Commercial Law Review

Corporation Code
Maria Zarah Villanueva - Castro

CORPORATION CODE (BP BLG 68)  Artificial Being

- It exist by fiction of law only, hence it is
*Corporation Code is the general law on Private
subject to limitations that are inherent
Corporation regarding to its creation, formation and
because of its nature
powers.
- A corporation is a juridical person which
INTRODUCTION: exists by process of legal fiction
Doctrine of Corporate Entity/Doctrine
A. Historical Background of Separate Personality - A corporation
Effectivity: May 1, 1980 is a legal or juridical person with a
Article XII Section 16 of the 1987 Constitution: personality separate and apart from its
“The Congress shall not, except by general law, individual stockholders or members and
provide for the formation, organization, or from any other legal entities to which it
regulation of private corporations. may be connected
Government-owned or controlled corporations Consequences/Implications of
may be created or established by special Separate Personality:
charters in the interest of the common good 1. It is entitled to own properties in its
and subject to the test of economic viability.” own name and its properties are
*Congress has limited powers in the formation, not the properties of its
creation and regulation of a private corporation. stockholders, directors and officers.
Purposes: Cases: Magsaysay-Labrador v CA;
1. Uniformity Sulo ng Bayan v Araneta
2. To avoid corruption *The interest of the stockholders
over the properties of the
General Rule: Congress is prohibited to enact a
corporation is merely inchoate.
law directly forming a private corporation.
*Merely inchoate because there are
Exception: GOCC may be created by special
still condition precedents before
charter.
the shareholders get their share,
*GOCC is a private corporation with regard to viz, in Asset, there are dissolution
function and in the meantime a public and satisfaction of claims; in profit-
corporation with regard to ownership. sharing, there are unrestricted
retained earnings and declaration
Twin Conditions must be present in forming a by the Board of Directors.
GOCC: 2. It can incur obligations and its
1. Interest in the common good obligations are not the obligations
2. Subject to the test of economic viability of its stockholders, directors and
- Means can survive alone in the market; officers.
can generate income which they can Case: Francisco v CA
use for their operating expenses 3. The rights belonging to the
corporation cannot be invoked by
CONCEPT AND ATTRIBUTES OF A CORPORATION:
the stockholders, directors and
A. Statutory definition of a Corporation officers and vice versa.
Section 2 of the Corporation Code: “A 4. Corporations are entitled to certain
corporation is an artificial being created by constitutional rights, i.e., right
operation of law, having the right of succession against unreasonable searches and
and the powers, attributes and properties seizure, due process clause.
expressly authorized by law or incident to its *It is not entitled to certain
existence.” constitutional right, i.e., right
B. Attributes of a Corporation against self-incrimination

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particularly production of corporate they do not have feelings and

documents. mental state.
*Right against self-incrimination is *Corporations can claim damages
applicable only to natural persons. such as actual, compensatory,
General Rule: Constitutional exemplary, loss of earning capacity.
guarantees are applicable to General Rule: Corporation cannot
corporations. claim moral damages.
Exceptions: Exception: If the corporation has a
1. Right against self-incrimination good reputation and such
2. Freedom to travel reputation was destroyed.
Case: Bataan Shipyard v PCGG Case: Coastal Pacific Trading v
5. It is liable for tort. It is liable when Southern Rolling Mills, Co.
the act was committed by the *In Filipinas Broadcasting Network
officer or agent under express Inc. v. Ago Medical and Educational
direction or authority from the Center, the SC ruled that a
stockholders or members acting as corporation can recover moral
a body or generally from the damages under Article 2219(7) if it
directors as the governing body. was the victim of defamation.
6. Generally, the corporation is
Doctrine of Piercing the Veil of Corporate Entity – The
considered a national of the
country where it was incorporated doctrine that a corporation is a legal entity distinct from
the persons composing it. It is a theory introduced for
(Place of incorporation test)
*Exceptions: 1. In times of war, the the purposes of convenience and to serve the ends of
justice. But when the veil of corporate fiction is used as
nationality of a corporation is
determined by the nationality of a shield to perpetuate fraud, to defeat public
convenience, justify wrong, or defend crime, this fiction
the controlling stockholders; 2.
Under the Foreign Investment Act shall be disregarded and the individuals composing it
will be treated identically.
of 1991
7. Corporations are incapable of Cases: Times Transportation Co. v Santos Sotelo;
Concept Builders v NLRC
intent, hence, they cannot commit
felonies that are punishable under *The doctrine of piercing the veil of corporate entity is
the exception to the doctrine of corporate entity.
the RPC. They cannot commit
crimes that are punishable under *The users of this doctrine are: 1. Stockholder; 2. Group
of stockholders; 3. Another corporation.
special laws because crimes are
personal in nature requiring Effects: 1. Stockholders, officers and corporation are in
effect jointly liable; 2. In case of two corporations, they
personal performance of overt acts.
In addition, the penalty of will be treated as one wherein they will be both
solidarily liable. (Instrumentality rule)
imprisonment cannot be imposed.
*Criminal liability falls upon to *There is no effect on the existence of each corporation
as long as their separate entity is used for legitimate
responsible officers.
*Responsible officers cannot invoke purposes.
the doctrine of separate Instrumentality Rule – When one corporation is so
personality. organized and controlled and its affairs are conducted
*Corporations cannot be so that it is in fact a mere instrumentality or adjunct of
incarcerated. the other, the fiction of the corporate entity to the
8. Moral damages cannot be awarded instrumentality may be disregarded.
in favor of corporations because *The user is another corporation.
Keyword: CONTROL

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Requisites: 1. Control, not mere majority or  Right of Succession

complete stock control, but complete dominion, not - Capacity to have continuity of existence
only of finances but of policy and business in despite the changes on the persons
respect to the transaction attacked so that the who compose it. Thus, the personality
corporate entity as to this transaction had at the continues despite the change of
time no separate mind, will or existence of its own; stockholders, members, board
2. Such control must have been used by the members or officers; death or disability.
defendant to commit fraud or wrong in - Also known as Principle of Perpetual
contravention of plaintiff’s legal rights; 3. The Succession
aforesaid control and breach of duty must
proximately cause the injury or unjust loss Reason: To make the corporation more
complained of. stable
Three cases of piercing the veil:  Creature of enumerated powers, attributes
1. Fraud Cases – when a corporation is used as a and properties
cloak to cover fraud, or to do wrong; Doctrine of Limited Capacity – No
2. Alter Ego Cases – when the corporate entity is corporation under the Corporation Code,
merely a farce since the corporation is an alter ego, shall possess or exercise any corporate
business conduit or instrumentality of a person or powers, except those conferred by law, its
another corporation; Articles of Incorporation, those implied
3. Equity cases – when piercing the corporate from express powers and those as are
fiction is necessary to achieve justice or equity. necessary or incidental to the exercise of
Probative Factors of Identity: the powers so conferred. The corporation’s
1. Identical shareholders; capacity is limited to such express, implied
2. Same set of officers, directors, or trustees; and incidental powers.
3. Use of same premises, properties, tools and *Corporation may be restrained from
equipments; engaging a particular transaction because it
4. Engage practically in the same business; 5. The is beyond their powers.
same manner of keeping books and records. *General Capacity – a corporation can
*The probative factors of identity are not conclusive perform any act for as long as it is lawful,
but may be considered as strong evidence. moral and not contrary to public policy or
 Creature of Law order.
Article XII Section 16 of the 1987 Ultra Vires Doctrine – Even if the act is
Constitution: “The Congress shall not, lawful, moral and not contrary to public
except by general law, provide for the order or policy but such act is not within the
formation, organization, or regulation of express, implied and incidental powers of
private corporations. Government-owned the corporation such act shall be void for
or controlled corporations may be created being ultra vires.
or established by special charters in the *These doctrines are based on Section 2
interest of the common good and subject to and Section 45 of the Corporation Code.
the test of economic viability.”
Concession Theory – It is a principle in the C. Classification of Private Corporations:
creation of corporations, under which a 1. As to existence of Stocks:
corporation is an artificial creature without Stock Corporation – Corporations which have
any existence until it has received the capital stock divided into shares and are
imprimatur of the State acting according to authorized to distribute to the holders of such
law, through the SEC. The life of the shares dividends or allotments of the surplus
corporation is a concession made by the profits on the basis of the shares held. (Sec. 3)
State.

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Non-stock Corporation – A corporation where Can be compared to a voidable contract,

no part of its income is distributable as i.e., valid until annulled.
dividends to its members, trustees, or officers, *Can be challenged by the State later on.
subject to the provisions of this Code on Cases: Hall v Piccio; Seventh Adventist v
dissolution. (Sec. 87) Northeastern Mindanao Mission
Q: Is it correct to say that a Non-stock *The filing of the Articles of Incorporation
corporation cannot generate income on their and the issuance of the certificate of
own? registration are the essential requisites for
A: NO the existence of a de facto corporation.
2. As to function/organizers: Requisites:
Public Corporation – for public purpose and 1. The existence of a valid law under which
organized by the State. it may be incorporated;
Private Corporation – for profit making 2. An attempt in good faith to incorporate;
functions and organized by private persons 3. Use of corporate powers;
alone or with the State 4. Filing of the Articles of Incorporation;
3. As to laws of Incorporation (Place of 5. Subsequent compliance with the
Incorporation) : requirement of law.
Domestic Corporation – corporation formed, *In both corporations, there must be a
organized or existing under the Philippine Laws. certificate of registration issued.
Foreign Corporation – corporation formed,
organized or existing under any laws other than Doctrine of Corporation by Estoppel – All persons
who assume to act as a corporation knowing it to be
those of the Philippines and whose laws allow
Filipino citizens and corporations to do business without authority to do so shall be liable as general
partners for all debts, liabilities and damages
in its own country or state. (Sec. 123)
*License is necessary for; 1. Regulation incurred or arising as an result thereof: Provided,
however, that when any such ostensible
purposes and 2. Access to local courts.
4. As to legal status: corporation is sued on any transaction entered into
by it as a corporation or on any tort committed by it
De Jure Corporation – corporation created in
strict or substantial compliance with the as such, it shall not be allowed to use as a defense
its lack or corporate personality. (Sec. 21)
mandatory requirements for incorporation and
the right of which to exist as a corporation - Group of persons which holds itself out
as a corporation and enters into a
cannot be successfully attacked or questioned
by any party even in a direct proceeding for that contract with a third person on the
strength of such appearance cannot be
purpose by the state.
De Facto Corporation – the due incorporation permitted to deny its existence in an
action under said contract.
of any corporation claiming in good faith to be a
corporation under the Corporation Code, and Case: Lim Tong Lim v CA
*Lim is stopped because he benefited from
its right to exercise corporate powers, shall not
be inquired into collaterally in any private suit the transaction.
Remedy: To ran after those persons
to which such corporation may be a party. Such
inquiry may be made by Solicitor General in a responsible for the representations
Essence: They are precluded from denying
quo warranto proceeding. (Sec. 20)
- organized with a colourable compliance their existence by their previous act or
conduct
with the requirements of a valid law
and its existence cannot be inquired Holding Corporation – it is one which controls another
as a subsidiary by the power to elect management. It is
collaterally.
- There is an irregularity or defect in the one that holds stocks in other companies for purposes
of control rather than for mere investment.
constitution or organization.

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Affiliate – one related to another by owning or being 8. Shares of stock;

owned by common management or by a long-term 9. Treasurer’s Affidavit.
lease of its properties or other control device. It may be
the controlled or controlling corporation, or under  Corporate Name
common control. Purpose: Identification
*Corporation can not adopt any name or
Subsidiary Corporation – one which is so related to
group of words at its pleasure because of
another corporation that the majority of its directors
statutory limitation, viz., Sec. 18 of the
can be elected either directly or indirectly by such other
Corporation Code which provides that: “No
corporation. It is always controlled.
corporate name may be allowed by the SEC
Open Corporation – one which is open to any person if the proposed name is identical or
who may wish to become a stockholder or member deceptively or confusingly similar to that
thereto. of any existing corporation or to any other
name already protected by law or is
Close Corporation – those whose shares of stock are patently deceptive, confusing or contrary
held by limited number of persons like the family or to existing laws. When a change in the
other closely knit group. (Sec. 96) corporate name is approved, the
Commission shall issue an amended
FORMATION AND ORGANIZATION OF A PRIVATE
certificate of incorporation under the
CORPORATION:
amended name.
A. Submission of Articles of Incorporation; SEC Guideline ”x x x b. In order to prevent
contractual significance confusion and difficulties of administration,
*The life of a corporation commences from the supervision and control, if the proposed
issuance of the Certificate of Registration by the name contains a word already use as a part
SEC upon filing of the Articles of Incorporation of the firm name or style of a registered
and other documents. entity, the proposed name must contain
Article of Incorporation – is the charter of the two other words different and distinct from
corporation, and the contractual relationships the name of the company already
between the State and the corporation, the registered or protected by law. x x x”
stockholder and the State, and between the Case: Ang Mga Kaanib Ni Jesus Cristo
corporation and its stockholders. *The phrase “Ang Mga Kaanib” are words
Contractual Significance: merely descriptive of membership while the
1. The issuance of a certificate of incorporation phrase “Sa Bansang Pilipinas” are merely
signals the birth of the corporation’s juridical descriptive of the place.
personality; *Both parties are religious institutions
2. It is an essential requirement for the *Both use the acronym H.S.K.
existence of a corporation, even a de facto one. As a rule, generic name or descriptive word
may be used as a corporate name.
B. Contents and Form of the Articles of Reason: public domain; can be used by
Incorporation (Secs. 14 and 15) anyone; public use.
Contents of Articles of Incorporation: Exception: Doctrine of Secondary Meaning
1. Corporate Name; – a word or phrase originally incapable of
2. Purpose Clause; exclusive appropriation with reference to
3. Principal office; an article on the market, because
4. Term of existence; geographically or otherwise descriptive,
5. Incorporators; might nevertheless have been used so long
6. Directors or trustees; and so exclusively by one producer with
7. Capitalization; reference to his article that in that trade

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and to that branch of the purchasing public, As a rule, no extension can be made earlier
the word or phrase has come to mean that than 5 years prior to the expiration of the
the article was his product. term.
Requisites: *No limitations regarding number of
1. Period of use; extension can apply.
2. The use must be exclusive. Reason: To compel the stockholders to
Case: Lyceum of the Philippines meet the corporation’s term.
*The exclusivity requirement was not Exception: If for compelling reasons, earlier
satisfied by Lyceum of the Philippines. extension will be allowed.
*In case of change of name, the corporation *During the three year winding up period,
is not dissolve nor create a new the corporation still has personality but
corporation; it also does not extinguish the activities are limited to the liquidation of
corporate liability. the corporation affairs and not to transact
*Change of name can be done by amending further business.
the Articles of Incorporation. As a rule, after the term has expired, no
Procedure: more extensions be allowed or entertained
1. Obtain approval of majority of the Board by the SEC.
and 2/3 stockholders; Reason: No more period to extend.
2. Submission to the SEC for approval. Exception: Doctrine of Relation – The filing
 Purpose Clause and recording of a certificate of extension
*Only one primary purpose. Primary after the term cannot relate back to the
purpose defines the business activities of date of the passage of the resolution of the
the corporation. It is the ordinary course of stockholders to extend the life of the
business of the corporation. corporation. However, the doctrine of
*Secondary Purpose is for future expansion. relations applies if the failure to file the
There is no limit on the secondary purpose. application for existence within the term of
*In case the primary purpose is not viable the corporation is due to neglect of the
then secondary purpose may be used. officer with whom the certificate is required
 Principal Office to be filed or to wrongful refusal on is part
*The principal place of business may to receive it.
determine the venue of court cases *The delay in submitting the application for
involving corporations. It may also extension is justifiable.
determine if service of summons and Keywords:
notices was properly made. It is also 1. Excusable delay;
important for tax purposes (local taxation). 2. Beyond the control of the corporation
*The SEC requires the exact address to be (insuperable intervening causes)
indicated in the Articles of Incorporation.  Incorporators
*It is the residence of the corporation. It is *Once an incorporator always an
where the corporation maintains its books incorporator. (Fait accompli – an
and records and where normally the bulk of accomplished fact which cannot be altered)
its business is being conducted or *They are the signatories to the Articles of
undertaken. Incorporation.
*For personal action, venue is the *They are originally forming the corporation
residence. Q: What is the reason behind the phrase
 Term of Existence that an incorporator is not always a
*A corporation has a maximum term of 50 corporator?
years. It may be extended for a period not A: To be an incorporator it is not necessary
exceeding 50 years in any single instance. to own a share unlike as a corporator.

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*Number is limited to 5 to 15. subscribed and paid by the stockholders of

*They must have a contractual capacity. the corporation.
*Juridical person cannot create another *Shows the total number of shares
juridical person. Subscribed Capital – that portion of the
*There is no citizen requirement but special authorized capital stock that is covered by
laws may require otherwise. subscription agreements whether fully paid
*Majority must be a resident of the or not.
Philippines. Paid-Up Capital – the portion of the
 Directors and trustees authorized capital stock which has been
*The Board of Directors is the governing subscribed and actually paid.
body in a stock corporation while Board of Outstanding Capital Stock – the total
Trustees is the governing body in a non- shares of stock issued to subscribers or
stock corporation. stockholders, whether or not fully or
*They exercise the powers of the partially paid except treasury shares so long
corporation. as there is a binding subscription
Qualifications: agreement.
1. Every director must own at least one (1)  Shares of stock
share of the capital stock; Q: Why shares of stock?
2. Majority of the directors or trustees must A: Because there is a share on the
be residents of the Philippines. capitalization.
*Any director who ceases to be the owner Economic Value:
of at least one share of the capital stock of 1. expectancy on the share in the profits
the corporation of which he is a director 2. expectancy on the share of assets in case
shall thereby cease to be a director. of dissolution/liquidation.
*Trustees of non-stock corporations must Political Value:
be members thereof. 1. vote
*Initial directors/trustees shall hold office 2. control in the management of the
for one year until their successors are corporation.
elected and qualified. Doctrine of Equality of Shares – “Except as
 Capitalization otherwise provided in the articles of
Section 14(8) states that: “If it be a stock incorporation and stated in the certificate
corporation, the amount of its authorized of stock, each share shall be equal in all
capital stock in lawful money of the respects to every other share.”
Philippines, the number of shares into - Provides that where the Article of
which it is divided, and in case the share are Incorporation do not provide for any
par value shares, the par value of each, the distinction of the shares of stock, all shares
names, nationalities and residences of the issued by the corporation are presumed to
original subscribers, and the amount be equal and enjoy the same rights and
subscribed and paid by each on his privileges and are also subject to the same
subscription, and if some or all of the shares liabilities.
are without par value, such fact must be Classes of Shares:
stated.” 1. Par Value Share – shares that have a
*It is required that at least 25% of the nominal value in the certificate of stock.
subscribed capital must be paid and in no Contractual Significance: The minimum
case may be paid-up capital be less than price at which the shares are to be
P5,000. issued.
Authorized Capital Stock – the amount *The price is fixed. It is stated in the
fixed in the articles of incorporation to be Articles of Incorporation.

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2. No Par Value Share – those shares 5. Increase or decrease of capital stock;

which do not have nominal value. 6. Merger or consolidation of the
However, they have issued value stated corporation with another corporation
in the certificate or articles of or other corporations;
incorporation. 7. Investment of corporate funds in
*There is flexibility in the price. another corporation or business in
*The price is determined by the Board. accordance with the Corporation Code;
Limitations: 8. Dissolution of the corporation.
1. No par value shares cannot have an *The exceptions are exclusive; the list is
issued price of less than P5.00; a closed list
2. The entire consideration for its Statutory Constraint: Sec. 6 of the
issuance constitutes capital so that no Corporation Code
part of it should be distributed as *The corporation cannot provide for
dividends; shares with no voting right
3. They cannot be used as preferred General Rule: Only redeemable and
stocks; preferred shares are deprived of voting
4. They cannot be issued by banks, trust right.
companies, insurance companies, Exception: Common shares may be
public utilities and building and loan denied of its voting right in the
association (Reason: imbued with following instances: 1. Delinquent in
public interest); paying the subscription; 2. If there was
5. The articles of incorporation must a founder’s share where it was given
state the fact that it issued no par value the right to vote exclusively for 5 years
shares as well as the number of said (Sec. 7).
shares; 5. Common Shares – the most common
6. Once issued, they are deemed fully type of shares which enjoy no
paid and non-assessable. preference.
3. Voting Shares – shares with the right to *The basic class of stock ordinarily and
vote. They have the right to participate usually issued without extraordinary
in the management of the corporation rights and privileges, and the owners
through the exercise of such right. thereof are entitled to a pro rata share
4. Non-voting Shares – shares without the in the profits of the corporation and in
right to vote. its assets upon dissolution and,
*Has only a limited right to vote. likewise, in the management of its
General Rule: Shareholder owning non- affairs without preference or advantage
voting shares has no right to vote. whatsoever.
Exceptions: 6. Preferred Shares- shares which enjoy
1. Amendment of the articles of preference as to dividends or assets
incorporation; upon dissolution as stated in the
2. Adoption and amendment of by- Articles of Incorporation.
laws; Reason: To attract investors.
3. Sale, lease, exchange, mortgage, *Preference does not give them a lien
pledge or other disposition of all or upon the property nor make them
substantially all of the corporate creditors of the corporation.
property; *Characterized as redeemable shares.
4. Incurring, creating or increasing Kinds:
bonded indebtedness; 1. Preferred shares as to assets – share
which gives the holder thereof

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preference in the distribution of the 6. Unrestricted retained earnings is not

assets of the corporation in case of necessary before shares can be
liquidation; redeemed but there must be sufficient
2. Preferred shares as to dividends – assets to pay the creditors and to
share which gives the holder thereof answer for operations.
preference in the distribution of the 8. Treasury Shares – shares which have
dividends to the extent agreed upon been earlier issued as fully paid and
before any dividends at all are paid to have thereafter been acquired by the
the holders of common shares; corporation by purchase, donation,
3. Participating preferred shares – the redemption or through some lawful
holders thereof are still given the right means.
to participate with the common - Shares which are previously issued by
stockholders in dividends beyond their the corporation but subsequently
stated preference; reacquired by the corporation.
4. Non-participating preferred shares – *Retired thus can no longer be re-
where there is no such participation; issued.
5. Cumulative preferred shares – the *They are not entitled to dividends.
shareholder is entitled to recover *They are not entitled to voting rights.
dividends in arrears. While dividend Rationale: to prevent abuse by the
declaration may not be compelled, once management.
it is declared, the shareholder is entitled *These shares may again be disposed of
to the said arrears; for a reasonable price fixed by the
6. Non-cumulative preferred shares – Board of Directors.
not entitled to arrears only to present 9. Founders’ Shares – classified as such in
dividends. the articles of incorporation may be
7. Redeemable Shares – are those which given certain rights and privileges not
permit the issuing corporation to enjoyed by the owners of other stocks,
redeem or purchase its own shares. provided that where the exclusive right
Limitations: to vote and be voted for in the election
1. Redeemable shares may be issued of directors is granted, it must be for
only when expressly provided for in the the limited period not to exceed 5 years
Articles of Incorporation; subject to the approval of the SEC. The
2. The terms and conditions affecting 5 year period shall commence from the
said shares must be stated both in the date of the approval by the SEC.
certificate of stock representing such  Treasurer’s affidavit
share; *The SEC shall not accept the Articles of
3. Redeemable shares may be deprived Incorporation of any stock corporation
of voting rights in the Articles of unless accompanied by a sworn statement
Incorporation, unless otherwise of the Treasurer elected by the subscribers
provided in the Corporation Code; showing that at least 25% of the authorized
4. The corporation is required to capital stock of the corporation has been
maintain a sinking fund to answer for subscribed, and at least 25% of the total
redemption price if the corporation is subscription has been fully paid to him in
required to redeem; actual cash and/or in property the fair
5. The redeemable shares are deemed valuation of which is equal to at least 25%
retired upon redemption unless of the said subscription, such paid up capital
otherwise provided in the Articles of being not less than P5,000.
Incorporation;

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*If the Treasurer’s affidavit is false such act Sec. 19 of the Corporation Code states that “ A
is tantamount to fraud. (PD 902-A) private corporation formed or organized under
*Fraud on the part of the corporation is a this Code commences to have corporate
ground for revocation or suspension of existence and juridical personality and is
license depending upon the extent of the deemed incorporated from the date the SEC
violation committed. issues a certificate of incorporation under its
*If there’s no Treasurer’s Affidavit, the first official seal; and thereupon the incorporators,
ground shall apply, i. e., noncompliance stockholders/members and their successors
with the minimum requirement. shall constitute a body politic and corporate
General Rule: 25% must be subscribed and under the name stated in the articles of
25% must be paid. incorporation for the period of time mentioned
Exception: If the law provides otherwise, therein, unless said period is extended or the
i.e., special laws. corporation is sooner dissolved in accordance
with law.”
C. Grounds for rejection of the Articles of *For purposes of determining whether a
Incorporation corporation enjoys the status of a de facto
1. The articles of incorporation or any corporation, it must have been at least issued a
amendment thereto is not substantially in certificate of registration.
accordance with the form prescribed
herein; E. Amendment of the Articles of Incorporation
2. The purpose or purposes of the corporation Sec. 16 of the Corporation Code states that:
are patently unconstitutional, illegal, “Unless otherwise prescribed by this Code or by
immoral, or contrary to government rules special law, and for legitimate purposes, any
and regulations; provision or matter stated in the articles of
3. The Treasurer’s Affidavit concerning the incorporation may be amended by a majority
amount of capital stock subscribed and/or vote of the board of directors or trustees and
paid is false; the vote or written assent of the stockholders
4. The percentage of ownership of the capital representing at least 2/3 of the outstanding
stock to be owned by citizens of the capital stock, without prejudice to the appraisal
Philippines has not been complied with as right of dissenting stockholders in accordance
required by existing laws or the with the provisions of this Code, or the vote or
Constitution. written assent of at least 2/3 of the members if
it be a non-stock corporation.”
Dual Franchise Requirement: No articles of *It is effective upon the approval of the SEC.
incorporation or amendment to articles of *There may be an amendment by inaction.
incorporation of banks, banking and quasi- Amendment by Inaction – Upon filing with the
banking institutions, building and loan SEC of the amendment and the Commission
associations, trust companies and other failed to act on it within 6 months from the date
financial intermediaries, insurance companies, of filing for a cause not attributable to the
public utilities, educational institutions, and corporation.
other corporations governed by special laws
shall be accepted or approved by the F. Effects of Non-Use of Corporate Charter
Commission unless accompanied by a Sec. 22 of the Corporation Code states that: “If
favourable recommendation of the appropriate a corporation does not formally organize and
government agency to the effect that such commence the transaction of its business or the
articles or amendment is in accordance with construction of its work within 2 years from the
law. date of its incorporation, its corporate powers
D. Commencement of Corporate Existence cease and the corporation shall be deemed

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dissolved. However, if the corporation has *Board of Directors/Trustees is the

commenced the transaction of its business but statutory representative of the corporation.
subsequently becomes continuously inoperative General Rule: All corporate powers
for a period of at least 5 years, the same shall emanate from the Board of
be a ground for the suspension or revocation of Directors/Trustees.
its corporate franchise or certificate of Exception: Unless otherwise provided in
incorporation. This provision shall not apply if this Code. (Limiting Clause)
the failure to organize, commence the The limiting clause means that there are
transaction of its businesses or the construction certain corporate matters that cannot be
of its works, or to continuously operate is due done by the Board by reason that such
to causes beyond the control of the corporation matters fall upon the shareholders; or
as may be determined by the SEC.” corporate matters that cannot be resolved
*The period must be counted from the issuance by the Board alone, i.e., it must be done
of the Certificate of Incorporation. with the approval of the shareholders.
*Automatic dissolution is not contemplated  Business Judgment Rule
under Section 22. (SEC Opinion). Business Judgment Rule – questions of
*Section 22 must be read in conjunction with policy or management are left solely to the
Sec 6(1) of PD 902-A which requires that the honest decision of officers and directors of
corporation must be given the opportunity to a corporation and the courts are without
be heard in compliance with the requirement of authority to substitute their judgment for
due process before the revocation of its license. the judgment of the board of directors; the
board is the business manager of the
corporation and so long as it acts in good
CONTROL AND MANAGEMENT OF A CORPORATION:
faith its orders are not reviewable by the
A. Levels of Corporate Control courts or the SEC.
1. By Stockholders/Shareholders; - A resolution or transaction pursued within
2. By Corporate Officers; the corporate powers and business
3. By Directors/Trustees operations of the corporation, and passed
in good faith by the board of
B. Board of Directors/Trustees directors/trustee, is valid and binding, and
 General Powers of the Board generally the courts have no authority to
Sec. 23 of the Corporation Code states that: review the same and substitute their own
“Unless otherwise provided in this Code, judgment, even when the exercise of such
the corporate powers of all corporations power may cause losses to the corporation
formed under this Code shall be exercised, or decrease the profits of a department.
all business conducted and all property of *Great respect is accorded to the decisions
such corporations controlled and held by of the Board of Directors/Trustees.
the board of directors or trustees to be *The directors are not liable to the
elected from among the holders of stocks, stockholders in performing such acts.
or where there is no stock, from among the  Qualifications of the Board Members
members of the corporation, who shall hold Sec. 23 of the Corporation Code states that:
office for one year until their successors are “Every director must have at least one
elected and qualified.” share of the capital stock of the corporation
Powers of the Board of Directors: of which he is a director, which share shall
1. Corporate Powers; stand in his name on the books of the
2. Manage the Corporation; and corporation. Any director who ceases to be
3. Control over and hold the properties of the owner of at least one share of the
the Corporation. capital stock of the corporation of which he

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is a director shall thereby cease to be a shares for as many persons as there are
director. Trustees of non-stock corporations directors to be elected or he may cumulate
must be members thereof. A majority of the said shares and give one candidate as many
directors or trustees of all corporations votes as the number of directors to be
organized under this Code must be elected multiplied by the number of his
residents of the Philippines.” shares shall equal, or he may distribute
*In order to be eligible as director, what is them on the same principle among as many
material is the legal title to and not candidates as he shall see fit: Provided, that
beneficial title or ownership of the stocks the total number of votes cast by him shall
appearing on the books of the corporation. not exceed the number of shares owned by
*The directors/trustees must be natural him as shown in the books of the
persons. corporation multiplied by the whole
*They must also be of legal age. number of directors to be elected:
*He must possess other qualifications as Provided, however, that no delinquent
may be prescribed in the by-laws of the stock shall be voted. Unless otherwise
corporation. provided in the articles of incorporation or
*Under Sec. 27 of the Corporation Code: in the by-laws, members of the
“No person convicted by final judgment of corporations which have no capital stock
an offense punishable by imprisonment for may cast as many votes as there are
a period exceeding 6 years, or a violation of trustees to be elected but may not cast
this Code committed within 5 years prior to more than one vote for one candidate.
the date of his election or appointment, Candidates receiving the highest number of
shall qualify as a director, trustee or officer votes shall be declared elected. Any
of any corporation.” meeting of the stockholders or members
Reason: The position is based on trust and called for an election may adjourn from day
confidence. to day or from time to time but not sine die
*No citizenship requirement. or indefinitely if, for any reason, no election
*The By-Laws may provide additional is held, or if there not present or
qualifications/disqualifications. represented by proxy, at the meeting, the
 Election of the Board Members owners of a majority of the outstanding
Sec. 24 of the Corporation Code provides capital stock, or if there be no capital stock,
that: “At all elections of directors or a majority of the member entitled to vote.”
trustees, there must be present, either in *It is the stockholders or corporators who
person or by representative authorized to elect members of the Board of Directors.
act by written proxy, the owners of a *The only procedure required by the Code
majority of the outstanding capital stock, or is through Election. There can be no other
if there be no capital stock, a majority of modes.
the members entitled to vote. The election *The election must be by ballot if requested
must be by ballot if requested by any voting by any voting member or stockholder.
stockholder or member. In stock *A stockholder cannot be deprived in the
corporations, every stockholder entitled to articles of incorporation or in the by-laws of
vote shall have the right to vote in person his statutory right to use any of the
or by proxy the number of shares of stock methods of voting in the election of
standing, at the time fixed in the by-laws, in directors.
his own name on the stock books of the *No delinquent stock shall be voted.
corporation, or where the by-laws are silent *It is not required that the candidate
at the time of the election; and said received the majority vote, what the law
stockholder may vote such number of provides is only plurality of votes.

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*Majority number is required only for the officers elected. Should a director, trustee
existence of a quorum. or officer die, resign or in any manner cease
Not included in outstanding capital stocks: to hold office, his heirs in case of his death,
1. Unissued stocks; the secretary, or any other officer of the
2. Non-voting stocks; corporation, or the director, trustee or
3. Treasury Shares. officer himself, shall immediately report
Methods of Voting: such fact to the SEC.”
1. Straight Voting – every stockholder may  Term of Office
vote such number of shares for as many *The directors or trustees shall hold office
persons as there are directors to be elected. for one (1) year subject to the “hold over”
2. Cumulative Voting for One Candidate – a principle, i.e., they continue in office until
stockholder is allowed to concentrate his their successors are elected and qualified.
votes and give one candidate as many votes *The one year period does not apply to
as the number of directors to be elected directors initially elected for purposes of
multiplied by the number of his shares shall incorporation.
equal.  Quorum Requirement in Board Meetings
*Example: X has 10 shares in his name; Sec. 25 of the Corporation Code states that:
there are 5 numbers of directors to be “Unless the articles of incorporation or the
elected. X has 50 votes (10x5) available to by-laws provide for a greater majority, a
him. X may opt to concentrate all his 50 majority of the number of directors or
votes to a particular candidate. trustees as fixed in the articles of
3. Cumulative Voting by Distribution – a incorporation shall constitute a quorum for
stockholder may cumulate his shares by the transaction of corporate business, and
multiplying also the number of his shares by every decision of at least a majority of the
the number of directors to be elected and directors or trustees present at a meeting at
distribute the same among as many which there is a quorum shall be valid as a
candidates as he shall see fit. corporate act, except for the election of
*Example: X has 10 shares in his name; officers which shall require the vote of a
there are 5 numbers of directors to be majority of all the members of the board.”
elected. X has 50 votes available to him. X Q: Is the director allowed to let a proxy
may opt to distribute the votes to as many attend a board meeting in behalf for
candidates as there are provided that the himself?
total number of votes does not exceed 50. A: NO. Proxy prohibition.
Purpose of cumulative voting: To protect Reason: Because of their personal
the minority stockholders. qualifications.
*The elected officer must act as a body. *Quorum requirement should always be
*In a stock corporation, cumulative voting is computed based on the number specified in
a statutory right whereas in a non-stock the Articles of Incorporation regardless of
corporation, cumulative voting is applicable ensuing vacancies.
if it is provided in the Article of *The basis is always the number specified in
Incorporation. the Articles of Incorporation.
Sec. 26 of the Corporation Code provides *The corporation can modify the number by
that: Within 30 days after the election of providing a different provision in the
the directors, trustees and officers of the articles of incorporation, however, the law
corporation, the secretary, or any other provides that the modification must be for a
officer of the corporation, shall submit to number greater than that provided in the
the SEC, the names, nationalities and law. It cannot provide for a number less
residences of the directors, trustees and than the general requirement of the code.

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*For voting purposes, majority of the 1. It must take place either at a regular
member present constituting a quorum. meeting or special meeting of the
Except: election of directors. stockholders or members called for the
 Removal of Board Members purpose;
Sec. 28 of the Corporation Code states that: 2. There must be previous notice to the
“Any director or trustee of a corporation stockholders or member of the intention to
may be removed from office by a vote of remove;
the stockholders holding or representing at 3. The removal must be by a vote of the
least 2/3 of the outstanding capital stock, or stockholders representing 2/3 outstanding
if the corporation be a non-stock capital stock or 2/3 of members;
corporation, by a vote of at least 2/3 of the 4. The director may be removed with or
members entitled to vote: Provided, that without cause unless he was elected by the
such removal shall take place either at a minority, in which case, it is required that
regular meeting of the corporation or at a there is cause for removal.
special meeting called for the purpose, and Reason: The functions of directors are
in either case, after previous notice to fiduciary in nature.
stockholders or members of the Requisites for the removal of minority
corporation of the intention to propose directors are:
such removal at the meeting. A special 1. Justifiable cause;
meeting of the stockholders or members of 2. Satisfaction of the voting requirements,
a corporation for the purpose of removal of i.e., 2/3 of OCS or members.
directors or trustees, or any of them, must *It is the secretary of the corporation upon
be called by the secretary on order of the order of the president or in case there is no
president or on the written demand of the secretary, stockholder representing
stockholders representing or holding at majority of the outstanding capital stocks or
least a majority of the outstanding capital member signing the demand who may call a
stock, or, if it be a non-stock corporation, meeting for the purpose of removal.
on the written demand of a majority of the  Vacancies in the Board
members entitled to vote. Should the Sec. 29 of the Corporation Code provides
secretary fail or refuse to call the special that: “Any vacancy occurring in the board of
meeting upon such demand or fail or refuse directors or trustees other than by removal
to give the notice, or if there is no secretary, by the stockholders or members or by
the call for the meeting may be addressed expiration of term, may be filled by the vote
directly to the stockholders or members by of at least a majority of the remaining
any stockholder or member of the directors or trustees, if still constituting a
corporation signing the demand. Notice of quorum; otherwise, said vacancies must be
the time and place of such meeting, as well filled by the stockholders in a regular or
as of the intention to propose such special meeting called for that purpose. A
removal, must be given by publication or by director or trustee so elected to fill a
written notice prescribed in this Code. vacancy shall be elected only or the
Removal may be with or without cause: unexpired term of his predecessor in office.
Provided, that removal without cause may A directorship or trusteeship to be filled by
not be used to deprive minority reason of an increase in the number of
stockholders or members of the right of directors or trustees shall be filled only by
representation to which they may be an election at a regular or at a special
entitled under Sec. 24 of this Code.” meeting of stockholders or members duly
Requisites: called for the purpose, or in the same
meeting authorizing the increase of

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directors or trustees if so stated in the  Concept of Corporate Officers

notice of the meeting.” *Corporate powers reside on the Board of
General Rule: Power to elect directors is Directors; decision/policymaking resides on
vested in the stockholders them. Implementation of rules/policy lies
Exception: Vacancy occurring in the board on the corporate officers
of directors or trustees other than by Categories:
removal by the stockholders or members or 1. Statutory Corporate Officers –
by expiration of term may be filled by the President (must be a stockholder);
vote of at least a majority of the remaining Secretary (must be a resident and citizen of
directors or trustees if still constituting a the Philippines); Treasurer (must be a
quorum. resident and citizen of the Philippines).
 Compensation of Board Members 2. As provided by the By-Laws – must
Sec. 30 of the Corporation Code provides be clearly stated in the By-Laws that such
that: “In the absence of any provision in the office is a corporate office.
by-laws fixing their compensation, the 3. Those designated by the Board of
directors shall not receive any Directors provided the Board of Directors
compensation, as such directors, except for is authorized to do so by the By-Laws.
reasonable per diems: Provided, however,  Validity and Binding Effect of Acts of
that any such compensation other than per Corporate Officers
diems may be granted to directors by the General Rule: No one, even corporate
vote of the stockholders representing at officers can bind the corporation. It is only
least a majority of the outstanding capital the Board of Directors who has the
stock at a regular or special stockholders’ authority to bind the corporation.
meeting. In no case shall the total yearly Exceptions:
compensation of directors, as such 1. If the By-Laws provides that such act is
directors, exceed 10% of the net income part of the function of such office;
before income tax of the corporation during 2. If authorized by the Board of Directors
the preceding year.”  Doctrine of Apparent Authority
General Rule: Directors are not entitled to Doctrine of Apparent Authority/Doctrine
receive compensation of Estoppel –If a corporation, knowingly
Exceptions: permits one of its officers, or any other
1. When their compensation is fixed in the agent, to act within the scope of an
by-laws; apparent authority, it holds him out to the
2. If compensation is granted to directors by public as possessing the power to do those
the vote of the stockholders representing at acts; and thus, the corporation will, as
least a majority of the outstanding capital against anyone who has in good faith dealt
stock at a regular or special stockholders’ with it through such agent, be stopped from
meeting. denying the agent’s authority.
Limitation: In no case shall the total yearly Cases: People’s Aircargo; Inter-Asia; Lapu-
compensation of directors exceed 10% of Lapu
the net income before income tax of the *Requires good faith on the part of third
corporation during the preceding year. person.
Reason: In order to avoid temptation on the
part of directors to abuse powers by D. Liability of Directors, Trustees and Officers
appropriating compensation packages since  Instances when Corporate
they are in control of corporate assets. Officers/Directors are held Solidarily Liable
Sec. 31 of the Corporation Code provides
C. Corporate Officers that: “Directors or trustees who wilfully and

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knowingly vote for or assent to patently Pilferage Act of 1997); Securities

unlawful acts of the corporation or who are Regulation Code
guilty of gross negligence or bad faith in
*In Carag v NLRC, the Supreme Court held
directing the affairs of the corporation or
acquire any personal or pecuniary interest that not any violative of law, the Code means
that violation must have a corresponding
in conflict with their duty as such directors
or trustees shall be liable jointly and penalty. Patently unlawful act means that a law
declares an act unlawful and that such law
severally for all damages resulting
therefrom suffered by the corporation, its provides penalty for that unlawful act.
stockholders or members and other  Self-Dealing Directors/Officers
persons. When a director, trustee or officer Sec. 32 of the Corporation Code states that:
attempts to acquire or acquires, in violation “A contract of the corporation with one or
of his duty, any interest adverse to the more of its directors or trustees or officers
corporation in respect of any matter which is voidable, at the option of such
has been reposed in him in confidence, as corporation, unless all of the following
to which equity imposes a disability upon conditions are present: 1. That the presence
him to deal in his own behalf, he shall be of such director or trustee in the board
liable as a trustee for the corporation and meeting in which the contract was
must account for the profits which approved was not necessary to constitute a
otherwise would have accrued to the quorum for such meeting; 2. That the vote
corporation.” of such director or trustee was not
General Rule: Directors/Trustees/Officers necessary for the approval of the contract;
are not solidarily liable with the 3. That the contract is fair and reasonable
corporation. under the circumstances; and 4. That in
Exceptions: case of an officer, the contract has been
1. Wilfully and knowingly vote for and previously authorized by the board of
assent to patently unlawful acts of directors. Where any of the first two
the corporation (Sec. 31). conditions set forth in the preceding
Case: Carag v NLRC paragraph is absent, in the case of a
2. Guilty of gross negligence or bad contract with a director or trustee, such
faith in directing the affairs of the contract may be ratified by the vote of the
corporation (Sec. 31). stockholders representing at least 2/3 of
Case: David v Construction the outstanding capital stock or of at least
Industry 2/3 of the members in a meeting called for
3. Acquire any personal or pecuniary the purpose: Provided, That full disclosure
interest in conflict of their duty of the adverse interest of the directors or
(Sec.31). trustees involved is made at such meeting:
4. Consent to the issuance of watered Provided, however, that the contract is fair
stocks or having knowledge thereof, and reasonable under the circumstances.”
fails to file objections with the Example:
secretary (Sec. 65). In XYZ Corporation, A is a director. The
5. Agree or stipulate in a contract to corporation acts through the Board of
hold himself personally liable with Directors. XYZ Corporation and A entered
the corporation. into a lease contract. A as the lessor and
6. By virtue of a specific provision of XYZ Corporation as lessee. The contract was
law such as BP 22; Trust receipts approved by the Board of Directors.
Law; RA 7832 (Anti-Electricity Q: What is the status of the contract?
General Rule: The contract is voidable.

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Exception: If the requisites provided in Sec. subject to the provisions of the preceding
32 are present. section insofar as the latter corporation or
Exception to the Exception: If requirement corporations are concerned. Stockholdings
number 1 or 2 is absent, in the case of a exceeding 20% of the outstanding capital
contract with a director or trustee, such stock shall be considered substantial for
contract may be considered valid by the purposes of interlocking directors.”
ratification of at least 2/3 of the Example:
outstanding capital stock or 2/3 of the A is a director of two corporation, ABC
members. Corporation and XYZ Corporation. XYZ
Requisites: Corporation and ABC Corporation entered
1. The presence of such director or trustee into a lease contract where ABC
in the board meeting in which the contract Corporation is the lessor and XYZ
was approved was not necessary to Corporation is the lessee.
constitute a quorum for such meeting; Q: Can this contract be invalidated on the
2. The vote of such director or trustee was ground that there is an interlocking
not necessary for the approval of the director?
contract; A: NO.
3. The contract is fair and reasonable under Q: What is the status of the contract?
the circumstances; A: General Rule: Contracts between two or
4. In case of an officer, the contract has more corporations having interlocking
been previously authorized by the board of directors are valid.
directors. Exceptions:
Reason: A’s presence in the board meeting 1. Contracts are void if contracts are
might affect the status of the contract. fraudulent or if contracts are unfair
and unreasonable.
Self-Dealing Directors/Officers – 2. If the By-Laws prohibits interlocking
directors/officers who transact business director.
with their own corporation. Case: Gokongwei, Jr. v SEC
- This is not prohibited by law. *The interest is nominal if his interest is
Interlocking Directors – those who have 20% or less of the outstanding capital stock.
been elected as directors in 2 or more The interest is substantial if his interest is
different corporations. more than 20% of the outstanding capital
- May be prohibited by the By-Laws stock.
(Gokongwei case). *If the interlocking director has a
-Not prohibited by law however there are substantial interest in one corporation and
consequences. has a nominal interest in the other
 Contracts involving Inter-locking Directors corporation, the director must comply with
Sec. 33 of the Corporation Code provides the requisites provided in Sec. 32 on self-
that: “Except in cases of fraud, and dealing directors.
provided the contract is fair and reasonable Reason: The case is analogous to that of
under the circumstances, a contract transactions involving self-dealing directors
between two or more corporations having because such director holds substantial
interlocking directors shall not be interest with the other company.
invalidated on that ground alone: Provided,  Doctrine of Corporate Opportunity
That if the interest of the interlocking Sec. 34 of the Corporation Code states that:
director in one corporation is substantial “Where a director, by virtue of his office,
and his interest in the other corporation or acquires for himself a business opportunity
corporations is merely nominal, he shall be which should belong to the corporation,

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thereby obtaining profits to the prejudice of *It must be stated in the By-Laws.
such corporation, he must account to the *Board Resolution is not sufficient if there is no
latter for all such profits by refunding the provision in the By-Laws.
same, unless his act has been ratified by a *The decision of the executive committee is
vote of the stockholders owning or considered a Board Resolution.
representing at least 2/3 of the outstanding *The decision of the executive committee is not
capital stock. This provision shall be subject to appeal to the board. However, if the
applicable notwithstanding the fact that the resolution of the Executive Committee is invalid
director risked his own funds in the it may be ratified by the Board.
venture.” *The decision of the executive committee needs
General Rule: A director shall refund to the no confirmation from the Board.
corporation all the profits he realizes on a Case: Filipinas Port, Inc.
business opportunity which: 1. the *The corporation may create other committees.
corporation is financially able to undertake; Distinction: In executive committee, there is a
2. from its nature, is in line with statutory restriction on members whereas in
corporations business and is of practical other committee there is no such restriction.
advantage to it; and 3. the corporation has General Rule: The executive committee may act
an interest or a reasonable expectancy. on specific matters within the competence of
Exception: His act has been ratified by a the board as may be delegated to it in the by-
vote of the stockholders owning or laws or on a majority vote of the board.
representing at least 2/3 of the outstanding Exceptions:
capital stock. 1. Approval of any action for which
*A business opportunity ceases to be shareholders’ approval is also required;
corporate opportunity and transforms to 2. The filing of vacancies in the board;
personal opportunity where the 3. The amendment or repeal of by-laws or the
corporation refuses or is definitely no adoption of new by-laws;
longer able to avail itself of the opportunity. 4. The amendment or repeal of any resolution
of the board which by its express terms is
E. Executive Committee not so amendable or repealable;
Sec. 35 of the Corporation Code states that: 5. A distribution of cash dividends to the
“The by-laws of a corporation may create an shareholders.
executive committee composed of not less than
3 members of the board to be appointed by the CORPORATE POWERS:
board. Said committee may act, by majority A. Doctrine of Limited Capacity; Concept of Ultra
vote of all its members, on such specific matters Vires Act
within the competence of the board, as may be Sec. 45 of the Corporation Code states that:
delegated to it in the by-laws or on a majority “No corporation under this Code shall possess
vote of the board, except with respect to: (1) or exercise any corporate powers except those
approval of any action for which shareholders’ conferred by this Code or by its articles of
approval is also required; (2) the filing of incorporation and except such as are necessary
vacancies in the board; (3) the amendment or or incidental to the exercise of powers so
repeal of by-laws or the adoption of new by- conferred.”
laws; (4) the amendment or repeal of any Ultra Vires Acts – an act committed outside the
resolution of the board which by its express object for which a corporation is created as
terms is not so amendable or repealable; and defined by the law of its organization and
(5) a distribution of cash dividends to the therefore beyond the power conferred upon it
shareholders.” by law.
Keyword: BY-LAWS Effects of Ultra Vires Acts:

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1. Executed Contract – courts will not set transaction of the lawful business of the
aside or interfere with such contracts. corporation may reasonably and necessarily
2. Executory Contract – no enforcement even require, subject to the limitations prescribed by
at the suit of either party. law and the Constitution; 8. To enter into
3. Partly executed and Partly executory merger or consolidation with other
contract – principle against unjust corporations as provided in this Code; 9. To
enrichment shall apply. make reasonable donations, including those for
the public welfare or for hospital, charitable,
B. Classes of Corporate Powers cultural, scientific, civic, or similar purposes:
1. Express Provided, That no corporation, domestic or
2. Implied foreign, shall give donations in aid of any
3. Incidental political party or candidate or for purposes of
 Express – those expressly authorized by the partisan political activity; 10. To establish
Corporation Code and other laws, and its pension, retirement, and other plans for the
Articles of Incorporation or Charter. benefit of its directors, trustees, officers and
 Implied – those that can be inferred from or employees; and 11. To exercise such other
necessary for the exercise of the express powers as may be essential or necessary to
powers. carry out its purpose or purposes as stated in
 Incidental – those that are incidental to the the articles of incorporation.”
existence of the corporation.  Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code states that:
Doctrine of Necessary Implication – those which can be “Unless otherwise prescribed by this Code
reasonably inferred from the express powers given or by special law, and for legitimate
since they are necessary for the corporation to perform purposes, any provision or matter stated in
a particular act are deemed part of such powers. the articles of incorporation may be
C. Statutory Powers of a Corporation and the amended by a majority vote of the board of
Limitations on their Exercise directors or trustees and the vote or written
Sec. 36 of the Corporation Code states that: assent of the stockholders representing at
“Every corporation incorporated under this least 2/3 of the outstanding capital stock,
Code has the power and capacity: 1. To sue and without prejudice to the appraisal right of
be sued in its corporate name; 2. Of succession dissenting stockholders in accordance with
by its corporate name for the period of time the provisions of this Code, or the vote or
stated in the articles of incorporation and the written assent of at least 2/3 of the
certificate of incorporation; 3. To adopt and use members if it be a non-stock corporation.”
a corporate seal; 4. To amend its articles of *The following are excluded in counting the
incorporation in accordance with the provisions outstanding capital stock: 1. Treasury stock;
of this Code; 5. To adopt by-laws, not contrary 2. Unissued shares.
to law, morals, or public policy, and to amend *Aside from the votes of majority of the
or repeal the same in accordance with this board and assent of the 2/3 of the OCS, the
Code; 6. In case of stock corporations, to issue approval of the SEC is necessary for the
or sell stocks to subscribers and to sell treasury amendment of the AOI.
stocks in accordance with the provisions of this *There is an implied approval of the SEC,
Code; and to admit members to the corporation i.e., failure to act on the application filed by
if it be a non-stock corporation; 7. To purchase, the corporation within 6 mos.
receive, take or grant, hold, convey, sell, lease, Q: How to get the approval of the
pledge, mortgage and otherwise deal with such stockholders?
real and personal property, including securities A: 1. Call for a meeting; 2. Obtain the
and bonds of other corporations, as the written assent of the stockholders.

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*In Tan v Sycip, the Supreme Court held diminution of the capital stock, or the
that in case of a non-stock corporation, incurring, creating or increasing of any
membership is personal and non- bonded indebtedness. Written notice of the
transferrable unless the by-laws provides proposed increase or diminution of the
otherwise. The deceased member is not capital stock or of the incurring, creating, or
entitled to vote. increasing of any bonded indebtedness and
of the time and place of the stockholders’
Four changes in Articles of Incorporation that require meeting at which the proposed increase or
the approval of the stockholders. diminution of the capital stock or the
1. Extension of corporate term; incurring or increasing of any bonded
2. Shortening of corporate term; indebtedness is to be considered , must be
3. Increase or Decrease of Capital Stock; addressed to each stockholder at his place
4. Increase or Decrease of Bonded indebtedness. of residence as shown on the books of the
*Approval of Stockholders is necessary in these changes corporation and deposited to the addressee
because they are necessary for the corporation’s in the post office with postage prepaid, or
existence. served personally. xxx.”
 Extension/Shortening of Corporate Term Q: When the corporation increases its
Sec. 37 of the Corporation Code states that: capital stock, is the 25% requirement
“A private corporation may extend or necessary? How can it be computed?
shorten its term as stated in the articles of A: YES. The SEC ruled that the 25% applies
incorporation when approved by a majority to the increase amount.
vote of the board of directors or trustees *The corporation is required to maintain a
and ratified at a meeting by the sinking fund.
stockholders representing at least 2/3 of Q: What does bonded indebtedness mean?
the outstanding capital stock or by at least A: Requires longer time of payment; special
2/3 of the members in case of non-stock burden on the corporation; involves the
corporation. Written notice of the proposed important assets of the corporation.
action and of the time and place of the  Denial of Pre-emptive Right
meeting shall be addressed to each Sec. 39 of the Corporation Code states that:
stockholder or member at his place of “All stockholders of a stock corporation
residence as shown on the books of the shall enjoy pre-emptive right to subscribe to
corporation and deposited to the addressee all issues or disposition of shares of any
in the post office with postage prepaid, or class, in proportion to their respective
served personally: Provided, That in case of shareholdings, unless such right is denied
extension of corporate term, any dissenting by the articles of incorporation or an
stockholder may exercise his appraisal right amendment thereto: Provided, That such
under the conditions provided in this code.” pre-emptive right shall not extend to shares
 Increase or Decrease of Capital Stock/ to be issued in compliance with laws
Incurrence, Creation or Increase of Bonded requiring stock offerings or minimum stock
Indebtedness ownership by the public; or to shares to be
Sec. 38 of the Corporation Code states that: issued in good faith with the approval of the
“No corporation shall increase or decrease stockholders representing 2/3 of the
its capital stock or incur, create or increase outstanding capital stock, in exchange for
any bonded indebtedness unless approved property needed for corporate purposes or
by a majority vote of the board of directors in payment of a previously contracted
and, at a stockholders’ meeting duly called debt.”
for the purpose, 2/3 of the outstanding *Coming from the increased authorized
capital stock shall favor the increase or capital stock.

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* Similar to Right of First Refusal capital stock, or in case of non-stock

*It is not a matter of right. It can be denied corporation by the vote of at least 2/3 of
by the corporation through denial of such the members, in a stockholders’ or
right in the articles of incorporation. members’ meeting duly called for the
Purposes: purpose. Written notice of the proposed
1. In order that the stockholder may be able action and of the time and place of the
to maintain their relative proportional meeting shall be addressed to each
voting trend and control in the corporation; stockholder or member at his place of
2. To avoid dilution of their proportionate residence as shown on the books of the
voting and control in the corporation. corporation and deposited to the addressee
General Rule: Pre-emptive right is available in the post office with postage prepaid, or
to stockholders. served personally: Provided, That any
Exception: if it is denied in the Articles of dissenting stockholder may exercise his
Incorporation or through amendment. appraisal right under the conditions
Exception to the Exception: Pre-emptive provided in this Code. A sale or other
right shall not extend to: disposition shall be deemed to cover
1. Shares to be issued in compliance with substantially all the corporate property and
laws requiring stock offerings or minimum assets if thereby the corporation would be
stock ownership by the public; rendered incapable of continuing the
2. Shares to be issued in good faith with the business or accomplishing the purpose for
approval of the stockholders representing which it was incorporated. xxx.”
2/3 of the outstanding capital stock, in Q: What makes the disposition peculiar?
exchange for property needed for corporate A: The disposition is of all or substantially all
purposes; and of the corporation’s properties and assets.
3. In payment of a previously contracted Q: What kind of disposition involve?
debt. A: 1. Sell; 2. Lease; 3. Exchange; 4.
*Pre-emptive right is satisfied as long as the Mortgage; 5. Pledge.
corporation gives the stockholder the Requirements:
opportunity to buy the shares. 1. Majority vote of the Board.
*The offer must first be made to the 2. Vote of the Stockholders representing
stockholders. 2/3 of the OCS.
 Sale or Disposition of Assets 3. The sale does not bring about the illegal
Sec. 40 of the Corporation Code states that: combinations and monopolies.
“ Subject to the provisions of existing laws *No need for the approval of the SEC.
on illegal combinations and monopolies, a Tests:
corporation may, by a majority vote of its 1. Quantitative Test – no statutory test;
board of directors or trustees, sell, lease, pertains to the disposition of all assets
exchange, mortgage, pledge or otherwise 2. Qualitative Test – there is a statutory
dispose of all or substantially all of its test; pertains to the disposition of
property and assets, including its goodwill, substantially all of its assets.
upon such terms and conditions and for *The provision is so strict because the law
such consideration, which may be money, wants the corporation will reach its
stocks, bonds or other instruments for the expiration term.
payment of money or other property or Q: With the sale of all the assets of the
consideration, as its board of directors or corporation, will the same result to its
trustees may deem expedient, when dissolution?
authorized by the vote of the stockholders A: NO. Possession or continued possession
representing at least 2/3 of the outstanding of corporate properties is not a condition

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for the existence of a corporation. Requisites:

Corporation still exists despite the 1. Unrestricted Retained Earnings
disposition of all its properties and assets. 2. The acquisition must be for legitimate
Q: Will the buying corporation be made purpose
answerable for the liabilities of the selling Q: What is an unrestricted retained
corporation? earnings?
A: NO. The two corporations are two A: Earnings not allocated for any other
separate personalities thus they are purpose.
separate and distinct from each other Q: What happens to reacquired shares?
hence the buying corporation cannot be A: General Rule: They are automatically
held liable to the obligations of the selling deemed retired.
corporation. Exception: The AOI provides otherwise.
General Rule: The sale of all or substantially
all of the assets of the corporation does not Trust Fund Doctrine – The capital stock, property and
make the buyer answerable for the other assets of the corporation are regarded as equity
obligations of the seller. in trust for the payment of the corporate creditors. The
Exceptions: subscribed capital stock of the corporation is a trust
1. If the buyer expressly agrees to assume fund for the payment of debts of the corporation which
the obligations of the seller. the creditors have the right to look up to satisfy their
2. If sale amounts to merger or credits. Corporation may not dissipate this and the
consolidation. creditors may sue stockholders directly for the unpaid
3. If and when application of piercing the subscription.
veil of corporate entity doctrine is
 Investment of Corporate Funds
warranted.
Sec. 42 of the Corporation Code states that:
4. If the purchaser becomes a
“Subject to the provisions of this Code, a
continuation of the seller.
private corporation may invest its funds in
5. Sale was done in violation of the Bulk
any other corporation or business or for any
Sales Law.
purpose other than the primary purpose for
Case: PNB v Andrada
which it was organized when approved by a
 Acquisition of Corporate Shares
majority of the board of directors or
Sec. 41 of the Corporation Code states that:
trustees and ratified by the stockholders
“A stock corporation shall have the power
representing at least 2/3 of the outstanding
to purchase or acquire its own shares for a
capital stock, or by at least 2/3 of the
legitimate corporate purpose or purposes,
members in the case of non-stock
including but not limited to the following
corporations, at a stockholders’ or
cases: Provided, That the corporation has
members’ meeting duly called for the
unrestricted retained earnings in its books
purpose. Written notice of the proposed
to cover the shares to be purchased or
investment and the time and place of the
acquired: 1. To eliminate fractional shares
meeting shall be addressed to each
arising out of stock dividends; 2. To collect
stockholder or member at his place of
or compromise an indebtedness to the
residence as shown on the books of the
corporation, arising out of unpaid
corporation and deposited to the addressee
subscription, in a delinquency sale, and to
in the post office with postage prepaid, or
purchase delinquent shares sold during said
served personally: Provided, That any
sale; and 3. To pay dissenting or
dissenting stockholder shall have appraisal
withdrawing stockholders entitled to
right as provided in this Code: Provided,
payment for their shares under the
however, That where the investment by the
provisions of this Code.”
corporation is reasonably necessary to
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accomplish its primary purpose as stated in decided to distribute among the

the articles of incorporation, the approval stockholders.
of the stockholders or members shall not be *The fact that the corporation has surplus
necessary.” earning does not mean that it is mandated
Requisites: to declare dividends; it is still upon the
1. Majority vote of the Board sound discretion of the board of directors.
2. Vote of the stockholders representing Reason: Trust Fund Doctrine
2/3 OCS. *There must be a unrestricted retained
 Declaration of Dividends earnings before dividends may be declared.
Sec. 43 of the Corporation Code states that: *The board may opt to restrict its earnings,
“The board of directors of a stock as the earnings may be allocated to
corporation may declare dividends out of legitimate business purpose.
the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of CASH DIVIDENDS STOCK DIVIDENDS
does not require Requires
outstanding stock held by them: Provided,
stockholders’ stockholders’
That any cash dividends due on delinquent approval approval
stock shall first be applied to the unpaid The stockholders The stockholders
balance on the subscription plus costs and receive cash receive stocks
expenses, while stock dividends shall be Creditor-debtor No creditor-debtor
withheld from the delinquent stockholder relationship relationship
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend Requisites for declaration of cash/property
shall be issued without the approval of dividends:
stockholders representing not less than 2/3 1. Board approval
of the outstanding capital stock at a regular 2. Unrestricted Retained Earnings
or special meeting duly called for the
Requisites for declaration of stock
purpose. Stock corporations are prohibited
dividends:
from retaining surplus profits in excess of
1. Unrestricted Retained Earnings;
100% of their paid-in capital stock, except:
2. Board approval;
1. When justified by definite corporate
3. Ratification by the stockholders.
expansion projects or programs approved
Q: Why stockholders’ ratification is
by the board of directors; or 2. When the
necessary in the declaration of stock
corporation is prohibited under any loan
dividends?
agreement with any financial institution or
A: Because the earnings are capitalized. It is
creditor, whether local or foreign, from
considered to be a corporate assets.
declaring dividends without its/his consent,
Q: May the board be compelled to declare
and such consent has not yet been secured;
dividends?
or 3. When it can be clearly shown that
A: General Rule: NO.
such retention is necessary under special
Exception: Stock corporations are
circumstances obtaining in the corporation,
prohibited from retaining surplus profits in
such as when there is need for special
excess of 100% of their paid-in capital stock.
reserve for probable contingencies.”
Exceptions to the Exception:
*This section is exclusive to stock
1. Corporate expansion
corporations.
2. Pursuant to loan agreement
Dividends – represents part of the earnings
3. Special circumstances/contingent
of the corporation which the board has
liabilities

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Q: Are the stock dividends considered as a meeting duly called for the purpose:
watered stocks because the stockholder Provided, That 1. Where a stockholder or
concerned does not pay anything therefor? stockholders representing the same interest
A: NO. The unrestricted retained earnings of both the managing and the managed
are considered to be a consideration thus corporations own or control more than 1/3
dividends received through stocks are not of the total outstanding capital stock
watered stocks. entitled to vote of the managing
*The source of payment is the unrestricted corporation; or 2. Where a majority of the
retained earnings. members of the board of directors of the
Q: Are delinquent stockholders entitled to managing corporation also constitute a
receive dividends? majority of the members of the board of
A: YES. But only in terms of cash dividends. directors of the managed corporation, then
Q: Who are entitled to receive dividends? the management contract must be
A: Stockholders approved by the stockholders of the
*In Nielson case, the SC held that dividends managed corporation owning at least 2/3 of
cannot be given to non-stockholders. the total outstanding capital stock entitled
*If there is date of record – Dividends may to vote, or by at least 2/3 of the members in
be received by those persons who are the case of a non-stock corporation. No
holders of stocks as of date of record. management contract shall be entered into
*If there is no date of record – dividends for a period longer than 5 years for any one
may be received by those persons who are term. The provisions of the next preceding
holders of stocks as of the declaration. paragraph shall apply to any contract
Q: When the corporation declares stock whereby a corporation undertakes to
dividends, would it likewise create a manage or operate all or substantially all of
creditor-debtor relationship between the the business of another corporation,
corporation and the stockholder? whether such contracts are called service
A: NO. Stock dividends will not bring about contracts, operating agreements or
a creditor-debtor relationship. When it otherwise: Provided, however, That such
comes to shareholdings, the one holding service contracts or operating agreements
the shares are considered investors; risk- which relate to the exploration,
takers. development, exploitation or utilization of
Q: Will legal compensation possible to natural resources may be entered into for
occur? such periods as may be provided by the
A: NO. The parties are not mutually pertinent laws or regulations.”
creditor-debtor of each other. The Requisite:
requisites under the Civil Code on legal General Rule: Majority vote of the OCS
compensation are not present. Exception: 2/3 of the OCS
 Management Contract *SEC’s approval is not necessary
Sec. 44 of the Corporation Code states that: *When the corporation enters into a
“No corporation shall conclude a management contract, appraisal right is
management contract with another NOT AVAILABLE to any dissenting
corporation unless such contract shall have stockholder.
been approved by the board of directors Reason: Sound business policy dictates that
and by stockholders owning at least the it would be better for the corporation, at
majority of the outstanding capital stock, or the inception of its operation, to be
by at least a majority of the members in the managed by a company who has been
case of a non-stock corporation, of both the experienced in a particular kind of business
managing and the managed corporation, at if the managed corporation needs the

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technical expertise, skills, experiences, stockholders representing at least a majority of

background of another entity. the outstanding capital stock, or of at least a
majority of the members in case of non-stock
CORPORATE BY-LAWS: corporations, shall be necessary. The By-Laws
A. Concept, Use and Nature of By-Laws shall be signed by the stockholders or members
By-Laws – relatively permanent and continuing voting for them and shall be kept in the
rules of action adopted by the corporation for principal office of the corporation, subject to
its own government and that of the individuals the inspection of the stockholders or members
composing it and those having the direction, during office hours. A copy thereof, duly
management and control of its affairs, in whole certified to by a majority of the directors or
or in part, in the management and control of its trustees countersigned by the secretary of the
affairs and activities. corporation, shall be filed with the SEC which
Nature: Regulates internal affairs of the shall be attached to the original articles of
corporation. incorporation. Notwithstanding the provisions
of the preceding paragraph, By-Laws may be
B. By-Laws in relation to Articles of Incorporation adopted and filed prior to incorporation; in such
Distinction between By-Laws and Articles of case, such By-Laws shall be approved and
Incorporation: signed by all the incorporators and submitted to
By-Laws –is a condition subsequent. the SEC, together with the articles of
Articles of Incorporation – is a condition incorporation. In all cases, By-Laws shall be
precedent. Essential for corporate existence. effective only upon the issuance by the SEC of a
certification that the By-Laws are not
inconsistent with this Code. The SEC shall not
ARTICLES OF BY-LAWS accept for filing the By-Laws or any amendment
INCORPORATION thereto of any bank, banking institution,
External affairs Internal Affairs building and loan association, trust company,
Affects the status of Does not affect the insurance companies, public utility, educational
existence of the status of the existence institution or other special corporations
corporation but has impact on the
governed by special laws, unless accompanied
existence; failure to
submit is a ground for by a certificate of the appropriate government
disenfranchisement agency to the effect that such By-Laws or
Joint decision of the General Rule: joint amendments are in accordance with law.”
board and decision *Submission of By-Law is not a requirement for
stockholders Exception: Delegates acquisition of corporate existence, however, for
the power to amend the corporation to be able to continue its
the By-Laws to the
corporate existence, the corporation is required
Board
to submit the corporate By-Law.
*Non-submission of the By-Laws within the
C. Adoption of By-Laws; Effect of Non-Filing within prescribed period allowed by law is a ground for
the prescribed period the dissolution of the corporation.
Sec. 46 of the Corporation Code states that: *In Loyola Grandvillas Homeowners
“Every corporation formed under this Code Association v CA, the SC held that failure to
must, within 1 month after receipt of official adopt a set of By-Laws within the prescribed
notice of the issuance of its certificate of period, notwithstanding the word used in the
incorporation by the SEC, adopt a code of By- Code, the same would not result to automatic
Laws for its government not inconsistent with dissolution of the corporation. The failure to file
this Code. For the adoption of By-Laws by the by-laws would not, by itself, amount to
corporation the affirmative vote of the

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dissolution or extinguishment of the corporate Requisites:

existence. 1. It must be consistent with Corporation
*Section 46 of the Corporation Code must be Code, other pertinent laws and regulations.
read in conjunction with PD 902-A which 2. It must be consistent with the Articles of
outlines the procedure to be followed before Incorporation.
the franchise/license of a private corporation 3. It must be reasonable and not arbitrary or
may be suspended or revoked. oppressive.
*Observance of Due Process is necessary. 4. It must not disturb vested rights, impair
*In Sawadjaan v CA, the SC held that contract or property rights of stockholders
meanwhile when the By-Laws is not yet or members or create obligations unknown
submitted, the corporation, at that time, and to law.
the very least, may be considered as a De Facto
Corporation and therefore, its right to exist as E. Amendment to By-Laws
such cannot be inquired into or cannot be Sec. 48 of the Corporation Code provides that:
collaterally attacked in a private suit. It is for the “The board of directors or trustees, by a
State to initiate a proceeding questioning the majority vote thereof, and the owners of at
existence, on the ground of its non-submission least a majority of the outstanding capital stock,
of By-Laws, within the prescribed period. or at least a majority of the members of a non-
stock corporation, at a regular or special
D. Contents of By-Laws; Requisites of a Valid By- meeting duly called for the purpose, may
Law Provision amend or repeal any By-Laws or adopt new By-
Sec. 47 of the Corporation Code states that: Laws. The owners of 2/3 of the outstanding
“Subject to the provisions of the Constitution, capital stock or 2/3 of the members in a non-
this Code, other special laws, and the articles of stock corporation may delegate to the board of
incorporation, a private corporation may directors or trustees the power to amend or
provide in its By-Laws for: 1. The time, place repeal any By-Laws or adopt new By-Laws:
and manner of calling and conducting regular or Provided, That any power delegated to the
special meetings of the directors or trustees; 2. board of directors or trustees to amend or
The time and manner of calling and conducting repeal any By-Laws or adopt new By-Laws shall
regular or special meetings of the stockholders be considered as revoked whenever
or members; 3. The required quorum in stockholders owning or representing a majority
meetings of stockholders or members and the of the outstanding capital stock or a majority of
manner of voting therein; 4. The form for the members in non-stock corporations, shall so
proxies of stockholders and members and the vote at a regular or special meeting. Whenever
manner of voting them; 5. The qualifications, any amendment or new By-Laws are adopted,
duties and compensation of directors or such amendment or new By-Laws shall be
trustees, officers and employees; 6. The time attached to the original By-Laws in the office of
for holding the annual election of directors or the corporation, and a copy thereof, duly
trustees and the mode or manner of giving certified under oath by the corporate secretary
notice thereof; 7. The manner of election or and a majority of the directors or trustees, shall
appointment and the term of office of all be filed with the SEC the same to be attached to
officers other than directors or trustees; 8. The the original articles of incorporation and original
penalties for violation of the By-Laws; 9. In the By-Laws. The amended or new By-Laws shall
case of stock corporations, the manner of only be effective upon the issuance by the SEC
issuing stock certificates; and 10. Such other of a certification that the same are not
matters as may be necessary for the proper or inconsistent with this Code.”
convenient transaction of its corporate business
and affairs.” F. By-Laws in relation to Third Parties

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*In China Banking Corporation v CA, the SC corporation by giving proper notice required by
held that in the absence of evidence that China this Code or by the by-laws. The petitioning
Bank is aware of the provisions of the By-Laws, stockholder or member shall preside thereat
China Bank is not bound to observe the until at least a majority of the stockholders or
provisions of the By-Laws. Hence, China Bank members present have been chosen one of
must be allowed to register the shares in its their number as presiding officer.”
name. *Regular meeting of stockholders/members
General Rule: Third parties are not affected by shall be held annually on a date fixed in the by-
the By-Laws. laws or if not so fixed, on any date in April of
Exception: If the third party has actual every year. Written notice of regular meetings
knowledge of the provisions of the By-Laws. shall be sent 2 weeks prior to the meeting
unless a different period is required by the by-
CORPORATE MEETINGS: laws.
A. Kinds of Corporate Meetings ** Special meeting of stockholders/members
Sec. 49 of the Corporation Code provides that: shall be held at any time deemed necessary or
“Meetings of directors, trustees, stockholders, as provided in the by-laws. Written notice shall
or members may be regular or special.” be sent to all stockholders or members at least
Kinds: one week or unless otherwise provided in the
a. Stockholders/Members: by-laws.
1. Regular meeting Sec. 53 of the Corporation Code provides that:
2. Special meeting “Regular meetings of the board of directors or
b. Directors/Trustees: trustees of every corporation shall be held
1. Regular meeting monthly, unless the by-laws provide otherwise.
2. Special meeting Special meetings of the board of directors or
Sec. 50 of the Corporation Code provides that: trustees may be held at any time upon the call
“Regular meetings of stockholders or members of the president or as provided in the by-laws.
shall be held annually on a date fixed in the by- Meetings of directors or trustees of
laws, or if not so fixed, on any date in April of corporations may be held anywhere in or
every year as determined by the board of outside of the Philippines, unless the by-laws
directors or trustees: Provided, That written provide otherwise. Notice of regular or special
notice of regular meetings shall be sent to all meetings stating the date, time and place of the
stockholders or members of record at least 2 meeting must be sent to every director or
weeks prior to the meeting, unless a different trustee at least 1 day prior to the scheduled
period is required by the by-laws. Special meeting, unless otherwise provided by the by-
meetings of stockholders or members shall be laws. A director or trustee may waive this
held at any time deemed necessary or as requirement, either expressly or impliedly.”
provided in the by-laws: Provided, however, *Regular meetings of directors/trustees shall be
That at least 1 week written notice shall be sent held monthly unless the by-laws provide
to all stockholders or members, unless otherwise.
otherwise provided in the by-laws. Notice of *Special meetings of directors/trustees may be
any meeting may be waived, expressly or held at any time upon the call of the president
impliedly, by any stockholder or member. or as provided in the by-laws.
Whenever, for any cause, there is no person *Meetings of directors or trustees may be held
authorized to call a meeting, the SEC, upon anywhere in or outside of the Philippines unless
petition of a stockholder or member on a the by-laws provide otherwise.
showing of good cause therefor, may issue an *Notice of regular or special meetings stating
order to the petitioning stockholder or member the date, time and place of the meeting must be
directing him to call a meeting of the sent to every director or trustee at least 1 day

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prior to the scheduled meeting unless within the Philippines and notice has been
otherwise provided by the by-laws. given. As an exception, if the by-laws is silent of
the place of the meeting, section 51 applies.
B. Requirements of a Meeting Sec. 52 of the Corporation Code provides that:
1. It must be held at the proper place. “Unless otherwise provided for in this Code or
2. It must be held at the stated date and at the in the by-laws, a quorum shall consist of the
appointed time or at a reasonable time stockholders representing a majority of the
thereafter. outstanding capital stock or a majority of the
3. It must be called by the proper person. members in the case of non-stock
4. There must be a previous notice. corporations.”
5. There must be a quorum. General Rule: Majority of the OCS or Majority
Sec. 51 of the Corporation Code provides that: of the members
“Stockholders’ or members’ meetings, whether Exception: Unless otherwise provided by the
regular or special, shall be held in the city or Code or by the By-Laws.
municipality where the principal office of the *In Tan v Sycip, deceased member is not
corporation is located, and if practicable in the entitled to vote
principal office of the corporation: Provided, Sec. 54 of the Corporation Code provides that:
That Metro Manila shall, for purposes of this “The president shall preside at all meetings of
section, be considered a city or municipality. the directors or trustees as well as of the
Notice of meetings shall be in writing, and the stockholders or members, unless the by-laws
time and place thereof stated therein. All provide otherwise.”
proceedings had and any business transacted at
any meeting of the stockholders or members, if C. Right to Vote of Stockholders
within the powers or authority of the  Instances when voting right not available
corporation, shall be valid even if the meeting Sec. 6 of the Corporation Code provides
be improperly held or called, provided all the that: “Except as provided in the
stockholders or members of the corporation are immediately preceding paragraph, the vote
present or duly represented at the meeting.” necessary to approve a particular corporate
*Applies to both stock and non-stock act as provided in this Code shall be
corporations. deemed to refer only to stocks with voting
General Rule: The meeting must be held in the rights.”
city or municipality where the principal office is Instances when voting right is not
located. available:
Exception: Sec. 93 on non-stock corporations, 1. Delinquent shares
the By-Laws may provide different venue for 2. Treasury shares
their meeting. 3. Fractional shares
*A casual reading of section 51 would say that a 4. Escrow shares
corporation cannot provide any other place for  Rules on:
the meeting of stockholders. But in case of a 1. Delinquent Shares
non-stock corporation, Section 93 of the Sec. 71 of the Corporation Code
Corporation provides that the by-laws could provides that: “No delinquent stock
provide any place for the meeting of its shall be voted for or be entitled to vote
members provided that it is within the or to representation at any
Philippines and proper notice has been given. stockholders’ meeting, nor shall the
Q: Is there a conflict between Section 51 and holder thereof be entitled to any of the
Section 93? rights of a stockholder except the right
A: YES. There is conflict but this conflict may be to dividends in accordance with the
reconciled. As a rule, the by-laws may provide a provisions of this Code, until and unless
different place of meeting provided that it is he pays the amount due on his
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subscription with accrued interest, and Exception: If there is a strong evidence

the costs and expenses of that indeed the shares have been
advertisement, if any.” purchased through public funds.
*Delinquency arises upon default in Requisites:
payment of subscription. 1. Strong evidence or prima facie
Q: Are they included for quorum and evidence that the shares are ill-
voting purposes? gotten.
A: NO. 2. There is an imminent danger that
Q: Even if there are proxies? the shares will be dissipated.
A: YES. Case: Transmiddle East v CA
Q: Shares not yet fully paid but not yet Q: During the pendency of
delinquent, are they entitled to vote? sequestration process, are the
A: YES. sequestered shares included for
*Delinquent stock is not entitled to vote quorum purposes?
and his presence would not be taken A: General Rule: YES.
for purposes of quorum. Q: Who can vote them?
*The only right remain is the right to A: General Rule: Stockholder of record.
receive dividends subject to the *In Republic of the Philippines v
provision of Section 43. COCOFED, the SC held that there is a
2. Escrow Shares prima facie evidence that the shares are
*Escrow shares are not entitled to vote purchased with the use of public funds.
before the fulfillment of the condition 5. Pledgor, Mortgagor or Administrator of
imposed thereon. Shares
3. Unpaid Shares Sec. 55 of the Corporation Code
Sec. 72 of the Corporation Code provides that: “In case of pledged or
provides that: “Holders of subscribed mortgaged shares in stock corporations,
shares not fully paid which are not the pledgor or mortgagor shall have the
delinquent shall have all the rights of a right to attend and vote at meetings of
stockholder.” stockholders, unless the pledgee or
General Rule: The holder of unpaid mortgagee is expressly given by the
shares can exercise the right to vote. pledgor or mortgagor such right in
Exception: If it is provided in the writing which is recorded on the
subscription contract that such right appropriate corporate books.
cannot be exercised until the Executors, administrators, receivers,
subscription is fully paid. and other legal representatives duly
4. Sequestered Shares appointed by the court may attend and
Q: What is the reason for sequestration vote in behalf of the stockholders or
process? members without need of any written
A: For investigative purposes; To avoid proxy.”
wastage dissipation of assets. Q: Can the pledgee/mortgagee exercise
Q: Is PCGG authorized to vote for the the right to vote?
sequestered shares? A: General Rule: No. The right to vote
A: General Rule: No. PCGG cannot vote remains to the owner thus, it is the
for the sequestered shares because pledgor/mortgagor that can exercise it.
being a conservator/administrator, it Exception: If there is an agreement that
should only perform acts of the pledgee/mortgagee can exercise
administration and not acts of the right to vote.
ownership. Case: Calapatia

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*Administrator/executor/heirs have 1. Must be in writing

the right to vote even without prior 2. Filed before the scheduled meeting; under
proxy. But the SEC requires them to the SEC rule, 10 days before the scheduled
submit letters of appointment or meeting
documents showing that he has been *Proxy ensures presence of a quorum and also
duly instituted as approval of corporate acts.
executor/administrator of the General Rule: Proxy is revocable.
deceased. Exception: If proxy is coupled with interest.
6. Shares Jointly Owned Ways to revoke proxy:
Sec. 56 of the Corporation Code 1. By execution of subsequent proxy.
provides that: “In case of shares of 2. If the stockholder concerned would appear
stock owned jointly by two or more in the scheduled meeting.
persons, in order to vote the same, the
Voting Trust Agreement is an agreement
consent of all the co-owners shall be
necessary, unless there is a written whereby one or more stockholders transfer
their shares of stocks to a trustee, who thereby
proxy, signed by all the co-owners,
authorizing one or some of them or any acquires for a period of time the voting rights
(and/or any other rights) over such shares; and
other person to vote such share or
shares: Provided, That when the shares in return, trust certificates are given to the
stockholders, which are transferable like stock
are owned in an “and/or” capacity by
the holders thereof, any one of the joint certificates, subject however, to the trust
agreement.
owners can vote said shares or appoint
a proxy therefor.” PROXY VOTING TRUST
AGREEMENT
D. Concept of Proxy and Voting Trust Agreement The stockholder The stockholder
Proxy is a written authorization given by one remains the ceases to be a
person to another so that the second person stockholder of record stockholder of record
can act for the first. Revocable Irrevocable
General Rule: 5 years
*Proxy is a representative.
Exception: If coupled
*Relationship: Principal-Agent. with interest
*Proxy is authorized to vote and also authorized
to be present in a meeting. *The transfer includes the transfer of legal title.
Functions: For quorum purposes; for voting Sec. 59 of the Corporation Code provides that:
purposes. “One or more stockholders of a stock
*In Board meeting, proxy is not allowed (Sec. 25 corporation may create a voting trust for the
of the Corporation Code). purpose of conferring upon a trustee or
Sec. 58 of the Corporation Code provides that: trustees the right to vote and other rights
“Stockholders and members may vote in person pertaining to the shares for a period not
or by proxy in all meetings of stockholders or exceeding 5 years at any time: Provided, That
members. Proxies shall be in writing, signed by in the case of a voting trust specifically required
the stockholder or member and filed before the as a condition in a loan agreement, said voting
scheduled meeting with the corporate trust may be for a period exceeding 5 years but
secretary. Unless otherwise provided in the shall automatically expire upon full payment of
proxy, it shall be valid only for the meeting for the loan. A voting trust agreement must be in
which it is intended. No proxy shall be valid and writing and notarized, and shall specify the
effective for a period longer than 5 years at any terms and conditions thereof. A certified copy
one time.” of such agreement shall be filed with the
Requisites: corporation and with the SEC; otherwise, said

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agreement is ineffective and unenforceable. performing the duties of a director because the
The certificate or certificates of stock covered law requires each and every director to have
by the voting trust agreement shall be cancelled legal, not beneficial title to at least one share.
and new ones shall be issued in the name of the
trustee or trustees stating that they are issued E. Derivative Suit; Concept and Requisites
Derivative Suit is a suit brought by any
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer stockholder, usually a minority shareholder, to
redress a wrong committed against the
in the name of the trustee or trustees is made
pursuant to said voting trust agreement. The corporation whenever the responsible officers
refuse to take any action thereon or are the
trustee or trustees shall execute and deliver to
the transferors voting trust certificates, which very person to be sued.
*This prerogative is developed through
shall be transferable in the same manner and
with the same effect as certificates of stock. The jurisprudence.
*This is expressly mandated by Sec. 31 of the
voting trust agreement filed with the
corporation shall be subject to examination by Corporation Code.
Q: Why derivative?
any stockholder of the corporation in the same
manner as any other corporate book or record: A: From the word derive. The one bringing the
suit derives the cause of action from the
Provided, That both the transferor and the
trustee or trustees may exercise the right of corporation.
Q: Who brings the suit?
inspection of all corporate books and records in
accordance with the provisions of this Code. A: Any stockholder/member usually minority
stockholder.
Any other stockholder may transfer his shares
to the same trustee or trustees upon the terms Q: Whose cause of action?
A: It is the corporation’s cause of action.
and conditions stated in the voting trust
agreement, and thereupon shall be bound by all Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
the provisions of said agreement. No voting
trust agreement shall be entered into for the board thus when the board refuses to take
action in order to protect the corporation
purpose of circumventing the law against
monopolies and illegal combinations in restraint derivative suit may be allowed.
Compelling Reason: Inaction of the officers.
of trade or used for purposes of fraud. Unless
expressly renewed, all rights granted in a voting Failure to discharge their responsibilities.
Requisites:
trust agreement shall automatically expire at
the end of the agreed period, and the voting 1. The stockholder bringing the suit must be
one of record as of the time the cause of
trust certificates as well as the certificates of
stock in the name of the trustee or trustees action accrues as well as of the time the
action is brought unless the cause of action
shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the is a continuing offer.
*The stockholder must implead the real
name of the transferors. The voting trustee or
trustees may vote by proxy unless the party in interest, i.e. the corporation.
*In Chua v CA, the SC held that the
agreement provides otherwise.”
Consequence: The stockholder entering into a corporation must be impleaded since it is
the real party in interest.
voting trust agreement ceases to be a
stockholder of record. 2. The action must be named under the
corporation’s name
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title to the 3. General Rule: The stockholder bringing the
suit must have exhausted intra-corporate
shares so that if the stockholder is, at the same
time, a director of the corporation, remedies within the corporation.
Exception: If the very person to be sued is
automatically he is disqualified to continue
the responsible officers themselves.
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**This is a condition precedent. said corporation fails to materialize within

4. The suit is not intended to harass the said period or within a longer period as may
defendant, not a nuisance or harassment be stipulated in the contract of
suit. subscription: Provided, That no pre-
5. Appraisal right must not be an available incorporation subscription may be revoked
remedy. after the submission of the articles of
incorporation to the SEC.”
Individual suit is a suit filed by the stockholder *Contracts between the subscribers.
because his personal right has been violated. 2 Fold Characteristics:
The cause of action is personal to the a. It is a contract between subscribers.
stockholder. The party injured is the b. May be regarded as continuing offer on
stockholder himself. the part of the subscriber concerned
Representative suit is a suit filed by a group of which the corporation may accept upon
stockholders that suffered common injury. acquisition of juridical personality.
Reason: The corporation is not yet in
SUBSCRIPTION CONTRACT: existence.
2. Post incorporation subscription – one
A. Ways to become a Stockholder of a Corporation
entered into after the incorporation for the
1. Subscription contract with the corporation.
acquisition of unissued stock.
2. Purchase or acquisition of shares from
*Contracts between the subscribers and the
existing stockholders.
corporation.
3. Purchase of treasury shares from the
*Creates a creditor-debtor relationship.
corporation.
*All of them involve shareholdings.
D. Consideration for the Issuance of Shares
*Subscription is unique because it involves
Sec. 62 of the Corporation Code provides that:
unissued shares.
“Stocks shall not be issued for a consideration
B. Concept of Subscription Contract less than the par or issued price thereof.
Subscription Contract is, under Sec. 60 of the Consideration for the issuance of stock may be
Corporation Code, “any contract for the any or a combination of any two or more of the
acquisition of unissued stock in an existing following: 1. Actual cash paid to the
corporation or a corporation still to be formed corporation; 2. Property, tangible or intangible,
shall be deemed a subscription within the actually received by the corporation and
meaning of this Title, notwithstanding the fact necessary or convenient for its use and lawful
that the parties refer to it as a purchase or purposes at a fair valuation equal to the par or
some other contract.” issued value of the stock issued; 3. Labor
*This is strictly regulated by the Corporation performed for or services actually rendered to
Code. the corporation; 4. Previously incurred
indebtedness of the corporation; 5. Amounts
C. Kinds of Subscription transferred from unrestricted retained earnings
1. Pre-incorporation subscription – one to stated capital; and 6. Outstanding shares
entered into before incorporation. exchanged for stocks in the event of
Sec. 61 of the Corporation Code provides reclassification of conversion. Where the
that: “A subscription for shares of stock of a consideration is other than actual cash, or
corporation still to be formed shall be consists of intangible property such as patents
irrevocable for a period of at least 6 months of copyrights, the valuation thereof shall initially
from the date of subscription, unless all of be determined by the incorporators or the
the other subscribers consent to the board of directors, subject to the approval by
revocation, or unless the incorporation of the SEC. Shares of stock shall not be issued in

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exchange for promissory notes or future capital stock and may collect the same or
service. The same considerations provided for such percentage thereof, in either case with
in this section, insofar as they may be accrued interest, if any, as it may deem
applicable, may be used for the issuance of necessary. Payment of any unpaid
bonds by the corporation. The issued price of subscription or any percentage thereof,
no-par value shares may be fixed in the articles together with the interest accrued, if any,
of incorporation or by the board of directors shall be made on the date specified in the
pursuant to authority conferred upon it by the contract of subscription or on the date
articles of incorporation or the by-laws, or in stated in the call made by the board. Failure
the absence thereof, by the stockholders to pay on such date shall render the entire
representing at least a majority of the balance due and payable and shall make the
outstanding capital stock at a meeting duly stockholder liable for interest at the legal
called for the purpose.” rate on such balance, unless a different rate
Valid considerations for the subscription of interest is provided in the by-laws,
agreements: computed from such date until full
1. Cash payment. If within 30 days from the said
2. Property date no payment is made, all stocks covered
3. Labor or services actually rendered to the by said subscription shall thereupon
corporation become delinquent and shall be subject to
4. Prior corporate obligations sale as hereinafter provided, unless the
5. Amounts transferred from unrestricted board of directors orders otherwise.”
retained earnings to stated capital *If there was no date as to payment of
6. Outstanding shares in exchange for stocks subscription stated in the subscription
in the event of reclassification or agreement, the board may call on all the
conversion. unpaid subscribers to pay the remaining
balance of their subscription. Failure to pay
E. Payment of Subscription within 30 days from the said date, all stocks
Q ： When payment of the subscription is covered by said subscription shall
made? thereupon become delinquent and shall be
A: Look into the subscription agreement. If subject to sale unless the board of directors
subscription agreement is silent as to when the orders otherwise.
amount of subscription to be paid, the board of
directors may call on all the unpaid subscribers F. Certificate of Stock
to pay the remaining balance of their Certificate of Stock is a written evidence of the
subscription. shares of stock but it is not the share itself.
 Remedies to enforce payment of *Does not represent credit.
subscription Q: How important is a stock certificate?
1. By Extra-judicial sale at public auction. A: It is an evidence of ownership of stocks.
2. By judicial action. Q: Who issue stock certificate?
3. Collection from cash dividends and A: Stock certificates must be signed by the
withholding of stock dividends. president or vice-president, countersigned by
 When shares are considered delinquent the secretary or assistant secretary.
Sec. 67 of the Corporation Code provides Q: When certificate of stock may be issued?
that: “Subject to the provisions of the A: Sec. 64 of the Corporation Code states that:
contract of subscription, the board of “No certificate of stock shall be issued to a
directors of any stock corporation may at subscriber until the full amount of his
any time declare due and payable to the subscription together with interest and
corporation unpaid subscriptions to the

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expenses (in case of delinquent shares), if any is 3. To be valid to third parties, the transfer must
due, has been paid.” be recorded in the books of the corporation.
 Doctrine of Indivisibility of Subscription *If not represented by the certificate, the
Contract shares may be transferred by means of a deed
Doctrine of Indivisibility of Subscription of assignment and such is duly recorded in the
Contract: Failure to pay any of the books of the corporation.
installments due would necessarily affect all *To make the transfer binding to the
the other installments because the corporation and third person, the transfer must
subscription is to be treated as one, whole, be recorded in the stock and transfer book of
entire, indivisible contract. Upon default of the corporation.
payment on any of the installment results Q: Who is the owner of the share?
to entire subscription due and demandable. A: The stockholder of record.
*The Certificate of Stock cannot be divided
into portions. H. Lost and Destroyed Certificate of Stock
*No certificate of stock shall be issued until Sec. 73 of the Corporation Code provides that:
the full payment of the subscription. “The following procedure shall be followed for
*The corporation has an automatic lien over the issuance by a corporation of new
the shares. certificates of stock in lieu of those which have
Q: What will happen to the payment been lost, stolen or destroyed: 1. The registered
already made by the subscriber? owner of a certificate of stock in a corporation
A: The payment partially made shall be or his legal representative shall file with the
applied proportionately to all the shares corporation an affidavit in triplicate setting
covered by the subscription. forth, if possible, the circumstances as to how
Example: the certificate was lost, stolen or destroyed, the
P10 per share; payment made is P6000 number of shares represented by such
covering 1000 shares. The P6000 shall be certificate, the serial number of the certificate
allocated equally to all shares. P6 per share and the name of the corporation which issued
has been paid. P4 per share is the liability. the same. He shall also submit such other
 Certificate of Stock, quasi-negotiable information and evidence which he may deem
Q: can the stock certificate be treated as necessary; 2. After verifying the affidavit and
negotiable instrument under NIL? other information and evidence with the books
A: No. The requisites are not complied of the corporation, said corporation shall
with. There is no engagement to pay in sum publish a notice in a newspaper of general
certain in money. circulation published in the place where the
*Negotiable instrument represents credit. corporation has its principal office, once a week
Creditor-debtor relationship arises. for 3 consecutive weeks at the expense of the
Q: Are certificates of stock negotiable? registered owner of the certificate of stock
A: They are negotiable in certain extent. which has been lost, stolen or destroyed. The
That is why they are quasi-negotiable. notice shall state the name of said corporation,
*The title over the share can be assigned, the name of the registered owner and the serial
transferred by indorsement and delivery. number of said certificate, and the number of
*Due course holding is not applicable. shares represented by such certificate, and that
after the expiration of 1 year from the date of
G. Transfer of Shares the last publication, if no contest has been
If represented by a certificate, the following presented to said corporation regarding said
must be strictly complied with: certificate of stock, the right to make such
1. Delivery of the certificate; contest shall be barred and said corporation
2. Indorsement by the owner or his agent; shall cancel in its books the certificate of stock

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which has been lost, stolen or destroyed and proposed action must be recorded in full on his
issue in lieu thereof new certificate of stock, demand. The records of all business
unless the registered owner files a bond or transactions of the corporation and the minutes
other security in lieu thereof as may be of any meetings shall be open to inspection by
required, effective for a period of 1 year, for any director, trustee, stockholder or member of
such amount and in such form and with such the corporation at reasonable hours on
sureties as may be satisfactory to the board of business days and he may demand, writing, for
directors, in which case a new certificate may a copy of excerpts from said records or minutes,
be issued even before the expiration of the 1 at his expense. Any officer or agent of the
year period provided herein: Provided, That if a corporation who shall refuse to allow any
contest has been presented to said corporation director, trustee, stockholder or member of the
or if an action is pending in court regarding the corporation to examine and copy excerpts from
ownership of said certificate of stock which has its records or minutes, in accordance with the
been lost, stolen or destroyed, the issuance of provisions of this Code, shall be liable to such
the new certificate of stock in lieu thereof shall director, trustee, stockholder or member for
be suspended until the final decision by the damages, and in addition, shall be guilty of an
court regarding the ownership of said certificate offense which shall be punishable under Section
of stock which has been lost, stolen or 144 of this Code: Provided, That if such refusal
destroyed. Except in case of fraud, bad faith, or is made pursuant to a resolution or order of the
negligence on the part of the corporation and board of directors or trustees, the liability under
its officers, no action may be brought against this section for such action shall be imposed
any corporation which shall have issued upon the directors or trustees who voted for
certificate of stock in lieu of those lost, stolen or such refusal: and Provided, further, That it shall
destroyed pursuant to the procedure above- be a defense to any action under this section
described.” that the person demanding to examine and
copy excerpts from the corporation’s records
CORPORATE BOOKS AND RECORDS: and minutes has improperly used any
A. Books required to be kept by a Corporation information secured through any prior
Sec. 74 of the Corporation Code provides that: examination of the records or minutes of such
“Every corporation shall keep and carefully corporation or of any other corporation, or was
preserve at its principal office a record of all not acting in good faith or for a legitimate
business transactions and minutes of all purpose in making his demand. Stock
meetings of stockholders or members, or of the corporations must also keep a book to be
board of directors or trustees, in which shall be known as the “stock and transfer book,” in
set forth in detail the time and place of holding which must be kept a record of all stocks in the
the meeting, how authorized, the notice given, names of the stockholders alphabetically
whether the meeting was regular or special, if arranged; the installments paid and unpaid on
special its object, those present and absent, and all stock for which subscription has been made,
every act done or ordered done at the meeting. and the date of payment of any installment; a
Upon the demand of any director, trustee, statement of every alienation, sale or transfer
stockholder or member, the time when any of stock made, the date thereof, and by and to
director, trustee, stockholder or member whom made; and such other entries as the by-
entered or left the meeting must be noted in laws may prescribe. The stock and transfer book
the minutes; and on a similar demand, the yeas shall be kept in the principal office of the
and nays must be taken on any motion or corporation or in the office of its stock transfer
proposition, and a record thereof carefully agent and shall be open for inspection by any
made. The protest of any director, trustee, director or stockholder of the corporation at
stockholder or member on any action or reasonable hours on business days. No stock

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transfer agent or one engaged principally in the *Can also claim damages.
business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to MERGER AND CONSOLIDATION:
operate in the Philippines unless he secures a A. Concept of Merger and Consolidation
license from the SEC and pays a fee as may be Merger is one where a corporation absorbs the
fixed by the Commission, which shall be other and remains in existence while the others
renewable annually: Provided, That a stock are dissolved.
corporation is not precluded from performing *There is a continuous flow of juridical
or making transfer of its own stocks, in which personality.
case all the rules and regulations imposed on Examples:
stock transfer agents, except the payment of a A+B=B
license fee herein provided, shall be A+B+C=C
applicable.” A+B+C=A
*Keeping of books and records are mandatory. A+B+C=B
Books required to be kept: Consolidation is one where a new corporation
1. Book of minutes – reflects the decisions and is created, and consolidating corporations are
actions of the Board of extinguished.
Directors/Stockholders. Examples:
2. Record of all business transactions A+B=C
3. Stock and Transfer Book/Membership Book A+B+C=D
4. Books of Proceedings A + B + C = ABC
A + B + C = XYZ
B. Right to Inspect Corporate Books
 Basis and Extent of the Right of Inspection B. Requisites of and Procedure for Merger and
Q: Is the keeping of these books Consolidation
mandatory? 1. Approval by majority vote of the Board of
A: YES. Section 144 of the Corporation Code Directors of each corporation.
provides penalty for any violation of the 2. Approval of the stockholders of each
provision of the Code. corporation representing 2/3 of the
Rationale: Right of inspection would be outstanding capital stock.
futile. Right of inspection would not be 3. Approval of SEC
exercised. Cases: Associated Bank v CA; Polyan v CA
 Limitations on the Right of Inspection Procedure:
1. The books and records shall be open to 1. The Board of each corporation shall draw
inspection at reasonable hours on up a plan of merger/consolidation.
business days. 2. The plan of merger or consolidation shall be
2. The books and records shall not be approved by majority vote of each board of
improperly used any information the concerned corporations at separate
secured through any prior examination meetings.
of the books or records. 3. The plan of merger/consolidation shall be
3. The stockholder’s demand must be in approved by the majority vote of the 2/3 of
good faith or for a legitimate purpose. the shareholders of the outstanding capital
*Inspection can be done personally or stock or members in case of a non-stock
through agent. corporation.
 Remedies to Enforce Right of Inspection 4. Articles of Merger/Consolidation shall be
*In case of refusal to exercise the right of executed by each of the constituent
inspection, the stockholder concerned may corporators, signed by the President or
file an action for mandamus before the RTC.

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Vice-President and certified by the *Stockholders cannot exercise this right at his
secretary or assistant secretary. pleasure.
5. Four copies of the Articles of Merger or Requisites:
Consolidation together with favorable 1. The Stockholder has dissented
recommendation of a pertinent 2. Corporate change must have been
government agency in certain cases shall be approved by the SEC.
submitted to the SEC for approval. *Any changes that affect the stockholders’
6. The SEC shall issue a certificate or merger if right.
it is satisfied that the merger or *Any changes that concern the
consolidation of the corporations corporation’s existence.
concerned is not inconsistent with the *Corporate changes that appraisal right can
provisions of this Code and existing laws. be availed of.
3. There must have an unrestricted retained
C. Effects of Merger or Consolidation earnings,
1. All property, real or personal, and all *It is not a matter of right.
receivables due to, and all other interest of Reason: If it is a matter of right it shall lead to
each constituent corporation, shall be the diminution or depletion of corporate assets
deemed transferred to and vested in such which is violative of the Trust Fund Doctrine.
surviving or consolidated corporation
without further act or deed. B. Instances of Appraisal Right
2. The surviving or consolidated corporation Sec. 81 of the Corporation Code provides that:
shall be responsible for all the liabilities and “Any stockholder of a corporation shall have the
obligations of each of the constituent right to dissent and demand payment of the fair
corporations. value of his shares in the following instances: 1.
3. Any claim, action or proceeding pending by In case any amendment to the articles of
or against any of the constituent incorporation has the effect of changing or
corporations may be prosecuted by or restricting the rights of any stockholder or class
against the surviving or consolidated of shares, or of authorizing preferences in any
corporations. respect superior to those of outstanding shares
4. The rights of the creditors or lien upon the of any class, or of extending or shortening the
property of any of each constituent term of corporate existence; 2. In case of sale,
corporation shall not be impaired by such lease, exchange, transfer, mortgage, pledge or
merger or consolidation. other disposition of all or substantially all of the
5. Dissolution of other corporation leaving the corporate property and assets as provided in
surviving or consolidated corporation exists. the Code; and 3. In case of merger or
Remedy of the dissenting stockholder: The consolidation.”
dissenting stockholder may exercise his
appraisal right. C. Requirements for a Valid Exercise of Appraisal
Right
RIGHT OF APPRAISAL: Sec. 82 of the Corporation Code provides that:
A. Concept of Appraisal Right “The appraisal right may be exercised by any
Appraisal Right is the right to withdraw from stockholder who shall have voted against the
the corporation and demand payment of the proposed corporate action, by making a written
fair value of his shares after dissenting from demand on the corporation within 30 days after
certain corporate acts involving fundamental the date on which the vote was taken for
changes in corporate structure. payment of the fair value of his shares:
*Demanding for the reasonable return of Provided, That failure to make the demand
investment. within such period shall be deemed a waiver of

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the appraisal right. If the proposed corporate 7. Stockholder must transfer his shares to the
action is implemented or affected, the corporation upon payment by the
corporation shall pay to such stockholder, upon corporation.
surrender of the certificate or certificates of
stock representing his shares, the fair value D. Effects of Exercising Appraisal Right
thereof as of the day prior to the date on which Sec. 83 of the Corporation Code provides that:
the vote was taken, excluding any appreciation “From the time of demand for payment of the
or depreciation in anticipation of such fair value of a stockholder’s shares until either
corporate action. If within a period of 60 days the abandonment of the corporate action
from the date the corporate action was involved or the purchase of the said shares by
approved by the stockholders, the withdrawing the corporation, all rights accruing to such
stockholder and the corporation cannot agree shares, including voting and dividend rights,
on the fair value of the shares, it shall be shall be suspended in accordance with the
determined and appraised by 3 disinterested provisions of this Code, except the right of such
persons, one of whom shall be named by the stockholder to receive payment of the fair value
stockholder, another by the corporation, and thereof: Provided, That if the dissenting
the third by the two thus chosen. The findings stockholder is not paid the value of his shares
of the majority of the appraisers shall be final, within 30 days after the award, his voting and
and their award shall be paid by the corporation dividend rights shall immediately be restored.”
within 30 days after such award is made: Effects:
Provided, That no payment shall be made to 1. All rights accruing to such shares shall be
any dissenting stockholder unless the suspended from the time of demand for
corporation has unrestricted retained earnings payment of the fair value of the shares until
in its books to cover such payment: and either the abandonment of the corporate
Provided, further, That upon payment by the action.
corporation of the agreed or awarded price, the 2. The dissenting stockholder shall be entitled
stockholder shall forthwith transfer his shares to receive payment of the fair value of his
to the corporation.” shares as agreed upon between him and
Requisites: the corporation or as determined by the
1. Any of the instances set forth by law must appraisers chosen by them.
be present. *Sec. 86. The dissenting stock can be sold
2. Dissenting stockholder must have voted during the pendency of its payment.
against the proposed action. Remedy in case appraisal right cannot be
*Abstaining stockholder cannot claim or exercised: Dispose the shareholdings.
exercise his appraisal right.
NON-STOCK CORPORATIONS:
3. Demand for payment must be made within
30 days from the date vote is taken A. Definition and Purposes of a Non-Stock
thereon. Failure to make demand shall be Corporation
deemed a waiver. Sec. 87 of the Corporation Code states that:
4. Price must be based on fair value as of day “For the purposes of this Code, a non-stock is
prior to date on which vote was taken one where no part of its income is distributable
5. Submission by withdrawing stockholder of as dividends to its members, trustees, or
his shares to the corporation for notation of officers, subject to the provisions of this Code
being a dissenting stockholder within 10 on dissolution: Provided, That any profit which
days from written demand. a non-stock corporation may obtain as an
6. Payment must be made only when the incident to its operations shall, whenever
corporation has unrestricted retained necessary or proper, be used for the
earnings in its books. furtherance of the purpose or purposes for

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which the corporation was organized, subject to

the provisions of this Title. The provisions
governing stock corporations, when pertinent, C. Membership in a Non-Stock Corporation
shall be applicable to non-stock corporations, Sec. 89 of the Corporation Code provides that:
except as may be covered by specific provisions “The right of the membership of any class or
of this Title.” classes to vote may be limited, broadened or
*Sec. 87 should be read in harmony with Sec. denied to the extent specified in the articles of
94. incorporation or the by-laws. Unless so limited,
*A Non-stock corporation is not precluded from broadened or denied, each member, regardless
engaging in profit-business related. of class, shall be entitled to one vote. Unless
Sec. 88 of the Corporation Code provides that: otherwise provided in the articles of
“Non-stock corporations may be formed or incorporation of the by-laws, a member may
organized for charitable, religious, educational, vote by proxy in accordance with the provisions
professional, cultural, fraternal, literary, of this Code. Voting by mail or other similar
scientific, social, civic service, or similar means by members of non-stock corporations
purposes, like trade, industry, agricultural and may be authorized by the by-laws of non-stock
like chambers, or any combination thereof, corporations with the approval of, and under
subject to the special provisions of this Title such conditions which may be prescribed by,
governing particular classes of non-stock the SEC.”
corporations.” General Rule: Sec. 58
*The purpose of a non-stock corporation is Exception: Sec. 89. This provision allows denial
related to public welfare. of proxy.
Reason: To promote camaraderie,
B. Distinguished from Stock Corporation togetherness, unity and familiarity.
*A member is entitled to 1 vote. However, such
Non- stock Stock Corporation
Corporation right may be limited, broadened or denied in
Public welfare For profit the Articles of Incorporation or By-Laws. Thus,
Board of Trustees Board of directors the By-laws of a non-stock corporation may
Generally, the term of 1 year subject to hold- provide for the desired voting rights of
office of trustees is 3 over principle members including the number of votes.
years Sec. 90 of the Corporation Code provides that:
By-laws can provide City or municipality
“Membership in a non-stock corporation and all
for a different venue where the principal
as long as it is within office is located rights arising therefrom are personal and non-
the Philippines transferable, unless the articles of incorporation
Member may be Proxy is allowed or the by-laws otherwise provide.”
deprived of their right General Rule: Membership is non-transferable.
to designate proxies Exception: If the Articles of Incorporation or the
by provisions in the By-laws provide otherwise.
articles of
Sec. 91 of the Corporation Code provides that:
incorporation or by-
laws “Membership shall be terminated in the
Reason: To promote manner and for the causes provided in the
camaraderie, articles of incorporation or the by-laws.
togetherness, unity Termination of membership shall have the
and familiarity. effect of extinguishing all rights of a member in
Generally, members Election is vested the corporation or in its property, unless
could directly elect upon Board of
otherwise provided in the articles of
officers. Except unless Directors
AOI provides incorporation or the by-laws.”
otherwise. Rules on Place of Meeting:

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General Rule: Sec. 51 similar activities as dissolved corporation;

Exception: Sec. 93 and
4. All other assets shall be distributed to
D. Rule on Distribution of Assets members, as provided for in the Articles or
Sec. 94 of the Corporation Code provides that: By-Laws.
“In case dissolution of a non-stock corporation Sec. 95 of the Corporation Code provides that:
in accordance with the provisions of this Code, “A plan providing for the distribution of assets,
its assets shall be applied and distributed as not inconsistent with the provisions of this Title,
follows: 1. All liabilities and obligations of the may be adopted by a non-stock corporation in
corporation shall be paid, satisfied and the process of dissolution in the following
discharged, or adequate provision shall be manner: The board of trustees shall, by majority
made therefor; 2. Assets held by the vote, adopt a resolution recommending a plan
corporation upon a condition requiring return, of distribution and directing the submission
transfer or conveyance, and which condition thereof to a vote at a regular or special meeting
occurs by reason of the dissolution, shall be of members having voting rights. Written notice
returned, transferred or conveyed in setting forth the proposed plan of distribution
accordance with such requirements; 3. Assets or a summary thereof and the date, time and
received and held by the corporation subject to place of such meeting shall be given to each
limitations permitting their use only for member entitled to vote, within the time and in
charitable, religious, benevolent, educational or the manner provided in this Code for the giving
similar purposes, but not held upon a condition of notice of meetings to members. Such plan of
requiring return, transfer or conveyance by distribution shall be adopted upon approval of
reason of the dissolution, shall be transferred or at least 2/3 of the members having voting rights
conveyed to one or more corporations, present or represented by proxy at such
societies or organizations engaged in activities meeting.”
in the Philippines substantially similar to those Q: Would it be possible for a non-stock
of the dissolving corporation according to a plan corporation to be converted into a stock
of distribution adopted pursuant to this corporation by mere amendment of the Articles
Chapter; 4. Assets other than those mentioned of Incorporation?
in the preceding paragraphs, if any, shall be A: NO. Because it would violate Section 87 of
distributed in accordance with the provisions of the Corporation Code which prohibits
the articles of incorporation or the by-laws, to distribution of income as dividends to
the extent that the articles of incorporation or members.
the by-laws, determine the distributive rights of Reason: Fraudulent to donors
members, or any class or classes of members, Q: Can a stock corporation be converted to a
or provide for distribution; and 5. In any other non-stock corporation by mere amendment of
case, assets may be distributed to such persons, the Articles of Incorporation?
societies, organizations or corporations, A: YES.
whether or not organized for profit, as may be Requirements:
specified in a plan of distribution adopted 1. Approval of 2/3 of the members
pursuant to this Chapter.” 2. Approval of the SEC
Order of distribution: Q: What was relinquished?
1. All its creditors shall be paid; A: Proprietary rights.
2. Assets held subject to return on dissolution, *Appraisal right is available.
shall be delivered back to their givers;
3. Assets held for charitable, religious CLOSE CORPORATIONS:
purposes, etc., without a condition for their
return on dissolution, shall be conveyed to A. Concept; Distinguished from Open Corporations
one or more organizations engaged in
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Sec. 96 of the Corporation Code states that: “A 7. Corporations declared to be vested with
corporation, within the meaning of this Code, is public interest
one whose articles of incorporation provide
Distinctions from Open Corporations:
that: (1) All the corporation’s issued stock of all
classes, exclusive of treasury shares, shall be Open Corporation Close Corporation
held of record by not more than a specified Its articles of Its articles must
number of persons, not exceeding 20; (2) all the incorporation need contain the special
issued stock of all classes shall be subject to one only contain the matters prescribed by
or more specified restrictions on transfer general matters Section 97 aside from
permitted by this Title; and (3) The corporation enumerated in Section the general matters in
14 of the Corporation Section 14. Failure to
shall not list in any stock exchange or make any
Code do so precludes a de
public offering of any of its stock of any class. jure close corporation
Notwithstanding the foregoing, a corporation status
shall not be deemed a close corporation when Its status as an 2/3 of its voting stock
at least 2/3 of its voting stock or voting rights is ordinary stock or voting rights must
owned or controlled by another corporation corporation is not not be owned or
which is not a close corporation within the affected by the controlled by another
ownership of its voting corporation which is
meaning of this Code. Any corporation may be
stock or voting rights not a close
incorporated as a close corporation, except corporation
mining or oil companies, stock exchanges, Its articles cannot Its articles may classify
banks, insurance companies, public utilities, classify its directors its directors
educational institutions and corporations Business of the Business of the
declared to be vested with public interest in corporation is corporation may be
accordance with the provisions of this Code. managed by the board managed by the
of directors stockholders if the
The provisions of this Title shall primarily
articles so provide, but
govern close corporations: Provided, That the they are liable as
provisions of other Titles of this Code shall directors
apply suppletorily except insofar as this Title The corporate officers Its articles may
otherwise provides.” and employees are provide that any or all
*Whether open or close corporation depends elected by a majority of the corporate
on its charter. vote of all the officers or employees
members of the board may be elected or
Case: San Juan Structural
of directors appointed by the
The following must be stated in the Articles of stockholders
Incorporation: The pre-emptive right The pre-emptive right
1. Membership is limited to 20 is subject to the is subject to no
2. Transfer or disposition of shares is subject exceptions found in exceptions unless
to specified restrictions Section 39 of the denied in the articles
3. Prohibition against offering to the public of Corporation Code
The appraisal right The appraisal right
the shares or listing in the stock exchange.
may be exercised by a may be exercised and
General Rule: Any corporation may be
stockholder only in the compelled against the
incorporated as close corporation. cases provided in corporation by a
Exceptions: Sections 81 and 42 of stockholder for any
1. Mining or oil companies the Corporation Code reason
2. Stock exchanges Except as regards In case of an
3. Banks redeemable shares, arbitration of an
the purchase by the intracorporate
4. Insurance companies
corporation of its own deadlock by the SEC,
5. Public utilities
stock must always be the corporation may
6. Educational institutions made from the be ordered to

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unrestricted retained purchase its own stockholders of the corporation shall be subject
earnings shares from the to all liabilities of directors. The articles of
stockholders incorporation may likewise provide that all
regardless of the officers or employees or that specified officers
availability of
or employees shall be elected or appointed by
unrestricted retained
earnings the stockholders, instead of by the board of
Arbitration of Arbitration of directors.”
intracorporate intracorporate
deadlock by the SEC is deadlock by the SEC is C. Restrictions on Transfer of Shares
not a remedy in case an available remedy in Sec. 98 of the Corporation Code provides that:
the directors or case the directors or “Restrictions on the right to transfer shares
stockholders are so stockholders are so
must appear in the articles of incorporation and
divided respecting the divided respecting the
management of the management of the in the by-laws as well as in the certificate of
corporation. corporation. stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than
*In San Juan Structural Steel Fabricators v CA, granting the existing stockholders or the
the SC held that the circumstance that around corporation the option to purchase the shares
99.86% of the total share holding of petitioner of the transferring stockholder with such
belongs to respondent would not justify reasonable terms, conditions or period stated
classification of the corporation as close. therein. If upon the expiration of said period,
B. Permissive Provisions in the Articles of the existing stockholders or the corporation
Incorporation fails to exercise the option to purchase, the
Sec. 97 of the Corporation Code provides that: transferring stockholder may sell his shares to
“The articles of incorporation of a close any third person.”
corporation may provide: 1. For a classification Option Restriction – this restriction provides
of shares or rights and the qualifications for that no disposition of shares will be made
owning or holding the same and restrictions on unless the shares are offered first to the
their transfers as may be stated therein, subject corporation or the stockholders.
to the provisions of the following section; 2. For *Pre-emptive right is exercisable or available.
a classification of directors into one or more *This restriction is valid and allowed.
classes, each of whom may be voted for and Reason: it is the one contemplated by law.
elected solely by a particular class of stock; and *Restriction derogates private rights.
3. For a greater quorum or voting requirements Consent Restriction – this restriction provides
in meetings of stockholders or directors than that no disposition of shares will be made
those provided in this Code. The articles of without the consent of directors.
incorporation of a close corporation may *This restriction is not valid.
provide that the business of the corporation Reason: It is more onerous and burdensome.
may provide that the business of the CORPORATE DISSOLUTION/LIQUIDATION:
corporation shall be managed by the
stockholders of the corporation rather than by a A. Methods of Voluntary Corporate Dissolution
board of directors. So long as this provision and the Requirements therefor
continues in effect: 1. No meeting of Dissolution refers to the extinguishment of
stockholders need be called to elect directors; franchise or termination of corporate existence.
2. Unless the context clearly requires otherwise, Modes of Dissolution:
the stockholders of the corporation shall be 1. Voluntary dissolution
deemed to be directors for the purpose of 2. Involuntary dissolution
applying the provisions of this Code; and 3. The Methods of Voluntary Dissolution:

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1. Voluntary dissolution where no creditors 3. The notice of meeting should also be

are affected published for 3 consecutive weeks in a
2. Voluntary dissolution where creditors are newspaper published in the place;
affected 4. The resolution to dissolve must be
3. Shortening of the corporate term by approved by the majority of the
amending the articles of incorporation directors/trustees and approved by the
*Dissolution takes effect upon the coming stockholders representing at least 2/3
of the shortened term. of the outstanding capital stock or 2/3
4. Expiration of corporate term of members;
5. A copy of the resolution shall be
 Voluntary dissolution where no creditors certified by the majority of the directors
are affected or trustees and countersigned by the
Sec. 118 of the Corporation Code provides secretary;
that: “If dissolution of a corporation does 6. The signed and countersigned copy will
not prejudice the rights of any creditor be filed with the SEC and the latter will
having a claim against it, the dissolution issue the certificate of dissolution
may be effected by majority vote of the
board of directors or trustees, and by a  Voluntary dissolution where creditors are
resolution duly adopted by the affirmative affected
vote of the stockholders owning at least 2/3 Sec. 119 of the Corporation Code provides
of the outstanding capital stock or of at that: “Where the dissolution of a
least 2/3 of the members of a meeting to be corporation may prejudice the rights of any
creditor, the petition for dissolution shall be
held upon call of the directors or trustees
filed with the Securities and Exchange
after publication of the notice of time, place Commission. The petition shall be signed by
and object of the meeting for 3 consecutive a majority of its board of directors or
weeks in a newspaper published in the trustees or other officers having the
place where the principal office of said management of its affairs, verified by its
corporation is located; and if no newspaper president or secretary or one of its directors
is published in such place, then in a or trustees, and shall set forth all claims and
demands against it, and that its dissolution
newspaper of general circulation in the
was resolved upon by the affirmative vote
Philippines, after sending such notice to of the stockholders representing at least
each stockholder or member either by two-thirds (2/3) of the outstanding capital
registered mail or by personal delivery at stock or by at least two-thirds (2/3) of the
least 30 days prior to said meeting. A copy members at a meeting of its stockholders or
of the resolution authorizing the dissolution members called for that purpose. If the
shall be certified by a majority of the board petition is sufficient in form and substance,
the Commission shall, by an order reciting
of directors or trustees and countersigned
the purpose of the petition, fix a date on or
by the secretary of the corporation. The SEC before which objections thereto may be
shall thereupon issue the certificate of filed by any person, which date shall not be
dissolution.” less than thirty (30) days nor more than
Requisites: sixty (60) days after the entry of the order.
1. A meeting must be held on the call of Before such date, a copy of the order shall
be published at least once a week for three
the directors or trustees;
(3) consecutive weeks in a newspaper of
2. Notice of the meeting should be given
general circulation published in the
to the stockholders by personal delivery municipality or city where the principal
or registered mail at least 30 days prior office of the corporation is situated, or if
to the meeting; there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and a similar copy shall be
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posted for three (3) consecutive weeks in term pursuant to the provisions of this
three (3) public places in such municipality Code. A copy of the amended articles of
or city. Upon five (5) day's notice, given incorporation shall be submitted to the
after the date on which the right to file
Securities and Exchange Commission in
objections as fixed in the order has expired,
accordance with this Code. Upon approval
the Commission shall proceed to hear the
petition and try any issue made by the of the amended articles of incorporation of
objections filed; and if no such objection is the expiration of the shortened term, as the
sufficient, and the material allegations of case may be, the corporation shall be
the petition are true, it shall render deemed dissolved without any further
judgment dissolving the corporation and proceedings, subject to the provisions of
directing such disposition of its assets as
this Code on liquidation.”
justice requires, and may appoint a receiver
to collect such assets and pay the debts of
the corporation.” B. Concept of Involuntary Dissolution and the
Requisites: Grounds therefor
1. Approval of the stockholders Sec. 121 of the Corporation Code provides that:
representing at least 2/3 of the “A corporation may be dissolved by the
outstanding capital stock or 2/3 of Securities and Exchange Commission upon filing
members in a meeting called for that
of a verified complaint and after proper notice
purpose;
2. Filing of a Petition with the SEC signed and hearing on the grounds provided by existing
by majority of directors or trustees or laws, rules and regulations.”
other officers having the management *This must be done with substantive and
of its affairs verified by President or procedural due process.
Secretary or Director. Claims and Grounds:
demands must be stated in the petition;
1. Failure to submit by-laws within the
3. If petition is sufficient in form and
prescribed period
substance, the SEC shall issue an Order
fixing a hearing date for objections; 2. Fraud in the procurement of Certificate of
4. A copy of the Order shall be published Registration
at least once a week for 3 consecutive 3. Misrepresentation as to the activities that
weeks in a newspaper of general the corporation will undertake
circulation or if there is no newspaper 4. Treasurer’s affidavit is false
in the municipality or city of the
5. Continued inoperation for 5 years
principal office, posting for 3
consecutive weeks in 3 public places is 6. Failure to commence business transactions
sufficient; within 2 years from issuance of certificate
5. Objections must be filed no less than 30 of registration
days nor more than 60 days after the 7. To some cases, performance of ultra vires
entry of the order; act since it is a violation to the franchise but
6. After the expiration of the time to file depending on the seriousness or gravity of
objections, a hearing shall be conducted
the offense
upon prior 5 day notice to hear the
objections; 8. Issuance of watered stocks
7. Judgment shall be rendered dissolving 9. De facto status
the corporation and directing the 10. Failure to keep corporate books and records
disposition of assets; the judgment may depending on the gravity or seriousness of
include appointment of a receiver. the offense
11. Violation of its charter
 Shortening of term of existence
Sec. 120 of the Corporation Code provides
C. Corporate Liquidation
that: “A voluntary dissolution may be
Liquidation is a process by which all the assets
effected by amending the articles of
of the corporation are converted into liquid
incorporation to shorten the corporate
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assets in order to facilitate the payment of Q: Can the 3 year period be extended?
obligations to creditors, and the remaining A: NO.
balance if any is to be distributed to the
Reason: Beyond the 3 year period, there is no
stockholders.
*Liquidation takes place after dissolution. corporate existence for all purposes subject to
doctrine of relation.
Sec. 122 of the Corporation Code provides that:
“Every corporation whose charter expires by its Remedy: Before the expiration of the 3 year
period, appoint a trustee/receiver.
own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for Q: During the 3 year period, does the
corporation enjoy corporate existence?
other purposes is terminated in any other
manner, shall nevertheless be continued as a A: YES. But for limited purpose only, i.e., for
liquidation purposes only. (Limited existence)
body corporate for three (3) years after the
time when it would have been so dissolved, for Q: May such corporation sue during the 3 year
period?
the purpose of prosecuting and defending suits
by or against it and enabling it to settle and A: YES. But only when the subject matter is
related to liquidation and winding up of its
close its affairs, to dispose of and convey its
property and to distribute its assets, but not for remaining affairs.
*In case trustee/receiver is appointed, he is not
the purpose of continuing the business for
which it was established. At any time during bound by the 3 year period.
*In Gelano v CA, the SC held that the lawyer of
said three (3) years, the corporation is
authorized and empowered to convey all of its the corporation can be considered as trustee.
The term trustee must be considered in its
property to trustees for the benefit of
stockholders, members, creditors, and other generic sense. Anyone who has been
designated by the corporation to act on its
persons in interest. From and after any such
conveyance by the corporation of its property in behalf could be considered as trustee for
purposes of pursuing a claim for and on behalf
trust for the benefit of its stockholders,
members, creditors and others in interest, all of the corporation. A lawyer falls within the
ambit of the word “trustee.”
interest which the corporation had in the
property terminates, the legal interest vests in *Appointment of trustee can be inferred from
the conduct of the corporation. This is by
the trustees, and the beneficial interest in the
stockholders, members, creditors or other Implication.
*If the corporation is the creditor appoint a
persons in interest. Upon the winding up of the
corporate affairs, any asset distributable to any trustee. If the corporation is the debtor appoint
a receiver.
creditor or stockholder or member who is
unknown or cannot be found shall be escheated Q: What if the corporate properties have
already been distributed among the
to the city or municipality where such assets are
located. Except by decrease of capital stock and shareholders without trustee/receiver?
A: Remedy: Run after the erring directors and
as otherwise allowed by this Code, no
corporation shall distribute any of its assets or officers.
property except upon lawful dissolution and E. Concept of Rehabilitation; Effects of
after payment of all its debts and liabilities.” Appointment of Management Committee or
Receiver
D. Methods of Liquidation or Winding Up Rehabilitation connotes a reopening or
1. By Board of Directors reorganization. Contemplates a continuance of
2. Through a trustee to whom the properties corporate existence in an effort to restore the
are conveyed corporation to its former successful operation.
3. By management committee or *This is a remedy expressly allowed under
rehabilitation receiver Section 6 of PD 902-A.

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Purpose: To make the corporation financially transact business in the Philippines after it shall
viable again. have obtained a license to transact business in
Substantive Grounds: this country in accordance with this Code and a
1. When there is imminent danger of certificate of authority from the appropriate
dissipation or wastage of corporate assets government agency.”
2. Serious paralyzation of business which Reciprocity Clause provides that the foreign
would work to the prejudice of the laws allow Filipino citizens and corporations to
stockholders and creditors of the do business in its own country or state.
corporation
*Mere misconduct of an officer is not a ground B. Tests to Determine Nationality of a Corporation
for corporate rehabilitation. 1. Incorporation Test – when the corporation
*A corporation cannot ask for corporate is incorporated, organized under the law of
rehabilitation and at the same time dissolution. other country.
*With the passage of RA8799, the remedy could 2. Control Test – for purposes of investment;
now be instituted with the proper RTC. the citizenship of a particular corporation is
Effect: Stay Order - stops or suspends the to be determined by the citizenship of the
enforcement of all claims for money or controlling stockholders.
otherwise whether enforcement is by court or
not, until rehabilitation proceedings are C. Concept of “Doing Business” and the License
terminated. Requirement therefor
Cases: PAL v Garcia; Sobrejuanite; Lingkod Substance Test provides that: a foreign
Manggagawa ng Rubberworld v Rubberworld corporation is doing business in the country if it
Philippines; RCBC v IAC is continuing the body or substance of the
*In PAL v Garcia, the SC held that stay order enterprise of business for which it was
suspends all enforcement in all stages of the organized.
proceedings. Continuity Test provides that: doing business
*In Lingkod Manggagawa sa Rubberworld v implies a continuity of commercial dealings and
Rubberworld Philippines, the SC held that labor arrangements, and contemplates to some
claims are likewise affected by the Stop order. extent the performance of acts or works or the
*In RCBC v IAC, the SC held that whether exercise of some functions normally incident to
creditors are secured or not, stay order will still and in progressive prosecution of, the purpose
affect them. The preference still remains it is and object of its organization.
just the enforcement that is suspended. *Foreign Corporation is required to obtain
license from the SEC to enable them to do
FOREIGN CORPORATIONS: business in the Philippines.
A. Concept of Foreign Corporation *The foreign corporation must appoint a
Foreign Corporation is a corporation formed, resident agent so that court may acquire
organized or existing under any law other than jurisdiction over the foreign corporation
those of the Philippines, and whose laws allow *License is essential if there is an intention to
Filipino citizens and corporations to do business maintain main or substance of the business in
in its own country or state. the Philippines or to continue the same.
Sec. 123 of the Corporation Code provides that: *Lack of license does not affect the validity of
“For the purposes of this Code, a foreign the transaction.
corporation is one formed, organized or existing *License is for regulatory purposes.
under any laws other than those of the *License requirement does not prevent
Philippines and whose laws allow Filipino performance of acts that are isolated from the
citizens and corporations to do business in its main business of the corporation and there is
own country or state. It shall have the right to

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no intent to continue the same in the 1. Failure to file its annual report or pay any
Philippines. fees as required by the Corporation Code
*If the foreign corporation is not licensed to do 2. Failure to appoint and maintain a resident
business in the Philippines, General Rule: they agent in the Philippines as required by the
have no access in Philippine Courts Corporation Code
Exceptions: 3. Failure, after change of its resident agent or
1. Isolated transactions his address, to submit to the SEC a
2. Infringement of trademark statement of such change as required by
*International offense can be sued the Corporation Code
anywhere. 4. Failure to submit to the SEC an
Cases: Expert Travel Tours v CA; Home authenticated copy of any amendment to
Insurance v Eastern Shipping Lines its articles of incorporation or by-laws or of
*In Expert Travel Tours v CA, the SC held that any articles of merger or consolidation
resident agent is not with authority to execute a within the time prescribed by the
certification of Forum shopping following Sec. Corporation Code
23 of the Corporation Code. 5. A misrepresentation of any material matter
*In Home Insurance v Eastern Shipping Lines, in any application, report affidavit or other
the SC held that if at the time the suit was document submitted by such corporation
brought, the suing foreign entity already have pursuant to the provisions of the
license to do business in the Philippines, the suit Corporation Code
will be allowed although at the time the 6. Failure to pay any and all taxes, imposts,
transaction was made it does not have the assessments or penalties, if any, lawfully
requisite of a license to do so, the remedial due to the Philippine Government or any of
defect is cured. its agencies or political subdivision
Cases: Japan Airlines v CA 7. Transacting business in the Philippines
*In Japan Airlines v CA, the SC held that the outside of the purpose or purposes for
selling of tickets though there is no aircraft which such corporation is authorized under
landing in the Philippines constitute doing its license
business in the Philippines. 8. Transacting business in the Philippines as
*In Ericks v CA, the SC held that license is agent of or acting for and in behalf of any
necessary in order the foreign corporation may foreign corporation or entity not duly
sue. In this case, the court considered the licensed to do business in the Philippines
continuity test, they found out that the foreign 9. Any other ground as would render it unfit to
corporation has the intent to continue business transact business in the Philippines.
in the Philippines.
*Credit is obtained to maintain longer
transactions.

D. Effects of Being Issued a License

1. They are placed under the jurisdiction of
the Philippine courts
2. They are placed under the same footing as
domestic corporations
3. The public is protected in dealing with
foreign corporations.

E. Revocation and Withdrawal of License

Grounds for Revocation:

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