which they can
use for their operating expenses
CONCEPT AND ATTRIBUTES OF A CORPORATION:
A. Statutory definition of a Corporation
Section 2 of the Corporation Code: A
corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes and properties
expressly authorized by law or incident to its
e iste e.
B. Attributes of a Corporation
 Artificial Being
- It exist by fiction of law only, hence it is
subject to limitations that are inherent
because of its nature
- A corporation is a juridical person which
exists by process of legal fiction
Doctrine of Corporate Entity/Doctrine
of Separate Personality - A corporation
is a legal or juridical person with a
personality separate and apart from its
individual stockholders or members and
from any other legal entities to which it
may be connected
Consequences/Implications
of
Separate Personality:
1. It is entitled to own properties in its
own name and its properties are
not the properties of its
stockholders, directors and officers.
Cases: Magsaysay-Labrador v CA;
Sulo ng Bayan v Araneta
*The interest of the stockholders
over the properties of the
corporation is merely inchoate.
*Merely inchoate because there are
still condition precedents before
the shareholders get their share,
viz, in Asset, there are dissolution
and satisfaction of claims; in profitsharing, there are unrestricted
retained earnings and declaration
by the Board of Directors.
2. It can incur obligations and its
obligations are not the obligations
of its stockholders, directors and
officers.
Case: Francisco v CA
3. The rights belonging to the
corporation cannot be invoked by
the stockholders, directors and
officers and vice versa.
4. Corporations are entitled to certain
constitutional rights, i.e., right
against unreasonable searches and
seizure, due process clause.
*It is not entitled to certain
constitutional right, i.e., right
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5.
6.
7.
8.
against
self-incrimination
particularly production of corporate
documents.
*Right against self-incrimination is
applicable only to natural persons.
General
Rule:
Constitutional
guarantees are applicable to
corporations.
Exceptions:
1. Right against self-incrimination
2. Freedom to travel
Case: Bataan Shipyard v PCGG
It is liable for tort. It is liable when
the act was committed by the
officer or agent under express
direction or authority from the
stockholders or members acting as
a body or generally from the
directors as the governing body.
Generally, the corporation is
considered a national of the
country where it was incorporated
(Place of incorporation test)
*Exceptions: 1. In times of war, the
nationality of a corporation is
determined by the nationality of
the controlling stockholders; 2.
Under the Foreign Investment Act
of 1991
Corporations are incapable of
intent, hence, they cannot commit
felonies that are punishable under
the RPC. They cannot commit
crimes that are punishable under
special laws because crimes are
personal in nature requiring
personal performance of overt acts.
In addition, the penalty of
imprisonment cannot be imposed.
*Criminal liability falls upon to
responsible officers.
*Responsible officers cannot invoke
the
doctrine
of
separate
personality.
*Corporations
cannot
be
incarcerated.
Moral damages cannot be awarded
in favor of corporations because
they do not have feelings and
mental state.
*Corporations can claim damages
such as actual, compensatory,
exemplary, loss of earning capacity.
General Rule: Corporation cannot
claim moral damages.
Exception: If the corporation has a
good
reputation
and
such
reputation was destroyed.
Case: Coastal Pacific Trading v
Southern Rolling Mills, Co.
*In Filipinas Broadcasting Network
Inc. v. Ago Medical and Educational
Center, the SC ruled that a
corporation can recover moral
damages under Article 2219(7) if it
was the victim of defamation.
Doctrine of Piercing the Veil of Corporate Entity – The
doctrine that a corporation is a legal entity distinct from
the persons composing it. It is a theory introduced for
the purposes of convenience and to serve the ends of
justice. But when the veil of corporate fiction is used as
a shield to perpetuate fraud, to defeat public
convenience, justify wrong, or defend crime, this fiction
shall be disregarded and the individuals composing it
will be treated identically.
Cases: Times Transportation Co. v Santos Sotelo;
Concept Builders v NLRC
*The doctrine of piercing the veil of corporate entity is
the exception to the doctrine of corporate entity.
*The users of this doctrine are: 1. Stockholder; 2. Group
of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation are in
effect jointly liable; 2. In case of two corporations, they
will be treated as one wherein they will be both
solidarily liable. (Instrumentality rule)
*There is no effect on the existence of each corporation
as long as their separate entity is used for legitimate
purposes.
Instrumentality Rule – When one corporation is so
organized and controlled and its affairs are conducted
so that it is in fact a mere instrumentality or adjunct of
the other, the fiction of the corporate entity to the
instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
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Requisites: 1. Control, not mere majority or
complete stock control, but complete dominion, not
only of finances but of policy and business in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the
defendant to commit fraud or wrong in
contravention of plaintiff’s legal ights; . The
aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
Three cases of piercing the veil:
1. Fraud Cases – when a corporation is used as a
cloak to cover fraud, or to do wrong;
2. Alter Ego Cases – when the corporate entity is
merely a farce since the corporation is an alter ego,
business conduit or instrumentality of a person or
another corporation;
3. Equity cases – when piercing the corporate
fiction is necessary to achieve justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and
equipments;
4. Engage practically in the same business; 5. The
same manner of keeping books and records.
*The probative factors of identity are not conclusive
but may be considered as strong evidence.
 Creature of Law
Article XII Section 16 of the 1987
Constitution:
The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-owned
or controlled corporations may be created
or established by special charters in the
interest of the common good and subject to
the test of e o o i ia ilit .
Concession Theory – It is a principle in the
creation of corporations, under which a
corporation is an artificial creature without
any existence until it has received the
imprimatur of the State acting according to
law, through the SEC. The life of the
corporation is a concession made by the
State.

Right of Succession
- Capacity to have continuity of existence
despite the changes on the persons
who compose it. Thus, the personality
continues despite the change of
stockholders,
members,
board
members or officers; death or disability.
- Also known as Principle of Perpetual
Succession
Reason: To make the corporation more
stable

Creature of enumerated powers, attributes
and properties
Doctrine of Limited Capacity – No
corporation under the Corporation Code,
shall possess or exercise any corporate
powers, except those conferred by law, its
Articles of Incorporation, those implied
from express powers and those as are
necessary or incidental to the exercise of
the po e s so o fe ed. The o po atio ’s
capacity is limited to such express, implied
and incidental powers.
*Corporation may be restrained from
engaging a particular transaction because it
is beyond their powers.
*General Capacity – a corporation can
perform any act for as long as it is lawful,
moral and not contrary to public policy or
order.
Ultra Vires Doctrine – Even if the act is
lawful, moral and not contrary to public
order or policy but such act is not within the
express, implied and incidental powers of
the corporation such act shall be void for
being ultra vires.
*These doctrines are based on Section 2
and Section 45 of the Corporation Code.
C. Classification of Private Corporations:
1. As to existence of Stocks:
Stock Corporation – Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of the shares held. (Sec. 3)
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Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
Non-stock Corporation – A corporation where
no part of its income is distributable as
dividends to its members, trustees, or officers,
subject to the provisions of this Code on
dissolution. (Sec. 87)
Q: Is it correct to say that a Non-stock
corporation cannot generate income on their
own?
A: NO
2. As to function/organizers:
Public Corporation – for public purpose and
organized by the State.
Private Corporation – for profit making
functions and organized by private persons
alone or with the State
3. As to laws of Incorporation (Place of
Incorporation) :
Domestic Corporation – corporation formed,
organized or existing under the Philippine Laws.
Foreign Corporation – corporation 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. (Sec. 123)
*License is necessary for; 1. Regulation
purposes and 2. Access to local courts.
4. As to legal status:
De Jure Corporation – corporation created in
strict or substantial compliance with the
mandatory requirements for incorporation and
the right of which to exist as a corporation
cannot be successfully attacked or questioned
by any party even in a direct proceeding for that
purpose by the state.
De Facto Corporation – the due incorporation
of any corporation claiming in good faith to be a
corporation under the Corporation Code, and
its right to exercise corporate powers, shall not
be inquired into collaterally in any private suit
to which such corporation may be a party. Such
inquiry may be made by Solicitor General in a
quo warranto proceeding. (Sec. 20)
- organized with a colourable compliance
with the requirements of a valid law
and its existence cannot be inquired
collaterally.
- There is an irregularity or defect in the
constitution or organization.
Can be compared to a voidable contract,
i.e., valid until annulled.
*Can be challenged by the State later on.
Cases: Hall v Piccio; Seventh Adventist v
Northeastern Mindanao Mission
*The filing of the Articles of Incorporation
and the issuance of the certificate of
registration are the essential requisites for
the existence of a de facto corporation.
Requisites:
1. The existence of a valid law under which
it may be incorporated;
2. An attempt in good faith to incorporate;
3. Use of corporate powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the
requirement of law.
*In both corporations, there must be a
certificate of registration issued.
Doctrine of Corporation by Estoppel – All persons
who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general
partners for all debts, liabilities and damages
incurred or arising as an result thereof: Provided,
however, that when any such ostensible
corporation is sued on any transaction entered into
by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense
its lack or corporate personality. (Sec. 21)
- Group of persons which holds itself out
as a corporation and enters into a
contract with a third person on the
strength of such appearance cannot be
permitted to deny its existence in an
action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited from
the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from denying
their existence by their previous act or
conduct
Holding Corporation – it is one which controls another
as a subsidiary by the power to elect management. It is
one that holds stocks in other companies for purposes
of control rather than for mere investment.
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Affiliate – one related to another by owning or being
owned by common management or by a long-term
lease of its properties or other control device. It may be
the controlled or controlling corporation, or under
common control.
Subsidiary Corporation – one which is so related to
another corporation that the majority of its directors
can be elected either directly or indirectly by such other
corporation. It is always controlled.
Open Corporation – one which is open to any person
who may wish to become a stockholder or member
thereto.
Close Corporation – those whose shares of stock are
held by limited number of persons like the family or
other closely knit group. (Sec. 96)
FORMATION AND ORGANIZATION OF A PRIVATE
CORPORATION:
A. Submission of Articles of Incorporation;
contractual significance
*The life of a corporation commences from the
issuance of the Certificate of Registration by the
SEC upon filing of the Articles of Incorporation
and other documents.
Article of Incorporation – is the charter of the
corporation, and the contractual relationships
between the State and the corporation, the
stockholder and the State, and between the
corporation and its stockholders.
Contractual Significance:
1. The issuance of a certificate of incorporation
sig als the i th of the o po atio ’s ju idi al
personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto one.
B. Contents and Form of the Articles
Incorporation (Secs. 14 and 15)
Contents of Articles of Incorporation:
1. Corporate Name;
2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
6. Directors or trustees;
7. Capitalization;
of
8. Shares of stock;
9. T easu e ’s Affida it.

Corporate Name
Purpose: Identification
*Corporation can not adopt any name or
group of words at its pleasure because of
statutory limitation, viz., Sec. 18 of the
Corporation Code hi h p o ides that: No
corporate name may be allowed by the SEC
if the proposed name is identical or
deceptively or confusingly similar to that of
any existing corporation or to any other
name already protected by law or is
patently deceptive, confusing or contrary
to existing laws. When a change in the
corporate name is approved, the
Commission shall issue an amended
certificate of incorporation under the
amended name.
SEC Guideline
. I o de to p e e t
confusion and difficulties of administration,
supervision and control, if the proposed
name contains a word already use as a part
of the firm name or style of a registered
entity, the proposed name must contain
two other words different and distinct from
the name of the company already
egiste ed o p ote ted la .
Case: Ang Mga Kaanib Ni Jesus Cristo
*The ph ase A g Mga Kaa i a e o ds
merely descriptive of membership while the
ph ase “a Ba sa g Pilipi as a e e el
descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or descriptive word
may be used as a corporate name.
Reason: public domain; can be used by
anyone; public use.
Exception: Doctrine of Secondary Meaning
– a word or phrase originally incapable of
exclusive appropriation with reference to
an article on the market, because
geographically or otherwise descriptive,
might nevertheless have been used so long
and so exclusively by one producer with
reference to his article that in that trade
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


and to that branch of the purchasing public,
the word or phrase has come to mean that
the article was his product.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was not
satisfied by Lyceum of the Philippines.
*In case of change of name, the corporation
is not dissolve nor create a new
corporation; it also does not extinguish the
corporate liability.
*Change of name can be done by amending
the Articles of Incorporation.
Procedure:
1. Obtain approval of majority of the Board
and 2/3 stockholders;
2. Submission to the SEC for approval.
Purpose Clause
*Only one primary purpose. Primary
purpose defines the business activities of
the corporation. It is the ordinary course of
business of the corporation.
*Secondary Purpose is for future expansion.
There is no limit on the secondary purpose.
*In case the primary purpose is not viable
then secondary purpose may be used.
Principal Office
*The principal place of business may
determine the venue of court cases
involving corporations. It may also
determine if service of summons and
notices was properly made. It is also
important for tax purposes (local taxation).
*The SEC requires the exact address to be
indicated in the Articles of Incorporation.
*It is the residence of the corporation. It is
where the corporation maintains its books
and records and where normally the bulk of
its business is being conducted or
undertaken.
*For personal action, venue is the
residence.
Term of Existence
*A corporation has a maximum term of 50
years. It may be extended for a period not
exceeding 50 years in any single instance.

As a rule, no extension can be made earlier
than 5 years prior to the expiration of the
term.
*No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
eet the o po atio ’s te .
Exception: If for compelling reasons, earlier
extension will be allowed.
*During the three year winding up period,
the corporation still has personality but
activities are limited to the liquidation of
the corporation affairs and not to transact
further business.
As a rule, after the term has expired, no
more extensions be allowed or entertained
by the SEC.
Reason: No more period to extend.
Exception: Doctrine of Relation – The filing
and recording of a certificate of extension
after the term cannot relate back to the
date of the passage of the resolution of the
stockholders to extend the life of the
corporation. However, the doctrine of
relations applies if the failure to file the
application for existence within the term of
the corporation is due to neglect of the
officer with whom the certificate is required
to be filed or to wrongful refusal on is part
to receive it.
*The delay in submitting the application for
extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the corporation
(insuperable intervening causes)
Incorporators
*Once an incorporator always an
incorporator. (Fait accompli – an
accomplished fact which cannot be altered)
*They are the signatories to the Articles of
Incorporation.
*They are originally forming the corporation
Q: What is the reason behind the phrase
that an incorporator is not always a
corporator?
A: To be an incorporator it is not necessary
to own a share unlike as a corporator.
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

*Number is limited to 5 to 15.
*They must have a contractual capacity.
*Juridical person cannot create another
juridical person.
*There is no citizen requirement but special
laws may require otherwise.
*Majority must be a resident of the
Philippines.
Directors and trustees
*The Board of Directors is the governing
body in a stock corporation while Board of
Trustees is the governing body in a nonstock corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least one (1)
share of the capital stock;
2. Majority of the directors or trustees must
be residents of the Philippines.
*Any director who ceases to be the owner
of at least one share of the capital stock of
the corporation of which he is a director
shall thereby cease to be a director.
*Trustees of non-stock corporations must
be members thereof.
*Initial directors/trustees shall hold office
for one year until their successors are
elected and qualified.
Capitalization
Section 14(8) states that: If it e a sto k
corporation, the amount of its authorized
capital stock in lawful money of the
Philippines, the number of shares into
which it is divided, and in case the share are
par value shares, the par value of each, the
names, nationalities and residences of the
original subscribers, and the amount
subscribed and paid by each on his
subscription, and if some or all of the shares
are without par value, such fact must be
stated.
*It is required that at least 25% of the
subscribed capital must be paid and in no
case may be paid-up capital be less than
P5,000.
Authorized Capital Stock – the amount
fixed in the articles of incorporation to be

subscribed and paid by the stockholders of
the corporation.
*Shows the total number of shares
Subscribed Capital – that portion of the
authorized capital stock that is covered by
subscription agreements whether fully paid
or not.
Paid-Up Capital – the portion of the
authorized capital stock which has been
subscribed and actually paid.
Outstanding Capital Stock – the total
shares of stock issued to subscribers or
stockholders, whether or not fully or
partially paid except treasury shares so long
as there is a binding subscription
agreement.
Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the profits
2. expectancy on the share of assets in case
of dissolution/liquidation.
Political Value:
1. vote
2. control in the management of the
corporation.
Doctrine of Equality of Shares – E ept as
otherwise provided in the articles of
incorporation and stated in the certificate
of stock, each share shall be equal in all
espe ts to e e othe sha e.
- Provides that where the Article of
Incorporation do not provide for any
distinction of the shares of stock, all shares
issued by the corporation are presumed to
be equal and enjoy the same rights and
privileges and are also subject to the same
liabilities.
Classes of Shares:
1. Par Value Share – shares that have a
nominal value in the certificate of stock.
Contractual Significance: The minimum
price at which the shares are to be
issued.
*The price is fixed. It is stated in the
Articles of Incorporation.
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2. No Par Value Share – those shares
which do not have nominal value.
However, they have issued value stated
in the certificate or articles of
incorporation.
*There is flexibility in the price.
*The price is determined by the Board.
Limitations:
1. No par value shares cannot have an
issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so that no
part of it should be distributed as
dividends;
3. They cannot be used as preferred
stocks;
4. They cannot be issued by banks, trust
companies,
insurance
companies,
public utilities and building and loan
association (Reason: imbued with
public interest);
5. The articles of incorporation must
state the fact that it issued no par value
shares as well as the number of said
shares;
6. Once issued, they are deemed fully
paid and non-assessable.
3. Voting Shares – shares with the right to
vote. They have the right to participate
in the management of the corporation
through the exercise of such right.
4. Non-voting Shares – shares without the
right to vote.
*Has only a limited right to vote.
General Rule: Shareholder owning nonvoting shares has no right to vote.
Exceptions:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of bylaws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the
corporation with another corporation
or other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with the Corporation Code;
8. Dissolution of the corporation.
*The exceptions are exclusive; the list is
a closed list
Statutory Constraint: Sec. 6 of the
Corporation Code
*The corporation cannot provide for
shares with no voting right
General Rule: Only redeemable and
preferred shares are deprived of voting
right.
Exception: Common shares may be
denied of its voting right in the
following instances: 1. Delinquent in
paying the subscription; 2. If there was
a fou de ’s sha e he e it as gi e
the right to vote exclusively for 5 years
(Sec. 7).
5. Common Shares – the most common
type of shares which enjoy no
preference.
*The basic class of stock ordinarily and
usually issued without extraordinary
rights and privileges, and the owners
thereof are entitled to a pro rata share
in the profits of the corporation and in
its assets upon dissolution and,
likewise, in the management of its
affairs without preference or advantage
whatsoever.
6. Preferred Shares- shares which enjoy
preference as to dividends or assets
upon dissolution as stated in the
Articles of Incorporation.
Reason: To attract investors.
*Preference does not give them a lien
upon the property nor make them
creditors of the corporation.
*Characterized as redeemable shares.
Kinds:
1. Preferred shares as to assets – share
which gives the holder thereof
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preference in the distribution of the
assets of the corporation in case of
liquidation;
2. Preferred shares as to dividends –
share which gives the holder thereof
preference in the distribution of the
dividends to the extent agreed upon
before any dividends at all are paid to
the holders of common shares;
3. Participating preferred shares – the
holders thereof are still given the right
to participate with the common
stockholders in dividends beyond their
stated preference;
4. Non-participating preferred shares –
where there is no such participation;
5. Cumulative preferred shares – the
shareholder is entitled to recover
dividends in arrears. While dividend
declaration may not be compelled, once
it is declared, the shareholder is
entitled to the said arrears;
6. Non-cumulative preferred shares –
not entitled to arrears only to present
dividends.
7. Redeemable Shares – are those which
permit the issuing corporation to
redeem or purchase its own shares.
Limitations:
1. Redeemable shares may be issued
only when expressly provided for in the
Articles of Incorporation;
2. The terms and conditions affecting
said shares must be stated both in the
certificate of stock representing such
share;
3. Redeemable shares may be deprived
of voting rights in the Articles of
Incorporation,
unless
otherwise
provided in the Corporation Code;
4. The corporation is required to
maintain a sinking fund to answer for
redemption price if the corporation is
required to redeem;
5. The redeemable shares are deemed
retired upon redemption unless
otherwise provided in the Articles of
Incorporation;

6. Unrestricted retained earnings is not
necessary before shares can be
redeemed but there must be sufficient
assets to pay the creditors and to
answer for operations.
8. Treasury Shares – shares which have
been earlier issued as fully paid and
have thereafter been acquired by the
corporation by purchase, donation,
redemption or through some lawful
means.
- Shares which are previously issued by
the corporation but subsequently
reacquired by the corporation.
*Retired thus can no longer be reissued.
*They are not entitled to dividends.
*They are not entitled to voting rights.
Rationale: to prevent abuse by the
management.
*These shares may again be disposed of
for a reasonable price fixed by the
Board of Directors.
9. Founders’ Shares – classified as such in
the articles of incorporation may be
given certain rights and privileges not
enjoyed by the owners of other stocks,
provided that where the exclusive right
to vote and be voted for in the election
of directors is granted, it must be for
the limited period not to exceed 5 years
subject to the approval of the SEC. The
5 year period shall commence from the
date of the approval by the SEC.
Treasurer’s affidavit
*The SEC shall not accept the Articles of
Incorporation of any stock corporation
unless accompanied by a sworn statement
of the Treasurer elected by the subscribers
showing that at least 25% of the authorized
capital stock of the corporation has been
subscribed, and at least 25% of the total
subscription has been fully paid to him in
actual cash and/or in property the fair
valuation of which is equal to at least 25%
of the said subscription, such paid up capital
being not less than P5,000.
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*If the T easu e ’s affida it is false su h a t
is tantamount to fraud. (PD 902-A)
*Fraud on the part of the corporation is a
ground for revocation or suspension of
license depending upon the extent of the
violation committed.
*If the e’s o T easu e ’s Affidavit, the first
ground shall apply, i. e., noncompliance
with the minimum requirement.
General Rule: 25% must be subscribed and
25% must be paid.
Exception: If the law provides otherwise,
i.e., special laws.
C. Grounds for rejection of the Articles of
Incorporation
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 T easu e ’s Affida it o e i g the
amount of capital stock subscribed and/or
paid is false;
4. The percentage of ownership of the capital
stock to be owned by citizens of the
Philippines has not been complied with as
required by existing laws or the
Constitution.
Dual Franchise Requirement: No articles of
incorporation or amendment to articles of
incorporation of banks, banking and quasibanking institutions, building and loan
associations, trust companies and other
financial intermediaries, insurance companies,
public utilities, educational institutions, and
other corporations governed by special laws
shall be accepted or approved by the
Commission unless accompanied by a
favourable recommendation of the appropriate
government agency to the effect that such
articles or amendment is in accordance with
law.
D. Commencement of Corporate Existence
Sec. 19 of the Corporation Code states that A
private corporation formed or organized under
this Code commences to have corporate
existence and juridical personality and is
deemed incorporated from the date the SEC
issues a certificate of incorporation under its
official seal; and thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance
ith la .
*For purposes of determining whether a
corporation enjoys the status of a de facto
corporation, it must have been at least issued a
certificate of registration.
E. Amendment of the Articles of Incorporation
Sec. 16 of the Corporation Code states that:
U less othe ise p es i ed this Code o
special law, and for legitimate purposes, any
provision or matter stated in the articles of
incorporation may be amended by a majority
vote of the board of directors or trustees and
the vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance
with the provisions of this Code, or the vote or
written assent of at least 2/3 of the members if
it be a non-stock corporation.
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction.
Amendment by Inaction – Upon filing with the
SEC of the amendment and the Commission
failed to act on it within 6 months from the date
of filing for a cause not attributable to the
corporation.
F. Effects of Non-Use of Corporate Charter
Sec. 22 of the Corporation Code states that: If
a corporation does not formally organize and
commence the transaction of its business or the
construction of its work within 2 years from the
date of its incorporation, its corporate powers
cease and the corporation shall be deemed
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dissolved. However, if the corporation has
commenced the transaction of its business but
subsequently becomes continuously inoperative
for a period of at least 5 years, the same shall
be a ground for the suspension or revocation of
its corporate franchise or certificate of
incorporation. This provision shall not apply if
the failure to organize, commence the
transaction of its businesses or the construction
of its works, or to continuously operate is due
to causes beyond the control of the corporation
as a e dete i ed the “EC.
*The period must be counted from the issuance
of the Certificate of Incorporation.
*Automatic dissolution is not contemplated
under Section 22. (SEC Opinion).
*Section 22 must be read in conjunction with
Sec 6(1) of PD 902-A which requires that the
corporation must be given the opportunity to
be heard in compliance with the requirement of
due process before the revocation of its license.

CONTROL AND MANAGEMENT OF A CORPORATION:
A. Levels of Corporate Control
1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees
 General Powers of the Board
Sec. 23 of the Corporation Code states that:
U less othe ise p o ided i this Code,
the corporate powers of all corporations
formed under this Code shall be exercised,
all business conducted and all property of
such corporations controlled and held by
the board of directors or trustees to be
elected from among the holders of stocks,
or where there is no stock, from among the
members of the corporation, who shall hold
office for one year until their successors are
ele ted a d ualified.
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties of
the Corporation.

*Board of Directors/Trustees is the
statutory representative of the corporation.
General Rule: All corporate powers
emanate
from
the
Board
of
Directors/Trustees.
Exception: Unless otherwise provided in
this Code. (Limiting Clause)
The limiting clause means that there are
certain corporate matters that cannot be
done by the Board by reason that such
matters fall upon the shareholders; or
corporate matters that cannot be resolved
by the Board alone, i.e., it must be done
with the approval of the shareholders.
Business Judgment Rule
Business Judgment Rule – questions of
policy or management are left solely to the
honest decision of officers and directors of
a corporation and 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.
- A resolution or transaction pursued within
the corporate powers and business
operations of the corporation, and passed
in good faith by the board of
directors/trustee, is valid and binding, and
generally the courts have no authority to
review the same and substitute their own
judgment, even when the exercise of such
power may cause losses to the corporation
or decrease the profits of a department.
*Great respect is accorded to the decisions
of the Board of Directors/Trustees.
*The directors are not liable to the
stockholders in performing such acts.
Qualifications of the Board Members
Sec. 23 of the Corporation Code states that:
E e di e to
ust ha e at least o e
share of the capital stock of the corporation
of which he is a director, which share shall
stand in his name on the books of the
corporation. Any director who ceases to be
the owner of at least one share of the
capital stock of the corporation of which he
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
is a director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
eside ts of the Philippi es.
*In order to be eligible as director, what is
material is the legal title to and not
beneficial title or ownership of the stocks
appearing on the books of the corporation.
*The directors/trustees must be natural
persons.
*They must also be of legal age.
*He must possess other qualifications as
may be prescribed in the by-laws of the
corporation.
*Under Sec. 27 of the Corporation Code:
No pe so o i ted
fi al judg e t of
an offense punishable by imprisonment for
a period exceeding 6 years, or a violation of
this Code committed within 5 years prior to
the date of his election or appointment,
shall qualify as a director, trustee or officer
of a
o po atio .
Reason: The position is based on trust and
confidence.
*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications.
Election of the Board Members
Sec. 24 of the Corporation Code provides
that: At all ele tio s of di e to s o
trustees, there must be present, either in
person or by representative authorized to
act by written proxy, the owners of a
majority of the outstanding capital stock, or
if there be no capital stock, a majority of
the members entitled to vote. The election
must be by ballot if requested by any voting
stockholder or member. In stock
corporations, every stockholder entitled to
vote shall have the right to vote in person
or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in
his own name on the stock books of the
corporation, or where the by-laws are silent
at the time of the election; and said
stockholder may vote such number of
shares for as many persons as there are
directors to be elected or he may cumulate
said shares and give one candidate as many
votes as the number of directors to be
elected multiplied by the number of his
shares shall equal, or he may distribute
them on the same principle among as many
candidates as he shall see fit: Provided, that
the total number of votes cast by him shall
not exceed the number of shares owned by
him as shown in the books of the
corporation multiplied by the whole
number of directors to be elected:
Provided, however, that no delinquent
stock shall be voted. Unless otherwise
provided in the articles of incorporation or
in the by-laws, members of the
corporations which have no capital stock
may cast as many votes as there are
trustees to be elected but may not cast
more than one vote for one candidate.
Candidates receiving the highest number of
votes shall be declared elected. Any
meeting of the stockholders or members
called for an election may adjourn from day
to day or from time to time but not sine die
or indefinitely if, for any reason, no election
is held, or if there not present or
represented by proxy, at the meeting, the
owners of a majority of the outstanding
capital stock, or if there be no capital stock,
a ajo it of the e e e titled to ote.
*It is the stockholders or corporators who
elect members of the Board of Directors.
*The only procedure required by the Code
is through Election. There can be no other
modes.
*The election must be by ballot if requested
by any voting member or stockholder.
*A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of the
methods of voting in the election of
directors.
*No delinquent stock shall be voted.
*It is not required that the candidate
received the majority vote, what the law
provides is only plurality of votes.
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*Majority number is required only for the
existence of a quorum.
Not included in outstanding capital stocks:
1. Unissued stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1. Straight Voting – every stockholder may
vote such number of shares for as many
persons as there are directors to be elected.
2. Cumulative Voting for One Candidate – a
stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes (10x5) available to
him. X may opt to concentrate all his 50
votes to a particular candidate.
3. Cumulative Voting by Distribution – a
stockholder may cumulate his shares by
multiplying also the number of his shares by
the number of directors to be elected and
distribute the same among as many
candidates as he shall see fit.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes available to him. X
may opt to distribute the votes to as many
candidates as there are provided that the
total number of votes does not exceed 50.
Purpose of cumulative voting: To protect
the minority stockholders.
*The elected officer must act as a body.
*In a stock corporation, cumulative voting is
a statutory right whereas in a non-stock
corporation, cumulative voting is applicable
if it is provided in the Article of
Incorporation.
Sec. 26 of the Corporation Code provides
that: Within 30 days after the election of
the directors, trustees and officers of the
corporation, the secretary, or any other
officer of the corporation, shall submit to
the SEC, the names, nationalities and
residences of the directors, trustees and


officers elected. Should a director, trustee
or officer die, resign or in any manner cease
to hold office, his heirs in case of his death,
the secretary, or any other officer of the
corporation, or the director, trustee or
officer himself, shall immediately report
su h fa t to the “EC.
Term of Office
*The directors or trustees shall hold office
fo o e
ea su je t to the hold over
principle, i.e., they continue in office until
their successors are elected and qualified.
*The one year period does not apply to
directors initially elected for purposes of
incorporation.
Quorum Requirement in Board Meetings
Sec. 25 of the Corporation Code states that:
U less the a ti les of i o po atio o the
by-laws provide for a greater majority, a
majority of the number of directors or
trustees as fixed in the articles of
incorporation shall constitute a quorum for
the transaction of corporate business, and
every decision of at least a majority of the
directors or trustees present at a meeting at
which there is a quorum shall be valid as a
corporate act, except for the election of
officers which shall require the vote of a
ajo it of all the e e s of the oa d.
Q: Is the director allowed to let a proxy
attend a board meeting in behalf for
himself?
A: NO. Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum requirement should always be
computed based on the number specified in
the Articles of Incorporation regardless of
ensuing vacancies.
*The basis is always the number specified in
the Articles of Incorporation.
*The corporation can modify the number by
providing a different provision in the
articles of incorporation, however, the law
provides that the modification must be for a
number greater than that provided in the
law. It cannot provide for a number less
than the general requirement of the code.
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
*For voting purposes, majority of the
member present constituting a quorum.
Except: election of directors.
Removal of Board Members
Sec. 28 of the Corporation Code states that:
A di e to o t ustee of a o po atio
may be removed from office by a vote of
the stockholders holding or representing at
least 2/3 of the outstanding capital stock, or
if the corporation be a non-stock
corporation, by a vote of at least 2/3 of the
members entitled to vote: Provided, that
such removal shall take place either at a
regular meeting of the corporation or at a
special meeting called for the purpose, and
in either case, after previous notice to
stockholders or members of the
corporation of the intention to propose
such removal at the meeting. A special
meeting of the stockholders or members of
a corporation for the purpose of removal of
directors or trustees, or any of them, must
be called by the secretary on order of the
president or on the written demand of the
stockholders representing or holding at
least a majority of the outstanding capital
stock, or, if it be a non-stock corporation,
on the written demand of a majority of the
members entitled to vote. Should the
secretary fail or refuse to call the special
meeting upon such demand or fail or refuse
to give the notice, or if there is no
secretary, the call for the meeting may be
addressed directly to the stockholders or
members by any stockholder or member of
the corporation signing the demand. 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 prescribed in this Code.
Removal may be with or without cause:
Provided, that removal without cause may
not be used to deprive minority
stockholders or members of the right of
representation to which they may be
e titled u de “e . of this Code.
Requisites:

1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. There must be previous notice to the
stockholders or member of the intention to
remove;
3. The removal must be by a vote of the
stockholders representing 2/3 outstanding
capital stock or 2/3 of members;
4. The director may be removed with or
without cause unless he was elected by the
minority, in which case, it is required that
there is cause for removal.
Reason: The functions of directors are
fiduciary in nature.
Requisites for the removal of minority
directors are:
1. Justifiable cause;
2. Satisfaction of the voting requirements,
i.e., 2/3 of OCS or members.
*It is the secretary of the corporation upon
order of the president or in case there is no
secretary,
stockholder
representing
majority of the outstanding capital stocks or
member signing the demand who may call a
meeting for the purpose of removal.
Vacancies in the Board
Sec. 29 of the Corporation Code provides
that: A
a a
o u i g i the oa d of
directors or trustees other than by removal
by the stockholders or members or by
expiration of term, may be filled by the vote
of at least a majority of the remaining
directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or
special meeting called for that purpose. A
director or trustee so elected to fill a
vacancy shall be elected only or the
unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by
reason of an increase in the number of
directors or trustees shall be filled only by
an election at a regular or at a special
meeting of stockholders or members duly
called for the purpose, or in the same
meeting authorizing the increase of
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
directors or trustees if so stated in the
oti e of the eeti g.
General Rule: Power to elect directors is
vested in the stockholders
Exception: Vacancy occurring in the board
of directors or trustees other than by
removal by the stockholders or members or
by expiration of term may be filled by the
vote of at least a majority of the remaining
directors or trustees if still constituting a
quorum.
Compensation of Board Members
Sec. 30 of the Corporation Code provides
that: I the a se e of a p o isio i the
by-laws fixing their compensation, the
directors
shall
not
receive
any
compensation, as such directors, except for
reasonable per diems: Provided, however,
that any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
least a majority of the outstanding capital
sto k at a egula o spe ial sto kholde s’
meeting. In no case shall the total yearly
compensation of directors, as such
directors, exceed 10% of the net income
before income tax of the corporation during
the p e edi g ea .
General Rule: Directors are not entitled to
receive compensation
Exceptions:
1. When their compensation is fixed in the
by-laws;
2. If compensation is granted to directors by
the vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regula o spe ial sto kholde s’
meeting.
Limitation: In no case shall the total yearly
compensation of directors exceed 10% of
the net income before income tax of the
corporation during the preceding year.
Reason: In order to avoid temptation on the
part of directors to abuse powers by
appropriating compensation packages since
they are in control of corporate assets.
C. Corporate Officers



Concept of Corporate Officers
*Corporate powers reside on the Board of
Directors; decision/policymaking resides on
them. Implementation of rules/policy lies
on the corporate officers
Categories:
1. Statutory Corporate Officers –
President (must be a stockholder);
Secretary (must be a resident and citizen of
the Philippines); Treasurer (must be a
resident and citizen of the Philippines).
2. As provided by the By-Laws – must
be clearly stated in the By-Laws that such
office is a corporate office.
3. Those designated by the Board of
Directors provided the Board of Directors
is authorized to do so by the By-Laws.
Validity and Binding Effect of Acts of
Corporate Officers
General Rule: No one, even corporate
officers can bind the corporation. It is only
the Board of Directors who has the
authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act is
part of the function of such office;
2. If authorized by the Board of Directors
Doctrine of Apparent Authority
Doctrine of Apparent Authority/Doctrine
of Estoppel –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; and thus, the corporation will, as
against anyone who has in good faith dealt
with it through such agent, be stopped from
de i g the age t’s autho it .
Cases: People’s Aircargo; Inter-Asia; LapuLapu
*Requires good faith on the part of third
person.
D. Liability of Directors, Trustees and Officers
 Instances
when
Corporate
Officers/Directors are held Solidarily Liable
Sec. 31 of the Corporation Code provides
that: Di e to s o t ustees ho ilfull a d
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knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest
in conflict with their duty as such directors
or trustees shall be liable jointly and
severally for all damages resulting
therefrom suffered by the corporation, its
stockholders or members and other
persons. When a director, trustee or officer
attempts to acquire or acquires, in violation
of his duty, any interest adverse to the
corporation in respect of any matter which
has been reposed in him in confidence, as
to which equity imposes a disability upon
him to deal in his own behalf, he shall be
liable as a trustee for the corporation and
must account for the profits which
otherwise would have accrued to the
o po atio .
General Rule: Directors/Trustees/Officers
are not solidarily liable with the
corporation.
Exceptions:
1. Wilfully and knowingly vote for and
assent to patently unlawful acts of
the corporation (Sec. 31).
Case: Carag v NLRC
2. Guilty of gross negligence or bad
faith in directing the affairs of the
corporation (Sec. 31).
Case: David v Construction
Industry
3. Acquire any personal or pecuniary
interest in conflict of their duty
(Sec.31).
4. Consent to the issuance of watered
stocks or having knowledge thereof,
fails to file objections with the
secretary (Sec. 65).
5. Agree or stipulate in a contract to
hold himself personally liable with
the corporation.
6. By virtue of a specific provision of
law such as BP 22; Trust receipts
Law; RA 7832 (Anti-Electricity
Pilferage Act of 1997); Securities
Regulation Code
*In Carag v NLRC, the Supreme Court held
that not any violative of law, the Code means
that violation must have a corresponding
penalty. Patently unlawful act means that a law
declares an act unlawful and that such law
provides penalty for that unlawful act.

Self-Dealing Directors/Officers
Sec. 32 of the Corporation Code states that:
A o t a t of the o po atio
ith o e o
more of its directors or trustees or officers
is voidable, at the option of such
corporation, unless all of the following
conditions are present: 1. That the presence
of such director or trustee in the board
meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting; 2. That the vote
of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable
under the circumstances; and 4. That in
case of an officer, the contract has been
previously authorized by the board of
directors. Where any of the first two
conditions set forth in the preceding
paragraph is absent, in the case of a
contract with a director or trustee, such
contract may be ratified by the vote of the
stockholders representing at least 2/3 of
the outstanding capital stock or of at least
2/3 of the members in a meeting called for
the purpose: Provided, That full disclosure
of the adverse interest of the directors or
trustees involved is made at such meeting:
Provided, however, that the contract is fair
a d easo a le u de the i u sta es.
Example:
In XYZ Corporation, A is a director. The
corporation acts through the Board of
Directors. XYZ Corporation and A entered
into a lease contract. A as the lessor and
XYZ Corporation as lessee. The contract was
approved by the Board of Directors.
Q: What is the status of the contract?
General Rule: The contract is voidable.
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Exception: If the requisites provided in Sec.
32 are present.
Exception to the Exception: If requirement
number 1 or 2 is absent, in the case of a
contract with a director or trustee, such
contract may be considered valid by the
ratification of at least 2/3 of the
outstanding capital stock or 2/3 of the
members.
Requisites:
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 an officer, the contract has
been previously authorized by the board of
directors.
Reason: A’s p ese e i the oa d eeti g
might affect the status of the contract.

Self-Dealing
Directors/Officers
–
directors/officers who transact business
with their own corporation.
- This is not prohibited by law.
Interlocking Directors – those who have
been elected as directors in 2 or more
different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however there are
consequences.
Contracts involving Inter-locking Directors
Sec. 33 of the Corporation Code provides
that: E ept i
ases of f aud, a d
provided the contract is fair and reasonable
under the circumstances, a contract
between two or more corporations having
interlocking directors shall not be
invalidated on that ground alone: Provided,
That if the interest of the interlocking
director in one corporation is substantial
and his interest in the other corporation or
corporations is merely nominal, he shall be

subject to the provisions of the preceding
section insofar as the latter corporation or
corporations are concerned. Stockholdings
exceeding 20% of the outstanding capital
stock shall be considered substantial for
pu poses of i te lo ki g di e to s.
Example:
A is a director of two corporation, ABC
Corporation and XYZ Corporation. XYZ
Corporation and ABC Corporation entered
into a lease contract where ABC
Corporation is the lessor and XYZ
Corporation is the lessee.
Q: Can this contract be invalidated on the
ground that there is an interlocking
director?
A: NO.
Q: What is the status of the contract?
A: General Rule: Contracts between two or
more corporations having interlocking
directors are valid.
Exceptions:
1.
Contracts are void if contracts are
fraudulent or if contracts are unfair
and unreasonable.
2.
If the By-Laws prohibits interlocking
director.
Case: Gokongwei, Jr. v SEC
*The interest is nominal if his interest is
20% or less of the outstanding capital stock.
The interest is substantial if his interest is
more than 20% of the outstanding capital
stock.
*If the interlocking director has a
substantial interest in one corporation and
has a nominal interest in the other
corporation, the director must comply with
the requisites provided in Sec. 32 on selfdealing directors.
Reason: The case is analogous to that of
transactions involving self-dealing directors
because such director holds substantial
interest with the other company.
Doctrine of Corporate Opportunity
Sec. 34 of the Corporation Code states that:
Whe e a di e to ,
i tue of his offi e,
acquires for himself a business opportunity
which should belong to the corporation,
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Maria Zarah Villanueva - Castro
thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock. This provision shall be
applicable notwithstanding the fact that the
director risked his own funds in the
e tu e.
General Rule: A director shall refund to the
corporation all the profits he realizes on a
business opportunity which: 1. the
corporation is financially able to undertake;
2. from its nature, is in line with
corporations business and is of practical
advantage to it; and 3. the corporation has
an interest or a reasonable expectancy.
Exception: His act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock.
*A business opportunity ceases to be
corporate opportunity and transforms to
personal
opportunity
where
the
corporation refuses or is definitely no
longer able to avail itself of the opportunity.
E. Executive Committee
Sec. 35 of the Corporation Code states that:
The -laws of a corporation may create an
executive committee composed of not less than
3 members of the board to be appointed by the
board. Said committee may act, by majority
vote of all its members, on such specific matters
within the competence of the board, as may be
delegated to it in the by-laws or on a majority
vote of the board, except with respect to: (1)
app o al of a a tio fo hi h sha eholde s’
approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new bylaws; (4) the amendment or repeal of any
resolution of the board which by its express
terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the
sha eholde s.
Keyword: BY-LAWS
*It must be stated in the By-Laws.
*Board Resolution is not sufficient if there is no
provision in the By-Laws.
*The decision of the executive committee is
considered a Board Resolution.
*The decision of the executive committee is not
subject to appeal to the board. However, if the
resolution of the Executive Committee is invalid
it may be ratified by the Board.
*The decision of the executive committee
needs no confirmation from the Board.
Case: Filipinas Port, Inc.
*The corporation may create other committees.
Distinction: In executive committee, there is a
statutory restriction on members whereas in
other committee there is no such restriction.
General Rule: The executive committee may act
on specific matters within the competence of
the board as may be delegated to it in the bylaws or on a majority vote of the board.
Exceptions:
1. Approval of any action for which
sha eholde s’ app o al is also e ui ed;
2. The filing of vacancies in the board;
3. The amendment or repeal of by-laws or the
adoption of new by-laws;
4. The amendment or repeal of any resolution
of the board which by its express terms is
not so amendable or repealable;
5. A distribution of cash dividends to the
shareholders.
CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept of Ultra
Vires Act
Sec. 45 of the Corporation Code states that:
No o po atio u de this Code shall possess
or exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary
or incidental to the exercise of powers so
o fe ed.
Ultra Vires Acts – an act committed outside the
object for which a corporation is created as
defined by the law of its organization and
therefore beyond the power conferred upon it
by law.
Effects of Ultra Vires Acts:
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1. Executed Contract – courts will not set
aside or interfere with such contracts.
2. Executory Contract – no enforcement even
at the suit of either party.
3. Partly executed and Partly executory
contract – principle against unjust
enrichment shall apply.
B. Classes of Corporate Powers
1. Express
2. Implied
3. Incidental
 Express – those expressly authorized by the
Corporation Code and other laws, and its
Articles of Incorporation or Charter.
 Implied – those that can be inferred from or
necessary for the exercise of the express
powers.
 Incidental – those that are incidental to the
existence of the corporation.
Doctrine of Necessary Implication – those which can be
reasonably inferred from the express powers given
since they are necessary for the corporation to perform
a particular act are deemed part of such powers.
C. Statutory Powers of a Corporation and the
Limitations on their Exercise
Sec. 36 of the Corporation Code states that:
E e
o po atio i o po ated u de this
Code has the power and capacity: 1. To sue and
be sued in its corporate name; 2. Of succession
by its corporate name for the period of time
stated in the articles of incorporation and the
certificate of incorporation; 3. To adopt and use
a corporate seal; 4. To amend its articles of
incorporation in accordance with the provisions
of this Code; 5. To adopt by-laws, not contrary
to law, morals, or public policy, and to amend
or repeal the same in accordance with this
Code; 6. 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 to admit members to the corporation
if it be a non-stock corporation; 7. 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, as the
transaction of the lawful business of the
corporation may reasonably and necessarily
require, subject to the limitations prescribed by
law and the Constitution; 8. To enter into
merger
or
consolidation
with
other
corporations as provided in this Code; 9. To
make reasonable donations, including those for
the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or
foreign, shall give donations in aid of any
political party or candidate or for purposes of
partisan political activity; 10. To establish
pension, retirement, and other plans for the
benefit of its directors, trustees, officers and
employees; and 11. To exercise such other
powers as may be essential or necessary to
carry out its purpose or purposes as stated in
the a ti les of i o po atio .
 Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code states that:
U less othe ise p es i ed
this Code
or by special law, and for legitimate
purposes, any provision or matter stated in
the articles of incorporation may be
amended by a majority vote of the board of
directors or trustees and the vote or written
assent of the stockholders representing at
least 2/3 of the outstanding capital stock,
without prejudice to the appraisal right of
dissenting stockholders in accordance with
the provisions of this Code, or the vote or
written assent of at least 2/3 of the
members if it be a non-sto k o po atio .
*The following are excluded in counting the
outstanding capital stock: 1. Treasury stock;
2. Unissued shares.
*Aside from the votes of majority of the
board and assent of the 2/3 of the OCS, the
approval of the SEC is necessary for the
amendment of the AOI.
*There is an implied approval of the SEC,
i.e., failure to act on the application filed by
the corporation within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain the
written assent of the stockholders.
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*In Tan v Sycip, the Supreme Court held
that in case of a non-stock corporation,
membership is personal and nontransferrable unless the by-laws provides
otherwise. The deceased member is not
entitled to vote.
Four changes in Articles of Incorporation that require
the approval of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.
*Approval of Stockholders is necessary in these changes
e ause the a e e essa
fo the o po atio ’s
existence.


Extension/Shortening of Corporate Term
Sec. 37 of the Corporation Code states that:
A p i ate o po atio
a e te d o
shorten its term as stated in the articles of
incorporation when approved by a majority
vote of the board of directors or trustees
and ratified at a meeting by the
stockholders representing at least 2/3 of
the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation. Written notice of the proposed
action and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That in case of
extension of corporate term, any dissenting
stockholder may exercise his appraisal right
u de the o ditio s p o ided i this ode.
Increase or Decrease of Capital Stock/
Incurrence, Creation or Increase of Bonded
Indebtedness
Sec. 38 of the Corporation Code states that:
No o po atio shall i ease o de ease
its capital stock or incur, create or increase
any bonded indebtedness unless approved
by a majority vote of the board of directors
a d, at a sto kholde s’ eeti g duly called
for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or

diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness. Written notice of the
proposed increase or diminution of the
capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and
of the ti e a d pla e of the sto kholde s’
meeting at which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered , must be
addressed to each stockholder at his place
of residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
se ed pe so all .
.
Q: When the corporation increases its
capital stock, is the 25% requirement
necessary? How can it be computed?
A: YES. The SEC ruled that the 25% applies
to the increase amount.
*The corporation is required to maintain a
sinking fund.
Q: What does bonded indebtedness mean?
A: Requires longer time of payment; special
burden on the corporation; involves the
important assets of the corporation.
Denial of Pre-emptive Right
Sec. 39 of the Corporation Code states that:
All sto kholde s of a sto k o po atio
shall enjoy pre-emptive right to subscribe to
all issues or disposition of shares of any
class, in proportion to their respective
shareholdings, unless such right is denied
by the articles of incorporation or an
amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock, in exchange for
property needed for corporate purposes or
in payment of a previously contracted
de t.
*Coming from the increased authorized
capital stock.
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* Similar to Right of First Refusal
*It is not a matter of right. It can be denied
by the corporation through denial of such
right in the articles of incorporation.
Purposes:
1. In order that the stockholder may be able
to maintain their relative proportional
voting trend and control in the corporation;
2. To avoid dilution of their proportionate
voting and control in the corporation.
General Rule: Pre-emptive right is available
to stockholders.
Exception: if it is denied in the Articles of
Incorporation or through amendment.
Exception to the Exception: Pre-emptive
right shall not extend to:
1. Shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public;
2. Shares to be issued in good faith with the
approval of the stockholders representing
2/3 of the outstanding capital stock, in
exchange for property needed for corporate
purposes; and
3. In payment of a previously contracted
debt.
*Pre-emptive right is satisfied as long as the
corporation gives the stockholder the
opportunity to buy the shares.
*The offer must first be made to the
stockholders.
Sale or Disposition of Assets
Sec. 40 of the Corporation Code states that:
“u je t to the p o isio s of e isti g la s
on illegal combinations and monopolies, a
corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon such terms and conditions and for
such consideration, which may be money,
stocks, bonds or other instruments for the
payment of money or other property or
consideration, as its board of directors or
trustees may deem expedient, when
authorized by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock, or in case of non-stock
corporation by the vote of at least 2/3 of
the
e e s, i
a sto kholde s’ o
e e s’
eeti g dul
alled fo the
purpose. Written notice of the proposed
action and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this Code. A sale or other
disposition shall be deemed to cover
substantially all the corporate property and
assets if thereby the corporation would be
rendered incapable of continuing the
business or accomplishing the purpose for
hi h it as i o po ated.
.
Q: What makes the disposition peculiar?
A: The disposition is of all or substantially all
of the o po atio ’s p ope ties a d assets.
Q: What kind of disposition involve?
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
Requirements:
1. Majority vote of the Board.
2. Vote of the Stockholders representing
2/3 of the OCS.
3. The sale does not bring about the illegal
combinations and monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test – no statutory test;
pertains to the disposition of all assets
2. Qualitative Test – there is a statutory
test; pertains to the disposition of
substantially all of its assets.
*The provision is so strict because the law
wants the corporation will reach its
expiration term.
Q: With the sale of all the assets of the
corporation, will the same result to its
dissolution?
A: NO. Possession or continued possession
of corporate properties is not a condition
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
for the existence of a corporation.
Corporation still exists despite the
disposition of all its properties and assets.
Q: Will the buying corporation be made
answerable for the liabilities of the selling
corporation?
A: NO. The two corporations are two
separate personalities thus they are
separate and distinct from each other
hence the buying corporation cannot be
held liable to the obligations of the selling
corporation.
General Rule: The sale of all or substantially
all of the assets of the corporation does not
make the buyer answerable for the
obligations of the seller.
Exceptions:
1. If the buyer expressly agrees to assume
the obligations of the seller.
2. If sale amounts to merger or
consolidation.
3. If and when application of piercing the
veil of corporate entity doctrine is
warranted.
4. If
the
purchaser
becomes
a
continuation of the seller.
5. Sale was done in violation of the Bulk
Sales Law.
Case: PNB v Andrada
Acquisition of Corporate Shares
Sec. 41 of the Corporation Code states that:
A sto k o po atio shall ha e the po e
to purchase or acquire its own shares for a
legitimate corporate purpose or purposes,
including but not limited to the following
cases: Provided, That the corporation has
unrestricted retained earnings in its books
to cover the shares to be purchased or
acquired: 1. To eliminate fractional shares
arising out of stock dividends; 2. To collect
or compromise an indebtedness to the
corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and 3. To pay dissenting or
withdrawing stockholders entitled to
payment for their shares under the
provisions of this Code.
Requisites:
1. Unrestricted Retained Earnings
2. The acquisition must be for legitimate
purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any other
purpose.
Q: What happens to reacquired shares?
A: General Rule: They are automatically
deemed retired.
Exception: The AOI provides otherwise.
Trust Fund Doctrine – The capital stock, property and
other assets of the corporation are regarded as equity
in trust for the payment of the corporate creditors. The
subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which
the creditors have the right to look up to satisfy their
credits. Corporation may not dissipate this and the
creditors may sue stockholders directly for the unpaid
subscription.

Investment of Corporate Funds
Sec. 42 of the Corporation Code states that:
“u je t to the p o isio s of this Code, a
private corporation may invest its funds in
any other corporation or business or for any
purpose other than the primary purpose for
which it was organized when approved by a
majority of the board of directors or
trustees and ratified by the stockholders
representing at least 2/3 of the outstanding
capital stock, or by at least 2/3 of the
members in the case of non-stock
o po atio s, at a sto kholde s’ o
e e s’
eeti g dul
alled fo the
purpose. Written notice of the proposed
investment and the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That where the investment by the
corporation is reasonably necessary to
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
accomplish its primary purpose as stated in
the articles of incorporation, the approval
of the stockholders or members shall not be
e essa .
Requisites:
1. Majority vote of the Board
2. Vote of the stockholders representing
2/3 OCS.
Declaration of Dividends
Sec. 43 of the Corporation Code states that:
The oa d of di e to s of a sto k
corporation may declare dividends out of
the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than 2/3
of the outstanding capital stock at a regular
or special meeting duly called for the
purpose. Stock corporations are prohibited
from retaining surplus profits in excess of
100% of their paid-in capital stock, except:
1. When justified by definite corporate
expansion projects or programs approved
by the board of directors; or 2. When the
corporation is prohibited under any loan
agreement with any financial institution or
creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured;
or 3. When it can be clearly shown that
such retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special
ese e fo p o a le o ti ge ies.
*This section is exclusive to stock
corporations.
Dividends – represents part of the earnings
of the corporation which the board has
decided to distribute among the
stockholders.
*The fact that the corporation has surplus
earning does not mean that it is mandated
to declare dividends; it is still upon the
sound discretion of the board of directors.
Reason: Trust Fund Doctrine
*There must be a unrestricted retained
earnings before dividends may be declared.
*The board may opt to restrict its earnings,
as the earnings may be allocated to
legitimate business purpose.
CASH DIVIDENDS
does not require
sto kholde s’
approval
The stockholders
receive cash
Creditor-debtor
relationship
STOCK DIVIDENDS
Requires
sto kholde s’
approval
The stockholders
receive stocks
No creditor-debtor
relationship
Requisites for declaration of cash/property
dividends:
1. Board approval
2. Unrestricted Retained Earnings
Requisites for declaration of stock
dividends:
1. Unrestricted Retained Earnings;
2. Board approval;
3. Ratification by the stockholders.
Q: Wh
sto kholde s’
atifi ation is
necessary in the declaration of stock
dividends?
A: Because the earnings are capitalized. It is
considered to be a corporate assets.
Q: May the board be compelled to declare
dividends?
A: General Rule: NO.
Exception:
Stock
corporations
are
prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock.
Exceptions to the Exception:
1. Corporate expansion
2. Pursuant to loan agreement
3. Special
circumstances/contingent
liabilities
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
Q: Are the stock dividends considered as
watered stocks because the stockholder
concerned does not pay anything therefor?
A: NO. The unrestricted retained earnings
are considered to be a consideration thus
dividends received through stocks are not
watered stocks.
*The source of payment is the unrestricted
retained earnings.
Q: Are delinquent stockholders entitled to
receive dividends?
A: YES. But only in terms of cash dividends.
Q: Who are entitled to receive dividends?
A: Stockholders
*In Nielson case, the SC held that dividends
cannot be given to non-stockholders.
*If there is date of record – Dividends may
be received by those persons who are
holders of stocks as of date of record.
*If there is no date of record – dividends
may be received by those persons who are
holders of stocks as of the declaration.
Q: When the corporation declares stock
dividends, would it likewise create a
creditor-debtor relationship between the
corporation and the stockholder?
A: NO. Stock dividends will not bring about
a creditor-debtor relationship. When it
comes to shareholdings, the one holding
the shares are considered investors; risktakers.
Q: Will legal compensation possible to
occur?
A: NO. The parties are not mutually
creditor-debtor of each other. The
requisites under the Civil Code on legal
compensation are not present.
Management Contract
Sec. 44 of the Corporation Code states that:
No corporation shall conclude a
management contract with another
corporation unless such contract shall have
been approved by the board of directors
and by stockholders owning at least the
majority of the outstanding capital stock, or
by at least a majority of the members in the
case of a non-stock corporation, of both the
managing and the managed corporation, at
a meeting duly called for the purpose:
Provided, That 1. Where a stockholder or
stockholders representing the same interest
of both the managing and the managed
corporations own or control more than 1/3
of the total outstanding capital stock
entitled to vote of the managing
corporation; or 2. Where a majority of the
members of the board of directors of the
managing corporation also constitute a
majority of the members of the board of
directors of the managed corporation, then
the management contract must be
approved by the stockholders of the
managed corporation owning at least 2/3 of
the total outstanding capital stock entitled
to vote, or by at least 2/3 of the members in
the case of a non-stock corporation. No
management contract shall be entered into
for a period longer than 5 years for any one
term. The provisions of the next preceding
paragraph shall apply to 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: Provided, however, That such
service contracts or operating agreements
which
relate
to
the
exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or egulatio s.
Requisite:
General Rule: Majority vote of the OCS
Exception: 2/3 of the OCS
*“EC’s app o al is ot e essa
*When the corporation enters into a
management contract, appraisal right is
NOT AVAILABLE to any dissenting
stockholder.
Reason: Sound business policy dictates that
it would be better for the corporation, at
the inception of its operation, to be
managed by a company who has been
experienced in a particular kind of business
if the managed corporation needs the
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technical expertise, skills, experiences,
background of another entity.
CORPORATE BY-LAWS:
A. Concept, Use and Nature of By-Laws
By-Laws – relatively permanent and continuing
rules of action adopted by the corporation for
its own government and that of the individuals
composing it and those having the direction,
management and control of its affairs, in whole
or in part, in the management and control of its
affairs and activities.
Nature: Regulates internal affairs of the
corporation.
B. By-Laws in relation to Articles of Incorporation
Distinction between By-Laws and Articles of
Incorporation:
By-Laws –is a condition subsequent.
Articles of Incorporation – is a condition
precedent. Essential for corporate existence.
ARTICLES OF
INCORPORATION
BY-LAWS
External affairs
Affects the status of
existence
of
the
corporation
Internal Affairs
Does not affect the
status of the existence
but has impact on the
existence; failure to
submit is a ground for
disenfranchisement
Joint decision of the General Rule: joint
board
and decision
stockholders
Exception: Delegates
the power to amend
the By-Laws to the
Board
C. Adoption of By-Laws; Effect of Non-Filing within
the prescribed period
Sec. 46 of the Corporation Code states that:
E e
o po atio fo ed u de this Code
must, within 1 month after receipt of official
notice of the issuance of its certificate of
incorporation by the SEC, adopt a code of ByLaws for its government not inconsistent with
this Code. For the adoption of By-Laws by the
corporation the affirmative vote of the
stockholders representing at least a majority of
the outstanding capital stock, or of at least a
majority of the members in case of non-stock
corporations, shall be necessary. The By-Laws
shall be signed by the stockholders or members
voting for them and shall be kept in the
principal office of the corporation, subject to
the inspection of the stockholders or members
during office hours. A copy thereof, duly
certified to by a majority of the directors or
trustees countersigned by the secretary of the
corporation, shall be filed with the SEC which
shall be attached to the original articles of
incorporation. Notwithstanding the provisions
of the preceding paragraph, By-Laws may be
adopted and filed prior to incorporation; in such
case, such By-Laws shall be approved and
signed by all the incorporators and submitted to
the SEC, together with the articles of
incorporation. In all cases, By-Laws shall be
effective only upon the issuance by the SEC of a
certification that the By-Laws are not
inconsistent with this Code. The SEC shall not
accept for filing the By-Laws or any amendment
thereto of any bank, banking institution,
building and loan association, trust company,
insurance companies, public utility, educational
institution or other special corporations
governed by special laws, unless accompanied
by a certificate of the appropriate government
agency to the effect that such By-Laws or
a e d e ts a e i a o da e ith la .
*Submission of By-Law is not a requirement for
acquisition of corporate existence, however, for
the corporation to be able to continue its
corporate existence, the corporation is required
to submit the corporate By-Law.
*Non-submission of the By-Laws within the
prescribed period allowed by law is a ground for
the dissolution of the corporation.
*In
Loyola
Grandvillas
Homeowners
Association v CA, the SC held that failure to
adopt a set of By-Laws within the prescribed
period, notwithstanding the word used in the
Code, the same would not result to automatic
dissolution of the corporation. The failure to file
by-laws would not, by itself, amount to
dissolution or extinguishment of the corporate
existence.
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*Section 46 of the Corporation Code must be
read in conjunction with PD 902-A which
outlines the procedure to be followed before
the franchise/license of a private corporation
may be suspended or revoked.
*Observance of Due Process is necessary.
*In Sawadjaan v CA, the SC held that
meanwhile when the By-Laws is not yet
submitted, the corporation, at that time, and
the very least, may be considered as a De Facto
Corporation and therefore, its right to exist as
such cannot be inquired into or cannot be
collaterally attacked in a private suit. It is for the
State to initiate a proceeding questioning the
existence, on the ground of its non-submission
of By-Laws, within the prescribed period.
D. Contents of By-Laws; Requisites of a Valid ByLaw Provision
Sec. 47 of the Corporation Code states that:
“u je t to the p o isio s of the Co stitution,
this Code, other special laws, and the articles of
incorporation, a private corporation may
provide in its By-Laws for: 1. The time, place
and manner of calling and conducting regular or
special meetings of the directors or trustees; 2.
The time and manner of calling and conducting
regular or special meetings of the stockholders
or members; 3. The required quorum in
meetings of stockholders or members and the
manner of voting therein; 4. The form for
proxies of stockholders and members and the
manner of voting them; 5. The qualifications,
duties and compensation of directors or
trustees, officers and employees; 6. The time
for holding the annual election of directors or
trustees and the mode or manner of giving
notice thereof; 7. The manner of election or
appointment and the term of office of all
officers other than directors or trustees; 8. The
penalties for violation of the By-Laws; 9. In the
case of stock corporations, the manner of
issuing stock certificates; and 10. Such other
matters as may be necessary for the proper or
convenient transaction of its corporate business
a d affai s.
Requisites:
1. It must be consistent with Corporation
Code, other pertinent laws and regulations.
2. It must be consistent with the Articles of
Incorporation.
3. It must be reasonable and not arbitrary or
oppressive.
4. It must not disturb vested rights, impair
contract or property rights of stockholders
or members or create obligations unknown
to law.
E. Amendment to By-Laws
Sec. 48 of the Corporation Code provides that:
The oard of directors or trustees, by a
majority vote thereof, and the owners of at
least a majority of the outstanding capital stock,
or at least a majority of the members of a nonstock corporation, at a regular or special
meeting duly called for the purpose, may
amend or repeal any By-Laws or adopt new ByLaws. The owners of 2/3 of the outstanding
capital stock or 2/3 of the members in a nonstock corporation may delegate to the board of
directors or trustees the power to amend or
repeal any By-Laws or adopt new By-Laws:
Provided, That any power delegated to the
board of directors or trustees to amend or
repeal any By-Laws or adopt new By-Laws shall
be considered as revoked whenever
stockholders owning or representing a majority
of the outstanding capital stock or a majority of
the members in non-stock corporations, shall so
vote at a regular or special meeting. Whenever
any amendment or new By-Laws are adopted,
such amendment or new By-Laws shall be
attached to the original By-Laws in the office of
the corporation, and a copy thereof, duly
certified under oath by the corporate secretary
and a majority of the directors or trustees, shall
be filed with the SEC the same to be attached to
the original articles of incorporation and
original By-Laws. The amended or new By-Laws
shall only be effective upon the issuance by the
SEC of a certification that the same are not
i o siste t ith this Code.
F. By-Laws in relation to Third Parties
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*In China Banking Corporation v CA, the SC
held that in the absence of evidence that China
Bank is aware of the provisions of the By-Laws,
China Bank is not bound to observe the
provisions of the By-Laws. Hence, China Bank
must be allowed to register the shares in its
name.
General Rule: Third parties are not affected by
the By-Laws.
Exception: If the third party has actual
knowledge of the provisions of the By-Laws.
CORPORATE MEETINGS:
A. Kinds of Corporate Meetings
Sec. 49 of the Corporation Code provides that:
Meeti gs of di e to s, t ustees, sto kholde s,
or members may be regular or spe ial.
Kinds:
a. Stockholders/Members:
1. Regular meeting
2. Special meeting
b. Directors/Trustees:
1. Regular meeting
2. Special meeting
Sec. 50 of the Corporation Code provides that:
Regular meetings of stockholders or members
shall be held annually on a date fixed in the bylaws, or if not so fixed, on any date in April of
every year as determined by the board of
directors or trustees: Provided, That written
notice of regular meetings shall be sent to all
stockholders or members of record at least 2
weeks prior to the meeting, unless a different
period is required by the by-laws. Special
meetings of stockholders or members shall be
held at any time deemed necessary or as
provided in the by-laws: Provided, however,
That at least 1 week written notice shall be sent
to all stockholders or members, unless
otherwise provided in the by-laws. Notice of
any meeting may be waived, expressly or
impliedly, by any stockholder or member.
Whenever, for any cause, there is no person
authorized to call a meeting, the SEC, upon
petition of a stockholder or member on a
showing of good cause therefor, may issue an
order to the petitioning stockholder or member
directing him to call a meeting of the
corporation by giving proper notice required by
this Code or by the by-laws. The petitioning
stockholder or member shall preside thereat
until at least a majority of the stockholders or
members present have been chosen one of
thei u e as p esidi g offi e .
*Regular meeting of stockholders/members
shall be held annually on a date fixed in the bylaws or if not so fixed, on any date in April of
every year. Written notice of regular meetings
shall be sent 2 weeks prior to the meeting
unless a different period is required by the bylaws.
** Special meeting of stockholders/members
shall be held at any time deemed necessary or
as provided in the by-laws. Written notice shall
be sent to all stockholders or members at least
one week or unless otherwise provided in the
by-laws.
Sec. 53 of the Corporation Code provides that:
Regula eeti gs of the oa d of directors or
trustees of every corporation shall be held
monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or
trustees may be held at any time upon the call
of the president or as provided in the by-laws.
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-laws
provide otherwise. Notice of regular or special
meetings stating the date, time and place of the
meeting must be sent to every director or
trustee at least 1 day prior to the scheduled
meeting, unless otherwise provided by the bylaws. A director or trustee may waive this
e ui e e t, eithe e p essl o i pliedl .
*Regular meetings of directors/trustees shall be
held monthly unless the by-laws provide
otherwise.
*Special meetings of directors/trustees may be
held at any time upon the call of the president
or as provided in the by-laws.
*Meetings of directors or trustees 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 1
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day prior to the scheduled meeting unless
otherwise provided by the by-laws.
B. Requirements of a Meeting
1. It must be held at the proper place.
2. It must be held at the stated date and at the
appointed time or at a reasonable time
thereafter.
3. It must be called by the proper person.
4. There must be a previous notice.
5. There must be a quorum.
Sec. 51 of the Corporation Code provides that:
“to kholde s’ o e e s’ eeti gs, hethe
regular or special, shall be held in the city or
municipality where the principal office of the
corporation is located, and if practicable in the
principal office of the corporation: Provided,
That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the
time and place thereof stated therein. All
proceedings had and any business transacted at
any meeting of the stockholders or members, if
within the powers or authority of the
corporation, shall be valid even if the meeting
be improperly held or called, provided all the
stockholders or members of the corporation are
present or duly represented at the meeti g.
*Applies to both stock and non-stock
corporations.
General Rule: The meeting must be held in the
city or municipality where the principal office is
located.
Exception: Sec. 93 on non-stock corporations,
the By-Laws may provide different venue for
their meeting.
*A casual reading of section 51 would say that a
corporation cannot provide any other place for
the meeting of stockholders. But in case of a
non-stock corporation, Section 93 of the
Corporation provides that the by-laws could
provide any place for the meeting of its
members provided that it is within the
Philippines and proper notice has been given.
Q: Is there a conflict between Section 51 and
Section 93?
A: YES. There is conflict but this conflict may be
reconciled. As a rule, the by-laws may provide a
different place of meeting provided that it is
within the Philippines and notice has been
given. As an exception, if the by-laws is silent of
the place of the meeting, section 51 applies.
Sec. 52 of the Corporation Code provides that:
Unless otherwise provided for in this Code or
in the by-laws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock
o po atio s.
General Rule: Majority of the OCS or Majority
of the members
Exception: Unless otherwise provided by the
Code or by the By-Laws.
*In Tan v Sycip, deceased member is not
entitled to vote
Sec. 54 of the Corporation Code provides that:
The p eside t shall p eside at all eeti gs of
the directors or trustees as well as of the
stockholders or members, unless the by-laws
p o ide othe ise.
C. Right to Vote of Stockholders
 Instances when voting right not available
Sec. 6 of the Corporation Code provides
that:
E ept as p o ided i
the
immediately preceding paragraph, the vote
necessary to approve a particular corporate
act as provided in this Code shall be
deemed to refer only to stocks with voting
ights.
Instances when voting right is not
available:
1. Delinquent shares
2. Treasury shares
3. Fractional shares
4. Escrow shares
 Rules on:
1. Delinquent Shares
Sec. 71 of the Corporation Code
p o ides that: No deli ue t sto k
shall be voted for or be entitled to vote
or
to
representation
at
any
sto kholde s’ eeti g, o shall the
holder thereof be entitled to any of the
rights of a stockholder except the right
to dividends in accordance with the
provisions of this Code, until and unless
he pays the amount due on his
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subscription with accrued interest, and
the
costs
and
expenses
of
ad e tise e t, if a .
*Delinquency arises upon default in
payment of subscription.
Q: Are they included for quorum and
voting purposes?
A: NO.
Q: Even if there are proxies?
A: YES.
Q: Shares not yet fully paid but not yet
delinquent, are they entitled to vote?
A: YES.
*Delinquent stock is not entitled to vote
and his presence would not be taken
for purposes of quorum.
*The only right remain is the right to
receive dividends subject to the
provision of Section 43.
2. Escrow Shares
*Escrow shares are not entitled to vote
before the fulfillment of the condition
imposed thereon.
3. Unpaid Shares
Sec. 72 of the Corporation Code
p o ides that: Holde s of su s i ed
shares not fully paid which are not
delinquent shall have all the rights of a
sto kholde .
General Rule: The holder of unpaid
shares can exercise the right to vote.
Exception: If it is provided in the
subscription contract that such right
cannot be exercised until the
subscription is fully paid.
4. Sequestered Shares
Q: What is the reason for sequestration
process?
A: For investigative purposes; To avoid
wastage dissipation of assets.
Q: Is PCGG authorized to vote for the
sequestered shares?
A: General Rule: No. PCGG cannot vote
for the sequestered shares because
being a conservator/administrator, it
should
only
perform
acts
of
administration and not acts of
ownership.
Exception: If there is a strong evidence
that indeed the shares have been
purchased through public funds.
Requisites:
1. Strong evidence or prima facie
evidence that the shares are illgotten.
2. There is an imminent danger that
the shares will be dissipated.
Case: Transmiddle East v CA
Q:
During
the
pendency
of
sequestration
process,
are
the
sequestered shares included for
quorum purposes?
A: General Rule: YES.
Q: Who can vote them?
A: General Rule: Stockholder of record.
*In Republic of the Philippines v
COCOFED, the SC held that there is a
prima facie evidence that the shares are
purchased with the use of public funds.
5. Pledgor, Mortgagor or Administrator of
Shares
Sec. 55 of the Corporation Code
provides that: I ase of pledged o
mortgaged shares in stock corporations,
the pledgor or mortgagor shall have the
right to attend and vote at meetings of
stockholders, unless the pledgee or
mortgagee is expressly given by the
pledgor or mortgagor such right in
writing which is recorded on the
appropriate
corporate
books.
Executors, administrators, receivers,
and other legal representatives duly
appointed by the court may attend and
vote in behalf of the stockholders or
members without need of any written
po .
Q: Can the pledgee/mortgagee exercise
the right to vote?
A: General Rule: No. The right to vote
remains to the owner thus, it is the
pledgor/mortgagor that can exercise it.
Exception: If there is an agreement that
the pledgee/mortgagee can exercise
the right to vote.
Case: Calapatia
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*Administrator/executor/heirs
have
the right to vote even without prior
proxy. But the SEC requires them to
submit letters of appointment or
documents showing that he has been
duly
instituted
as
executor/administrator
of
the
deceased.
6. Shares Jointly Owned
Sec. 56 of the Corporation Code
p o ides that: I
ase of sha es of
stock owned jointly by two or more
persons, in order to vote the same, the
consent of all the co-owners shall be
necessary, unless there is a written
proxy, signed by all the co-owners,
authorizing one or some of them or any
other person to vote such share or
shares: Provided, That when the shares
a e o ed i a a d/o
apa it
the holders thereof, any one of the joint
owners can vote said shares or appoint
a p o the efo .
D. Concept of Proxy and Voting Trust Agreement
Proxy is a written authorization given by one
person to another so that the second person
can act for the first.
*Proxy is a representative.
*Relationship: Principal-Agent.
*Proxy is authorized to vote and also authorized
to be present in a meeting.
Functions: For quorum purposes; for voting
purposes.
*In Board meeting, proxy is not allowed (Sec. 25
of the Corporation Code).
Sec. 58 of the Corporation Code provides that:
“to kholde s a d e e s a ote i pe so
or by proxy in all meetings of stockholders or
members. Proxies shall be in writing, signed by
the stockholder or member and filed before the
scheduled meeting with the corporate
secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid and
effective for a period longer than 5 years at any
o e ti e.
Requisites:
1. Must be in writing
2. Filed before the scheduled meeting; under
the SEC rule, 10 days before the scheduled
meeting
*Proxy ensures presence of a quorum and also
approval of corporate acts.
General Rule: Proxy is revocable.
Exception: If proxy is coupled with interest.
Ways to revoke proxy:
1. By execution of subsequent proxy.
2. If the stockholder concerned would appear
in the scheduled meeting.
Voting Trust Agreement is an agreement
whereby one or more stockholders transfer
their shares of stocks to a trustee, who thereby
acquires for a period of time the voting rights
(and/or any other rights) over such shares; and
in return, trust certificates are given to the
stockholders, which are transferable like stock
certificates, subject however, to the trust
agreement.
PROXY
VOTING TRUST
AGREEMENT
The
stockholder The
stockholder
remains
the ceases to be a
stockholder of record stockholder of record
Revocable
Irrevocable
General Rule: 5 years
Exception: If coupled
with interest
*The transfer includes the transfer of legal title.
Sec. 59 of the Corporation Code provides that:
O e o
o e sto kholde s of a sto k
corporation may create a voting trust for the
purpose of conferring upon a trustee or
trustees the right to vote and other rights
pertaining to the shares for a period not
exceeding 5 years at any time: Provided, That
in the case of a voting trust specifically required
as a condition in a loan agreement, said voting
trust may be for a period exceeding 5 years but
shall automatically expire upon full payment of
the loan. A voting trust agreement must be in
writing and notarized, and shall specify the
terms and conditions thereof. A certified copy
of such agreement shall be filed with the
corporation and with the SEC; otherwise, said
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agreement is ineffective and unenforceable.
The certificate or certificates of stock covered
by the voting trust agreement shall be cancelled
and new ones shall be issued in the name of the
trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer
in the name of the trustee or trustees is made
pursuant to said voting trust agreement. The
trustee or trustees shall execute and deliver to
the transferors voting trust certificates, which
shall be transferable in the same manner and
with the same effect as certificates of stock. The
voting trust agreement filed with the
corporation shall be subject to examination by
any stockholder of the corporation in the same
manner as any other corporate book or record:
Provided, That both the transferor and the
trustee or trustees may exercise the right of
inspection of all corporate books and records in
accordance with the provisions of this Code.
Any other stockholder may transfer his shares
to the same trustee or trustees upon the terms
and conditions stated in the voting trust
agreement, and thereupon shall be bound by all
the provisions of said agreement. No voting
trust agreement shall be entered into for the
purpose of circumventing the law against
monopolies and illegal combinations in restraint
of trade or used for purposes of fraud. Unless
expressly renewed, all rights granted in a voting
trust agreement shall automatically expire at
the end of the agreed period, and the voting
trust certificates as well as the certificates of
stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the
name of the transferors. The voting trustee or
trustees may vote by proxy unless the
ag ee e t p o ides othe ise.
Consequence: The stockholder entering into a
voting trust agreement ceases to be a
stockholder of record.
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title to the
shares so that if the stockholder is, at the same
time, a director of the corporation,
automatically he is disqualified to continue
performing the duties of a director because the
law requires each and every director to have
legal, not beneficial title to at least one share.
E. Derivative Suit; Concept and Requisites
Derivative Suit is a suit brought by any
stockholder, usually a minority shareholder, to
redress a wrong committed against the
corporation whenever the responsible officers
refuse to take any action thereon or are the
very person to be sued.
*This prerogative is developed through
jurisprudence.
*This is expressly mandated by Sec. 31 of the
Corporation Code.
Q: Why derivative?
A: From the word derive. The one bringing the
suit derives the cause of action from the
corporation.
Q: Who brings the suit?
A: Any stockholder/member usually minority
stockholder.
Q: Whose cause of action?
A: It is the o po atio ’s ause of a tio .
Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
board thus when the board refuses to take
action in order to protect the corporation
derivative suit may be allowed.
Compelling Reason: Inaction of the officers.
Failure to discharge their responsibilities.
Requisites:
1. The stockholder bringing the suit must be
one of record as of the time the cause of
action accrues as well as of the time the
action is brought unless the cause of action
is a continuing offer.
*The stockholder must implead the real
party in interest, i.e. the corporation.
*In Chua v CA, the SC held that the
corporation must be impleaded since it is
the real party in interest.
2. The action must be named under the
o po atio ’s a e
3. General Rule: The stockholder bringing the
suit must have exhausted intra-corporate
remedies within the corporation.
Exception: If the very person to be sued is
the responsible officers themselves.
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**This is a condition precedent.
4. The suit is not intended to harass the
defendant, not a nuisance or harassment
suit.
5. Appraisal right must not be an available
remedy.
Individual suit is a suit filed by the stockholder
because his personal right has been violated.
The cause of action is personal to the
stockholder. The party injured is the
stockholder himself.
Representative suit is a suit filed by a group of
stockholders that suffered common injury.
SUBSCRIPTION CONTRACT:
A. Ways to become a Stockholder of a Corporation
1. Subscription contract with the corporation.
2. Purchase or acquisition of shares from
existing stockholders.
3. Purchase of treasury shares from the
corporation.
*All of them involve shareholdings.
*Subscription is unique because it involves
unissued shares.
B. Concept of Subscription Contract
Subscription Contract is, under Sec. 60 of the
Corporation Code, a
o t a t fo the
acquisition of unissued stock in an existing
corporation or a corporation still to be formed
shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or
so e othe o t a t.
*This is strictly regulated by the Corporation
Code.
C. Kinds of Subscription
1. Pre-incorporation subscription – one
entered into before incorporation.
Sec. 61 of the Corporation Code provides
that: A su s iptio fo sha es of sto k of a
corporation still to be formed shall be
irrevocable for a period of at least 6 months
from the date of subscription, unless all of
the other subscribers consent to the
revocation, or unless the incorporation of
said corporation fails to materialize within
said period or within a longer period as may
be stipulated in the contract of
subscription: Provided, That no preincorporation subscription may be revoked
after the submission of the articles of
inco po atio to the “EC.
*Contracts between the subscribers.
2 Fold Characteristics:
a. It is a contract between subscribers.
b. May be regarded as continuing offer on
the part of the subscriber concerned
which the corporation may accept upon
acquisition of juridical personality.
Reason: The corporation is not yet in
existence.
2. Post incorporation subscription – one
entered into after the incorporation for the
acquisition of unissued stock.
*Contracts between the subscribers and the
corporation.
*Creates a creditor-debtor relationship.
D. Consideration for the Issuance of Shares
Sec. 62 of the Corporation Code provides that:
“to ks shall ot e issued fo a o side atio
less than the par or issued price thereof.
Consideration for the issuance of stock may be
any or a combination of any two or more of the
following: 1. Actual cash paid to the
corporation; 2. Property, tangible or intangible,
actually received by the corporation and
necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or
issued value of the stock issued; 3. Labor
performed for or services actually rendered to
the corporation; 4. Previously incurred
indebtedness of the corporation; 5. Amounts
transferred from unrestricted retained earnings
to stated capital; and 6. Outstanding shares
exchanged for stocks in the event of
reclassification of conversion. Where the
consideration is other than actual cash, or
consists of intangible property such as patents
of copyrights, the valuation thereof shall
initially be determined by the incorporators or
the board of directors, subject to the approval
by the SEC. Shares of stock shall not be issued in
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exchange for promissory notes or future
service. The same considerations provided for
in this section, insofar as they may be
applicable, may be used for the issuance of
bonds by the corporation. The issued price of
no-par value shares may be fixed in the articles
of incorporation or by the board of directors
pursuant to authority conferred upon it by the
articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders
representing at least a majority of the
outstanding capital stock at a meeting duly
alled fo the pu pose.
Valid considerations for the subscription
agreements:
1. Cash
2. Property
3. Labor or services actually rendered to the
corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares in exchange for stocks
in the event of reclassification or
conversion.
E. Payment of Subscription
Q：When payment of the subscription is made?
A: Look into the subscription agreement. If
subscription agreement is silent as to when the
amount of subscription to be paid, the board of
directors may call on all the unpaid subscribers
to pay the remaining balance of their
subscription.
 Remedies to enforce payment of
subscription
1. By Extra-judicial sale at public auction.
2. By judicial action.
3. Collection from cash dividends and
withholding of stock dividends.
 When shares are considered delinquent
Sec. 67 of the Corporation Code provides
that: “u je t to the p o isio s of the
contract of subscription, the board of
directors of any stock corporation may at
any time declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same or
such percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary. Payment of any unpaid
subscription or any percentage thereof,
together with the interest accrued, if any,
shall be made on the date specified in the
contract of subscription or on the date
stated in the call made by the board. Failure
to pay on such date shall render the entire
balance due and payable and shall make the
stockholder liable for interest at the legal
rate on such balance, unless a different rate
of interest is provided in the by-laws,
computed from such date until full
payment. If within 30 days from the said
date no payment is made, all stocks covered
by said subscription shall thereupon
become delinquent and shall be subject to
sale as hereinafter provided, unless the
oa d of di e to s o de s othe ise.
*If there was no date as to payment of
subscription stated in the subscription
agreement, the board may call on all the
unpaid subscribers to pay the remaining
balance of their subscription. Failure to pay
within 30 days from the said date, all stocks
covered by said subscription shall
thereupon become delinquent and shall be
subject to sale unless the board of directors
orders otherwise.
F. Certificate of Stock
Certificate of Stock is a written evidence of the
shares of stock but it is not the share itself.
*Does not represent credit.
Q: How important is a stock certificate?
A: It is an evidence of ownership of stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed by the
president or vice-president, countersigned by
the secretary or assistant secretary.
Q: When certificate of stock may be issued?
A: Sec. 64 of the Corporation Code states that:
No e tifi ate of sto k shall e issued to a
subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if any is
due, has ee paid.
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

Doctrine of Indivisibility of Subscription
Contract
Doctrine of Indivisibility of Subscription
Contract: Failure to pay any of the
installments due would necessarily affect all
the other installments because the
subscription is to be treated as one, whole,
entire, indivisible contract. Upon default of
payment on any of the installment results
to entire subscription due and demandable.
*The Certificate of Stock cannot be divided
into portions.
*No certificate of stock shall be issued until
the full payment of the subscription.
*The corporation has an automatic lien over
the shares.
Q: What will happen to the payment
already made by the subscriber?
A: The payment partially made shall be
applied proportionately to all the shares
covered by the subscription.
Example:
P10 per share; payment made is P6000
covering 1000 shares. The P6000 shall be
allocated equally to all shares. P6 per share
has been paid. P4 per share is the liability.
Certificate of Stock, quasi-negotiable
Q: can the stock certificate be treated as
negotiable instrument under NIL?
A: No. The requisites are not complied
with. There is no engagement to pay in sum
certain in money.
*Negotiable instrument represents credit.
Creditor-debtor relationship arises.
Q: Are certificates of stock negotiable?
A: They are negotiable in certain extent.
That is why they are quasi-negotiable.
*The title over the share can be assigned,
transferred by indorsement and delivery.
*Due course holding is not applicable.
G. Transfer of Shares
If represented by a certificate, the following
must be strictly complied with:
1. Delivery of the certificate;
2. Indorsement by the owner or his agent;
3. To be valid to third parties, the transfer must
be recorded in the books of the corporation.
*If not represented by the certificate, the
shares may be transferred by means of a deed
of assignment and such is duly recorded in the
books of the corporation.
*To make the transfer binding to the
corporation and third person, the transfer must
be recorded in the stock and transfer book of
the corporation.
Q: Who is the owner of the share?
A: The stockholder of record.
H. Lost and Destroyed Certificate of Stock
Sec. 73 of the Corporation Code provides that:
The follo i g p o edu e shall e follo ed fo
the issuance
by a corporation of new
certificates of stock in lieu of those which have
been lost, stolen or destroyed: 1. The registered
owner of a certificate of stock in a corporation
or his legal representative shall file with the
corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how
the certificate was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the certificate
and the name of the corporation which issued
the same. He shall also submit such other
information and evidence which he may deem
necessary; 2. After verifying the affidavit and
other information and evidence with the books
of the corporation, said corporation shall
publish a notice in a newspaper of general
circulation published in the place where the
corporation has its principal office, once a week
for 3 consecutive weeks at the expense of the
registered owner of the certificate of stock
which has been lost, stolen or destroyed. The
notice shall state the name of said corporation,
the name of the registered owner and the serial
number of said certificate, and the number of
shares represented by such certificate, and that
after the expiration of 1 year from the date of
the last publication, if no contest has been
presented to said corporation regarding said
certificate of stock, the right to make such
contest shall be barred and said corporation
shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock,
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unless the registered owner files a bond or
other security in lieu thereof as may be
required, effective for a period of 1 year, for
such amount and in such form and with such
sureties as may be satisfactory to the board of
directors, in which case a new certificate may
be issued even before the expiration of the 1
year period provided herein: Provided, That if a
contest has been presented to said corporation
or if an action is pending in court regarding the
ownership of said certificate of stock which has
been lost, stolen or destroyed, the issuance of
the new certificate of stock in lieu thereof shall
be suspended until the final decision by the
court regarding the ownership of said certificate
of stock which has been lost, stolen or
destroyed. Except in case of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure abovedes i ed.
CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a Corporation
Sec. 74 of the Corporation Code provides that:
E e
o po atio shall keep a d a efull
preserve at its principal office a record of all
business transactions and minutes of all
meetings of stockholders or members, or of the
board of directors or trustees, in which shall be
set forth in detail the time and place of holding
the meeting, how authorized, the notice given,
whether the meeting was regular or special, if
special its object, those present and absent, and
every act done or ordered done at the meeting.
Upon the demand of any director, trustee,
stockholder or member, the time when any
director, trustee, stockholder or member
entered or left the meeting must be noted in
the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or
proposition, and a record thereof carefully
made. The protest of any director, trustee,
stockholder or member on any action or
proposed action must be recorded in full on his
demand. The records of all business
transactions of the corporation and the minutes
of any meetings shall be open to inspection by
any director, trustee, stockholder or member of
the corporation at reasonable hours on
business days and he may demand, writing, for
a copy of excerpts from said records or minutes,
at his expense. Any officer or agent of the
corporation who shall refuse to allow any
director, trustee, stockholder or member of the
corporation to examine and copy excerpts from
its records or minutes, in accordance with the
provisions of this Code, shall be liable to such
director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an
offense which shall be punishable under Section
144 of this Code: Provided, That if such refusal
is made pursuant to a resolution or order of the
board of directors or trustees, the liability under
this section for such action shall be imposed
upon the directors or trustees who voted for
such refusal: and Provided, further, That it shall
be a defense to any action under this section
that the person demanding to examine and
op e e pts f o the o po atio ’s e o ds
and minutes has improperly used any
information secured through any prior
examination of the records or minutes of such
corporation or of any other corporation, or was
not acting in good faith or for a legitimate
purpose in making his demand. Stock
corporations must also keep a book to be
k o
as the sto k a d t a sfe ook, i
which must be kept a record of all stocks in the
names of the stockholders alphabetically
arranged; the installments paid and unpaid on
all stock for which subscription has been made,
and the date of payment of any installment; a
statement of every alienation, sale or transfer
of stock made, the date thereof, and by and to
whom made; and such other entries as the bylaws may prescribe. The stock and transfer book
shall be kept in the principal office of the
corporation or in the office of its stock transfer
agent and shall be open for inspection by any
director or stockholder of the corporation at
reasonable hours on business days. No stock
transfer agent or one engaged principally in the
business of registering transfers of stocks in
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behalf of a stock corporation shall be allowed to
operate in the Philippines unless he secures a
license from the SEC and pays a fee as may be
fixed by the Commission, which shall be
renewable annually: Provided, That a stock
corporation is not precluded from performing
or making transfer of its own stocks, in which
case all the rules and regulations imposed on
stock transfer agents, except the payment of a
license fee herein provided, shall be
appli a le.
*Keeping of books and records are mandatory.
Books required to be kept:
1. Book of minutes – reflects the decisions and
actions
of
the
Board
of
Directors/Stockholders.
2. Record of all business transactions
3. Stock and Transfer Book/Membership Book
4. Books of Proceedings
A. Concept of Merger and Consolidation
Merger is one where a corporation absorbs the
other and remains in existence while the others
are dissolved.
*There is a continuous flow of juridical
personality.
Examples:
A+B=B
A+B+C=C
A+B+C=A
A+B+C=B
Consolidation is one where a new corporation
is created, and consolidating corporations are
extinguished.
Examples:
A+B=C
A+B+C=D
A + B + C = ABC
A + B + C = XYZ
B. Right to Inspect Corporate Books
 Basis and Extent of the Right of Inspection
Q: Is the keeping of these books
mandatory?
A: YES. Section 144 of the Corporation Code
provides penalty for any violation of the
provision of the Code.
Rationale: Right of inspection would be
futile. Right of inspection would not be
exercised.
 Limitations on the Right of Inspection
1. The books and records shall be open to
inspection at reasonable hours on
business days.
2. The books and records shall not be
improperly used any information
secured through any prior examination
of the books or records.
3. The stockholder’s de a d must be in
good faith or for a legitimate purpose.
*Inspection can be done personally or
through agent.
 Remedies to Enforce Right of Inspection
*In case of refusal to exercise the right of
inspection, the stockholder concerned may
file an action for mandamus before the RTC.
*Can also claim damages.
B. Requisites of and Procedure for Merger and
Consolidation
1. Approval by majority vote of the Board of
Directors of each corporation.
2. Approval of the stockholders of each
corporation representing 2/3 of the
outstanding capital stock.
3. Approval of SEC
Cases: Associated Bank v CA; Polyan v CA
Procedure:
1. The Board of each corporation shall draw
up a plan of merger/consolidation.
2. The plan of merger or consolidation shall be
approved by majority vote of each board of
the concerned corporations at separate
meetings.
3. The plan of merger/consolidation shall be
approved by the majority vote of the 2/3 of
the shareholders of the outstanding capital
stock or members in case of a non-stock
corporation.
4. Articles of Merger/Consolidation shall be
executed by each of the constituent
corporators, signed by the President or
Vice-President and certified by the
secretary or assistant secretary.
5. Four copies of the Articles of Merger or
Consolidation together with favorable
MERGER AND CONSOLIDATION:
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recommendation
of
a
pertinent
government agency in certain cases shall be
submitted to the SEC for approval.
6. The SEC shall issue a certificate or merger if
it is satisfied that the merger or
consolidation
of
the
corporations
concerned is not inconsistent with the
provisions of this Code and existing laws.
C. Effects of Merger or Consolidation
1. All property, real or personal, and all
receivables due to, and all other interest of
each constituent corporation, shall be
deemed transferred to and vested in such
surviving or consolidated corporation
without further act or deed.
2. The surviving or consolidated corporation
shall be responsible for all the liabilities and
obligations of each of the constituent
corporations.
3. Any claim, action or proceeding pending by
or against any of the constituent
corporations may be prosecuted by or
against the surviving or consolidated
corporations.
4. The rights of the creditors or lien upon the
property of any of each constituent
corporation shall not be impaired by such
merger or consolidation.
5. Dissolution of other corporation leaving the
surviving or consolidated corporation exists.
Remedy of the dissenting stockholder: The
dissenting stockholder may exercise his
appraisal right.
RIGHT OF APPRAISAL:
A. Concept of Appraisal Right
Appraisal Right is the right to withdraw from
the corporation and demand payment of the
fair value of his shares after dissenting from
certain corporate acts involving fundamental
changes in corporate structure.
*Demanding for the reasonable return of
investment.
*Stockholders cannot exercise this right at his
pleasure.
Requisites:
1. The Stockholder has dissented
2. Corporate change must have been
approved by the SEC.
*A
ha ges that affe t the sto kholde s’
right.
*Any
changes
that
concern
the
o po atio ’s e iste e.
*Corporate changes that appraisal right can
be availed of.
3. There must have an unrestricted retained
earnings,
*It is not a matter of right.
Reason: If it is a matter of right it shall lead to
the diminution or depletion of corporate assets
which is violative of the Trust Fund Doctrine.
B. Instances of Appraisal Right
Sec. 81 of the Corporation Code provides that:
A sto kholde of a o po atio shall ha e the
right to dissent and demand payment of the fair
value of his shares in the following instances: 1.
In case any amendment to the articles of
incorporation 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, or of extending or shortening the
term of corporate existence; 2. In case of sale,
lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the
corporate property and assets as provided in
the Code; and 3. In case of merger or
o solidatio .
C. Requirements for a Valid Exercise of Appraisal
Right
Sec. 82 of the Corporation Code provides that:
The app aisal ight a e e e ised
a
stockholder who shall have voted against the
proposed corporate action, by making a written
demand on the corporation within 30 days after
the date on which the vote was taken for
payment of the fair value of his shares:
Provided, That failure to make the demand
within such period shall be deemed a waiver of
the appraisal right. If the proposed corporate
action is implemented or affected, the
corporation shall pay to such stockholder, upon
surrender of the certificate or certificates of
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stock representing his shares, the fair value
thereof as of the day prior to the date on which
the vote was taken, excluding any appreciation
or depreciation in anticipation of such
corporate action. If within a period of 60 days
from the date the corporate action was
approved by the stockholders, the withdrawing
stockholder and the corporation cannot agree
on the fair value of the shares, it shall be
determined and appraised by 3 disinterested
persons, one of whom shall be named by the
stockholder, another by the corporation, and
the third by the two thus chosen. The findings
of the majority of the appraisers shall be final,
and their award shall be paid by the corporation
within 30 days after such award is made:
Provided, That no payment shall be made to
any dissenting stockholder unless the
corporation has unrestricted retained earnings
in its books to cover such payment: and
Provided, further, That upon payment by the
corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares
to the o po atio .
Requisites:
1. Any of the instances set forth by law must
be present.
2. Dissenting stockholder must have voted
against the proposed action.
*Abstaining stockholder cannot claim or
exercise his appraisal right.
3. Demand for payment must be made within
30 days from the date vote is taken
thereon. Failure to make demand shall be
deemed a waiver.
4. Price must be based on fair value as of day
prior to date on which vote was taken
5. Submission by withdrawing stockholder of
his shares to the corporation for notation of
being a dissenting stockholder within 10
days from written demand.
6. Payment must be made only when the
corporation has unrestricted retained
earnings in its books.
7. Stockholder must transfer his shares to the
corporation upon payment by the
corporation.
D. Effects of Exercising Appraisal Right
Sec. 83 of the Corporation Code provides that:
F o the ti e of de a d fo pa e t of the
fair value of a sto kholde ’s sha es u til eithe
the abandonment of the corporate action
involved or the purchase of the said shares by
the corporation, all rights accruing to such
shares, including voting and dividend rights,
shall be suspended in accordance with the
provisions of this Code, except the right of such
stockholder to receive payment of the fair value
thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares
within 30 days after the award, his voting and
dividend rights shall i
ediatel e esto ed.
Effects:
1. All rights accruing to such shares shall be
suspended from the time of demand for
payment of the fair value of the shares until
either the abandonment of the corporate
action.
2. The dissenting stockholder shall be entitled
to receive payment of the fair value of his
shares as agreed upon between him and
the corporation or as determined by the
appraisers chosen by them.
*Sec. 86. The dissenting stock can be sold
during the pendency of its payment.
Remedy in case appraisal right cannot be
exercised: Dispose the shareholdings.
NON-STOCK CORPORATIONS:
A. Definition and Purposes of a Non-Stock
Corporation
Sec. 87 of the Corporation Code states that:
Fo the pu poses of this Code, a o -stock is
one where no part of its income is distributable
as dividends to its members, trustees, or
officers, subject to the provisions of this Code
on dissolution: Provided, That any profit which
a non-stock corporation may obtain as an
incident to its operations shall, whenever
necessary or proper, be used for the
furtherance of the purpose or purposes for
which the corporation was organized, subject to
the provisions of this Title. The provisions
governing stock corporations, when pertinent,
shall be applicable to non-stock corporations,
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except as may be covered by specific provisions
of this Title.
*Sec. 87 should be read in harmony with Sec.
94.
*A Non-stock corporation is not precluded from
engaging in profit-business related.
Sec. 88 of the Corporation Code provides that:
No -stock corporations may be formed or
organized for charitable, religious, educational,
professional, cultural, fraternal, literary,
scientific, social, civic service, or similar
purposes, like trade, industry, agricultural and
like chambers, or any combination thereof,
subject to the special provisions of this Title
governing particular classes of non-stock
o po atio s.
*The purpose of a non-stock corporation is
related to public welfare.
B. Distinguished from Stock Corporation
Non- stock
Stock Corporation
Corporation
Public welfare
For profit
Board of Trustees
Board of directors
Generally, the term of 1 year subject to holdoffice of trustees is 3 over principle
years
By-laws can provide City or municipality
for a different venue where the principal
as long as it is within office is located
the Philippines
Member
may
be Proxy is allowed
deprived of their right
to designate proxies
by provisions in the
articles
of
incorporation or bylaws
Reason: To promote
camaraderie,
togetherness,
unity
and familiarity.
Generally, members Election is vested
could directly elect upon
Board
of
officers. Except unless Directors
AOI
provides
otherwise.
C. Membership in a Non-Stock Corporation
Sec. 89 of the Corporation Code provides that:
The ight of the e e ship of a
lass o
classes to vote may be limited, broadened or
denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless
of class, shall be entitled to one vote. Unless
otherwise provided in the articles of
incorporation of the by-laws, a member may
vote by proxy in accordance with the provisions
of this Code. Voting by mail or other similar
means by members of non-stock corporations
may be authorized by the by-laws of non-stock
corporations with the approval of, and under
such conditions which may be prescribed by,
the “EC.
General Rule: Sec. 58
Exception: Sec. 89. This provision allows denial
of proxy.
Reason:
To
promote
camaraderie,
togetherness, unity and familiarity.
*A member is entitled to 1 vote. However, such
right may be limited, broadened or denied in
the Articles of Incorporation or By-Laws. Thus,
the By-laws of a non-stock corporation may
provide for the desired voting rights of
members including the number of votes.
Sec. 90 of the Corporation Code provides that:
Membership in a non-stock corporation and all
rights arising therefrom are personal and nontransferable, unless the articles of incorporation
or the by-la s othe ise p o ide.
General Rule: Membership is non-transferable.
Exception: If the Articles of Incorporation or the
By-laws provide otherwise.
Sec. 91 of the Corporation Code provides that:
Me e ship shall e te i ated in the
manner and for the causes provided in the
articles of incorporation or the by-laws.
Termination of membership shall have the
effect of extinguishing all rights of a member in
the corporation or in its property, unless
otherwise provided in the articles of
incorporation or the by-la s.
Rules on Place of Meeting:
General Rule: Sec. 51
Exception: Sec. 93
D. Rule on Distribution of Assets
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Sec. 94 of the Corporation Code provides that:
I ase dissolutio of a o -stock corporation
in accordance with the provisions of this Code,
its assets shall be applied and distributed as
follows: 1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefor; 2. Assets held by the
corporation upon a condition requiring return,
transfer or conveyance, and which condition
occurs by reason of the dissolution, shall be
returned, transferred or conveyed in
accordance with such requirements; 3. Assets
received and held by the corporation subject to
limitations permitting their use only for
charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
requiring return, transfer or conveyance by
reason of the dissolution, shall be transferred or
conveyed to one or more corporations,
societies or organizations engaged in activities
in the Philippines substantially similar to those
of the dissolving corporation according to a plan
of distribution adopted pursuant to this
Chapter; 4. Assets other than those mentioned
in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of
the articles of incorporation or the by-laws, to
the extent that the articles of incorporation or
the by-laws, determine the distributive rights of
members, or any class or classes of members,
or provide for distribution; and 5. In any other
case, assets may be distributed to such persons,
societies, organizations or corporations,
whether or not organized for profit, as may be
specified in a plan of distribution adopted
pu sua t to this Chapte .
Order of distribution:
1. All its creditors shall be paid;
2. Assets held subject to return on dissolution,
shall be delivered back to their givers;
3. Assets held for charitable, religious
purposes, etc., without a condition for their
return on dissolution, shall be conveyed to
one or more organizations engaged in
similar activities as dissolved corporation;
and
4. All other assets shall be distributed to
members, as provided for in the Articles or
By-Laws.
Sec. 95 of the Corporation Code provides that:
A pla p o idi g fo the dist i utio of assets,
not inconsistent with the provisions of this Title,
may be adopted by a non-stock corporation in
the process of dissolution in the following
manner: The board of trustees shall, by majority
vote, adopt a resolution recommending a plan
of distribution and directing the submission
thereof to a vote at a regular or special meeting
of members having voting rights. Written notice
setting forth the proposed plan of distribution
or a summary thereof and the date, time and
place of such meeting shall be given to each
member entitled to vote, within the time and in
the manner provided in this Code for the giving
of notice of meetings to members. Such plan of
distribution shall be adopted upon approval of
at least 2/3 of the members having voting rights
present or represented by proxy at such
eeti g.
Q: Would it be possible for a non-stock
corporation to be converted into a stock
corporation by mere amendment of the Articles
of Incorporation?
A: NO. Because it would violate Section 87 of
the Corporation Code which prohibits
distribution of income as dividends to
members.
Reason: Fraudulent to donors
Q: Can a stock corporation be converted to a
non-stock corporation by mere amendment of
the Articles of Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.
CLOSE CORPORATIONS:
A. Concept; Distinguished from Open Corporations
Sec. 96 of the Corporation Code states that: A
corporation, within the meaning of this Code, is
one whose articles of incorporation provide
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that:
All the o po atio ’s issued sto k of all
classes, exclusive of treasury shares, shall be
held of record by not more than a specified
number of persons, not exceeding 20; (2) all the
issued stock of all classes shall be subject to one
or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when
at least 2/3 of its voting stock or voting rights is
owned or controlled by another corporation
which is not a close corporation within the
meaning of this Code. Any corporation may be
incorporated as a close corporation, except
mining or oil companies, stock exchanges,
banks, insurance companies, public utilities,
educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall
apply suppletorily except insofar as this Title
otherwise p o ides.
*Whether open or close corporation depends
on its charter.
Case: San Juan Structural
The following must be stated in the Articles of
Incorporation:
1. Membership is limited to 20
2. Transfer or disposition of shares is subject
to specified restrictions
3. Prohibition against offering to the public of
the shares or listing in the stock exchange.
General Rule: Any corporation may be
incorporated as close corporation.
Exceptions:
1. Mining or oil companies
2. Stock exchanges
3. Banks
4. Insurance companies
5. Public utilities
6. Educational institutions
7. Corporations declared to be vested with
public interest
Distinctions from Open Corporations:
Open Corporation
Its
articles
of
incorporation
need
only
contain
the
general
matters
enumerated in Section
14 of the Corporation
Code
Its status as an
ordinary
stock
corporation is not
affected
by
the
ownership of its voting
stock or voting rights
Its articles cannot
classify its directors
Business
of
the
corporation
is
managed by the board
of directors
The corporate officers
and employees are
elected by a majority
vote of all the
members of the board
of directors
The pre-emptive right
is subject to the
exceptions found in
Section 39 of the
Corporation Code
The appraisal right
may be exercised by a
stockholder only in the
cases provided in
Sections 81 and 42 of
the Corporation Code
Except as regards
redeemable
shares,
the purchase by the
corporation of its own
stock must always be
made
from
the
unrestricted retained
earnings
Close Corporation
Its
articles
must
contain the special
matters prescribed by
Section 97 aside from
the general matters in
Section 14. Failure to
do so precludes a de
jure close corporation
status
2/3 of its voting stock
or voting rights must
not be owned or
controlled by another
corporation which is
not
a
close
corporation
Its articles may classify
its directors
Business
of
the
corporation may be
managed
by
the
stockholders if the
articles so provide, but
they are liable as
directors
Its
articles
may
provide that any or all
of
the
corporate
officers or employees
may be elected or
appointed by the
stockholders
The pre-emptive right
is subject to no
exceptions
unless
denied in the articles
The appraisal right
may be exercised and
compelled against the
corporation
by
a
stockholder for any
reason
In
case
of
an
arbitration
of
an
intracorporate
deadlock by the SEC,
the corporation may
be
ordered
to
purchase its own
shares
from
the
stockholders
regardless of the
availability
of
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Arbitration
of
intracorporate
deadlock by the SEC is
not a remedy in case
the
directors
or
stockholders are so
divided respecting the
management of the
corporation.
unrestricted retained
earnings
Arbitration
of
intracorporate
deadlock by the SEC is
an available remedy in
case the directors or
stockholders are so
divided respecting the
management of the
corporation.
*In San Juan Structural Steel Fabricators v CA,
the SC held that the circumstance that around
99.86% of the total share holding of petitioner
belongs to respondent would not justify
classification of the corporation as close.
B. Permissive Provisions in the Articles of
Incorporation
Sec. 97 of the Corporation Code provides that:
The a ti les of incorporation of a close
corporation may provide: 1. For a classification
of shares or rights and the qualifications for
owning or holding the same and restrictions on
their transfers as may be stated therein, subject
to the provisions of the following section; 2. For
a classification of directors into one or more
classes, each of whom may be voted for and
elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements
in meetings of stockholders or directors than
those provided in this Code. The articles of
incorporation of a close corporation may
provide that the business of the corporation
may provide that the business of the
corporation shall be managed by the
stockholders of the corporation rather than by a
board of directors. So long as this provision
continues in effect: 1. No meeting of
stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise,
the stockholders of the corporation shall be
deemed to be directors for the purpose of
applying the provisions of this Code; and 3. The
stockholders of the corporation shall be subject
to all liabilities of directors. The articles of
incorporation may likewise provide that all
officers or employees or that specified officers
or employees shall be elected or appointed by
the stockholders, instead of by the board of
di e to s.
C. Restrictions on Transfer of Shares
Sec. 98 of the Corporation Code provides that:
Rest i tio s o the ight to t a sfe sha es
must appear in the articles of incorporation and
in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated
therein. If upon the expiration of said period,
the existing stockholders or the corporation
fails to exercise the option to purchase, the
transferring stockholder may sell his shares to
a thi d pe so .
Option Restriction – this restriction provides
that no disposition of shares will be made
unless the shares are offered first to the
corporation or the stockholders.
*Pre-emptive right is exercisable or available.
*This restriction is valid and allowed.
Reason: it is the one contemplated by law.
*Restriction derogates private rights.
Consent Restriction – this restriction provides
that no disposition of shares will be made
without the consent of directors.
*This restriction is not valid.
Reason: It is more onerous and burdensome.
CORPORATE DISSOLUTION/LIQUIDATION:
A. Methods of Voluntary Corporate Dissolution
and the Requirements therefor
Dissolution refers to the extinguishment of
franchise or termination of corporate existence.
Modes of Dissolution:
1. Voluntary dissolution
2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary dissolution where no creditors
are affected
2. Voluntary dissolution where creditors are
affected
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3. Shortening of the corporate term by
amending the articles of incorporation
*Dissolution takes effect upon the coming
of the shortened term.
4. Expiration of corporate term

Voluntary dissolution where no creditors
are affected
Sec. 118 of the Corporation Code provides
that: If dissolutio of a o po atio does
not prejudice the rights of any creditor
having a claim against it, the dissolution
may be effected by majority vote of the
board of directors or trustees, and by a
resolution duly adopted by the affirmative
vote of the stockholders owning at least 2/3
of the outstanding capital stock or of at
least 2/3 of the members of a meeting to be
held upon call of the directors or trustees
after publication of the notice of time, place
and object of the meeting for 3 consecutive
weeks in a newspaper published in the
place where the principal office of said
corporation is located; and if no newspaper
is published in such place, then in a
newspaper of general circulation in the
Philippines, after sending such notice to
each stockholder or member either by
registered mail or by personal delivery at
least 30 days prior to said meeting. A copy
of the resolution authorizing the dissolution
shall be certified by a majority of the board
of directors or trustees and countersigned
by the secretary of the corporation. The SEC
shall thereupon issue the certificate of
dissolutio .
Requisites:
1. A meeting must be held on the call of
the directors or trustees;
2. Notice of the meeting should be given
to the stockholders by personal delivery
or registered mail at least 30 days prior
to the meeting;
3. The notice of meeting should also be
published for 3 consecutive weeks in a
newspaper published in the place;
4. The resolution to dissolve must be
approved by the majority of the
directors/trustees and approved by the
stockholders representing at least 2/3
of the outstanding capital stock or 2/3
of members;
5. A copy of the resolution shall be
certified by the majority of the directors
or trustees and countersigned by the
secretary;
6. The signed and countersigned copy will
be filed with the SEC and the latter will
issue the certificate of dissolution

Voluntary dissolution where creditors are
affected
Sec. 119 of the Corporation Code provides
that:
Whe e the dissolutio
of a
corporation may prejudice the rights of any
creditor, the petition for dissolution shall be
filed with the Securities and Exchange
Commission. The petition shall be signed by
a majority of its board of directors or
trustees or other officers having the
management of its affairs, verified by its
president or secretary or one of its directors
or trustees, and shall set forth all claims and
demands against it, and that its dissolution
was resolved upon by the affirmative vote
of the stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of the
members at a meeting of its stockholders or
members called for that purpose. If the
petition is sufficient in form and substance,
the Commission shall, by an order reciting
the purpose of the petition, fix a date on or
before which objections thereto may be
filed by any person, which date shall not be
less than thirty (30) days nor more than
sixty (60) days after the entry of the order.
Before such date, a copy of the order shall
be published at least once a week for three
(3) consecutive weeks in a newspaper of
general circulation published in the
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and a similar copy shall be
posted for three (3) consecutive weeks in
three (3) public places in such municipality
or city. Upon five (5) day's notice, given
after the date on which the right to file
objections as fixed in the order has expired,
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the Commission shall proceed to hear the
petition and try any issue made by the
objections filed; and if no such objection is
sufficient, and the material allegations of
the petition are true, it shall render
judgment dissolving the corporation and
directing such disposition of its assets as
justice requires, and may appoint a receiver
to collect such assets and pay the debts of
the o po atio .
Requisites:
1. Approval
of
the
stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
members in a meeting called for that
purpose;
2. Filing of a Petition with the SEC signed
by majority of directors or trustees or
other officers having the management
of its affairs verified by President or
Secretary or Director. Claims and
demands must be stated in the petition;
3. If petition is sufficient in form and
substance, the SEC shall issue an Order
fixing a hearing date for objections;
4. A copy of the Order shall be published
at least once a week for 3 consecutive
weeks in a newspaper of general
circulation or if there is no newspaper
in the municipality or city of the
principal office, posting for 3
consecutive weeks in 3 public places is
sufficient;
5. Objections must be filed no less than 30
days nor more than 60 days after the
entry of the order;
6. After the expiration of the time to file
objections, a hearing shall be conducted
upon prior 5 day notice to hear the
objections;
7. Judgment shall be rendered dissolving
the corporation and directing the
disposition of assets; the judgment may
include appointment of a receiver.

Shortening of term of existence
Sec. 120 of the Corporation Code provides
that: A olu ta
dissolutio
a
e
effected by amending the articles of
incorporation to shorten the corporate
term pursuant to the provisions of this
Code. A copy of the amended articles of
incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon approval
of the amended articles of incorporation of
the expiration of the shortened term, as the
case may be, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of
this Code on liquidation.
B. Concept of Involuntary Dissolution and the
Grounds therefor
Sec. 121 of the Corporation Code provides that:
A o po atio
a
e dissol ed
the
Securities and Exchange Commission upon filing
of a verified complaint and after proper notice
and hearing on the grounds provided by existing
laws, rules and regulations.
*This must be done with substantive and
procedural due process.
Grounds:
1. Failure to submit by-laws within the
prescribed period
2. Fraud in the procurement of Certificate of
Registration
3. Misrepresentation as to the activities that
the corporation will undertake
4. T easu e ’s affida it is false
5. Continued inoperation for 5 years
6. Failure to commence business transactions
within 2 years from issuance of certificate
of registration
7. To some cases, performance of ultra vires
act since it is a violation to the franchise but
depending on the seriousness or gravity of
the offense
8. Issuance of watered stocks
9. De facto status
10. Failure to keep corporate books and records
depending on the gravity or seriousness of
the offense
11. Violation of its charter
C. Corporate Liquidation
Liquidation is a process by which all the assets
of the corporation are converted into liquid
assets in order to facilitate the payment of
obligations to creditors, and the remaining
balance if any is to be distributed to the
stockholders.
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*Liquidation takes place after dissolution.
Sec. 122 of the Corporation Code provides that:
E e o po atio
hose ha te e pi es
its
own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for
other purposes is terminated in any other
manner, shall nevertheless be continued as a
body corporate for three (3) years after the
time when it would have been so dissolved, for
the purpose of prosecuting and defending suits
by or against it and enabling it to settle and
close its affairs, to dispose of and convey its
property and to distribute its assets, but not for
the purpose of continuing the business for
which it was established. At any time during
said three (3) years, the corporation is
authorized and empowered to convey all of its
property to trustees for the benefit of
stockholders, members, creditors, and other
persons in interest. From and after any such
conveyance by the corporation of its property in
trust for the benefit of its stockholders,
members, creditors and others in interest, all
interest which the corporation had in the
property terminates, the legal interest vests in
the trustees, and the beneficial interest in the
stockholders, members, creditors or other
persons in interest. Upon the winding up of the
corporate affairs, any asset distributable to any
creditor or stockholder or member who is
unknown or cannot be found shall be escheated
to the city or municipality where such assets are
located. Except by decrease of capital stock and
as otherwise allowed by this Code, no
corporation shall distribute any of its assets or
property except upon lawful dissolution and
after payment of all its debts and liabilities.
D. Methods of Liquidation or Winding Up
1. By Board of Directors
2. Through a trustee to whom the properties
are conveyed
3. By
management
committee
or
rehabilitation receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period, there is no
corporate existence for all purposes subject to
doctrine of relation.
Remedy: Before the expiration of the 3 year
period, appoint a trustee/receiver.
Q: During the 3 year period, does the
corporation enjoy corporate existence?
A: YES. But for limited purpose only, i.e., for
liquidation purposes only. (Limited existence)
Q: May such corporation sue during the 3 year
period?
A: YES. But only when the subject matter is
related to liquidation and winding up of its
remaining affairs.
*In case trustee/receiver is appointed, he is not
bound by the 3 year period.
*In Gelano v CA, the SC held that the lawyer of
the corporation can be considered as trustee.
The term trustee must be considered in its
generic sense. Anyone who has been
designated by the corporation to act on its
behalf could be considered as trustee for
purposes of pursuing a claim for and on behalf
of the corporation. A lawyer falls within the
a it of the o d t ustee.
*Appointment of trustee can be inferred from
the conduct of the corporation. This is by
Implication.
*If the corporation is the creditor appoint a
trustee. If the corporation is the debtor appoint
a receiver.
Q: What if the corporate properties have
already been distributed among the
shareholders without trustee/receiver?
A: Remedy: Run after the erring directors and
officers.
E. Concept of Rehabilitation; Effects of
Appointment of Management Committee or
Receiver
Rehabilitation connotes a reopening or
reorganization. Contemplates a continuance of
corporate existence in an effort to restore the
corporation to its former successful operation.
*This is a remedy expressly allowed under
Section 6 of PD 902-A.
Purpose: To make the corporation financially
viable again.
Substantive Grounds:
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1. When there is imminent danger of
dissipation or wastage of corporate assets
2. Serious paralyzation of business which
would work to the prejudice of the
stockholders and creditors of the
corporation
*Mere misconduct of an officer is not a ground
for corporate rehabilitation.
*A corporation cannot ask for corporate
rehabilitation and at the same time dissolution.
*With the passage of RA8799, the remedy could
now be instituted with the proper RTC.
Effect: Stay Order - stops or suspends the
enforcement of all claims for money or
otherwise whether enforcement is by court or
not, until rehabilitation proceedings are
terminated.
Cases: PAL v Garcia; Sobrejuanite; Lingkod
Manggagawa ng Rubberworld v Rubberworld
Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay order
suspends all enforcement in all stages of the
proceedings.
*In Lingkod Manggagawa sa Rubberworld v
Rubberworld Philippines, the SC held that labor
claims are likewise affected by the Stop order.
*In RCBC v IAC, the SC held that whether
creditors are secured or not, stay order will still
affect them. The preference still remains it is
just the enforcement that is suspended.
FOREIGN CORPORATIONS:
A. Concept of Foreign Corporation
Foreign Corporation is a corporation formed,
organized or existing under any law other than
those of the Philippines, and whose laws allow
Filipino citizens and corporations to do business
in its own country or state.
Sec. 123 of the Corporation Code provides that:
Fo the pu poses of this Code, a foreign
corporation is one 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. It shall have the right to
transact business in the Philippines after it shall
have obtained a license to transact business in
this country in accordance with this Code and a
certificate of authority from the appropriate
government agency.
Reciprocity Clause provides that the foreign
laws allow Filipino citizens and corporations to
do business in its own country or state.
B. Tests to Determine Nationality of a Corporation
1. Incorporation Test – when the corporation
is incorporated, organized under the law of
other country.
2. Control Test – for purposes of investment;
the citizenship of a particular corporation is
to be determined by the citizenship of the
controlling stockholders.
C. Co ept of Doi g Busi ess a d the Li e se
Requirement therefor
Substance Test provides that: a foreign
corporation is doing business in the country if it
is continuing the body or substance of the
enterprise of business for which it was
organized.
Continuity Test provides that: doing business
implies a continuity of commercial dealings and
arrangements, and contemplates to some
extent the performance of acts or works or the
exercise of some functions normally incident to
and in progressive prosecution of, the purpose
and object of its organization.
*Foreign Corporation is required to obtain
license from the SEC to enable them to do
business in the Philippines.
*The foreign corporation must appoint a
resident agent so that court may acquire
jurisdiction over the foreign corporation
*License is essential if there is an intention to
maintain main or substance of the business in
the Philippines or to continue the same.
*Lack of license does not affect the validity of
the transaction.
*License is for regulatory purposes.
*License requirement does not prevent
performance of acts that are isolated from the
main business of the corporation and there is
no intent to continue the same in the
Philippines.
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*If the foreign corporation is not licensed to do
business in the Philippines, General Rule: they
have no access in Philippine Courts
Exceptions:
1. Isolated transactions
2. Infringement of trademark
*International offense can be sued
anywhere.
Cases: Expert Travel Tours v CA; Home
Insurance v Eastern Shipping Lines
*In Expert Travel Tours v CA, the SC held that
resident agent is not with authority to execute a
certification of Forum shopping following Sec.
23 of the Corporation Code.
*In Home Insurance v Eastern Shipping Lines,
the SC held that if at the time the suit was
brought, the suing foreign entity already have
license to do business in the Philippines, the suit
will be allowed although at the time the
transaction was made it does not have the
requisite of a license to do so, the remedial
defect is cured.
Cases: Japan Airlines v CA
*In Japan Airlines v CA, the SC held that the
selling of tickets though there is no aircraft
landing in the Philippines constitute doing
business in the Philippines.
*In Ericks v CA, the SC held that license is
necessary in order the foreign corporation may
sue. In this case, the court considered the
continuity test, they found out that the foreign
corporation has the intent to continue business
in the Philippines.
*Credit is obtained to maintain longer
transactions.
2. Failure to appoint and maintain a resident
agent in the Philippines as required by the
Corporation Code
3. Failure, after change of its resident agent or
his address, to submit to the SEC a
statement of such change as required by
the Corporation Code
4. Failure to submit to the SEC an
authenticated copy of any amendment to
its articles of incorporation or by-laws or of
any articles of merger or consolidation
within the time prescribed by the
Corporation Code
5. A misrepresentation of any material matter
in any application, report affidavit or other
document submitted by such corporation
pursuant to the provisions of the
Corporation Code
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any of
its agencies or political subdivision
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized under
its license
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines
9. Any other ground as would render it unfit
to transact business in the Philippines.
D. Effects of Being Issued a License
1. They are placed under the jurisdiction of
the Philippine courts
2. They are placed under the same footing as
domestic corporations
3. The public is protected in dealing with
foreign corporations.
E. Revocation and Withdrawal of License
Grounds for Revocation:
1. Failure to file its annual report or pay any
fees as required by the Corporation Code
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