CORPORATION

DEFINITION: A Corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

ATTRIBUTES:

1. ARTIFICIAL BEING - it has a juridical personality, separate and distinct from the persons composing it.

Implications of corporation for being artificial being

a. The corporation cannot be held criminally liable particularly the penalty of imprisonment, but it may
be held liable for fines for corporate crimes. The corporate officers who approve the particular corporate
crime will be the ones to be held criminally liable.

b. As a general rule, a corporation is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental
anguish and moral shock except when a corporation has a reputation that is debased, resulting in its
humiliation in the business realm such in the case of civil action for damages on the ground of libel or
defamation.

c. The corporation is not entitled to constitutional right against self-incrimination

CORPORATE ENTITY THEORY/DOCTRINE OF SEPARATE PERSONALITY

The corporation has a juridical personality separate and distinct from the stockholders or members.
Accordingly, it can sue and be sued in its own name, it can possess properties belonging to it to the exclusion
of the stockholders and their personal creditors, and in the same vein cannot be made to answer the personal
obligations of the individual stockholders and vice versa.

On the other hand, the liabilities of the corporations are generally its own and cannot extend to the
stockholders in their personal capacities, which is otherwise known as the Limited Liability Doctrine/Rule.

PIERCING THE VEIL OF CORPORATE ENTITY/FICTION: The doctrine of piercing the veil of
corporate entity is used whenever a court finds that the corporate fiction is being used to defeat public
convenience, justify wrong, protect fraud, or defend crime or confuse legitimate issues, or that a corporation
is the mere alter ego or business conduit of a person or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. (Robledo vs. NLRC)

In cases where the doctrine of piercing the veil of corporate fiction is applied, the concept of the corporation
having a separate juridical personality shall be set aside.

ILLUSTRATION: Isabelo Calingasan (Calingasan), the employer of Alfredo Carillo, was held subsidiarily
liable when Carillo, driving the jeepney of Calingasan, ran over a child. Later on, Calingasan transferred said
jeep to Fely Transport Corporation, where the incorporators are Calingasan, his wife, his son, Dr. Calingasan
and his two daughters and the only asset thereof was the same jeepney. When Carillo was not able to pay, the
subsidiary liability of Calingasan was invoked and the jeepney was sought to be sold to pay the civil liability.
Calingasan argued that the jeepney is owned by the Corporation with a separate and distinct personality from
him. Is Calingasan correct?

ANSWER: No. It is evident that Calingasan's main purpose in forming the corporation was to evade his
subsidiary civil liability resulting from the conviction of his driver-employee. This conclusion is borne out
by the fact that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr.
Calingasan, and his two daughters. The Court believed that this one case where the defendant corporation
should not be heard to say that it has a personality separate and distinct from its members when to allow it to
do so would be to sanction the use of the fiction of corporate entity as a shield to further an end of subversive
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of justice. Furthermore, the failure of the defendant corporation to prove that it has other property other than
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 the jeep strengthens the conviction that its formation was for the purpose above indicated. (Palacio vs. Fely
Transport Corporation, GR No. L-15121; Aug. 31, 1962)

2. CREATED BY OPERATION OF LAW - a corporation's legal existence and possession of a separate

and juridical personality must be acquired through the formalities required by law. Private corporations are
created under the authority of the State through the Corporation Code, while certain corporations are created
by special laws enacted by Congress.

CONCESSION THEORY: means that a corporation owes its existence to the law and the state and the
extent of its existence, powers and liberties is fixed by its charter. Thus, it only possesses properties,
attributes, rights and powers provided by law or incident to its existence

COMMENCEMENT OF CORPORATE EXISTENCE: is at the time of the issuance of the Certificate of

Incorporation or Registration. EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Sole Corporation - which is reckoned from the filing of verified articles.

3. RIGHT OF SUCCESSION - unlike in a partnership, the death, insolvency, incapacity or civil

interdiction of one or more or even all of its stockholder does not result in its dissolution; this is otherwise
referred to as the corporation's "strong" juridical personality.

4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW - in a way,

the acts of a corporation are limited only to those which are authorized by law or implied therefrom or
incidental to its existence. Anything done outside such powers will be considered as ultra vires acts.

Powers of a corporation:

a. Express Powers - those expressly authorized by the Corporation Code and other laws, and its Articles of
Incorporation.
b. Implied Powers - Those that can be inferred from or necessary for the exercise of EXPRESS powers;
c. Incidental Powers those that are incidental to the existence of the corporation.

Express Powers: under the Corporation Code, a corporation has power and capacity:
a. To sue and be sued in its corporate name;
b. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate of incorporation;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this Code;
e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and
to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
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 merger or consolidation with other corporations as provided in this Code ( now, a
corporation can also enter into a partnership and joint venture);
i. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, that no corporation, foreign, 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; and

Implied Powers: are those inferred from or reasonably necessary for the exercise of the provided powers of
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the Corporation. They flow from the nature of the underlying business enterprise.
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a. To issue checks or promissory note or bill of exchange or mercantile documents

 b. To establish a local post office in case of a mining company
c. To operate power plant in case of a cement factory company
d. To sell, supply or manage advertising materials in case of an advertising company.

Incidental or inherent powers are powers that attached to a corporation at particular primary purpose and
may be said to necessarily arise from its being a juridical person engaged in business. They flow from the
nature of as a juridical person.
a. Right of succession
b. Right to have corporate name
c. Right to make by-laws for its governance
d. Right to sue and be sued
e. Right to acquire and hold properties for the purposes authorized by the charter

Ultra Vires Acts or Contracts are acts committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the express, implied and incidental powers of the
corporation.

Ultra Vires Acts are not necessarily illegal. The corporation acting as an accommodation party in a
negotiable instrument is an ultra vires act because it does not possess the power or authority to do so, but it is
not necessarily illegal.

Status of Ultra Vires Acts by the Corporation

a. Ultra vires acts which are illegal per se - Null and void
b. Ultra vires acts for failure to comply with voting formality required by law - Null and void but the
declaration of nullity may be barred by estoppel
c. Ultra vires acts for being outside the primary and secondary purposes of the corporation - Voidable on
the part of the other party

Status of ultra vires acts or contracts by the corporate officers the Corporation on behalf of the
corporation
a. Ultra vires acts which are illegal per se - Null and void
b. Ultra vires acts which are unauthorized or when the corporate officers exceed their authority -
Unenforceable but they may become enforceable on the basis of (1) express or implied ratification by
the corporation (2) doctrine of estoppel or (3) doctrine of apparent authority of the corporate officers

ADVANTAGES AND DISADVANTAGES OF FORMING A CORPORATION

Advantages:
1. Continuity of existence
2. Limited liability on the part of investors
3. Strong juridical personality
4. Legal capacity to act as a distinct unit
5. Centralized management
6. Ease in transferability of shares of stocks in case of stock corporation
7. Ease in raising funds
Disadvantages
1. High cost of formation
2. Little voice of stockholders in management
3. Weakened credit rating because of limited liability feature
4. Being subject to greater degree of governmental regulation
5. More taxes particularly indirect double taxation

CLASSES OF CORPORATIONS

STOCK CORPORATIONS - Corporations which have capital stock divided into shares and are authorized
to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the
shares held are stock corporations.
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NON-STOCK CORPORATIONS - Corporations which are not authorized to distribute surplus profits.
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 DOMESTIC CORPORATION - are those organized or created under or by virtue of the Philippine laws,
either by legislative act or under the provisions of the General Corporation Law.

FOREIGN CORPORATION - are those formed, organized or existing under any laws other than those of
the Philippines

CLOSE CORPORATIONS - are those whose shares of stock are held by a number of persons not
exceeding 20 and are usually formed by closely related individuals such as a family. They cannot list in a
stock exchange and certain restrictions are placed in the transfer of the shares.

OPEN CORPORATIONS - are those which can accept outsiders as stockholders and are authorized to list
in a stock exchange and the transfer of shares are not required to have restrictions. In case it does list in a
stock exchange, it shall be known as a PUBLICLY LISTED CORPORATIONS.

PRIVATE CORPORATIONS - those formed for some private purpose, benefit, aim or end, created under
the provisions of a general enabling law, i.e., the Corporation Code

PUBLIC CORPORATIONS -are those created by special law for a public purpose, which may either be:
1. Municipal corporation is a public corporation created by special law for the governance of a particular
local territory.
2. Government owned and controlled corporation is a public corporation created by special law for
public purpose but performing proprietary or commercial functions

RELIGIOUS OR ECCLESIASTICAL CORPORATIONS - are those which are formed for religious or
spiritual purposes which may be classified as a religious society or a corporation sole.

A corporation sole is that which of only of one individual formed for the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a
corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding
elder of such religious denomination, sect or church.

On the other hand, Religious Societies are composed of more than one individual and may be formed by any
religious society, order, diocese, synod or district organization of any religious denomination, sect or church,
upon written consent/affirmative vote of at least 2/3 of its membership for the administration or management
of its affairs, properties and estate by filing with the SEC, its Article of Incorporation verified by the affidavit
of the presiding elder, secretary, or clerk/any member of religious society.

LAY COPORATIONS -are those organized for purpose other than religion. They may further be classified
as:
a. ELEEMOSYNARY: formed or created for charitable purposes.
b. CIVIL: formed or created for the benefit of the persons composing it and not for charitable purposes.

Classes of Corporation according to validity of formation:

DE JURE CORPORATION
 It has full compliance with requirements for valid incorporation.
 It has separate and distinct personality from stockholders.
 Its personality cannot be question either by direct attack or collateral attack.

DE FACTO CORPORATION
 Requisites for existence:
1. There exists a valid law under which it may be incorporated;
2. An attempt in good faith to incorporate (colorable compliance)
3. Use of corporate powers
 It has separate and distinct personality form stockholders.
 Its personality can be question by direct attack via quo warranto Rule 66 of Rules of Court.
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CORPORATION BY ESTOPPEL
 No compliance at all the persons who compose it only set themselves out as a corporation.
  No separate personality, stockholders are liable as general partners
 Its personality can be question either by direct attack or collateral attack.

Direct Attack: means the very subject of the case is the legal existence personality of the corporation. This is
allowed in a de facto corporation

Collateral Attack: means that the main subject of the case is other attacking the personality of the
corporation, but it is questioned as a side subject.

ILLUSTRATION: Mr. X was invited by his friends to invest in XYZ Corp a newly organized firm where
he was appointed president. He entered int a contract of sale with ABC Corp. Later on, however, it was
discovered the Articles of Incorporation had not been filed by his friends. The corporation became bankrupt,
and Mr. X is now being sued by ABC Corp in his personal capacity for breach of contract. Mr. X invoked
the corporate entity theory that the corporation has a personality separate and distinct from him. Thus, he
should not be liable in a contract where he signed only in his capacity as President. Is Mr. X correct?

ANSWER: No. Since the Articles of Incorporation was not filed, there is no attempt in good faith to
incorporate. Thus, it is neither a de jure nor de facto corporation, but a corporation by estoppel only.
Accordingly, it does not have a personality distinct and separate from the supposed stockholders. Mr. X can
be held liable in his personal capacity.

Note also that the personality of the corporation was validly questioned collaterally, since the main subject of
the case is breach of contract. This is valid since it is a corporation by estoppel. If it did qualify as de jure or
de facto, there could not have been a valid collateral attack on its personality.

Kinds of Corporations as to Control or Ownership:

1. Holding or parent corporation is a corporation that controls another corporation.
2. Subsidiary corporation is a corporation being controlled by another corporation.
3. Affiliate is a corporation which is a member of a group of companies.
4. Associate is corporation being significantly influenced by an investor.

ORGANIZATION AND INCORPORATION

Formation of Private Stock Corporation or Incorporation refers to the performance of conditions, acts, deeds,
and writings by incorporators, and the official acts, certification or records, which give the corporation its
existence. Filing of articles of incorporation and applications for amendments thereto with SEC in the form
of electronic document is now allowed subject to the rules and regulations to be issued by SEC.

1. PROMOTIONAL STAGE: undertaken by promoters or organizers who look for investors and bring
them together to form the corporation. At this stage, the corporation has not validly existed yet and a
promoter/organizer who enters into contracts on behalf of the proposed corporation is generally personally
liable on such unless there is a stipulation for novation on the person of the promoter after the corporation is
formed.

2. PROCESS OF INCORPORATION: includes the preparation and filing of the Articles of Incorporation
and relevant supporting documents with the SEC, and the issuance of the Certificate of Incorporation.

CONTENTS OF THE ARTICLES OF INCORPORATION

a. The name of the corporation;

The name of the corporation is essential to its existence since it is through it that it can act and perform all
legal acts. Each corporation should therefore, have a name by which it is to sue and be sued and do all legal
acts.

Thus, the organizers must make sure that the name they intend to use as a corporate name is not similar or
confusingly similar to any other name already registered and protected by law since the SEC would refuse
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registration if such be the case.

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 This requirement is now specifically indicated in the Revised Corporation Code.

b. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, the non-stock
corporation may not include a purpose which would change or contradict its nature as such;

The Articles must indicate the primary purpose for which the corporation formed and such other secondary
purposes if any, which must be lawful and stated concisely in broad or general terms.

The indication of the purpose/s is/are material in order the determine:

1. Whether there is a minimum Filipino-ownership requirement on activity to be taken up by the
corporation;
2. Other requirements of the law, such as the need for a special franchise capitalization requirement,
etc.
3. Whether the purposes, if there is more than one, may be lawfully combined.

c. The place where the principal office of the corporation is to be located which must be within the
Philippines;

It must be located within the Philippines. What must be indicated in the Articles is the principal office which
is not necessarily the place of operations. A corporation can have its principal office in Makati even if its
manufacturing plant is located in Bulacan.

The indication of the principal office is relevant in determining:

i. Proper venue of actions;
ii. Where chattel mortgage on shares will be registered; and
iii. Venue of stockholders' or members' meetings.

d. The term for which the corporation is to exist;

A corporation now generally has perpetual existence since the Revised Corporation Code removed the
limitation of 50 years unless the Articles of Incorporation would provide otherwise.

This equally applies to already existing corporations, except if by majority vote of its stockholders, it notifies
the SEC to retain its specific corporate term

Definite Term: If the corporation would opt to have a definite term for its existence, any extension thereof
can be made no earlier than 3 years (from 5 years) prior to expiry date, unless there are justifiable reasons
to allow earlier extension.

Revival: Also under Sec. 11, after the expiration of the corporate term , a corporation may file for revival of
its corporate existence. Upon approval by the Commission, the corporation shall be deemed revived and a
certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise.

e. The names, nationalities and residences of the incorporators;

CORPORATORS are those who compose the corporation at any given time. They are the stockholders.

INCORPORATORS are the founders of the corporation or the original stockholders whose names are
indicated in the Articles and signatories thereof.

An incorporator may be considered as a corporator as long as he continues to be a stockholder or a member,

but not all corporators are incorporators.

Number of Incorporators: not more than 15 (previously 5 to 15)

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Qualifications:
 1. Must be natural persons (now can also include a partnership, association or corporation)
2. Of Legal Age (still a requirement for natural person-incorporators under SEC MC No. 16-2019)
3. Must own or subscribe to at least 1 share.
4. Majority must be residents of the Philippines (already removed)

Note that the law's previous requirement is that of residency not citizenship
However, there are industries or activities where the law would require a certain minimum, or full, Filipino
Ownership requirement, such as.
1. Mass Media - 100% reserved to Filipinos
2. Advertising – 70% reserved to Filipinos
3. Public Utility – 60% reserved to Filipinos
4. Educational Institution – 60% reserved to Filipinos
5. Exploration, evaluation and development of natural resources – 60% reserved to Filipinos
6. Ownership of land – 60% of the stockholders of the Corporation must be Filipinos

f. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);

DIRECTORS compose the governing board in stock corporations which should not exceed 15.

TRUSTEES pertain to non-stock corporations which may exceed 15.

INDPENDENT DIRECTORS: Section 22 of the RCC, the following corporations vested with public
interest shall have independent directors constituting at least 20% of such board:
1. Corporations covered by the Securities Regulations Code;
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-
need, trust and insurance companies, and other financial intermediaries; and
3. Other corporations engaged in business vested with public interest similar to the above, as may be
determined by the SEC.

An independent director is a person who, apart from shareholdings and fees received from the corporation,
is independent of management and free from any business or other relationship which could, or could
reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the
responsibilities as a director

g. The names, nationalities and residences of persons who shall act is directors or trustees until the
first regular directors or trustees are duly elected and qualified in accordance with this Code;

h. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares into which it is divided, and in case the share are par value shares,
the par value of each, the names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on his subscription, and if some or all of the shares are without
par value, such fact must be stated;

Stock Corporations with par value shares: are required to indicate its Authorized Capital Stock, the number
of shares into which it is divided, and the par value of each.

No-par value shares: the stated value or issue price need not be indicated in the Articles, as it may be fixed
by the Board of Directors after incorporation, if they are authorized, or by the stockholders themselves. The
fact, however, that they are no-par value shares must be indicated in the Articles.

Minimum subscription and paid-up capital: The requirement that at least 25% of the authorized capital
stock must be subscribed and that 25% of the subscription must be paid-up (but not less than P5,000) has
already been removed under the Revised Corporation Code, but still applies to increase in authorized capital
stock.

AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed and
paid-in or secured to be paid by the subscribers. It may also refer to the maximum number of shares that a
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corporation can issue.

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 SUBSCRIBED CAPITAL STOCKS are those which are covered by subscription contracts for their
acquisition. It represents the portion of the capital stock that is already promised to be paid for.

PAID UP CAPITAL STOCK or paid-in capital is the amount of shares that are already issued and paid for.
Considerations for stocks:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its
use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

AMENDMENT: Consideration for stocks under Section 61 (formerly Section 60) now includes:
1. Shares of stock in another corporation; and/or
2. Other generally accepted form of consideration.

Note:
 Stocks cannot be issued for a consideration less than the par or issue price thereof
 Promissory notes or future service cannot be considered valid consideration for stocks.

OUTSTANDING CAPITAL STOCK: total number of shares issued, including those which are subscribed
and not yet fully paid, but excluding treasury shares.

i. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of
the contributors and the amount contributed by each; and

j. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.

RESTRICTIONS AND PREFERENCES: if there are any restrictions and/or preferences on the shares of
stock, in order to be binding, the same must be indicated:

Ordinary Stock Corporations Close Corporations

Articles of Incorporation Articles of Incorporation
Stock Certificate Stock Certificate
By-laws

OTHER MATTERS TO BE INDICATED IN THE ARTICLES INCORPORATION:

1. The name of the Treasurer duly elected by the subscribers
2. No Transfer Clause: in case a corporation is required to maintain a required minimum Filipino
ownership, committing that no transfer shall be made which shall reduce the ownership of Filipino
citizens to less than the required percentage.
3. The Execution Clause: which will contain the names and signatures of the incorporators
4. Notarial Acknowledgment

GROUNDS FOR DISAPPORVAL BY THE SEC:

a. That the articles of incorporation or any amendment thereto is not substantially in accordance with the
form prescribed herein;
b. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
c. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false;
d. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not
been complied with as required by existing laws or the Constitution.
e. That the required favorable recommendation from the appropriate government agency, for corporations
governed by special laws, was not obtained, e.g., Banks - BSP, Insurance Companies Insurance
Commission.
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 AMENDMENT: The following were specifically included as those who would be needing a favorable
recommendation from the concerned government agency:
1. Non-Stock Savings and Loans Associations; and
2. Pawnshops.

On the other hand, the following were removed from the enumeration of entities requiring favorable
recommendations:
1. Educational Institutions; and
2. Other corporations governed by special laws.

AMENDMENT OF THE ARTICLES OF INCORORPATION, IN GENERAL WOULD REQUIRE:

a. Majority approval of the members of the Board;
b. Written assent of stockholders representing 2/3 of the outstanding stocks;
c. Approval of the SEC. If the SEC did not act on the application within 6 months from the date of
filing, the amended is deemed approved.

BOARD OF DIRECTORS

The Board of Directors (or trustees in case of non-stock corporations) is the governing body of the
corporation and directs its affairs. However, there are certain acts that would still need the
ratification/approval of the stockholders such as amendments to the Articles.

Classification of powers of the board members/corporate officers: The general rule is that a corporation is
bound by the acts of its corporate officers who act within the scope of the classifications of powers of
corporate agents, which are:

1. Those expressly conferred or those granted by the articles of incorporation, corporate by-laws or by
the official act of the board of directors;
2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and
necessary to carry out the corporate purpose or purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually granted, the principal knowingly
allows or permits it to be done; and
5. Powers arising out of customs, usage or emergency

QUALIFICATIONS AND DISQUALIFICATIONS

Qualifications of a Director/Trustee:
1. Must own at least 1 share in their own names or a member (in the case of trustees);
2. Majority must be resident of the Philippines. Even aliens may be elected as directors, provided that the
majority of such directors are residents of the Philippines. EXCEPT: in activities exclusively reserved to
Filipino citizens like the management of educational institutions and those governed by the Retail Trade
Law.
3. Those indicated in the by-laws.

Disqualifications of a Director/Trustee: A person shall be disqualified being a director, trustee or officer of

any corporation:
1. If, within 5 years prior to election or appointment as such, the person was Convicted by Final Judgment
a. Of an offense punishable by imprisonment for a period exceeding 6 years;
b. Violation of the Corporation Code;
c. Violation of the Securities Regulations Code
2. Found administratively liable for any offense involving fraud acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similar to the disqualifications under the Code.
4. Such other disqualifications that may be provided in the by-laws.

AMENDMENT: Items underlined are new disqualifications provided under the Revised Corporation
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Code.
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 Qualifications and Disqualifications under the Revised Code of Corporate Governance

Qualifications of Directors:

In addition to the qualifications for membership in the Board provided for in the Corporation Code,
Securities Regulation Code and other relevant laws, the Board may provide for additional qualifications
which include, among others, the following:
1. College education or equivalent academic degree;
2. Practical understanding of the business of the corporation;
3. Membership in good standing in relevant industry, business or professional organizations; and
4. Previous business experience

Disqualifications of Directors

1. Permanent Disqualification - the following shall be grounds for the permanent disqualification of a
director:
i. Any person convicted by final judgment or order by a competent judicial or administrative body of
any crime that:
a. Involves the purchase or sale of securities, as defined in the Securities Regulation Code;
b. Arises out of the person's conduct as an underwriter, broker, dealer, investment adviser,
principal, distributor, mutual fund dealer, futures commission merchant, commodity trad 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;

ii. Any person who, by reason of misconduct, after hearing, 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 a willfully violating the laws that govern securities and banking
activities.

The disqualification shall also apply if such person is currently the subject of an order of the Commission or
any 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 a 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;

iii. Any person convicted by final judgment or order by a court competent administrative body of an
offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting
misappropriation, forgery, bribery, false affirmation, perjury other fraudulent acts;
iv. Any person who has been adjudged by final judgment or order of the Commission, court, or
competent administrative body to have willfully violated, or willfully aided, abetted, counseled,
induced or procured the violation of any provision of the Corporation Code, Securities Regulation
Code or any other law administered by the Commission or BSP, or any of its rule, regulation or
order;
v. Any person earlier elected as independent director who becomes an officer, employee or consultant
of the same corporation;
vi. Any person judicially declared as insolvent;
vii. Any person found guilty by final judgment or order of a foreign court or equivalent financial
regulatory authority of acts, violations or misconduct similar to any of the acts, violations or
10

misconduct enumerated in sub-paragraphs (i) to (v) above;

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 viii. Conviction by final judgment of an offense punishable by imprisonment for more than six (6) years,
or a violation of the Corporation Code committed within five (5) years prior to the date of his
election or appointment.

2. Temporary Disqualification - the Board may provide for the temporary disqualification of a director for
any of the following reasons:
i. Refusal to comply with the disclosure requirements of the Securities Regulation Code and its
Implementing Rules and Regulations. The disqualification shall be in effect as long as the refusal
persists.
ii. Absence in more than fifty (50) percent of all regular and special meetings of the Board during his
incumbency, or any twelve (12) month period during the said incumbency, unless the absence is due
to illness, death in the immediate family or serious accident. The disqualification shall apply for
purposes of the succeeding election.
iii. Dismissal or termination for cause as director of any corporation covered by this Code. The
disqualification shall be in effect until he has cleared himself from any involvement in the cause that
gave rise to his dismissal or termination.
iv. If the beneficial equity ownership of an independent director in the corporation or its subsidiaries and
affiliates exceeds two percent of its subscribed capital stock. The disqualification shall be lifted if the
limit is later complied with.
v. If any of the judgments or orders cited in the grounds for permanent disqualification has not yet
become final.

A temporarily disqualified director shall, within sixty (60) business days from such disqualification, take the
appropriate action to remedy or correct the disqualification. If he fails or refuses to do so for unjustified
reasons, the disqualification shall become permanent.

ELECTION OF MEMBERS OF THE BOARD/TRUSTEES AND VACANCY

BUSINESS JUDGMENT RULE or Doctrine of Management Prerogative means that the decision of the
board of directors on matters of cannot be changed by the court unless such management decision is ultra
vires or destructive of the interest of minority stockholders.

ELECTION
1. A quorum of at least a majority of the outstanding capital stock or a majority of the members in case of a
non-stock corporation in the meeting where the election will be held.
2. Voting via viva-voce is allowable. However, on the request of any voting stockholder or member, the
election may be held by ballot.
3. There is no minimum required number of votes. As such, the candidates receiving the highest number of
votes shall be elected as directors.

Report Requirement: Section 25 of the RCC requires a report within 30 days to be submitted to the SEC in
case of non-holding of elections, which shall include a new date for the election, which shall not be later than
60 days from the scheduled date.

If no new date has been designated, or if the rescheduled election is likewise not held, the SEC may, upon
the application of a stockholder, member director or trustee, summarily order that an election be held. Should
a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the director,
trustee or officer of the corporation, or incase of death, the officer's heirs shall, within seven (7) days from
knowledge thereof, report in writing such fact to the SEC.

METHODS OF VOTING:
1. Straight Voting - a stockholder's vote is determined by the number shares he owns. E.g., If a stockholder
has 1,000 shares, he gets 1,000 votes.
2. Cumulative Voting: the stockholders' vote is determined by the number of shares he owns and the
number of directors to be elected. He may either concentrate all such votes into one candidate
(Cumulative Voting for one candidate) or he may distribute them among the candidates as he may see fit
11

(Cumulative voting by distribution).

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 ILLUSTRATION: ABC Corporation's stockholders are to elect the 5 members of the Board of Directors.
Mr. X is a stockholder with 1,000 shares. In cumulative voting,
i. Mr. X will have 5,000 votes (5 members of the BOD* 1,000 [no. of shares])
ii. Mr. X can either concentrate all his votes to 1 candidate, or he can spread it to as many candidates
as he sees fit (2,000 votes fo
iii. r Y, 3,000 votes for Z, or equally between them)

PURPOSE: to allow the minority to have a rightful representation in the board of directors by combining
their cumulative votes to elect a director.

Non-stock corporations: in non-stock corporations, cumulative voting is generally NOT allowed, unless it is
authorized in the by-laws.

REMOVAL AND FILLING-UP OF VACANCIES

The grounds for removal of a director may be provided for in the by-laws.
1. Director representing the minority interest - may not be removed except for those causes;
2. A director NOT representing the minority may be removed even without a cause.

AMENDMENT: The SEC is now empowered to motu proprio (not just 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.

Requirements for a valid removal:

1. The removal should take place at a general or special meeting duly call for that purpose;
2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding capital
stock or the members entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the intention to propose such removal
at the meeting either by publication or on written notice to the stockholders or members.

Vacancy:
CAUSE OF VACANCY WHO WILL FILL THE WHEN ELECITON WILL BE
VACANCY HELD*
Removal Stockholders Same day of the meeting
authorizing the removal.
Expiration of the term Stockholders No later than the day of such
expiration at a meeting called for
that purpose.
Other causes (death, resignation, Board of Directors – If they still No later than 45 days from the
abandonment) constitute a quorum; time the vacancy arose.

Stockholders – if the Directors no

longer constitute a quorum
Increase in the number of Stockholders In a general or special meeting
Directors called for the purpose or in the
same meeting authorizing the
increase in the number of
directors.

AMENDMENTS: Section 28 of the RCC now provides when* should the election of the replacement
member of the Board will be held.

Replacement of Hold-Over Directors: in the event that a director, after the expiration of his term is not
replace since there was no election held, such director can continue to function in a holdover capacity.
However, if he resigns, the stockholders will be the one to replace him even I f the remaining directors
continue to constitute a quorum. Note that the power of the Board to fill up the vacancy is only if the director
resigns before the expiration of his term. In this instance, the term of the director already expired, he just
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continued as such only in a hold-over capacity.

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 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.

The action by the designated director or trustee shall be limited to the emergency action necessary, and the
term shall cease within a reasonable time from the termination of the emergency or upon election of the
replacement director or trustee, whichever comes earlier. The corporation must notify the SEC within 3 days
from the creation of the emergency board, stating therein the reason for its creation.

ILLUSTRATION: The 9 members of the BOD of ABC Corporation are A, B, C, D, E, F, G, H and I.

1. If one of them, say E, is removed by the vote of the stockholders, then the replacement will be
decided by the stockholders also, since the cause of the vacancy is removal, even if the remaining
members still constitutes a quorum.
2. If the term of any of them, say F, expired, it is the stockholders who will elect the replacement
despite the fact that the remaining members still constitutes a quorum.
3. If A, resigned, B died, C retired - the remaining directors (6 of 9) constituting a quorum can elect the
replacement since they still constitute a quorum.

DIRECTORS' DUTY OF LOYALTY

CORPORATE OPPORTUNITY DOCTRINE: A director cannot appropriate to himself opportunity

which in fairness should belong to the corporation. If he does, he shall be liable to account for the profits
except if the acquisition of the business opportunity is ratified by the stockholders owing or representing at
least 2/3 of the outstanding capital stock.

ILLUSTRATION: A, B, C, D and E are directors of REALTY CORP., a corporation engaged in the real
estate business. Z wanted to sell his property with a fair market value of ₱100M for ₱90M.
1. In this case, the sale of land at a discount is a business opportunity that may belong to the
corporation since it is engaged in the realty business.
2. If it was offered first to A, and instead of offering the opportunity to the corporation, took it for
himself and made a profit, he would be liable to account for such profits unless his act is ratified by
the stockholders representing at least 2/3 of the outstanding capital stock

ACQUIRING ADVERSE INTEREST ON A MATTER REPOSED IN HE IN CONFIDENCE: A

director is liable to account for profits if he attempts acquire or acquires any interest adverse to the
corporation in respect to a matter reposed in him in confidence as to which equity imposes a disability upon
him to deal in his own behalf. This is not subject to ratification.

ILLUSTRATION: If in the earlier illustration, if instead of offering the land to A, Z offered it to the
corporation itself, and being a director, A knew of such opportunity. He then went to Z and offered to buy it
at ₱95M (instead of the ₱90M price given to the corporation) to which Z agreed.
1. In this case, the offer to sell was a matter reposed in A as a director in confidence. Since he acquired
the opportunity to the detriment of the corporation, he shall be liable to account for any profit he will
derive from such transaction.
2. A's act is not subject to ratification.

SELF-DEALING DIRECTORS: is one who deals or transacts business with his own corporation.

Generally, A contract entered into by a director with his own corporation is voidable at the latter's option.
This is because the director might take advantage of his position to make the terms of the transaction more
favorable to him to the detriment of the corporation.

Except (in which case the transaction will be valid)

1. All of the following are present:
a. That the presence of such director or trustee in the board meeting which the contract was approved
13

was not necessary to constitute quorum for such meeting;

b. That the vote of such director or trustee was not necessary for the approval of the contract (see
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amendment below);
 c. That the contract is fair and reasonable under the circumstances; and

2. Where any of the first two conditions is absent, the contract becomes voidable subject to the ratification
of the stockholders representing 2/3 of the outstanding capital stock - the requirements of which are:
a. there must be a meeting called for that purpose;
b. full disclosure of the adverse interest of the director; and
c. the contract is fair and reasonable under the circumstances.
3. If the self-dealing director owns all or substantially all of the shares of stock, thereby making
ratification easily possible, the reasonableness of the transaction shall be determined - to which there
is no yardstick and remains to be a question of fact depending on the circumstances.

AMENDMENT: The approval for transactions of self-dealing directors of corporations vested with public
interest shall require:
1. At least two-thirds (2/3) of the entire membership of the board, with
2. At least a majority of the independent directors.

Self-Dealing Officers: Generally voidable as well, except if number 1 above applies, or the contract has
been previously authorized by the board of directors.

INTERLOCKING DIRECTOR: is a director of two corporations who have a transaction with each other
which may result in the director favoring one corporation over another.

General Rule: The contract between corporations with interlocking director is valid provided it is
reasonable under the circumstances;

Exceptions:
1. If there is fraud; or
2. If the interest of the interlocking director in one corporation exceeds 20% (substantial) and in the other
merely nominal, the contract becomes voidable at the latter corporation's option. In effect, the director
would be treated as a self-dealing director discussed above.

If the interest in both companies is either both substantial or both nominal, the transaction is valid.

ILLUSTRATION: A Corporation and B Corporation entered contract with each other. X is a director in
both corporations.
1. X would be considered an interlocking director.
2. The status of the contract, absent fraud, would be dependent on the ownership of X in the
corporations:

X’s ownership in A X’s ownership in B Status of the Contract?

20% 10% Valid – both nominal
25% 40% Valid – both substantial
15% 30% Voidable

In the case above where X's ownership in A Corporation is nominal and his ownership in B Corporation is
substantial, the contract shall be voidable at the option of A Corporation. The rational of this rule is that X
would want B Corporation to profit more in the transaction since he has a substantial interest therein. For this
purpose, X will be treated as a self-dealing director of A and thus the transaction may still be valid if any of
the exceptions under Self-Dealing Directors are present (as discussed above).

OTHER DUTIES OF A DIRECTOR

Duty of obedience: the Board of Directors must follow the Corporation Code and all implementing rules
and regulations issued by SEC.

Duty of diligence: the Board of Directors must observe ordinary diligence of diligence of good father of a
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family in making business judgment for the corporation.

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REMEDIES AGAINST ERRING OFFICERS/DIRECTORS:

 1. Individual or Personal Action - Individual suit is an action brought by a stockholder against the
corporation for direct violation of his contractual rights. (Stockholder vs. Corporation)
2. Representative suit refers to an action brought by a person in his own behalf or on behalf of all similarly
situated. (Association of Stockholders vs. Corporation)
3. Derivative suit refers to a suit brought by one or more stockholders of members in the name and on
behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of
the corporation. The corporation is a necessary party to the suit. It is a suit filed by a person who must be
a shareholder to enforce a corporation's cause of action. (Stockholder on behalf of corporation vs. Board
of Directors of Corporation)

COMMITTEES

EXECUTIVE COMMITTEE: An executive committee, composed of not less than three members of the
Board, to be appointed by the Board, may be created to act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be delegated to it in the by-laws or on a
majority vote of the board, except with respect to: (sec 34)
1. Approval of any action for which shareholders' approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of bylaws or the adoption of new by-laws;
4. The amendment or repeal of any resolution of the board which by its express terms is not so
amendable or repealable; and
5. A distribution of cash dividends to the shareholders.

AMENDMENT: The board of directors may create special committees of temporary or permanent nature
and to determine the members' term, composition, compensation, powers, and responsibilities.

Board Committees under the Revised Code of Corporate Governance

The Board shall constitute the proper committees to assist it in good corporate governance.
1. The Audit Committee shall consist of at least three (3) directors, who shall preferably have accounting
and finance backgrounds, one of whom shall be an independent director and another with audit
experience. The chair of the Audit Committee should be an independent director. The committee shall
have the following functions:
a. Assist the Board in the performance of its oversight responsibility for the financial reporting
process, system of internal control, audit process, and monitoring of compliance with applicable
laws, rules and regulations;
b. Provide oversight over Management's activities in managing med market, liquidity, operational,
legal and other risks of t 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:
15

 Any change/s in accounting policies and practices

 Major judgmental areas
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 Significant adjustments resulting from the audit

  Going concern assumptions
 Compliance with accounting standards 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 overall consultancy expenses. The committee
shall disallow any non-audit work that will conflict with his duties as an external auditor or may
pose a threat to his independence. The non-audit work, if allowed, should be disclosed in the
corporation's annual report;

Non-audit work are the other services offered by an external auditor to a corporation that are not
directly related and relevant to its statutory audit functions, such as, accounting, payroll,
bookkeeping, reconciliation, computer project management, data processing, or information
technology outsourcing services, internal audit, and other services that may compromise the
independence and objectivity of an external auditor.

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.

2. A Nomination Committee which may be composed of at least three (3) members and one of whom
should be an independent director, to review and evaluate the qualifications of all persons nominated
to the Board and other appointments that require Board approval, and to assess the effectiveness of the
Board's processes and procedures in the election or replacement of directors;
3. A Compensation or Remuneration Committee, which may be composed of at least three (3) members
and one of whom should be an independent director, to establish a formal and transparent procedure for
developing policy on remuneration of directors and officers to ensure that their compensation is
consistent with the corporation's culture, strategy in the business environment in which it operates.

COMPENSATION OF DIRECTORS

Compensation of Directors/Trustees: General Rule: Directors are not entitled to receive any compensation.
Except:
1. Reasonable per diems;
2. As provided in the by-laws
3. Upon a majority vote of the stockholders; and
4. If they are performing functions other than that of a director.

Limit: In no case shall the total yearly compensation of the directors (except number 4 above), exceed 10%
of the net income before tax of the corporation during the preceding year. (Section 30)

CORPORATE OFFICERS

ELECTION OF CORPORATE OFFICERS: Except in a close corporation where the corporate officers
may be elected directly by the stockholders the Code requires the BOD to elect the said officers;

The officers that may be elected are the:

1. President - who must be a director;
2. Treasurer who may or may not be a director (now required to be resident of the Philippines);
16

3. Secretary - who should be a resident and citizen of the Philippines;

4. Such other officers as may be provided for in the by-laws.
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 Compliance Officer - is now a required corporate officer in corporations vested with public interest under
the Revised Corporation Code.

Concurrent positions: Any two or more positions may be held concurrently the same person, except:
1. The president and the secretary;
2. The president and the treasurer.

AUTHORITY OF CORPORATE OFFICERS TO ACT ON BEHALF OF THE CORPORATION: a

corporate officer or agent may represent and bind the corporation in transactions with third person to the
extent that authority has been conferred upon him, and this includes powers which have been:
1. intentionally conferred, and
2. those incidental thereto, or
3. may be implied therefrom,
4. powers added by custom and usage, as usually pertaining to the particular officer or agent, and
5. such apparent powers as the corporation have caused persons dealing with the officer or agent to
believe that it has conferred

LIABILITY OF CORPORATE OFFICERS: The general rule is that unless the law specifically provides a
corporate officer or agent is not civilly or criminally liable for acts done by him as such officer or agent, or
when absent bad faith or malice.

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) gross
negligence in directing its affairs, or (d) conflict of interest, resulting in damages to the corporation,
its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
4. He is made, by a specific provision of law, to personally answer for his corporate action.

ELECTION OF CORPORATE OFFICERS: require the majority of ALL MEMBERS of the Board, not
just the usual majority of those present in the meeting. Meaning, if there are 15 members of the Board, and 9
are present, 8 votes would be necessary to elect a corporate officer.

Responsibilities of the Corporate Secretary and Compliance Officer under the Revised Code of
Corporate Governance

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
1. 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 be other official records of the corporation;
2. Be loyal to the mission, vision and objectives of the corporation;
3. Work fairly and objectively with the Board, Management and stockholders;
4. Have appropriate administrative and interpersonal skills;
5. 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;
6. Have a working knowledge of the operations of the corporation;
7. Inform the members of the Board, in accordance with the bylaws, of the agenda of their meetings and
ensure that the members have before then accurate information that will enable them to arrive at
intelligent decisions on matters that require their approval;
8. Attend all Board meetings, except when justifiable causes, such as, illness death in the immediate family
and serious accidents, prevent him from doing so;
9. Ensure that all Board procedures, rules and regulations are strictly followed by the members; and
10.If he is also the Compliance Officer, perform all the duties and responsibilities of the said officer as
17

provided for in this Code.

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The Compliance Officer

 The Board shall appoint a Compliance Officer who shall report directly 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 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 and, if there are any deviations, explain the reason for such deviation.

Note, that under the Revised Corporation Code, a Compliance Officer is now required for corporations
vested with public interest.

SHARES OF STOCK

Shares of Stock designate the units into which the proprietary interest in a corporation is divided. It
represents the rights of the holders in:
1. The management of the corporation;
2. The assets in case of liquidation; and
3. Any surplus profits after paying the liabilities.

Certificate of Stock is a document or instrument evidencing the interest of a stockholder in the corporation.

AMENDMENT: The SEC may require corporations whose securities are traded in trading markets and
which can reasonably demonstrate their capability to do so to issue their securities or shares of stocks in
uncertificated or scripless form in accordance with the rules of the SEC. (Section 62)

COMMON STOCKS are those shares of stocks with complete voting rights. They must be present in every
corporation. They may be issued as par value shares or no-par value shares

Voting Rights: A common share's right to vote can only be limited where there exists Founders' Shares.

FOUNDERS' SHARES: are shares issued to the founders of the corporation and be voted for in the election
of directors, for a period not to exceed 5 years, which grant certain right and privileges such as the exclusive
right to vote subject to the approval of the SEC.

AMENDMENT: the amended Section removed the requirement of "approval of the SEC," from where the
start of the five-year period shall commence.

On the other hand, a limitation was added "That such exclusive right shall not be allowed if its exercise will
violate Commonwealth Act No. 108 otherwise known as the "Anti-Dummy Law"; Republic Act No. 7042
otherwise known as the "Foreign Investments Act of 1991"; and other pertinent laws."

PREFERRED STOCKS are those that have preference over common stock with respect to the payment of
dividends and/or with respect to distribution of assets upon liquidation.

Limitations imposed by the Code in the issuance of preferred stocks:

1. They can be issued only with a stated par value; and
2. The preference must be stated in the AOI and in the certificate of stock otherwise each share shall
be, in all respect, equal to every other share.

Preference as to Dividends: the preferred shares are paid first their dividend before the common
stockholders.

Participating and Non-Participating Preferred Shares

1. Participating Preferred Stocks entitle the shareholders to participate with the common shares in excess
18

distribution at some predetermined or at fixed ratio as may be determined.

2. Nonparticipating Preferred Stocks entitle the shareholder thereof receive the stipulated preferred
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dividends and no more.

 Cumulative and Non-cumulative Preference Shares
1. Cumulative Preferred Stocks entitle the owner thereof to payment not only of current dividends but also
back dividends not previously paid whether or not during the past year's dividends were declared or
paid.
2. Noncumulative Preferred Stocks grant the holders of such shares only the payment of current dividends
but not back dividends when and if dividends are paid to the extent agreed upon before any other
stockholders are paid the same.
Preference upon liquidation: gives the holder of the shares priority in the distribution of the assets over the
common stockholders.

Voting Rights of Preferred Shares: same with redeemable shares, preferred usually denied voting rights -
but this right must be clearly withheld. However, even if the right to vote is withheld, they shall have the
shares are right to vote on the following: (I3 AM SAD)
1. Incurring, creating or increasing bonded indebtedness;
2. Increase or decrease of capital stock;
3. Investment of corporate funds in another corporation or business in accordance with this Code; and
4. Amendment of the articles of incorporation;
5. Merger or consolidation of the corporation with another corporation or other corporations;
6. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;

AMENDMENTS: In determining whether the sale involved covers all or substantially all the properties and
assets of the corporation, the old Section 40 only provides "if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it was incorporated".

Section 39, amending the above-mentioned provision now includes "The determination of whether or not the
sale involves all or substantially all of the corporation's properties and assets must be computed based on its
net asset value, as shown in its latest financial statements."
7. Adoption and amendment of by-laws;
8. Dissolution of the corporation.

Examples on when non-voting shares do not have the right to vote:

1. Granting of compensation of directors
2. Removal of directors
3. Ratification of disloyalty of directors or voidable contract involving self-dealing director or
interlocking director
4. Approval of management contract
5. Distribution of stock dividends
6. Election of directors

PAR AND NO-PAR VALUE SHARES

Par Value Shares are those whose par values, or the minimum subscription amount or price, are indicated in
the Articles and shown on the certificate.

No Par Value Shares are those whose issue price or stated value are indicated in the certificate of stock but
may be fixed in the AOI, or by the BOD when so authorized in the or the by-laws, or by the stockholders
themselves.

The Code allows the issuance of no-par value shares, subject to the following limitations:
1. Such shares once issued, are deemed fully paid and thus, non-assessable
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies public utilities and building
19

and loans associations.

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 WATERED STOCKS: Watering of stocks happened when the shares an issued at less than its par value or
issue price.

ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided in (1) 5M shares at P1.00 par value;
and (2) 1M no par value shares with issued value at P5.00. A acquired 1M of the par value shares for P.80
and 100,000 no par value shares at P4.00:

1. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the issuance or were passive
about it, without written dissent, are solidarily liable with A for the difference of P.20;
2. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because the no par value shares
are "deemed fully paid and no assessable" (Sec. 6). Accordingly, only the directors or officer consenting
to the issuance are liable.

REDEEMABLE SHARES: are shares which may be purchased (or redeemed) by the corporation from the
holders of such share upon the expiration of a fixed period, regardless of the of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other terms and conditions stated in the
articles of incorporation and the certificate of stock representing the shares, subject to rules and regulations
issued by the Commission.

TREASURY SHARES: are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful
means, and since it is the corporation that technically owns the shares, they do not form part of outstanding
shares.

The corporation may subsequently re-issue the shares by selling them at a reasonable price or declaring them
as property dividends.

PROMOTERS' SHARES are those shares issued to the promoters of the corporation.

ESCROW SHARES are those shares the issuance of which is subject to a suspensive condition

SUBSCRIPTION CONTRACT: is an agreement between a corporation and a subscriber for the acquisition
of unissued shares of stocks of a corporation at a specified amount.

Nature: It is:
1. Indivisible
2. Consensual; and
3. Not covered by the Statute of Frauds.

Pre-incorporation subscriptions: refer to subscriptions for shares of stock of a corporation still to be formed
and are deemed irrevocable:
1. For a period of at least 6 months from the date of subscription unless (a) all the subscribers consent
to the revocation; or (b) the incorporation fails to materialize within said period or within a longer
period as may stipulated in the contract of subscription; and
2. After submission of the AOI to the SEC

While post-incorporation subscriptions are those made or executed after the formation or organization of
the corporation.

Issuance of certificates of stock; requisites:

1. It must be signed by the president or vice-president and countersigned by the secretary or assistant
secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any should have been paid.

Indivisibility: Subscription to shares of stock are deemed indivisible and certificate of stock can be issued
20

unless and until the full amount of subscription including interest and expenses, if any is paid.
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 ILLUSTRATION: X subscribed to 10,000 shares for its par value, P1/share He was able to pay P9,500
already. In this case, he is still not entitled to a certificate of stock because the entire contract is indivisible
and there can be no partial issuance of certificates, which shall be issued only upon full payment of the entire
subscription price.

Rights of a SUBSCRIBER: a subscriber, even if not yet fully paid, is entitled to exercise all the rights of a
stockholder and the corresponding liability that attach thereunder, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right.

Delinquent Shares of Stock: if within 30 days on the date indicated in the subscription contract or on the
date specified by the BOD pursuant to a call, no payment is made, all the shares covered by the subscription
considered delinquent.

Effect of Delinquency:
General Rule: the stockholder thereof immediately loses the right to vote and be voted upon or represented
in any stockholders meeting as well as all the rights pertaining to a stockholder

Except: the right to receive dividends:

1. Cash dividend - shall first be applied to the unpaid balance subscription plus cost and expenses;
while
2. Stock dividends - shall be withheld until his unpaid subscription is paid in full.

Delinquent shares; enforcement of payment of subscriptions: The unpaid subscription together with
interest if required by the by-laws or the contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a "call" declaring any or all
unpaid portion thereof to be so payable

To enforce payment, the following remedies are available:

1. By board action such as a delinquency sale; and
2. By a collection case in court.

Delinquency Sale:
1. Amount to be paid includes:
a. The balance due on each subscription
b. All accrued interest
c. Costs of advertisement; and
d. Expenses of sale
2. Bids: shall all be for the amount due above and shall differ only on the number of shares that the bidders
are willing to accept in exchange of the said amount.
3. Highest Bidder: shall be the bid made for the least number of shares in exchange for the total amount due.
4. Effect of Delinquency Sale: The stock so purchased shall be transferred to such purchaser in the books of
the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any,
shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
5. No bidder: there be no bidder at the public auction, the corporation may bid for the same, and the total
amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the corporation as treasury shares.

ILLUSTRATION: X subscribed to 10,000 shares at P1/share, its par value. X was able to pay P6,000 until
the shares were declared delinquent for his failure to pay within the prescribed period. The corporation
incurred P1,000 for expenses of the sale and costs of advertisement. In this case,

1. All the bidders would have to offer to pay the unpaid price of P4,000 and the additional expenses of
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P1,000.
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 2. If A bid for 4,300 shares; B for 4,500 shares; and C for 5,000 shares, A I would be considered the
highest bidder, the person willing to accept the least number of shares for the amount to be paid (ie.,
P5,000).
3. Accordingly, A will receive 4,300 shares, and the balance of 5,700 shares will go to X.
4. If there was no bidder, the entire 10,000 shares will be treasury shares of the corporation and X will
not receive any share.

RIGHTS OF A STOCKHOLDER

1. Participation in the management of the corporate affairs by exercising their right to vote and be voted
upon either personally or by proxy a provided for under Sec. 50 and 58 of the Code;

Instances where the concurrence of the stockholders are necessary for the exercise of the powers of
the corporations
a. Requiring majority vote of the BOD and concurrence of the stockholders representing 2/3 of the
outstanding capital stock:
i. Increase/decrease corporate stock
ii. Incur, create or increase bonded indebtedness;
iii. Sell, dispose, lease, encumber all or substantially all of corporate assets;
iv. Invest in another corporation other than the primary purpose;
v. Amend the articles of incorporation.
vi. Merger or consolidation
vii. Voluntary dissolution of the corporation

AMENDMENT: Voluntary dissolution now requires majority vote only of the stockholders for instances
with NO creditors affected. For voluntary dissolutions where creditors are affected, the voting requirement
remains to be 2/3.
viii. Extend or shorten the corporate term;
ix. Declare stock dividends
x. Deny the pre-emptive right
xi. Enter into a management contract where a stockholder(s) own 1/3 of the capital stock of the
managing corporation or where a majority of the members of the board of the managing
corporation also constitute a majority of the board of the managed corporation:

b. Majority of the BOD + majority of the outstanding capital:

i. Enter into a management contract, as a general rule (other than above);
ii. adopt, amend or repeal the by-laws

c. Without board resolution, 2/3 of the stockholders may:

i. Delegate to the board the power to amend the by-laws
ii. Remove a member of the Board of Directors - vote required
iii. Ratify a business opportunity entered into by a member of the Board (corporate opportunity
doctrine)
iv. Ratification of contracts of self-dealing directors, where his presence is required to constitute a
quorum and/or his vote is required for its approval by the BOD.

d. Without board resolution, majority of the stockholders:

i. Revoke delegated power to amend by-laws
ii. Calling a special meeting to remove directors
iii. To fix compensation of directors
iv. To fix the issue price or stated value of no-par value shares
v. Election of directors (quorum required)

2. To receive DIVIDENDS and to compel their declaration under Sec. 42;

If the dividends to be declared are stock dividends, it requires not only the majority vote of the BOD but also
22

the approval of stockholders owning at least 2/3 of the outstanding capital stock.
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 The BOD can be compelled to declare dividends if the retained earnings are in excess of 100% of the paid-up
capital. However, the BOD can still refuse, if:
a. Justified by a definite corporate expansion/projects/programs approved by the Board;
b. The corporation is prohibited under a loan agreement to declare dividends without the creditor's
consent and such consent has not yet been secured;
c. It can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation.

If there are no retained earnings, dividends, as a rule, cannot be declared out of capital stock. EXCEPT:
a. Liquidating dividends
b. Investments in wasting assets such as mining, oil, well, etc.

TRUST FUND DOCTRINE means that assets of the corporations are considered trust fund reserved for
payment of liabilities to creditors of the corporation. This is why the corporation cannot, as a rule, declare
dividends from other than the retained earnings.

3. To exercise pre-emptive rights as provided for in Sec. 38;

PRE-EMPTIVE RIGHT
A pre-emptive right is the shareholder's right to subscribe to all issues of disposition of shares of any class in
proportion to his present holdings, the purpose being to enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the surplus. Except in the following cases:
a. Shares to be issued to comply with the laws requiring stock offering of minimum stock ownership by
the public;
b. Shares issued in good faith in exchange for property needed for corporate purposes;
c. Shares issued in payment for previously contracted debt;
d. In case the right is denied in the Articles of Incorporation;

If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to
purchase the corresponding shares of the shareholder who declined. But if nobody purchased the same and
later on the board re-issued the shares, the pre-emptive right applies.

4. To exercise their appraisal right in accordance with the provision of Sec 81 and in those instances
allowed by law under Sec. 80;

APPRAISAL RIGHT

APPRAISAL RIGHT: Every stockholder has the right to the right to dissent and if he loses in the vote, he
may exercise his appraisal right and demand payment of the fair value of his shares.

When may it be exercised:

a. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights
of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of corporate existence;

Not all amendments: the right may only be exercised in cases of amendments which have the above
effects. Accordingly, if the amendment is, say, to change the corporate name, the appraisal right is not
available.

b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all
of the corporate property and assets as provided in the Code;
c. In case of merger or consolidation;
d. Investment of funds in another corporation or business or for any other purpose other than its primary
purpose;

In a close corporation, a stockholder can compel the corporation "for any reason” to purchase his shares at
23

their fair value which shall not be less than the par or issued value, when the corporation has sufficient assets
to cover its debts and liabilities, exclusive of capital stock.
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 Manner of exercise:
a. The dissenting stockholder shall make a written demand on the corporation within 30 days after the date
on which the vote was taken for the payment of the fair value of his shares.
b. The withdrawing stockholder must submit his shares to the corporation for notation of being dissenting
stockholder within 10 days from his written demand.
c. All rights accruing to such shares shall be suspended from time of demand for payment of the fair value
of the shares until the abandonment of the corporate action.
d. The dissenting stockholder shall be entitled to receive payment of the fair value of shares thereof as of the
day prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
e. The payment must be made by the corporation within 30 days from the determination by the Board of
Appraisers of the fair value of the shares otherwise the rights of the dissenting stockholders will be
restored. The Board of Appraisers consists of a person appointed by the corporation, a person appointed
by the dissenting stockholder and the third person appointed by the two appointees. The decision of
majority of the Board of Appraisers on the determination of fair value of shares shall prevail.
f. Stockholder must transfer his shares to the corporation upon payment by the corporation.
g. Upon payment of the fair value of shares, all the rights of dissenting stockholders are terminated and not
merely suspended.
h. There must be unrestricted retained earnings for the exercise of appraisal right to prosper

5. To inspect the books of the corporation subject only to the limitations imposed by Sec. 73;

Requisites for valid exercise:

a. The right must be exercised during reasonable hours on business days
b. The person demanding the right has not improperly used any information obtained through any previous
examination of the books and records of the corporation.
c. The demand is made in good faith or for legitimate purpose

AMENDMENTS: Section 73 (formerly Section 74) introduced the following amendments:

a. Includes an enumeration of, and specified, the records to be kept in the principal place of
business.
b. Specifies that the inspection of the books and records are bound by the Intellectual Property Law,
the Data Privacy Act, the Securities Regulations Code and the Rules of Court.
c. A requesting party who is not a stockholder or member of record/ or is a competitor or otherwise
represents the interests of a competitor shall have no right to inspect or demand reproduction of
corporate records.
d. Abuse of the right to inspect is punishable under Section 158.
e. If the corporation denies or does not act on a demand for inspection and/or reproduction, the
aggrieved party may report such to the SEC. Within five (5) days from receipt of such report, the
SEC shall conduct a summary investigation and issue an order directing the inspection or
reproduction of the requested records.
f. the SEC may require stock corporations which transfer and/or trade stocks in secondary markets
to have an independent transfer agent.

6. To be furnished by the most recent financial statement of the corporation as by Sec. 74;

AMENDMENT: Changes introduced by section 74 (formerly Section 75) concerning the issuance of the
corporation’s financial statements are as follows:

Section 75 (old) Section 74 (RCC)

Certification Independent CPA In accordance with the Code and
the rules the SEC may prescribe
Alternative Certification If paid-up capital is less than If the total assets or total
₱50,000, the FS may be certified liabilities of the corporation is
under oath by the treasurer or less than ₱600,000, or such
any responsible officer of the other amount as may be
24

corporation determined appropriate by the

DOF, the financial statements
Page

may be certified under oath by

 the treasurer and the president.

VOTING TRUST AGREEMENT

7. To enter into a voting trust agreement subject to the procedure, requirements and limitations imposed
under Sec. 58; and the right to execute a proxy.

Voting Trust Agreement Proxy

Definition This refers to the agreement This refers to a written
whereby stockholders (trustors) authorization given by one person
of a stock corporation confers to another so that the second can
upon a trustee the right to vote act for the first. It also refers to
and other rights pertaining to the the agent or holder of authority or
shares, and it should not be used person authorized by an absent
to circumvent the law against stockholder or member to vote
monopolies and illegal for him at a stockholders' meeting
combinations in restraint of trade
or for fraud purposes.
Requirements for validity 1. It should be in writing. 1. It shall be in writing.
2. It should be notarized. 2. It shall be filed before the
3. It should be filed before the scheduled meeting with the
corporate secretary. corporate secretary.
3. It shall be signed by the
shareholder/member
concerned.
Validity As long as it is effective, the Only for the meeting which it
trustee can vote in any meeting was intended unless classified as
continuing proxy.
Transfer of title There is transfer of title to the No transfer of title to the proxy.
trustee. Accordingly, the trustee The proxy votes only as an agent.
votes as an owner.
Being a director The stocks being in the name of Proxy cannot be elected as a
the trustee, he can be elected as a director
director
Revocability Irrevocable Revocable
Period of validity/term Not exceeding 5 years Not exceeding 5 years

8. To transfer shares of stock subject only to reasonable restrictions such as the options and preferences as
may be allowed by law inclusive of the right of the transferee to compel the registration of the transfer in
the books of the corporation as provided for in Sec. 62;
9. To be issued a certificate of stock for fully paid-up shares in accordance with Sec. 63;
10.To institute and file a derivative suit;
11.To have the corporation dissolved within the grounds provided for by law;
12.To participate in the distribution of assets of the corporation upon dissolution;
13.Right of first refusal: provides that a stockholder who may wish to sell or assign his shares must first
offer the shares to the corporation or to other existing stockholders of the corporation, under terms and
conditions which are reasonable; and that only when the corporation or the other stockholders do not or
fail to exercise their option, is the offering stockholder at liberty to dispose of his shares to third parties. It
arises only by virtue of contractual stipulations; in which case the right is construed strictly against the
right of persons to dispose of or deal with their property. It is normally available in a close corporation as
stated in its articles of incorporation. It is a contractual right of a stockholder

BY-LAWS

BY-LAWS refer to the rules of action adopted by a corporation for its internal government and for the
regulation of conduct, and it prescribes the rights and duties of its or members towards itself and among
themselves in reference to the management.
25
Page

Effectivity: After approval by the SEC.

 Adoption of by-laws: may be made:
1. Prior to incorporation-it must be signed by all the incorporators with need of the majority vote of
outstanding stocks or members as long as it is submitted together with the AOI;
2. After incorporation - must be submitted within 1 month after receipt of the notice of issuance of
certificate of registration or incorporation and must be approved by majority of the outstanding capital
stock members. Failure to file within the 1-month period may be a ground for suspension or revocation
of the corporate franchise.

AMENDMENT: Section 45 (amending Section 46) of the RCC removed the one-month (from receipt of the
notice of issuance of the certificate of incorporation) requirement to submit the by-laws.

Amendment of by-laws; two modes:

1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or
members, at a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning 2/3 of the outstanding capital
stock or 2/3 of the members. This power however, is considered revoked, when so voted by a majority
of the outstanding capital stock or members in a regular or special meeting

AMENDMENTS: Section 46(d) of the RCC now includes "The modes by which a stockholder, member,
director, or trustee may attend meeting and cast their vote."

It likewise includes that an arbitration agreement may be provided in the bylaws.

The submission of the amended by-laws no longer requires that it be filed with the SEC attached to the
original articles of incorporation and original bylaws.

Contents of the Bylaws;

1. The time, place and manner of calling and conducting regular meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings and mode of notifying the
stockholders or members thereof;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The modes by which a stockholder, member, director or trustees may attend meetings and cast their votes;
5. The form for proxies of stockholders and members and the manner of voting them;
6. 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;
7. The time for holding the annual election of directors or trustees and the mode or manner of giving notice
thereof;
8. The manner of election or appointment and the term of officers other than directors or trustees;
9. The penalties for violation of the bylaws;
10.In the case of stock corporations, the manner of issuing stock certificates; and
11.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.

An arbitration agreement may be provided in the bylaws pursuant to Section 181 of the Revised Corporation
Code

STOCK AND TRANSFER BOOKS

Stock and Transfer Books refers to corporate book which contains the record of all stocks in the names of the
stockholders alphabetically arranged; the installment paid and unpaid on all stock for which subscription has
been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe.
It must be set up and registered by the Corporation with the SEC within 30 days from receipt of its certificate
of registration.
26
Page
 All entries must be made only by the corporate secretary in the absence of a stock and transfer agent
employed by the corporation. If any entry is made by any officer other than the corporate secretary, such
entry is null and void

Unless the bylaws provide for a longer period, the stock and transfer book or membership book shall be
closed at least 20 days for regular meeting and 7 days for special meetings before the scheduled date of
the meeting

MEETINGS

DIRECTORS STOCKHOLDERS
Quorum Majority Majority of the Outstanding
Capital Stock
Date of Regular Meeting Monthly as fixed in the by-laws Annual as fixed in the by-laws. If
no such date is fixed, any date
after April 15.
Date of Special Meeting At any time deemed necessary or At any time deemed necessary or
as provided for in the by-laws as provided for in the by-laws
Notice Regular/Special Meetings – 2 Regular Meeting – 21 days (from
days prior to the meeting 2 weeks)
(previously 1 day prior to the
meeting) Special Meeting – 1 week
Place Anywhere (even outside the The meeting shall not be at the
Philippines) principal office itself, unless it is
not practicable, in the city or
municipality where the principal
office is located.

Moreover, Metro Cebu and Metro

Davao, as well as other
Metropolitan Areas are now
considered a city or municipality.
Proxy Voting Not allowed for director or Generally allowed
trustee, since he was supposedly
elected because of his personal
qualifications and thus must
personally attend and vote on
matters brought before the
meeting.
Voting requirement General Rule: Majority of those Refer to voting requirements
present shall be valid as corporate under Rights of Stockholders
act.

Exceptions:
1. Election of corporate
officers: majority of all
the members of the
board.
2. When the by-laws
provide for higher voting
requirement.

Validity of Stockholders' Meetings despite defect: If the voting requirement is met, any resolution passed in
the meeting, even if improperly held or called will be valid if ALL the stockholders or members are present
or duly represented thereat, as provided under the last paragraph of Sec. 51: " All proceedings had and any
business transacted at any meeting of the stockholders or members, if within the powers or authority of the
27

corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or
Page

members of the corporation are present or duly represented at the meeting."

 AMENDMENT: The meeting is still considered valid even if improperly held as long as ALL the
stockholders or members are present or duly represented, EXCEPT if the purpose of their attendance is only
object to the transaction of any business because the meeting is not lawfully called or convened.

Notice: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

However, under the revised Section 49 of the RCC, general waivers of notice in the articles of incorporation
or the bylaws shall not be allowed.

The attendance at a meeting shall constitute a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting to the transaction of any business because the meeting
is not lawfully called or convened.

Attending the meeting in absentia: In the stockholders' meeting for the election of directors/trustees,
Section 23 of the RCC now specifically allows the stockholders or members to vote through remote
communication or in absentia, in case the by-laws or majority of the BOD authorizes the same, or even
without such authorization in case of corporations vested with public interest.

Directors/trustees are also now allowed to attend the meeting through remote communication such as
videoconferencing, teleconferencing, or other alternative modes of communication that allow them
reasonable opportunities to participate.

A stockholder or member who participates through remote communication or in absentia, shall be deemed
present for purposes of quorum.

MERGER AND CONSOLIDATION

MERGER: is a combination of two or more corporations whereby one corporation (known as the surviving
corporation) absorbs the other corporation(s) (known as the absorbed corporation/s).

Example: It was agreed that B Company will take over and acquire all the business, assets, properties,
rights and liabilities of C Corporation and by virtue of which B will absorb C which is to be dissolved.
(B+C=B)

Here B is known as the surviving corporation, and C is known as the absorbed corporation.

CONSOLIDATION: is the combination of two or more corporations (known as constituent corporations)

and forming a new corporation (known as the consolidated corporation).

Thus, in the example given, if B and C agreed to form a new corporation, A Company, which will absorb
both business, and all of B's and C's assets, properties, rights and liabilities are transferred to A which will
continue their combined business while B and C will be dissolved, a consolidation takes place.

Here, B and C are known as the constituent corporations, while A, the newly formed corporation is known
as the consolidated corporation.

In effect, in a consolidation, the constituent corporations are all dissolved, while in a merger, the absorbing
or surviving corporation is not, only the absorbed.

REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION:

1. The BOD/T of each constituent corporations shall approve a plan of merger or consolidation setting for
the matters required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3 of the
member in non-stock corporations of each of such corporations at separate corporate meetings called for
the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be
28

given to all stockholders or members in the same manner as in regular/special meetings of

stockholders (from 2 weeks, either personally or by registered mail stating the purpose thereof):
Page
 4. Execution of the articles of merger or consolidation by each constituent corporations to be signed by the
president or vice-president and certified by the corporate secretary or assistant secretary setting forth the
matters required in Sec. 78;
5. Submission of the articles of merger or consolidation in quadruplicate (AMENDMENT: the
requirement to submit in quadruplicate has been removed) to the SEC subject to the requirement of Sec.
79 that if it involve corporations under direct supervision of any other government agency or governed by
special laws the favorable recommendation of the government agency concerned shall first be secured;
and
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger or
consolidation shall be effective. If the plan, however, is believed to be contrary to law, the SEC shall set a
hearing to give the corporations concerned an opportunity to be heard upon notice and thereafter, the
Commission shall proceed as provided in the Code.

EFFECTS OF MERGER OR CONSOLIDATION:

1. There will only be a single corporation - the surviving corporation or the consolidated corporation.
2. The termination of corporate existence of the constituent corporations and the absorbed corporation.
3. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and
franchises of the constituent corporations, and all property and all receivables due, including
subscriptions to shares and other choses in action, and every other interest of, or belonging to or due to
the constituent corporations shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
4. The rights of creditors or any lien on the property of the constituent corporations shall not be
impaired by the merger or consolidation.
5. There would be no need to liquidate or wind-up the affairs of the absorbed or constituent
corporation because (1) there are no assets to distribute; (2) no debts and liabilities to pay since all
these are transferred to the surviving or consolidated corporation.

NON-STOCK CORPORATIONS

A non-stock corporation is one where no part of its income is distributable as dividends to its members,
trustees, or officers, and any profit which it may obtain incidental to its operations shall, whenever necessary
or proper, be used for the furtherance of the purpose of purposes for which the corporation was organized.

The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations,
except as may be covered by specific provisions pertaining to non-stock corporations.

STOCK CORPORATION NON-STOCK CORPORATION

Purpose Generally, for profit Maybe organized for charitable,
religious, educational,
professional, cultural, scientific,
social, civic service, or similar
purpose, like trade, industry,
agricultural and like chambers or
any combination thereof.
Distribution of dividend Authorized Not authorized
Term of office of the 1 year until their successor is 3 years
directors/trustees elected and qualified
Voting Cumulative Straight voting unless cumulative
voting is authorized under the by-
laws or AOI
Manner of voting Either in person or by proxy By mail or other similar means as
may be authorized by the by-laws
Transferability of interest Transferable Membership is personal and non-
transferable, unless the AOI or
by-laws provide otherwise.
Ownership of director At least one share Member
29

Independent trustees are not

Page

required to be member
 Place of meeting of City or municipality where the Same
stockholders/members principal office is located (now
Principal Office unless not
practicable)

Distribution of Assets in the event of dissolution: The assets of a nonstock corporation undergoing the
process of dissolution for reasons other than those set forth in Section 139 of the Code shall be applied and
distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate
provision shall be made therefor;
2. Assets held by the corporation upon a condition requiring return, transfer or conveyed in accordance
with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for charitable
religious, benevolent, education or similar purpose, but not held upon a condition requiring return
transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one (1) or more
corporations, societies or organizations engaged in activities in the Philippines substantially similar to
those of the dissolving corporation according to a plan of distribution adopted.
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance
with the provisions of the articles of incorporation or the bylaws, to the extent that the articles of
incorporation or the bylaws determine the distributive rights of members, or any class or classes of
members, or provide for distribution; and
5. In any other case, assets may be distributed to such person, societies, organizations or corporations,
whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this
chapter.

CLOSE CORPORATIONS

DEFINITION: A close corporation is one whose articles of incorporation provided that:

1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not exceeding twenty (20);
2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by the Title on Close Corporations in the Corporation Code; and
3. The corporation shall not list in any stock exchange or make any public offering of any of its stock
of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a
close corporation.

Business with public interest: may not be formed as close corporation. Sec. 140 of the Code lays down a
similar policy authorizing NEDA to recommend to the legislature the setting of maximum limits to family or
group ownership of stock in corporations vested with public interest, and the determination of whether or not
it should be vested with public interest within its domain. The following cannot be a close corporation:
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utility;
7. Educational institutions

Difference with an Ordinary Stock Corporation:

CLOSE CORPORATION ORDINARY STOCK CORPORATION
The number of stockholders cannot exceed 20 No limitation as to number of shareholders
Shares of stock are subject to specified restrictions Generally, no restriction on transfer of shares
Shares of stock are prohibited from being listed in No prohibition
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the stock exchange or offered for sale to the public

Stockholders may take an active part in corporate Management is lodged in the Board of Directors
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management by vesting of management to them

 rather than a Board of Director
To the extent that all stockholders can be deemed Maximum number of directors is 15
directors, the number of directors can effectively be
up to 20.
To the extent that directors may be classified into Ordinarily, no such classification and no restrictions
one or more classes and to be voted solely by a on cumulative voting
particular class of stock, cumulative voting may, in
effect, be restricted.
The articles of incorporation may provide that all Officers are elected by the Board of Directors
officers shall be elected or appointed by the
stockholders
Restriction on transfer of share should be indicated Valid and binding if indicated in the articles of
in the articles of incorporation, stock certificate and incorporation and stock certificates.
by-laws.
Pre-emptive right of stockholders is broader as it Pre-emptive rights may be denied on certain
indicates all issues without exception. grounds.
Appraisal right may be exercised for any reason
with the limitation only that the corporation has
sufficient assets to cover its liabilities exclusive of
capital stock

ONE PERSON CORPORATION

A One Person Corporation (OPC) is one formed by a natural person, a trust (established by a trustor to a
trustee for the benefit of a beneficiary) or an estate, who is the sole stockholder thereof. The provision of the
new Chapter III of the Revised Corporation Code Shall to an OPC, and other provision of the Code shall
apply suppletory (Section 115);

Corporate Name: must contain “OPC”.

Not Applicable to OPC:

1. Authorized Capital Stock

2. Minimum capital stock
3. By-Laws
4. Minutes of the Meetings of the Board of Directors (in lieu of which shall be the resolutions recorded in a
Minutes Book)

Not allowed to incorporate as an OPC:

1. Banks, quasi-banks, pre-need, trust, insurance companies
2. Public and publicly listed companies
3. Non-chartered GOCCS
4. Natural persons for the purpose of exercising their profession.

Articles of Incorporation: shall be the same as an ordinary corporation with the following additional
provisions:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee,
administrator, executor, guardian, conservator custodian, or other person exercising fiduciary duties together
with the proof of such authority to act on behalf of the trust or estate, and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and
limitation of the authority.

Corporate Officers: The sole stockholder shall automatically be the sole director and the President. Within
15 days from the issuance of its certificate of incorporation, an OPC shall appoint a treasurer, corporate
secretary, and other officers as it may deem necessary, and notify the SEC thereof within 5 days from
appointment.
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Other positions of the president/sole stockholder:

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1. Corporate Secretary: not allowed

 Corporate Secretary: In addition to the functions designated by the OPC, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which
notice shall be given no later than 5 days from such occurrence;
c. Notify the SEC of the death of the single stockholder within 5 days from such occurrence and stating in
such notice the names, residence addresses, and contact details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a 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.

2. Treasurer: allowed provided he shall give a bond to the SEC in such a sum as may be required and a
written undertaking to faithfully administer the OPC's funds to be received as treasurer, and to disburse
and invest the same according to the Articles as approved by the SEC

Nominee and Alternate Nominee: The single stockholder shall designate a nominee and an alternate
nominee who shall, in the event of the single stockholder's death or incapacity, take the place of the single
stockholder as director and shall manage the corporation's affairs.

The articles of incorporation shall state the names, residence addresses and contact details of the nominee
and alternate nominee, as well as the extent and limitations of their authority in managing the affairs of the
OPC.

The written consent of the nominee and alternate nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in writing any time before the death or incapacity of the
single stockholder

Term of the Nominee: When the incapacity of the single stockholder is temporary, the nominee shall sit as
director and manage the affairs of the OPC until the stockholder, by self-determination, regains the capacity
to assume such duties.

In case of death or permanent incapacity of the single stockholder, the nominee shall sit as director and
manage the affairs of the OPC until the legal heirs of the single stockholder have been lawfully determined,
and the heirs have designated one of them or have agreed that the estate shall be the single stockholder of the
OPC.

The alternate nominee shall sit as director and manage the OPC in case of the nominee's inability, incapacity,
death, or refusal to discharge the functions as director and manager of the corporation, and only for the same
term and under the same conditions applicable to the nominee.

Change of Nominee: The single stockholder may, at any time, change its nominee and alternate nominee by
submitting to the SEC the names of the new nominees and their corresponding written consent. For this
purpose, the articles of incorporation need not be amended.

Liability of Single Stockholder: A sole shareholder claiming limited liability has the burden of
affirmatively showing that the corporation was adequately financed. 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. The principle of piercing
the corporate veil applies with equal force to OPC as with other corporations.

Conversion from Ordinary Corporation to OPC: When a single stockholder acquires all the stocks of an
ordinary stock corporation, the latter may apply for conversion into OPC, subject to the submission of such
documents as the SEC may require.

Conversion from OPC to Ordinary Corporation: An OPC may be converted into an ordinary stock
corporation after due notice to the SEC (within 60 days from occurrence) of such fact and of the
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circumstances leading to the conversion, and after compliance with all other requirements for stock
corporations under the RCC. If all requirements have been complied with the Commission shall issue an
Page

amended certificate of incorporation reflecting the conversion.

 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 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 SEC of the transfer. Within 60 days from the transfer of the shares, the legal heirs
shall notify the SEC of their decision to either wind up and dissolve the OPC or convert it into an ordinary
stock corporation.

The ordinary stock corporation converted from an OPC shall succeed the latter and be legally responsible for
all the latter's outstanding liabilities as of the date of conversion.

FOREIGN CORPORATIONS

A FOREIGN CORPORATION is one formed, organized or existing under any laws other than those of the
Philippines.

Incorporation Test: is applied in determining whether a corporation is domestic or foreign. If it is

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

Control Test or Liberal Rule and the Grandfather Rule/Test: The Control Test is used to determine
corporate nationality for purposes of applying laws, e.g., prohibition to acquire lands applicable to
corporations more than 40% of which is owned by non-Filipinos.

Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is
considered as Filipino.

On the other hand, the Grandfather Rule is a method of determining the nationality of a corporation which
in turn is owned by another corporation by breaking down the entity structure of the shareholders of the
corporation. The true Filipino ownership is traced all the way to the individual stockholders of the
corporation (A) owning shares in another corporation (B), by multiplying the Filipino ownership of the first
corporation (A) to the corresponding ownership of the other corporation (B).

It applies to nationalized activities or those which require whole or partial Filipino ownership.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test
and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules
which implemented the requirement of the Constitution and other laws pertaining to the controlling interests
in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:

1. Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality. (Control Test)

2. But if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine nationality.
(Grandfather Rule)

Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital
stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say 50% of the capital stock or capital of the corporation or
partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by
Filipinos and the other 50,000 shall be recorded as belonging to aliens.

In Narra Nickel Mining and Development Corporation vs. Redmont Consolidated Mines Corporation (GR
No. 195580, Jan. 28, 2015), the SC held that the grandfather rule shall be applied when:
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a. The Corporation's Filipino equity falls below the threshold required; or

b. There exists "doubt" as to the Filipino or Foreign equity
Page
 This would thus require the application first of the control test. When after applying the Control Test, and it
meets the required nationality requirement but there exists a "doubt" as to the Filipino ownership of the
Corporation, the grandfather rule would be supplementally applied.

RESIDENT AGENT: As a condition precedent to the grant of license to do or transact business in the
Philippines, the foreign corporation is required to designate its resident agent on whom summons and other
legal processes may be served in all actions or legal proceedings against such corporation.

A resident agent corporation for a foreign corporation is now required that it is of sound financial standing
and must show proof that it is in good standing as certified by the SEC.

LICENSE REQUIREMENT AND DOING BUSINESS WITHOUT ONE: A foreign corporation must
secure the necessary license before it can transact or do business in the Philippines.

What constitutes "doing business": Doing business in the Philippines may be determined using the following
tests:
1. Continuity test - doing business implies a continuity of commercial dealings and arrangements and
contemplates to some extent the performance of acts or works or the exercise of some functions
normally incident to and in progressive prosecution of the purpose and object of its organization;
2. Substance test - a foreign corporation is doing business in the country if it is continuing the body or
substance of the enterprise of business for which it was organized
3. Contract test-actual performance of specific commercial acts within the territory of the Philippines

"DOING BUSINESS" under the Foreign Investment Act (Sec. 3, d), "doing business" would include:
1. Soliciting orders, service contracts;
2. Opening offices, whether called "liaison offices" or branches;
3. Appointing representatives or distributor domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totaling 180 days or more;
4. Participating in the management, supervision or control of any domestic business, firm, entity or
corporation in the Philippines;
5. Any other act that implies a continuity of commercial dealings or arrangements and contemplate to
that extent the performance of acts or works, or the exercise of functions normally incident to and in
progressive prosecution of commercial gain or of the purpose and object of the business
organization.

Provided, however, that the phrase "doing business" shall not be deemed to include:
1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do
business, and/or exercise of rights as such investor, nor
2. Having a nominee director or officer to represent its interest in such corporation; nor
3. Appointing a representative or distributor domiciled in the Philippines which transacts business in its
own name and for its own account.

Doing Business without a license: a foreign corporation shall NOT be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but
such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.

"It is not the lack of required license but doing business without a license which bars a foreign corporation
from access to our courts" (Universal Shipping vs. IAC)

EXCEPTIONS:
1. Foreign corporations can sue before the Philippine Courts if the act or transaction involved is an
"isolated transaction" or the corporation is not seeking to enforce any legal or contractual rights
arising from, or growing out of, any business which it has transacted in the Philippines (Western
Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue before the forum if the purpose of
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the suit is to protect its trademark, trade name, corporate name, reputation or goodwill; (Western
Equipment Supply vs. Reyes)
Page
 3. Or where it is based on a violation of the Revised Penal Code (Le Chemise Lacoste, SA vs.
Fernandez);
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
5. Or where a party is estopped to challenge the personality of the corporation by entering into a
contract with it (Communications Materials and Design, Inc. vs. CA and ITEC)

DISSOLUTION AND LIQUIDATION

DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate existence.

When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the business for
which it was incorporated. It will nevertheless continue as a body corporate for another period of three years
from the time it is dissolved but only for the purpose of winding up its affairs and the liquidation of its assets.

THREE WAYS OF DISSOLUTION:

1. Expiration of its corporate term
Extension: should be made before the expiration of the original term, but not earlier than 3 years prior to
such expiration, otherwise the corporation is dissolved, ipso facto.

Dissolution by shortening the term of corporate existence: The stockholders cause the amendment of the
Articles to shorten the term and have the corporation dissolved. This, however, requires the vote of the may
stockholders to be cast in a meeting therefor, not only "written assent" as for general amendments. Moreover,
this requires the approval of the SEC and its inaction is not deemed.

2. Voluntary surrender of its primary franchise (voluntary dissolution); and

Formal and Procedural Requirements when no creditors are affected.

a. Majority vote of the board of directors or trustees;
b. Sending of notice of each stockholder or member either by registered mail or personal delivery at least
thirty (30) days prior (now 20 days) to the meeting (scheduled by the board for the purpose of
submitting the board action to dissolve the corporation for approval of the stockholder or members.);
c. Publication of the notice of time, place and subject of the meeting for three (3) consecutive weeks (now
once) in a newspaper published in the place where the principal office of said corporation is located or
in a newspaper of general circulation in the Philippines;
d. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members (now majority) at the meeting duly called for the purpose;
e. A copy of the resolution authorizing the dissolution must be certified by a majority of the board of
directors or trustees and countersigned by the corporate secretary (now A verified request for
dissolution shall be filed with the SEC stating: (a) the reason for the dissolution; (b) the form, manner,
and time when the notices were given; (c) names of the stockholders and directors or members and
trustees, who approved the dissolution; (d) the date, place, and time of the meeting in which the vote
was made; and (e) details of publication.)
Withdrawal:
i. A withdrawal of the request for dissolution shall be made in writing, duly verified by any
incorporator, director, trustee, shareholder, or member and signed by the same number of
incorporators, directors, trustees, necessary to request for dissolution.
ii. The withdrawal shall be submitted no later than fifteen (15) days from receipt by the SEC of the
request for dissolution.
iii. Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action on the request
for dissolution and shall after investigation: (a) make a pronouncement that the request for
dissolution is deemed withdrawn; (b) direct a joint meeting of the board of directors or trustees and
the stockholders or members for the purpose of ascertaining whether to proceed with dissolution; or
(c) issue such other orders as it may deem appropriate.
f. Issuance of a certificate of dissolution by the SEC.

Where creditors are affected, the voting requirement remains to be 2/3 of the stockholders and what is filed
35

with the SEC is a petition not a request.

Page

3. The revocation of its corporate franchise (involuntary dissolution)

 Grounds:
a. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;
b. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts
which would amount to a grave violation of its franchise;
c. Continuous inoperation for a period of at least five (5) years;

Continuous inoperation: If a corporation has commenced its business but subsequently becomes inoperative
continuously for a period of at least 5 years, the same shall be merely a ground for suspension or revocation
of its corporate franchise or certificate of registration.

AMENDMENTS: In case of continuous non-operation for 5 years, no longer considered a ground for
revocation, at least not immediately. In such case, the SEC may, after due hearing and notice place the
corporation under delinquent status and allow the corporation to resume operations within 2 years upon the
requirements of the SEC; where upon compliance, the SEC shall issue an order lifting the delinquent status.
In case of non-compliance, with the requirements and to resume operations, only then will the SEC cause the
revocation of the corporation's certificate of incorporation.

Notably, the Section 21 no longer includes the exception that the provision on failure to commence and
continuous non-operation shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond the control of
the corporation as may be determined by the SEC.

COMMENCEMENT OF BUSINESS: Once the certificate of incorporation has been issued, the
corporation MUST formally organize and commence its business.

Non-Use of Corporation Charter: the failure of the corporation to organize within 2 years would result in its
automatic dissolution, unless, of course, its failure to do so is due to causes beyond its control.

AMENDMENT: The period for the automatic revocation of the corporate charter has been increase from 2
to 5 years in case of failure to organize.

Formal Organization: refers to the process of structuring the corporation to enable it to effectively pursue the
purpose for which it was organized.

d. Failure to file by-laws within the required period;

e. Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period.

Other grounds provided under the Corporation Code:

a. Violation of any provision of the Code under section 144;
b. In case of deadlock in a close corporation as provided for in section 105:
c. In a close corporation, any acts of directors, officers or those in control of the corporation which is
illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any
stockholder or whenever corporate assets are being misapplied or wasted under section 105.

AMENDMENTS: Aside from empowering the SEC to motu proprio dissolve a corporation, the following
grounds are now specified under Section 138:
1. Non-use of corporate charter
2. Continuous inoperation of a corporation
3. Upon receipt of a lawful court order dissolving the corporation
4. Upon finding by final judgment that the corporation procured its incorporation through fraud
5. Upon finding by final judgment that the corporation:
a. 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;
36

b. Committed or aided in the commission of securities violations smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its stockholders knew; and
Page
 c. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other
fraudulent or illegal acts by its directors trustees, officers, or employees.

If the corporation is ordered dissolved by final judgment pursuant to the above grounds (a), (b) and (c) under
no. 5, its assets, after payment of its liabilities, shall, upon petition of the SEC with the appropriate court, be
forfeited in favor of the national government. Such forfeiture shall be without prejudice to the rights of
innocent stockholders and employees for services rendered, and to the application of other penalty or
sanction under the RCC or other laws

EFFECTS OF DISSOLUTION: Dissolution terminates its power to enter into contracts or to continue the
business as a going concern.

Despite its dissolution, a corporation nonetheless, continues to be a body corporate for a period of 3 years
for purposes of liquidation and winding up its affairs (Sec. 122, now Sec. 139). Upon expiration of the 3-
year period to wind up its affairs, the juridical personality of the corporation ceases for all intent and
purposes, and as a general rule, it can no longer sue and be sued.

But if the liquidation is to be pursued by appointing a trustee, a the 3-year period will not apply.

LIQUIDATION AND WINDING-UP:

1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the stockholders.

AMENDMENTS: Section 139 of the RCC introduced the following amendments concerning Corporate
Liquidation:
1. The exclusion of Banks is now specifically provided, given that they are governed by the New
Central Bank Act and the PDIC Law;
2. Upon the winding up of corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall now be escheated in favor of the national
government, which used to be the city or municipality where the property is located under the old
Section 122.
-End-

References: Soriano, N., Manuel, K., Laco, R. The RFBT Reviewer. 2nd edition. Pages 290-362
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