CORPORATION LAW

The Revised Corporation Code of the Philippines, R.A. No. 11232, took effect on February 23, 2019. It
provides for the formation and organization of corporations, defines their powers, fixes the duties of directors and
other officers, declare the rights and liabilities of shareholders and members and prescribe the conditions under
which corporations may transact business.

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 of a corporation.
(1) It is an artificial being with separate and distinct personality;
(2) It is created by operation of law;
(3) It has the right of succession; and
(4) It has only the powers, attributes, and properties expressly authorized by law or incident to its existence.

Corporation as an Artificial Personality.

A corporation is a legal or judicial person vested with a personality separate and distinct from those
acting for and its behalf and, in general, from its individual members or stockholders and other people comprising
it.

While it is a basic principle in Corporation Law that a corporation has a personality separate and distinct
from the officers or member who compose it, however, not every stockholder or officer can bind the corporation
considering the existence of a corporate entity separate from those who compose it. This is known as the Doctrine
of Separate Entity.

It is good to note, that a corporation acquires this separate and distinct personality only upon the
issuance of the certificate of incorporation by the SEC.

➢ Thereby:

a. As a rule, a corporation is not liable for the debts of its stockholders, and the latter are not individually liable
for the corporation's debts. They can lose no more than their investment on the corporation.
b. It may acquire and possess property of all kinds, as well as incur obligations and bring civil and criminal
actions (Arts. 44,46, Civil Code) in its own name in the same manner as a natural person.
c. Property conveyed to or acquired by the corporation in law the property of the corporation itself as a
distinct legal entity and not that of the members or stockholders as such.
d. All contracts entered into in its name by its regular appointed officers and agents are the contracts of the
corporation and not those of the members or stockholders.
e. A tax exemption granted to a corporation cannot be extended to include the dividends paid by such corporation
to its stockholders (Manila Gas Corporation vs. Collector of Revenue, 71 Phil. 513.) if such dividends are not
exempted from tax.
f. A corporation has no personality to bring an action for and in behalf of its stockholders or members for the
purpose of recovering property which belongs to said stockholders or members in their personal capacities.
(Sulo ng Bayan, Inc. vs. G. Araneta, Inc., 72 SCRA 347.)
g. As an entity distinct from its members or stockholders, a corporation remains unchanged and unaffected in its
identity by changes in its individual membership. It has continuous existence since it would exist even if all
the stockholders die.

➢ Disregarding or piercing the veil of corporate fiction

The doctrine that a corporation is a legal entity or a person in law, distinct from the persons
composing it, is a legal theory introduced for purposes of convenience and to promote the ends of justice. Thus,
when the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong
or defend crime, this fiction shall be disregarded and the individuals composing it shall be treated identically.

➢ Elements of Doctrine of Piercing the Veil of Corporate Fiction

Piercing the veil of corporate fiction may be allowed only if the following elements
concur:
1. Control- not mere stock control, but complete domination – not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
 2. such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation
of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff’s
legal right; and
3. the said control and breach of duty must have proximately caused the injury or unjust loss complained of.

➢ Instances where fiction is disregarded.

(1) Where a corporation functions for the benefit of a single person who has complete control over the funds
and the said person is the sole owner thereof.
(2) Where the corporation is a mere instrumentality of the individual stockholders, the latter must
individually answer for corporate obligations.
(3) Where a domestic or Philippine corporation is controlled by aliens.

➢ Corporation as a creation of law or by operation of law.

A corporation is created and organized under a general law and is considered a legal body with rights and
powers. It is not created by agreement of persons.

Concession Theory is a principle in the creation of corporations, under which a

corporation is an artificial creature without any existence until it has received the imprimatur of the State
acting according to law, through the SEC. In other words, the life of a corporation is a concession made
by the State.
➢ How corporations are created:
1. General Law - private corporations are generally created under the provisions of the Code.
This is done by filing the appropriate Articles of Incorporation with SEC; and its life starts from
the issuance of the Certificate of Incorporation.
2. Special Law - public corporations are created through special laws. Private corporation cannot be created
by special laws. Exceptions are the government-owned and controlled corporations which are actually
private corporations but with special charter, thus, the Code simply apply in a suppletory manner.

➢ Corporation has a Right of Succession

A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or
incapacity of the individual members or stockholders, board members or officers and regardless of the transfer
of their interest or shares of stock.

By succession is not meant that the corporation is immortal. It simply means that a corporation has continuity
of existence independent of that of its stockholders and members. This continued existence is, however, limited
to the period stated in its Articles of Incorporation or in the Act creating it. Under the revised Code, a corporation
shall have perpetual existence unless its articles of incorporation provides otherwise. (Sec. 11, RCP)

➢ Power, attributes, and properties of a corporation.

Theory of Special Capacities/Limited Capacity Doctrine states that no corporation, under the Code, shall
possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those
implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred.
The corporation’s capacity is limited to such express, implied and incidental powers. Thus, if the act of the
corporation is not one of those express, implied or incidental powers, the act is ultra vires.

A corporation, being a mere creation of law, may exercise only such powers as are granted by the law of
its creation. An express grant, however, is not necessary. All powers which may be implied from those
expressly provided by law and those which are incidental or essential to the corporation’s existence may
also be exercised.

Similarities between a partnership and a corporation.

(1) Like a partnership, a corporation has a juridical personality separate and distinct from that of the
individuals composing it.
(2) Like a partnership, a corporation can act only through agents;
(3) Like a partnership, a corporation (except a corporation sole and one person corporation) is an
organization composed of an aggregate of individuals;
(4) Like a partnership, a corporation distributes its profits to those who contribute capital.
 (5) Like a partnership, a corporation can be organized only where there is a law authorizing its
organizations; and
(6) A partnership, no matter how created or organized, is taxable as a corporation, subject to income tax.

Advantages of a business corporation.

(1) The corporation has a legal capacity to act as a legal unit;
(2) It has continuity of existence because of its non-dependence on the lives of those who compose it;
(3) Its credit is strengthened by such continuity of existence;
(4) Its management is centralized in the board of directors;
(5) Its creation, organization, management and dissolution are standardized as they are governed under one
general incorporation law;
(6) It makes gigantic financial enterprises since it enables many individuals to invest their separate funds in
the enterprise;
(7) The shareholders have limited liability;
(8) The shares of stocks can be transferred without the consent of the other stockholders.

Disadvantage of a business corporation.

(1) The corporation is relatively complicated in formation and management;
(2) It entails relatively high cost of formation and operations;
(3) Its credit is weakened by the limited liability of the stockholders;
(4) There is ordinarily lack of personal element in view of the transferability of shares;
(5) There is greater degree of government control and supervision than in any other forms of business
organization;
(6) The stockholders’ voting rights have become theoretical particularly in large corporations because of the
use of proxies and widespread ownership;
(7) The stockholders have little voice in the conduct of the business; and
(8) In large corporations, management and control are separate from ownership.

CLASSIFICATION OF CORPORATIONS UNDER THE CODE (Sec. 3)

Primary classification of corporation.

The Code classifies private corporations into stock and non-stock corporations, according to whether
their membership is represented by shares of stock or not.

1) Stock Corporation – one which have capital stock divided into shares and are 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. It is ordinary business corporation created and operated for the purpose of making a profit which may be
distributed in the form of dividends to stockholders on the basis of their invested capital.

2) Non-stock corporations - it does not issue stock and are created not for profit but for the public good
and welfare. Of this character are most of the religious, social, literary, scientific, civic and political organizations
and societies. Non-stock corporations have no capital stock which can be subscribed by their members. Their
capital is sourced from contributions and donations. No part of its income is distributable to tis members, trustees,
and officers. In case there is profit obtained as an incident to its operations, it shall whenever necessary or proper,
be used in furtherance of the purpose for which it had been organized.

OTHER CLASSES OF CORPORATION

As to Purpose
Public corporation Private corporation
A corporation organized for the government A corporation formed for some private
of a portion of the state for the general good purpose’ benefit or end.
and welfare.
Government-owned or controlled Quasi-public corporation
corporation
A corporation owned by the government A private corporation which has accepted
directly or through its instrumentalities from the state the grant of franchise or
either wholly, or, where applicable as in the contract involving the performance of public
case of stock corporations, to the extent of at duties but which is organized for profit
least 51% of its capital stock. (examples are electric, water, and
 transportation companies. )
As to legal right to corporate existence
De Jure corporation De facto corporation
A corporation created in strict or substantial The due incorporation of any corporation of
conformity with the mandatory statutory claiming in good faith to be a corporation
requirements for incorporation cannot be under this code and its right to exercise
successfully attacked or questioned by any corporate powers, shall not be inquired in
party even in a direct proceedings for that collaterally in any private suit to which such
purpose by the state. corporation may be a party. Such inquiry
maybe made by the Solicitor General in a quo
warranto proceeding.
Corporation by estoppel Corporation by prescription
All person who assume to act as a One which has exercised corporate powers
corporation knowing it to be without for an indefinite period without interference
authority to do so shall be liable as general on the part of the government.
partners for all debts, liabilities and damages
incurred or arising as a result thereof.
As to laws of incorporation
Domestic corporation Foreign corporation
A corporation incorporated under the laws of A corporation is a formed, organized or
the Philippines. existing under any laws others than those of
the Philippines and whose laws allow
Filipino citizens and corporations to do
business in its own country or State.
As to whether they are open to the public or not
Open corporation Close corporation
A corporation which is open to any person A close corporation is one whose articles of
who may wish to become a stockholder or incorporation provide that: (1) All the
member thereto. 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 20; (2) All the
issued stock of all classes shall be subject to
one or more specified restrictions on
transfer; (3) The corporation shall not list in
any stock exchange or make any public
offering of any of its stock of any classes.
As to relationship of management and control
Parent or holding corporation Subsidiary corporation
A corporation that hold stock in another A corporation more than 50% of the voting
corporation for purposes of control. stock of which is controlled directly or
indirectly by another corporation, which
thereby becomes its parent corporation.
As to the numbers of persons who compose them
Corporation aggregate Corporate sole
A corporation consisting of more than one A corporation consisting only one member
member: for the purpose of administering and
managing, as trustee, the affairs, property
and temporalities of any religious
denomination, sect or church.
As to whether they are for religious purpose or not
Ecclesiastical corporation Lay corporation
A corporation organized for religious A corporation organized for a purpose other
purposes than for religion.
As to whether they are for charitable purposes or not
Eleemosynary corporation Civil corporation
A corporation organized for charitable A corporation organized for business profit.
purpose.

Test of distinction between public and private corporations. (Sec. 4)

 The true test is the purpose of the corporation. If the corporation is created for political or public purpose
connected with the administration of government, then it is a public
corporation.
(1) In the Philippines, the public corporations are the provinces, cities, municipalities, and barangays. In
addition, the Constitution mandates the creation of autonomous regions in Muslim Mindanao and the
Cordilleras. (see Art. X, Sec. 1 thereof.) These local units are also called municipal corporations or local
governments.
(2) Private corporations include
a) Government – owned or controlled corporations are owned by the government directly through a
parent corporation or subsidiary to the extent of at least a majority of its outstanding capital stock
or of its outstanding voting capital stock
b) Quasi-public corporations or those which have accepted from the State the grant of a franchise or
contract involving the rendition or performance of some duties or service, but which are organized
for profit. They are also known as “public utilities” or “public service” corporations

Components of corporations (Sec. 5)

(1) Incorporators – those mentioned in the articles of incorporation as originally forming and composing the
corporation and who executed and signed the articles of incorporation and acknowledged the same before
a notary public. They have no powers beyond those vested in them by the statute.
(2) Corporators – all the stockholders or members of a corporation including the incorporators who are still
stockholders.
Distinctions between Corporators from Incorporators

INCORPORATORS CORPORATORS

1. Signatory to the articles of 1. Stockholder of stock corporation or

incorporation. members of a non-stock corporation.

2. Do not cease to be such 2. Cease to be such if they are no

longer stockholders.

3. Number is limited from 5 to 15. 3. No restriction as to number.

4. Must have contractual capacity 4. May be such through his guardian.

(3) Stockholders
- the owners of shares of stock in a stock corporation.
- They are the owners of the corporation.
- They are also called shareholders
(4) Members
- Corporators of a corporation which has no capital stock.
(5) Board of Directors or Board of Trustees
- The board of directors is the governing body in a stock corporation while the Board of Trustees is the
governing body in a non-stock corporation.
(6) Corporate Officers – they are the officers who are identified as such in the Code, the Articles of
Incorporation (AOI) or the By-laws of the corporation. If the corporation is vested with public interest, the
board shall also elect a compliance officer.
(7) Subscriber – Persons who have agreed to take and pay for original, unissued shares of a corporation
formed or to be formed.
(8) Underwriter – A person who guarantees on a firm commitment and/or declared best effort basis
the distribution and sale of securities of any kind by another company. A person or entity, especially an
investment banker, who guarantees the sale of newly issued securities by purchasing all or part of the
shares for resale to the public.
(9) Promoter is a person who brings about or cause to bring about the information and organization of a
corporation by:
1. Bringing together the incorporators or the persons interested in the enterprise;
2. Procuring subscriptions or capital for the corporations; and
3. Setting in motion the machinery which leads to the incorporation of the corporation itself.
 A founder or organizer of a corporation or business venture; one who takes the entrepreneurial initiative
in funding or organizing a business enterprise.
Power to classify shares. (Sec. 6)

The shares of stock corporations “may be divided into classes or series of shares, or both, any of which
classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of
incorporation.”

The primary classification of shares is common and preferred each of which may be divided into other
classes.

When classification of shares may be made.

(1) By the incorporators – if determined by them then it has to be stated in the Articles of
Incorporation (AOI) which will be filed with the Securities and Exchange Commission.
(2) By the board of directors and the stockholders – the original classification of shares made by the
incorporators stated in the AOI can be amended by a majority vote of the BOD and the vote or written assent
of the stockholders representing at least 2/3 of the outstanding capital stock.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
1) Retail trade enterprises with paid-up capital of less than US$2.5 Million, no foreign Stockholder
is allowed (Sec. 5, R.A. No. 8762)
2) Private radio communications network allows up to twenty percent (20%) foreign equity (R.A.
No. 3846)
3) Private recruitment, whether for local or overseas employment allows up to twenty-five (25%)
foreign equity (Art. 27, P.D. 442)
4) Exploration, development and utilization of natural resources allows up to forty percent (40%)
of foreign equity (Art. XII, Sec. 2, Constitution)
5) Financing Companies allows up to sixty percent (60%) foreign equity (Sec. 6, R.A. No. 5980,
As amended by R.A. No. 8556)

Shares presumed to be equal in all respects.

The law provides that “Except as otherwise provided by the articles of incorporation and stated in the
certificate of stock, each share shall be in all respects equal to every other share.” This is referred to as the Doctrine
of Equality of Shares.

Capital stock is the amount fixed in the articles of incorporation, to be subscribed and paid in by the
shareholders of a corporation, either in money or property, labor or services, at the organization of the
corporation or afterwards and upon which it is to conduct its operation.

Authorized capital stock is synonymous with capital stock where the shares of the corporation have par
value.

Subscribed capital stock is the amount of the capital stock subscribed whether fully paid or not.
Outstanding capital stock is the portion of the capital stock which is issued and held by persons other than
the corporation itself. It refers to “the total shares of stock issued to subscribers or stockholders, whether
fully or partially paid, except treasury shares.”

Paid-up capital stock is that portion of the subscribed or outstanding capital stock that is paid.
Unissued capital stock is that portion of the capital stock that is not issued or subscribed.
Capital is used broadly to indicate the entire property or assets of the corporation. It includes the amount
invested by the stockholders plus the undistributed earnings less losses and expenses.

Legal capital*is the amount equal to the aggregate par value and/or issued value of the outstanding
capital stock.

Stock or share of stock is one of the units into which the capital stock is divided. It represents the
interest or right which the owner has.
 Nature of share of stock.
(1) A share of stock merely represents a distinct undivided share or interest in the common property of the
corporation.
(2) Shares of stock constitute property distinct from the capital or tangible property of the corporation and
belong to the different owners.
(3) They do not constitute an indebtedness of the corporation to the shareholder.
(4) A share of stock only represents an undivided part of the corporation’s property.

Certificate of stock is a written acknowledgement by the corporation of the interest, right, and
participation of a person in the management, profits, and assets of a corporation.

Classes of shares in general.

(1) Par value or no par value;

(2) Voting or non-voting
(a) Preferred as to assets in case of liquidation; or
(b) Preferred as to dividends, and which, in turn, may be either:
1) Cumulative or non-cumulative; or
2) Participating or non-participating
(3) Promotion share;
(4) Share in escrow;
(5) Convertible stock;
(6) Founder’s share (see Sec. 7.);
(7) Redeemable share (see Sec. 8.); and
(8) Treasury share. (see Sec. 9.)

Par value share is one with a specific money value fixed in the articles of incorporation and appearing in
the certificate of stock for each share of stock of the same issue.

No par value share is one without any stated or par value appearing on the face of the certificate of stock.
It is a stock which does not state how much money it represents.

Voting share is share with right to vote.

Non-voting share is share without right to vote. The law provides that shares classified and issued as
preferred or redeemable shares may be deprived of voting right.

Common share of stock is stock which entitles the holder thereof to pro rata division of the profits, if there
are any, without any preference or advantage in that respect over other stockholder or class of stockholders.
A class of stock entitling the holder to vote on corporate matters, to receive dividends after other claims
and dividends have been paid (especially to preferred shareholders) and to share in assets upon liquidation.
Common stock is often called
as capital stock if it is the corporation’s only class of stock outstanding. Also termed ordinary shares.
The common stockholders have complete voting rights.

Preferred share of stock is stock which entitles the holder thereof to certain preferences over the holders
of common stock. Generally, without voting rights except when so given as stated in the AOI.

Promotion share is such share as is issued to promoters, or those in some way interested in the company,
for incorporating the company, or for services rendered in launching or promoting the welfare of the
company, such as advancing the fees for incorporating, advertising, attorney’s fees, surveying, etc.

Share in escrow is share subject to an agreement by virtue of which the share is deposited by the grantor
or his agent with a third person to be kept by the depository until the performance of a certain condition or
the happening of a certain event contained in the agreement.

Convertible stock is stock which is convertible or changeable by the stockholder from one class to another
class, such as from preferred to common, at the conversion ratio, i.e., the price at which the common is to
be valued as against the preferred.

Classes of preferred stocks:

(a) Preferred as to assets in case of liquidation;
(b) Preferred as to dividends.
 Preferred stocks may either be:
1) Cumulative or non-cumulative;
2) Participating or non-participating.

Instances when holders of non-voting shares are allowed to vote:

1. Amendment of the articles of incorporation;

2. Adaptation and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporation.
7. Investment of corporate funds in another corporation or business in accordance with this code; and
8. Dissolution of the corporation.

As an exception to the rule, where the Articles of Incorporation provide for non-voting shares in the
cases allowed by the Code, the holders of such shares shall nevertheless be entitled to vote in the eight instances
above. The rationale of the law is the principle of equity, as such, holders of non-voting shares also have
proprietary rights in the corporation. Public interest and policy require that they should likewise be afforded the
protection granted to those with voting rights.

Kinds of preferred shares

1) Preferred share as to assets is share which gives the holder thereof preference in the distribution of the
assets of the corporation in case of liquidation.
2) Preferred share as to dividends is share the holder of which is entitled to receive dividends on said share
at fixed rates before any dividends at all are paid to common stockholders.

Founder’s shares (Sec. 7)

Founder’s shares have been defined as “shares issued to the organizers and promoters of a corporation
in consideration of some supposed right or property. Shares classified as such in the articles of incorporation which
may be given certain rights and privileges (e.g. dividends payments) not enjoyed by the owners of other stock.

(1) Special rights and privileges. – The shares of stock of a corporation, close or non-close (see
Title XII.), may include founder’s shares classified as such in the articles of incorporation. Such shares may
be given special rights and privileges not enjoyed by the owners of other stocks, such as preference in the
payment of dividends.
(2) Exclusive right to vote and be voted. – Where, however, the exclusive right to vote and be voted for in the
election of directors is granted, such right must be for a limited period not exceeding five (5) years and must
be approved by the Securities and Exchange Commission, the period to commence from the date of
incorporation.

Redeemable shares (Sec. 8)

Redeemable or callable share is share, usually preferred, which by its terms is redeemable at a fixed
date or at the option of either the issuing corporation or the stockholder or both at a
certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for
cancellation. The present Code allows:

(1) When redeemable shares may be issued. – Redeemable shares may be issued only when expressly so
provided in the articles of incorporation. In the absence of provisions on redemption of preferred shares in
the articles of incorporation and the by-laws, they are deemed irredeemable. Common shares are never
“redeemed.” Its kinds may be Compulsory or Optional. The former requires the corporation to redeem the
shares, while the latter, does not so mandate.

Retained Earnings - a corporation’s accumulated income after dividends have been distributed, also termed as
earned surplus or undistributed profit.

Concept of Trust Fund Doctrine in relation to Redeemable Shares

 The doctrine provides that subscriptions to the capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of their claims It is the underlying principle in the procedure
for the distribution of capital assets, embodied in the Code, which allows the distribution of corporate capital only
in three (3) instances:
(1) amendment in the articles of incorporation to reduce the authorized capital stock;
(2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted
retained earnings;
(3) dissolution and eventual liquidation of the corporation.

Treasury shares (Sec. 9)

Treasury share is shares of stock which has been lawfully issued by the corporation and fully paid for and
later reacquired by the issuing corporation either by purchase, redemption (Sec. 8.), donation, forfeiture or other
lawful means.

(1) Status. – Section 41 expressly empowers a stock corporation, in the absence of qualified bidder, to
purchase or acquire its own shares for legitimate corporate purposes
(a) Treasury shares are not retired shares;
(b) Treasury shares are issued shares but being in the treasury they do not have the status of
outstanding shares.
(2) Resale. – They may be resold by the corporation at any price the board of directors sees fit to accept, even
at less than par, having once been legally issued as fully paid, provided such price is reasonable under the
circumstances.
(3) Declaration as property dividend. – Treasury shares being unrealized income, are not considered as part of
earned or surplus profits, and, therefore, not distributable as dividends, either in cash or
stock.
(4) Voting rights. – Treasury shares have no voting rights as long as they remain in the treasury (Sec.57.), i.e.,
not cancelled and subject to reissue.
(5) Right to dividends. – Neither are treasury shares entitled to dividends or assets because dividends cannot be
declared by a corporation to itself as such distribution would be like taking money or stock from one of its
pockets and putting the same in another, which would be pointless.

INCORPORATION AND ORGANIZATION

Incorporation means the performance of conditions, acts, deeds, and writings by incorporators, and the
official acts, certification or records, which give the corporation its existence. Being a mere grant of privilege
from the State, the requirements and procedures must be complied with.

Incorporation of a private corporation

The right to be and act as a corporation does not belong to any person as a natural and civil right, but a
mere privilege granted as a special sovereign power of the State, through issuance of a franchise. Corporations
cannot be created nor exist, nor corporate powers be assumed by mere agreement of the parties.

Steps in the Creation of a Corporation

In order that a corporation can come to light, the Corporation Code provides for convenient steps as guide
and the activities to be done in order for a corporation to acquire a juridical personality:

(1) Promotion - the term "promotion" is said to be not a legal but a business term, usefully summing up
in a single word, a number of business operations peculiar to the business world by which a company is generally
brought into existence. The following are the steps involved:
a.) Bringing together persons who are interested in the formation of the
corporation as incorporators.
b.) Procuring subscriptions to capital stock.
c.) Making arrangements to finance the enterprise.
d.) Preparation of incorporation contracts

(2) Incorporation – as defined constitute the performance of the acts needed and documents to be
executed by incorporators so it can be granted the privilege to act as a body politic by the State through its
governmental instrumentality which is the SEC. Steps in incorporation process includes the following:
(1) Drafting and execution of the articles of incorporation by the incorporators;
(2) Filing with the Securities and Exchange Commission of the articles of incorporation together with
the following:
(a) Treasurer's affidavit
(b) Name verification slip
 (c) Certificate of Bank deposit
(d) In case the corporation is governed by a special law (e.g., educational institution), a favorable
recommendation of the appropriate government agency
(3) Payment of the filing and publication fees (see Sec.139.); and
(4) The issuance by the Security and Exchange Commission of the certificate of incorporation if all the
papers filed after verification and examination, are found in order. (see Sec.19.)

*Drafting and execution of the Articles of Incorporation is usually done by Incorporators who must
possess the following qualifications mandated under Sec. 10, Title II of the Code):
a. Natural persons
b. Of legal age – capacity to enter into a contract since corporations involves making of contract
c. Not more than fifteen (15)
d. If a stock corporation, then ownership or subscription of at least one (1) share of the Capital
Stock registered under his/her name
e. In the case of a One Person Corporation, only natural persons, trust or estate may form it.

(3) Formal organization and commencement of business operations. – Organization, in reference to

corporations, means executive structure, election of officers, providing for subscription and payment of capital,
adoption of bylaws, and all steps necessary for a corporation to transact business.
a. Adoption of By-laws within one month from issuance of certificate of incorporation;
b. Election of the Board of Directors/Trustees;
c. Election of the officers of the corporation, namely the president, secretary, treasurer, and
other officers stated in the by-laws;
d. Commencement of business operation within five (5) years from date of incorporation

* Effect of Failure to Organize

Within five (5) years after the issuance of the certificate of incorporation by the SEC, the
corporation must formally organize and transact business otherwise the corporate powers shall cease by
operation of law, its certificate of incorporation shall be deemed revoked as of the day following the end of
the five (5) year period.

Corporate Term, Name and Amendments thereto (Sec. 11, 15,17)

A corporation shall have perpetual existence, unless the Articles of Incorporation provides otherwise or
if it provides for a specific period. A corporate term for a specific period may be extended or shortened by amending
the articles of incorporation.

Consequently, a corporation should adopt a corporate name for the purpose of identification,
particularly because its personality is separate and distinct from the stockholders or members comprising it. Hence,
when it enters into a transaction or contract, then it should be in and for the name and account of the corporation.
However, in the use of a name it is subject to the requirements laid down by the Code that it is not distinguishable
from that already reserved or registered for the use of another corporation, or if such name is already protected by
law, or when its use is contrary to existing law, rules and regulations. It must also contain the word “Inc.,
Corporation, or OPC”.

The Code allows a change in corporate name by simply amending its articles of incorporation, subject
to the rules and procedures as defined under Sec. 15 (Amendments of Articles of Incorporation) hereunder.
However, it is good to note that any amendments in the corporation’s AOI shall take effect only upon approval by
the SEC or from the date of filing with the said Commission if not acted upon within six (6) months from the date
of filing for a cause not attributable to the corporation.

Minimum Capital Stock is not required of a Stock Corporation (Sec. 12)

General rule is that Stock Corporations shall not be required to have a minimum capital stock, subject
to if there is a specific provision by special law. Hence, corporations are allowed to determine their own authorized
capital stock* as long as it is stated in the articles of incorporation under a valid subscription contract* and paid-
up* by shareholders.

Subscription* - a written contract to purchase newly issued shares of stock or bonds. Also termed stock
subscription.

Paid-up capital*- is that portion of the authorized capital stock which has been both subscribed and paid. To
reiterate, such must form part of the authorized capital stock of the corporation, subscribed and then actually paid
up.

Authorized Capital Stock* - this is the maximum amount fixed in the articles of incorporation that may be
subscribed and paid by the stockholders of the corporation.
Contents of the Articles of Incorporation and the Form prescribed (Sec. 13-14)

An important document to be drafted and executed for the purpose of incorporation is the corporation’s
Articles of Incorporation described as one that defines the charter of the corporation and the contractual
relationships between the State and the corporation, the stockholders and the State, and between the corporation
and its stockholders. It cannot be gainsaid that the contents of the articles of incorporation are binding not only on
the corporation, but also on its shareholders.

Three-fold nature of the articles of incorporation

1) A contract between the State and the corporation;
2) A contract between the corporation and its stockholders; and
3) A contract between the stockholders inter se

Corporations can only act within the bounds of the purpose for which it has been formed. For this
point, its Purpose Clause will confer, as well as limit, the powers which a corporation may exercise. Any act beyond
its powers is known as ultra vires acts.

One important content of the articles of incorporation other than the corporate name, term of existence,
its authorized capital among others is its principal place of business. Its significance lies in the fact, that it may
determine the venue of court cases involving corporations. It may also determine if summons and notices was
properly made, or if meetings among stockholders, members, the board and officers had been properly held.

Commencement of Corporate Existence and Effect of Non-Use of Corporate Charter and Continuous In-
operation (Sec 18, 21)

It is incumbent upon any corporation that once the documents for incorporation had been submitted,
and duly approved by the SEC it signifies the commencement of its corporate existence and juridical personality
and is deemed incorporated from the date it is issued the Certificate of Incorporation under its official seal. It is
the certificate of incorporation that gives juridical personality to a corporation and places it under the jurisdiction
of the Securities and Exchange Commission.

But take note, in case the corporation does not formally organize or commence its business within five
(5) years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day
following the end of the five (5) year period.

However, if it managed to start its business but subsequently became inoperative for a period of at
least five (5) consecutive years, the Commission may, after due notice and hearing place the corporation under
delinquent status.

Doctrine of Corporation by Estoppel (Sec. 20)

All persons who assume to act as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages incurred or arising as a result of such
misrepresentation.

Corporation by Estoppel is founded on the principle of equity and is designed to prevent injustice and
unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into
business relations with third person but in reality there is no such association, and in the process third persons suffer
economic injury, the persons who made such misrepresentation cannot later be allowed to deny its corporate
capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack
of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.

BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

A corporation’s board of directors is understood to be that body which: (Sec. 22)

(1) exercises all powers provided for under the Corporation Code;
(2) conducts all business of the corporation; and
(3) controls and holds all property of the corporation. Its members have been characterized
as trustees or directors clothed with a fiduciary character. Moreover, the directors may appoint
officers and agents and as incident to this power of appointment, they may discharge those
appointed.
Three levels of control in a Corporation.

1. The board of directors

They are responsible for corporate policies and the general management of the
business affairs of the corporation. However, just as a natural person may authorized
another to do certain acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed by it.
2. The officers
They, in theory, execute the policies laid down by the board, but in practice often have
wide latitude in determining the course of business operations.
3. The stockholders
They have the residual power over fundamental corporate changes, like amendments
of the articles of incorporation.

As a general rule, all corporate powers are to be exercised by the board of directors,
exceptions are made where the Code provides otherwise. Likewise, the board of
directors/trustees of a private corporation must act together and as a corporate body in order
to bind the corporation by their acts and transactions. The Corporation Code requires that to be
a valid corporate act, it must be a decision of at least a majority of the directors or trustees
present at a meeting.

Qualifications of a board of director/trustee.

1. For a stock corporation, ownership of at least 1 share of the capital stock of the corporation
in his own name. For a non-stock corporation, only members of the corporation can be
elected.
2. The director or trustee must be capacitated. He must not have been convicted by final
judgment of an offense punishable by imprisonment of a period exceeding six (6) years or a
violation of the Corporation Code, committed within five (5) years before the date of his
election (Sec 26, RCP)
3. The director or trustee must be of legal age.
4. Majority of the directors/trustees must be residents of the Philippines.
5. Other qualifications as may be prescribed in the by-laws of the corporation.

Requirements for the Election of Directors or Trustees. (Sec. 23)

1.) The owners of majority of the outstanding capital stock or a majority of the members entitled
to vote, of the corporation must be present, either in person or through a representative
authorized to act by a written proxy.
2.) When so authorized in the by-laws or by a majority of the board of directors, the stockholders
or members may also vote through remote communication or in absentia.
3.) The election must be by ballot, if requested by any voting stockholder or member.
4.) In stock corporations, the total number of the votes cast shall not exceed the number of
shares owned by the stockholder as shown in the books of the corporation multiplied by the
whole number of directors to be elected. Provided, that no delinquent stock shall be voted.
5.) In non-stock corporations, the members may cast as many votes as there are trustees to be
elected but may not cast more than one (1) vote for one (1) candidate.
6.) Nominees for directors or trustees receiving the highest number of votes shall be declared
elected.

Kinds of Voting and Rules of Voting in the election of directors

➢ Three (3) methods of voting in the election of directors which stockholders have the
option to adopt:
1.) Straight voting - every stockholder “may vote such number of shares for as many persons as
there are directors” to be voted;
2.) Cumulative Voting for One Candidate - a stockholder is allowed to concentrate his votes “give
one candidate as many votes as the number of directors to be elected multiplied by the
number of shares shall equal”;
 3.) Cumulative Voting by Distribution - a stockholder may cumulate his shares by multiplying
also the number of shares by the number of directors to be elected and distribute the same
among as many candidates as he shall see fit.

Corporate Officers (Sec 24)

It is a settled rule that the position of corporate officers must be expressly mentioned in the
by-laws in order to be considered as a corporate officer. As a general rule, the acts of corporate
officers within the scope of their authority are binding on the corporation. But when these officers
exceed their authority, their actions cannot bind the corporation, unless

Officers of the corporation, as provided for by the by-laws, shall be elected by the board
directors at their first meeting after the election of Directors. These officers shall be elected to hold
office until their successors are elected and qualified.

Corporate Officers and their Qualifications

Officer Requirement Citizenship Residency

President 1. Must be a director Need not be a Filipino Need not be a resident
2. Must be a stockholder Citizen of the Philippines
on record of at least 1
share

Secretary May or may not be a Must be a Filipino Must be a resident of

director Citizen the Philippines
Treasurer May or may not be a Need not be a Filipino Must be a resident of
director Citizen the Philippines
Compliance Officer If the corporation is vested with public interest.
Other officers Qualification may be provided for in the by-laws.

* Any two or more positions may be held concurrently by the same person, except that no one
shall act as president and secretary or as president and treasurer at the same time.
Quorum at the meeting of directors or trustee?

A majority of the directors or trustee, as fixed in the articles of incorporation, shall

constitute a quorum for the transaction of corporate business (unless the articles of
incorporation or the bylaws provide for a greater majority). Majority means fifty percent plus
one (50%+1).

➢ General rule:
A majority of the number of directors or trustees, as fixed in the articles of incorporation,
shall constitute a quorum for the transaction of corporate business, and every decision of at
least a majority of the directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers which shall require the vote
of a majority of all the members of the board.

➢ Exception:
If the articles of incorporation or by the by-laws provide for a greater majority.

Disqualification of Directors, Trustees or Officers.

A person shall be disqualified from being a director, trustee or officer of any

corporation if, within five (5) years prior to the election of any corporation if, within five (5)
years prior to the election or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
(2) For violating this Code; and
 (3) For violating Republic Act No. 8799, otherwise known as “The Securities
Regulation Code”;
(b) Found administratively liable for any offense involving fraudulent acts; and
By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similar to those enumerated in paragraphs (a) and (b) above

The foregoing is without prejudice to qualifications or other disqualifications, which the

Commission, the primary regulatory agency, or the Philippine Competition Commission may
impose in its promotion of good corporate governance or as a sanction in its administrative
proceedings.

7.8 Power to remove directors or trustees (Sec. 27)

The power to remove directors or trustees belongs to the stockholders or members

exclusively.
However, the Securities and Exchange Commission shall, motu proprio or upon verified
complaint, and after due notice and hearing, order the removal of a director or trustee elected
despite the disqualification, or whose disqualification arose or is discovered subsequent to an
election. The removal of a disqualified director shall be without prejudice to other sanctions that
the Commission may impose on the board of directors or trustees who, with knowledge of the
disqualification, failed to remove such director or trustee.

➢ General Rule:
Removal of directors or trustees may be with or without cause.
➢ Exception:
Removal without cause may not be used to deprived minority stockholders or members of
the right of representation to which they may be entitled under Section 23 of this Code.
➢ Requisites for removal
1. The removal should take place at a regular or special meeting duly called for the purpose;
2. The director or trustee can only be removed by a vote of the stockholders representing at
least 2/3 of the outstanding capital stock or 2/3 of the members entitled to vote in case of
non-stock corporations;
3. There must be a previous notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting; and
4. The special meeting of the Stockholders or members of a corporation for the purpose of
removal must be called by the secretary on order of the president or on the written demand
of the stockholders representing or holding at least a majority of the outstanding capital
stock or a majority of the members entitled to vote.

Vacancies in the Office of Director or Trustee (Sec 28)

As a rule, any vacancy that occurs in the board of directors or trustees other than by
removal or by expiration of term may be filled by the vote of at least a majority of the remaining
directors or trustees, if they still constitute a quorum; otherwise, said vacancies must be filled by
the stockholders or members in a regular or special meeting called for the purpose.

Causes of vacancies and Filing of such vacancies in the Office of the Director/Trustee

I. By the stockholders or members

1. Removal by the stockholders or members;
2. Expiration of term;
3. Increase in the number of directors or trustees due to amendment of the
articles of incorporation;
4. Other than the removal or expiration of term, like death, resignation,
abandonment, or disqualification, if the remaining directors or trustees do not
constitute a quorum for the purpose of filing the vacancy.
II. By the members of the board of directors or trustees
If still constituting a quorum, at least a majority of them are empowered to fill any
vacancy occurring in the board other than by removal by the stockholders or
members or by expiration of term.
 * Any directorship or trusteeship to be filled by reason of an increase in the number of directors
or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting authorizing the increase of directors
or trustees if so stated in the notice of the meeting.

Compensation for Directors or Trustees (Sec 29)

➢ General rule:
Directors or trustees shall not receive any compensation, except for reasonable per diem.
This provision on compensation of directors does not include corporate officers who are
not Directors.

➢ Exception:
1. When it is fixed by the corporation’s by-laws; and
2. When the stockholders, representing at least a majority of the outstanding capital stock,
or Majority of the members, vote to grant a compensation.

Limitation on Compensation: In no case shall the total yearly compensation of directors

exceed 10% of the net income before income tax of the corporation during the preceding year.

*Directors or trustees shall not participate in the determination of their own per diems or
compensation.

Dealings of Directors or trustees or officers (Sec. 31)

Directors, trustees and officers are to serve with utmost fidelity and honesty in the
corporation where they are clothed with such fiduciary character. Hence, when they deal with the
corporation in such a way that they may enter into a contract for some corporate transaction, they
become self-dealing and in order to avoid possibility of conflict in interest, the provision of the Code
states that such contract is voidable unless certain conditions are met.

➢ Self-Dealing directors or trustees or officers

A contract of the corporation with one or more of its directors or trustees, officers or their
spouses and relatives within the fourth civil degree of consanguinity or affinity.

➢ General Rule:
A contract of the corporation with one or more of its directors or trustees, officers or their
spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable, at the
option of such corporation.

➢ Exceptions:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustees was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances.
4. In case of corporations vested with public interest, material contracts are approved by at
least two-thirds (2/3) of the entire membership of the board, with at least a majority of the
independent directors voting to approve the material contract; and
5. That in case of an officer, the contract has been previously authorized by the board of
directors.

Contracts between Corporations with Interlocking Directors (Sec 32)

➢ Interlocking Directors
These are the members of the board of directors in a certain corporation who are also
directors in another corporation.

➢ General Rule:
 A contract between two or more corporations having interlocking directors shall not be
invalidated on such ground alone.

➢ Requisites for the concept of interlocking directors to apply:

1. The contract is not fraudulent; and
2. The contract is fair and reasonable under the circumstance.

➢ Exception:
If the interest of the interlocking director in one corporation is substantial* and his interest
in the other corporation or corporations is merely nominal, he shall be subject to the
provisions of Sec. 31 insofar as the latter corporation or corporations are concerned.

*Substantial interest is stockholdings exceeding twenty percent (20%) of the

outstanding capital stock shall be considered substantial for purposes of
interlocking directors.

Disloyalty of a Director (Sec 33)

As stated in a previous section of the Code, every director or trustee is clothed with
fiduciary character, and as such is expected to perform the duties and functions with utmost loyalty,
honesty and faithfulness in the pursuance of the benefit and advantage of the corporation. Hence,
where a director or trustee obtains information anent his position and use it to obtain a business
opportunity which should otherwise belong to the corporation, securing profit for himself to the
disadvantage of the corporation, is said to be in violation of the doctrine of corporate opportunity*,
which constitute a breach of the fiduciary relationship.

➢ Doctrine of Corporate Opportunity

A director, by virtue of his office acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he
is guilty of disloyalty, and as such he is obliged to account to the latter for all such profits
obtained from such transaction by refunding the same

➢ Ratification by the stockholders

The act of a director violating the doctrine of corporate opportunity can be ratified by a vote
of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock.

Executive Management and Other Special Committees (Sec. 34)

The by-laws of the corporation may provide for the formation of an executive committee* or
such other committees as may be relevant and helpful in the effective and convenient management
of the affairs and business of the corporation. They perform only functions as delegated to them by
the board of directors.

➢ Executive Committee
It is a body created by the by-laws and composed of not less than three (3) members of the
board which, subject to the statutory limitations, has all the authority of the board of
directors to the extent provided in the by-laws.

➢ Limitations on the powers of the Executive Committee

1) Approval of any action for which shareholders’ approval is also required;
2) Filing of vacancies in the board.
3) Amendment, repeal, or adoption of new by-laws.
4) Amendment or repeal of any resolution of the board which by its express terms is not so
amenable or repealable.
5) Distribution of cash dividend

POWERS OF CORPORATIONS

Corporate powers and source.

The right to be and act as a corporation constitutes the primary franchise granted by the State to
incorporated individuals. And once it is incorporated as a corporation, a secondary franchise may
be given to exercise the power and authority as a corporation. All of these are granted by the State.

The extent of corporate authority depends upon the purposes for which it was
incorporated. When the corporation is formed under a special law, its purposes are specified in that
special law. If it is formed under a general incorporation law, its purposes are specified in the
Articles of Incorporation.

8.2 Classifications of corporate powers and authority:

a. Express powers - those expressly authorized by law, or those granted by the words of the
corporate charter or applicable laws.
Example: These powers are expressly provided in Section 35 of the Revised Corporation
Code. Classified into General and Specific Powers.

b. Incidental powers - these are the powers which a corporation can exercise by the mere fact
of it being a corporation and are, therefore, impliedly granted as an incidence to its existence.
Example: 1. Power of Succession.
2. Power to sue and be sued.
3. To make a seal.
4. To make by-laws.
Note: These incidental powers of the corporation are found in the express powers.

c. Implied powers - these are the powers that are reasonably necessary to execute the express
powers granted to a corporation.
Example: 1. Acts in the usual course of business.
2. Acts to protect debts owing to the corporation.
3. Acts to protect or aid employees.
4. Acts to increase business.

8.3 General Powers of the Corporation (Sec. 35, RCP)

➢ Sue and sued in its corporate name;

➢ Succession;
➢ Adopt and use a corporate seal;
➢ Amend the Articles of Incorporation;
➢ Adopt, amend, or repeal by-laws;
➢ For stock corporations – issue stocks to subscribers and to sell treasury
stocks; For non-stock corporations – admit members;
➢ Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with real and personal property, pursuant to its lawful business;
➢ Enter into merger and consolidation;
➢ To make reasonable donations for public welfare, hospital, charitable, cultural, scientific,
civic or similar purposes. Prohibited: for partisan political activity;
➢ To establish pension, retirement and other plans for the benefit of directors, trustees,
officers and employees; and
➢ Other powers essential or necessary to carry out its purposes

8.4 Specific Powers of the Corporation (Sec. 36-43, RCP)

➢ Power to extend or shorten the Corporate Term (Sec. 36)

• Voting Requirements:
1. Approval of the majority vote of the board of directors/trustees;
2. Ratification by stockholders representing 2/3 of the outstanding Capital stock or by at least
2/3 of the members in the case of non-Stock corporations

Note: Written notice of the proposed action to extend or shorten the corporations’ term as
stated in the articles of incorporation and the time and place of the meeting shall be sent to
stockholders or members at their respective place of residence as shown in the books of the
corporation, and must be deposited to the addressee in the post office with postage prepaid, served
personally, or when allowed in the bylaws or done with the consent of the stockholder, sent
electronically in accordance with rules and regulations of the Commission on the use of electronic
data messages.
In case of shortening or extension of corporate term, any dissenting stockholder may
exercise his appraisal right.*

APPRAISAL RIGHT* - means that a stockholder who dissented and voted against the proposed
corporate action, may choose to get out of the corporation by demanding payment of the fair market
value of his shares.

➢ Power to Increase or Decrease Capital (Sec. 37)

• The capital stock of a corporation may be altered by:

1.) Increasing the capital stock
2.) Decreasing the capital stock
3.) Changing the number or par value of the shares without either increasing or
diminishing the aggregate amount of the capital stock

• Voting Requirement: Majority of the Board of Directors and the consent of at least 2/3
outstanding capital stock, voting and non-voting shares.

➢ Power to Incur, create or increase bonded indebtedness (Sec. 37)

• Voting Requirement: Majority of the Board of Directors and assented by at least 2/3 of the
outstanding capital stock, voting and non-voting shares

• Concept of a Corporate Bond - this is an instrument, representing a corporate debt, wherein

the corporation assumes to pay a fixed sum at a stated time with interest at a fixed rate until
maturity.
It is a long-term indebtedness secured usually by real property.

➢ Power to Deny Pre-emptive Right (Sec. 38)

• PRE-EMPTIVE RIGHT - it is the preferential right of all stockholders of a stock corporation

to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings, before the shares of the corporation are offered to the general
public.

• Purpose: The purpose of pre-emptive right is to enable the shareholder to retain his
proportionate control in the corporation.

• Right of pre-emption applies to all issuance or disposition of shares of any class, such as:
a. When the capital of the corporation is increased and new shares are issued.
b. When shares from the unsubscribed portion of the original or authorized capital
stock are issued.

• Exceptions to the Right of Pre-emption:

a. When such right is denied by the Articles of Incorporation or an amendment
thereto;
b. Shares are issued in compliance with laws requiring stock offering or minimum
stock ownership by the public;
c. In exchange for property needed for corporate expansion with the concurrence of at
least 2/3 of the outstanding capital stock; and
d. In payment of a previously contracted debt with the concurrence of at least 2/3 of
the outstanding capital stock.

➢ Power to Sell Corporate Property (Sec39)

 • Common forms of corporate combinations or union are spoken of as “Amalgamation”
a. Sale of all or part of the assets of one corporation to another.
b. By the transfer of assets of one corporation to another by lease.
c. By merger or consolidation.
d. By the use of a holding company.
Note: 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.

Substantially all of the corporate assets* - a sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it was incorporated.

• Voting Requirements: Majority of the Board of Directors and assented to by at least 2/3 of
the outstanding capital stock.

➢ Power to acquire its own shares (Sec. 40)

A Corporation may, in the absence of restrictions, purchase its own stock, provided it
acts in good faith and is not insolvent and provided such purchase is not prejudicial to the rights
of its creditors or stockholders. Likewise, the condition of corporate affairs warrants it.

A stock corporation shall exercise such power only for legitimate purpose provided that
the corporation has unrestricted retained earnings in its books to cover the shares to be
purchased. The following are allowed:
a. To eliminate fractional shares* arising out of stock dividends.
b. To collect or compromise a indebtedness to the corporation arising out of unpaid
subscription, and to purchase delinquent shares sold during said sale.
c. To pay dissenting or withdrawing stockholders entitled to payment.
d. To purchase redeemable shares regardless of existence of unrestricted retained earnings.
e. To acquire treasury shares.
f. To effect a decrease of capital stock.
g. Where there is a deadlock in the management of the business of a close corporation. The
SEC may order the corporation to purchase at their fair value the shares of any of its
stockholders.

• TRUST FUND DOCTRINE – as applied to the exercise of this corporate power, it means
that the
capital and other assets of the corporation are regarded as equity in trust to be used for the
payment of the debts of the corporation. Therefore, no payment or distribution of the capital
of the corporation shall be made to stockholders without reserving sufficient funds for the
payment of the claims of the creditors of the corporation, otherwise, the distribution is in
violation of the doctrine, hence, void from the beginning.

The trust fund doctrine provides that subscriptions to the capital stock of the corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their claims. The
doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied
in the Corporation Code, which allows the distribution of the capital only in three (3) instances: (1)
Amendment of the articles of incorporation to reduce the authorized capital stock;
(2) Purchase of redeemable shares by the corporation, regardless of unrestricted earnings; (3)
Dissolution and eventual liquidation of the corporation.

➢ Power to Invest its Corporate Funds in Another Corporation or Business (Sec. 41)

• The following are the rules in the exercise of said power:

1) If it is similar or incidental or related to its primary purpose, the board can invest the
Corporate funds without the consent of the stockholders or members. What is required is
only the vote of the majority of the board of directors or trustees.
2) If the investment is in another corporation of different business or purpose, the Affirmative
vote of majority of the board consented by 2/3 of the outstanding capital Stock or 2/3 of
the members if non-stock corporation is required.

➢ Power to Declare Dividends (Sec. 42)

The board of directors in a corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in property, or in stock to all stockholders
on the basis of outstanding capital held by them.

• RETAINED EARNINGS – are the accumulated profits realized out of normal and continuous
operations of the business after deducting therefrom distributions to stockholders and
transfers to capital or other accounts.

• UNRESTRICTED RETAINED EARNINGS – the retained earnings which have been reserved
or set aside by the board of directors for some corporate purpose. This is a source from
which dividends shall be declared.

• Concept of DIVIDENDS – Corporate profits set aside, declared, and ordered to be paid by
the directors for ratable distribution among stockholders at a fixed time. Dividends cannot,
as a rule, legally be declared and paid out of the capital of the corporation. Dividends is
dependent upon the availability of unrestricted retained earnings.
• Classes of Dividends.
a. Cash dividend - payable in cash.
b. Property dividend - payable in the form of property, such as warehouse receipts, shares of
stocks of another corporation.
c. Stock dividend - payable in unissued or increased or additional shares instead of cash or
property.
d. Optional dividend - gives the stockholder the option to receive cash or stock dividend
e. Composite dividend - partly in cash and partly in stocks.
f. Scrip dividend - a written certificate issued to a stockholder entitling him to the payment
of money because at the time of declaration there was no cash.
g. Bond - distributed in bonds of the corporation.
h. Liquidating dividend - distribution of the assets of the corporation upon dissolution or
winding up.

Distinction between a Cash dividends vs. Stock dividends

Cash dividends Stock dividends

It is part of general fund. It is part of capital.
It results in cash outlay. It does not result in cash outlay.
It is not subject to levy by corporate It can be levied by the corporate creditors
creditors. because they are part of corporate capital.
It is declared by the majority of the quorum It is declared by the majority of the quorum
of the board of directors. of the board of directors with the
concurrence of the stockholders
representing at least 2/3 of the outstanding
capital stock.
It does not increase the corporate capital The corporate capital is increased.
Its declaration creates a debt from the No debt is created by its declaration.
corporation to each of its stockholders.

• Limitations on Dividends
1) The right to dividend is based on duly recorded stockings.
2) Dividends among stockholders of the same class must always be pro rata equal and
without discrimination and regardless of the time when the shares were acquired.
the right of the stockholder to be paid dividends accrues as soon as the declaration
is made.
3) The right to dividend accrues even if there is no SEC approval.
 4) Declaration of dividends is discretionary upon the board of directors.
5) Dividends cannot be declared out of paid-in surplus and revaluation surplus.
6) Treasury shares cannot be declared as stock or cash dividends.

➢ Power to Enter into Management Contract (Sec. 43)

• Management contract - It is an agreement whereby a corporation delegates the

management of its affairs to another corporation for a certain period of time. No
management contract shall be entered into for a period longer than five years for any one
term.

Any contract whereby a corporation undertakes to manage or operate all or substantially all of
the business of another corporation, whether such contracts are called service contracts, operating
agreements or otherwise.

• Requirements to enter into such Management Contract:

1) Approval by majority of the quorum of the board of directors;
2) Ratification by stockholders owning at least majority of the outstanding
capital stock or of the members in case of non-stock corporations, of both the
managing and the managed corporation, at a meeting duly called for the
purpose; and
3) Approval by the stockholders of the managed corporation owning at least 2/3
of the total Outstanding capital stock entitled to vote, or by at least 2/3 of the
members in case of a non-stock corporation, in cases of:

a. Interlocking stockholders. - where a stockholder/s representing the same interest of both

the managing and managed corporations own or control more than 1/3 of the total
outstanding capital stock entitled to vote of managing corporation.
b. Interlocking directors. - where a majority of the members of the board of directors of the
managing corporation also constitute a majority of the members of the board of directors of
the managed corporation.

• No management contract shall be entered into for a period longer than five years for any
one term.
Exception:
Service contracts or operating agreements which relate to the exploration, developments,
exploitation or utilization of natural resources may be entered into for such periods as may
be provided by the pertinent laws or regulations.

8.5 Concept of Ultra Vires Acts

The term ultra vires refers to an act outside or beyond corporate powers, including those
that may ostensibly be within such powers but are, by general or special laws, prohibited or
declared illegal. The Revised Corporation Code defines an ultra vires act as one outside the powers
conferred by the Code or by the Articles of Incorporation, or beyond what is necessary or incidental
to the exercise of the powers so conferred.

Note: Ultra vires acts vs Illegal Acts. The term ultra vires is distinguished from an illegal act
for the former is merely voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated.

BY-LAWS
Nature of By-laws.

By-laws are relatively permanent and continuing rules of action adopted by the
corporation for its own government and that of the individuals composing it and those having the
direction, management and control of its affairs, in whole or in part, in the management and control
of its affairs and activities. In effect, it signifies the rules and regulations enacted by the corporation
to regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their relation to
it.

9.2 Purpose of By-laws.

Its purpose is to regulate the conduct and define the duties of the members towards the
corporation and among themselves. They are self-imposed and, although adopted pursuant to
statutory authority, have no status as public law.

9.3 Requisites of Valid By-laws

Since by-laws are for the internal governance of a corporation, there are requisites it
must satisfy in order that it will be valid, therefore, binding. The following are the requisites:
1) It must be consistent with the Corporation Code, other pertinent laws and
regulations.
Example: A provision in the By-laws granting a permanent seat in the Board of
Director is contrary to the Code.
2) It must be consistent with the Articles of Incorporation. Hence, in case of
conflict, the Articles of Incorporation prevails.
3) It must be reasonable and not arbitrary or oppressive.
4) It must not disturb vested rights of stockholders or members or create
obligations unknown to law.

9.4 Distinctions between Articles of Incorporation vs By-laws

Articles of Incorporation By-laws

It is a condition precedent in the acquisition of It is a condition subsequent. Its absence merely
corporate existence. furnishes a ground for the revocation of the
franchise or certificate of registration
It constitute the charter or fundamental law of It is the rules and regulations adopted by the
the corporation. corporation.
It is executed before incorporation. It is executed before or after incorporation.
It is amended by majority of the board of It may be amended by a majority vote of the
directors or trustees and stockholders board of directors and majority vote of the
representing 2/3 of the outstanding capital outstanding capital stock or a majority of the
stock, or 2/3 of the members in case of non- members in a non0stock corporation.
stock corporations.
The power to amend or repeal the articles of The power to amend or repeal by-laws or adopt
incorporation cannot be delegated by the new by-laws may be delegated by the 2/3 of the
stockholders or members to the board of outstanding capital stock or 2/3 of the
directors or trustees. members in the case of a non-stock corporation.

9.5 Effectivity of by-laws

Upon the issuance by the Securities and Exchange Commission of a certification that the
by-laws are in accordance with the Revised Corporation Code.

9.6 Rules in the Adoption and Amendment of By-laws

a. Original By-laws

1) Before Incorporation (Pre-incorporation)

1.1 Must be duly signed and approved by all the incorporators and filed with
SEC together with the articles of incorporation;

2) After incorporation (Post-incorporation)

2.1 The affirmative vote of the stockholders representing at least a

majority of the outstanding capital stock, or a majority of the members
 shall be necessary. It must be signed by the stockholders or members
voting for them.
2.2 Filed within one (1) month from notice of issuance of certificate of
incorporation to the SEC

Note: Non-filing within one (1) month is a ground to forfeit franchise

and will not result in automatic dissolution.

b. Amendment may be made by

(1) Stockholders together with the Board, or

1.1 Majority of the board plus majority of the outstanding capital stock is needed
to approve such amendment of the by-laws;

By the Board only as delegated by 2/3 of outstanding capital stock or 2/3 of

members at a regular or special meeting called for the purpose

Binding effects of the By-laws

1. As to directors or trustees, officers, and stockholders or members

▪ They are bound and must comply because they are presumed to know
the provisions of the by-laws.
▪ As for its contents, Sec 46 is instructive.

2. As to third persons
They are not bound unless they have knowledge of the by-laws

MEETINGS

Nature of Corporate Meetings.

Generally, stockholder’s or member’s meetings are called for the purpose of electing
directors or trustees and transacting some other business calling for or requiring the action or
consent of the shareholders or members, such as the amendments of the articles of incorporation
and by-laws, sale or disposition of all or substantially all corporate assets, consolidation and
merger and the like, or any other business that may properly come before the meeting.

In the absence of an express charter or statutory provision to the contrary, the general rule
is that every member of a nonstock corporation, and every legal owner of shares in a stock
corporation, has a right to be present and to vote in all corporate meetings. Conversely, those who
are not stockholders or members have no right to vote. Voting may be expressed personally, or
through proxies who vote in their representative capacities. Generally, the right to be present and
to vote in a meeting is determined by the time in which the meeting is held.

10.2 Kinds of Meeting for Stockholders or members and for Directors or Trustees

➢ Regular meetings for stockholders or members shall be held annually on a date fixed in
the By-laws. If not so fixed, on any date after April 15 of every year as determined by the
Board of Directors or trustees.
➢ Special meetings for stockholders or members shall be held at any time deemed
necessary or as provided for in the By-laws.

➢ Requirements for stockholders’ or members’ meetings

1. It must be held at the proper place
2. It must be held at the stated date and at the appointed time;
3. It must be called by the proper person;
4. The person or persons designated in the by-laws have authority to call stockholder’s or
Member’s meeting;
 5. In the absence of such provision in the by-laws, it may be called by a director or trustee
or by an officer entrusted with the management of the corporation;
6. A petitioning stockholder or member may make the call on order of the SEC whenever
for any cause, there is no person authorized to call a meeting or the person authorized
unjustly refuses to call a meeting;
7. There must be a previous notice;
8. There must be a quorum.

Note: Written notice of regular meetings shall be sent to all stockholders or members of
record at least twenty-one (21) days prior to the meeting unless a different period is provided in
the by-laws, law, or regulation. The written notice of regular meetings may be sent to all
stockholders or members of record through electronic mail or such other manner as the
Commission shall allow under the guidelines. For special meetings at least one (1) week written
notice shall be sent to all stockholders or members, unless a different period is provided in the by-
laws, law, or regulation.

In stock corporation Quorum in meetings of stockholders is ascertained and counted on the

basis of the outstanding capital stock (voting stock) which means the total shares of stock issued
under binding subscription contracts to subscribers or stockholders, whether fully or partially
paid, except treasury shares. For nonstock corporations, only those who are actual, living members
with voting rights shall be counted in determining the existence of a quorum during member’s
meeting. Dead members shall not be counted.

➢ Regular meetings for Directors or Trustees shall be held monthly, unless the by-laws
provide otherwise.
➢ Special meetings for Directors or Trustees may be held at any time upon the call of the
President or as provided in the by-laws.
➢ Requirements for directors’ or trustees’ meetings
1. It must be held at the proper place – may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.

2. There must be a previous notice - notice of regular or special meeting stating the date,
time and place must be sent to every director or trustee at least two (2) days prior to the
scheduled meeting, unless a longer time is provided in the by-laws. A director or trustee
may waive this this requirement, either expressly or impliedly.

3. There must be presence of a quorum – a majority of the directors or trustees, as fixed in

the articles of incorporation, shall constitute a quorum for the transaction of corporate
business, unless the articles of incorporation or the by-laws provide for a greater majority.
Majority means fifty percent plus one (50% + 1).

4. The chairman, or in his absence, the president shall preside at all meetings of the directors
or Trustees as well as the stockholders or members, unless the bylaws provide otherwise.

Manner of Voting through Proxies

Distinction between Voting trust agreement vs Proxy

Voting trust agreement Proxy

Governed by the law on trust. Governed by the law on agency.
Trustee acquires legal title to the shares of Proxy has no legal title to the shares of the
the transferring stockholder; only beneficial principal.
title remains with the stockholder.
The trustee votes as owner The proxy votes as agent
The agreement must be notarized Proxy need not be notarized
The trustee may vote in person or proxy The proxy must vote in person
The trustee is not limited to act at any The proxy can only act at a specified
particular meeting. stockholder’s meeting
A trustee can vote even when the stockholder A proxy can only vote in the absence of the
is present owners of the stock
 An agreement must not exceed 5 years at any A proxy is usually shorter duration although
one time except when the same is made a the corporation law provides that it cannot
condition of a loan. exceed 5 years at any one time.
As a rule, a voting trust agreement is As a rule, proxy is revocable.
intended to be irrevocable for a definite and
limited period of time.
A trustee has the right to inspect a corporate A proxy does not have a right of inspection of
books. corporate books.
The stock certificate shall be cancelled and a There is no cancellation of the stock
new one in the name of the trustee shall be certificate.
issued stating that they are issued pursuant
to a voting trust agreement.

➢ Requirements for validity of a proxy

1. It shall be in writing, in any form authorized in the by-laws;
2. It shall be signed by the stockholder or member;
3. It shall be filed before the scheduled meeting with the corporate secretary;
4. Unless otherwise provided in the proxy, it shall be valid only for the meeting which it is
intended; and
5. No proxy shall be valid and effective for a period longer than 5 years at any one time.
Note: Directors or trustees cannot attend or vote by proxy at board meetings but there is no
prohibition for them to act as proxies in stockholders’ meetings.

Note: Treasury shares shall have no voting right as long as such shares remain in the Treasury.

➢ Purposes of proxies
1. For convenience.
2. It assures the presence of a quorum.
3. It enables those who do not wish to attend the meeting to protect their interest.
4. It secures voting control.

Note: In the above provision, there is no limitation as to who may be a proxy.

➢ The right to vote by proxy may be exercised in any of the following instances:
1. Election of the Board of Directors or Board of Trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust agreement;
4. Voting by members in non-stock corporation;
5. In cases of pledge or mortgage of shares;
6. In all meetings of stockholders or members; and
7. In all other matters as may be provided in the by-laws.

➢ Revocation of Proxies may be made through:

1. Formal notice;
2. Verbal communication; or
3. Conduct of the stockholder

Nature of Voting Trust Agreement (VTA)

By its very nature, a VTA results in the separation of the voting rights of a stockholder
from his other rights such as the right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation.
However, as can be seen from the table presented above (10.2) where a distinction was
made between a voting trust agreement and a proxy and other voting pools and agreements, it must
pass three criteria or tests, namely:
1) that the voting rights of the stock are separated from the other attributes of
ownership;
 2) that the voting rights granted are intended to be irrevocable for a definite period of
time; and
3) that the principal purpose of the grant of voting rights is to acquire voting control of
the corporation.

Requirements and Limitation Imposed on Voting Trust Agreement

1) The agreement must be in writing and notarized and specify the terms and conditions
thereof;
2) A certified copy of such agreement shall be filed with the corporation and with the
SEC, otherwise said agreement is ineffective and unenforceable;
3) The certificate or certificates of stock covered by the VTA agreement shall be cancelled
and new ones shall be issued in the name of the trustee or trustees stating that they are
issued pursuant to such agreement;
4) The books of the corporation shall state that the transfer in the name of the trustee or
trustees is made pursuant to said VTA;
5) The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same effect as
certificate of stock;
6) A VTA must be entered into for a period not exceeding 5 years at any time. However, in
the case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5) years but shall automatically expire
upon full payment of the loan; and
7) No voting trust agreement shall be entered into for purposes of circumventing the laws
against anti-competitive agreements, abuse of dominant position, anti-competitive
mergers and acquisitions, violation of nationality and capital requirements, or for the
perpetuation of fraud.

STOCKS AND STOCKHOLDERS

A person may become a stockholder in a corporation by voluntarily acquiring a share.

Voluntary onerous acquisition of shares can be by (1) purchase or (2) through subscription.
Purchase may be from the corporation itself or from other shareholders.

The differences in the two modes of becoming a shareholder are the following:

(1) As to time when they were entered into, subscription can be made before or after incorporation
while purchase is made only after incorporation;
(2) If there no agreement as to the time of payment, the subscriber in a subscription agreement* need
not pay unless there is a call, while sales is reciprocal, the purchaser under a deed of absolute
assignment or sale must fully pay the purchase price at the time the shares are transferred;
(3) The subscriber cannot be released from his obligation to pay the subscription price while a
stockholder who sells his shares can condone the obligation to pay;
(4) The Statute of Frauds does not apply to subscription contracts while the same apply to purchase
if the price is less than P500.00.

Subscription Contract* - any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription which necessarily
involves the corporation as one of the contracting parties since the subject matter of the transaction
is a property owned by the corporation – its shares of stock. As to its nature, it is a consensual
contract, and an indivisible contract. (Sec 59)

Kinds of Subscription

(1) Pre-Incorporation Subscription – which is a subscription for shares of stock of a

corporation still to be formed. (Sec. 60)
Rules to observe:
1. It is irrevocable for a period of at least 6 months from the date of subscription.
Exception: a) All of the other subscribers consent to the revocation.
 b) The corporation fails to incorporate within the same period
or within a longer period stipulated in the contract of
subscription.
2. No pre-incorporation subscription may be revoked after the submission of the
Articles of incorporation to the SEC.

(2) Post-Incorporation Subscription – a subscription entered into after the

incorporation for the acquisition of unissued stocks.

Modes of Stock Issuance.

Any person capable of entering into a binding contract may become a subscriber. A
corporation, however, cannot be one of its own members, and cannot subscribe for shares of its own
stock. It can be a subscriber or corporator in another corporation.

Following are the modes of stock issuance:

1) By subscription;
2) By sale of the unissued stock;
3) By increasing the amount of capital stock;
4) By making stock dividend.

Considerations for Stocks (Sec 61)

As to the amount of consideration, the rule is, stocks shall not be issued for a consideration
less than the par or issued price thereof. Note that the Code does not prohibit a corporation from
issuing stocks for a consideration above the par or issued price.

By issue of stock it means that it is disposed of and put into circulation for the first
time, as when it first passes into the hands of a stockholder.

The following are the considerations for the issuance of stocks:

• Actual cash paid to the corporation;
• 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;
• Labor performed for or services actually rendered to the corporation;
• Previously incurred indebtedness of the corporation;
• Amounts transferred from unrestricted retained earnings to stated capital;
• Outstanding shares exchanged for stocks in the event of reclassification for conversion;
• Shares of stock in another corporation; and/or
• Other generally accepted form of consideration.

Certificate of Stock and Transfer of Shares (Sec. 62)

As previously discussed, the capital stock of corporations can be divided into shares for
which certificates* signed by the president or vice-president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with
the bylaws. Since these shares of stocks issued are considered personal property, they may be
transferred* by delivery of the certificate indorsed by the owner, his attorney-in-fact, or any other
person legally authorized to make the transfer.

However, no transfer will be valid except as between the parties unless it is recorded in
the books of the corporation showing the names of the parties to the transaction, the date of such
transfer, the number of certificates, and the number of shares transferred. Note that no shares of
stock against which the corporation holds any unpaid claim* shall be transferrable in the books of
the corporation.

Certificate of stock*- it is a written instrument signed by the proper officer of the corporation
stating or acknowledging that the person named therein is the owner of a designated number of
shares of its stock.
 Transfer* - is an act by which the owner of a thing delivers it to another with the intent of passing
the rights which he has in it to the latter.

Unpaid claim* - refers to “any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from any other
transaction.

Issuance of Stock Certificates (Sec 63)

Distinctions between Share of stock vs. Certificate of stock

Shares of stock Certificate of stock
Unit of interest in a corporation Evidence of the holder’s ownership of the
stock and of his right as a shareholder
Intangible personal property Tangible personal property
May be issued by the corporation even if the May be issued only if the subscription is fully
subscription is not fully paid paid

The rule is, no certificate of stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of delinquent shares), if any is due, has
been paid.

Liability of Directors for Watered Stocks (Sec 64)

It is basic that a corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising it. The general
rule is that obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities, and vice versa.

There are times, however, when solidary liabilities may be incurred and the veil of
corporate fiction may be pierced. Exceptional circumstances warranting such disregard of
a separate personality are summarized as follows:
1) When directors and trustees, or in appropriate case, the officers of a corporation:
a) vote for or assent to patently unlawful acts of the corporation;
b) act in bad faith or with gross negligence in directing the corporate affairs;
c) are guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons;
2) When a director or officer has consented to the issuance of watered down
stocks* or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
3) When a director, trustee, or officer has contractually agreed or stipulated to
hold himself personally and solidarily liable with the corporation; or
4) When a director, trustee, or officer is made, by specific provision of law,
personally liable for his corporate action.

Basis of the solidary liability of directors is the fiduciary character of their position.

Watered Stock* - are stocks issued not in exchange for its equivalent either in cash, property,
share, stock dividends, or services; thus, the issuance of such stocks are prohibited. These
include stocks:
1) issued without consideration (bonus share);
2) issued as fully paid when the corporation has received a lesser sum of money than
its par or issued value (discounted share);
3) issued for consideration other than actual cash (i.e., property or services), the
fair valuation of which is less than its par or issued value;
4) issued as stock dividend when there are no sufficient retained earnings or surplus
to justify it.

Directors or officers who consented to its issuance is solidarily liable to the corporation
for the difference in value.
Interest on Unpaid Subscriptions and Payment of Balance of Subscription (Sec. 65-66)

Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions
from the date of subscription, if so required, at the rate of interest fixed in the bylaws. If
no rate of interest is fixed in the bylaws, such rate shall be deemed to be the legal rate.
Payment of unpaid subscription
I. Voluntary payment - payment shall be made on the date specified in the contract
of subscription or on the date stated in the call made by the board.

II. Involuntary payment

1. Extra-judicial:
a) Delinquency Sale*. The board of directors may, by resolution, order the sale of
the delinquent stock.
b) Application of Dividends. The cash dividends due on delinquent stock shall first
be applied on the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid.

2. Judicial action. The corporation can collect by action in a court of proper

jurisdiction the amount due on any unpaid subscription, with accrued
interest, costs and expenses. (Sec 69)

Delinquency Sale (Sec 67)

This is the first and most special remedy given by the Code if a shareholder is in default
in paying the subscription by permitting the corporation to put up the unpaid shares for sale and
dispose of it in a delinquency sale for the account of the delinquent subscriber.

The following are the steps that must be strictly complied with in a delinquency sale:

1) Resolution passed by the board ordering the sale of the delinquent stock.
2) Notice of said sale, with copy of resolution sent to every delinquent shareholder
either personally or by registered mail.
3) Publication of the notice once a week for two consecutive weeks in a newspaper of
general circulation in the province or city where the principal office of the
corporation is located.
4) Sale of the delinquent stock at a public auction held not less than 30 days nor more
than 60 days from the date the stocks become delinquent to the highest bidder*.
5) Transfer the stock so purchased to such purchaser in the book of the corporation and a
certificate for such stock shall be issued in his favor; and
6) Credit of remainder. The remaining shares, if any, shall be credited in favor of the
delinquent shareholder who shall likewise be entitled to the issuance of a certificate of
stock covering the same.

➢ Who is a highest bidder?

Bidder who shall offer to pay the full amount of the balance on the subscription together
with accrued interest, costs of advertisement and expenses of sale, for the smallest number
of share or fraction of a share. The winning bidder would then be entitled to the issuance of
a certificate of stock covering the same.

➢ Cancellation of Sale. The delinquent shareholder may actually stop the delinquent sale if he
pays to the corporation, on or before the date specified in the sale of the delinquent stock,
the balance due on his subscription, plus accrued interest, costs of advertisement. And
expenses of sale. Payment made by delinquent shareholder automatically stops the sale.
However, the sale may also be stopped upon the order of the board of directors.
➢ Action to recover. After the delinquent sale, the delinquent shareholder may file an action
to recover the delinquent stocks that were sold if the following are complied with:
1) The action is filed on the ground of irregularity or defect in the notice of sale, or
in the sale itself of the delinquent stock;
 2) The party who wants to take such action must first pay or offer to the party
holding the stock the sum for which the same was sold, with interest from the
date of sale at the legal rate; and
3) The complaint is files within six (6) months from the date of sale. (Sec. 68)

Effects of Delinquency on the rights of the Delinquent stockholder. (Sec. 70)

1) Suspension of his rights as a stockholder, thus he cannot vote and he is not

entitled to representation during meetings. He cannot be elected as director and
cannot continue to serve if he is an incumbent director. It is only upon full
payment that the stockholder will be restored to his full rights.
2) A delinquent shareholder is still entitled to dividends, however, if cash dividends
are declared, the dividends shall be applied to the subscription price that is due
to the corporation.
3) Delinquent stockholders shall not be included in determining the existence of
the required quorum since this is based on the majority of those entitled to vote.
4) Since delinquent stockholders (and delinquent members) are not entitled to
vote, hence, voting rights cannot be delegated. Assignment of voting rights is
therefore not permitted.

Rights of unpaid shares. (Sec 71)

A pre-incorporation subscriber becomes a shareholder from the moment the Certificate

of Incorporation is issued. He is a shareholder from the inception of the corporation. Unless certain
terms and conditions are required, a post-incorporation subscriber becomes a shareholder from
the perfection of the subscription contract.

Whether the subscription is pre-incorporation or post-incorporation subscription, the

subscriber is entitled to all the rights of a shareholder from the time be becomes such shareholder.
It is not necessary that the subscription price has been fully paid. It is also not necessary that a
certificate of stock is issued. The only right which is not available if the shares are not fully paid, is
the right to secure a stock certificate or to have any subsequent transfer registered in the books of
the corporation. So that there is no cause of action for mandamus to compel the corporation to
register the transfer if the corporation has an unpaid claim on the share and no certificate has been
issued. The transfer is effective only between the parties.

As stated, a shareholder has interest over the management, income, and assets of the
corporation. He has certain rights, which include proprietary rights, as well as the right to
participate directly or indirectly in the management of the corporation through the election of the
board of directors and by directly approving specific corporate acts as well as the exercise of
certain remedial rights. Outlined below are the shareholders rights even if he has not yet fully
paid his shares (provided they are not delinquent shares), as well as hos concomitant obligations
to the corporation.

A.) BASIC RIGHTS OF A STOCKHOLDER

I. MANAGEMENT RIGHTS
1. To attend and vote in person or by proxy at a stockholder
2. To elect and remove directors
3. To approve certain corporate acts.
4. To adopt and amend or repeal the by-laws or adopt new by laws
5. To compel the calling of the meetings
6. To enter into a voting trust agreement
7. To have the corporation voluntarily dissolved
II. PROPRIETARY RIGHTS
1. To transfer stock in the corporate book
2. To receive dividends when declared
3. To issuance of certificate of stock
4. To participate in the distribution of corporate assets upon dissolution
5. To pre-emption in the issue of shares
 III. REMEDIAL RIGHTS
1. To inspect corporate books
2. To recover stock unlawfully sold for delinquent payment of subscription
3. To be furnished with most recent financial statements
4. To bring suits (derivative, individual, and representative suit)*
5. To demand payment in the exercise of appraisal righ
B.) LIABILITIES OF STOCKHOLDERS
1. Liability for the unpaid subscription
2. Liability for interest on unpaid subscription
3. Liability to creditors of the corporation on the unpaid subscription
4. Liability for watered stocks
5. Liability for dividends unlawfully paid

11.10 Right to File an Action

A shareholder has the right to file three types of actions which are meant not only to
directly protect his interest but also the corporation as well. The cause of action need not even
pertain to him, as in the case of a derivative action. These actions can be categorized into: (1)
Derivative Actions*; (2) Individual Actions; and (3) Representative Actions.

Derivative suit*
Derivative suit is an action brought by minority shareholders in the name of the corporation
to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy
designed by equity and has been the principal defense of the minority shareholders against abuses
by the majority.

11.10.1 Distinctions among the three types of Actions that can be filed by stockholders

Derivative suit vs. Individual suit vs. Class suit

Derivative suit Individual suit Class/Representative suit
Where the acts complained of Where a stockholder or Where the wrong is done to a
constitute a wrong to the member is denied the right of group of stockholders, as
corporation itself, the cause inspection, his suit would be where preferred
of action belongs to the individual because the wrong stockholders’ rights are
corporation and not to the is done to him personally and violated, a class or
individual stockholder or not to the other stockholders representative suit will be
member. Although in most or the corporation. proper for the protection of
case of wrong to the all stockholders belonging to
corporation, each the same group.
stockholder is necessarily
affected because the value of
his interest therein would be
impaired, this fact of itself is
not sufficient to give him an
individual cause of action

Lost or Destroyed Certificates (Sec. 73)

The rationale of the provision is designed to protect not only the real owner but the
corporation as well. The real owner is protected against improvident issuance of another certificate
and at the same time provides some shield to the corporation and its officers to prevent them from
being made liable. Hence, except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any corporation which shall have
issued certificate in lieu of those lost, stolen or destroyed so long as the procedure provided in the
above cited provision have been fully complied, viz:
(1) Affidavit of Loss executed by the real owner regarding the shares and
circumstance of its Loss;
 (2) Verification on the content of the affidavit and other information and evidence with
the books of the corporation’
(3) Publication of a notice in a newspaper of general circulation in the place where the
corporation has its principal office, once a week for three consecutive weeks at the
expense of the registered owner of the certificate of stock that has been lost, stolen,
or destroyed;
(4) One-Year waiting Period from the date of last publication during which a
contest can be interposed;
(5) Contest, when presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock which had been lost, stolen, or
destroyed, the issuance of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court regarding the ownership of said
certificate alleged to have been lost, stolen, or destroyed;
(6) Replacement of the certificates by the corporation if there is no contest within the
one-year period. The replacement of share can only be made before the expiration
of the one-year period if a bond is posted.

CORPORATE BOOKS AND RECORDS

What books are required to be maintained by the corporation? (Sec. 73)

Every corporation shall keep and carefully preserve at its principal office all
information relating to the corporation including, but not limited to:

1) The articles of incorporation and bylaws of the corporation and all their amendments;
3) The current ownership structure and voting rights of the corporation, including lists of
stockholders or members, group structures, intra-group relations, ownership data, and
beneficial ownership The names and addresses of all the members of the board of
directors or trustees and the executive officers;
4) A record of all business transactions;
5) A record of the resolutions of the board or directors or trustees and of the
stockholders or members;
6) Copies of the latest reportorial requirements submitted to the Commission; and
7) The minutes of all meetings of stockholders or members, or of the board of directors or
trustees. Such minutes shall set forth in detail, among others: the time and place of the
meeting held, how it was authorized, the notice given, the agenda therefor, whether the
meeting was regular or special, its object if special, those present and absent, and every
act done or ordered done at the meeting. Upon the demand of a director, trustee,
stockholder or member, the time when any director, trustee, stockholder or member
entered or left the meeting must be noted in the minutes; and on a similar demand, the
yeas and nays must be taken on any motion or proposition, and a record thereof carefully
made. The protest of a director, trustee, stockholder or member on any action or
proposed action must be recorded in full upon their demand.

➢ The Corporate Books to be maintained by the corporation under Sec. 73 are:

 a.) Book of minutes of stockholders’ or members’ meetings;
b.) Book of minutes of board meetings;
c.) Record or Book of all business transactions; and
d.) Stock and Transfer book.

The proper custodian of the books, minutes and official records of a corporation is
usually the Corporate Secretary. Being the custodian of corporate records, the corporate
secretary has the duty to record and prepare the minutes of the meeting. The signature of the
corporate secretary gives the minutes of the meeting the probative value and credibility. Thus,
without the certification of the corporate secretary, it is incumbent upon the other directors
or stockholders as the case may be, to submit proof that the minutes of the meeting is
accurate and reflective of what transpired during the meeting.

Stock and Transfer Book* - is necessary as a measure of precaution, expediency, and

convenience since it provides the only certain and accurate method of establishing the
various corporate act and transactions and of showing the ownership of stock and like
matters.

➢ Contents of the Stock and Transfer Book includes:

• All stocks in the name of the stockholders which are alphabetically
arranged;
• Amount paid and unpaid on all stocks and the date of payment of any
instalment;
• Alienation, sale or transfer of stocks; and
• Other entries as the bylaws may prescribe.

Stock Transfer Agent* - he is one engaged principally in the business of registering

transfer of stocks in behalf of a stock corporation allowed to operate in the Philippines by
securing a license from the Commission and the payment of a fee to be fixed by the
Commission, which shall be renewable annually.
➢ The corporate secretary is the officer who is authorized to make entries on the stock
and transfer book, unless there is a stock transfer agent retained by the corporation
for this purpose. Being as it may, entries made by the Chairman or President are
invalid.

Stockholders’ Right of Inspection

The stockholder’s right of inspection of the corporation’s books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed as equitable ownership, a beneficial ownership, or a quasi-ownership. This right is
predicated upon the necessity of self-protection. The right of inspection is closely related to
the interest of the member as a stockholder, and has to be proper and lawful in character
and not contrary to the interest of the corporation as well.
 However, be it noted that this right to inspect corporate books granted in the Code is
not absolute., as when the stockholder is not acting in good faith and for a legitimate purpose
or when the demand is purely speculative or merely to satisfy curiosity.

➢ Limitations on the right of inspection

• The person demanding the right has not improperly used any information
obtained through any previous examination of the books and records of the
corporation;
• The demand is made in good faith or for a legitimate purpose;
• The person demanding the right is not a competitor, director, officer,
controlling stockholder or otherwise represents the interests of a
competitor.

➢ Corporate records, regardless of the form in which they are stored, shall be open to
inspection by any director, trustee, stockholder or member of the corporation in
person or by a representative at reasonable hours on business days, and a demand in
writing may be made at their expense, for copies of such records or excerpts from
said records.

➢ A requesting party who is not a stockholder or member of record, or is a competitor,

director, officer, controlling stockholder or otherwise represents the interests of a
competitor shall have no right to inspect or demand reproduction of corporate
records.

➢ Mandamus is a proper remedy if the stockholder is being improperly deprived of

his right to inspect.

Right to Financial Statement (Sec. 74)

A corporation shall furnish a stockholder or member, within ten (10) days from
receipt of their written request, its most recent financial statement, in the form and
substance of the financial reporting required by the Commission.
It is likewise, a right that at regular stockholders or members meeting, the board of
directors or trustees present a financial report of the operations of the corporation for the
preceding year, which shall include financial statements, duly signed and certified in
accordance with the requirements prescribe of the Code and of the Commission.

But where the total assets or total liabilities of the corporation are less than Six
hundred thousand pesos (P600,000.00), or such other amount as may be determined
appropriate by the Department of Finance, the financial statement may be certified under
oath by the treasurer and the President.

APPRAISAL RIGHT
Nature of an Appraisal Right
 Appraisal right means that a stockholder who dissented and voted against the
proposed corporate action, may choose to get out of the corporation by demanding payment
of the fair market value of his shares. When a person invests in the stock of a corporation,
he subjects his investment to all the risks of the business and cannot just pull out such
investment should the business not turn out as he expected. He will have to wait until the
corporation is finally dissolved before he can get back his investment, and even then, only
if sufficient assets are left after paying all corporate creditors. His only way out before
dissolution is to sell his shares should he find a willing buyer. If no buyer, then he has no
recourse but to stay with the corporation. However, in certain specified instances, the Code
grants the stockholder the right to get out of the corporation even before its dissolution
because there has been a major change in his contract of investment with which he is not
amenable and which the lae presumes he did not foresee when he bought his shares. Since
the will of the two-thirds of the stocks will have to prevail over his objections, the law
considers it but fair to allow him to get back his investment and withdraw from the
corporation.

When the Right of Appraisal May be Exercised (Sec 80)

The Corporation Code expressly made appraisal rights available to the
dissenting stockholder in the following instances:
1.) In case any amendment to the articles of incorporation has the effect of:
a) Changing or restricting the rights of any stockholders or class of shares,
or
b) Authorizing preferences in any respect superior to those of
outstanding shares of any class, or
c) Extending or shortening the term of corporate existence;
2.) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of
all or substantially all of the corporate property and assets as provided in this
Code;
3.) In case of merger or consolidation; and
4.) In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation.

Note: In a close corporation, any stockholder of a close corporation may, for any reason,
compel the said corporation to purchase his shares at their fair value, which shall not be
less than their par or issued value, when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital stock.

How Appraisal Right is Exercised (Sec. 81)

The dissenting stockholder who voted against a proposed corporate action may
exercise such right by making a written demand on the corporation for the payment of the
fair value of shares held within thirty (30) days from the date on which the vote was taken.
Failure by the dissenting stockholder to exercise the right within such period he shall be
deemed to have waived his appraisal right.
Where the proposed corporate action is implemented, the corporation will be
obliged to pay the stockholder, upon surrender of the certificates of stocks representing the
stockholder’s shares, the fair value of the shares as of the day before the vote was taken,
excluding any appreciation or depreciation in anticipation of such corporate action.
If, within sixty (60) days from the approval of the corporate action by the
stockholders. The withdrawing stockholder and the corporation cannot agree on the
fair value of the shares, it shall be determined and appraised by three (3)
disinterested persons, one of whom shall be named by the stockholder, another by
the corporation, and the third by the two (2) thus chosen. The findings of the majority
of the appraisers shall be final, and their award shall be paid by the corporation within
thirty (30) days after such award is made. The Code requires that no payment shall
be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment. Finally, that upon such payment
by the corporation of the agreed upon or awarded price, the stockholder shall right
away transfer the shares to the corporation.

Effect of demand and termination of right (Sec 82)

The following will be the effect upon the rights of the dissenting stockholder
reckoned from the time he makes a written demand for the payment of the fair value of his
shares including the surrounding circumstances leading up to, and until he receives
payment:
1.) From the time of demand for payment of the fair value of a stockholder’s shares
until
either the abandonment of the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such shares, including voting and
dividend rights, shall be suspended.
2.) The dissenting stockholder shall be entitled to receive payment of the fair value of his
shares as agreed upon between him and the corporation or as determined by the
appraiser chosen by them.
3.) If the dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.
4.) Upon such payment, all his rights are terminated, not merely suspended. But if before he
is paid the proposed corporate action is abandoned, his rights and status as a
stockholder shall thereupon be permanently restored.
5.) Payment may be made only if the corporation has unrestricted retained earnings in its
books to cover the same.

When Right to Payment Ceases (Sec. 83)

➢ General Rule:
A dissenting stockholder who demands payment of his shares is no longer allowed
to withdraw from his decision.
 ➢ Exceptions:
1. The corporation consents to the withdrawal;
2. The proposed corporate action is disapproved by the SEC where its approval is
necessary;
3. The proposed corporate action is abandoned or rescinded by the corporation; and
4. The SEC determines that such stockholder is not entitled to appraisal right.

Who Bears the Costs of Appraisal? (Sec 84)

➢ General Rule:
It is the corporation that shall bear the costs of appraisal.
➢ Exception:
The fair value ascertained by the appraisers is approximately the same as the price
which the corporation may have offered to pay the stockholder, in which case costs
shall be borne by the stockholder

Effects of Transfer of Dissenting shares (Sec 85)

Within ten (10) days after demanding payment for shares held, a dissenting
stockholder shall submit the certificates of stock representing the shares to the corporation
for notation that such shares are dissenting shares. In the event he fails to do so, at the option
of the corporation, terminate the rights of said stockholder. If the shares represented by the
certificates bearing such notation are transferred, and the certificates consequently
cancelled, the rights of the transferor as a dissenting stockholder shall cease and the
transferee shall have all the rights of a regular stockholder, and all dividend distributions
which would have accrued on such shares shall be paid to the transferee.
Hence, the effect of such transfer of shares to another (called the transferee) are
summarized as follows;
1.) The rights of the transferor as a dissenting stockholder shall cease and the transferee
shall have all the rights of a regular stockholder.
2.) All dividend distributions which would have accrued on such shares shall be paid to
the Transferee.

NON-STOCK CORPORATIONS

Nature and purposes of Non-stock corporations. (Sec. 86-87)

It is one where no part of its income is distributable as dividends to its member,

trustees, or officers. Any profit which a non-stock corporation may obtain as an incident to
its operation shall, whenever necessary or proper, be used for the furtherance of the purpose
or purposes for which the corporation was organized.
 In fact, it has been ruled that even if there is a statement of capital stock, the
corporation is still not a stock corporation if dividends are not supposed to be declared, that
is, there is no distribution of retained earnings. In addition, the purpose must be that which
is covered by Sec. 88 of the Corporation Code. In other words, the requirements in both Sec
87 and 88 must concur. Thus, a non-stock corporation has the following essential requisites:
1) It does not have a capital stock divided into shares;
2) No part of its income is distributable as dividend to members; and
3) Non-stock corporation must be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary, scientific, social, civic
service or similar purposes, Like trade, industry, agricultural and like chambers,
or any combination thereof.

Implicit from the essential requisites, particularly the second requisite, is the
underlying requirement that a non-stock corporation must have members. In other words,
a corporation cannot be considered as a non-stock corporation if it does not have members.
The nationality of a non-stock corporation is computed on the basis of the
nationality of its members and not premised on the membership contribution. Thus, if there
are five members and two of whom are foreigners and three are Filipinos, the non-stock
corporation is 40% Foreign and 60% Filipino. However, SEC rules provide that a non-stock
corporation is considered Philippine National:
1) If all of its members are Filipino citizens; or
2) If at least 60% of its members entitled to vote are citizens of the Philippines;
or
3) If at least 60% of its members’ total number of votes as broadened in the
Bylaws are held by Citizens of the Philippines; or
4) If all the members of a foreign non-stock corporation licensed to do
business by the SEC are citizens of the Philippines.

14.2 Distinctions Between Stock and Non-Stock Corporations

NON-STOCK CORPORATIONS STOCK CORPORATIONS

1. Components Members Shareholders
2. Board Member Trustees Directors
3. As to existence There is no capital stock There is capital stock divided
of shares divided into shares. into shares.
4. Dividends No dividends declared Dividends are declared
5. Purpose The primary purpose is non- The purpose is primarily
profit; it is limited to those Business.
specified under Sec. 87.
6. Business It can conduct business but only The business purpose is the
Activities if it is incidental to the primary Primary purpose.
purpose.
7. Voting Rights The voting rights can be One share – one vote.
Modified.
8. Transferability Membership is generally non- Shares are transferable.
 of interest Transferrable. (Sec. 90)
9. Termination Membership can be terminated. Ownership of shareholder
(Sec. 91) cannot be terminated until the
transfer of the shares upon
liquidation
10. Effect of Death Death of a member terminates Shares can be acquired
the membership; through succession.
Generally, membership is not
transferred.
11. Dues Payment of dues can be No dues are paid.
Required.
12. Board There can be more than 15 Not more than 15
members/trustees. members/directors.
13. Term of Board Staggered term; serve for 3 Term is not staggered.
Members years
14. Voting Cumulative voting is not Cumulative voting is expressly
allowed unless provided for in allowed.
the Articles or Bylaws; Section
24 is limited to stock
corporations
15. Liquidation Generally, the members will not Shareholders will get their
get a share in the assets unless share in the net assets known
provided for in the Articles and as liquidated dividends.
Bylaws. (Sec.94[4])

Characteristics of a Non-Stock Corporation

➢ The following are the Nonstock corporations’ salient characteristics:

1. It does not have capital stocks divided into shares.
2. No part of its income during its existence is distributable as dividends to its
members, trustees, and officers.
3. As a general rule, it is not empowered to engage in business with the object of
making income or profits directly or indirectly. However, it is not prohibited
to make income or profits as an incident to its operation.
4. There is non-transferability of membership.
5. The right to vote of members may be limited, broadened, or even denied in the
articles of incorporation or the bylaws.
6. Non-stock corporation may, through their articles of incorporation or their
by-laws, designate their governing boards by any name other than board of
trustees.
7. Bylaws may provide that the members may hold their meetings at any
place even outside the place where the principal office of the corporation
is located, provided that such place is within the Philippines.
8. A non-stock corporation is not allowed to distribute any of its assets or any
incidental income or profit made by the corporation during its existence.
 9. A non-stock corporation cannot be converted into a stock corporation by
mere amendment of its articles of incorporation because the conversion
would change the corporate nature from non-profit to profit.

Voting Rights of Members (Sec. 88)

The members right to vote is incidental to membership, of which a member cannot

be deprived without his consent. This right may be limited, broadened, or denied by the by-
laws or the Articles of Incorporation. Members of nonstock corporations can be classified
into voting and non-voting. Be it noted that non-voting is not absolutely disqualified to vote,
and such is given in cases provided for in Section 6, par. 3 of the Code.

Hence, unlike in a stock corporation that the right to vote is inherent in and
incidental to the ownership of corporate stocks, in nonstock corporation, the voting rights
attach to membership. Members vote as persons, in accordance with the law and the bylaws.
Each member is entitled to one vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. We hold that when the principle for determining the quorum for
stock corporations is applied by analogy to nonstock corporations, only those who are
actual members with voting rights should be counted.

As in the case of a stock corporation, a member may vote by proxy, in accordance

with the provision of this Code. The bylaws may likewise authorize voting rights through
remote communication and/or in absentia.

Membership in a Non-stock corporation

Membership in and all rights arising from a nonstock corporation are personal and
non-transferable, unless the articles of incorporation or the bylaws of the corporation
provide otherwise. It is personal in the sense that a member may not transfer his right unless
permitted by the Articles of Incorporation or bylaws. The corporation’s bylaws may
therefore provide that a member may assign his membership to another who substitutes
him as a new member, resulting in the cancellation of assignor’s name in the list of members
of the nonstock corporation.

Stated otherwise, the determination of whether or not “dead members” are entitled
to exercise their voting rights (through their executor or administrator) in corporate matters
or the requisite quorum for the annual member’s meeting, depends on those articles of
incorporation or bylaws.

Termination of Membership (Sec 90)

The power to admit members pertain to the Board in the absence of any contrary
provision in the Articles of Incorporation and bylaws. Consistently, it is also the Board of
Trustees who has the power to terminate membership.
 Membership shall be terminated in the manner and for the causes provided in the
articles of incorporation or the bylaws. Termination of membership shall extinguish all right
of a member in the corporation or in its property, unless otherwise provided in the articles
of incorporation or the bylaws.

The usual causes for terminating membership set forth in the bylaws are, non-
payment of annual membership fee or dues, abandonment of duties, dishonorable conduct
in the corporation or outside of it, and even immorality. As to the requirements for
termination, the corporation through its board of trustees will give a notice to the concerned
member, and the fair opportunity to be heard in his defense.

Trustees and Officers, their Election and Term of Office (Sec 91)

Task with the management of the affairs of the nonstock corporation are the Board
of Trustees, whose number shall be fixed in the articles of incorporation or the bylaws which
may or may not be more than fifteen (15). They shall hold office for not more than three (3)
years until their successors are elected and qualified. In case there is a vacancy in the board
due to valid causes, similar to that in a stock corporation, the trustee elected to fill such
vacancy occurring before the expiration of a particular term shall hold office only for the
unexpired period.

As to who can be elected as trustee, only a member of the corporation shall be elected
with the exception of a nonstock corporation imbued with public interest where the Code
requires an independent trustee to sit with the board.

As to the officers, they are directly elected by the members unless otherwise
provided in the articles of incorporation or the bylaws. Thus, the articles of incorporation or
the bylaws may provide that the officers of the corporation may be elected by the board of
trustees.

List of Members and Proxies, Place of Meetings (Sec. 92)

The corporation, shall at all times, keep a list of members and their proxies in the form
the SEC may require. As to where meetings of the members of the nonstock
corporation will be held, the Code provides that such meetings, regular or special may
be held at any place even outside the place where the principal office of the
corporation is located; however, it shall be within the Philippine territory.

Rules on Conversion from Nonstock to Stock Corporation

The following are the rules to observed if a nonstock corporation desires to

make a conversion into becoming a stock corporation:
1) A nonstock corporation cannot be converted into a stock corporation through
mere amendment of its Articles of Incorporation. This would violate Section 87
which prohibits distribution of income as dividends to members. Giving the
members shares is tantamount to distribution of its assets or income.
 2) A non-stock corporation can b e converted into a stock corporation only if the
members dissolve it first and then organize a stock corporation. However,
there is a resulting new corporation (SEC Opinion, May 13, 1992)

3) A stock corporation may be converted into a nonstock corporation by

mere amendment provided all the requirements are complied with.
Its rights and liabilities will remain.

Distribution of Assets in Nonstock Corporation (Sec. 93 in relation to Sec 139 RCP)

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) In accordance with the rules laid down in Sec. 93 (Rules of Distribution)
2) In accordance with the plan of distribution adopted by a majority of the board
of trustees and approved by at least 2/3 of the voting members present or
represented by proxy in a meeting called for the purpose of adopting such plan
under Sec. 94 (Plan of Distribution of Assets)

Order of Distribution of Assets on Dissolution are:

a) all its creditors shall be paid;
b) assets held subject to return on dissolution shall be delivered back to their
givers;
c) assets held for charitable, religious purposes, etc. without a condition for
their return on dissolution, shall be conveyed to one or more organization
engaged in similar activities as dissolved corporation; and
d.) all other assets shall be distributed to members, as provided for in the
Articles or bylaws.

ONE PERSON CORPORATIONS

Basic Characteristics of a One Person Corporation. (Sec. 116)

1) It is a corporation with a single stockholder;
2) Only a natural person, trust, or an estate may form a One Person Corporation;
3) Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed
companies, and non-chartered government-owned and controlled corporations may not
incorporate as One Person Corporation;
4) That a natural person who is licensed to exercise a profession may not organize
as a One Person Corporation for the purpose of exercising such profession,
except as otherwise provided under special laws.
 Who are not allowed to form OPCs?
• Banks and quasi-banks,
• Preneed,
• Trust,
• Insurance,
• Public and publicly-listed companies, and
• Non-chartered government-owned and –controlled corporations

) Not required to have a minimum authorized capital stock except as otherwise
provided by law; (Sec 117)
It shall file articles of Incorporation in accordance with the requirements
under Section 14 of this Code. It shall likewise substantially contain the
following: (Sec.118)

(a.) 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 proof of such authority to act on behalf of the trust or
estate; and
(b.) Name, nationality, residence of the nominee and alternate nominee, and
the extent, coverage and limitation of the authority.

6.) The One Person Corporation is not required to submit and file
corporate bylaws. (Sec.119)

7) Display of Corporate Name which shall indicate the letters “OPC” either
below or at the end of its corporate name; (Sec. 120)

8) The single stockholder shall be the sole director and president of the OPC; (Sec.
121)
9) OPC shall appoint a treasurer, corporate secretary, and other officers as it may
deem necessary, within fifteen (15) days from the issuance of its certificate of
incorporation, and notify the Commission within five (5) days from
appointment; (Sec. 122x)

➢ Special Functions of the Corporate Secretary (Sec. 123)

1.) The corporate secretary shall be responsible for maintaining the minutes book and/or
records of the corporation;
2.) The corporate secretary shall notify the nominee or alternate nominee of the death or
incapacity of the single stockholder, which notice shall be given no later than five (5) days
from such occurrence;
 3.) The corporate secretary shall notify the Commission of the death of the single stockholder
within five (5) days from such occurrence and stating in such notice the names, residence,
addresses, and contact details of all known legal heirs; and
4.) The corporate secretary shall 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.

➢ Temporary Incapacity of the Single stockholder

The nominee shall sit as director and manage the affairs of the One Person
Corporation until the stockholder regains the capacity to assume such duties.

➢ Incapacity is permanent or in case of death of the Single stockholder

The nominee shall sit as director and manage the affairs of the One Person
Corporation 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 One Person Corporation.

➢ Nominee’s Inability, incapacity, death, or refusal to discharge the function’s

as director and manager of the One Person Corporation
The alternate nominee shall sit as director and manage the One Person
Corporation only for the same term and under the same conditions applicable to the
nominee. (Sec. 125)

➢ The single stockholder may at any time, change its nominee and alternate nominee
by submitting to the SEC the name of the new nominees and their corresponding
written consent. The articles of incorporation need not be amended. (Sec. 126)

➢ A One Person Corporation shall maintain a minutes book which shall contain all
actions, decisions, and resolutions taken by the OPC for purposes of record
keeping. (Sec.127)
➢ When action is needed on any matter, it shall be sufficient to prepare a written
resolution, signed and dated by the single stockholder, and recorded in the minutes
book of the One Person Corporation. Such date of recording shall be the date of the
meeting for all purposes under the Code. (Sec. 128)

Reportorial Requirements for a One Person Corporation (Sec. 129)

The SEC may place the corporation under delinquent status should the corporation
fail to submit the following reportorial documents 3 times, consecutively or intermittently,
within a period of 5 years:
1. Annual Financial Statements audited by an independent certified public
accountant.
 2. A report containing explanation or comments by the president on every
qualification, reservation, or adverse remark or disclaimer made by the
auditor in the latter’s report;
3. A disclosure of all self-dealings and related party transactions entered into
between the OPC and the single stockholder; and
4. Other reports as the SEC may require. (Sec. 129)

Liability of Single Shareholder (Sec. 130)

A sole shareholder claiming limited liability has the burden of affirmatively showing
that the corporation was adequately financed. But 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 principles of piercing the corporate veil applies with equal force to OPC same as
with other corporations.
Conversion from an Ordinary Corporation to a One Person Corporation (Sec. 131)
When a single stockholder acquires all the stocks of an ordinary stock corporation, the
latter may apply for conversion into a One Person Corporation. If the application for
conversion is approved, the SEC shall issue a certificate of filing of amended articles of
incorporation reflecting the conversion.
The OPC converted from an ordinary stock corporation shall succeed the latter and
be legally responsible for all the latter’s outstanding liabilities as of the date of conversion.

Conversion from a One Person Corporation to an Ordinary Corporation (Sec. 132)

A One Person Corporation may be converted into an ordinary stock
corporation after due notice to the SEC of such fact and of the circumstances leading to the
conversion. If all requirements have been complied with, the Commission shall issue a
certificate of filing of amended articles of incorporation reflecting the conversion. The
period of time within which notice to the SEC is made is sixty (60) days from the
occurrence of the circumstance leading to the conversion into an ordinary stock
corporation.
The ordinary stock corporation converted from a One Person Corporation
shall succeed the latter and be legally responsible for all the latter’s outstanding liabilities
as of the date of conversion.

DISSOLUTION

Concept of Corporate Dissolution

 Dissolution of a corporation means the extinguishment of the franchise of a
corporation and termination of its corporate existence as a body politic. (Black’s Law Dict.,
p.377)

Kinds of Dissolution:

De jure dissolution - dissolution in accordance with the statutory procedure provided for
the purpose.

De facto dissolution – dissolution takes place in substance and in fact, when the corporation
by reason of insolvency or other reason suspends all its operations and goes into
liquidation without availing itself of the statutory procedure provided for the purpose.

Modes of dissolution
➢ Voluntary dissolution
a. By the vote of the board of directors or trustees and the resolution adopted by the
stockholders or members where no creditors are affected; (Sec. 134)
b. By the judgement of the SEC after hearing the petition for voluntary dissolution
where creditors are affected; (Sec 135)
c. By amending the articles of incorporation to shorten the corporate term; (Sec. 136)
d. In case of a corporation sole, by submitting to the SEC a verified declaration of the
dissolution for approval; and
e. In case of merger or consolidation.

➢ Involuntary dissolution – A corporation may be dissolved by the Commission

motu propio or upon filing of a verified complaint by any interested party. The
following are the grounds: (Sec. 138)
a. By expiration of corporate term provided for in the articles of incorporation;
b. By legislative enactment;
c. Upon receipt of a lawful court order dissolving the corporation;
d. By failure to formally organize and commence its business within 5 years
from the date of incorporation;
e. If a corporation has commenced its business but subsequently becomes
inoperative for a period of at least five (5) consecutive years, the SEC may,
after due notice and hearing, place the corporation under delinquent status. A
delinquent corporation shall have a period of two (2) years to resume
operations and comply with all requirements that the SEC shall prescribe.
Failure to comply with the requirements and resume operations within the
period given by the SEC shall cause the revocation of the corporation’s
certificate of incorporation; and

f. By order of the SEC on grounds under existing laws

Effects of Dissolution, Insolvency, or Death of stockholders or members
Once a corporation is dissolved by whichever mode, the following will be the effects:
• Transfer of Legal Title to Corporate Property. – dissolution results in the transfer of
legal title to properties in the stockholders who become co-owners thereof;
• On Continuation of Corporate Business. - the corporation ceases as a body corporate
to continue the business for which it was established.
• Creation of a New Corporation. – The stockholders are not prevented from conveying
their respective shareholdings toward the creation of a new corporation to continue
the business of the old;
• Reincorporation of Dissolved Corporation. - Though a dissolved corporation cannot
be revived, those interested may reincorporate by refiling the new Articles of
Incorporation and by-laws;
• Continuation of a Body Corporation. – The corporation continues as a body
corporate for three (3) years for purposes of winding up or liquidation;
• Cessation of Corporate Existence for All Purposes. – Upon the expiration of the three
(3) year-winding up period, the corporation ceases to exist for all purposes.
• Corporation suffers from Insolvency. While the possession of assets is necessary to
the creation of a stock corporation, but the loss of all its property does not affect its
existence. But the inability to exercise its corporate rights by reason of insolvency
might constitute such non-user as to warrant a decree of dissolution.

• Death of stockholders or members. A corporation does not cease to exist on the death
of its principal stockholder and president nor is it dissolved by the death of all its
members, since the shares, being property, pass by assignment, bequest or descend,
and must ever remain the property of some persons who must of necessity be
members of the corporation as long as it may exist, and who can perpetuate, its legal
existence.

Concept of Corporate Liquidation (Sec. 139)

Liquidation is the process by which all the assets of the corporation are
converted into liquid assets (cash) in order to facilitate the payment of obligations to
creditors, and the remaining balance if any is to be distributed to the stockholders.
➢ General Rule:
Every corporation whose charter expires pursuant to its articles of
incorporation, is annulled by forfeiture, or whose corporate existence is terminated in
any other manner, shall nevertheless remain as a body corporate for three (3) years
after the effective date of dissolution, for the purpose of prosecuting and defending suits
by or against it and enabling it to settle and close its affairs, dispose of and convey its
property, and distribute its assets, but not for the purpose of continuing the business for
which it was established.
 ➢ Exception:
Except for banks, which shall be covered by the applicable provisions of Republic Act No.
7653, otherwise known as the “New Central Bank Act”, as amended, and Republic Act No.
3591, otherwise known as the “Philippine Deposit Insurance Corporation Charter”, as
amended.

Modes of Liquidation
The process of liquidation in a corporation can be done in any of the
following modes depending on the ground for dissolution, thus:
➢ By the Board of Directors;
➢ Through the trustee to whom the properties are conveyed by the corporation
(Trusteeship); and
By management committee or rehabilitation receiver – one appointed by the court
(Receivership).