LAW ON CORPORATIONS

DEFINITION
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its
existence.
ATTRIBUTES
CREATED BY OPERATION OF LAW – the formal requirement
of the State’s consent through compliance with the requirements
imposed by law is necessary for its creation such that the mere
agreement of the persons composing it or intending to organize
it does not warrant the grant of its independent existence as a
juridical entity;

ARTIFICIAL BEING – it has a juridical personality, separate

and distinct from the persons composing it. This is also known as
the Doctrine of Separate Juridical Personality.

RIGHT OF SUCCESSION – unlike in a partnership, the death,

incapacity or civil interdiction of one or more of its stockholder
does not result in its dissolution;
ATTRIBUTES
POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
AUTDHORIZED BY LAW – it can exercise only such powers
and can hold only such properties as are granted to it by the
enabling statutes unlike natural persons who can do anything as
they please. This is also called the Doctrine of Limited Capacity.

Powers of a corporation:
1. Express Powers – those expressly authorized by the
Corporation Code and other laws, and its Articles of
Incorporation.
2. Implied Powers – Those that can be inferred from or
necessary for the exercise of EXPRESS powers;
3. Incidental Powers – those that are incidental to the existence
of the corporation
ULTRA VIRES ACT
ULTRA VIRES ACTS are those which cannot be executed or
performed by a corporation because they are not within its
express, inherent, or implied powers as defined by its charter or
Articles of Incorporation. Accordingly, it may be subject to a
collateral attack questioning the authority of the corporation to
engage in such particular endeavor.
ULTRA VIRES ACT
Consequences:
1. On the Corporation itself: The proper forum may suspend or
revoke, after proper notice and hearing, the franchise or
certificate of registration of the corporation for serious
misrepresentation as to what the corporation can do or is
doing to the great damage or prejudice of the general public.
2. On the rights of the Stockholders: A stockholder may bring
either an individual or derivative suit to enjoin a threatened
ultra-vires act or contract. If already performed, a derivative
suit against the directors may be filed, but their liability will
depend on whether they acted in good faith and with
reasonable diligence in entering into the contract.
ULTRA VIRES ACT
Consequences:
3. On the immediate parties:
a. If the contract is fully executed in both sides, the contract is
effective and the courts will not interfere to deprive either
party of what has been acquired under it;
b. If the contract is executory on both sides, as a rule, neither
party can maintain an action for its non-performance; and
c. Where the contract is executory on one side only, and has
been fully performed on the other, the courts differ as to
whether an action will lie on the contract against the party
who has received benefits of performance under it. Majority
of the courts, however, hold that the party who has received
benefits from the performance is “estopped” to set up that
the contract is ultra vires to defeat an action on the contract.
QUESTION
An ultra vires act is an act which is:
A. Considered illegal
B. Contrary to morals, public policy, good customs
C. Not within the express, implied or incidental powers of the
corporation
D. All of the above
QUESTION
An ultra vires act is an act which is:
A. Considered illegal
B. Contrary to morals, public policy, good customs
C. Not within the express, implied or incidental powers of
the corporation
D. All of the above
SEPARATE JURIDICAL PERSONALITY
As a legal entity, the corporation is possessed with a juridical
personality separate and distinct from the individual stockholders
or members and is not affected by the personal rights, obligations
or transactions of the latter. The properties it possesses belongs
to it exclusively as a separate juridical entity such that the
personal creditors of its stockholders or members cannot attach
corporate properties to satisfy their claims.

On the other hand, the corporation is not likewise liable for the
debts, obligations or liabilities of its stockholders. Neither may it
properties be made answerable to satisfy the claim of creditors
against its stockholders or member even if the stockholder
concerned is its president.
SEPARATE JURIDICAL PERSONALITY
PIERCING THE VEIL OF CORPORATE ENTITY: The
applicability of the corporate entity theory is confined to
legitimate transactions and is subject to equitable limitations to
prevent its being used as a cloak or cover for fraud or illegality, or
to work injustice.

When the notion of legal entity is used to defeat public

convenience, justify wrong, protect fraud, defend crime, the law
will regard the corporation as a mere association of persons, or in
the case of two corporations, merge them into one, the one being
merely regarded as part or instrumentality of the other. The same
is true where a corporation is a mere dummy and serves no
business purpose and is intended only as a blind, or an alter-ego
or business conduit for the sole benefit of the stockholders.
QUESTION
Mr. X invested his property in exchange for shares in ABC
Corporation. Later on, the same property mortgaged as security
for the loan of ABC Corporation from M Bank. For failure to pay,
the mortgage was foreclosed and proceeds was less than the
amount of the outstanding balance of the loan which M Bank
sought from Mr. X contending that the property was invested by
him. Mr. X cannot be made liable under which principle:
A. Corporate Entity Theory
B. Piercing the Veil of Corporate Entity
C. Limited Liability Principle
D. All of the above.
QUESTION
Mr. X invested his property in exchange for shares in ABC
Corporation. Later on, the same property mortgaged as security
for the loan of ABC Corporation from M Bank. For failure to pay,
the mortgage was foreclosed and proceeds was less than the
amount of the outstanding balance of the loan which M Bank
sought from Mr. X contending that the property was invested by
him. Mr. X cannot be made liable under which principle:
A. Corporate Entity Theory
B. Piercing the Veil of Corporate Entity
C. Limited Liability Principle
D. All of the above.
QUESTION
Rustan Corp., through Tantoco, its general manager and
president, entered into a contract of sale with Lluch Corp., which
was later on stopped by Rustan Corp. Lluch then sued for breach
of contract against Rustan Corp and Tantoco. In this case,
A. Both Rustan Corp and Tantoco can be held liable.
B. Only Rustan Corp can be made liable
C. Only Tantoco can be made liable
D. None of the above.
QUESTION
Rustan Corp., through Tantoco, its general manager and
president, entered into a contract of sale with Lluch Corp., which
was later on stopped by Rustan Corp. Lluch then sued for breach
of contract against Rustan Corp and Tantoco. In this case,
A. Both Rustan Corp and Tantoco can be held liable.
B. Only Rustan Corp can be made liable
C. Only Tantoco can be made liable
D. None of the above.
QUESTION
The president and manager of a corporation, who entered into
and signed a contract in his official capacity, cannot be made
liable thereunder in his individual capacity in the absence of
stipulation to that effect due to the personality of a corporation
being separate and distinct from the person composing it. (Rustan
Pulp and Paper Mills, Inc. vs. IAC)
QUESTION
Isabelo Calingasan, the employer of Alfredo Carillo, was held
subsidiarily liable when Carillo, driving the jeepney of Calingasan,
ran over a child. Later on, Calingasan transferred said jeep to Fely
Transport Corporation, where the incorporators are Calingasan,
his wife, his son, Dr. Calingasan and his two daughters and the
only asset thereof was the same jeepney. In this case,
A. Fely Transport Corporation has sole liability since the jeepney
was already transferred to it.
B. Isabelo Calingasan can no longer be held liable since he no
longer owns the jeepney.
C. Both Fely Transport Corporation and Isabelo Calingasan can be
held liable since the transfer was only made to escape liability.
D. All incorporators of Fely Transport Corporation can be made
liable.
QUESTION
Isabelo Calingasan, the employer of Alfredo Carillo, was held
subsidiarily liable when Carillo, driving the jeepney of Calingasan,
ran over a child. Later on, Calingasan transferred said jeep to Fely
Transport Corporation, where the incorporators are Calingasan,
his wife, his son, Dr. Calingasan and his two daughters and the
only asset thereof was the same jeepney. In this case,
A. Fely Transport Corporation has sole liability since the jeepney
was already transferred to it.
B. Isabelo Calingasan can no longer be held liable since he no
longer owns the jeepney.
C. Both Fely Transport Corporation and Isabelo
Calingasan can be held liable since the transfer was
only made to escape liability.
D. All incorporators of Fely Transport Corporation can be made
liable.
QUESTION
It is evident that Calingasan’s main purpose in forming the
corporation was to evade his subsidiary civil liability resulting from
the conviction of his driver. This conclusion is borned out by the
fact that the incorporators of the Fely Transportation are Isabelo
Calingasan, his wife, his son, Dr. Calingasan, and his two
daughters. We believe that this one case where the defendant
corporation should not be heard to say that it has a
personality separate and distinct from its members when
to allow it to do so would be to sanction the use of the
fiction of corporate entity as a shield to further an end of
subversive of justice. Furthermore, the failure of the defendant
corporation to prove that it has other property other than the jeep
strengthens the conviction that its formation was for the purpose
above indicated.
PARTNERSHIP VS. CORPORATION
PARTNERSHIP CORPORATION
Creation: Voluntary agreement of Created by the state in the form of
parties. a special charter or by a general
enabling law (The Corporation
Code)
Existence: No time limit except Not more than 50 years.
agreement of parties.
Liability of members: may extend Liable only for payment of their
to private property. subscribed capital stock.
Transferability of Interest: All Does not need the consent of the
partners need to consent to the other stockholders.
transfer of interest to another.
PARTNERSHIP VS. CORPORATION
PARTNERSHIP CORPORATION
Ability to bind the firm: Generally, Generally, stockholders cannot
partners acting on behalf of the bind corporations since its official
partnership are agents thereof acts are through a board of
directors
Mismanagement: A partner can A stockholder cannot sue a
sue another partner who director who mismanages, it must
mismanages be in the name of the corporation.
Nationality: A partnership is a Generally, under whose laws it
national of the country where it was created
was created.
Legal Personality: from the time From registration with the
the contract begins Securities and Exchange
Commission
PARTNERSHIP VS. CORPORATION
PARTNERSHIP CORPORATION
Dissolution: Death, retirement, Such causes do not dissolve a
insolvency, civil interdiction, or corporation.
insanity of a partner dissolves the
partnership.
Governing Law: Civil Code Corporation Code
CLASSIFICATION OF CORPORATIONS
In general, corporations are classified as:
1. Stock Corporations - corporations which have capital stock
divided into shares and are authorized to distribute to the
holders of such shares dividends or allotments of the surplus
profits on the basis of the shares held are stock corporations.
2. Non-Stock Corporations - corporations which are not
authorized to distribute surplus profits.
OTHER CLASSIFICATION OF
CORPORATIONS
DOMESTIC are those organized or created under or by
Under CORPORATION virtue of the Philippine laws, either by
which law legislative act or under the provisions of the
it was General Corporation Law.
created FOREIGN are those formed, organized or existing under
CORPORATION any laws other than those of the Philippines
CLOSE are those whose shares of stock are held by a
CORPORATIONS limited number of persons like the family or
other closely-knit group. There are no public
investors.
Whether OPEN are those formed to openly accept outsiders
public or CORPORATIONS as stockholders or investors. They are
not authorized and empowered to list in the stock
exchange and to offer their shares to the
public such that stock ownership can widely
be dispersed. In which case, they are called
PUBLICLY-LISTED CORPORATIONS.
OTHER CLASSIFICATION OF
CORPORATIONS
CORPORATION A group of persons which holds itself out as a
BY ESTOPPEL corporation and enters into a contract with
third persons on the strength of such
appearance cannot be permitted to deny its
Legal existence in an action under the said contract.
DE JURE A corporation organized in accordance with
Right of
CORPORATION the requirements of law
Corporate DE FACTO A corporation where there exists a flaw in its
Existence CORPORATION incorporation. The requisites:
a. There exists a valid law under which it may
be incorporated;
b. An attempt in good faith to incorporate;
c. Use of corporate powers.
QUESTION
Mr. X was invited by his friends to invest in XYZ Corp., a newly organized
firm where he was appointed president. He entered into a contract of
sale with ABC Corp. to purchase equipment, in accordance with the
primary purpose of the corporation. Later on, however, it was discovered
that the Articles of Incorporation had not been filed by his friends. He
hurriedly attended to the matter and when the SEC issued the Certificate
of Registration, the corporation became bankrupt and Mr. X is now being
sued by ABC Corp. in his personal capacity. In this case,
A. Mr. X cannot be made liable since XYZ Corp. is considered a de facto
corporation which has a separate personality.
B. Mr. X cannot be made liable since the de facto status of the
corporation has not been attacked by the State.
C. Mr. X can be made liable upto his personal assets since he is the
president of XYZ Corporation which is a corporation by estoppel.
D. Mr. X can be made liable only upto his investment since he had no
knowledge that the corporation was not validly incorporated.
QUESTION
Mr. X was invited by his friends to invest in XYZ Corp., a newly organized
firm where he was appointed president. He entered into a contract of
sale with ABC Corp. to purchase equipment, in accordance with the
primary purpose of the corporation. Later on, however, it was discovered
that the Articles of Incorporation had not been filed by his friends. He
hurriedly attended to the matter and when the SEC issued the Certificate
of Registration, the corporation became bankrupt and Mr. X is now being
sued by ABC Corp. in his personal capacity. In this case,
A. Mr. X cannot be made liable since XYZ Corp. is considered a de facto
corporation which has a separate personality.
B. Mr. X cannot be made liable since the de facto status of the
corporation has not been attacked by the State.
C. Mr. X can be made liable upto his personal assets since he is the
president of XYZ Corporation which is a corporation by estoppel.
D.Mr. X can be made liable only upto his investment since he
had no knowledge that the corporation was not validly
incorporated.
OTHER CLASSIFICATION OF
CORPORATIONS
PRIVATE those formed for some private purpose,
CORPORATIONS benefit, aim or end. They are created for the
immediate benefit and advantage of the
individuals or members composing it and their
franchise may be considered as privileges
As to conferred by the State to be exercised and
Purpose enjoyed by them in the form of the
corporation.
PUBLIC those formed or organized for the
CORPORATIONS government of a portion of the State or any
of its political subdivisions and which have for
their purpose the general good and welfare.
OTHER CLASSIFICATION OF
CORPORATIONS
ECCLESIASTICAL are composed exclusively of ecclesiastics
CORPORATIONS organized for spiritual purposes or for
administering properties held for religious
ones. They are organized to secure public
worship or perpetuating the right of a
Whether particular religion.
LAY are those organized for purposes other than
for
CORPORATIONS religion. They may further be classified as:
Religious a. ELEEMOSYNARY: created for charitable
Purpose or and benevolent purposes such as those
not organized for the purpose of maintaining
hospitals and houses for the sick, aged or
poor.
b. CIVIL: organized not for the purpose of
public charity but for the benefit, pecuniary or
otherwise, of its members.
OTHER CLASSIFICATION OF
CORPORATIONS
AGGREGATE are those composed of a number of
CORPORATIONS individuals vested with corporate powers.
As to CORPORATION those consist of one person or individual only
number of SOLE and who are made as bodies corporate and
persons politic in order to give them some legal
composing capacity and advantage which, as natural
the persons, they cannot have. Under the Code, a
corporatio corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or
n
other presiding elder or religious
denominations, sects or churches.
SHARES OF STOCK
Shares of Stock designate the units into which the proprietary
interest in a corporation is divided. They represent the
proportionate integers or units, the sum of which constitutes the
capital stock of the corporation. It is likewise the interest or right
which the owner, called the stockholders or shareholder, has in
the management of the corporation, and in the surplus profits
and in case of distribution, in all of its assets remaining after the
payment of its debts.

Certificate of Stock is a document or instrument evidencing

the interest of a stockholder in the corporation.
KINDS OF SHARES OF STOCK; AS TO
PAR VALUE
Par Value Shares are those whose values are fixed in the
Articles and shown on the certificate. The par value is the
minimum subscription or original issue price of the shares.
No Par Value Shares are those whose issued price are not
stated in the certificate of stock but may be fixed in the AOI, or
by the BOD when so authorized the articles or the by-laws, or in
the absence thereof, the stockholders themselves.
KINDS OF SHARES OF STOCK; AS TO
PAR VALUE
Watered Stocks: if the shares are issued at less than its par or
stated value, the shares sold is considered as watered stocks,
and the stockholders will remain liable for the difference of the
par value and the amount paid therefor as well as the members
of the Board of Directors who consented to the issuance of the
watered stocks, unless they file a written objection thereto.
KINDS OF SHARES OF STOCK; AS TO
PAR VALUE
Limitations on Non-Par Value Shares:
1. Such shares once issued, are deemed fully paid and thus,
non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not
available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance
companies, public utilities and building and loans associations.
QUESTION
X Co. has P10M Authorized Capital Stock divided into: (1) 5M
shares at P1.00 par value; and (2) 1M no par value shares with
issued value at P5.00. A acquired 1M of the par value shares for
P0.80. In this case,
A. There is no issuance of watered stocks
B. A and the directors of X Co. are solidarily liable for the P0.20
per share difference.
C. Only A is liable for the P0.20 per share difference.
D. Only the directors of X Co. is liable for the P0.20 per share
difference.
QUESTION
X Co. has P10M Authorized Capital Stock divided into: (1) 5M
shares at P1.00 par value; and (2) 1M no par value shares with
issued value at P5.00. A acquired 1M of the par value shares for
P0.80. In this case,
A. There is no issuance of watered stocks
B. A and the directors of X Co. are solidarily liable for the
P0.20 per share difference.
C. Only A is liable for the P0.20 per share difference.
D. Only the directors of X Co. is liable for the P0.20 per share
difference.
QUESTION
In the preceding question, if A also acquired 100,000 no par
value shares at P4.00,
A. There is no issuance of watered stocks
B. A and the directors of X Co. are solidarily liable for the P1.00
per share difference.
C. Only A is liable for the P1.00 per share difference.
D. Only the directors of X Co. is liable for the P1.00 per share
difference.
QUESTION
In the preceding question, if A also acquired 100,000 no par
value shares at P4.00,
A. There is no issuance of watered stocks
B. A and the directors of X Co. are solidarily liable for the P1.00
per share difference.
C. Only A is liable for the P1.00 per share difference.
D. Only the directors of X Co. is liable for the P1.00 per
share difference.
QUESTION
In relation to the two preceding questions, if X, who is a director
signified his intention during the meeting by orally objecting to
the proposal to approve the issuances,
A. Is not liable for the issuance of watered stocks since he
objected
B. Is still liable for the issuance of the watered stocks because
the objection is not in writing
C. Is not liable since he did not vote for the issuance
D. Is still liable for the issuance since he was present in the
meeting.
QUESTION
In relation to the two preceding questions, if X, who is a director
signified his intention during the meeting by orally objecting to
the proposal to approve the issuances,
A. Is not liable for the issuance of watered stocks since he
objected
B. Is still liable for the issuance of the watered stocks
because the objection is not in writing
C. Is not liable since he did not vote for the issuance
D. Is still liable for the issuance since he was present in the
meeting.
KINDS OF SHARES OF STOCK; AS TO
VOTING RIGHTS
Voting Shares – a corporation will always have a class of voting
shares, and generally, shares have the right to vote unless they
are issued as “preferred” or “redeemable”.

Non-Voting Shares – are share without the right to vote.

Typical examples would be preferred and redeemable shares.
However, non-voting shares may still vote in the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
KINDS OF SHARES OF STOCK; AS TO
VOTING RIGHTS
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
QUESTION
As a general rule, preferred shares do not give the holder the
right to vote. However, they shall have the right to vote on the
following, except:
A. Amendment of the Articles of Incorporation
B. Adoption and amendment of the by-laws
C. Sale of all or substantially all of the inventories
D. Increase or decrease of capital stock
QUESTION
As a general rule, preferred shares do not give the holder the
right to vote. However, they shall have the right to vote on the
following, except:
A. Amendment of the Articles of Incorporation
B. Adoption and amendment of the by-laws
C. Sale of all or substantially all of the inventories
D. Increase or decrease of capital stock
KINDS OF SHARES OF STOCK; AS TO
PREFERENCE
COMMON STOCKS are the most commonly issued shares of
stock of a corporation. Although no clear-cut definition can be
found, it has been described as one which entitles it owner to an
equal or pro-rata division of profits, if there are any, but without
any preference or advantage in that respect over any other
stockholder or class of stockholders.

PREFERRED STOCKS are those that gives the holder

preference over the holder of common stocks with respect to the
payment of dividends and/or with respect to distribution of
capital upon liquidation.
KINDS OF SHARES OF STOCK; AS TO
PREFERENCE
LIMITATIONS imposed by the Code in the issuance of
preferred stocks:
1. They can be issued only with a stated par value; and
2. The preference must be stated in the AOI and in the
certificate of stock otherwise each share shall be, in all
respect, equal to every other share.
QUESTION
Which of the following is false with regards preferred shares?
A. Preferred share is a stock that gives the holder preference
over the holder of common stocks with respect to the
payment of dividends and/or with respect to distribution of
capital upon liquidation.
B. A preferred share can be issued without a par value provided
it is not issued for less than P5.
C. The preference must be stated in the Articles of Incorporation
and the Certificate of Stock.
D. None of the above
QUESTION
Which of the following is false with regards preferred shares?
A. Preferred share is a stock that gives the holder preference
over the holder of common stocks with respect to the
payment of dividends and/or with respect to distribution of
capital upon liquidation.
B. A preferred share can be issued without a par value
provided it is not issued for less than P5.
C. The preference must be stated in the Articles of Incorporation
and the Certificate of Stock.
D. None of the above
KINDS OF SHARES OF STOCK; AS TO
PREFERENCE
1. PREFERENCE AS TO DIVIDENDS: They have the privilege
of being paid dividends first before any other stockholders are
paid theirs. The guaranty is not absolute so as to create a
relation of debtor and creditor between the corporation and the
holders of such stock. The amount of preference is stated in the
contract of subscription and is usually a fixed percentage or by
specified amount indicated therein.

KINDS:
Participating and Non-Participating Preferred Shares: If
the preferred share is participating, they are entitled to
participate in dividends with the common shareholders beyond
their stated preference. Non-participating preferred shares on the
other hand are entitled to its fixed priority or preference only.
KINDS OF SHARES OF STOCK; AS TO
PREFERENCE
Cumulative and Non-cumulative Preference Shares
Cumulative preferred shares are those that entitle the owner
thereof to payment not only of current dividends but also back
dividends not previously paid whether or not, during the past
years, dividends were declared or paid. In light of the provision of
the Code stating that all shares are equal in all respects unless
otherwise stated in the AOI, a preferred share to be considered
cumulative, the same must be provided for and specified in the
certificate.

Non-cumulative preferred shares are those which grant the holders

of such shares only to the payment of current dividends but not
back dividends, when and if dividends are paid, to the extent
agreed upon before any other stockholders are paid the same
KINDS OF SHARES OF STOCK; AS TO
PREFERENCE
Cumulative and Non-cumulative Preference Shares
Cumulative preferred shares are those that entitle the owner
thereof to payment not only of current dividends but also back
dividends not previously paid whether or not, during the past
years, dividends were declared or paid. In light of the provision of
the Code stating that all shares are equal in all respects unless
otherwise stated in the AOI, a preferred share to be considered
cumulative, the same must be provided for and specified in the
certificate.

Non-cumulative preferred shares are those which grant the holders

of such shares only to the payment of current dividends but not
back dividends, when and if dividends are paid, to the extent
agreed upon before any other stockholders are paid the same
KINDS OF SHARES OF STOCK; AS TO
PREFERENCE
2. Preference upon liquidation: this preference must be
stated in the contract to accordingly grant such preference in the
distribution of the assets ahead of the common stockholders,
including dividends in arrears in case the preferred shares are
cumulative.
OTHER KINDS OF SHARES OF STOCK
FOUNDER’S SHARES: are shares issued to the founders of the
corporation which are granted certain right and privileges such as
the exclusive right to vote and be voted for in the election of
directors, for a period not to exceed 5 years, subject to the
approval of the SEC.

The period of 5 years is non-extendable because it may result in

the almost perpetual disqualification of other stockholders to
elect or be elected as members of the BOD resulting to the lack
of proper representation thereat.
OTHER KINDS OF SHARES OF STOCK
REDEEMABLE SHARES: are those subject to redemption, as
indicated in the contract, usually attached to preferred shares
and other debt securities like bonds. This type of shares grants
the corporation the right to repurchase the shares at its option or
at the option of the holder based on the face or issued value plus
a specified premium. The redemption may be optional or
mandatory at a fixed future date.

The repurchase is not subject to the availability of unrestricted

retained earnings.
OTHER KINDS OF SHARES OF STOCK
TREASURY SHARES: are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption, donation or
through some other lawful means. Subsequently, the corporation
can re-issue the shares of stock or sell them or declare them as
property dividends.

Such shares, though paid for already, do not form part of

outstanding shares and accordingly, do not have the right to vote
and receive dividends.
OTHER KINDS OF SHARES OF STOCK
PROMOTION STOCKS are those issued to promoters of the
corporation.

SHARES IN ESCROW are those deposited with a third party

and kept there until the condition contained in an agreement is
fulfilled.

CONVERTIBLE SHARES are those which may be exchanged for

other types of shares.
CORPORATE TERM
A corporation may exist for a maximum of 50 years subject to
extension/renewal.

Extension: should be made before the expiration of the original

term, but not earlier than 5 years prior to such expiration,
otherwise the corporation is dissolved, ipso facto
ORGANIZATION AND
INCORPORATION OF A CORPORATION
PROMOTIONAL STAGE: undertaken by the organizers or
promoters who bring together persons interested in the business
venture. They enter into contract either in their own names or in
the name of the proposed corporation.

A promoter, although he may assume to act for and on behalf of

a projected corporation and not for himself, will be held
personally liable on contracts made by him for the benefit of a
corporation he intends to organize. The personal liability
continues even after the formation of the corporation unless
there is novation or other agreement to release him from liability.
ORGANIZATION AND
INCORPORATION OF A CORPORATION
Which of the following statements is false?
A. The promotional stage undertaken by the organizers or
promoters who bring together persons interested in the
business venture.
B. A promoter, although he may assume to act for and on behalf
of a projected corporation and not for himself, will be held
personally liable on contracts made by him for the benefit of a
corporation he intends to organize.
C. The personal liability of promoters for contracts entered into
in behalf of the projected corporation ceases after the
formation of the corporation.
D. None of the above.
ORGANIZATION AND
INCORPORATION OF A CORPORATION
Which of the following statements is false?
A. The promotional stage undertaken by the organizers or
promoters who bring together persons interested in the
business venture.
B. A promoter, although he may assume to act for and on behalf
of a projected corporation and not for himself, will be held
personally liable on contracts made by him for the benefit of a
corporation he intends to organize.
C. The personal liability of promoters for contracts
entered into in behalf of the projected corporation
ceases after the formation of the corporation.
D. None of the above.
ORGANIZATION AND
INCORPORATION OF A CORPORATION
PROCESS OF INCORPORATION: includes the drafting of the
Articles of Incorporation, preparation and submission of
additional and supporting documents, filing with the SEC, and
the subsequent issuance of the Certificate of Incorporation.
CONTENTS OF ARTICLES OF
INCORPORATION
1. The name of the corporation;
The name of the corporation is essential to its existence since it is
through it that it can act and perform all legal acts. Each corporation
should therefore, have a name by which it is to sue and be sued and do
all legal acts.

A corporation, once formed, cannot use any other name, unless its
Articles of Incorporation has been amended in accordance with law as
this would result in confusion and may open the door to fraud and
evasion as well as difficulties of administration and supervision.

Thus, the organizers must make sure that the name they intend to use
as a corporate name is not similar or confusingly similar to any
other name already registered and protected by law since the SEC would
refuse registration if such be the case.
CONTENTS OF ARTICLES OF
INCORPORATION
2. The specific purpose or purposes for which the
corporation is being incorporated. Where a
corporation has more than one stated purpose, the
articles of incorporation shall state which is the
primary purpose and which is/are the secondary
purpose or purposes: Provided, that a non-stock
corporation may not include a purpose which would
change or contradict its nature as such.

The statement of the objects or purpose or powers in the charter

results practically in defining the scope of authority of the
corporate enterprise or undertaking. This statement both congers
and also limits the actual authority of the corporate
representatives.
QUESTION
Which of the following is a false statement?
A. A bank cannot have insurance activities as its secondary
purpose.
B. Educational corporations cannot include any other purpose
which would change or contradict its nature.
C. Stock brokers can have no other line of business not peculiar
to them.
D. A group of CPAs can form a corporation for the purpose of
practicing their profession.
QUESTION
Which of the following is a false statement?
A. A bank cannot have insurance activities as its secondary
purpose.
B. Educational corporations cannot include any other purpose
which would change or contradict its nature.
C. Stock brokers can have no other line of business not peculiar
to them.
D. A group of CPAs can form a corporation for the
purpose of practicing their profession.
QUESTION
First statement: Corporations whose capital is less than $2.5M
engaged in retail trade must be wholly Filipino-owned.
Second statement: Corporations with foreign equity can engage
in restaurant business if it is incidental or in connection with their
hotel or inn-keeping business.
A. Both statements are true
B. Both statements are false
C. Only the first statement is true
D. Only the second statement is true
QUESTION
First statement: Corporations whose capital is less than $2.5M
engaged in retail trade must be wholly Filipino-owned.
Second statement: Corporations with foreign equity can engage
in restaurant business if it is incidental or in connection with their
hotel or inn-keeping business.
A. Both statements are true
B. Both statements are false
C. Only the first statement is true
D. Only the second statement is true
CONTENTS OF ARTICLES OF
INCORPORATION
3. The place where the principal office of the
corporation is to be located, which must be within the
Philippines;

It must be located within the Philippines. The AOI must not only specify
the province, but also the City or Municipality where it is located. In this
regard, it is to be observed that the principal office may be in one place,
but the business operations are actually conducted in other areas. The
law does not, of course, require a statement of the place of corporate
operations and, therefore, may be dispensed with.

The principal office serves as the residence of the corporation and is

thus important in: (1) venue of actions; (2) registration of chattel
mortgage of shares; (3) validity of meetings of stockholders or members
in so far as venue thereof is concerned
CONTENTS OF ARTICLES OF
INCORPORATION
4. The term for which the corporation is to exist;

The corporate term is necessary in determining at what point in

time the corporation will cease to exist or have lost its juridical
personality. Once it ceases to exist, its legal personality also
expires and could not thereafter, act in its own name for the
purpose of prosecuting it business.
CONTENTS OF ARTICLES OF
INCORPORATION
5. The names, nationalities and residences of the
incorporators.

CORPORATORS apply to all who compose the corporation at any given

time and need not be among those who executed the AOI at the start of
its formation or organization.

INCORPORATORS are those mentioned in the AOI as originally

forming the corporation and who are signatories in the AOI.

An incorporator may be considered as a corporator as long as he

continues to be a stockholder or a member, but not all corporators are
incorporators.

Number of Incorporators: not less than 5 but not more than 15

CONTENTS OF ARTICLES OF
INCORPORATION
Qualifications of Incorporators:
1. Must be natural persons. It implies that a corporation or a
partnership cannot become incorporators. EXCEPTION: (1)
cooperatives; (2) corporations primarily organized to hold
equities in rural banks and may rightfully become
incorporators thereof.
2. Of Legal Age. Minors cannot be incorporators. They may,
however, become stockholders provided they are legally
represented by parents, guardians or administrators.
3. Must own at least 1 share.
4. Majority must be residents of the Philippines.
QUESTION
Incorporators must not be less than 5 but not more than 15 and
(choose the exception):
A. Must be natural persons
B. Must be of legal age
C. Owns at least 1 share
D. Majority must be citizens of the Philippines
QUESTION
Incorporators must not be less than 5 but not more than 15 and
(choose the exception):
A. Must be natural persons
B. Must be of legal age
C. Owns at least 1 share
D. Majority must be citizens of the Philippines
CONTENTS OF ARTICLES OF
INCORPORATION
6. The number of directors or trustees, which shall not be
less than five (5) nor more than fifteen (15)

DIRECTORS compose the governing board in stock corporations.

TRUSTEES pertain to non-stock corporations.

There must be at least 5 but not more than 15 directors in a

private corporation. EXCEPTIONS:
1. Educational corporations registered as non-stock corporations
whose number of trustees, though not less than 5 and not more
than 15 should be divisible by 5.
2. In close corporations where all stockholders are considered as
members of the board of directors (Sec. 97) thereby effectively
allowing 20 members in the board.
CONTENTS OF ARTICLES OF
INCORPORATION
7. The names, nationalities and residences of persons
who shall act as directors or trustees until the first
regular directors or trustees are duly elected and
qualified in accordance with this Code;
CONTENTS OF ARTICLES OF
INCORPORATION
7. If it be a stock 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.
CONTENTS OF ARTICLES OF
INCORPORATION
The Corporation Code requires the AOI to state the authorized
capital stock, the number of shares and/or kind of shares into
which the authorized capital is divided, the par value of each
share, if there be any, the names, nationalities and residences of
the original subscribers, and the amount subscribed and paid by
each. At least 25% of the authorized capital stock must be
subscribed and at least 25% of the subscribed capital must be
paid and in no case may the paid-up capital be less than P5,000.

The 25% minimum paid-in capital can be paid by any

shareholder, meaning that it is not particularly required that each
subscriber pay 25% of their subscription.
QUESTION
A, B, C, D and E is organizing a corporation whose Authorized
Capital Stock is P64,000. How much is the minimum paid-up
capital requirement?
A. P4,000 C. P10,000
B. P5,000 D. P25,000
QUESTION
A, B, C, D and E is organizing a corporation whose Authorized
Capital Stock is P64,000. How much is the minimum paid-up
capital requirement?
A. P4,000 C. P10,000
B. P5,000 D. P25,000
CONTENTS OF ARTICLES OF
INCORPORATION
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed
in the articles to be subscribed and paid-in or secured to be paid
by the subscribers. It may also refer to the maximum number of
shares that a corporation can issue.

SUBSCRIBED CAPITAL STOCK is the total number of shares

and its total value for which there are contracts for their
acquisition or subscription. It is in effect, the stockholder’s equity
account showing that part of the authorized capital stock which
has been paid or promised to be paid, or that portion of the
authorized capital stock which has been subscribed by the
subscribers or stockholders.
CONTENTS OF ARTICLES OF
INCORPORATION
PAID UP CAPITAL STOCK or paid-in capital is the actual
amount or value which has been actually contributed or paid to
the corporation in consideration of the subscriptions made
thereon.

OUTSTANDING CAPITAL STOCK: total number of shares

issued, including those which are subscribed and not yet fully
paid, but excluding treasury shares.
CONTENTS OF ARTICLES OF
INCORPORATION
8. If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of the
contributors and the amount contributed by each; and
CONTENTS OF ARTICLES OF
INCORPORATION
9. Such other matters as are not inconsistent with law
and which the incorporators may deem necessary and
convenient.

RESTRICTIONS AND PREFERENCES:

If the corporation desires to grant such options, restrictions and/or
preferences, the same must be indicated in the AOI AND in all of the
stock certificates. Failure to provide the same in the AOI would not bind
the purchasers in good faith despite the fact that the said restriction
and/or preference is indicated in the by-laws of the corporation.

In a close corporation, however, such restrictions and preferences must

not only appear in the articles of incorporation and in the stock
certificates BUT ALSO be embodied in the by-laws of that close
corporation otherwise it may not bind purchasers in good faith.
CONTENTS OF ARTICLES OF
INCORPORATION
10. OTHER MATTERS TO BE INCLUDED IN THE ARTICLES
OF INCORPORATION

a. The name of the Treasurer duly elected by the subscribers

b. No Transfer Clause: in case a corporation is required to maintain a
required minimum Filipino ownership, committing that no transfer
shall be made which shall reduce the ownership of Filipino citizens to
less than the required percentage.
c. The Execution Clause: which will contain the names and signatures
of the incorporators
d. Treasurer’s Affidavit which contains the certification of the Treasurer,
under oath, that the required 25% of the authorized capital stock
has been subscribed, 25% of the subscription has been paid, in an
amount not less than P5,000.
e. Notarial Acknowledgment
COMMENCEMENT OF CORPORATE
EXISTENCE
GENERAL RULE: at the time of the issuance of the Certificate of
Incorporation or Registration. It is only from this time that it
acquires juridical personality and legal existence.

EXCEPTIONS:
1. Corporations by Estoppel;
2. Those created by special laws;
3. Those organized as Cooperatives covered by Bureau of
Cooperatives;
4. Home Owners’ Associations covered by Home Insurance
Guaranty Corporation;
5. Corporation Sole – which is reckoned from the filing of
verified articles.
COMMENCEMENT OF CORPORATE
BUSINESS
Once the certificate of incorporation has been issued, the
corporation MUST formally organize and commence its business.

Non-Use of Corporation Charter: the failure of the corporation

to organize within 2 years would result in it automatic
dissolution, unless, of course, its failure to do so is due to
causes beyond its control.

Continuous Non-Operation: If a corporation has commenced its

business but subsequently becomes inoperative continuously
for a period of at least 5 years, the same shall be merely
a ground for suspension or revocation of its corporate
franchise or certificate of registration.
BOARD OF DIRECTORS
The Board of Directors (or trustees or other designation allowed
under Sec. 138) is the supreme authority in matter of
management of the regular and ordinary business affairs of the
corporation.

However, this authority does not extend to the fundamental

changes in the corporate charter such as amendments or
substantial changes thereof, which belong to the stockholders as
a whole.
BOARD OF DIRECTORS;
QUALIFICATIONS
QUALIFICATIONS AND DISQUALIFICATIONS: The by-laws
of a corporation may provide for additional qualifications and
disqualifications of its members of the board of directors or
trustees. However, it may not do away with the minimum
qualifications and disqualifications.

Qualifications of a Director/Trustee:
1. Must own at least 1 share in their own names or a member
(in the case of trustees);
2. Majority must be resident of the Philippines. Even aliens may
be elected as directors, provided that the majority of such
directors are residents of the Philippines. EXCEPT: in activities
exclusively reserved to Filipino citizens.
BOARD OF DIRECTORS;
DISQUALIFICATIONS
Disqualifications of a Director/Trustee:
1. Imprisonment for a period exceeding 6 years within 5 years
prior to the date of election or appointment;
2. Violation of the Corporation Code within 5 years prior to the
date of election or appointment;
3. Such other disqualifications that may be provided in the by-
laws.
QUESTION
The following are qualifications of a Director under the
Corporation Code, except:
A. They must own at least 1% share.
B. Majority must be residents of the Philippines.
C. They do not possess any of the disqualifications under the
Corporation Code.
D. None of the above
QUESTION
The following are qualifications of a Director under the
Corporation Code, except:
A. They must own at least 1% share.
B. Majority must be residents of the Philippines.
C. They do not possess any of the disqualifications under the
Corporation Code.
D. None of the above
QUESTION
John Gokongwei, Jr. is a major stockholder of a corporation in
direct competition with SMC. He later on invested in SMC and
sought to be a member of the Board but the by-laws contained a
disqualification for stockholders of competing corporations. In
this case,
A. The disqualification is invalid since it is not provided for under
the Corporation Code.
B. The disqualification is valid since a corporation is authorized
to prescribe qualifications/ disqualifications in the Articles of
Incorporation
C. The disqualification is valid since a corporation is authorized
to prescribe qualifications/ disqualifications in the by-laws
D. None of the above is a correct statement
QUESTION
John Gokongwei, Jr. is a major stockholder of a corporation in
direct competition with SMC. He later on invested in SMC and
sought to be a member of the Board but the by-laws contained a
disqualification for stockholders of competing corporations. In
this case,
A. The disqualification is invalid since it is not provided for under
the Corporation Code.
B. The disqualification is valid since a corporation is authorized
to prescribe qualifications/ disqualifications in the Articles of
Incorporation
C. The disqualification is valid since a corporation is
authorized to prescribe qualifications/
disqualifications in the by-laws
D. None of the above is a correct statement
BOARD OF DIRECTORS; ELECTION
1. Majority of the outstanding capital stock, whether in person
or by written proxy must be present at the election of the
directors; or majority of members entitled to vote, in the case
of a non-stock corporation. If the required quorum is not
obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the
election may be held by ballot otherwise viva-voce would
suffice.
3. The candidates receiving the highest number of votes shall be
elected
BOARD OF DIRECTORS; ELECTION
1. Majority of the outstanding capital stock, whether in person
or by written proxy must be present at the election of the
directors; or majority of members entitled to vote, in the case
of a non-stock corporation. If the required quorum is not
obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the
election may be held by ballot otherwise viva-voce would
suffice.
3. The candidates receiving the highest number of votes shall be
elected
BOARD OF DIRECTORS; ELECTION
METHODS OF VOTING:
1. Straight Voting – the number of votes a stockholder gets is
equivalent to the number of shares held.
2. Cumulative Voting – the number of votes a stockholder
gets is equivalent to the number of shares held multiplied by
the number of directors to be elected.
BOARD OF DIRECTORS; ELECTION
A, is a stockholder of Silvestre Corporation, who holds 10,000
shares thereof. A stockholders meeting was called to elect
members of a 5-man Board. How many votes can A cast in favor
of B, a candidate to be a Director, if they employ cumulative
voting?
A. 10,000 votes C. 50,000 votes
B. 25,000 votes D. 100,000 votes
BOARD OF DIRECTORS; ELECTION
A, is a stockholder of Silvestre Corporation, who holds 10,000
shares thereof. A stockholders meeting was called to elect
members of a 5-man Board. How many votes can A cast in favor
of B, a candidate to be a Director, if they employ cumulative
voting?
A. 10,000 votes C. 50,000 votes
B. 25,000 votes D. 100,000 votes
BOARD OF DIRECTORS; REMOVAL
By-laws may provide for causes or grounds for removal of a
director;
▪ A director representing the minority may not be removed
except for those causes;
▪ A director NOT representing the minority may be removed
even without a cause
BOARD OF DIRECTORS; REMOVAL
Requirements for a valid removal:
1. The removal should take place at a general or special meeting
duly call for that purpose;
2. The removal must be by the vote of the stockholders holding
or representing 2/3 of the outstanding capital stock or the
members entitled to vote in cases of non-stock corporations;
and
3. There must be a previous notice to the stockholders or
members of the intention to propose such removal at the
meeting either by publication or on written notice to the
stockholders or members.
BOARD OF DIRECTORS; FILLING-UP
OF VACANCIES
CAUSE OF VACANCY WHO WILL FILL THE VACANCY
Removal Stockholders by the election of a
replacement in the same meeting
as that of the removal
Expiration of the term Stockholders
Other causes (death, Board of Directors – if they still
resignation, constitute a quorum;
abandonment) Stockholders – if the Directors no
longer constitute a quorum
QUESTION
Jaime Dinglasan was elected Director of Valle Verde Country
Club, Inc. From 1997-2001, there was lack of the requisite
quorum to elect new directors and they continued in a hold-over
capacity. On September 1, 1998, Dinglasan resigned. Who should
replace the vacancy?
A. Stockholders in the same meeting
B. Stockholders in a meeting called for the purpose
C. Board of Directors if they constitute a quorum
D. Board of Directors regardless if they constitute a quorum or
not
QUESTION
Jaime Dinglasan was elected Director of Valle Verde Country
Club, Inc. From 1997-2001, there was lack of the requisite
quorum to elect new directors and they continued in a hold-over
capacity. On September 1, 1998, Dinglasan resigned. Who should
replace the vacancy?
A. Stockholders in the same meeting
B. Stockholders in a meeting called for the purpose
C. Board of Directors if they constitute a quorum
D. Board of Directors regardless if they constitute a quorum or
not
QUESTION
Replacement of Hold-Over Directors: in the event that a
director, after the expiration of his term is not replace since there
was no election held, such director can continue to function
in a holdover capacity. However, if he resigns, the
stockholders will be the one to replace him even if the
remaining directors continue to constitute a quorum. Note
that the power of the Board to fill up the vacancy is only if the
director resigns before the expiration of his term. In this
instance, the term of the director already expired, he just
continued as such only in a hold-over capacity.
BOARD OF DIRECTORS;
COMPENSATION
General Rule: Directors are not entitled to receive any
compensation this is because the office of a director is usually
filled up by those chiefly interested in the welfare of the
institution by virtue of their interest in stock or other advantages
and such interests are presumed to be the motive for executing
duties of the office without compensation.
Exceptions:
1. Reasonable per diems;
2. As provided in the by-laws or upon a majority vote of the
stockholders; and
3. If they are performing functions other than that of a director.
Limit: not more than 10% of the net income before tax of the
preceding year.
QUESTION
A, B, C, D and E are directors of XYZ Corporation. They are
provided with per diems amounting to P10,000 per meeting.
However, on 2017, the Company incurred losses and the dividend
rate provided to the stockholders are less than the inflation rate
for that year. In 2018, there were a total of 12 meetings, where
A attended only 7. How much is A entitled to in per diems?
A. P0 C. P70,000
B. P10,000 D. P120,000
QUESTION
A, B, C, D and E are directors of XYZ Corporation. They are
provided with per diems amounting to P10,000 per meeting.
However, on 2017, the Company incurred losses and the dividend
rate provided to the stockholders are less than the inflation rate
for that year. In 2018, there were a total of 12 meetings, where
A attended only 7. How much is A entitled to in per diems?
A. P0 C. P70,000
B. P10,000 D. P120,000
DISLOYALTY OF A DIRECTOR; THE
CORPORATE OPPORTUNITY DOCTRINE
A director of a corporation is in a fiduciary position and is thus prohibited
from seizing a business opportunity and/or developing it at the expense
and with the facilities of the corporation. He cannot appropriate to
himself opportunity which should belong to the corporation.

In Sec. 34, if a director acquires a business opportunity which should

belong to the corporation, he is bound to account for such profits unless
his act is ratified by the stockholders owing or representing at least 2/3
of the outstanding capital stock.

Note, however, that under Sec. 31 when a director attempts to acquire

or acquires any interest adverse to the corporation in respect to any
matter reposed in him in confidence as to which equity imposes a
disability upon him to deal in his own behalf – this is not subject to
ratification
QUESTION
A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
his property with a fair market value of P100M for P90M. Z
offered the property first to A, who acquired it for P90M and
eventually sold the same for P100M. In this case,
A. A can keep the profits provided the sale is ratified by the
stockholders.
B. A can keep the profits because it was offered to him and not
to REALTY CORP.
C. The sale is not subject to ratification and A may be required
to remit the profits to REALTY CORP.
D. None of the above
QUESTION
A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
his property with a fair market value of P100M for P90M. Z
offered the property first to A, who acquired it for P90M and
eventually sold the same for P100M. In this case,
A. A can keep the profits provided the sale is ratified by
the stockholders.
B. A can keep the profits because it was offered to him and not
to REALTY CORP.
C. The sale is not subject to ratification and A may be required
to remit the profits to REALTY CORP.
D. None of the above
QUESTION
In the preceding question, assuming the property was first
offered to REALTY CORP for P90M, and C offered to buy the
same for P95M to which Z acceded. In this case,
A. A can keep the profits provided the sale is ratified by the
stockholders.
B. A can keep the profits because it was offered to him and not
to REALTY CORP.
C. The sale is not subject to ratification and A may be required
to remit the profits to REALTY CORP.
D. None of the above.
QUESTION
In the preceding question, assuming the property was first
offered to REALTY CORP for P90M, and C offered to buy the
same for P95M to which Z acceded. In this case,
A. A can keep the profits provided the sale is ratified by the
stockholders.
B. A can keep the profits because it was offered to him and not
to REALTY CORP.
C. The sale is not subject to ratification and A may be
required to remit the profits to REALTY CORP.
D. None of the above.
QUESTION
Mr. X is a director of XYZ Corporation where he had a contract of
sale with. In this case, Mr. X is known as a/an:
A. Disloyal director
B. Interlocking director
C. Self-dealing director
D. Dual director
QUESTION
Mr. X is a director of XYZ Corporation where he had a contract of
sale with. In this case, Mr. X is known as a/an:
A. Disloyal director
B. Interlocking director
C. Self-dealing director
D. Dual director
QUESTION
Mr. X is a Director of both XYZ Corporation and ABC Corporation.
XYZ and ABC entered into a contract of sale. Mr. X is known as
a/an:
A. Disloyal director
B. Interlocking director
C. Self-dealing director
D. Dual director
QUESTION
Mr. X is a Director of both XYZ Corporation and ABC Corporation.
XYZ and ABC entered into a contract of sale. Mr. X is known as
a/an:
A. Disloyal director
B. Interlocking director
C. Self-dealing director
D. Dual director
SELF-DEALING DIRECTORS
A Self-Dealing Director is one who transacts business with his
own corporation.

Generally, A contract entered into by a director with his own

corporation is voidable at the latter’s option, except
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was nor necessary
for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
SELF-DEALING DIRECTORS
On the other hand, where any of the first two conditions is
absent, the contract becomes voidable subject to the ratification
of the stockholders representing 2/3 of the outstanding capital
stock – the requirements of which are: (1) there must be a
meeting called for that purpose; (2) full disclosure of the adverse
interest of the director; and (3) the contract is fair and
reasonable under the circumstances.

If the self-dealing director owns all or substantially all of the

shares of stock, thereby making ratification easily possible, the
reasonableness of the transaction shall be determined - to which
there is no yardstick and remains to be a question of fact
depending on the circumstances.
INTERLOCKING DIRECTOR
INTERLOCKING DIRECTOR: is a director in one corporation who
deals or transacts with another corporation of which he is also a
director. In such case, there may effectively be a dual agency, a
divided allegiance where allegiance in one corporation may
subordinated to the other.

1. The contract between corporations with interlocking director is

valid absent fraud and provided it is reasonable under the
circumstances;
2. If the interest of the interlocking director in one corporation
exceeds 20% and in the other merely nominal, the contract
becomes voidable at the latter corporation’s option. In effect, the
director would be treated as a self-dealing director discussed
above.
3. If the interest in both companies is either both substantial or both
nominal, no. 1 would apply.
QUESTION
Mr. X is a director in both XYZ and ABC Corporations which
entered into a contract of sale. The contract between XYZ and
ABC, is considered valid absent fraud and provided it is
reasonable under the circumstances. But it is considered voidable
if the shareholdings of Mr. X in the two corporations is:

ABC XYZ
A. 25% 25%
B. 5% 5%
C. 25% 5%
D. 3% 20%
QUESTION
Mr. X is a director in both XYZ and ABC Corporations which
entered into a contract of sale. The contract between XYZ and
ABC, is considered valid absent fraud and provided it is
reasonable under the circumstances. But it is considered voidable
if the shareholdings of Mr. X in the two corporations is:

ABC XYZ
A. 25% 25%
B. 5% 5%
C. 25% 5%
D. 3% 20%
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
CORPORATE GOVERNANCE is the framework of rules,
systems and processes in the corporation that governs the
performance by the Board of Directors and Management of their
respective duties and responsibilities to the stockholders.

Board of Directors is the governing body elected by the

stockholders that exercises the corporate powers of a
corporation, conducts all its business and controls its properties.

Management is the body given the authority by the Board of

Directors to implement the policies it has laid down in the
conduct of the business of the corporation.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
APPLICABILITY: : the Revised Code of Corporate Governance
(Code) applies to:
1. Registered Corporations that sell equity and/or debt securities to
the public
2. Branches or Subsidiaries of Foreign Corporations operating in the
Philippines that:
a. Sell equity/debt securities to the public that are required to
be registered with the Securities and Exchange Commission
(Commission); or
b. Have assets in excess of P50,000,000 and at least 200
stockholders who own at least 100 shares each of equity
securities;
c. Whose equity securities are listed on an Exchange;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Exchange is an organized market place or facility that brings
together buyers and sellers, and executes trades of securities
and/or commodities

3. Are grantees of secondary licenses from the Commission

REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
RULES OF INTERPRETATION:
1. All references to the masculine gender in the salient
provisions of this Code shall likewise cover the feminine
gender.
2. All doubts or questions that may arise in the interpretation or
application of this Code shall be resolved in favor of
promoting transparency, accountability and fairness to the
stockholders and investors of the corporation.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
BOARD GOVERNANCE

The Board of Directors (the “Board”) is primarily responsible for

the governance of the corporation. Corollary to setting the
policies for the accomplishment of the corporate objectives, it
shall provide an independent check on Management.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Composition of the Board:

The Board shall be composed of at least five (5), but not more than
fifteen (15), members who are elected by the stockholders.

All companies covered by the Code shall have at least two (2)
independent directors or such number of independent directors that
constitutes twenty percent (20%) of the members of the Board,
whichever is lesser, but in no case less than two (2). All other companies
are encouraged to have independent directors in their boards.

An Independent director is a person who, apart from his fees and

shareholdings, is independent of management and free from any
business or other relationship which could, or could reasonably be
perceived to, materially interfere with his exercise of independent
judgment in carrying out his responsibilities as a director;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The membership of the Board may be a combination of executive and
non-executive directors (which include independent directors) in order
that no director or small group of directors can dominate the decision-
making process.

An Executive director is a director who is also the head of a department

or unit of the corporation or performs any work related to its operation;

A Non-executive director is a director who is not the head of a

department or unit of the corporation nor performs any work related to
its operation.

The non-executive directors should possess such qualifications and

stature that would enable them to effectively participate in the
deliberations of the Board.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
MULTIPLE BOARD SEATS

The Board may consider the adoption of guidelines on the number of

directorships that its members can hold in stock and non-stock
corporations. The optimum number should take into consideration the
capacity of a director to diligently and efficiently perform his duties and
responsibilities.

The Chief Executive Officer (“CEO”) and other executive directors may
be covered by a lower indicative limit for membership in other boards. A
similar limit may apply to independent or non-executive directors who,
at the same time, serve as full-time executives in other corporations. In
any case, the capacity of the directors to diligently and efficiently
perform their duties and responsibilities to the boards they serve should
not be compromised.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The Chair and Chief Executive Officer

The roles of Chair and CEO should, as much as practicable, be

separate to foster an appropriate balance of power, increased
accountability and better capacity for independent decision-
making by the Board. A clear delineation of functions should be
made between the Chair and CEO upon their election.

If the positions of Chair and CEO are unified, the proper checks
and balances should be laid down to ensure that the Board gets
the benefit of independent views and perspectives.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The duties and responsibilities of the Chair in relation to the
Board may include, among others, the following:
1. Ensure that the meetings of the Board are held in accordance
with the by-laws or as the Chair may deem necessary;
2. Supervise the preparation of the agenda of the meeting in
coordination with the Corporate Secretary, taking into
consideration the suggestions of the CEO, Management and
the directors; and
3. Maintain qualitative and timely lines of communication and
information between the Board and Management.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Qualifications of Directors

In addition to the qualifications for membership in the Board

provided for in the Corporation Code, Securities Regulation Code
and other relevant laws, the Board may provide for additional
qualifications which include, among others, the following:

1. College education or equivalent academic degree;

2. Practical understanding of the business of the corporation;
3. Membership in good standing in relevant industry, business or
professional organizations; and
4. Previous business experience
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Disqualifications of Directors
1. Permanent Disqualification - the following shall be
grounds for the permanent disqualification of a director:
i. Any person convicted by final judgment or order by a
competent judicial or administrative body of any crime
that:
a. Involves the purchase or sale of securities, as defined
in the Securities Regulation Code;
b. Arises out of the person’s conduct as an underwriter,
broker, dealer, investment adviser, principal, distributor,
mutual fund dealer, futures commission merchant,
commodity trading advisor, or floor broker; or
c. Arises out of his fiduciary relationship with a bank,
quasi-bank, trust company, investment house or as an
affiliated person of any of them
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ii. Any person who, by reason of misconduct, after hearing, is
permanently enjoined by a final judgment or order of the
Commission or any court or administrative body of competent
jurisdiction from:
a. Acting as underwriter, broker, dealer, investment adviser,
principal distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, or
floor broker;
b. Acting as director or officer of a bank, quasi bank, trust
company, investment house, or investment company;
c. Engaging in or continuing any conduct or practice in any
of the capacities mentioned in sub-paragraphs (a) and
(b) above, or willfully violating the laws that govern
securities and banking activities.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The disqualification shall also apply if such person is currently the
subject of an order of the Commission or any court or
administrative body denying, revoking or suspending any
registration, license or permit issued to him under the Corporation
Code, Securities Regulation Code or any other law administered
by the Commission or Bangko Sentral ng Pilipinas (BSP), or under
any rule or regulation issued by the Commission or BSP, or has
otherwise been restrained to engage in any activity involving
securities and banking; or such person is currently the subject of
an effective order of a self-regulatory organization suspending or
expelling him from membership, participation or association with
a member or participant of the organization.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
iii. Any person convicted by final judgment or order by a court or
competent administrative body of an offense involving moral
turpitude, fraud, embezzlement, theft, estafa, counterfeiting,
misappropriation, forgery, bribery, false affirmation, perjury or
other fraudulent acts;
iv. Any person who has been adjudged by final judgment or order
of the Commission, court, or competent administrative body to
have willfully violated, or willfully aided, abetted, counseled,
induced or procured the violation of any provision of the
Corporation Code, Securities Regulation Code or any other law
administered by the Commission or BSP, or any of its rule,
regulation or order;
v. Any person earlier elected as independent director who becomes
an officer, employee or consultant of the same corporation;
vi. Any person judicially declared as insolvent;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
vii. Any person found guilty by final judgment or order of a foreign
court or equivalent financial regulatory authority of acts,
violations or misconduct similar to any of the acts, violations or
misconduct enumerated in sub-paragraphs (i) to (v) above;
viii. Conviction by final judgment of an offense punishable by
imprisonment for more than six (6) years, or a violation of the
Corporation Code committed within five (5) years prior to the
date of his election or appointment.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
2. Temporary Disqualification - the Board may provide for
the temporary disqualification of a director for any of the
following reasons:
i. Refusal to comply with the disclosure requirements of the
Securities Regulation Code and its Implementing Rules and
Regulations. The disqualification shall be in effect as long
as the refusal persists.
ii. Absence in more than fifty (50) percent of all regular and
special meetings of the Board during his incumbency, or
any twelve (12) month period during the said incumbency,
unless the absence is due to illness, death in the
immediate family or serious accident. The disqualification
shall apply for purposes of the succeeding election.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
iii. Dismissal or termination for cause as director of any
corporation covered by this Code. The disqualification
shall be in effect until he has cleared himself from any
involvement in the cause that gave rise to his dismissal or
termination.
iv. If the beneficial equity ownership of an independent
director in the corporation or its subsidiaries and affiliates
exceeds two percent of its subscribed capital stock. The
disqualification shall be lifted if the limit is later complied
with.
v. If any of the judgments or orders cited in the grounds for
permanent disqualification has not yet become final.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
A temporarily disqualified director shall, within sixty (60) business
days from such disqualification, take the appropriate action to
remedy or correct the disqualification. If he fails or refuses to do
so for unjustified reasons, the disqualification shall become
permanent.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
General Responsibility of the Board

It is the Board’s responsibility to foster the long-term success of

the corporation, and to sustain its competitiveness and
profitability in a manner consistent with its corporate objectives
and the best interests of its stockholders.

The Board should formulate the corporation’s vision, mission,

strategic objectives, policies and procedures that shall guide its
activities, including the means to effectively monitor
Management’s performance.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Duties and Functions of the Board: To ensure a high standard of best
practice for the corporation and its stockholders, the Board should
conduct itself with honesty and integrity in the performance of, among
others, the following duties and functions:
a. Implement a process for the selection of directors who can add value
and contribute independent judgment to the formulation of sound
corporate strategies and policies. Appoint competent, professional,
honest and highly motivated management officers. Adopt an
effective succession planning program for Management.
b. Provide sound strategic policies and guidelines to the corporation on
major capital expenditures. Establish programs that can sustain its
long-term viability and strength. Periodically evaluate and monitor
the implementation of such policies and strategies, including the
business plans, operating budgets and Management’s overall
performance.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
c. Ensure the corporation’s faithful compliance with all applicable laws,
regulations and best business practices.
d. Establish and maintain an investor relations program that will keep
the stockholders informed of important developments in the
corporation. If feasible, the corporation’s CEO or chief financial
officer shall exercise oversight responsibility over this program.
e. Identify the sectors in the community in which the corporation
operates or are directly affected by its operations, and formulate a
clear policy of accurate, timely and effective communication with
them.
f. Adopt a system of check and balance within the Board. A regular
review of the effectiveness of such system should be conducted to
ensure the integrity of the decision-making and reporting processes
at all times. There should be a continuing review of the corporation’s
internal control system in order to maintain its adequacy and
effectiveness.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
g. Identify key risk areas and performance indicators and monitor these
factors with due diligence to enable the corporation to anticipate and
prepare for possible threats to its operational and financial viability.
h. Formulate and implement policies and procedures that would ensure
the integrity and transparency of related party transactions between
and among the corporation and its parent company, joint ventures,
subsidiaries, associates, affiliates, major stockholders, officers and
directors, including their spouses, children and dependent siblings
and parents, and of interlocking director relationships by members of
the Board.
i. Constitute an Audit Committee and such other committees it deems
necessary to assist the Board in the performance of its duties and
responsibilities.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
j. Establish and maintain an alternative dispute resolution system in
the corporation that can amicably settle conflicts or differences
between the corporation and its stockholders, and the corporation
and third parties, including the regulatory authorities.
k. Meet at such times or frequency as may be needed. The minutes of
such meetings should be duly recorded. Independent views during
Board meetings should be encouraged and given due consideration.
l. Keep the activities and decisions of the Board within its authority
under the articles of incorporation and by-laws, and in accordance
with existing laws, rules and regulations.
m. Appoint a Compliance Officer who shall have the rank of at least vice
president. In the absence of such appointment, the Corporate
Secretary, preferably a lawyer, shall act as Compliance Officer.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Special Duties and Responsibilities of a Director

A director’s office is one of trust and confidence. A director should act in

the best interest of the corporation in a manner characterized by
transparency, accountability and fairness. He should also exercise
leadership, prudence and integrity in directing the corporation towards
sustained progress.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
A director should observe the following norms of conduct:

i. Conduct fair business transactions with the corporation and

ensure that his personal interest does not conflict with the
interests of the corporation.

The basic principle to be observed is that a director should not use his
position to profit or gain some benefit or advantage for himself and/or his
related interests. He should avoid situations that may compromise his
impartiality. If an actual or potential conflict of interest may arise on the part
of a director, he should fully and immediately disclose it and should not
participate in the decision-making process. A director who has a continuing
material conflict of interest should seriously consider resigning from his
position.

A conflict of interest shall be considered material if the director’s personal or

business interest is antagonistic to that of the corporation or stands to
acquire or gain financial advantage at the expense of the corporation.

Devote the time and attention necessary to properly and effectively

REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ii. Devote the time and attention necessary to properly and
effectively perform his duties and responsibilities.

A director should devote sufficient time to familiarize himself with the

corporation’s business. He should be constantly aware of and
knowledgeable with the corporation’s operations to enable him to
meaningfully contribute to the Board’s work. He should attend and
actively participate in Board and committee meetings, review meeting
materials and, if called for, ask questions or seek explanation.

iii. Act judiciously.

Before deciding on any matter brought before the Board, a director

should carefully evaluate the issues and, if necessary, make inquiries
and request clarification.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
iv. Exercise independent judgment.

A director should view each problem or situation objectively. If a

disagreement with other directors arises, he should carefully evaluate
and explain his position. He should not be afraid to take an unpopular
position. Corollarily, he should support plans and ideas that he thinks
are beneficial to the corporation.

v. Have a working knowledge of the statutory and regulatory

requirements that affect the corporation, including its
articles of incorporation and by-laws, the rules and
regulations of the Commission and, where applicable, the
requirements of relevant regulatory agencies. A director should
also keep abreast with industry developments and business trends in
order to promote the corporation’s competitiveness.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
vi. Observe confidentiality.

A director should keep secure and confidential all non-public

information he may acquire or learn by reason of his position as
director. He should not reveal confidential information to
unauthorized persons without the authority of the Board
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Internal Control Responsibilities of the Board

Internal control refers to the system established by the Board of

Directors and Management for the accomplishment of the
corporation’s objectives, the efficient operation of its business,
the reliability of its financial reporting, and faithful compliance
with applicable laws, regulations and internal rules

Internal control system is the framework under which internal

controls are developed and implemented (alone or in concert
with other policies or procedures) to manage and control a
particular risk or business activity, or combination of risks or
business activities, to which the corporation is exposed.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The control environment of the corporation consists of:
a. The Board which ensures that the corporation is properly and
effectively managed and supervised;
b. A Management that actively manages and operates the
corporation in a sound and prudent manner;
c. The organizational and procedural controls supported by
effective management information and risk management
reporting systems; and
d. An independent audit mechanism to monitor the adequacy
and effectiveness of the corporation’s governance, operations,
and information systems, including the reliability and integrity
of financial and operational information, the effectiveness and
efficiency of operations, the safeguarding of assets, and
compliance with laws, rules, regulations and contracts.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
i. The minimum internal control mechanisms for the
performance of the Board’s oversight responsibility may
include:
a. Definition of the duties and responsibilities of the CEO
who is ultimately accountable for the corporation’s
organizational and operational controls;
b. Selection of the person who possesses the ability, integrity
and expertise essential for the position of CEO;
c. Evaluation of proposed senior management
appointments;
d. Selection and appointment of qualified and competent
management officers; and
e. Review of the corporation’s human resource policies,
conflict of interest situations, compensation program for
employees, and management succession plan.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ii. The scope and particulars of the systems of effective
organizational and operational controls may differ among
corporations depending on, among others, the following
factors: nature and complexity of the business and the
business culture; volume, size and complexity of transactions;
degree of risks involved; degree of centralization and
delegation of authority; extent and effectiveness of
information technology; and extent of regulatory compliance.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
iii. A corporation may establish an internal audit system that can
reasonably assure the Board, Management and stockholders
that its key organizational and operational controls are
faithfully complied with. The Board may appoint an Internal
Auditor to perform the audit function and may require him to
report to a level in the organization that allows the internal
audit activity to fulfill its mandate. The Internal Auditor shall
be guided by the International Standards on Professional
Practice of Internal Auditing.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Internal audit is an independent and objective assurance activity
designed to add value to and improve the corporation’s operations, and
help it accomplish its objectives by providing a systematic and
disciplined approach in the evaluation and improvement of the
effectiveness of risk management, control and governance processes.

Internal audit department is a department or unit of the corporation and

its consultants, if any, that provide independent and objective assurance
services in order to add value to and improve the corporation’s
operations;

Internal Auditor is the highest position in the corporation responsible for

internal audit activities. If internal audit activities are performed by
outside service providers, he is the person responsible for overseeing
the service contract, the overall quality of these activities, and follow-up
of engagement results.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Board Meetings and Quorum Requirement

The members of the Board should attend its regular and special meetings in
person or through teleconferencing conducted in accordance with the rules
and regulations of the Commission.

Independent directors should always attend Board meetings. Unless

otherwise provided in the by-laws, their absence shall not affect the quorum
requirement. However, the Board may, to promote transparency, require the
presence of at least one independent director in all its meetings.

To monitor the directors’ compliance with the attendance requirements,

corporations shall submit to the Commission, on or before January 30 of the
following year, a sworn certification about the directors’ record of attendance
in Board meetings. The certification may be submitted through SEC Form 17-
C or in a separate filing.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Remuneration of Directors and Officers

The levels of remuneration of the corporation should be sufficient

to be able to attract and retain the services of qualified and
competent directors and officers. A portion of the remuneration
of executive directors may be structured or be based on
corporate and individual performance.

Corporations may establish formal and transparent procedures

for the development of a policy on executive remuneration or
determination of remuneration levels for individual directors and
officers depending on the particular needs of the corporation. No
director should participate in deciding on his remuneration.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The corporation’s annual reports and information and proxy
statements shall include a clear, concise and understandable
disclosure of all fixed and variable compensation that may be
paid, directly or indirectly, to its directors and top four (4)
management officers during the preceding fiscal year.

To protect the funds of a corporation, the Commission may, in

exceptional cases, e.g., when a corporation is under receivership
or rehabilitation, regulate the payment of the compensation,
allowances, fees and fringe benefits to its directors and officers.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Board Committees

The Board shall constitute the proper committees to assist it in

good corporate governance.

1. The Audit Committee shall consist of at least three (3)

directors, who shall preferably have accounting and finance
backgrounds, one of whom shall be an independent director
and another with audit experience. The chair of the Audit
Committee should be an independent director. The committee
shall have the following functions:
a. Assist the Board in the performance of its oversight
responsibility for the financial reporting process, system of
internal control, audit process, and monitoring of
compliance with applicable laws, rules and regulations;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
b. Provide oversight over Management’s activities in
managing credit, market, liquidity, operational, legal and
other risks of the corporation. This function shall include
regular receipt from Management of information on risk
exposures and risk management activities;
c. Perform oversight functions over the corporation’s internal
and external auditors. It should ensure that the internal
and external auditors act independently from each other,
and that both auditors are given unrestricted access to all
records, properties and personnel to enable them to
perform their respective audit functions;
d. Review the annual internal audit plan to ensure its
conformity with the objectives of the corporation. The
plan shall include the audit scope, resources and budget
necessary to implement it;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
e. Prior to the commencement of the audit, discuss with the
external auditor the nature, scope and expenses of the
audit, and ensure proper coordination if more than one
audit firm is involved in the activity to secure proper
coverage and minimize duplication of efforts;
f. Organize an internal audit department, and consider the
appointment of an independent internal auditor and the
terms and conditions of its engagement and removal;
g. Monitor and evaluate the adequacy and effectiveness of
the corporation’s internal control system, including
financial reporting control and information technology
security;
h. Review the reports submitted by the internal and external
auditors;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
i. Review the quarterly, half-year and annual financial
statements before their submission to the Board, with
particular focus on the following matters:
i. Any change/s in accounting policies and practices
ii. Major judgmental areas
iii. Significant adjustments resulting from the audit
iv. Going concern assumptions
v. Compliance with accounting standards
vi. Compliance with tax, legal and regulatory
requirements
j. Coordinate, monitor and facilitate compliance with laws,
rules and regulations;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
k. Evaluate and determine the non-audit work, if any, of the
external auditor, and review periodically the non-audit
fees paid to the external auditor in relation to their
significance to the total annual income of the external
auditor and to the corporation’s overall consultancy
expenses. The committee shall disallow any non-audit
work that will conflict with his duties as an external
auditor or may pose a threat to his independence. The
non-audit work, if allowed, should be disclosed in the
corporation’s annual report;
l. Establish and identify the reporting line of the Internal
Auditor to enable him to properly fulfill his duties and
responsibilities. He shall functionally report directly to the
Audit Committee.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The Audit Committee shall ensure that, in the performance of the
work of the Internal Auditor, he shall be free from interference by
outside parties.

For Philippine branches or subsidiaries of foreign corporations

covered by this Code, their Internal Auditor should be
independent of the Philippine operations and should report to the
regional or corporate headquarters.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
2. A Nomination Committee which may be composed of at
least three (3) members and one of whom should be an
independent director, to review and evaluate the
qualifications of all persons nominated to the Board and
other appointments that require Board approval, and to
assess the effectiveness of the Board’s processes and
procedures in the election or replacement of directors;
3. A Compensation or Remuneration Committee, which
may be composed of at least three (3) members and one of
whom should be an independent director, to establish a
formal and transparent procedure for developing a policy on
remuneration of directors and officers to ensure that their
compensation is consistent with the corporation’s culture,
strategy and the business environment in which it operates.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The Corporate Secretary

The Corporate Secretary, who should be a Filipino citizen and a

resident of the Philippines, is an officer of the corporation. He
should -
i. Be responsible for the safekeeping and preservation of the
integrity of the minutes of the meetings of the Board and its
committees, as well as the other official records of the
corporation;
ii. Be loyal to the mission, vision and objectives of the
corporation;
iii. Work fairly and objectively with the Board, Management and
stockholders;
iv. Have appropriate administrative and interpersonal skills;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
v. If he is not at the same time the corporation’s legal counsel,
be aware of the laws, rules and regulations necessary in the
performance of his duties and responsibilities;
vi. Have a working knowledge of the operations of the
corporation;
vii. Inform the members of the Board, in accordance with the
bylaws, of the agenda of their meetings and ensure that the
members have before them accurate information that will
enable them to arrive at intelligent decisions on matters that
require their approval;
viii. Attend all Board meetings, except when justifiable causes,
such as, illness, death in the immediate family and serious
accidents, prevent him from doing so;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ix. Ensure that all Board procedures, rules and regulations are
strictly followed by the members; and
x. If he is also the Compliance Officer, perform all the duties
and responsibilities of the said officer as provided for in this
Code.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The Compliance Officer
The Board shall appoint a Compliance Officer who shall report
directly to the Chair of the Board. He shall perform the following
duties:
i. Monitor compliance by the corporation with this Code and the rules
and regulations of regulatory agencies and, if any violations are
found, report the matter to the Board and recommend the
imposition of appropriate disciplinary action on the responsible
parties and the adoption of measures to prevent a repetition of the
violation;
ii. Appear before the Commission when summoned in relation to
compliance with this Code; and
iii. Issue a certification every January 30th of the year on the extent of
the corporation’s compliance with this Code for the completed year
and, if there are any deviations, explain the reason for such
deviation.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ADEQUATE AND TIMELY INFORMATION

To enable the members of the Board to properly fulfill their

duties and responsibilities, Management should provide them
with complete, adequate and timely information about the
matters to be taken in their meetings.

Reliance on information volunteered by Management would not

be sufficient in all circumstances and further inquiries may have
to be made by a member of the Board to enable him to properly
perform his duties and responsibilities. Hence, the members
should be given independent access to Management and the
Corporate Secretary. The information may include the
background or explanation on matters brought before the Board,
disclosures, budgets, forecasts and internal financial documents.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The members, either individually or as a Board, and in
furtherance of their duties and responsibilities, should have
access to independent professional advice at the corporation’s
expense.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ACCOUNTABILITY AND AUDIT

A. The Board is primarily accountable to the stockholders. It

should provide them with a balanced and comprehensible
assessment of the corporation’s performance, position and
prospects on a quarterly basis including interim and other
reports that could adversely affect its business, as well as
reports to regulators that are required by law.

Thus, it is essential that Management provide all members of

the Board with accurate and timely information that would
enable the Board to comply with its responsibilities to the
stockholders.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
Management should formulate, under the supervision of the
Audit Committee, the rules and procedures on financial reporting
and internal control in accordance with the following guidelines:

i. The extent of its responsibility in the preparation of the

financial statements of the corporation, with the
corresponding delineation of the responsibilities that pertain
to the external auditor, should be clearly explained;
ii. An effective system of internal control that will ensure the
integrity of the financial reports and protection of the assets
of the corporation should be maintained;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
iii.On the basis of the approved audit plans, internal audit
examinations should cover, at the minimum, the evaluation of
the adequacy and effectiveness of controls that cover the
corporation’s governance, operations and information
systems, including the reliability and integrity of financial and
operational information, effectiveness and efficiency of
operations, protection of assets, and compliance with
contracts, laws, rules and regulations;
iv. The corporation should consistently comply with the financial
reporting requirements of the Commission;
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
v. The external auditor should be rotated or changed every five (5)
years or earlier, or the signing partner of the external auditing
firm assigned to the corporation, should be changed with the
same frequency. The Internal Auditor should submit to the Audit
Committee and Management an annual report on the internal
audit department’s activities, responsibilities and performance
relative to the audit plans and strategies as approved by the
Audit Committee. The annual report should include significant
risk exposures, control issues and such other matters as may be
needed or requested by the Board and Management. The
Internal Auditor should certify that he conducts his activities in
accordance with the International Standards on the Professional
Practice of Internal Auditing. If he does not, he shall disclose to
the Board and Management the reasons why he has not fully
complied with the said standards.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
B. The Board, after consultations with the Audit Committee, shall
recommend to the stockholders an external auditor duly
accredited by the Commission who shall undertake an
independent audit of the corporation, and shall provide an
objective assurance on the manner by which the financial
statements shall be prepared and presented to the
stockholders. The external auditor shall not, at the same time,
provide internal audit services to the corporation. Non-audit
work may be given to the external auditor, provided it does
not conflict with his duties as an independent auditor, or does
not pose a threat to his independence.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
If the external auditor resigns, is dismissed or ceases to perform his
services, the reason/s for and the date of effectivity of such action
shall be reported in the corporation’s annual and current reports. The
report shall include a discussion of any disagreement between him
and the corporation on accounting principles or practices, financial
disclosures or audit procedures which the former auditor and the
corporation failed to resolve satisfactorily. A preliminary copy of the
said report shall be given by the corporation to the external auditor
before its submission.

If the external auditor believes that any statement made in an

annual report, information statement or any report filed with the
Commission or any regulatory body during the period of his
engagement is incorrect or incomplete, he shall give his comments
or views on the matter in the said reports.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
STOCKHOLDERS’ RIGHTS AND PROTECTION OF
MINORITY STOCKHOLDERS’ INTERESTS

A. The Board shall respect the rights of the stockholders as

provided for in the Corporation Code, namely:
i. Right to vote on all matters that require their consent or
approval;
ii. Pre-emptive right to all stock issuances of the
corporation;
iii. Right to inspect corporate books and records;
iv. Right to information;
v. Right to dividends; and
vi. Appraisal right.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The Board should be transparent and fair in the conduct of the
annual and special stockholders’ meetings of the corporation.
The stockholders should be encouraged to personally attend such
meetings. If they cannot attend, they should be apprised ahead
of time of their right to appoint a proxy. Subject to the
requirements of the bylaws, the exercise of that right shall not be
unduly restricted and any doubt about the validity of a proxy
should be resolved in the stockholder’s favor.

It is the duty of the Board to promote the rights of the

stockholders, remove impediments to the exercise of those rights
and provide an adequate avenue for them to seek timely redress
for breach of their rights.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
The Board should take the appropriate steps to remove excessive
or unnecessary costs and other administrative impediments to
the stockholders’ meaningful participation in meetings, whether
in person or by proxy. Accurate and timely information should be
made available to the stockholders to enable them to make a
sound judgment on all matters brought to their attention for
consideration or approval.

Although all stockholders should be treated equally or without

discrimination, the Board should give minority stockholders the
right to propose the holding of meetings and the items for
discussion in the agenda that relate directly to the business of
the corporation.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
GOVERNANCE SELF-RATING SYSTEM

The Board may create an internal self-rating system that can

measure the performance of the Board and Management in
accordance with the criteria provided for in this Code.

The creation and implementation of such self-rating system,

including its salient features, may be disclosed in the
corporation’s annual report.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
DISCLOSURE AND TRANSPARENCY

The essence of corporate governance is transparency. The more

transparent the internal workings of the corporation are, the more
difficult it will be for Management and dominant stockholders to
mismanage the corporation or misappropriate its assets.

It is therefore essential that all material information about the

corporation which could adversely affect its viability or the interests of
the stockholders should be publicly and timely disclosed. Such
information should include, among others, earnings results, acquisition
or disposition of assets, off balance sheet transactions, related party
transactions, and direct and indirect remuneration of members of the
Board and Management. All such information should be disclosed
through the appropriate Exchange mechanisms and submissions to the
Commission.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
COMMITTEE OF GOOD CORPORATE GOVERNANCE

All covered corporations shall establish and implement their corporate

governance rules in accordance with this Code. The rules shall be
embodied in a manual that can be used as reference by the members of
the Board and Management. The manual should be submitted to the
Commission for its evaluation within one hundred eighty (180) business
days from the date this Code becomes effective to enable the
Commission to determine its compliance with this Code taking into
consideration the nature, size and scope of the business of the
corporation; provided, however, that corporations that have earlier
submitted their manual may, at their option, continue to use the said
manual as long it complies with the provisions of this Code.

The manual shall be made available for inspection by any shareholder at

reasonable hours on business days.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
REGULAR REVIEW OF THE CODE AND THE SCORECARD

To monitor the compliance by covered corporations with this

Code, the Commission may require them to accomplish annually
a scorecard on the scope, nature and extent of the actions they
have taken to meet the objectives of this Code.

The Commission shall periodically review this Code to ensure that

it meets its objectives
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ADMINISTRATIVE SANCTIONS

A fine of not more than Two Hundred Thousand Pesos

(P200,000) shall, after due notice and hearing, be imposed for
every year that a covered corporation violates the provisions of
this Code, without prejudice to other sanctions that the
Commission may be authorized to impose under the law;
provided, however, that any violation of the Securities Regulation
Code punishable by a specific penalty shall be assessed
separately and shall not be covered by the abovementioned fine.
REVISED CODE OF CORPORATE
GOVERNANCE (SEC MEMORANDUM
CIRCULAR No. 6-2009)
ADMINISTRATIVE SANCTIONS

A fine of not more than Two Hundred Thousand Pesos

(P200,000) shall, after due notice and hearing, be imposed for
every year that a covered corporation violates the provisions of
this Code, without prejudice to other sanctions that the
Commission may be authorized to impose under the law;
provided, however, that any violation of the Securities Regulation
Code punishable by a specific penalty shall be assessed
separately and shall not be covered by the abovementioned fine.
EXECUTIVE COMMITTEE
1. The by-laws of a corporation may create an executive
committee, composed of not less than three members of
the board, to be appointed by the board.
2. 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.
EXECUTIVE COMMITTEE
Executive Committees have no power to:
1. Approve any action for which stockholders’ approval is
required;
2. Fill-up vacancies in the board;
3. Amend or repeal the by-laws or adopt new by-laws;
4. Amend or repeal any resolution of the board which by its
express terms is not so amendable or repealable;
5. Distribute cash dividends to the shareholders.
CORPORATE OFFICERS
ELECTION OF CORPORATE OFFICERS: Except in a close
corporation where the corporate officers may be elected directly
by the stockholders, the Code requires the BOD to elect the said
officers;

The officers that may be elected are the:

1. President – who must be a director;
2. Treasurer – who may or may not be a director;
3. Secretary – who should be a resident and citizen of the
Philippines;
4. Such other officers as may be provided for in the by-laws.
CORPORATE OFFICERS
Any two or more positions may be held concurrently by the same
person, except:
1. The president and the secretary;
2. The president and the treasurer.
QUESTION
Any two or more corporate officer position may be held
concurrently by the same person, except in the following cases
(choose which is not an exception):
A. President and Secretary
B. Treasurer and Secretary
C. President and Treasurer
D. None of the above
QUESTION
Any two or more corporate officer position may be held
concurrently by the same person, except in the following cases
(choose which is not an exception):
A. President and Secretary
B. Treasurer and Secretary
C. President and Treasurer
D. None of the above
CORPORATE OFFICERS
Votes Required for Election of Corporate Officers: is
majority of the number of the Board of Directors (not Majority of
those present)
QUESTION
A, B, C, D, E, F, G are the directors of a 7-man Board of Directors
of XYZ Corporation. A meeting was called to elect corporate
officers where only A, B, C and D are present. How many votes
are required to elect a corporate officer in this case?
A. 7 C. 4
B. 5 D. 3
QUESTION
A, B, C, D, E, F, G are the directors of a 7-man Board of Directors
of XYZ Corporation. A meeting was called to elect corporate
officers where only A, B, C and D are present. How many votes
are required to elect a corporate officer in this case?
A. 7 C. 4
B. 5 D. 3
PERSONAL LIABILITY OF OFFICERS
The general rule is that acts done by him as such officer or
agent, or when absent bad faith or malice, there is no personal
liability.
PERSONAL LIABILITY OF OFFICERS
Personal liability of a corporate director, trustee or officer
along (although not necessarily) with the corporation may so
validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation,
or (b) for bad faith, or (c) gross negligence in directing its
affairs, or (d) conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with
the corporation;
4. He is made, by a specific provision of law, to personally
answer for his corporate action
QUESTION
Leon Gaw delivered to Ricardo Llamado, treasurer of Pan Asia
Finance Corporation, P180,000 as a loan with 6% interest. In
return, Ricardo Llamado issued a post-dated check in behalf of
the corporation which was later on found to be drawn against
insufficient funds. In this case,
A. Ricardo Llamado cannot be held personally liable since he
merely signed the check in his capacity as Treasurer.
B. Ricardo Llamado can be held personally liable since he is
made, by specific provision of law, personally liable for his
corporate action.
C. Ricardo Llamado cannot be held personally liable since it is
not shown that he had no personal knowledge of the fact of
insufficiency of funds.
D. Ricardo Llamado can be held personally liable if the assets of
the Corporation are insufficient to cover the amount of the
loan
QUESTION
Leon Gaw delivered to Ricardo Llamado, treasurer of Pan Asia
Finance Corporation, P180,000 as a loan with 6% interest. In
return, Ricardo Llamado issued a post-dated check in behalf of
the corporation which was later on found to be drawn against
insufficient funds. In this case,
A. Ricardo Llamado cannot be held personally liable since he
merely signed the check in his capacity as Treasurer.
B. Ricardo Llamado can be held personally liable since he
is made, by specific provision of law, personally liable
for his corporate action.
C. Ricardo Llamado cannot be held personally liable since it is
not shown that he had no personal knowledge of the fact of
insufficiency of funds.
D. Ricardo Llamado can be held personally liable if the assets of
the Corporation are insufficient to cover the amount of the
loan
QUESTION
Petitioner's argument that he should not be held personally liable
for the amount of the check because it was a check of the Pan
Asia Finance Corporation and he signed the same in his capacity
as Treasurer of the corporation, is also untenable. The third
paragraph of Section 1 of BP Blg. 22 states:

“Where the check is drawn by a corporation, company or

entity, the person or persons who actually signed the
check in behalf of such drawer shall be liable under this
Act”
QUESTION
Employees of Crispa, Inc. were retrenched on the ground of
serious business losses through a Board Resolution signed by
Elena Uichico, Samuel Floro, Victoria Basilio and Valeriano Floro
(Corporate Officers). It was later on determined that there was
no basis to claim serious business losses and that the
retrenchment was done in bad faith. In this case,
A. Corporate Officers cannot be held liable since their acts are in
their official capacity.
B. Corporate Officers cannot be held liable since Crispa, Inc. has
a personality separate and distinct from its corporate officers.
C. Corporate Officers can be held liable since the law makes
them personally liable.
D. Corporate officers can be held liable since the act is
considered patently unlawful or in bad faith
QUESTION
Employees of Crispa, Inc. were retrenched on the ground of
serious business losses through a Board Resolution signed by
Elena Uichico, Samuel Floro, Victoria Basilio and Valeriano Floro
(Corporate Officers). It was later on determined that there was
no basis to claim serious business losses and that the
retrenchment was done in bad faith. In this case,
A. Corporate Officers cannot be held liable since their acts are in
their official capacity.
B. Corporate Officers cannot be held liable since Crispa, Inc. has
a personality separate and distinct from its corporate officers.
C. Corporate Officers can be held liable since the law makes
them personally liable.
D. Corporate officers can be held liable since the act is
considered patently unlawful or in bad faith
QUESTION
In labor cases, particularly, corporate directors and officers are
solidarily liable with the corporation for the termination of
employment of corporate employees done with malice or in bad
faith. In this case, it is undisputed that petitioners have a direct
hand in the illegal dismissal of respondent employees. They
were the ones, who as high-ranking officers and directors
of Crispa, Inc., signed the Board Resolution retrenching
the private respondents on the feigned ground of serious
business losses that had no basis apart from an unsigned
and unaudited Profit and Loss Statement which, to
repeat, had no evidentiary value whatsoever. This is
indicative of bad faith on the part of petitioners for which
they can be held jointly and severally liable with Crispa,
Inc. for all the money claims of the illegally terminated
respondent employees in this case.
CORPORATE POWERS
Actions requiring Stockholders’ Vote:
1. To amend its articles of incorporation in accordance with the provisions
of this Code;
2. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
3. In case of stock corporations, to issue or sell stocks to subscribers and to
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;
4. 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;
5. To enter into merger or consolidation with other corporations as provided
in this Code;
CORPORATE POWERS
Actions which do not require Stockholders’ Vote:
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 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;
5. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
6. Implied Powers: To exercise such other powers as may be
essential or necessary to carry out its purpose or purposes as stated
in the articles of incorporation.
QUESTION
Under the corporation code, a corporation has power and
capacity to (choose the exception):
A. To sue and be sued in its corporate name
B. To adopt and use a corporate seal
C. To make reasonable donations for public welfare including
giving aid to political parties
D. To acquire real and personal properties in its own name
QUESTION
Under the corporation code, a corporation has power and
capacity to (choose the exception):
A. To sue and be sued in its corporate name
B. To adopt and use a corporate seal
C. To make reasonable donations for public welfare
including giving aid to political parties
D. To acquire real and personal properties in its own name
POWER TO ACQUIRE OWN SHARES
Requisites:
1. The acquisition is for a legitimate corporate purpose/s, including but
not limited to the following:
a. To eliminate fractional shares arising out of stock dividends
b. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase the delinquent shares sold during said sale; and
c. To pay dissenting or withdrawing stockholders entitled to payment
for their shares, as in the exercise of an appraisal right.

2. There is available unrestricted earnings to cover the shares to be

acquired or purchased.
POWER TO DECLARE DIVIDENDS
Declaration of stock dividends requires not only the majority
vote of the BOD but also the approval of stockholders owning at
least 2/3 of the outstanding capital stock.

The BOD can be compelled to declare dividends if the retained

earnings are in excess of 100% of the paid-up capital.
However, the BOD can still refuse, if:
1. Justified by a definite corporate expansion/projects/programs
approved by the Board;
2. The corporation is prohibited under a loan agreement to
declare dividends without the creditor’s consent and such
consent has not yet been secured;
3. It can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation.
POWER TO DECLARE DIVIDENDS
If there are no retained earnings, dividends, as a rule, cannot be
declared out of capital stock. EXCEPT:
1. Liquidating dividends
2. Investments in wasting assets such as mining, oil, well, etc.
MANAGEMENT CONTRACT; VOTING
REQUIREMENTS
A Management Contract is a contract whereby a corporation
(managing corporation) undertakes to manage or operate all or
substantially all of the business of another corporation (managed
corporation).
Voting Requirement: General Rule: Majority of the Board of
Directors + Majority of the Stockholders of both the managing
and managed corporation.

Exception: BOD + 2/3 of the Stockholders of the Managed

Corporation, when:
1. The stockholders own 1/3 of the capital stock of the managing
corporation.
2. A majority of the members of the board of the managing corporation
also constitute a majority of the board of the managed corporation.
VOTING REQUIREMENTS
The following require a MAJORITY vote from the stockholders,
concurring with the BOD:
1. Adoption of by-laws
2. Amendment of the by-laws
3. Entering a management contract, as a rule.

Without Board Resolution:

1. Election of Directors
2. Calling a special meeting for removal of directors
3. Approval of the compensation of the directors
4. Revoke the delegation of the power to amend by-laws from
the BOD
5. Adoption of by-laws after incorporation
VOTING REQUIREMENTS
The following require 2/3 vote from the stockholders, concurring
with the BOD:
1. Extend or shorten the corporate term;
2. Increase/decrease corporate stock
3. Incur or create bonded indebtedness;
4. Deny pre-emptive right
5. Sell, dispose, lease, encumber all or substantially all of
corporate assets;
6. Invest in another corporation other than the primary purpose;
7. Amend the articles of incorporation.
8. Merger or consolidation.
9. Declare stock dividends
10.Enter into a management contract as exception
VOTING REQUIREMENTS
The following require 2/3 vote from the stockholders, without
BOD:
1. Delegate to the board the power to amend the by-laws
2. Remove a member of the Board of Directors
3. Ratify a business opportunity entered into by a member of the
Board
4. Ratification of contracts of self-dealing directors, where his
presence is required to constitute a quorum and/or his vote is
required for its approval by the BOD.
BY-LAWS
BY-LAWS are rules made by a corporation for its own
government; to regulate the conduct and define the duties of the
stockholders or members towards the corporation and among
themselves. They are the rules and regulations or private laws
enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholder or
members and directors and officers with relation thereto and
among themselves in their relation to it.

Effectivity: After approval by the SEC.

BY-LAWS
Adoption of by-laws: may be made:
◦ Prior to incorporation – it must be signed by all the
incorporators without need of the majority vote of outstanding
stocks or members as long as it is submitted together with the
AOI;
◦ After incorporation – must be submitted within 1 month after
receipt of the notice of issuance of certificate of registration or
incorporation and must be approved by majority of the
outstanding capital stock or members. Failure to file within the
1 month period may be a ground for suspension or revocation
of the corporate franchise.
BY-LAWS
Amendment of by-laws; two modes:
1. By a majority vote of the directors or trustees and the
majority vote of the outstanding capital stock or members, at
a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by
stockholders owning 2/3 of the outstanding capital stock or
2/3 of the members. This power, however, is considered
revoked, when so voted by a majority of the outstanding
capital stock or members in a regular or special meeting.
MEETINGS
DIRECTORS’ STOCKHOLDERS’
Proxy Not allowed Allowed
Date of Meeting Regular – monthly Regular – annual
unless otherwise dated fixed in the by-
provided in by-laws; laws, otherwise any
day in April;
Special – anytime Special – any time
upon call of the deemed necessary
president or provided
in the by-laws
Notice Requirement Regular and Special – Regular – 2 weeks
1 day prior to the
meeting Special – 1 week or as
stated in the by-laws
MEETINGS
DIRECTORS’ STOCKHOLDERS’
Place Anywhere in or out of City or Municipality
the Philippines unless where the principal
otherwise provided in office of the
the by-laws corporation is located
Quorum Majority of the BOD/T Majority of the
unless the AOI or By- outstanding capital
laws provide for stock or members
greater majority
Presiding Officer President unless the same
by-laws provide
otherwise.
MEETINGS
Proper Party to Call the Meeting:
a. The person or persons authorized under the by-laws;
b. Absent any provision in the by-laws, it may be called by the
President;
c. By the secretary on order of the president or on written
demand of the stockholders representing at least a majority
of the outstanding capital stock or majority of the members
entitled to vote, or the stockholder or member making the
demand if there is no secretary or he refuses to do so; and
d. A stockholder as empowered by the SEC when there is no
person authorized to call a meeting, after a petition for such
purpose is filed by the stockholder
MEETINGS
Proper Party to Call the Meeting:
a. The person or persons authorized under the by-laws;
b. Absent any provision in the by-laws, it may be called by the
President;
c. By the secretary on order of the president or on written
demand of the stockholders representing at least a majority
of the outstanding capital stock or majority of the members
entitled to vote, or the stockholder or member making the
demand if there is no secretary or he refuses to do so; and
d. A stockholder as empowered by the SEC when there is no
person authorized to call a meeting, after a petition for such
purpose is filed by the stockholder
SUBSCRIPTION CONTRACT
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription, notwithstanding the fact that the parties refer to it
as a purchase or some other contract.

Subscriptions may be made upon a condition precedent or upon

special terms (condition subsequent). A conditional
subscription, or one made upon a condition precedent, does
not make the subscriber a stockholder, or render him to pay the
amount of his subscription, until performance of the condition. A
subscription upon special terms, on the other hand, is an
absolute subscription, making the subscriber a stockholder, and
rendering him liable as such, as soon as the subscription is
accepted, the special term being an independent stipulation.
SUBSCRIPTION CONTRACT
Pre-incorporation subscriptions: refer to subscriptions for
shares of stock of a corporation still to be formed while post-
incorporation subscriptions are those made or executed after the
formation or organization of the corporation, and are deemed
irrevocable:
1. For a period of at least 6 months from the date of
subscription unless (a) all the subscribers consent to the
revocation; or (b) the incorporation fails to materialize within
said period or within a longer period as may stipulated in the
contract of subscription; and
2. After submission of the AOI to the SEC.
STOCK CERTIFICATES
Issuance of certificates of stock; requisites:
1. It must be signed by the president or vice-president and
countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or
expenses, if any) should have been paid.

Indivisibility: As the law stands now, subscription to shares of

stock are deemed indivisible and no certificate of stock can be
issued unless and until the full amount of his subscription
including interest and expenses, if any is paid.
RIGHTS OF A SUBSCRIBER
A subscriber, even if not yet fully paid, is entitled to exercise all
the rights of a stockholder and the corresponding liability that
attach thereunder, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right.
QUESTION
Mr. A subscribed to 10,000 shares of P1 par value for P10 per
share. He was able to pay 50% of the subscription price. In this
case, which of the following is not a right granted to Mr. A:
A. He can receive dividends attributable to the whole 10,000
shares
B. He has the right to vote equivalent to the 10,000 shares
C. He can demand the issuance of certificate of stock for the
5,000 shares already paid
D. None of the above.
QUESTION
Mr. A subscribed to 10,000 shares of P1 par value for P10 per
share. He was able to pay 50% of the subscription price. In this
case, which of the following is not a right granted to Mr. A:
A. He can receive dividends attributable to the whole 10,000
shares
B. He has the right to vote equivalent to the 10,000 shares
C. He can demand the issuance of certificate of stock for
the 5,000 shares already paid
D. None of the above.
ENFORCEMENT OF PAYMENT OF
SUBSCRIPTIONS
Enforcement of payment of subscriptions: Unpaid
subscription or any percentage thereof, together with interest if
required by the by-laws or the contract of subscription, shall be
paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD
pursuant to a “call” declaring any or all unpaid portion thereof
to be so payable

To enforce payment, the following remedies are available:

1. By board action; and
2. By a collection case in court
DELINQUENT SHARES OF STOCK
A subscriber becomes delinquent when no payment is made on the
balance of all or any portion of the subscription on the date or
dates fixed in the contract of subscription without need of call, or
on the date specified by the BOD pursuant to a call.

Effect of Delinquency:
1. The stockholder thereof immediately loses the right to vote and
be voted upon or represented in any stockholders meeting as
well as all the rights pertaining to a stockholder except the
right to receive dividends in accordance with the Code.
2. Any cash dividend due on delinquent stockholders shall first be
applied to the unpaid balance on his subscription plus cost and
expenses, while stock dividends shall be withheld until his
unpaid subscription is paid in full.
DELINQUENT SHARES OF STOCK
The shares will be subjected to a public sale where the highest
bidder is the person who is willing to take the least number of
shares for the unpaid amount and costs incidental to the
delinquency.
QUESTION
The following rights of a stockholder who is delinquent in his
subscription loses the following rights or the rights are
suspended, except:
A. Right to vote
B. Right to receive cash dividends
C. Right to receive stock dividends
D. None of the above
QUESTION
The following rights of a stockholder who is delinquent in his
subscription loses the following rights or the rights are
suspended, except:
A. Right to vote
B. Right to receive cash dividends
C. Right to receive stock dividends
D. None of the above
REMEDIES AGAINST ERRING
OFFICERS/DIRECTORS
In case of a wrongful or fraudulent act of a director, officer or
agent, stockholders have the following options:
1. Individual or Personal Action – for direct injury to his rights, such
as denial of his right to inspect corporate books and records or
pre-emptive rights;
2. Representative or Class Suit – in which one or more members of
a class sue for themselves as a class or for all to whom the right
was denied, either as an individual action or a derivative suit;
and a
3. Derivative Suit – an action based on injury to the corporation –
to enforce a corporate right – wherein the corporation itself is
joined as a necessary party, and recovery is in favor of and for
the corporation. It is a suit granted to any stockholder to
institute a case to remedy a wrong done directly to the
corporation and indirectly to stockholders
APPRAISAL RIGHT
Appraisal right is the method of paying a shareholder for the
taking of his property. It is a statutory means whereby a
stockholder can avoid the conversion of this property into
another property not of his own choosing.

When may it be exercised:

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.
APPRAISAL RIGHT
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;
3. In case of merger or consolidation;
4. Investment of funds in another corporation or business or for
any other purpose other than its primary purpose;
5. In a close corporation, a stockholder has the unbridled right
to compel the corporation “for any reason” to purchase his
shares at their fair value which shall not be less than the par
or issued value, when the corporation has sufficient assets to
cover its debts and liabilities, exclusive of capital stock.
REORGANIZATION: MERGER OR
CONSOLIDATION
REORGANIZATION: is generally entered into to put the
company upon a sound financial basis and to enable it to take
care of its obligations thereby avoiding liquidation or bankruptcy.
But in some cases, a reorganization is effected notwithstanding
the fact that the corporation is solvent.

MERGER: is a union effected by absorbing one or more existing

corporations by another which survives and continues the
combined business. It is the uniting of two or more corporations
by the transfer of property to one of them which continue in
existence, the other or the others being dissolved and merged
therein.
REORGANIZATION: MERGER OR
CONSOLIDATION
CONSOLIDATION: is the uniting or amalgamation of two or
more existing corporations to form a new corporation. It signifies
a union as necessarily results in the creation of a new
corporation and the termination of existence of old ones. The
united concern resulting from such union is called consolidated
corporation.
REQUIREMENTS AND PROCEDURE TO
ACCOMPLISH MERGER OR
CONSOLIDATION
1. The BOD/T of each constituent corporations shall approve a plan or
merger or consolidation setting for the matters required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3
outstanding capital stock or 2/3 of the member in non-stock
corporations of each of such corporations at separate corporate
meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of
merger or consolidation shall be given to all stockholders or
members at least 2 weeks prior to the scheduled meeting, either
personally or by registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each
constituent corporations to be signed by the president or vice-
president and certified by the corporate secretary or assistant
secretary setting forth the matters required in Sec. 78;
REQUIREMENTS AND PROCEDURE TO
ACCOMPLISH MERGER OR
CONSOLIDATION
5. Submission of the articles of merger or consolidation in quadruplicate
to the SEC subject to the requirement of Sec. 79 that if it involve
corporations under direct supervision of any other government
agency or governed by special laws the favorable recommendation
of the government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at
which time the merger or consolidation shall be effective. If the plan,
however, is believed to be contrary to law, the SEC shall set a
hearing to give the corporations concerned an opportunity to be
heard upon notice and thereafter, the Commission shall proceed as
provided in the Code.
EFFECTS OF
MERGER/CONSOLIDATION
1. There will only be a single corporation. In case of merger, the
surviving corporation or the consolidate corporation in case of
consolidation;
2. The termination of corporate existence of the constituent
corporations, except that of the surviving corporation or the
consolidated corporation;
3. The surviving corporation or the consolidated corporation will
possess all the rights, privileges, immunities and powers and
shall be subject to all the duties and liabilities of a corporation
organized under the Code;
EFFECTS OF
MERGER/CONSOLIDATION
4. The surviving or consolidated corporation shall possess all the
rights, privileges, immunities and franchises of the constituent
corporations, and all property and all receivables due,
including subscriptions to shares and other choses in action,
and every other interest of, or belonging to or due to the
constituent corporations shall be deemed transferred to and
vested in such surviving or consolidated corporation without
further act or deed; and
5. The rights of creditors or any lien on the property of the
constituent corporations shall not be impaired by the merger
or consolidation.
NON-STOCK CORPORATIONS
A non-stock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers,
except upon dissolution. 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.

The provisions governing stock corporation, when pertinent, shall

be applicable to non-stock corporations, except as may be
covered by specific provisions pertaining to non-stock
corporations.
NON-STOCK CORPORATIONS
A non-stock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers,
except upon dissolution. 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.

The provisions governing stock corporation, when pertinent, shall

be applicable to non-stock corporations, except as may be
covered by specific provisions pertaining to non-stock
corporations.
STOCK VS. NON-STOCK
CORPORATIONS
STOCK NON-STOCK
Number of 5 to 15 May be more than 15 as
Directors the articles or the by-laws
provide
Term of office of 1 year until their 1/3 of the number of
the successor is elected directors shall expire every
directors/trustees and qualified year; and subsequent
elections of trustees
comprising 1/3 shall be held
annually and trustees so
elected shall have a term of
3 years
STOCK VS. NON-STOCK
CORPORATIONS
STOCK NON-STOCK
Purpose For profit Primarily organized for
charitable, religious,
educational, professional,
cultural, scientific, social,
civic service, or similar
purposes, like trade,
industry, agricultural and
like chambers or any
combination thereof
Voting Cumulative Straight voting unless
authorized under the by-
laws or AOI
STOCK VS. NON-STOCK
CORPORATIONS
STOCK NON-STOCK
Manner of voting Either in person or By mail or other similar
by proxy means as may be
authorized by the by-laws
Distribution of Authorized Not authorized
dividend
Transferability of Transferable Membership is personal
interest and non-transferable,
unless the AOI or by-laws
provide otherwise
Ownership of director At least one share Member
Place of meeting of City or municipality Any place in the
stockholders/member where the principal Philippines
s office is located
CLOSE CORPORATIONS
A close corporation is one whose articles of incorporation provide
that:
1. All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (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.
CLOSE CORPORATIONS
Business with public interest: may not be formed as close
corporation. Sec. 140 of the Code lays down a similar policy
authorizing NEDA to recommend to the legislature the setting of
maximum limits to family or group ownership of stock in
corporations vested with public interest, and the determination of
whether or not it should be vested with public interest within its
domain. The following cannot be a close corporation:
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utility;
7. Educational institutions
CLOSE CORPORATIONS
DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the close
corporation may provide that the corporation shall be managed by the
stockholders rather than by the BOD. If such be the case, the
stockholders are deemed directors and are subject to all the rights and
liabilities of a director.

In order that the provision allowing a close corporation to do away with

a BOD may be effective, the same must contain the continuing
provisions:
1. 1. No meeting of stockholders need be called to elect directors;
2. 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. 3. The stockholders of the corporation shall be subject to all liabilities
of directors.
CLOSE VS. ORDINARY STOCK
CORPORATIONS
CLOSE CORPORATION ORDINARY STOCK
CORPORATION
The number of stockholders No limitation as to number of
cannot exceed 20 shareholder
To the extent that all Maximum number of directors is
stockholders can be deemed 15
directors, the number of
directors can effectively be
more than 15
Shares of stock are subject Generally no restriction on
to specified restrictions transfer of shares
Shares of stock are No prohibition
prohibited from being listed
in the stock exchange or
offered for sale to the public
CLOSE VS. ORDINARY STOCK
CORPORATIONS
CLOSE CORPORATION ORDINARY STOCK
CORPORATION
Stockholders may take an Management is lodged in the
active part in corporate Board of Directors
management by vesting
management to them rather
than a Board of Director
Those active in management Directors are liable for torts only
are personally liable for if they have acted negligently or
corporate torts unless the fraudulently
corporation has obtained an
adequate liability insurance
Directors can validly act even Directors must, as a rule, act as
without a meeting a body at a duly constituted
meeting
CLOSE VS. ORDINARY STOCK
CORPORATIONS
CLOSE CORPORATION ORDINARY STOCK
CORPORATION
Agreements between Not valid and binding since
stockholders regarding thestockholders’ agreement cannot
operations of the business can limit the discretion of the Board
validly be made to manage corporate affairs
To the extent that directors may Ordinarily, no such classification
be classified into one or more and no restrictions on cumulative
classes and to be voted solely byvoting
a particular class of stock,
cumulative voting may, in
effect, be restricted
The articles of incorporation Officers are elected by the Board
may provide that all officers of Directors
shall be elected or appointed by
the stockholders
CLOSE VS. ORDINARY STOCK
CORPORATIONS
CLOSE CORPORATION ORDINARY STOCK
CORPORATION
It may provide for greater Although the articles of
quorum and voting incorporation or by-laws may
requirements in meetings of provide for greater quorum and
stockholders and directors voting requirements in directors’
meeting under section 25, those
for stockholders’ meeting cannot
generally be altered
Restriction on transfer of Valid and binding if indicated in the
shares should be indicated in articles of incorporation and stock
the articles of incorporation, certificates
by-laws and stock certificates
CLOSE VS. ORDINARY STOCK
CORPORATIONS
CLOSE CORPORATION ORDINARY STOCK
CORPORATION
Pre-emptive right of Pre-emptive rights may be denied
stockholders is broader as it as provided for in section 39
includes all issues without
exception
A stockholder may withdraw Unless he sells his shares, a
and compel the corporation to stockholder cannot get back his
purchase his shares for any investment nor compel the
reason with the limitation only corporation to buy his shares
that the corporation has except in the exercise of his
sufficient assets to cover its appraisal right
liabilities exclusive of capital
stock
CLOSE VS. ORDINARY STOCK
CORPORATIONS
CLOSE CORPORATION ORDINARY STOCK
CORPORATION
The proper forum may Courts cannot interfere with the
interfere in the management business judgment of the
of a close corporation in case directors/stockholders “BUSINESS
of deadlocks under Section JUDGMENT RULE”
104, even of the
directors/stockholders are
acting in good faith
Any stockholder may petition Dissolution may be had only on the
the SEC for corporate grounds provided by the provisions
dissolution on grounds among of the Code on dissolution and P.D.
others, provides for in section 902-A, as amended
105.
SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS:
1. Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen
(15): Provided, however, That the number of trustees shall be in
multiples of five (5).
2. Unless otherwise provided in the articles of incorporation or the by-
laws, the board of trustees of incorporated schools, colleges, or
other institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number
shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall
be defined in the by-laws.
SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS:
1. Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen
(15): Provided, however, That the number of trustees shall be in
multiples of five (5).
2. Unless otherwise provided in the articles of incorporation or the by-
laws, the board of trustees of incorporated schools, colleges, or
other institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number
shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall
be defined in the by-laws.
SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS:
3. For institutions organized as stock corporations, the number
and term of directors shall be governed by the provisions on
stock corporations.
4. Educational institutions, other than those established by
religious groups and mission boards, shall be owned solely by
citizens of the Philippines or corporations or associations at
least sixty per centum of the capital of which is owned by
such citizens. The control and administration of educational
institutions shall be vested in citizens of the Philippines.
SPECIAL CORPORATIONS
RELIGIOUS CORPORATIONS:
1. Religious corporations may be incorporated by one or more persons.
Such corporations may be classified into corporations sole and
religious societies.
2. CORPORATION SOLE: consists of one person only and his
successor in some particular station, who are incorporated by law in
order to give them some legal capacities and advantages, particularly
that of perpetuity, which in their natural persons they could not have
had.
3. TERM OF EXISTENCE: the AOI of a corporation sole does not
require a provision for its term of existence. For obvious reasons,
since a corporation sole is supposed to exist in perpetuity. It may,
however, be dissolved in accordance with Sec. 115 of the Code.
SPECIAL CORPORATIONS
RELIGIOUS CORPORATIONS:
4. BEGINNING OF CORPORATE EXISTENCE: is upon filing of the
verified AOI with the SEC and the documents required under Sec.
112. This serves as an exception to the rule that a corporation
acquires juridical personality only upon the issuance of a certificate
of incorporation by the said government agency.
5. POWER TO ALIENATE PROPERTIES, LIMITATION: The extent
of the its power to mortgage or sell real properties is, however,
subject to certain restriction, that is, a proper court order must first
be secured for that purpose, which is not otherwise imposed in any
other corporation. Intervention of the court may dispensed with only
if the rules, regulations and discipline of the religious denomination,
sect or church concerned provide or regulate the manner or method
of holding or alienating properties
SPECIAL CORPORATIONS
RELIGIOUS CORPORATIONS:
6. Religious societies. - Any religious society or religious order, or
any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution,
rules, regulations, or discipline of the religious denomination, sect
or church of which it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a meeting called
for the purpose of at least two-thirds (2/3) of its membership,
incorporate for the administration of its temporalities or for the
management of its affairs, properties and estate by filing with the
Securities and Exchange Commission, articles of incorporation
verified by the affidavit of the presiding elder, secretary, or clerk or
other member of such religious society or religious order, or
diocese, synod, or district organization of the religious
denomination, sect or church.
DISSOLUTION
DISSOLUTION is the extinguishment of the corporate franchise
and the termination of corporate existence.

When a corporation is dissolved, it ceases to be a juridical entity

and can no longer pursue the business for which it was
incorporated. It will nevertheless continue as a body corporate
for another period of three years from the time it is dissolved but
only for the purpose of winding up its affairs and the liquidation
of its assets.
THREE WAYS TO DISOOLVE A
CORPORATION
1. Expiration of its corporate term

Extension: should be made before the expiration of the original

term, but not earlier than 5 years prior to such expiration,
otherwise the corporation is dissolved, ipso facto.

Dissolution by shortening the term of corporate existence: A

corporation may exist for 50 years, but there is no law which
prevents the shareholders thereof to shorten that period and
effect a dissolution of the corporation. This, however, requires
the vote of the stockholders to be cast in a meeting therefor, not
only “written assent” as for general amendments. Moreover, this
requires the approval of the SEC and its inaction is not deemed
an approval therefor
THREE WAYS TO DISOOLVE A
CORPORATION
2. Voluntary surrender of its primary franchise
(voluntary dissolution); and
Formal and Procedural Requirements:
a. Majority vote of the board of directors or trustees;
b. Sending of notice of each stockholders or member either by
registered mail or personal delivery at least thirty (30) days
prior to the meeting (scheduled by the board for the purpose
of submitting the board action to dissolve the corporation for
approval of the stockholder or members.);
c. Publication of the notice of time, place and subject of the
meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said
corporation is located or in a newspaper of general circulation
in the Philippines;
THREE WAYS TO DISSOLVE A
CORPORATION
d. Resolution adopted by the affirmative vote of the
stockholders owning at least 2/3 of the outstanding capital
stock or 2/3 of the members at the meeting duly called for
the purpose;
e. A copy of the resolution authorizing the dissolution must be
certified by a majority of the board of directors or trustees
and countersigned by the corporate secretary;
f. Issuance of a certificate of dissolution by the SEC.
THREE WAYS TO DISSOLVE A
CORPORATION
3. The revocation of its corporate franchise (involuntary
dissolution)

Grounds:
a. Fraud in procuring its certificate of registration;
b. Serious misrepresentation as to what the corporation can
do or is doing to the great prejudice of or damage to the
general public;
c. Refusal to comply or defiance of any lawful order of
the Commission restraining commission of acts which would
amount to a grave violation of its franchise;
d. Continuous inoperation for a period of at least five (5)
years;
e. Failure to file by-laws within the required period;
f. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed period.
THREE WAYS TO DISSOLVE A
CORPORATION
Other grounds provided under the Corporation Code:
a. Violation of any provision of the Code under section 144;
b. In case of deadlock in a close corporation as provided for in
section 105;
c. In a close corporation, any acts of directors, officers or
those in control of the corporation which is illegal or
fraudulent or dishonest or oppressive or unfairly prejudicial
to the corporation or any stockholder or whenever corporate
assets are being misapplied or wasted under section 105.
EFFECTS OF DISSOLUTION
Dissolution terminates its power to enter into contracts or to
continue the business as a going concern.

Despite its dissolution, a corporation nonetheless, continues to

be a body corporate for a period of 3 years for purposes of
liquidation and winding up its affairs (Sec. 122). Upon expiration
of the 3-year period to wind up its affairs, the juridical
personality of the corporation ceases for all intent and purposes,
and as a general rule, it can no longer sue and be sued
LIQUIDATION AND WINDING-UP
1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the
stockholders

It may be done by:

1. By the corporation itself through the BOD
2. By a trustee appointed by the corporation
3. By appointment of a receiver
FOREIGN CORPORATIONS
A FOREIGN CORPORATION is one formed, organized or
existing under any laws other than those of the Philippines.

Incorporation Test: is applied in determining whether a

corporation is domestic or foreign. If it is incorporated in another
state, it is a foreign corporation, while if it is registered under
Philippine laws, it is deemed a Filipino or domestic corporation
irrespective of the nationality of its stockholders.

Control Test: on the other hand, is used to determine corporate

nationality for purposes of applying laws, e.g., prohibition to
acquire lands applicable to corporations more than 40% of which
is owned by non-Filipinos.
FOREIGN CORPORATIONS
A FOREIGN CORPORATION is one formed, organized or
existing under any laws other than those of the Philippines.

Incorporation Test: is applied in determining whether a

corporation is domestic or foreign. If it is incorporated in another
state, it is a foreign corporation, while if it is registered under
Philippine laws, it is deemed a Filipino or domestic corporation
irrespective of the nationality of its stockholders.

Control Test: on the other hand, is used to determine corporate

nationality for purposes of applying laws, e.g., prohibition to
acquire lands applicable to corporations more than 40% of which
is owned by non-Filipinos.
FOREIGN CORPORATIONS
RESIDENT AGENT: As a condition precedent to the grant of
license to do or transact business in the Philippines, the foreign
corporation is required to designate its resident agent on whom
summons and other legal processes may be served in all actions
or legal proceedings against such corporation.
FOREIGN CORPORATIONS
LICENSE REQUIREMENT AND DOING BUSINESS
WITHOUT ONE: A foreign corporation must secure the
necessary license before it can transact or do business in the
Philippines.

Without a license: a foreign corporation shall NOT be permitted

to maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action
recognized under Philippine laws.
SECURITIES REGULATIONS CODE (RA
No. 8799)
PURPOSE: The Securities Regulations Code or RA No. 8799
aims to protect the investing public primarily through a system of
disclosure and provide punishment for fraudulent practices.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Securities are shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in
character. (Section 3.1) They include:
1. Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
2. Investment contracts, certificates of interest or participation in a
profit sharing agreement, certifies of deposit for a future
subscription;
3. Fractional undivided interests in oil, gas or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments
6. Proprietary or nonproprietary membership certificates in
corporations; and
7. Other instruments as may in the future be determined by the
Commission.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Investment contract is a contract, transaction, or scheme
whereby a person invests his money in a common enterprise and
is led to expect profits primarily from the efforts of others.

ILLUSTRATION: Power Homes Unlimited Corp. (PHUC) requires

an investor to pay $234 to become a Business Center Owner
(BCO), which entitles him to recruit two person who should pay
$234 each and out of which he shall receive a commission of
$92. In case the two referrals/enrollees would recruit a minimum
of four (4) persons each recruiting two (2) persons who become
his/her own down lines, the BCO will receive a total amount of
US$147.20, and so on.

Here, the BCO is considered as an investment contract because

the investor would be earning primarily from the efforts of his
recruits and their recruits, as the pyramid goes on.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Investment contract is a contract, transaction, or scheme
whereby a person invests his money in a common enterprise and
is led to expect profits primarily from the efforts of others.
QUESTION
Power Homes Unlimited Corp. (PHUC) requires an investor to pay
$234 to become a Business Center Owner (BCO), which entitles
him to recruit two person who should pay $234 each and out of
which he shall receive a commission of $92. In case the two
referrals/enrollees would recruit a minimum of four (4) persons
each recruiting two (2) persons who become his/her own down
lines, the BCO will receive a total amount of US$147.20, and so
on. In this case,
A. The BCO is considered an investment contract required to be
registered with the SEC.
B. The BCO is not considered an investment contract since it
only entitles the owner to commission income.
C. The BCO is not considered an investment contract since the
income derived therefrom involves a participation on the part
of the owner.
D. None of the above is correct statement
QUESTION
Power Homes Unlimited Corp. (PHUC) requires an investor to pay
$234 to become a Business Center Owner (BCO), which entitles
him to recruit two person who should pay $234 each and out of
which he shall receive a commission of $92. In case the two
referrals/enrollees would recruit a minimum of four (4) persons
each recruiting two (2) persons who become his/her own down
lines, the BCO will receive a total amount of US$147.20, and so
on. In this case,
A. The BCO is considered an investment contract
required to be registered with the SEC.
B. The BCO is not considered an investment contract since it
only entitles the owner to commission income.
C. The BCO is not considered an investment contract since the
income derived therefrom involves a participation on the part
of the owner.
D. None of the above is correct statement
SECURITIES REGULATIONS CODE (RA
No. 8799)
REGISTRATION AND REPORTORIAL REQUIREMENTS

REGISTRATION: The Securities Regulations Code (SRC)

provides that securities shall not be sold or offered for sale or
distribution within the Philippines, without a registration
statement duly filed with and approved by the SEC
(Commission). Prior to such sale, information on the securities, in
such form and with such substance as the Commission may
prescribe, shall be made available to each prospective purchaser.

The Commission may audit the financial statements, assets and

other information of firm applying for registration of its securities
whenever it deems the same necessary to insure full disclosure
or to protect the interest of the investors and the public in
general.
SECURITIES REGULATIONS CODE (RA
No. 8799)
SECURITIES exempt from registration:
1. Any security issued or guaranteed by the Government of the
Philippines, or by any political subdivision or agency thereof, or by any
person controlled or supervised by, and acting as an instrumentality of
said Government.
2. Any security issued or guaranteed by the government of any
country with which the Philippines maintains diplomatic relations, or
by any state, province or political subdivision thereof on the basis of
reciprocity: Provided, That the SEC may require compliance with the
form and content for disclosures the SEC may prescribe.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body.
4. Any security or its derivatives the sale or transfer of which, by law, is
under the supervision and regulation of the Office of the Insurance
Commission, Housing and Land Use Rule Regulatory Board, or
the Bureau of Internal Revenue.
5. Any security issued by a bank except its own shares of stock.
QUESTION
The following are securities exempt from the coverage of the
Securities Regulations Code, except:
A. Securities issued by the Philippine Government or
Government of any country
B. Certificates issued by a trustee or a receiver in bankruptcy
C. Securities or derivatives, the sale or transfer of which is under
the supervision or regulation of the Insurance Commission,
the Housing and Land Use Regulatory Board, or the Bureau of
Internal Revenue.
D. Securities issued by a bank, including its own shares of stock
QUESTION
The following are securities exempt from the coverage of the
Securities Regulations Code, except:
A. Securities issued by the Philippine Government or
Government of any country
B. Certificates issued by a trustee or a receiver in bankruptcy
C. Securities or derivatives, the sale or transfer of which is under
the supervision or regulation of the Insurance Commission,
the Housing and Land Use Regulatory Board, or the Bureau of
Internal Revenue.
D. Securities issued by a bank, including its own shares
of stock
SECURITIES REGULATIONS CODE (RA
No. 8799)
TRANSACTIONS exempt from registration:
1. At any judicial sale, or sale by an executor, administrator, guardian
or receiver or trustee in insolvency or bankruptcy.
2. By or for the account of a pledge holder, or mortgagee or any of a
pledge lien holder selling of offering for sale or delivery in the
ordinary course of business and not for the purpose of avoiding the
provision of SRC, to liquidate a bonafide debt, a security pledged in
good faith as security for such debt.
3. An isolated transaction in which any security is sold, offered for
sale, subscription or delivery by the owner thereof, or by his
representative for the owner’s account, such sale or offer for sale or
offer for sale, subscription or delivery not being made in the course
of repeated and successive transaction of a like character by such
owner, or on his account by such representative and such owner or
representative not being the underwriter of such security.
SECURITIES REGULATIONS CODE (RA
No. 8799)
4. The distribution by a corporation actively engaged in the business
authorized by its articles of incorporation, of securities to its
stockholders or other security holders as a stock dividend or other
distribution out of surplus.
5. The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in connection with
the sale of such capital stock.
6. The issuance of bonds or notes secured by mortgage upon real
estate or tangible personal property, when the entire mortgage
together with all the bonds or notes secured thereby are sold to a
single purchaser at a single sale.
SECURITIES REGULATIONS CODE (RA
No. 8799)
7. The issue and delivery of any security in exchange for any other
security of the same issuer pursuant to a right of conversion
entitling the holder of the security surrendered in exchange to make
such conversion: Provided, That the security so surrendered has
been registered under the SRC or was, when sold, exempt from the
provision of the SRC, and that the security issued and delivered in
exchange, if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to registration
under the SRC. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which
the securities issued and delivered in such exchange are sold.
8. Broker’s transaction, executed upon customer’s orders, on any
registered Exchange or other trading market.
SECURITIES REGULATIONS CODE (RA
No. 8799)
9. Subscriptions for shares of the capitals stocks of a corporation
prior to the incorporation thereof or in pursuance of an increase
in its authorized capital stocks under the Corporation Code,
when no expense is incurred, or no commission, compensation or
remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for
soliciting, giving or taking of such subscription is to comply with the
requirements of such law as to the percentage of the capital stock of
a corporation which should be subscribed before it can be registered
and duly incorporated, or its authorized, capital increase.
10. The exchange of securities by the issuer with the existing
security holders exclusively, where no commission or other
remuneration is paid or given directly or indirectly for soliciting such
exchange.
11. The sale of securities by an issuer to fewer than twenty (20)
persons in the Philippines during any twelve-month period.
SECURITIES REGULATIONS CODE (RA
No. 8799)
12. The sale of securities to any number of the following qualified
buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government
of the Philippines or any political subdivision thereof or manage
by a bank or other persons authorized by the Bangko Sentral to
engage in trust functions;
e. Investment company or
f. Such other person as the SEC may rule by determine as qualified
buyers, on the basis of such factors as financial sophistication,
net worth, knowledge, and experience in financial and business
matters, or amount of assets under management
SECURITIES REGULATIONS CODE (RA
No. 8799)
12. The sale of securities to any number of the following qualified
buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government
of the Philippines or any political subdivision thereof or manage
by a bank or other persons authorized by the Bangko Sentral to
engage in trust functions;
e. Investment company or
f. Such other person as the SEC may rule by determine as qualified
buyers, on the basis of such factors as financial sophistication,
net worth, knowledge, and experience in financial and business
matters, or amount of assets under management
SECURITIES REGULATIONS CODE (RA
No. 8799)
REPORTORIAL REQUIREMENTS:

Annual report composed of a Balance Sheet, Profit and Loss

Statement, and a Statement of Cash Flows certified by a CPA and
a management discussion and analysis of results of operation

Other periodical reports for interim fiscal periods and current

reports on significant developments of the issuer as the SEC may
prescribe as necessary to keep current information on the
operation of the business and financial condition of the issuer.
SECURITIES REGULATIONS CODE (RA
No. 8799)
These reportorial requirements shall apply to an issuer:
1. Which has sold a class of its securities pursuant to a registration
2. With a class of securities listed for trading in an Exchange
3. With assets of at least Fifty million pesos (50,000,000.00) or such
other amount as the SEC shall prescribe, and having two hundred
(200) or more holders each holding at least one hundred (100) share
of a class of its equity securities: Provided, however, That the
obligation of such issuer to file report shall be terminate ninety (90)
days after notification to the SEC by the issuer that the number of its
holders holding at least one hundred (100) share reduced to less
than one hundred (100)

The issuer shall likewise furnish to each holder of such equity security an
annual report in such form and containing such information as the SEC
shall prescribe.
SECURITIES REGULATIONS CODE (RA
No. 8799)
TENDER OFFER: is an offer by a person or group of persons to
the stockholders of a corporation to tender their shares for
purchase.

Purpose: The rule on mandatory tender offer seeks to protect

minority shareholders and provide them with a fair price for their
share whenever a person or group of persons intends to buy a
sizable number of shares in the company.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Mandatory Tender Offer: applies to any person who intends
to acquire at least 35% over a period of 12 months (previously
30, increased by the SEC pursuant to Section 72.1 of the SRC) of
any class of any equity security of a:
1. Listed corporations; or
2. Corporations with:
a. Assets of at least P50M and
b. Having at least 200 shareholders who each have at least
100 shares

The rule shall likewise apply even if the acquisition is less than
35% but will result in ownership of over 51% of the total
outstanding equity securities of the public company.
QUESTION
U Corporation, a corporation listed in the PSE, has two principal
stockholder-corporations, X Corporation which owns 60% and
ABC Corporation which owns 17%.

In turn, the principal stockholders of X Corporation are: XA

(21%); XB (30%) and ABC Corporation (9%).

XA and XB agreed to sell their shares to ABC Corporation. ABC

Corporation is required to make a tender offer to the
shareholders of:
I. X Corporation
II. U Corporation

A. I and II C. I only
B. Neither I nor II D. II only
QUESTION
U Corporation, a corporation listed in the PSE, has two principal
stockholder-corporations, X Corporation which owns 60% and
ABC Corporation which owns 17%.

In turn, the principal stockholders of X Corporation are: XA

(21%); XB (30%) and ABC Corporation (9%).

XA and XB agreed to sell their shares to ABC Corporation. ABC

Corporation is required to make a tender offer to the
shareholders of:
I. X Corporation
II. U Corporation

A. I and II C. I only
B. Neither I nor II D. II only
Since ABC Corporation will own 60% of X Corporation (21% +
30% + 9%);

X Corporation likewise owns 60% of U Corporation, resulting in

36% (60% * 60%) indirect ownership;

Accordingly, they will own a total of 53% of U Corporation (36%

indirect ownership + 17% direct ownership).

As such, ABC Corporation is required to make a tender offer to

the stockholders of U Corporation
SECURITIES REGULATIONS CODE (RA
No. 8799)
Transactions EXEMPT from the Mandatory Tender Offer
Requirement:
1. Any purchase of shares from the unissued capital stock provided
that the acquisition will not result to a 50% or more ownership of
shares by the purchaser;
2. Any purchase of shares from an increase in authorized capital
stock.
3. Purchase in connection with foreclosure proceedings involving a duly
constituted pledge or security arrangement where the acquisition is
made by the debtor or creditor.
4. Purchases in connection with privatization undertaken by the
government of the Philippines.
5. Purchases in connection with corporate rehabilitation under court
supervision.
6. Purchases through an open market at the prevailing market price
7. Merger or consolidation.
SECURITIES REGULATIONS CODE (RA
No. 8799)
INSIDER TRADING: when an insider in possession of material
non-public information buys or sells a security.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Material Non-Public Information: Information that will affect
the price of the security or would influence a person in deciding
whether to buy, sell, or hold a security which is not available to the
public.
Insider:
1. The issuer.
2. A director or officer of the issuer or a person controlling the
issuer.
3. A person whose relationship or former relationship to the issuer
gives or gave him access to material non-public information.
4. A government employee, or director, or officer of an exchange,
clearing agency, and/or self-regulatory organization who has
access to material non-public information.
5. A person who learns such information by a communication from
any of the foregoing insiders.
QUESTION
Gas Gas Corporation, a publicly listed company, discovered a rich
deposit of natural gas. This information was not made public in
order to acquire the lands in the surrounding area at cheap
prices. Prior to the disclosure of the information to the SEC, the
directors and officers of the company bought shares of the
Corporation. The prices of such shares went up once the
discovery was made public and the directors and officers then
sold their shares at a profit.
A. The directors and officers are guilty of insider trading.
B. The directors and officers are not considered insiders
C. The information obtained by the directors and officers is not
considered material nor are they non-public.
D. All of the above
QUESTION
Gas Gas Corporation, a publicly listed company, discovered a rich
deposit of natural gas. This information was not made public in
order to acquire the lands in the surrounding area at cheap
prices. Prior to the disclosure of the information to the SEC, the
directors and officers of the company bought shares of the
Corporation. The prices of such shares went up once the
discovery was made public and the directors and officers then
sold their shares at a profit.
A. The directors and officers are guilty of insider trading.
B. The directors and officers are not considered insiders
C. The information obtained by the directors and officers is not
considered material nor are they non-public.
D. All of the above
QUESTION
In the preceding question, assuming the exploration report was
sent to a printing company by mistake together with other
documents for printing. The employees of said printing company
came across the information and bought shares of Gas Gas prior
to release of the information to the public. Eventually, they sold
the shares at a huge profit when the prices thereof increased due
to the public disclosure of the report. In this case,
A. The employees are liable for insider trading.
B. The employees are not considered insiders
C. The information obtained by the employees is not considered
material nor are they non-public.
D. All of the above.
QUESTION
In the preceding question, assuming the exploration report was
sent to a printing company by mistake together with other
documents for printing. The employees of said printing company
came across the information and bought shares of Gas Gas prior
to release of the information to the public. Eventually, they sold
the shares at a huge profit when the prices thereof increased due
to the public disclosure of the report. In this case,
A. The employees are liable for insider trading.
B. The employees are not considered insiders
C. The information obtained by the employees is not considered
material nor are they non-public.
D. All of the above.
SECURITIES REGULATIONS CODE (RA
No. 8799)
INSIDER TRADING WHERE INFORMATION RELATES TO A
TENDER OFFER: if the information is relative to a tender offer,
it is unlawful for any person (other than the tender offeror) who
is in possession of material nonpublic information relating to such
tender offer, to buy or sell the securities of the issuer that are
sought or to be sought by such tender offer if such person knows
or has reason to believe that the information is nonpublic and
has been acquired directly or indirectly from the tender offeror,
those acting on its behalf, the issuer of the securities sought or
to be sought by such tender offer, or any insider of such issuer.
QUESTION
X is the secretary of the President of ABC Corporation which
plans to acquire XYZ Corporation where the projected cash
inflows would increase by P10,000,000 annually due to the
increase in its market share. By virtue of his work, X learned
about the merger but resigned prior to the actual merger. He
then acquired 10,000 shares at the time the shares of stock were
valued at P10 per share. After the merger, the shares of ABC
Corporation increased to P80 per share and X sold the 10,000
shares. In this case,
A. X is guilty of insider trading
B. X is not guilty of insider trading because he is in no position
to acquire material non-public information
C. X is not guilty of insider trading because he is not an insider
since he is already resigned from ABC Corporation
D. X is not guilty of insider trading because he did not acquire the
shares of XYZ Corporation
QUESTION
X is the secretary of the President of ABC Corporation which
plans to acquire XYZ Corporation where the projected cash
inflows would increase by P10,000,000 annually due to the
increase in its market share. By virtue of his work, X learned
about the merger but resigned prior to the actual merger. He
then acquired 10,000 shares at the time the shares of stock were
valued at P10 per share. After the merger, the shares of ABC
Corporation increased to P80 per share and X sold the 10,000
shares. In this case,
A. X is guilty of insider trading
B. X is not guilty of insider trading because he is in no position
to acquire material non-public information
C. X is not guilty of insider trading because he is not an insider
since he is already resigned from ABC Corporation
D. X is not guilty of insider trading because he did not acquire the
shares of XYZ Corporation
SECURITIES REGULATIONS CODE (RA
No. 8799)
FRAUDULENT TRANSACTIONS AND OTHER MARKET
MANIPULATIONS
Wash sale – any transaction in a security which involves no change in
the beneficial ownership. A series of buy and sale transaction may be
placed by one and the same beneficial owner in the exchange which
would not affect any change of ownership of the shares transacted.

Matched Order – refers to an order or orders for the purchase or sale

of security with the knowledge that a simultaneous order or orders of
substantially the same size, time and price for the sale or purchase of
such security has, or wil be entered by or for the same or different
parties.

Wash Sale and Matched Orders are not in themselves illegal. But they
are considered fraudulent whenever they are resorted to in order to
create a false or misleading appearance of active trading.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Marking the close – placing of purchase or sale order, at or
near the close of the trading period in order to affect the closing
price likewise affecting the opening price the following day.

Painting the tape – akin to marking the close but the activity is
made during normal trading hours which involves buying activity
among nominee accounts at increasingly higher or lower prices
or causing fictitious reports to appear on the ticker tape.

Squeezing the float – part or portion of the issue/security

which is outstanding but intentionally held by dealers or other
person with a view of reselling them later for profit. Thereby
affecting supply of the security or its availability while demand
remains the same or increases, driving the prices up.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Hype and Dump – involves the following steps:
1. Purchase of outstanding capital stock of a dormant public
shell company for a nominal amount;
2. Merger of the shell company with the privately held company
of the person or group of persons involved to gain control of
the majority of the stocks of the merged entity;
3. Reverse-split of the shares
4. Reissuance of the shares certificates in the name of the
merged entity to relatives and associates;
5. Hiring a broker-dealer who would market the stocks of the
newly merged entity;
6. Hiring a promoter to “hype” the virtues of the company;
7. When the market reaches the high price, they would “dump”
their shareholdings and bail out.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Boiler Room Operations – involves an intensive selling
campaign through numerous salesmen by telephone or through
direct mail offerings for securities of either a certain type or from
a specific issuer. Investors are induced to purchase through hard-
sell techniques based on unfounded predictions and mailing of
misleading market letters.

Circulating or Disseminating Information On Share Price

Movement – involves people providing information that the
price of any security listed in the exchange will or is likely to rise
or fall because of manipulative market operations of any one or
more persons conducted for the purpose of raising or depressing
the price of the security and thus inducing the purchase or sale
of such security.
SECURITIES REGULATIONS CODE (RA
No. 8799)
Making False or Misleading Statements – with respect to
any material fact, which he knew or had some reasonable
grounds to believe was so false or misleading for the purpose of
inducing the purchase or sale of any security.

Pegging or Fixing or Stabilizing the price of security

effected either alone or with others through any series of
transactions for the purchase or sale thereof, if done for such
purpose.

Short Sale – selling the security which the vendor does not own
and borrowed only from another. This is not illegal per se but
only regulated
END