CRC-ACE The Professional CPA Review School

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REGULATORY FRAMEWORK
FOR
BUSINESS TRANSACTIONS

BOOKLET 5
ONLINE REVIEW

TOPICS:

RFBT 0512 – LECTURE – CORPORATION

RFBT 0513 – QUIZZER – CORPORATION

ATTY. MARY ANN R. SAGANA

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REVISED CORPORATION CODE OF THE PHILIPPINES

(Republic Act No. 11232)
(Effective: 23 February 2019)

CHAPTER I. DEFINITION AND CLASSIFICATIONS

CORPORATION
- Artificial being created by operation of law having the right of succession,
and the powers, attributes and properties expressly authorized by law or
incidental to its existence.

CONSEQUENCES OF A CORPORATION AS AN ARTIFICIAL BEING:

a. has a personality separate and distinct from the
stockholders/members
b. may acquire and possess properties
c. can sue and be sued upon
d. can be adjudged insolvent although the SH/M are solvent
e. can incur obligations
f. can enter into contracts

ATTRIBUTES OF A CORPORATION:
1. It is an artificial being.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attribute and properties expressly authorized by
law or incident to its existence.

THEORIES ON FORMATION OF CORPORATION:

a. THEORY OF CONCESSION - To organize a corporation that could

claim a juridical personality of its own and transact business as
such, is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary to
impose

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b. THEORY OF ENTERPRISE ENTITY - Corporations are composed
of natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of injustice and
inequity.

CLASSES OF CORPORATION:
a. STOCK CORPORATION- a corporation in which capital stock is divided
into shares and is authorized to distribute to holders of such shares,
dividends or allotments of the surplus profits on the basis of the shares
held.

b. NON-STOCK CORPORATION– does not issue stocks and no part of its

income is distributable as dividends to its members, trustees and officers
PURPOSES:
1. Charitable 2.Religious 3.Professional 4.Cultural
5. Fraternal 6. Literary 7. Scientific 8. Social
9. Civic service 10. Similar purposes e.g. chambers for trade or
industry
11. EDUCATIONAL:
• Board of Trustee (BOT) - not less than 5 but not more than 15
• number of trustees shall be in multiples of 5
• 1/5 of the number of trustees upon organization will have a
term of 1 year
• BOT elected thereafter to fill vacancy due to expiration of term
shall hold office for 5 years

RIGHT TO VOTE:
• Members are entitled to one (1) vote
• The By Laws may authorize voting by proxy or through remote
communication and/or in absentia
• The right of the members to vote may be limited, broadened or
denied in the AOI or by the By Laws

TERMINATION OF MEMBERSHIP:
• Membership shall be terminated in the manner and for the causes
provided in the AOI or the By Laws

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• Termination of membership shall extinguish all rights of a
member in the corporation or on its property unless otherwise
provided in the AOI of the By Laws.
• Membership is personal and non-transferrable unless otherwise
provided in the articles of incorporation or the By Laws.

ELECTION AND TERM OF OFFICE:

a. The number of trustees shall be fixed in the AOI or By Laws
which MAY or MAY NOT be more than 15
b. Trustees are elected to hold office for three (3) years and until
their successors are elected and qualified;
c. Trustees elected before the expiration of a particular term shall
hold office only for the unexpired period
d. Only members of the corporation can be elected trustees except
for non stock corporations vested with public interest
e. Trustees will elect the officers of the corporation

MEETINGS:
a. Regular or special meeting shall be held at any place provided for in
the by laws within Philippine territory;
b. Notice must be sent prior to the meeting indicating the date, time
and place of the meeting
c. The list of members and proxies must be updated twenty (20) days
prior to the scheduled meeting

DISTRIBUTION OF ASSETS ON DISSOLUTION OF NON-STOCK

CORPORATION:
1. All its creditors shall be paid;
2. Assets held subject to return on dissolution shall be delivered back
to their givers;
3. Assets held for charitable, religious, etc., without a condition for their
return on dissolution, shall be conveyed to one or more
organizations engaged in similar activities as dissolved corporation;
and
4. All other assets shall be distributed to members, as provided for in
the Articles or by-laws.

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OTHER CLASSES OF CORPORATION:

1. AS TO ORGANIZERS
a. public - by State only
b. private - by private persons alone or with the State

2. AS TO FUNCTIONS
a. public – governmental, public good and welfare
b. private - profit

3. AS TO GOVERNING LAW
a. public – created by special laws
b. private – Corporation Code

4. AS TO LEGAL STATUS
a. DE JURE CORPORATION- organized in accordance with the
requirements of law
b. DE FACTO CORPORATION- a corporation where there exists a
flaw in its incorporation. Its existence cannot be inquired
collaterally. Such inquiry may be made by the Solicitor General in
a quo warranto proceeding.

REQUISITES OF DE FACTO CORPORATION:

1. The existence of a valid law under which it may be
incorporated;
2. An attempt in good faith to incorporate;
3. Use of corporate powers; and
4. Issuance of certificate of incorporation by the SEC as a
minimum requirement of continued good faith.

c. CORPORATION BY ESTOPPEL- groups of persons which holds

itself out as a corporation and enters into a contract with a 3rd
person on the strength of such appearance. It cannot be
permitted to deny its existence in an action under said contract.

d. CORPORATION BY PRESCRIPTION- body that though not

lawfully organized as a corporation, has been duly recognized by

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immemorial usage as a corporation, with rights and duties
maintainable at law.

5. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL

a. Holding corporation - it is one which controls another as a
subsidiary by the power to elect management. It is one which
holds stocks in other companies for purposes of control rather
than for mere investment. It has a passive portfolio merely
holding securities for control and management

b. Investment Company - It is one which holds stocks in other

companies for purposes of investment rather than control. It has
an active investment policy which has an active portfolio buying
and selling securities.

c. Parent and subsidiary corporation - separate entitles with power

to contract with each other. The board of directors of the parent
company determines its representatives to attend and vote in the
stockholder's meeting of its subsidiary. The stockholders of the
parent company demand representation in the board meetings of
its subsidiary. The board of directors of the parent or holding
company has the prerogative to choose its nominees in the
board of directors or its subsidiary.

d. Affiliates - company which is subject to common control of a

mother holding company and operated as part of the system.

6. CORPORATIONS VESTED WITH PUBLIC INTEREST

a. Corporations whose securities are registered with the SEC, with
an exchange or with assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred (200) or more holders
of shares, each holding at least one hundred (100) shares of a
class of its equity shares;
b. Banks and quasi-banks, non-stock saving and loan associations
(NSSLAs), pawnshops, corporations engaged in money service

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business, pre-need, trust and insurance companies, and other
financial intermediaries; and
c. Other corporations engaged in business vested with public
interest similar to the above, as may be determined by the SEC

7. RELIGIOUS CORPORATIONS (ECCLESIASTICAL

CORPORATIONS)
a. Corporation sole - special form of corporation, usually associated
with the clergy and consists of one person only and his
successors, who are incorporated by law to give some legal
capacities and advantages
b. Religious societies (Corporation Aggregate) - non-stock
corporation governed by a board but with religious purposes.

8. LAY CORPORATION – Opposite of Ecclesiastical corporation.

a. Eleemosynary Corporation - created for charitable purposes
b. Civil corporation - organized for profit

9. QUASI - PUBLIC CORPORATION – private corporations which

have accepted from the State the grant of a franchise or contract
involving the performance of public duties (public service
corporations)

10. QUASI – CORPORATION - though not vested with the general

powers of corporations, are organized by statutes or immemorial
usage, as persons or aggregate corporations with precise duties
which may be enforced, and privileges which may be maintained,
by suits of law.

11. TRAMP-CORPORATION – Registered in one country but doing

business elsewhere

12. CLOSE CORPORATION

• number of stockholders not to exceed 20
• restriction on the transfer; preemption in favor of the
stockholder or the corporation;

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• the stocks cannot be listed in the stock exchange nor
should they be publicly offered.

NOTE: A corporation is not a close corporation if 2/3 of the voting

stocks or voting rights is owned or controlled by another
corporation which is not a close corporation.

CHARACTERISTICS OF A CLOSE CORPORATION:

1. Share holders act as directors without need of election and
therefore are liable as directors;
2. Quorum may be greater than mere majority;
3. Transfers of stocks to others, which would increase the number
of share holders to more than the maximum are invalid;
4. Corporate actuations may be binding even without a formal
board meeting, if the share holders had knowledge or ratified the
informal action of the others;
5. Preemptive right extends to all stock issues;
6. Deadlocks in board are settled by the SEC, on the written
petition by any share holders
7. Share holders may withdraw and avail of his right of appraisal.

The following CANNOT be a close corporations:(SOME – BPI –

Vpi)
1. mining companies
2. oil companies
3. stock exchanges
4. banks
5. insurance companies
6. public utility
7. educational institution
8. corporations vested with public interest

CONTENTS of AOI of a CLOSE CORPORATION:

(a) A classification of shares or rights, the qualifications for
owning or holding the same, and restrictions on their transfers,
subject to the provisions of the following section;

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(b) A classification of directors into one (1) or more classes,
each of whom may be voted for and elected solely by a
particular class of stock; and
(c) Greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.

NOTE:
1. The AOI of a close corporation may provide that the business of
the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. SH shall liable to
all liabilities of directors.
2. The AOI may provide that all officers or employees or that
specified officers or employees shall be elected or appointed by
the stockholders, instead of by the board of directors.
RESTRICTIONS ON TRANSFERS:
• The restrictions in the transfer of the stocks must appear in the
AOI, inthe Bylaws; and on the stock certificates.
• Restriction on the transfer must not be onerous than granting the
existing shareholders or corporation the option to purchase the
shares.

PRE-EMPTIVE RIGHT IN CLOSE CORPORATIONS:

- shall extend to all stocks to be issued, including re-issuance of
treasury share, whether for money or property or personal services,
or in payment or corporate debts, unless the articles of
incorporation provide otherwise

DEADLOCKS:
If the directors or stockholders are so divided on the management of
the corporation's business and affairs that the votes required for a
corporate action cannot be obtained, with the consequence that the
business and affairs that the votes required for that the business of the
corporation can no longer be conducted to the advantage of the
stockholders generally, the SEC, upon written petition by any
stockholder, shall have the power to arbitrate the dispute.

In the exercise of the power to ARBITRATE, the SEC shall have

authority to makeappropriate orders, such as:
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(a) cancelling or altering any provision contained in the articles
of incorporation, bylaws, or any stockholders' agreement;
(b) cancelling, altering or enjoining a resolution or act of the
corporation or its board of directors, stockholders, officers,
or other person party to the action;
(c) directing or prohibiting any act of the corporation or its board
of directors, stockholders, officers, or other persons party
to the action
(d) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability or unrestricted retained earnings in its, books or
by the other stockholder;
(e) appointing a provisional director; (f) dissolving the
corporation; or
(g) granting such other relief as the circumstances may
warrant.

PROVISIONAL DIRECTOR:
1. an impartial person who is neither a stockholder nor a
creditor of the corporation or any of its subsidiaries or
affiliates, and whose further qualifications, if any, may be
determined by the SEC.
2. is not a receiver of the corporation and does not have the
title and powers of a custodian or receiver.
3. shall have all the rights and powers of a duly elected
director, including the right to be notified of and to vote at
meetings of directors until removed by order of the SEC or
by all the stockholders.
4. the compensation of the provisional director shall be
determined by agreement between such provisional
director and the corporation.

13. DOMESTIC CORPORATION - corporation formed, organized or

existing under Philippine laws

14. FOREIGN CORPORATION - a corporation formed, organized or

existing under any laws other than those of the Philippines and

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whose laws allow Filipino citizens and corporation to do business in
its own country or state.

General rule: A corporation can have no legal existence outside the

boundaries of the sovereign by which it is created.
Exception: By virtue of state comity, a corporation created by
laws of one state is usually allowed to transact
business in other states and to sue in the courts of
the forum, subject to restrictions and certain
requirements imposed therein.

CONSENT DOCTRINE: A foreign corporation may engage and

transact business in another country with the express
consent of such country or sovereignty

Requisites for a foreign corporation to transact business in the

Philippines:
1. A license or permit to do so; and
2. A certificate of authority from the appropriate
government agency

FOREIGN INVESTMENT, HOW MADE:

1. By establishing a domestic branch in the Philippines
2. By establishing a Philippine representative office
3. By operating through a business association in the Philippines
4. By operating through a local subsidiary which may be owned
entirely or partially by the foreign business entity
5. By establishing joint venture arrangement with a local corporation
or business organization
6. By establishing an affiliate in the Philippines

DOING BUSINESS - implies a community of commercial dealings and

arrangements, and contemplates to some extent the
performance of acts or works or the exercise of some
functions normally incident to and in progressive prosecution
of, the purpose and object of its organization. (Continuity
Test).

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“Doing Business in the Philippines”:

(1) Soliciting orders, service contracts, or opening offices;
(2) Appointing representatives, distributors domiciled in the
Philippines or who stay for a period or periods totaling 180 days
or more;
(3) Participating in the management, supervision, or control of any
domestic business, firm, entity, or corporation in the Philippines;
(4) Any act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to some extent the
performance of acts or works or the exercise of some functions,
normally incident to and in progressive prosecution of the
purpose and object of its organization.

“Not Doing Business in the Philippines”:

(1) Mere investment as shareholder and exercise of rights as
investor;
(2) Having a nominee director or officer to represent its interest in
the corporation;
(3) Appointing a representative or distributor which transacts
business in its own name and for its own account.
(4) Products manufactured off-shore and returned back to foreign
corporation

SUABILITY OF FOREIGN CORPORATIONS:

1. Foreign corporation doing business in the Philippines -
a. with license : may sue and be sued in the Philippines
b. without license: cannot sue but may be sued in the Philippines
2.Foreign corporation not doing business in the Philippines on
ISOLATED TRANSACTION: may sue and be sued.

DOCTRINE OF ISOLATED TRANSACTION - Foreign corporation

can sue or be sued on a transaction or series of transaction set
apart from the common business of a foreign enterprise in the
sense that there is no intention to engage in a progressive
pursuit of the purpose and object of business transaction.
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FULLY FOREIGN-OWNED BRANCH OFFICE- Branch offices can do

business and earn income in the Philippines. However, it cannot
engage in any activities where the Philippine Constitution and laws
impose restrictions as to foreign equity ownership
• The minimum paid up capital requirements for branch offices of
foreign companies – US$ 200,000.
• As a branch office is considered an extension of the parent
company, it does not need separate directors or corporate
officers. It does, however, need a resident agent. If the person is
a foreign national, he or she must have a work permit in the
Philippines.
• A RESIDENT AGENT may be either an individual residing in the
Philippines or a domestic corporation lawfully transacting
business in the Philippines: Provided, That an individual resident
agent must be of good moral character and of sound financial
standing: Provided, further, That in case of a domestic
corporation who will act as a resident agent, it must likewise be
of sound financial standing and must show proof that it is in good
standing as certified by the SEC

REPRESENTATIVE OFFICE - cannot engage in any commercial

activities nor earn any revenue. However, they can provide customer
service, conduct market research, and promote the company’s
products.
• Representative offices are also suitable for companies who
would like to register their products but not to deal with the
distributors yet. US$ 30,000 is required to be deposited to the
corporate bank account in the Philippines to cover the
operating expenses of the representative office.

GROUNDS FOR REVOCATION OF LICENSE OF A FOREIGN

CORPORATION:
1. Failure to file its annual report or pay any fees as required
2. Failure to appoint and maintain a resident agent in the
Philippines
3. Failure, after change of its resident agent or address, to submit
to the SEC a statement of such change
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4. Failure to submit to the SEC an authenticated copy of any
amendment to its AOI or BL or of any articles of merger or
consolidation
5. A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such corporation
6. Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine Government or
any of its agencies or political subdivisions
7. Transacting business in the Philippines outside of the purpose or
purposes for which such corporation is authorized under its
license
8. Transacting business in the Philippines as agent of or acting on
behalf of any foreign corporation or entity not duly licensed to do
business in the Philippines
9. Other ground as would render it unfit to transact business in the
Philippines

TESTS TO DETERMINE NATIONALITY OF A CORPORATION:

1. INCORPORATION TEST– place of creation regardless of the
citizenship of
Stockholders

2. CONTROL TEST– citizenship of controlling Stockholders

a. Foreign Investments Act of 1991 - a corporation is a “Philippine
National” if it is organized under the laws of the Philippines and
at least 60 percent of its capital stock outstanding and entitled to
vote are owned and held by Filipino citizens.
b. SEC MC O8, series of 2013 – The 60-40 ratio requirement refers
to both:
i. The total number of outstanding shares of stocks entited to
vote in the election of directors (voting stocks)
ii. The total number of outstanding shares, of stocks whether
such shares are entitled to vote or not. (voting and non
voting)
3. BUSINESS DOMICILE TEST/ CENTER OF MANAGEMENT THEORY
– place of domicile/principal office

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NOTE: CONTROL TEST is applied in case of exploitation of natural
resources or public utilities

THE GRANDFATHER RULE, SEC Rules of 1967 - The stricter test –

• applies when there is “doubt” over the 60-40 Filipino-foreign
equity ownership. This rule states that if the percentage of
Filipino ownership in the corporation is less than 60 percent,
only the number of shares corresponding to this percentage
shall be declared as Filipino. Pursuant to this rule, the
combined total in the investing and investee corporations
must be traced or “grandfathered” to determine the total
percentage of Filipino ownership.
• applied specifically in cases where the corporation has
corporate stockholders with alien stockholdings, otherwise, if
the rule is not applied, the presence of such corporate
stockholders could diminish the effective control of Filipinos.

15. ONE PERSON CORPORATION

Corporations with a single stockholder is considered a One Person
Corporation (OPC). Only NATURAL PERSON, TRUST or an ESTATE
may form OPC.

• A foreign natural person can set up an OPC subject to applicable

capital requirements and constitutional and statutory restrictions in
certain investment areas.
• In case of trust or estate as incorporator, proof of authority to act on
behalf of the trust or estate must be submitted at the time of
incorporation.

The following are not allowed to incorporate or organize as OPCs:

1. Banks, non-bank financial institutions, quasi-banks;
2. Pre-need, trust, insurance companies;
3. Public and publicly-listed companies;
4. Non-chartered government-owned-and-controlled corporations
(GOCCs); and
5. A natural person who is licensed to exercise a profession

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TERM OF EXISTENCE OF OPC: PERPETUAL.
In case of the trust or estate, its term of existence shall be co-
terminous with the existence of the trust or estate.

CONTENTS of AOI of OPC:

a. Name with the suffix “OPC”
b. Primary purpose
c. Principal office
d. Term of existence
e. Names and details of the single stockholder;
f. Nominee and alternate nominee;
g. The authorized, subscribed and paid-up capital

• The OPC is not required to submit and file By Laws

• The OPC is not required to have a minimum authorized capital stock,
except as otherwise provided by special law.

OFFICERS of OPC:
1. Within fifteen (15) days from the issuance of its Certificate of
Incorporation, the OPC shall appoint a Treasurer, Corporate
Secretary, and other officers;
2. Within five (5) days from appointment, the OPC shall notify the SEC

• The single stockholder shall be the sole director and president of

the OPC. He can be the Corporate Treasurer but not as the
Corporate Secretary.
• The single stockholder who assumes the position of the
Treasurer shall post a surety bond subject to renewal every two
(2) years

ADDITIONAL FUNCTIONS of the CORPORATE SECRETARY:

1. Responsible for maintaining the minutes book and/or records of
the corporation;
2. Notify the nominee or alternate nominee of the death or
incapacity of the single stockholder, which notice shall be given
no later than five (5) days from such occurrence;
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3. Notify the SEC of the death of the single stockholder within five
(5) days from such occurrence and stating in such notice he
names, residence addresses, and contact details of all known
legal heirs; and
4. Call the nominee or alternate nominee and the known legal heir
to meeting and advise the legal heirs with regard to, among
others, the election of a new director, amendment of the articles
of incorporation, and other ancillary and/or consequential
matters.

REPORTORIAL REQUIREMENTS:
1. Annual financial statements audited by an independent
certified public accountant. If the total assets or total liabilities
of the corporation are less than Six hundred thousand pesos
(₱600,000.00), the financial statements shall be certified
under oath by the corporation's treasurer and president;
2. A report containing explanations or comments by the
president on every qualification, reservation, or adverse
remark or disclaimer made by the auditor in the latter's report;
3. A disclosure of all self-dealings and related party transactions
entered into between the OPC and the single stockholder
• MINUTE BOOK. - A OPC shall maintain a minutes book
which shall contain all actions, decisions, and resolutions
taken by the corporation.

LIABILITY OF SINGLE SHAREHOLDER:

Where the single stockholder cannot prove that the property of the
OPC is independent of the stockholder’s personal property, the
stockholder shall be jointly and severally liable for the debts and
other liabilities of the OPC.

CONVERSION:
1. ORDINARY CORPORATION to OPC – A single stockholder
acquires all the stocks of an ordinary stock corporation and the
application for conversion into OPC is approved by SEC
2. OPC to ORDINARY CORPORATION – A OPC may be converted
into an ordinary stock corporation after due notice to the SEC of
such fact and of the circumstances leading to the conversion.
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• In case of death of the single stockholder, the nominee or
alternate nominee shall transfer the shares to the duly
designated legal heir or estate within seven (7) days from
receipt of either an affidavit of heirship or self-adjudication
executed by a sole heir, or any other legal document
declaring the legal heirs of the single stockholder and notify
the Commission of the transfer. Within sixty (60) days from
the transfer of the shares, the legal heirs shall notify the
Commission of their decision to either wind up and dissolve
the One Person Corporation or convert it into an ordinary
stock corporation.

DOCTRINE OF SEPARATE PERSONALITY - A corporation has a

personality separate and distinct from that of its
stockholders or members

PIERCING DOCTRINE OF THE VEIL OF CORPORATE FICTION-

Allows the state to disregard for certain justifiable reasons the fiction
of juridical personality for the corporation, separate and distinct from
the persons composing it.

THREE CLASSES OF PIERCING:

1. Fraud Cases -when a corporation is used as a cloak to cover

fraud, or to do wrong
2. Alter Ego-Cases- INSTRUMENTALITY RULE
- when the corporate entity is merely a farce since the corporation
is an alter ego, business conduit or instrumentality or a person or
another corporation
- Where one corporation is so organized and controlled and its
affairs are conducted so that it is in fact, a mere instrumentality
or adjunct of the other, the fiction of the corporate entity of the
"instrumentality" may be disregarded. The control necessary to
invoke the rule is not mere majority or even complete stock
control bust such domination of finances, policies, practices that
the controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is, but a conduit for its principal
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3. Equity cases – when piercing the corporate fiction is necessary to
achieve justice or equity.

Chapter II. INCORPORATION and ORGANIZATION OF PRIVATE

CORPORATIONS

INCORPORATORS
- those mentioned in the articles of incorporation as originally forming and
composing the corporation, having signed the articles and acknowledged
the same before a notary public.

Number and qualifications of incorporators:

1. Any person, partnership, association or corporation
2. Two but not more than 15 persons
3. Incorporators who are natural persons must be of legal age
4. Each must own or subscribe to at least one share
• A corporation with a single stockholder is considered a
One Person Corporation

SUBSCRIBER - a person who has agreed to take stock from the

corporation on the original issue of such stock

UNDERWRITER - a person who promises, (with an underwriter

agreement entered into before the corporate shares are brought
before the public) to subscribe and take the stocks in the event the
stocks will be offered to the public and will not be subscribed.

CHARTER: the instrument granting the right and privilege to the

corporation to be and act as such.

FRANCHISE: the privilege itself to act as a corporation.

FRANCHISES OF CORPORATION
1. PRIMARY FRANCHISE - the franchise to exist as a corporation.
2. SECONDARY FRANCHISE - right or privilege conferred upon
existing corporation, such as to use the streets of a municipality
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to lay pipes or tracks, or operate a messenger and express
delivery service.

STEPS IN THE REGISTRATION OF A CORPORATION:

1. VERIFICATION and RESERVATION of INTENDED CORPORATE
NAME
• No corporate name shall be allowed if it is not
distinguishable from that already reserved or registered for
the use of another corporation, or if such name is already
protected by law, or when its use is contrary to existing
law, rules and regulations.
• A name is not distinguishable even if it contains one or
more of the following:
a. The word “corporation”, “company”, “incorporated”,
“limited”, “limited liability”, or an abbreviation of one of
such words; and
b. Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or
number of the same word or phrase.

2. SUBMISSION and FILING of the AOI and BL and all the necessary
attachments
3. ISSUANCE of COI and COMMENCEMENT OF BUSINESS
OPERATIONS (w/in 5yrs. After issuance of COI)

EFFECTS OF NON-USE OF CORPORATE CHARTER AND

CONTINUOUS INOPERATION OF CORPORATION:

1. NON-USER FOR 5 YEARS - when the corporation does not fully organize
and commence the transaction of its business or the construction of its
works within 5 years from the date of its incorporation, its corporate
powers cease and the corporation shall be deemed dissolved.

2. CONTINOUS INOPERATION FOR 5 YEARS - when the corporation has

commenced the transaction of its business but subsequently becomes
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continuously inoperative for a period of at least 5 years, it MAY be
placed under DELIQUENT STATUS. The corporation shall have 2 years
to comply with the requirements of SEC for the lifting of the delinquent
status, otherwise it may cause the dissolution of the corporation.

CONTENTS OF ARTICLES OF INCORPORATION:

a. The name of the corporation
b. The specific purpose or purposes indicating the primary purpose
and the secondary purpose or purposes
c. The place where the principal office of the corporation is to be
located, which must be within the Philippines
d. The term for which the corporation is to exist, if the corporation has
not elected perpetual existence
NOTE:
1. Change in the corporate term may give rise to the exercise of
appraisal right
2. Corporations which elected to be with a fixed term my file for
extension or shortening of term Three (3) years prior to the
expiration of the term
3. Dissolved corporation may file for revival of corporate existence,
BUT No application for revival of certificate of incorporation of
banks, banking and quasi- banking institutions, preneed,
insurance and trust companies, non-stock savings and loan
associations (NSSLAs), pawnshops, corporations engaged in
money service business, and other financial intermediaries shall
be approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government
agency.
4. The act relative to the corporate term should be approved by 2/3
of the outstanding capital stock.
e. The names, nationalities, and residence addresses of the incorporators
f. The number of directors, which shall not be more than fifteen (15) or
the number of trustees which may be more than fifteen (15)
g. The names, nationalities, and residence addresses of persons who
shall act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with the RCC
h. If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each,
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names, nationalities, and residence addresses of the original
subscribers, amount subscribed and paid by each on the
subscription, and a statement that some or all of the shares are
without par value, if applicable
NOTE: Stock corporations shall not be required to have a
minimum capital stock, except as otherwise specifically
provided by special law.
i. If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence addresses of the contributors, and
amount contributed by each
j.An arbitration agreement may be provided in the articles of incorporation

GROUNDS WHEN AOI or AMENDMENTS MAY BE DISAPPROVED:

1. The AOI or amendment Is not in accordance with the form prescribed
2. The purpose/s or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules and
regulations
3. The certification concerning the amount of capital stock subscribed
and/or paid (if required) is false
4. The required percentage of Filipino ownership of the capital stock has
not been complied with.

• No AOI or amendment to AOI of banks, banking and quasi-banking

institutions, preneed, insurance and trust companies, NSSLAS,
pawnshops, and other financial intermediaries shall be approved by
the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
• The AOI and applications for amendments thereto may be filed with
the in the form of an electronic document, in accordance with the
SEC’s rules and regulations on ELECTRONIC FILING.

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WHAT CANNOT BE AMENDED IN THE ARTICLES OF INCORPORATION
Those matters referring to facts existing as of the date of incorporation such
as:
1. names of incorporators
2. names of original subscribers to the capital stock of the corporation
and their subscribed and paid up capital
3. treasurer elected by the original subscribers
4. members who contributed to the initial capital of a non-stock
corporation
5. date and place of execution of the articles of incorporation
6. witnesses, to and acknowledgment of the articles.

CHAPTER III. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

BOARD OF DIRECTORS:
a. The board of directors exercises corporate powers, conducts all the
business and controls and holds all the property of the corporation but
the task of actual management and carrying on the details of business
operations are delegated by it to administrative officers over whom it
exercises supervision;
b. Composed of not more than 15 members elected from the
stockholders,
c. The directors or trustees are elected to hold office for one (1) year and
until their successors are elected and qualified;
d. The directors of a stock corporation are elected by cumulative voting

CUMULATIVE VOTING - Shareholders, being entitled to that

number of votes that his number of shares multiplied by the
number of directors to be elected will bring, may give all said
votes to one candidate or he may distribute them among as
many candidates as he sees fit.

e. INDEPENDENT DIRECTOR - is a person who, apart from

shareholdings and fees received from the corporation, is independent
of management and free from any business or other relationship
which could, or could reasonably be perceived to materially interfere
with the exercise of independent judgment in carrying out the
responsibilities as a director.
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f. At least 20% of the BOD of a corporation vested with public interest
must be independent directors (minimum of 2)
g. Election must be by secret ballot if requested by any voting SH
h. SH may vote in person or through written proxy
i. Voting through remote communication:
1. automatic if corporation is vested with public interest
2. must be provided for in the bylaws for other corporations

THREE-FOLD DUTY OF A DIRECTOR:

1. Duty of Obedience
2. Duty of Diligence
3. Duty of Loyalty

DOCTRINE OF CORPORATE OPPORTUNITY - if there is presented to

a corporate officer or director a business opportunity which:
a. corporation is financially able to undertake
b. from its nature, is in line with corporations business and is of
practical advantage to it
c. one in which the corporation has an interest or a reasonable
expectancy

NOTE:
• The directors or trustees cannot delegate discretionary powers
vested exclusively in them by law, or by the by-laws, or by the vote of
the stockholders or members, or are especially delegated to them,
like the delegated power to adopt or amend the by-laws;
• The directors or trustees cannot validly act by proxy as they are
required to exercise their personal judgment;
• The directors are agents of the corporation and they occupy fiduciary
relation
• The qualifications, duties, and compensation of directors or trustees
are those prescribed by the law or by the by-laws.

QUALIFICATIONS OF A DIRECTOR:
1. Every director must own at least one (1) share of the capital stock
and must continuously own at least a share of stock during his term,
otherwise, he shall automatically cease to be a director

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2. The share of stock held by the director must be registered in the
books of the corporation;

ADDITIONAL QUALIFICATIONS:
Under special laws, citizenship may be required.
a. Rural Banks – BOD 100% Filipino citizens
b. Private development bank - BOD 100% Filipino citizens
c. Registered investment company - BOD 100% Filipino citizens
d. Domestic bank banking institutions and common carriers - BOD 2/3
Filipino citizens

DISQUALIFICATIONS: as BOD, BOT or officer

1. CONVICTION by final judgment within 5 YEARS PRIOR to the
election or appointment:
a. an offense punishable by imprisonment for a period exceeding
six (6) years
b. violation of the Corporation Code (RA 11232)
c. violation of The Securities Regulation Code (RA 8799)
2. Found administratively liable for any offense involving fraudulent
acts
3. Found guilty of any acts under numbers (1) and (2) above by a
foreign court or equivalent foreign regulatory authority
COMPENSATION OF DIRECTORS:
GENERAL RULE: Board members shall not receive any compensation in
their capacity as such, except for reasonable per
diems.
EXCEPTION : IF otherwise provided in the by-laws upon approval of a
majority vote of the OCS. Board members cannot vote.
LIMITATION: In no case shall the total yearly compensation of directors
exceed ten (10%) percent of the net income before income tax of
the corporation during the preceding year

REMOVAL OF DIRECTOR . – REQUISITES

1. Vote of the SH at least two-thirds (2/3) of the OCS
2. the removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose after
previous notice to SH
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3. the meeting must be called by the secretary on order of the president,
or upon written demand of the SH representing or holding at least a
majority of the OCS
4. Removal of minority stock holder must be with cause

NOTE: The SEC motu proprio or upon verified complaint, and after
due notice and hearing, order the removal of a director or trustee
elected despite the disqualification, or whose disqualification arose
or is discovered subsequent to an election.

VACANCIES IN THE OFFICE OF DIRECTOR:

1. When caused by REMOVAL or EXPIRATION OF TERM – OCS will
fill the vacancy
2. When caused by other grounds – BOD – if they still constitute
QUORUM

• A director elected to fill a vacancy shall be referred to as

replacement director and shall serve only for the unexpired
term of the predecessor in office.
• EMERGENCY BOARD - when the vacancy prevents the
remaining directors from constituting a quorum and emergency
action is required to prevent grave, substantial, and irreparable
loss or damage to the corporation, the vacancy may be
temporarily filled from among the officers of the corporation by
unanimous vote of the remaining directors or trustees.

DEALINGS OF DOT WITH THE CORPORATION.

RULE: A contract of the corporation with (1) one or more of its
directors, trustees, officers or their spouses and relatives within
the fourth civil degree of consanguinity or affinity is VOIDABLE,
at the option of such corporation, unless all the following
conditions are present:
1. The presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for
the approval of the contract;
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3. The contract is fair and reasonable under the
circumstances;
4. In case of corporations vested with public interest, material
contracts are approved by at least two-thirds (2/3) of the
entire membership of the board, with at least a majority of
the independent directors voting to approve the material
contract; and
5. In case of an officer, the contract has been previously
authorized by the board of directors.

NOTE: Where any of the first three (3) conditions is absent - contract
may be ratified by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or of at
least two-thirds (2/3) of the members in a meeting called for
the purpose

RULES in case CORPORATIONS with INTERLOCKING

DIRECTORS:
1. The Contract between the corporations is valid except if there
was fraud
2. If the interest of the interlocking director is SUBSTANTIAL
(exceeding twenty percent (20%) of the OCS) in one corporation
and only NOMINAL in the other corporation, the provisions of the
law on dealings of DOT shall also be observed.

CORPORATE OFFICERS:
1. President – who must be a director
2. Treasurer – who must be a resident
3. Secretary – who must be a resident and citizen of the Philippines
4. Compliance Officer – for corporations vested with public interest
5. Such other officers as may be provided in the by-laws

NOTE:
1. Officers can occupy more than one position
2. The president cannot be a secretary or a treasurer at the same
time
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3. The BOD/BOT will elect the officers
4. The OPC cannot be the president and secretary at the same
time

EXECUTIVE COMMITTEE: the BOD, if the BL so provides may

create an EXECOM composed of at least
3 BOD

Acts that CANNOT be delegated to the Executive Committee:

1. Approval of any action where the approval of the SH is also
required
2. Filling vacancies in the Board
3. Repeal or Amendment of By-laws or Adoption of new By-laws,
4. Amendment or Repeal of any Board Resolution
5. Distribution of cash dividends to shareholders

CHAPTER IV. BY LAWS and MEETINGS

ELEMENTS OF A VALID BY-LAWS:

1. Must not be contrary to existing law nor inconsistent with the Code,
else they have no binding effect;
2. Must not be contrary to morals and public policy
3. Must not impair contractual obligations
4. Must be general and uniform
5. Must be consistent with the charter or articles of incorporation
6. Must be reasonable, not arbitrary or oppressive.

CONTENTS OF BYLAWS:
a. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or special
meetings and mode of notifying the stockholders or members
thereof;
c. The required quorum in meetings of stockholders or members and
the manner of voting therein;
d. The modes by which a stockholder, member, director, or trustee
may attend meetings and cast their votes;
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e. The form for proxies of stockholders and members and the manner
of voting them;
f. The directors’ or trustees’ qualifications, duties and responsibilities,
the guidelines for setting the compensation of directors or trustees
and officers, and the maximum number of other board
representations that an independent director or trustee may have
which shall, in no case, be more than the number prescribed by the
Commission;
g. The time for holding the annual election of directors or trustees and
the mode or manner of giving notice thereof;
h. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
i. The penalties for violation of the bylaws;
j. In the case of stock corporations, the manner of issuing stock
certificates; and
k. Such other matters as may be necessary for the proper or
convenient transaction of its corporate affairs for the promotion of
good governance and anti-graft and corruption measures.

NOTE:
1. The BL should filed with the AOI.
2. The BL may be adopted by the incorporators or majority of
the OCS or members
3. Amendment of the BL should be by vote of – majority of
OCS/M and majority of BOD/BOT
4. Delegation of power to the BOD/BOT to amend or repeal the
BL or adopt a new BL - 2/3 votes of OCS/M
5. Revocation of the power – majority votes of the OCS/M
MEETINGS:
REQUISITES:
1. It must be held at the proper place
2. It must be held at the stated date and at the appointed time or at a
reasonable time thereafter
3. It must be called by the proper person
4. There must be a previous notice
5. There must be a quorum.

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PERSON WHO CAN CALL A MEETING:
1. The person or persons designated in the by-laws
2. In the absence of such provision, a director/trustee or an officer
entrusted with the management of the corporation, unless otherwise
provided by law
3. Stockholder or member authorized by the SEC whenever for any
cause, there is no person authorized to call a meeting
4. The special meeting for the removal of directors or trustees may be
called by the secretary of the corporation or by a stockholder or
member.

PERSON WHO WILL PRESIDE THE MEETING:

1. The person or persons designated in the by-laws
2. The chairman
3. The president

MEETINGS OF STOCKHOLDERS OR MEMBERS:

a. REGULAR or those held annually on a date fixed in the by-laws, or
if not so fixed, on any date AFTER April 15 of every year as
determined by the board of directors or trustees
NOTICE OF MEETING shall be sent at least twenty one (21) days
prior to the meeting unless the by-laws will require a different period

b. SPECIAL or those held at any time deemed necessary or as

provided in the by-laws. NOTICE OF MEETING shall be sent at
least one (1) week prior to the meeting unless the by-laws will
require a different period

VENUE OF MEETING:
1. Principal office
2. In the city or municipality where the principal office of the
corporation is located provided that Metro Manila, Metro Cebu,
Metro Davao, and other Metropolitan areas shall, be considered
a city or municipality.

NOTE:
1. The stock and transfer book or membership book shall be closed at
least twenty (20) days for regular meetings and seven (7) days
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for special meetings before the scheduled date of the meeting.
Unless the bylaws provide for a longer period.
2. In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall be
sent to all stockholders or members of record at least two (2)
weeks prior to the date of the meeting, unless a different period
is required under the bylaws, law or regulation.
3. The right to vote of stockholders or members may be exercised in
person, through a proxy, or when so authorized in the bylaws,
through remote communication or in absentia

MEETINGS OF DIRECTORS OR TRUSTEES:

a. REGULAR or those held by the board monthly, unless the by-laws
provide otherwise
b. SPECIAL or those held by the board at any time upon the call of the
president or as provided in the by-laws.
VENUE - anywhere in or outside the Philippines, unless the by-laws
provide otherwise
NOTICE – notice of meetings stating the date, time and place of the
meeting must be sent to every director or trustee at least
two (2) days prior to the meeting unless the BL provides
for a longer period

NOTE: Participation in meetings may be through remote

communication. DOT CANNOT attend or vote by proxy.

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CHAPTER V.
POWERS OF CORPORATIONS

POWERS OF A CORPORATION
1. EXPRESS – granted by law, Corporation Code and its Articles of
Incorporation or Charter
2. INHERENT / INCIDENTAL - expressly stated but are deemed to be
within the capacity of corporate entities
3. IMPLIED / NECESSARY - exists as a necessary consequence of the
exercise of the express powers of the corporation or the pursuit
of its purposes as provided for in the AOI

CORPORATE POWERS AND CAPACITY:

a. To sue and be sued in its corporate name
b. To have perpetual existence unless the certificate of incorporation
provides otherwise
c. To adopt and use a corporate seal
d. To amend its articles of incorporation
e. To adopt bylaws, not contrary to law, morals or public policy, and to
amend or repeal the same
f. In case of stock corporations -- to issue or sell stocks to subscribers
and to sell treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a nonstock
corporation
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property,
including securities and bonds of other corporations, 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
h. To enter into a partnership, joint venture, merger, consolidation, or
any other commercial agreement with natural and juridical persons
i. To make reasonable donations, including those for the public welfare
or for hospital, charitable, cultural, scientific, civic, or similar purposes:

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NOTE: No foreign corporation shall give donations in aid of
any political party or candidate or for purposes of
partisan political activity
j. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers, and employees

OTHER CORPORATE POWERS:

1. Power to extend or shorten corporate term
• In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal

2. Power to increase or decrease capital stock

• Twenty-five percent (25%) of the increase in capital stock
must be subscribed and that at least twenty-five percent (25%)
of the amount subscribed must be paid
• No decrease in capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate
creditors.

3. Power to incur, create or increase bonded indebtedness

4. Power to deny pre-emptive rights

• All stockholders of a stock corporation shall enjoy preemptive
right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings
• Pre-emptive right may be denied if provided for under the AOI
• NO pre-emptive right on shares:
a. issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public
b. issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.

5. Power to sell or dispose assets

• Must not be violative of the Philippine Competition Act (R.A.
10667)
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• A sale or other disposition shall be deemed to cover
SUBSTANTIALLY all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.

6. Purchase or acquire own shares provided:

a. There is an unrestricted retained earnings
b. Without prejudice to creditors and SH
c. Done in good faith
d. For legitimate purpose:
i. To eliminate fractional shares arising out of stock dividends
ii. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
iii. To pay dissenting or withdrawing stockholders entitled to
payment for their shares

7. Invest corporate funds in another corporation or business for other

purpose other than primary purpose

8. Power to declare dividends out of unrestricted retained earnings --

NOTE: Stock corporations are prohibited from retaining surplus
profits in excess of one hundred percent (100%) of their paid-in
capital stock, except:
a. when justified by definite corporate expansion projects or
programs approved by the board of directors;
b. when the corporation is prohibited under any loan
agreement with financial institutions or creditors, whether
local or foreign, from declaring dividends without their
consent, and such consent has not yet been secured;
c. when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve
for probable contingencies.

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9. Enter into management contract --

• one entered into between two corporations whereby one
corporation undertakes to manage all or substantially all of the
business of the other corporation for certain period of time,
whether such be a service contract, operating agreement or
otherwise.
• should not be longer than 5 years for any 1 term
• the management contract must be approved by the
stockholders of the managed corporation owning at least two-
thirds (2/3) of the total outstanding capital stock entitled to
vote, if:
a. stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the
managing corporation;
b. where a majority of the members of the board of
directors of the managing corporation also constitute a
majority of the members of the board of directors of the
managed corporation.

VOTES REQUIRED FOR THE APPROVAL OF CERTAIN CORPORATE

ACTS:
1. To amend the articles of incorporation
— a majority of the board of directors or trustees and vote or written
assent of 2/3 of the outstanding capital stock or of the members.
2. To elect directors or trustees
— a majority of the outstanding capital stock or of the members
must be present, represented by proxy or will vote through
remote communication/in absentia if provided for by the BL
3. To call a special meeting to remove directors or trustees
—a majority of the outstanding capital stock or of the members
4. To remove directors or trustees
— 2/3 of the outstanding capital stock or of the members
5. To ratify a contract of a director/trustee or officer with the corporation
— 2/3 of the outstanding capital stock or of the members
6. To extend or shorten corporate term
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— a majority of the board of directors or trustees and ratified by 2/3
votes of the outstanding capital stock or of the members.
7. To increase or decrease the capital stock
— a majority of the board of directors and approved by 2/3 of the
outstanding capital stock
8. To incur, create or increase bonded indebtedness
—a majority of the board of directors or trustees and approved by
2/3 of the outstanding capital stock or of the members.
9. To sell, lease, exchange, mortgage, pledge or other- wise dispose of
all or substantially all of the corporate assets
— a majority vote of the board of directors or trustees and
authorized By 2/3 of the outstanding capital stock or of the voting
members
10. To invest corporate funds in another corporation or business or for
any purpose other than the primary purpose
— a majority of the board of directors or trustees and ratified By 2/3
of the outstanding capital stock or of the members
11. To issue stock dividends
—a majority of the quorum of the board of directors and approved
by 2/3 of the outstanding capital stock. The approval of the
stockholders is not required with respect to other dividends such
as cash and bond dividends.
12. To enter into a management contract
— a majority of the quorum of the boards of directors or trustees
and a majority of outstanding capital stock or of the members of
both the managing and the managed corporations and, in some
cases, 2/3 of the total outstanding capital stock entitled to vote or
of the members, with respect to the managed corporation
13. To adopt by-laws
—a majority of the outstanding capital stock or of the members.
14. To amend or repeal the by-laws or adopt new by-laws
—a majority of the board of directors or trustees and majority of the
outstanding capital stock or of the members
15. To delegate to the board of directors or trustee the power to amend or
repeal the by-laws or adopt new by- laws
— 2/3 of the outstanding capital stock or of the members.

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16. To revoke the preceding power delegated to the board of directors or
trustees
— a majority of the outstanding capital stock or of the members
17. To fix the issued price of no par value shares
— a majority of the quorum of the board of directors if authorized by
the articles of incorporation or in the absence of such authority,
by a majority of the outstanding capital stock
18. To effect or amend a plan of merger or consolidation
— a majority of the board of directors or trustees and 2/3 of the
outstanding capital stock or of the members of the constituent
corporations.
19. To dissolve the corporation
— a majority of the board of directors or trustees and 2/3 of the
outstanding capital stock or of the members.
20. To adopt a plan of distribution of assets of a non-stock corporation
— a majority vote of the board of trustees and 2/3 of the members
having voting rights.

ULTRA VIRES ACT - an act which is not within the express, implied, and
incidental powers of a corporation
EFFECTS:
1. Contract is illegal per se. — It is wholly void and cannot be ratified.
2. Contract is not illegal per se. — It is merely beyond the power of a
corporation:
a. Executory on both sides. — It cannot be enforced by either
party thereto
b. Fully executed on both sides. — Neither party can maintain an
action to set aside the transaction or to recover what has been
parted with; and
c. Executory on one side and fully executed on the other. —
1. Courts permit recovery on behalf of the latter;
2. There are instances when the courts hold the contract
unenforceable, but compel the party who has received the
benefits of performance to return what he has received, or
in default thereof, to pay its reasonable value.

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CHAPTER VI. STOCKS AND STOCKHOLDERS

SUBSCRIPTION CONTRACT. – Any contract for the acquisition of

unissued stock in an existing
corporation or a corporation still to be
formed

TRUST FUND DOCTRINE - the subscribed capital stock of the

corporation is a trust fund for the payment of debts of the
corporation which the creditors have the right to look up to satisfy
their credits. Corporation may not dissipate this and the creditors
may sue stockholders directly for the unpaid subscription.

CALL - Declaration officially made by the corporation usually in the form

of a resolution of the BOD requiring payment of unpaid
subscription
ELEMENTS OF A VALID CALL:
1. It must be in a manner prescribed by law
2. It must be made by the BOD
3. It must be uniform in operation
CALL IS NOT NECESSARY IF:
a. Corporation is insolvent
b. Subscription is payable on a specified date, or by installment
at a specified time

VALID CONSIDERATIONS IN SUBSCRIPTION AGREEMENT:

1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of
the stock issue
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation
5. Amounts transferred from unrestricted retained earnings to stated
capital
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion
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7. Shares of stock in another corporation
NOTE:
• Shares of stock shall not be issued in exchange for promissory
notes or future services. But may be issued for checks and
other bill of exchange.
• Where the consideration is other than actual cash, or consists
of intangible property such as patents or copyrights, the
valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval
of the SEC

DELINQUENT STOCK - stock which was not paid within 30 days from
the date fixed in the contract of subscription or from the
date stated in the call made by the BOD
EFFECTS OF DELINQUENCY:
1. Delinquent stocks shall be subject to delinquency sale but it
should be within a period not less than 30 days and not more than
60ndays from declaration of deliquency
2. The stock shall not be voted or be entitled to vote or to
representation at any stockholder’s meeting
3. The holder thereof shall not be entitled to any of the rights of a
stockholder except the right to dividends, but the corporation has
the right:
a. to apply cash dividends due to the unpaid balance on the
unpaid subscription plus cost and expenses
b. to withhold stock dividends until the unpaid subscription is
fully paid
AUTHORIZED CAPITAL STOCK OR CAPITAL STOCK OR LEGAL
STOCK OR

STATED CAPITAL– the amount fixed in the Articles of Incorporation to

be subscribed and
paid by the stockholders of the corporation

SHARES OF STOCK - interest or right which owner has in the

management of the
corporation, and its surplus profits, and, on dissolution, in all
of its assets remaining after the payment of its debt.
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CERTIFICATE OF STOCK - written acknowledgement by the corporation

of the stockholder’s interest or right in
the corporation and its property.

PAID-UP CAPITAL – the portion of the authorized capital stock which

has been subscribed and actually paid

SUBSCRIBED CAPITAL – the portion of the authorized capital stock that

is covered by subscription agreements whether
fully paid or not

OUTSTANDING CAPITAL STOCK – the total shares of stock issued to

subscribers or stockholders, whether or not fully or
partially paid except treasury shares so long as
there is a binding subscription agreement

CAPITAL – properties and assets of the corporation that are used for its
business or operation

WORKING CAPITAL - excess of current assets over current liabilities.

CIRCULATING CAPITAL - refers to the total amount of current assets.

DIVIDENDS – unrestricted retained earnings set apart from the general

mass of funds of the corporation and distributed among
the shareholders in proportion to their shares or interest
in the corporation, in the form of case, property or stocks.
REQUISITES FOR DECLARATION OF DIVIDENDS:
1. Surplus profits
2. Original and unissued shares – in case of stock dividends
3. Declared by the BOD and necessary vote of the SH

CLASSIFICATION OF SHARES:
1. PREFERRED SHARES - issued with par value and preference may be
to
a. assets after dissolution
b. distribution of dividends and other preferences;
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2. REDEEMABLE SHARES - are those which permit the issuing

corporation to redeem or purchase its own shares.
LIMITATIONS ON THE ISSUANCE:
a. Redeemable shares may be issued only when expressly provided
for in the articles of incorporation
b. The terms and conditions affecting said shares must be stated both
in the articles of incorporation and in the certificate of stock
representing such share.
c. Redeemable shares may be deprived of voting rights in the articles
of incorporation, unless otherwise provided in the Code.

3. TREASURY SHARES - shares which have been earlier issued as fully

paid and have thereafter been acquired by the corporation by
purchase, donation, redemption or through some lawful
means.

RULES:
a. If purchased from the stockholders - the transaction in effect is a
return to the stockholders of the value of their investment in the
company and a reversion of the shares to the corporation. The
corporation must have surplus profits with which to buy the
shares so that the transaction will not cause an impairment of the
capital.
b. If by donation from the stockholders - the act would amount to a
surrender of their stock without getting back their investments
which are instead, voluntarily given to the corporation.
NOTE: Treasury shares are not entitled to dividends and are not
part of the OCS

4. FOUNDER'S SHARE - may be given certain rights and privileges not

enjoyed by the owners of other stocks. Where the exclusive right to
vote and be voted for in the election of directors is granted, it must
be for a limited period not to exceed five (5) years from the date of
incorporation: Provided, That such exclusive right shall not be
allowed if its exercise will violate the “Anti-Dummy Law” (CA 108);
and the “Foreign Investments Act of 1991” (RA 7042)

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5. COMMON SHARE - is the basic class of stock ordinarily and usually
issued without extraordinary rights and privileges and the owners
thereof are entitled to a pro rata share in the profits of the
corporation and in its assets upon dissolution and likewise in the
management of its affairs without preference or advantage
whatsoever.

6. PROMOTER’S SHARES/PROMOTION STOCK - shares issued to

promoters of a corporation who helped in the formal organization of
the corporation

7. ESCROW STOCK - deposited with 3rd person to be delivered to

stockholder or his assign after complying with certain conditions,
usually payment of full subscription price;

8. OVER-ISSUED STOCK - are those issued in excess of the authorized

capital stock.

9. WATERED STOCK - issued as fully paid when in fact it is not “water”

in the stock- represents the difference between the fair market
value at the time of the issuance of the stock and the par or issued
value of said stock. Both par and no-par stocks can thus be watered
stocks.

9. PAR VALUE SHARES- or nominal value is the value stated and fixed
in the AOI

10. NO PAR VALUE SHARES- shares having no par value but have
issued value stated in the articles of incorporation or to be fixed by the
Board of Directors
LIMITATIONS IN THE ISSUANCE:
a. No par value shares cannot have an issued price of less than P5.00
while the par value of a share can be as low as 1 cent.
b. The entire consideration for its issuance constitutes capital so that
no part of it should be distributed as dividends.
c. They cannot be issued as preferred stocks.
d. They cannot be issued by banks, trust companies, insurance
companies, preneed companies, public utilities, building and
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loan association, and other corporations authorized to obtain
or access funds from the public whether publicly listed or not.
e. The articles of incorporation must state the fact that it issued no
par value shares as well as the number of said shares.
f. Once issued, they are deemed fully paid and non- assessable.

12. STOCK WARRANT - security which entitle holder the right to

subscribe to, or purchase from, the unissued capital stock of a
corporation in the future.

RIGHTS OF STOCKHOLDERS:
I. DIRECT OR INDIRECT PARTICIPATION IN MANAGEMENT
a. VOTING RIGHTS
1. Preferred or redeemable shares may be deprived of the right
to vote unless otherwise provided in the Code
2. Fractional shares of stock cannot be voted unless they
constitute at least one full share.
3. Treasury shares have no voting rights as long as they remain
in the treasury
4. Holders of stock declared delinquent by the board of directors
for unpaid subscription are not entitled to vote or a
representation at any stockholder's meeting.
5. A transferee of stock cannot vote if his transfer is not
registered in the stock and transfer book of the corporation
6. MATTERS WHERE HOLDERS OF NON-VOTING SHARES
MAY VOTE:
a. Amendment of the articles of incorporation;
b. Adoption and amendment of bylaws;
c. Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another
corporation or other corporations;
g. Investment of corporate funds in another corporation or
business in accordance with this Code; and
h. Dissolution of the corporation.
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b. RIGHT TO REMOVE DIRECTORS

PROXIES - Shareholders and members may vote in person of by proxy in

all meetings of shareholders or members.
FORM - in writing, signed by the shareholder or member and filed
before the scheduled meeting with the corporate secretary.
PERIOD OF VALIDITY – unless otherwise provided in the proxy, it
should be valid only for the meeting for which it is intended. No
proxy shall be valid and effective for a longer period than five
years at any one time
• Proxies are also considered as corporate devise for securing
voting control of the corporation

Instances where the right to vote by proxy are explicitly provided for:
1. election of the board of directors or trustees
2. voting in case of joint ownership of stock
3. voting by trustee under voting agreement
4. pledged or mortgaged share
5. as provided for in its by-laws

VOTING TRUST - one or more shareholder of a stock corporation may

create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the shares for
a period not exceeding 5 years at any one time. However, if the
voting trust was a requirement for a loan agreement, period may
exceed 5 years but shall automatically expire upon full payment of
the loan.

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PROXY VOTING TRUSTS
1. Proxy votes as agent 1. Trustee votes as owner rather than as
mere agent
2. Proxy must vote in person 2. Trustee may vote in person or by
proxy unless the agreement provides
otherwise
3. The principal in a proxy does 3. The beneficial owner ceases to be
not cease to be a stockholder recognized as a shareholder of record
and the trustee assumes - practically all
the rights of a stockholder
4. Proxy has no legal title to the 4. Trustee acquires legal title to the
shares of the principal shares of the transferring stockholder
5. Proxy need not be notarized 5. The agreement must be notarized
6. Revocable anytime except 6. The agreement is irrevocable
one with interest
7. Proxy can only act at a 7.Trustee is not limited to act at any
specified stockholder's meeting particular meeting
(if not continuing)
8. Proxy can only vote in the 8.A trustee can vote and exercise all the
absence of the owners of the rights of the stockholder even when the
stock latter is present
9. A proxy is usually of shorter 9. An agreement must not exceed 5
duration although under Sec. years at any one time except when the
58 it cannot exceed 5 years at same is made a condition of a loan
any one time
10. The right to vote is inherent 10. The voting right is distinct and
in or inseparable from the right separate from the ownership of stocks
to ownership of stock
11. Proxy may vote in the 11. Trustee can be voted as a director
election of directors but he
cannot be voted as a director

II. PROPRIETARY RIGHTS

A. Right to dividends:
B. Appraisal right
C. Right to issuance of stock certificate for fully paid shares

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D. Proportionate participation in the distribution of assets in
liquidation
E. Right to transfer of stocks in corporate books
F. PRE-EMPTIVE RIGHT - right to subscribe to all issues or
dispositions of shares of any class in proportion to his present
stockholdings, the purpose being to enable the shareholder to retain
his proportionate control in the corporation and to retain his equity in
surplus.
G. Right to inspect books and records
H. Right to be furnished of the most recent financial statement/
financial report
I. Right to recover stocks unlawfully sold for delinquent payment of
subscription.

APPRAISAL RIGHT – right to withdraw from the corporation and

demand payment of the fair market value of his shares after
dissenting from certain corporate acts involving fundamental
changes in corporate structure

INSTANCES WHEN THE RIGHT MAY BE EXERCISED:

a. In case an 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 anyrespect
superior to those of outstanding shares of any class
b. In case of extending or shortening the term of corporate existence
c. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate property
and assets
d. In case of merger or consolidation
e. In case of investment of corporate funds for any purpose other
than the primary purpose of the corporation.

III. REMEDIAL RIGHTS

a. INDIVIDUAL SUIT
b. REPRESENTATIVE SUIT
c. DERIVATIVE SUIT - suit brought by stockholders for and in behalf
of the corporation and against any person, who could be another
stockholder, director, officer or and 3rd person.
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REQUISITES:
1. the party bringing suit should be a shareholder as of the time
of the act or transaction complained of;
2. he has exhausted infra- corporate remedies; and
3. the cause of action actually devolves on the corporation, the
wrongdoing or harm having been caused to the corporation
and not to the particular stockholder bringing the suit

OBLIGATIONS OF A STOCKHOLDER:
1. Liability for failure to create corporation.
2. Liability for dividends unlawfully paid
3. Liability to the creditors of the corporation for unpaid subscription
4. Liability for watered stock
5. Liability to the corporation for interest on unpaid subscription if so
required by the by-laws
6. Liability to the corporation for unpaid subscription

CHAPTER VII. CORPORATE BOOKS AND RECORDS

MERGER AND CONSOLIDATIONDISSOLUTION and LIQUIDATION

BOOKS and RECORDS REQUIRED TO BE KEPT:

1. The AOI and BL of the corporation and all their amendments
2. The current ownership structure and voting rights of the corporation,
including lists of stockholders or members, group structures, intra-
group relations, ownership data, and beneficial ownership;
3. The names and addresses of all the members of the BOD or BOT and
the EXECOM;
4. A record of all business transactions;
5. A record of the resolutions of the BOT or BOT and of the SH or M;
6. Copies of the latest reportorial requirements submitted to the SEC;
7. The minutes of all meetings of SH or M, or of the BOD or BOT
8. Stock and transfer book
NOTE:
1. The stock and transfer book shall be kept in the principal office of
the corporation or in the office of its stock transfer agent and shall
be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days. Stock

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corporations which transfer and/or trade stocks in secondary
markets to have an independent transfer agent.
2. STOCK TRANSFER AGENT - one engaged principally in the
business of registering transfers of stocks in behalf of a stock
corporation.

REPORTORIAL REQUIREMENTS OF CORPORATIONS.

1. Annual financial statements audited by an independent certified public
accountant.
• If the total assets or total liabilities of the corporation are less
than Php 600k, the financial statements shall be certified under
oath by the corporation’s treasurer or chief financial officer
2. A general information sheet.

3. Corporations vested with public interest must also submit the following:
a. A director or trustee compensation report
b. A director or trustee appraisal or performance report and the
standards or criteria used to assess each, director or trustee.

• The SEC may place the corporation under delinquent status in

case of failure to submit the reportorial requirements three (3)
times, consecutively or intermittently, within a period of five (5)
years.

AMALGAMATION – corporate combinations

1. Merger
2. Consolidation
3. Formation of a holding corporation
4. Lease of assets of one corporation to another corporation
5. Sale of assets of one corporation to another corporation

MERGER - one corporation absorbs the other and remains in existence

while the other is dissolved.

CONSOLIDATION - a new corporation is created, and consolidating

corporations are extinguished.
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PROCEDURE FOR MERGER OR CONSOLIDATION:

1. The Board of each corporation shall draw up a plan of merger or
consolidation setting forth:
a. Names of the corporation involved
b. Terms and mode of carrying it
c. Statement of changes, if any, in the present articles of the
surviving corporation or the articles of the new corporation to be
formed in the case of consolidation.
2. Plan for merger or consolidation shall be approved by majority vote of
each of the board of the concerned corporations at separate meetings
and approved by the majority vote of the 2/3 of the Outstanding Capital
Stock or members for non-stock corporations.
3. Any amendment to the plan must be approved by the majority vote of
the board members or trustees of the constituent corporations and
affirmative vote of 2/3 of OCS or members
4. Articles of Merger or Articles of Consolidation shall be executed by
each of the constituent corporations, signed by the President or Vice-
President and certified by the Secretary or Assistant Secretary setting
fort:
a. plan of merger or consolidation
b. for stock corporation, the number of shares outstanding; for non-
stock, the number of members
c. as to each corporation, number of shares or members voting for and
against such plan respectively
5. Four (4) copies of the Articles of Merger or Consolidation shall be
submitted in to the SEC for approval.

EFFECTS OF MERGER OR CONSOLIDATION.

a. The constituent corporations shall become a single corporation
which, in case of merger, shall be the SURVIVING CORPORATION
designated in the plan of merger; and, in case of consolidation, shall
be the CONSOLIDATED CORPORATION designated in the plan of
consolidation
b. The separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation

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c. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities, and powers and shall be subject to all
the duties and liabilities of a corporation
d. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities and franchises of each constituent
corporation; and all real or personal property, all receivables due on
whatever account, including subscriptions to shares and other
choses in action, and every other interest of, belonging to, or due to
each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further
act or deed
e. The surviving or consolidated corporation shall be responsible for all
the liabilities and obligations of each constituent corporation as
though such surviving or consolidated corporation had itself incurred
such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any constituent corporation may be
prosecuted by or against the surviving or consolidated corporation.
The rights of creditors or liens upon the property of such constituent
corporations shall not be impaired by the merger or consolidation.

DISSOLUTION
Dissolution of a corporation is the extinguishment of its franchise and
the termination of its corporate existence or business purpose.

MODES OF DISSOLUTION
i. VOLUNTARY
a. Where no creditors are affected
1. Notice of the meeting should be given to the stockholders or
members by personal delivery or registered mail at least 20
days prior to the meeting.
2. The notice of meeting should also be published at least once
in a newspaper published in the place where the principal
office of said corporation is located. If no newspaper is
published in such place, then in a newspaper of general
circulation in the Philippines.
3. The resolution to dissolve must be approved by the majority of
the directors/trustees and approved by the stockholders

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representing at least majority of the OCS or majority of
members.
4. A copy of the resolution shall be certified by the majority of the
directors or trustees and countersigned by the secretary.
5. The signed and countersigned copy will be filed with the SEC
and the latter will issue the certificate of dissolution within 15
days
6. SEC will issue a Certificate of Dissolution

• No application for dissolution of banks, banking and quasi-

banking institutions, preneed, insurance and trust companies,
NSSLAs, pawnshops, and other financial intermediaries shall
be approved unless accompanied by a favorable
recommendation of the appropriate government agency.

b. Where creditors are affected

1. A PETITION shall be signed by a majority of its board of
directors or trustees or other officers having management of
its affairs.
2. The petition must be verified by its president, or secretary or
one of its director or trustees.
3. Approval of the stockholders representing at least 2/3 of the
OCS or 2/3 of members in a meeting called for that purpose.
4. The Order for filing of objections should also be published for
3 consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located. If no
newspaper is published in such place, then in a newspaper of
general circulation in the Philippines.
5. Filing of a petition with the SEC signed by majority of directors
or trustees or other officers having the management of its
affairs verified by the President or Secretary or Director.
Claims and demands must be stated in the petition.
6. SEC will issue a Certificate of Dissolution

c. Dissolution by Shortening Corporate Term. – A voluntary

dissolution may be effected by amending the articles of incorporation
to shorten the corporate term pursuant to the provisions of the RCC.
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The dissolution shall automatically take effect on the day following
the last day of the corporate term stated in the AOI, without the need
for the issuance by the SEC of a certificate of dissolution.

ii. INVOLUNTARY
A corporation may be dissolved by the SEC motu proprio or upon
filing of a verified complaint by any interested party based on the
following grounds:
a. Non-use of corporate charter
b. Continuous inoperation of a corporation
c. Upon receipt of a lawful court order dissolving the corporation
d. Upon finding by final judgment that the corporation procured its
incorporation through fraud
e. Upon finding by final judgment that the corporation:
1. Was created for the purpose of committing, concealing or
aiding the commission of securities violations, smuggling,
tax evasion, money laundering, or graft and corrupt practices
2. Committed or aided in the commission of securities
violations, smuggling, tax evasion, money laundering, or
graft and corrupt practices, and its stockholders knew
3. Repeatedly and knowingly tolerated the commission of graft
and corrupt practices or other fraudulent or illegal acts by its
directors, trustees, officers, or employees.

CORPORATE LIQUIDATION.
Every corporation whose charter expires pursuant to its articles of
incorporation, is annulled by forfeiture, or whose corporate
existence is terminated in any other manner, shall nevertheless
remain as a body corporate for three (3) years after the effective
date of dissolution, for the purpose of prosecuting and defending
suits by or against it and enabling it to settle and close its affairs,
dispose of and convey its property, and distribute its assets, but not
for the purpose of continuing the business for which it was
established.

• Liquidation of BANKS is governed by the New Central Bank

Act and the PDIC

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CHAPTER VIII. INVESTIGATIONS, OFFENSES, AND PENALTIES

OFFENSES AND PENALTIES

1. Unauthorized use of corporate name – FINE of Php1ok to Php200k
2. Violation of disqualification provision -
FINE of Php1ok to Php200k and/or permanent disqualification to be
elected DOT
If violation is injurious to the public - FINE of Php2ok to Php400k
and/or permanent
disqualification to be elected DOT
3. Violation of duty to maintain records, to allow their inspection or
reproduction -
FINE of Php1ok to Php200k
If violation is injurious to the public - FINE of Php2ok to Php400k

4. Willful Certification of Incomplete, Inaccurate, False; or Misleading

Statements or Reports
FINE of Php2ok to Php200k

If violation is injurious to the public - FINE of Php4ok to Php400k

5. Independent Auditor Collusion

FINE of Php8ok to Php500k

If violation is injurious to the public - FINE of Php10ok to Php600k

6. Obtaining Corporate Registration Through Fraud

FINE of Php200k to Php 2m
If violation is injurious to the public - FINE of Php40ok to
Php 5m
7. Fraudulent Conduct of Business
FINE of Php200k to Php 2m
If violation is injurious to the public - FINE of Php40ok to
Php 5m

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8. Acting as Intermediaries for Graft and Corrupt Practices

FINE of Php100k to Php5m
• Failure to install safeguards for the transparent and lawful
delivery of services and policies, code of ethics, and
procedures against graft and corruption shall be prima facie
evidence of corporate liability

9. Tolerating Graft and Corrupt Practices

FINE of Php500k to Php1m

10. Retaliation Against Whistleblowers.

FINE of Php100k to Php 1m

• A WHISTLEBLOWER refers to any person who provides

truthful information relating to the commission or possible
commission of any offense or violation under the RCC.

NOTE: If the offender is a corporation, the penalty may, at the discretion

of the court, be imposed upon such corporation and/or upon its
directors, trustees, stockholders. members, officers, or employees
responsible for the violation or indispensable to its commission.

POWERS, FUNCTIONS, AND JURISDICTION OF THE SEC:

a. Exercise supervision and jurisdiction over all corporations and
persons acting on their behalf
b. Exercise jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution. The Commission shall retain
jurisdiction over pending suspension of payment/rehabilitation cases
filed as of 30 June 2000 until finally disposed
c. Impose sanctions for the violation of the RCC, its implementing rules
and orders of the SEC
d. Promote corporate governance and the protection of minority
investors, through, among others, the issuance of rules and
regulations consistent with international best practices
e. Issue opinions to clarify the application of laws, rules and regulations
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f. Issue cease and desist orders ex parte to prevent imminent fraud or
injury to the public
g. Hold corporations in direct and indirect contempt
h. Issue subpoena duces tecum and summon witnesses to appear in
proceedings
i. In appropriate cases, order the examination, search and seizure of
documents, papers, files and records, and books of accounts of any
entity or person under investigation as may be necessary for the
proper disposition of the cases, subject to the provisions of existing
laws;
j. Suspend or revoke the certificate of incorporation after proper notice
and hearing;
k. Dissolve or impose sanctions on corporations, upon final court order,
for committing, aiding in the commission of, or in any manner
furthering securities violations, smuggling, tax evasion, money
laundering, graft and corrupt practices, or other fraudulent or illegal
acts
l. Issue writs of execution and attachment to enforce payment of fees,
administrative fines, and other dues collectible under the RCC
m. Prescribe the number of independent directors and the minimum
criteria in determining the independence of a director
n. Impose or recommend new modes by which a stockholder, member,
director, or trustee may attend meetings or cast their votes, as
technology may allow, taking into account the company’s scale,
number of shareholders or members, structure, and other factors
consistent with the basic right of corporate suffrage
o. Formulate and enforce standards, guidelines, policies, rules and
regulations to carry out the provisions of the RCC
p. Exercise such other powers provided by law or those which may be
necessary or incidental to carrying out the powers expressly granted
to the SEC
q. Formulate the rules and regulations, which shall govern arbitration of
corporations

• Arbitration for Corporations. - An arbitration agreement may be

provided in the articles of incorporation or bylaws of a
corporation. When such an agreement is in place, disputes
between the corporation, its stockholders or members, which
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arise from the implementation of the articles of incorporation or
bylaws, or from intra-corporate relations, shall be referred to
arbitration.
• A dispute shall be non-arbitrable when it involves criminal
offenses and interests of third parties.

SECURITIES – proof of one’s ownership OR indebtedness in a company

short term – ex. treasury bills and commercial papers
long term – ex. stocks and bonds

TYPES OF SECURITIES:
1. Common stocks
2. Preferred stocks
3. Warrants
4. Philippine Deposit Receipts
5. Small Denominated Treasury Bonds (SDT-Bonds)

General Rule: All securities before being offered for sale/actual sale to the
public must first be registered and have the proper permit.
Exception:
1. Exempt securities
a. issued by the government subdivisions/instrumentalities
b. issued by foreign government which the Philippines has diplomatic
relations
c. issued by receiver/trustee of an insolvent approved by the court
d. issued by building and loan association
e. issued by receiver/trustee of an insolvent approved by the court
f. policy of insurance issued by insurance corporation supervised by the
insurance commission
g. security/right/interest in real property including subdivision
lot/condominium supervised by the Ministry of Human Settlements
h. pension plans regulated by BIR/Insurance Commission

2. Exempt Transactions
a. judicial sale by execution, etc. in insolvency
b. sale of pledged property/foreclosed property to liquidate an obligation
c. isolated transactions on securities done by owner/agent
d. stock transfers emanating from mergers and consolidations
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e. pre-incorporation subscription
f. securities issued by public service operator to broaden equity base

3. Grounds for Rejection of Registration

a. application incomplete/untruthful/omits to state a material fact
b. issuer/registrant insolvent, violated code/ SEC rules, engages in
fraudulent transactions
c. issuer’s business not sound
d. officer, director, stockholders of issuers is disqualified
e. issue would prejudice the public

4. Grounds for Revocation

a. issuer insolvent
b. violated of Code/SEC rules
c. fraudulent transaction
d. dishonesty by issuer/misrepresented prospectus
e. does not conduct business in accordance with law

5. Prohibited Acts
a. manipulation of security prices
b. manipulation of deceptive devices
c. artificial measures of price control
d. fraudulent transactions
e. insider trading
f. false prospectus, communications, reports

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REVISED CODE OF CORPORATE GOVERNANCE

(SEC Memorandum Circular 24-2019)
Effective: January 12, 2020

CORPORATE GOVERNANCE – the system of stewardship and control to

guide organizations in fulfilling their long-term economic, moral, legal and
social obligations towards their shareholders/members and other
stakeholders.

Covered by Revised Code of Corporate Governance

1. Registered corporations;
2. Branches or subsidiaries of foreign corporations operating in the
Philippines that:
a. Sell equity and/or debt securities to the public that are required to
be registered with the Commission, or
b. Have a assets in excess of Fifty Million Pesos and at least two
hundred (200) stockholders who own at least one hundred (100)
shares each equity securities, or
c. Whose equity securities are listed on an Exchange; or
d. Grantees of secondary licenses from the Commission.

Interpretation in case of doubt

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.

Board of Director
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.

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.

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Membership of the Board
1. Executive – a director who is also the head of a department or unit of
the corporation or performs any work related to its operation.
2. Non-executive directors – a director who is not the head of a
department or unit of the corporation nor performs any work related
to its operation.

Multiple Board Seats

The board may consider the adoption of guidelines on the member 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 for 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.

The Chair and Chief Executive Officer

The role 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 are unified, the
power checks and balances should be laid down to ensure that the Board
gets the benefits of independent views and perspectives

Duties and Responsibilities of Chair

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

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3. Maintain qualitative and timely lines-of communication and information
between the Board and Management.

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;
1. Membership in good standing in relevant industry, the business or
professional organizations; and
2. Previous business experience.

Disqualification of Directors
1. Permanent Disqualification
The following shall be grounds for the permanent disqualification of a
director;
a. Any person convicted by final judgment or order by a competent
judicial or administrative body of any crime that (a) involves the
purchased 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.
b. 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.
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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;
c. 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;
d. 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;
e. Any person earlier elected as independent director who becomes an
officer, employee or consultant of the same corporation.
f. Any person judicially declared as insolvent;
g. 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;
h. 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.
2. Temporary Disqualification
The Board may provide for the temporary disqualification of a director for
any of the following reasons:

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a. 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.
b. Absence in more than fifty (50) percent of all regular and special
meetings of the Board during his incumbency, or any twelve (12)
months 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.
c. 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.
d. If the beneficial equity ownership of an independent director in the
corporation or its subsidiaries and affiliates exceed two percent of its
subscribed capital stock. The disqualification shall be lifted if the limit
is later complied with.
e. If any of the judgments or orders cited in the grounds for permanent
disqualification has not yet become final.

A temporary 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.

General Responsibility of the Board

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

Duties and Function 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:

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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 plan, operating budgets and Management’s overall
performance.
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. Indentify 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 process at
all times. There should be a continuing review of the corporation’s
internal control system in order to maintain its adequacy and
effectiveness.
g. Identify key risk areas and performance indicators and monitor these
factors with due diligence to enable the corporation to participate 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.

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i. Constitute an Audit Committee and such other committees it deems
necessary to assist the Board in the performance of its duties and
responsibilities.
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.

Specific Duties and Responsibility 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.
A director should observe the following norms of conduct:
a. 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
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.
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b. Devotee 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, review meeting materials
and, if called for, ask questions or seek explanation.
c. 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.
d. 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. Corollary, He should support plans and ideas that he thinks
are beneficial to the corporation.
e. Have a working knowledge of the statutory and regulatory
requirements that affect the corporation, including its articles of
iincorporation and by-laws, the rules and regulations of the
Commission and, where applicable, the requirements of relevant
regulatory agencies.
f. 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.

Internal Control Responsibilities of the Board

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
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financial and operational information, the effectiveness and efficiency of
operations, the safeguarding of assets, and compliance with laws, rules,
regulations and contracts.
(i) The Minimum internal control mechanisms for the performance of the
Board’s oversight responsibility may include:
a. Definition of thee 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.
(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; extend and effectiveness of information
technology; and extent of regulatory compliance.
(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.

Board Committees
The Board shall constitute the proper committees to assist it in good
corporate governance.
(i) 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
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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.
b. Provide oversight over Management’s activities in managing credit,
market, liquidity, operational, legal and other risk of 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.
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;
i. Review the quarterly, half-year and annual financial statements
before their submission to the Board, with particular focus on the
following matters:
1. Any change/s in accounting policies and practices
2. Major judgmental areas
3. Significant adjustments resulting from the audit
4. Going concern assumptions
5. Compliance with accounting standards
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6. Compliance with tax, legal and regulatory requirements.
j. Coordinate, monitor and facilitate compliance with laws, rules and
regulations;
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 over all
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.
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.
(ii) The Board may also organize the following committees:
a. 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’s approval, and to assess the effectiveness of the Board’s
processes and procedures in the election or replacement of
directors.
b. 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.

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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 –
a. 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;
b. Be loyal to the mission, vision and objectives of the corporation,
c. Work fairly and objectively with the Board, Management and
stockholders;
d. Have appropriate administrative and interpersonal skills;
e. 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;
f. Have a working knowledge of the operations of the corporation;
g. 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;
h. Attend all Board meetings, except when justifiable causes, such as,
illness, death in the immediate family and serious accident, prevent
him from doing so;
i. Ensure that all Board procedures, rules and regulations are strictly
followed by the members; and
j. If he is also the Compliance Officer, perform all the duties and
responsibilities of the said officer as provided for in this Code.

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;
1. 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;
2. Appear before the Commission when summoned in relation to
compliance with this Code; and
3. Issue a certification every January 30th of the year on the extent of
the corporation’s compliance with this Code for the completed year
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and, if there are any deviations, explain the reason for such
deviation.

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 a report 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.
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:
1. 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.
2. 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;
3. 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;
4. The corporation should consistently comply with the financial
reporting requirements of the Commission;
5. 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
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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.

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.
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.

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:
1. Right to vote on all matters that require their consent or approval;
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2. Pre-emptive right to all stock issuances of the corporation;
3. Right to inspect corporate books and records;
4. Right to information;
5. Right to dividends; and
6. Appraisal right.
B. The Board should be transparent and fair in the conduct of thee
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 an provide an
adequate avenue for them to seek timely redress for breach of their
rights.
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.

Disclosure and Transparency

The more transparency the internal workings of the corporation are, the
more difficult it will be for the 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 affects its validity 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
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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.

Commitment to 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.

Administrative Sanctions
Fine of not more than Two Hundred thousand pesos (P200,000) 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.
Any violation of the Securities Regulation Code (SRC) punishable by a
specific penalty shall be assessed separately and shall not be covered by
the above mentioned fine.

TERMINOLOGIES:

Enterprise Risk Management - a process, effected by an entity's Board of

Directors, Management and other personnel, applied in strategy setting and
across the enterprise that is designed to identify potential events that may
affect the entity, manage risks to be within its risk appetite, and provide
reasonable assurance regarding the achievement of entity objectives.

Executive director - a director who has executive responsibility of day-to-

day operations of a part or the whole of the corporation.
Independent director - a person who is independent of Management and the
controlling shareholder, and is 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.
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Internal control - a process designed and effected by the entity's Board of

Directors/ Trustees, Senior Management, and all levels of personnel to
provide reasonable assurance on the achievement of objectives through
efficient and effective operations; reliable, complete and timely financial and
management of corporate information; and compliance with applicable laws,
regulations, and the organization's policies and procedures.

Management - a group of executives given the authority by the Board of

Directors/ Board of Trustees to implement the policies it has laid down in the
conduct of the business of the corporation. Members - the members of non-
stock corporations.

Non-executive director - a director who has no executive responsibility and

does not perform any work related to the day-to-day operations of the
corporation.
Non-Proprietary Right - an interest, participation or privilege over a specific
property of a corporation that allows the holder to use such property under
certain terms and conditions. The holder, however, shall not be entitled to
dividends from the corporation or to its assets upon its liquidation.

Proprietary Right - an interest, participation or privilege in a corporation

which gives the holder the right to use the facilities and to receive dividends
or earnings
from the corporation. Upon the liquidation of the corporation, the holder shall
have proportionate ownership rights over its assets.

Public Company - a company with assets of at least Fifty Million Pesos

(Php50,000,000.00) and having two hundred (200) or more shareholders
holding at least one hundred (100) shares each of equity securities.

Registered Issuer - a company that: (1) issues proprietary and/or non-

proprietary shares/certificates; (2} issues equity securities to the public that
are not listed in an Exchange; or (3) issues debt securities to the public that
are required to be registered to the SEC, whether or not listed in an
Exchange.

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Related parties - covers the covered entity's directors, officers, substantial
shareholders and their spouses and relatives within the fourth civil degree of
consanguinity or affinity, legitimate or common-law, and other persons if
these persons have control, joint control or significant influence over the
covered entity. It also covers the covered entity's parent, subsidiary, fellow
subsidiary, associate, affiliate, joint venture or an entity that is controlled,
jointly controlled or significantly influenced or managed by a person who is a
related party.

Related Party Transactions - a transfer of resources, services or

obligations between a reporting entity and a related party, regardless of
whether a price is charged. It should be interpreted broadly to include not
only transactions that are entered into with related parties, but also
outstanding transactions that are entered into with an unrelated party that
subsequently becomes a related party.

Significant Influence - The power to participate in the financial and

operating policy decisions of the company but has no control or joint control
of those policies.

Stakeholders - any individual, organization or society at large who can

either affect and/or be affected by the company's strategies, policies,
business decisions and operations, in general. This includes, among others,
non-proprietary certificate holders, customers, creditors, employees,
suppliers, investors, as well as the government and the community in which
the company operates

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QUIZZER IN CORPORATION LAW

1. All of this corporation’s issued stock of all classes exclusive of

treasury shares shall be held of record by not more than twenty
persons
A. Public corporation C. Close corporation
B. Stock corporation D. Non-stock corporation

2. Any profit which it may earn shall be used for the furtherance of the
purpose for which the corporation was organized as such profit is not
distributable to its members
A. public corporation C. stock corporation
B. close corporation D. non-stock corporation

3. The right of the corporation to exist as a judicial person during its

terms as stated in its Articles of Incorporation despite the death of
any of its stockholders is:
A. Right of Existence C. Right of Succession
B. Right of Redemption D. Pre-emptive Right

4. Contracts between a corporation and third persons must be made by

or under the authority of its:
A. General Manager C. Stockholders
B. President and CEO D. Board of Directors

5. Which of the following does not form part of the three-fold duty of
directors?
A. Duty of Diligence C. Duty of Loyalty
B. Duty of Transparency D. Duty of Obedience

6. The difference between corporations and partnerships is that in

corporations:
A. The liability extends up to private properties
B. There is no dissolution in case of death, withdrawal or
resignation of an owner
C. The interest or ownership is transferable only if the other owner
consents
D. It is created by mere consent of the owners
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7. In which of the following cases will the doctrine of separate corporate

personality apply?
A. When used as a cloak to cover fraud, illegality or it results in
injustice.
B. To defeat public convenience, justify wrong, defend crime
C. Where two corporations are made to appear as one and used
as a device to defeat the ends of law or as a shield to confuse
legitimate issues
D. Where two corporations have interlocking directors.

8. When a corporation is used to defeat public convenience, justify

wrong, protect fraud, or defend crime or made as a shield to confuse
the legitimate issues or where a corporation is a mere alter ago or
business conduit of a person, this doctrine applies:
A. Doctrine of business opportunity
B. De facto doctrine
C. Trust fund doctrine
D. Doctrine of piercing the veil of corporate fiction

9. If shares of stock are sold to a buyer, the delivery as a mode of

transferring ownership may be effected by:
A. Traditional longa-manu C. Traditiobrevi-manu
B. Quasi-traditio D. Symbolical delivery

10. Which of the following is the disadvantage of forming a corporation?

A. The free and ready transferability of ownership.
B. The shareholders are not liable for the debts of the business.
C. Because of the power of succession, the existence of the entity
is not affected by the personal vicissitudes of the individual
shareholders.
D. The subservience of minority stockholders to the wishes of the
majority subject only to equitable restraint.

11. The number of the Board of Trustees in a nonstock corporation.

A. Shall not be more than 15
B. May be more than 15
C. Must be 15
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D. Shall not be less than five but not more than fifteen

12. For purposes of interlocking directors, the stockholdings shall be

considered substantial if:
A. Exceeding 10% of the authorized capital stock
B. Exceeding 10% of the outstanding capital stock
C. Exceeding 20% of the authorized capital stock
D. Exceeding 20% of the outstanding capital stock

13. The corporation shall be deemed dissolved and its corporate

powers cease, if from the date of its incorporation, it does not
formally organize and commence the transaction of its business or
the construction of its works within
A. 4 years B. 3 years C. 2 years D. 5 years

14. Which of the following qualifications is necessary in order that one

may be a director of a corporation?
A. He must be a citizen and a resident of the Philippines.
B. He must not be a stockholder or director of a competitor
corporation.
C. He must not be an officer of the government
D. He must own at least one (1) share of stock of the corporation.

15. Which of the following qualifications is necessary in order that one

may be elected secretary of the corporation?
A. He must be a citizen and a resident of the Philippines.
B. He must be a director of the corporation.
C. He must be a stockholder of the corporation.
D. He must not be a treasurer of any other corporation.

16. Which of the following qualifications is necessary in order that one

may be elected president of the corporation?
A. He must be a citizen and a resident of the Philippines.
B. He must not be a stockholder or director of a competitor
corporation.
C. He must not be a president of any other corporation.
D. He must be a director of the corporation.

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17. A private corporation commences to have juridical personality from
the date:
A. The officers of the corporation are elected by the stockholders.
B. The incorporators sign the articles of incorporation.
C. The articles of incorporation and by-laws are presented to the
SEC.
D. The SEC issues a certificate of incorporation under its official
seal.

18. The articles of incorporation were prepared, signed and filed with the
Securities and Exchange Commission. After some time, the
corresponding certificate of incorporation was issued. Later, it was
discovered that the corporation failed to submit one requirement for
registration. What is the status of the corporation?
A. Corporation by estoppel C. De jure corporation
B. Open corporation D. De facto corporation

19. The corporation has a 15-member board. Three of the members of

the Board have sold their shares while three others are abroad. To
have a quorum, this number is required:
A. Seven C. Six
B. Five D. Eight

20. The subscriber of unpaid shares which are not delinquent shall be
entitled to the following rights, except the right to:
A. Vote.
B. Inspect corporate books.
C. A stock certificate.
D. Dividends.

21. One of the following acts may be performed by the executive

committee of a corporation. Which is it?
A. Declaration of stock dividends.
B. Filling of vacancies in the board of directors.
C. Amendments or repeal of the by-laws or adoption of new by-laws.
D. Approval of contracts in the ordinary course of business.

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22. Which cause of vacancy in the board of directors may be filled by the
board of directors if the remaining directors still constitute a quorum
and by the stockholders if such quorum does not exist?
A. Removal of a director.
B. Resignation of a director.
C. Increase in the number of directors.
D. Expiration of the term of some directors.

23. In case the members of the board of directors of a corporation still

constitute a quorum, and there are vacancies, who will fill up such
vacancies?
Expiration Increase in the
Removal Resignation of term number of Directors
a. Stockholders Board Stockholders Board
b. Board Board Stockholders Stockholders
c. Stockholders Board Stockholders Stockholders
d. Stockholders Stockholders Board Stockholders

24. Which of the following statements relative to a corporation is false?

A. A corporation has a legal personality distinct and separate from
its stockholders.
B. A corporation may be entitled to an award of moral damages
where its good reputation is besmirched resulting into social
humiliation.
C. The corporate can be declared insolvent
D. A corporation is not within the protection of the Constitution
regarding the right to be secure against unreasonable searches
and seizures.

25. This is an element of the doctrine of “piercing the veil of corporate

entity?”
A. Complete control over the business
B. Control is used to commit fraud or wrong
C. The corporation is already insolvent
D. The corporation is owned by a single stockholder

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26. The doctrine of “piercing the veil of corporate entity” shall not be
applied where:
A. The corporation operates for the benefit of a single individual
who exercises complete control over its funds.
B. The corporation is owned by a single stockholder
C. The corporation is a mere alter ego of another corporation.
D. The corporation is organized as a device to evade an
outstanding legal obligation.

27. Which of the following statements is true?

A. A corporation enjoying a legislative franchise to supply
electricity may engage in buying and selling agricultural lands.
B. A corporation engaged in car dealership may engage in land
transportation business.
C. A corporation engaged in deep-sea fishing may operate an ice
plant as a public service operator.
D. A corporation engaged in the manufacture of rubber shoes
may engage in the manufacture of rubber cement.

28. One of the following attributes is not common to both a corporation

and a partnership:
A. Succession
B. Juridical personality
C. Income tax rate
D. Can act through agents only

29. One of the following entities cannot be organized as a stock

corporation:
A. Bank
B. Close corporation
C. Religious corporation
D. Education corporation

30. What is the term of corporate existence?

A. Must not be less than 50 years.
B. Must not be more than 50 years
C. 20 years subject to renewal

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D. Perpetual existence unless a specified term is specified in the
Articles of Incorporation

31. Determine which of the following “purpose clauses” contained in the

articles of incorporation shall be accepted by the SEC?
A. To practice lawful profession
B. To carry out any lawful business or purpose
C. Both a and b
D. Neither a nor b

32. Which of the following statements relative to de jure and de facto

corporations is false?
A. A de jure corporation is one that was able to comply
substantially with all the requirements of the law for its
incorporation.
B. A de facto corporation is one that was able to make colorable
compliance of the legal requirements for its incorporation.
C. A de jure corporation’s existence can be attacked in a quo
warranto proceeding.
D. Both de jure and de facto corporations were issued a
certificate of incorporation

33. Which of the following is not a characteristic of a de facto

corporation?
A. There is a bona fide attempt to comply with the requirements of
the law in organizing the corporation.
B. There is an actual exercise of corporate powers in good faith.
C. Non issuance of Certificate of Incorporation
D. Good faith

34. Which of the following statements relative to a corporation by

estoppel is false?
A. It is an ostensible corporation.
B. It is treated as a de jure or de facto corporation between the
persons misrepresenting themselves as a corporation and the
persons who relied on their misrepresentation.

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C. Those who assume to act as a corporation shall be liable as
general partners for all debts, liabilities and damages resulting
therefrom.
D. Stockholders may invoke doctrine of separate corporate
personality

35. Determine which of the following omissions shall result into the
automatic cessation of corporate powers and dissolution of the
corporation?
A. Failure of a corporation to formally organize and commence
business transactions or construction of its works within two
(2) years from the date of its incorporation.
B. Subsequent continuous in operation for at least five (5) years.
C. Failure of a corporation to formally organize and commence
business transactions or construction of its works within five
(5) years from the date of its incorporation.
D. Subsequent continuous in operation for at least five (5) years

36. Which of the following statements relative to the board of directors of

a stock corporation is true?
A. The number of directors must not be more than fifteen (15).
B. The majority of the directors must be citizens of the
Philippines.
C. Each director must own at least 10 shares of the capital stock
registered in his name in the corporate books
D. The majority of the directors must be residents of the
Philippines.

37. Which of the following statements relative to the board of directors of

a stock corporation is false?
A. A director must not have been convicted by final judgment of
an offense punishable by more than six (6) years
imprisonment, or committed a violation of the Corporation
Code within five (5) years prior to the date of election or
appointment.
B. A director may be removed from office by a vote of the
majority of the outstanding capital with or without cause.

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C. No director shall receive any compensation (other than per
diems) as such, unless the same is granted under the by-laws
or by a vote of at least 2/3 of the outstanding capital stock;
provided; that the total yearly compensation (excluding per
diems and compensation as officers) shall not exceed ten
(10%) percent of the net income before income tax of the
corporation during the preceding year.
D. Additional qualification for the election of directors may be
provided in the by-laws

38. A, B, C, D, E, F, and G are the members of the board of directors of a

corporation. Unfortunately, E, F, and G resigned for personal
reasons. How shall the vacancies be filled up?
A. The vacancies shall be filled up by the majority vote of the
board of directors.
B. The vacancies shall be filled up by the majority vote of the
stockholders in a regular or special meeting.
C. The vacancies shall be filled up by the vote of at least 2/3 of
the stockholders in a regular or special meeting.
D. The vacancies shall be filled up by the 2/3 vote of the board of
directors.

39. A, B, C, D, E, F, and G are the members of the board of directors of a

corporation. Unfortunately E, F, and G were removed from office due
to fraudulent practices. How shall the vacancies be filled up?
A. The vacancies shall be filled up by the majority vote of the
board of directors.
B. The vacancies shall be filled up by the majority vote of the
stockholders in a regular or special meeting.
C. The vacancies shall be filled up by the vote of at least 2/3 of
the stockholders in a regular or special meeting.
D. The vacancies shall be filled up by the 2/3 vote of the board of
directors.

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40. The contract entered into by a self-dealing director, trustee or officer
is valid where:
A. The presence of the director, trustee or officer in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting.
B. The vote of such director, trustee or officer was not necessary
for the approval of the contract.
C. Both a and b.
D. Neither a nor b.

41. X is a director owning 20% of the outstanding capital stock of ABC

Corporation and 40% of RST Corporation. The two corporations
entered into a contract whereby ABC Corporation sold its commercial
lot to RST Corporation. The contract was approved as follows: ABC
Corporation – 4 out of 5 directors voted in the affirmative, including X;
RST Corporation – 5 out of 7 directors voted in the affirmative,
including X. The contract entered into by the two corporations is:
A. Valid
B. Voidable
C. Unenforceable
D. Void

42. A corporation has an authorized capital stock of P4,000,000

composed of 40,000 shares @ P100 par value, of which only 10,000
shares have been offered for subscription. These 10,000 shares are
now fully subscribed and paid for. The board of directors, by majority
vote that is ratified by 2/3 vote of the outstanding capital stock,
increased its capital stock by an additional 20,000 shares @ P100
par value.
Which of the following shall meet the minimum subscription
requirement?
A. At least 15,000 shares must be subscribed and 3,750 shares
thereof must be paid before the increase in capital stock will
be approved by the SEC.
B. At least 12,500 shares must be subscribed and 3,125 shares
thereof must be paid before the increase in capital stock will
be approved by the SEC.

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C. At least 5,000 shares must be subscribed and 1,250 shares
thereof must be paid before the increase in capital stock will
be approved by the SEC.
D. None of the foregoing.

43. A corporation is organized for the purpose of manufacturing and

processing fruit stuffs. Which of the following transactions shall be
deemed an ultra vires act?
A. Manufacture of canned tomato products
B. Manufacture of shabu
C. Both a and b
D. Neither a nor b

44. Which of the following statements relative to corporate board

meetings is false?
A. It may be held within or outside the Philippines.
B. It can be done through teleconferencing or videoconferencing.
C. It may be held more than once a month
D. It may be attended by means of proxy.

45. Which of the following statements relative to corporate stockholders’

or members’ meetings is true?
A. It may be attended by means of proxy
B. It is always held on any day of April each year
C. It can be conducted anywhere in the Philippines
D. It cannot be called on a special basis

46. One of the following is not an attribute of a close corporation:

A. Restriction can be made prohibiting the transfer of stock to
outsiders unless and until the corporation buys these stocks
from the transferring stockholder.
B. Management of the corporation may be entrusted to the
stockholders rather than to a board of directors.
C. The number of stockholders may exceed 20 persons
D. The stocks are not listed in any stock exchange or offered to
the public.

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47. One of the following is not an attribute of a close corporation:
A. The officers or employees may be elected or appointed by the
stockholders themselves rather than by the board of directors
as may be provided in the articles of incorporation.
B. A close corporation is deemed not a close corporation when
at least 2/3 of its voting stock is owned or controlled by
another corporation which is not a close corporation.
C. The pre-emptive right of the stockholders does not extend to
treasury shares
D. A corporation vested with public interest cannot be organized
as a close corporation.

48. One of the following statements is not a characteristics of an ordinary

non-stock corporation:
A. It does not distribute dividends to its members, although its
membership may in some cases be expressed in terms of
“shares of stock.”
B. It is prohibited to engage in business with object of making
profits, although it may earn income as an incident to its
operation which must be used in the furtherance of its
purpose.
C. Each member is titled to one vote which cannot be broadened
or denied in the articles of incorporation or by-laws
D. Straight-voting can be used in the election of the board of
trustees, unless cumulative voting is expressly provided in the
articles of incorporation or by-laws.

49. One of the following statement is not a characteristics of an ordinary

non-stock corporation:
A. Membership can be terminated in the manner and for the
causes provided in the articles of incorporation and by-laws.
B. The term of the office of the trustees shall be five (5) years,
with one-fifth (1/5) of their number to expire each year.
C. The board of trustees must be composed of its members;
provided, that the representatives of corporate members may
be nominated and elected in the board of trustees as may be
provided in the articles of incorporation or by-laws;

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D. The number of trustees may be composed of more than
fifteen (15) as may be provided in the articles of incorporation
or by-laws;

50. Starbucks is a foreign corporation that entered into a contract with

Farronccino, a domestic corporation. After several transactions were
made, Farronccino, ceased to honor its contract with Starbucks.
However, Starbucks failed to secure any license to do business in the
Phil. Which of the following statements is correct?
A. Starbucks can sue Farronccino before the Philippine courts.
B. Farronccino cannot sue Starbucks before the Philippine
courts.
C. The contract between Starbucks and Farronccino is null and
void.
D. Starbucks can secure the requisite license even after the
breach and then sue Farronccino.

51. Which of the following activities of foreign corporations were held by

the Court as “doing business in the Philippines?”
A. A foreign corporation sold construction equipment in an
isolated transaction.
B. A foreign corporation that is engaged in the manufacture of
uniforms purchased soccer jerseys from the Philippines.
C. A foreign insurance company issued a policy to the consignee
of exporter steel pipes.
D. A foreign subsidiary assumed the payment of the loan by a
foreign corporation doing business in the Philippines, and the
subsequent acquisition by the former of the latter.

52. Which of the following activities of foreign corporations were held by

the Court as “not doing business in the Philippines?”
a. A foreign corporation that manufactures cars appointed a
Philippine distributor who merely transmits to it orders from
buyers, the former fixing the price and the down payment,
receiving payment directly from buyers, and shipping the cars
directly to the buyers.
b. A foreign corporation licensed a domestic corporation to
manufacture its products.
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c. A foreign shipping company loaded cargoes in the Philippines
once a year for two consecutive years.
d. A foreign corporation appointed an exclusive distributor of its
products in the Philippines, registered its trade name, and sent
an officer to conduct a training program four times.

53. Which type of corporate officer is required to be a director of the

corporation?
A. President
B. Secretary
C. Vice-President
D. Treasurer

54. Which of the following can be One Person Corporation?

A. Banks
B. Pre-need company
C. Business Process Outsourcing
D. Person engaged in the exercise of a profession

55. In the matter of management of the business affairs of the

corporation, this is supreme
A. Board of directors
B. President of the corporation
C. 2/3 of the stockholders
D. Majority of stockholder

56. A single stockholder as a one person corporation may hold two or

more positions in the corporation but not as:
A. President and Secretary
B. President and Treasurer
C. President and Chairman of the Board
D. Director and Treasurer

57. Under this test, a corporation is a national of the country pursuant to

whose laws it is incorporated:
A. Nationality test C. Control test
B. Capitalization test D. Incorporation test

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58. The stockholders or members mentioned in the Articles of
Incorporation originally forming and composing the corporation and
who are signatories thereof are called:
A. incorporators C. subscribers
B. promoters D. founders

59. I. Any vacancy in the board of directors in a stock corporation, other

than by expiration of term, any be filled by the vote of at least a
majority of the remaining directors, if still constituting a quorum;
otherwise, the vacancy must be filled by 2/3 votes of the stockholders
entitled to vote, in special meeting called for the purpose.
II. Any vacancy in the board of directors in a stock corporation,
other than by removal from office, may be filled by the vote of at least
a majority of the remaining directors, if still constituting a quorum;
otherwise, the vacancy must be filled by majority votes of the
stockholders entitled to vote.
A. Only I is true
B. Only II is true
C. Both are true
D. Both are false

60. The Board of Directors of XYZ Corp. unanimously passed a

Resolution approving the taking of steps that in reality amounted to
willful tax evasion. On discovering this, the government filed tax
evasion charges against all the company’s members of the board of
directors. The directors invoked the defense that they have no
personal liability, being mere directors of a fictional being. Are they
correct?
A. No, since as a rule only natural persons like the members of the
board of directors can commit corporate crimes.
B. No, since the law makes directors of the corporation solidarily
liable for gross negligence and bad faith in the discharge of their
duties.
C. Yes, since it is the corporation that did not pay the tax and it has
a personality distinct from its directors.
D. Yes, since the directors officially and collectively performed acts
that are imputable only to the corporation.

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61. The term of one (1) year of the Board of Directors of AAA
Corporation expired last March 8, 2022. No new election of the
Board of Directors was called, hence, the existing members of Board
continue as Directors in hold over capacity. Which statement is most
accurate?
A. This is not allowed because the term of the directors must only be
for one (1) year.
B. This is allowed provided there is a valid and justifiable reason for
not calling for an election of the new members of the Board.
C. The positions of the members of the Board of Directors will be
automatically declared vacant.
D. Acting as members of the Board of Directors in a hold over
capacity must be ratified by the stockholders.

62. To constitute a quorum for the transaction of corporate business, only

a majority of the number of Board of Directors is required:
A. Majority of the number of directors stated in the articles of
incorporation unless a different majority is required by the articles
of incorporation or the Bylaws
B. As fixed in a Board Resolution
C. Actually serving in the board
D. Actually serving in the board but constituting a quorum

63. At the annual meeting of the Corporation for the election of five (5)
directors as provided for in its Articles of Incorporation, A, B, C, D, E,
F and G were nominated. A, B C, D and E received the highest
number of votes and were proclaimed elected. F received ten votes
less than E. Subsequently, E sold all his shares to F. At the next
meeting of the Board of Directors both E and F appeared. Who is
entitled to sit as member of the board?
A. E
B. Neither E or F
C. E and F
D. F

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64. Removal of directors by the stockholders may be with or without

cause provided that removable without cause may not be used to
deprive the minority stockholders of their ____________.
A. pre-emptive right.
B. right of representation to which they may be entitled under the
law.
C. right to file derivative suit against the majority stockholders.
D. appraisal right.

65. Tapos Nah Corporation’s corporate existence expired on Feb 24,

2018. The stockholders of wish to continue its operation and asked
your advice what legal action is required? What is your BEST
advice?
A. Secure from the Securities and Exchange Commission, a
Certificate of Revival of corporate existence subject to all the
requirements prescribed by the SEC.
B. File with the Securities and Exchange Commission (SEC) for an
extension of the corporate term of the corporation.
C. Establish a new corporation, since the corporation has no legal
personality.
D. No action is required; as corporations shall have perpetual
existence and hence, the corporation shall continue its business
operations.

66. What vote is needed to consider every decision of the Board of

Directors to be a valid corporate act?
A. At least a majority of the directors present at the meeting.
B. Two-thirds of the directors present at the meeting at which there
is a quorum.
C. At least majority of the directors present at the meeting which
there is a quorum.
D. Two-thirds of the directors present at the meeting.

67. One of the following can’t be a close corporation.

A. Mining corporations
B. Public utilities
C. Industrial corporations
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D. Banks

68. Corporations which are organized for profit but doing governmental
functions.
A. public corporation C. non stock corporation
A. close corporation D. quasi - public corporation

69. Corporations which are organized for charitable purposes

A. quasi corporation C. ecclesiastical corporation
B. eleemosynary corporation D. lay corporation

70. Which of the following qualifications is necessary in order that one

may be elected treasurer of the corporation?
A. He must be a citizen and a resident of the Philippines.
B. He must not be a stockholder or director of a competitor
corporation.
C. He must be a resident of the Philippines
D. He must be a director of the corporation.

/mrs

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