The Professional CPA Review School

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INTEGRATED REVIEW ATTY. MARY ANN R. SAGANA

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

STUDY AID
REVISED CORPORATION CODE OF THE PHILIPPINES
(Republic Act No. 11232)

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

CONSEQUENCES OF A CORPORATION AS AN ARTIFICIAL BEING:

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

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

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

b. NON-STOCK CORPORATION – does not issue stocks and no part of its income is
distributable as dividends to its members, trustees and officers
PURPOSES:
1. Charitable 2.Religious 3.Professional 4.Cultural
5. Fraternal 6. Literary 7. Scientific 8. Social
9. Civic service 10. Similar purposes e.g. chambers for trade or industry
11. EDUCATIONAL:
• Board of Trustee (BOT) - not less than 5 but not more than 15
• number of trustees shall be in multiples of 5
• 1/5 of the number of trustees upon organization will have a term of 1 year
• BOT elected thereafter to fill vacancy due to expiration of term shall hold office
for 5 years

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

ELECTION AND TERM OF OFFICE:

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

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

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

OTHER CLASSES OF CORPORATION:

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

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

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

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

REQUISITES OF DE FACTO CORPORATION:

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

c. CORPORATION BY ESTOPPEL - groups of persons which holds itself out as a

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

d. CORPORATION BY PRESCRIPTION - body that though not lawfully organized as

a corporation, has been duly recognized by immemorial usage as a corporation, with
rights and duties maintainable at law.

5. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL

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

b. Investment Company - It is one which holds stocks in other companies for purposes of
investment rather than control. It has an active investment policy which has an active
portfolio buying and selling securities.

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

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

and operated as part of the system.

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6. CORPORATIONS VESTED WITH PUBLIC INTEREST
a. Corporations whose securities are registered with the SEC, with an exchange or with
assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200)
or more holders of shares, each holding at least one hundred (100) shares of a class of
its equity shares;
b. Banks and quasi-banks, non-stock saving and loan associations (NSSLAs), pawnshops,
corporations engaged in money service business, pre-need, trust and insurance
companies, and other financial intermediaries; and
c. Other corporations engaged in business vested with public interest similar to the above,
as may be determined by the SEC

7. RELIGIOUS CORPORATIONS (ECCLESIASTICAL CORPORATIONS)

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

8. LAY CORPORATION – Opposite of Ecclesiastical corporation.

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

9. QUASI - PUBLIC CORPORATION – private corporations which have accepted from the
State the grant of a franchise or contract involving the performance of public duties
(public service corporations)

10. QUASI – CORPORATION - though not vested with the general powers of corporations,
are organized by statutes or immemorial usage, as persons or aggregate corporations
with precise duties which may be enforced, and privileges which may be maintained,
by suits of law.

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

12. CLOSE CORPORATION

• number of stockholders not to exceed 20
• restriction on the transfer; preemption in favor of the stockholder or the
corporation;
• the stocks cannot be listed in the stock exchange nor should they be publicly
offered.

NOTE: A corporation is not a close corporation if 2/3 of the voting stocks or voting rights is
owned or controlled by another corporation which is not a close corporation.

CHARACTERISTICS OF A CLOSE CORPORATION:

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

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

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

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RESTRICTIONS ON TRANSFERS:
• The restrictions in the transfer of the stocks must appear in the AOI, in the Bylaws;
and on the stock certificates.
• Restriction on the transfer must not be onerous than granting the existing
shareholders or corporation the option to purchase the shares.

PRE-EMPTIVE RIGHT IN CLOSE CORPORATIONS:

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

13. DOMESTIC CORPORATION - corporation formed, organized or existing under

Philippine laws

14. FOREIGN CORPORATION - a corporation formed, organized or existing under any

laws other than those of the Philippines and whose laws allow Filipino citizens and
corporation to do business in its own country or state.

General rule: A corporation can have no legal existence outside the boundaries of the
sovereign by which it is created.
Exception: By virtue of state comity, a corporation created by laws of one state is
usually allowed to transact business in other states and to sue in the courts
of the forum, subject to restrictions and certain requirements imposed
therein.

Requisites for a foreign corporation to transact business in the Philippines:

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

DOING BUSINESS - implies a community of commercial dealings and arrangements, and

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

“Doing Business in the Philippines”:

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

“Not Doing Business in the Philippines”:

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

SUABILITY OF FOREIGN CORPORATIONS:

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

DOCTRINE OF ISOLATED TRANSACTION - Foreign corporation can sue or be

sued on a transaction or series of transaction set apart from the common business of
a foreign enterprise in the sense that there is no intention to engage in a progressive
pursuit of the purpose and object of business transaction.

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

GROUNDS FOR REVOCATION OF LICENSE OF A FOREIGN CORPORATION:

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

TESTS TO DETERMINE NATIONALITY OF A CORPORATION:

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

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

utilities

15. ONE PERSON CORPORATION

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

• A foreign natural person can set up an OPC subject to applicable capital requirements and
constitutional and statutory restrictions in certain investment areas.
• In case of trust or estate as incorporator, proof of authority to act on behalf of the trust or
estate must be submitted at the time of incorporation.

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

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

TERM OF EXISTENCE OF OPC: PERPETUAL.

In case of the trust or estate, its term of existence shall be co-terminous with the existence
of the trust or estate.

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

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

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

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

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

ADDITIONAL FUNCTIONS of the CORPORATE SECRETARY:

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

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

LIABILITY OF SINGLE SHAREHOLDER:

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

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

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 Commission of their decision to either wind up and dissolve the One Person
Corporation or convert it into an ordinary stock corporation.

DOCTRINE OF SEPARATE PERSONALITY - A corporation has a personality separate

and distinct from that of its stockholders or members

PIERCING DOCTRINE OF THE VEIL OF CORPORATE FICTION-

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

THREE CLASSES OF PIERCING:

1. Fraud Cases -when a corporation is used as a cloak to cover fraud, or to do wrong

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

Chapter II. INCORPORATION and ORGANIZATION OF PRIVATE CORPORATIONS

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

Number and qualifications of incorporators:

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

SUBSCRIBER - a person who has agreed to take stock from the corporation on the original
issue of such stock

UNDERWRITER - a person who promises, (with an underwriter agreement entered into

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

STEPS IN THE REGISTRATION OF A CORPORATION:

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

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

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EFFECTS OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS
INOPERATION OF CORPORATION:

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

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

CONTENTS OF ARTICLES OF INCORPORATION:

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

GROUNDS WHEN AOI or AMENDMENTS MAY BE DISAPPROVED:

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

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

insurance and trust companies, NSSLAS, pawnshops, and other financial intermediaries
shall be approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or
amendment is in accordance with law.

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 • The AOI and applications for amendments thereto may be filed with the in the form of an
electronic document, in accordance with the SEC’s rules and regulations on
ELECTRONIC FILING.

WHAT CANNOT BE AMENDED IN THE ARTICLES OF INCORPORATION

Those matters referring to facts existing as of the date of incorporation such as:
1. names of incorporators
2. names of original subscribers to the capital stock of the corporation and their subscribed
and paid up capital
3. treasurer elected by the original subscribers
4. members who contributed to the initial capital of a non-stock corporation
5. date and place of execution of the articles of incorporation
6. witnesses, to and acknowledgment of the articles.

CHAPTER III. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

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

CUMULATIVE VOTING - Shareholders, being entitled to that number of votes that

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

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

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

THREE-FOLD DUTY OF A DIRECTOR:

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

DOCTRINE OF CORPORATE OPPORTUNITY - if there is presented to a corporate

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

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

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QUALIFICATIONS OF A DIRECTOR:
1. Every director must own at least one (1) share of the capital stock and must continuously
own at least a share of stock during his term, otherwise, he shall automatically cease to
be a director
2. The share of stock held by the director must be registered in the books of the corporation;

DISQUALIFICATIONS: as BOD, BOT or officer

1. CONVICTION by final judgment within 5 YEARS PRIOR to the election or appointment:
a. an offense punishable by imprisonment for a period exceeding six (6) years
b. violation of the Corporation Code (RA 11232)
c. violation of The Securities Regulation Code (RA 8799)
2. Found administratively liable for any offense involving fraudulent acts
3. Found guilty of any acts under numbers (1) and (2) above by a foreign court or equivalent
foreign regulatory authority

COMPENSATION OF DIRECTORS:
GENERAL RULE: Board members shall not receive any compensation in their capacity as such,
except for reasonable per diems.
EXCEPTION : IF otherwise provided in the by-laws upon approval of a majority vote of the
OCS. Board members cannot vote.
LIMITATION: In no case shall the total yearly compensation of directors exceed ten (10%)
percent of the net income before income tax of the corporation during the preceding year

REMOVAL OF DIRECTOR . – REQUISITES

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

VACANCIES IN THE OFFICE OF DIRECTOR:

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

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

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

DEALINGS OF DOT WITH THE CORPORATION.

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

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

11
 RULES in case of CORPORATIONS with INTERLOCKING DIRECTORS:
1. The Contract between the corporations is valid except if there was fraud
2. If the interest of the interlocking director is SUBSTANTIAL (exceeding twenty
percent (20%) of the OCS) in one corporation and only NOMINAL in the other
corporation, the provisions of the law on dealings of DOT shall also be observed.

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

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

EXECUTIVE COMMITTEE: the BOD, if the BL so provides may create an EXECOM

composed of at least 3 BOD

Acts that CANNOT be delegated to the Executive Committee:

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

CHAPTER IV. BYLAWS and MEETINGS

ELEMENTS OF A VALID BY-LAWS:

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

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

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 NOTE:
1. The BL should filed with the AOI.
2. The BL may be adopted by the incorporators or majority of the OCS or members
3. Amendment of the BL should be by vote of – majority of OCS/M and majority of
BOD/BOT
4. Delegation of power to the BOD/BOT to amend or repeal the BL or adopt a new
BL - 2/3 votes of OCS/M
5. Revocation of the power – majority votes of the OCS/M

MEETINGS:
REQUISITES:
1. It must be held at the proper place
2. It must be held at the stated date and at the appointed time or at a reasonable time
thereafter
3. It must be called by the proper person
4. There must be a previous notice
5. There must be a quorum.

PERSON WHO CAN CALL A MEETING:

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

PERSON WHO WILL PRESIDE THE MEETING:

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

MEETINGS OF STOCKHOLDERS OR MEMBERS:

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

b. SPECIAL or those held at any time deemed necessary or as provided in the by-laws.
NOTICE OF MEETING shall be sent at least one (1) week prior to the meeting unless the
by-laws will require a different period

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

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

MEETINGS OF DIRECTORS OR TRUSTEES:

a. REGULAR or those held by the board monthly, unless the by-laws provide otherwise
b. SPECIAL or those held by the board at any time upon the call of the president or as
provided in the by-laws.

VENUE - anywhere in or outside the Philippines, unless the by-laws provide otherwise

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 NOTICE – notice of meetings stating the date, time and place of the meeting must be sent
to every director or trustee at least two (2) days prior to the meeting unless the
BL provides for a longer period

NOTE: Participation in meetings may be through remote communication. DOT CANNOT

attend or vote by proxy.

CHAPTER V. POWERS OF CORPORATIONS

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

CORPORATE POWERS AND CAPACITY:

a. To sue and be sued in its corporate name
b. To have perpetual existence unless the certificate of incorporation provides otherwise
c. To adopt and use a corporate seal
d. To amend its articles of incorporation
e. To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the
same
f. In case of stock corporations -- to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a nonstock corporation
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution
h. To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons
i. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes:
NOTE: No foreign corporation shall give donations in aid of any political party or
candidate or for purposes of partisan political activity
j. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers, and employees

OTHER CORPORATE POWERS:

1. Power to extend or shorten corporate term
• In case of extension of corporate term, a dissenting stockholder may exercise the
right of appraisal
2. Power to increase or decrease capital stock
• Twenty-five percent (25%) of the increase in capital stock must be subscribed and
that at least twenty-five percent (25%) of the amount subscribed must be paid
• No decrease in capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
3. Power to incur, create or increase bonded indebtedness
4. Power to deny pre-emptive rights
• All stockholders of a stock corporation shall enjoy preemptive right to subscribe to
all issues or disposition of shares of any class, in proportion to their respective
shareholdings
• Pre-emptive right may be denied if provided for under the AOI
• NO pre-emptive right on shares:
a. issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public

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 b. issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property needed
for corporate purposes or in payment of a previously contracted debt.

5. Power to sell or dispose assets

• Must not be violative of the Philippine Competition Act (R.A. 10667)
• A sale or other disposition shall be deemed to cover SUBSTANTIALLY all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it was
incorporated.
6. Purchase or acquire own shares provided:
a. There is an unrestricted retained earnings
b. Without prejudice to creditors and SH
c. Done in good faith
d. For legitimate purpose:
i. To eliminate fractional shares arising out of stock dividends
ii. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
iii. To pay dissenting or withdrawing stockholders entitled to payment for their
shares

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

9. Enter into management contract --

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

VOTES REQUIRED FOR THE APPROVAL OF CERTAIN CORPORATE ACTS:

1. To amend the articles of incorporation
— a majority of the board of directors or trustees and vote or written assent of 2/3 of the
outstanding capital stock or of the members.
2. To elect directors or trustees
— a majority of the outstanding capital stock or of the members must be present,
represented by proxy or will vote through remote communication/in absentia if
provided for by the BL
3. To call a special meeting to remove directors or trustees
— a majority of the outstanding capital stock or of the members
4. To remove directors or trustees
— 2/3 of the outstanding capital stock or of the members
5. To ratify a contract of a director/trustee or officer with the corporation
— 2/3 of the outstanding capital stock or of the members

15
6. To extend or shorten corporate term
— a majority of the board of directors or trustees and ratified by 2/3 votes of the
outstanding capital stock or of the members.
7. To increase or decrease the capital stock
— a majority of the board of directors and approved by 2/3 of the outstanding capital
stock
8. To incur, create or increase bonded indebtedness
— a majority of the board of directors or trustees and approved by 2/3 of the outstanding
capital stock or of the members.
9. To sell, lease, exchange, mortgage, pledge or other- wise dispose of all or substantially all
of the corporate assets
— a majority vote of the board of directors or trustees and authorized By 2/3 of the
outstanding capital stock or of the voting members
10. To invest corporate funds in another corporation or business or for any purpose other than
the primary purpose
— a majority of the board of directors or trustees and ratified By 2/3 of the outstanding
capital stock or of the members
11. To issue stock dividends
— a majority of the quorum of the board of directors and approved by 2/3 of the
outstanding capital stock. The approval of the stockholders is not required with respect
to other dividends such as cash and bond dividends.
12. To enter into a management contract
— a majority of the quorum of the boards of directors or trustees and a majority of
outstanding capital stock or of the members of both the managing and the managed
corporations and, in some cases, 2/3 of the total outstanding capital stock entitled to
vote or of the members, with respect to the managed corporation
13. To adopt by-laws
— a majority of the outstanding capital stock or of the members.
14. To amend or repeal the by-laws or adopt new by-laws
— a majority of the board of directors or trustees and majority of the outstanding capital
stock or of the members
15. To delegate to the board of directors or trustee the power to amend or repeal the by-laws or
adopt new by- laws
— 2/3 of the outstanding capital stock or of the members.
16. To revoke the preceding power delegated to the board of directors or trustees
— a majority of the outstanding capital stock or of the members
17. To fix the issued price of no par value shares
— a majority of the quorum of the board of directors if authorized by the articles of
incorporation or in the absence of such authority, by a majority of the outstanding
capital stock
18. To effect or amend a plan of merger or consolidation
— a majority of the board of directors or trustees and 2/3 of the outstanding capital stock
or of the members of the constituent corporations.
19. To dissolve the corporation
— a majority of the board of directors or trustees and 2/3 of the outstanding capital stock
or of the members.
20. To adopt a plan of distribution of assets of a non-stock corporation
— a majority vote of the board of trustees and 2/3 of the members having voting rights.

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

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 CHAPTER VI. STOCKS AND STOCKHOLDERS

SUBSCRIPTION CONTRACT. – Any contract for the acquisition of unissued stock in an

existing corporation or a corporation still to be formed

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

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

VALID CONSIDERATIONS IN SUBSCRIPTION AGREEMENT:

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

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

AUTHORIZED CAPITAL STOCK OR CAPITAL STOCK OR LEGAL STOCK OR

STATED CAPITAL – the amount fixed in the Articles of Incorporation to be subscribed and
paid by the stockholders of the corporation

SHARES OF STOCK - interest or right which owner has in the management of the
corporation, and its surplus profits, and, on dissolution, in all
of its assets remaining after the payment of its debt.

CERTIFICATE OF STOCK - written acknowledgement by the corporation of the

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

PAID-UP CAPITAL – the portion of the authorized capital stock which has been subscribed
and actually paid

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 SUBSCRIBED CAPITAL – the portion of the authorized capital stock that is covered by
subscription agreements whether fully paid or not

OUTSTANDING CAPITAL STOCK – the total shares of stock issued to subscribers or

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

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

WORKING CAPITAL - excess of current assets over current liabilities.

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

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

CLASSIFICATION OF SHARES:
1. PREFERRED SHARES - issued with par value and preference may be to
a. assets after dissolution
b. distribution of dividends and other preferences;

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

3. TREASURY SHARES - shares which have been earlier issued as fully paid and have
thereafter been acquired by the corporation by purchase, donation, redemption or
through some lawful means.

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

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

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

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

corporation who helped in the formal organization of the corporation

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 7. ESCROW STOCK - deposited with 3rd person to be delivered to stockholder or his assign
after complying with certain conditions, usually payment of full subscription price;

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

9. WATERED STOCK - issued as fully paid when in fact it is not “water” in the stock-
represents the difference between the fair market value at the time of the issuance of the
stock and the par or issued value of said stock. Both par and no-par stocks can thus be
watered stocks.

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

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

12. STOCK WARRANT - security which entitle holder the right to subscribe to, or purchase
from, the unissued capital stock of a corporation in the future.

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

b. RIGHT TO REMOVE DIRECTORS

PROXIES - Shareholders and members may vote in person of by proxy in all meetings of
shareholders or members.
FORM - in writing, signed by the shareholder or member and filed before the scheduled
meeting with the corporate secretary.
PERIOD OF VALIDITY – unless otherwise provided in the proxy, it should be valid only for
the meeting for which it is intended. No proxy shall be valid and effective for a longer
period than five years at any one time

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 • Proxies are also considered as corporate devise for securing voting control of the
corporation

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

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

II. PROPRIETARY RIGHTS

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

APPRAISAL RIGHT – right to withdraw from the corporation and demand payment of
the fair market value of his shares after dissenting from certain corporate acts involving
fundamental changes in corporate structure

INSTANCES WHEN THE RIGHT MAY BE EXERCISED:

a. In case an amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any class
b. In case of extending or shortening the term of corporate existence
c. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets
d. In case of merger or consolidation
e. In case of investment of corporate funds for any purpose other than the primary purpose
of the corporation.

III. REMEDIAL RIGHTS

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

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

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 CHAPTER VII. CORPORATE BOOKS AND RECORDS
MERGER AND CONSOLIDATION DISSOLUTION and LIQUIDATION

BOOKS and RECORDS REQUIRED TO BE KEPT:

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

REPORTORIAL REQUIREMENTS OF CORPORATIONS.

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

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

• The SEC may place the corporation under delinquent status in case of failure to
submit the reportorial requirements three (3) times, consecutively or intermittently,
within a period of five (5) years.

AMALGAMATION – corporate combinations

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

MERGER - one corporation absorbs the other and remains in existence while the other is
dissolved.

CONSOLIDATION - a new corporation is created, and consolidating corporations are

extinguished.

PROCEDURE FOR MERGER OR CONSOLIDATION:

1. The Board of each corporation shall draw up a plan of merger or consolidation setting forth:
a. Names of the corporation involved
b. Terms and mode of carrying it
c. Statement of changes, if any, in the present articles of the surviving corporation or the
articles of the new corporation to be formed in the case of consolidation.
2. Plan for merger or consolidation shall be approved by majority vote of each of the board of
the concerned corporations at separate meetings and approved by the majority vote of the
2/3 of the Outstanding Capital Stock or members for non-stock corporations.
3. Any amendment to the plan must be approved by the majority vote of the board members or
trustees of the constituent corporations and affirmative vote of 2/3 of OCS or members

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 4. Articles of Merger or Articles of Consolidation shall be executed by each of the constituent
corporations, signed by the President or Vice-President and certified by the Secretary or
Assistant Secretary setting fort:
a. plan of merger or consolidation
b. for stock corporation, the number of shares outstanding; for non-stock, the number of
members
c. as to each corporation, number of shares or members voting for and against such plan
respectively
5. Four (4) copies of the Articles of Merger or Consolidation shall be submitted in to the SEC
for approval.

EFFECTS OF MERGER OR CONSOLIDATION.

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

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

MODES OF DISSOLUTION
i. VOLUNTARY
a. Where no creditors are affected
1. Notice of the meeting should be given to the stockholders or members by personal
delivery or registered mail at least 20 days prior to the meeting.
2. The notice of meeting should also be published at least once in a newspaper
published in the place where the principal office of said corporation is located. If no
newspaper is published in such place, then in a newspaper of general circulation in
the Philippines.
3. The resolution to dissolve must be approved by the majority of the
directors/trustees and approved by the stockholders representing at least majority
of the OCS or majority of members.
4. A copy of the resolution shall be certified by the majority of the directors or trustees
and countersigned by the secretary.
5. The signed and countersigned copy will be filed with the SEC and the latter will issue
the certificate of dissolution within 15 days
6. SEC will issue a Certificate of Dissolution

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

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

b. Where creditors are affected

1. A PETITION shall be signed by a majority of its board of directors or trustees or
other officers having management of its affairs.
2. The petition must be verified by its president, or secretary or one of its director or
trustees.
3. Approval of the stockholders representing at least 2/3 of the OCS or 2/3 of members
in a meeting called for that purpose.

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 4. The Order for filing of objections should also be published for 3 consecutive weeks
in a newspaper published in the place where the principal office of said corporation
is located. If no newspaper is published in such place, then in a newspaper of
general circulation in the Philippines.
5. Filing of a petition with the SEC signed by majority of directors or trustees or other
officers having the management of its affairs verified by the President or Secretary
or Director. Claims and demands must be stated in the petition.
6. SEC will issue a Certificate of Dissolution

c. Dissolution by Shortening Corporate Term. – A voluntary dissolution may be

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

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

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

• Liquidation of BANKS is governed by the New Central Bank Act and the PDIC

CHAPTER VIII. INVESTIGATIONS, OFFENSES, AND PENALTIES

OFFENSES AND PENALTIES

1. Unauthorized use of corporate name – FINE of Php 1ok to Php 200k
2. Violation of disqualification provision -
FINE of Php 1ok to Php 200k and/or permanent disqualification to be elected DOT
If violation is injurious to the public - FINE of Php 2ok to Php 400k and/or permanent
disqualification to be elected DOT
3. Violation of duty to maintain records, to allow their inspection or reproduction -
FINE of Php 1ok to Php 200k
If violation is injurious to the public - FINE of Php 2ok to Php 400k

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

FINE of Php 2ok to Php 200k
If violation is injurious to the public - FINE of Php 4ok to Php 400k

5. Independent Auditor Collusion

FINE of Php 8ok to Php 500k
If violation is injurious to the public - FINE of Php 10ok to Php 600k

6. Obtaining Corporate Registration Through Fraud

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 FINE of Php 200k to Php 2m
If violation is injurious to the public - FINE of Php 40ok to Php 5m
7. Fraudulent Conduct of Business
FINE of Php 200k to Php 2m
If violation is injurious to the public - FINE of Php 40ok to Php 5m

8. Acting as Intermediaries for Graft and Corrupt Practices

FINE of Php 100k to Php 5m
• Failure to install safeguards for the transparent and lawful delivery of services and
policies, code of ethics, and procedures against graft and corruption shall be prima
facie evidence of corporate liability

9. Tolerating Graft and Corrupt Practices

FINE of Php 500k to Php 1m

10. Retaliation Against Whistleblowers.

FINE of Php 100k to Php 1m

• A WHISTLEBLOWER refers to any person who provides truthful information

relating to the commission or possible commission of any offense or violation under
the RCC.
NOTE: If the offender is a corporation, the penalty may, at the discretion of the court, be
imposed upon such corporation and/or upon its directors, trustees, stockholders. members,
officers, or employees responsible for the violation or indispensable to its commission.

POWERS, FUNCTIONS, AND JURISDICTION OF THE SEC:

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

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