CORPORATION AND SECURITIES LAW

#BELIEVEIT

HISTORY (SPAIN) general partner compose absence of

 Code of Commerce governed business organizations can represent the express authority
 The provisions of sociedad de cuentas en participation or joint partnership
accounts remain in the statute books Cannot be Transfer of Corporate shares
transferred interest are freely
TYPES OF BUSINESS ORGANIZATIONS without the transferrable
1. Sole Proprietorship – with only one proprietary owner; a single consent of the without consent
individual conducts business under his own name or under a other partners of other
business name stockholders
Most simplest and prevalent form of business enterprise (unless there is
May be the only choice for some income-generating stipulation)
undertakings because there are activities that are not open to May be liable As to liability of Limited to their
corporate form (lawyers, doctors) beyond their those who investment
Complete control over the business investment compose
NO LEGAL PERSONALITY separate from its proprietor No right of Succession Has right of
DEPENDENT in the life of the proprietor succession succession
o GR: Heirs or other interested persons
o XPN: If the goodwill of the business is linked to the SIMILARITES:
proprietor, it will cease upon his death  Both have juridical personality
FUNDS – personal contributions or loans  Capital of both are derived from their components
BUSINESS NAME – register with DTI (Business name Law)  There is distribution of profits
 Valid for 5 years ; Must be made within 6 mos before the 3. Joint Accounts or Cuentas en Participacion – the existence is
commencement of the business  automatic cancellation for only known to those who had an interest in the same there
failure to renew within 6 months being no mutual agreement between the parties and without
Failure to register – her cannot use or sign the business name indicating to the public that there were other people besides
on any written or printed receipts and cannot exhibit the the one who ostensibly managed the business (ACCIDENTAL
business name in plain view PARTNERSHIP)
MERCHANTS – those having a legal capacity to engage in commerce JOINT PARTNERSHIP
and habitually devote themselves to it ACCOUNTS
DISQUALIFICATIONS IN ENGAGING IN BUSINESS, ENTERING INTO No Juridical As to Has a personality
CONTRACTS OR FINANCIALLY INTERESTED IN TRANSACTIONS personality juridical separate and
a. Senators and Congressman personality distinct from the
b. President, VP, Members of the Cabinet and their deputies partners
or assistants No commercial As to Can adopt a
c. Members of the CONCOM name common business partnership name
d. Pres, VP, Members of the Cabinet, Congress and SC and to all name
CONCOM – to obtain loan or other financial participants
accommodation from GOCC Bank Only the As to General partners
ostensible management are all mangers in
2. Partnership – when 2 or more persons bind themselves to partner partnership
contribute money, property or industry to a common fund,
manages the
with the intention of dividing the profits among themselves
business in his
REGISTRATION WITH SEC – necessary for those having P3000 own name
or more capital (but the juridical personality still exits for
Only the As to parties All general
failure to register)
ostensible in cases partners may be
o Purpose – give notice to third parties
partner can be liable even up to
PARTNERSHIP CORPORATION sued and is the extent of their
Created by mere As to manner of Commences from liable to persons personal
agreement creation the issuance of a transacting with properties
Cert of him
Registration by
4. Business Trusts – legal relation whereby one person “trustor”
SEC or by passage conveys a property to another “trustee” for the benefit of a
of law
person “beneficiary”
May be 2 persons As to the number At least 5 5. Joint Venture—association of persons or companies jointly
of organizers incorporators undertaking a commercial enterprise; generally all contribute to
Subject only to As to powers More restricted the assets and share risks (temporary)
what may be in its power Reduce the investment required and distribute the risk of
agreed upon by because of its undertaking an expensive and risky venture
the partners limited May gain possible legal or public relations advantages
personality 6. Cooperative – autonomous and duly registered association of
There is mutual Authority of Stockholders are persons with a common bond of interest who have voluntarily
agency and each those who not agents in the joined together
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7. Syndicate – group of people who come together to work for a 2. Created by operation of law
common aim (eg insurance) ; practice of dividing investment 3. Has the right of succession
risk 4. Has the powers, attributes expressly authorized by law or
8. Corporations incident to its existence
Its separate personality (Doctrine of Separate Personality) and
the limited liability (Limited liability Rule) makes it the most HOW ARE CORPORATIONS CREATED?
desirable business organization 1. By general law – private corporations are created under
the CC
CHARACTERISTICS: 2. By special law – public corporations are created through
1. Legal personality special laws. Private corporations cannot be created by
2. Limited liability special laws except GOCCs
3. Transferability of shares
4. Delegated management under a board structure CONCESSION THEORY  it owes its life to the State and its birth is
5. Investor ownership purely dependent on the State’s will.
 “Fiat theory” ; Govt Paternity Theory” ; Franchise Theory
GENOSSENCHAFT THEORY  the reality of the group as a social and
ADVANTAGES OF CORPORATIONS legal entity, independent of state recognition and concession
1. Capacity to act as a legal unit 1. Realist or Inherence Theory – legal recognition of group
2. Limitation or exemption from individual liability interests that already exists
3. Continuity of existence 2. Enterprise Theory – stresses the underlying commercial
4. Transferability of shares enterprise without emphasis in entity aggregate distinctions of
5. Easy capital generations components
3. Symbol Theory -- a corporation is a symbol for the aggregate
DISADVANTAGES OF CORPORATIONS of the associates in their group personalities
1. Prone to “double taxation”
2. Subject to greater governmental regulation and control FRANCHISE
3. Harder to organize Special privilege conferred by governmental authority and
4. Harder or more complicated to maintain which does not belong to citizens of the country generally as a
matter of common right
SECTION 1. Title of the Code – This code shall be known as “The  A corporation is granted by the State the right to exist by virtue
Corporation Code of the Philippines” of a primary franchise

HISTORY Corporate or GENERAL/ Special or SECONDARY

Corporation Law Act No 1459 – first general law on PRIMARY FRANCHISE FRANCHISE
corporations Franchise to exist as a Certain rights and privileges
BP 68 repealed such and took effect on May 1 1980 corporation conferred upon existing
 The Corporation Code applies to all corporations already in corporations (use of streets,
existence at the time of the Code took effect erect poles)
o Gives the corporations already in existence a period of 2 Is vested in the individuals Vested in the corporation
years to comply with the new requirements who compose the
corporation
PURPOSE OF THE CORPORATION CODE Cannot be conveyed May be conveyed or
1. Defining the area within which the parties are free to allocate without legislative mortgaged
risk, control and profit as they wish authority to do so
2. Prescribe the allocation of these elements in the absence of
agreement CREATION BY SPECIAL LAW  Only GOCCs may be created by
special law
WHEN CC APPLIES SUPPLETORILY CONTRACT THEORY  incorporation is deemed to involve contracts
GR: CC is the primary law that should be applied in the regulation of among members , between the members and corp, and between
corporations the members of the corp and the State
XPN: General Banking Law and New Central Bank Act are the  Right against non0-impairment of contracts
primary laws on banks; CC – suppletorily
 General law VS. Special law RIGHT OF SUCCESSION
“PERPETUAL SUCCESSION”  continuous existence which enables a
SECTION 2. Corporation defined. – A corporation is an artificial corporation to manage its affairs and hold property without the
being created by operation of law, having the right of succession necessity of perpetual conveyances for purposes of transmitting it
and the powers, attributes and properties expressly authorized by DOES NOT IMPLY CORPORATE IMMORTALITY  Only
law or incident to its existence continuity of existence (50 years subject to frutehr extension)

ATTRIBUTES OF A CORPORATION DOCTRINE OF SEPARATE PERSONALITY

1. It is an artificial being It has a separate personality distinct and separate from the
persons composing it

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Properties belonging to a corporation cannot be attached to B. Such control must be used by the defendant to commit
satisfy the debt of a stockholder fraud or wrong
C. The said control and breach of duty must proximately
NATURE OF STOCKHOLDERS’ INTEREST IN CORPORATE PROPERTIES cause the injury or unjust loss complained of
Inchoate and becomes actual only upon liquidation of assets of 3. ALTER EGO DOCTRINE – it must be shown that there is unity of
the corporation interest and ownership that the separate personalities of the
The stockholders do not own pro indiviso share on the assets corporation and individual no longer exist and that if the acts
and cannot mortgage or convey the same except as directors or are treated as those of the corporation alone, an inequitable
duly authorized officer of the corporation result will follow
o Would result to appropriation and distribution of the
corporate assets before dissolution and liquidation CASES WHEN PIERCING THE VEIL MAY BE APPLIED
Only the corporation is the real party in interest for damages 1. Cases when fraud or the wrongful acts or omissions are present
arising from wrongful attachment of corporation’s assets 2. Cases when there is no intent to commit a wrongful act in
organizing the corporation but injustice may result
SEPARATE OBLIGATIONS  The obli of the corporation are not the
obli of its shareholders and members and officers and vice versa FRAUD  if there is deception that would lead an ordinary prudent
 A stockholder cannot condone an obli of a third person to the person into error
corporation
TOTALITY OF CIRCUMSTANCES TEST
LIMITED LIABILITY RULE  A stockholder is personally liable for the  Each case must be decided on its own set of facts (See pg62)
financial obligations of the corporation to the extent of his unpaid
subscription PROBATIVE FACTORS in applying piercing the veil
GR: While stockholders are generally not liable, the stockholders 1. Stock ownership by one or common ownership of both
may be liable if they are not or have not fully paid the subscription corporations
price 2. Identity of directors and officers
REMEDY  Impleaded 3. The manner of keeping corporate books and records
4. Methods of conducting business
SEPARATE ACTS  The acts of the stockholders do not bind the
corporation unless authorized; the acts of officers in their personal SUBSIDIARY (Parent Company - Subsidiary)
capacity cannot be imputed to the corporation A corporation more than 50% of the voting stock of which is
owned or controlled directly or indirectly through one or more
DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION intermediaries by another corporations which becomes a
GR: Separate personality parent company
However, the corporation’s separate juridical personality may
be disregarded when there is an abuse of the corporate form CIRCUMSTANCES WHICH IN DETERMINING WON A SUBSIDIARY IS
o EG. When the corporate identity is used to defeat public BUT A MERE INSTRUMENTALITY IR ALTER EGO OF THE PARENT -
convenience, fraud or defend crime CORPORATION
o If the corporation is a mere alter ego or business conduit 1. The parent corpo owns all or most of the capital stocks of the
of a person or where the corporation is so organized and subsidiary
controlled and its affairs are conducted as to make it 2. The parent and subsidiary corp have common directors or
merely an instrumentality, agency of another corporation officers
o Overlapping of incorporators and stockholders  does not 3. The parent corporation finances the subsidiary
justify the piercing of veil 4. The subsidiary has grossly inadequate capital
5. The parent corpo pays the salaries and expenses or losses of
THEORY OF ENTERPRISE ENTITY  there can be no coporate the subsidiary
existence without persons to compose it.  See pg 65 for more

CLASSIFICATIONS (when piercing the veil may be applied) JUDICIAL FUNCTION

1. Cases where public convenience may be defeated – when the  Only the courts can pierce the veil
corpo is used as vehicle for evasion of an existing obli  A corporation not impleaded in a suit cannot be subject to the
2. Fraud cases – when the corpo entity is used to justify a wrong, court’s process of piercing the veil of its corporate fiction
protect fraud or defend a crime PERSONALITY NOT ABROGATED  When the veil is pierced, the
3. Alter ego cases – where a corpo is merely a farce since it is a corporate character is not necessarily abrogated, it continues for
mere alter ego or business conduit of a person or where the legitimate objectives
corporation is so organized and controlled and its affairs are
conducted as to make it merely an instrumentality, agency of
another corporation PIERCING THE VEIL vs LIMITED LIABILITY RULE
If piercing the veil is applied, the entire obligation may be
1. IDENTITY DOCTRINE enforced against a stockholder while under the Limited liability
2. INSTRUMENTALITY RULE (3 FACTORS) rule, only the unpaid subscription price is due
A. Control

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GROUP OF COMPANIES  refers to corporations that are financially XPN: IN APPLYING GF RULE
related to one another as parent corporations, subsidiaries and  Applies if the share of the Filipinos is less than 60%. If the
affiliates percentage of Filipino ownership in the shareholder
 Has NO PERSONALITY SEPARATE AND DISTINCT from each other corporation or partnership is less than 60%, only the number of
sahres corresponding to the percentage shall be counted as
ASSOCIATED ENTERPRISE OR RELATED PARTIES  2 or more Philippine nationality
enterprises are associated if one participates directly or indirectly in
the management, control of the other/ of the enterprise NO NATIONALITY FOR CORPORATION SOLE

ONE MAN CORPORATION  All outstanding shares belong to one RESIDENCE  The principal place where their legal representation is
person established

PRIMARY RULES OF ATTRIBUTION  the acts of the Board of TORT LIABILITY  A corporation is civilly liable. A corporation is
Directors will be treated as an action of the corporation liable whenever a tortious act is committed by an officer or agent
under the express direction from the stockholders or members
ATTRIBUTION OF KNOWLEDGE  notice to the Board of Directors is acting as a body
notice to the corporation  Vicarious or direct

NATIONALITY AND CITIZENSHIP DOCTRINE OF CORPORATE RESPONSIBILITY

Membership in body politic, which carries with it the duty of  Eg. Hospitals,schools
allegiance to the State and exercise of political rights like right  Directly liable for failure to establish the standard of conduct to
of suffrage and to hold public office which it should conform as a coproration
o Citizenship is limited only to natural persons as they are RIGHT TO MORAL DAMAGES
the ones who are capable of performing such acts GR: Not entitled as it has no feelings, emotions
2 TESTS TO DETERMINE IF A CORPORATION IS FOREIGN OR XPN: when a corporation has a good reputation that is debased,
DOMESTIC resulting in its humiliation in the business realm
1. The Aggregate Test/ Control Test – requires looking into the
nationality, domicile or residence of individuals who control the CONSTITUTIONAL RIGHTS
corporation 1. Right against unreasonable searches and seizure
2. The Entity Test /Incorporation Test – looks to the nation where 2. Due process
the corporation was incorporated 3. Equal protection of the law
NOT ENTITLED  Right against self – incrimination; it is a mere
VOTING CONTROL TEST and BENEFICIAL OWNERSHIP TEST creature of law.
 Full beneficial ownership of the stocks, coupled with voting  The State has reserved its right to investigate
rights is essential to determine if a corporation is a Philippine
National CRIMINAL LIABILITY
o A corporation organized under Philippine laws of which GR: Cannot be held liable for a crime committed by its officer since it
60% of the capital stock outstanding and entitled to vote is has no malice
owned and held by Filipinos XPN: by express provision of law, the responsible officers would be
o A corporation organized abroad and registered as doing criminally liable
business in the Philippines under the CC of which 100% of  Trust receipts law
the capital stocks entitled to vote belong to Filipinos  Anti-dummy law
 Anti-money laundering act
The required percentage of Filipino ownership shall be applied to
both: SECTION 3. Classes of corporations. – Corporations formed or
1. The total number of outstanding shares of stock entitled to organized under this Code may be stock or non-stock corporations.
vote in the election of directors Corporations which have capital stock divided into shares and are
2. The total number of outstanding shares, WON entitled to vote authorized to distribute to the holders of such shares dividends or
in the election of directors allotments of the surplus profits on the basis of the shares held are
stock corporations. All other corporations are non-stock
GRANDFATHER RULE / INVESTMENT TEST corporations.
Method of determining the nationality of corporation which in
turn is owned by another corporation by breaking down the SECTION 4. Corporations created by special laws or charters. –
equity structure of the shareholders of the corporation Corporations created by special laws or charters shall be governed
When the court is in doubt in the 60-40 filipino equity primarily by the provisions of the special law or charter creating
ownership in the corporation, it may apply the grandfather rule them or applicable to them, supplemented by the provisions of this
Code, insofar as they are applicable
CONTROL TEST
A corporation shall be considered a Filipino corporation if the CLASSIFICATIONS OF CORPORATIONS
Filipino ownership of its capital is at least 60% and where the A. As to the number of components
60-40 filipino-alien shareholding is not in doubt 1. Aggregate corporation – a corporation consisting of more
than one member

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2. Corporation Sole – a corporation consisting of only one  GOING PUBLIC –when it decides to list its shares in the stock
person or member exchange
B. As to functions  GOINF PRIVATE – it would restrict the sahreholders to a certain
1. Public Corporations – organized for the govt of a portion group
of a State for the purpose of serving the welfare
2. Private Corporation – formed for some private purpose or QUASI PUBLIC CORPORATIONS
benefit EG. Railroad and canal corporations
C. As to manner of creation Engaged in private business affected with public interest
1. Special law – directly created by Congress, Such
corporation must be GOCC GOCCs  Any agency organized as a stock or non-stock corporation
2. General law – created under the CC vested with functions relating to public needs whether
3. Corporations by prescription – was not formally organized governmental or proprietary and owned by the govt or its
as such but has been duly recognized by immemorial instrumentalities to the extent of at least 51% of its capital stock
usage 1. With original charter or created under the special law
D. As to legal status 2. Incorporated under the general law (CC)
1. De Jure – organized in accordance with requirements of Considered as private corporations
the law May be created under special law but the SEC has no
2. De Facto – formed where there exists a flaw in in its jurisdiction since they are primarily governed by their charters
incorporation but there is colourable compliance with the If created under the CC – Non chartered GOCC ; SEC /
requirements of law
3. Corporation by estoppel – a group of persons holidng CREATION THROUGH SPECIAL LAW OF GOCCs
themselves as a corporation and enters into a contract 1. Must be a GOCC
with third persons 2. Must be for the interest of the common good
E. As to existence of stocks 3. Meets the test of economic viability
1. Stock corporation – capital stock is divided into shares and
is authorized to distribute to holders of such shares CSC – employees of GOCCs created by special law
dividends or allotments of the surplus profits Labor Code – GOCCs created by CC
2. Non stock – does not issue stocks and does not distribute
dividends to their members
F. As laws of incorporation GOVERNMENTAL INSTRUMENTALITIES
1. Domestic – formed under the Philippine law  Instrumentalities which are neither corporations nor agencies
2. Foreign – formed udner any laws other than the integrated within the departmental framework but vested with
Philippines and whose laws allow Filipino citizens and special functions endowed with some if not all corporate
corporations to do business in its own country powers
G. Special types of corporations under the CC  Eg. MIAA, PPA
1. Close corporation – articles of incorporation provide that:
a. All the corporation’s issue dstock shall be held of GOVERNMENT FINANCIAL INSTITUTIONS
record by not more than 20  The govt directly or indirectly owns majority of the capital stock
b. All the issued stock shall be subject to one or more and which are either:
specified restrictions on transfer 1. Registered with the BSP
c. The corporation shall not list in an ystock exchange or 2. Collecting funds from the public and places them in
make any public offering of any of its stock financial instruments GSIS or SSS
2. Special corporation – includes an educational corporation Section 5. Corporators and incorporators, stockholders and
and religious corporation members. – Corporators are those who compose a corporation,
H. Ecclesiastical and Lay Corporations whether as stockholders or as members. Incorporators are those
1. Ecclesiastical – composed entirely of spiritual persons stockholders or members mentioned in the articles of
2. Lay – all corporations other than ecclesiastical incorporation as originally forming and composing the corporation
I. Eleemosynary and Civil Corporation and who are signatories thereof.
1. Eleemosynary/ Charitable – created not for profit but for
charitable purposes Corporators in a stock corporation are called stockholders or
2. Civil – for benefit, pecuniary of its members shareholders. Corporators in a non-stock corporation are called
J. As to relationship members.
1. Subsidiary – a corporation more than 50% of the voting
stock is owned or controlled directly/ indirectly through COMPONENTS OF CORPORATION
one or more intermediaries by another corporation 1. Shareholders or members
2. Affiliate – corporation that directly or indirectly through 2. Directors or trustees
one or more intermediaries, is controlled or is under the 3. Officers
control of another corporation
3. Parent corporation –has control over another corporation Incorporators – appears in the Articles of Incorporations and cannot
directly/indirectly through one or more intermediaries be amended to change the names
Shareholders – holders of shares in a corporation with interest over
GOING PUBLIC AND GOING PRIVATE the management, income and assets of the corporation

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 2/3 of the outstanding capital is necessary in the exercise of the 3. Sale, lease, exchange, mortgage, pledge or other
power to: disposition of all or substantially all of the corporate
o Amend the articles on incorporation property;
o Extend or shorten corporate term 4. Incurring, creating or increasing bonded indebtedness;
o Increase or decrease stock 5. Increase or decrease of capital stock;
o Incur bonded indebtedness 6. Merger or consolidation of the corporation with
o Deny pre-emptive right another corporation or other corporations;
o Sell corporate assets 7. Investment of corporate funds in another corporation
 Majority if: or business in accordance with this Code; and
o Entering into management contract 8. Dissolution of the corporation.
o Adopt, amend or repeal by laws
o Power to revoke the power of the board to amend the by Except as provided in the immediately preceding paragraph, the
laws vote necessary to approve a particular corporate act as provided in
o Fix the issued valued or price of no par value shares this Code shall be deemed to refer only to stocks with voting rights

Section 6. Classification of shares. – The shares of stock of stock SHARES – Unit into which the proprietary interests in a corporation
corporations may be divided into classes or series of shares, or are divided
both, any of which classes or series of shares may have such rights,  Intangible interest or right which an owner has in the
privileges or restrictions as may be stated in the articles of management, profit and assets of the corporation
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or CAPITAL STOCK – consists of all classes of shares issued to
"redeemable" shares, unless otherwise provided in this Code: stockholders that is common shares as well as preferred shares
Provided, further, That there shall always be a class or series of which may have diff rights, privileges or restrictions
shares which have complete voting rights. Any or all of the shares
or series of shares may have a par value or have no par value as REASON FOR CLASSIFICATION
may be provided for in the articles of incorporation: Provided,  So that entrepreneurs who decide to go to the business would
however, That banks, trust companies, insurance companies, have flexibility
public utilities, and building and loan associations shall not be  in order to assure that they will be able to raise capital and at
permitted to issue no-par value shares of stock. the same time run the corpo in the manner which will be
equitable to all investors
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in KINDS OF SHARES
case of liquidation and in the distribution of dividends, or such 1. Common or Preferred shares
other preferences as may be stated in the articles of incorporation  Common – basic class of stock ordinarily and usually issued
which are not violative of the provisions of this Code: Provided, without without extraordinary rights or privileges and entitles
That preferred shares of stock may be issued only with a stated par the shareholder to a pro rate division of profits
value. The board of directors, where authorized in the articles of  Preferred – those that entitle the shareholder to some priority
incorporation, may fix the terms and conditions of preferred shares on dividends and asset distribution
of stock or any series thereof: Provided, That such terms and a. To avoid use of the bonds that have fixed interest charges
conditions shall be effective upon the filing of a certificate thereof b. To avoid issuing many additional common shares
with the Securities and Exchange Commission. c. To avoid diluting the common shareholders’ control of the
corporation
Shares of capital stock issued without par value shall be deemed Deprived of voting rights because they are merely investors
fully paid and non-assessable and the holder of such shares shall o To avoid inequity – provide in the Articles of Incorporation
not be liable to the corporation or to its creditors in respect and certificates that the right to vote shall resume if no
thereto: Provided; That shares without par value may not be dividends are declared after a certain number of years
issued for a consideration less than the value of five (P5.00) pesos o NO GUARANTY THAT THE HOLDER SHALL RECEIVED
per share: Provided, further, That the entire consideration received DIVIDENDS
by the corporation for its no-par value shares shall be treated as  Preferences granted to preferred stockholders do not
capital and shall not be available for distribution as dividends. give them a lien upon the property of the corporation
nor make them creditors of the corporation, the right
A corporation may, furthermore, classify its shares for the purpose of the former being always subordinate to the latter
of insuring compliance with constitutional or legal requirements.  Dividends are payable only when there are profits
Except as otherwise provided in the articles of incorporation and earned by the corporation and as a GR, even if there
stated in the certificate of stock, each share shall be equal in all are existing profits, the board of directors has the
respects to every other share. discretion to determine WON dividends are to be
declared
Where the articles of incorporation provide for non-voting shares PREFFERED SHARES:
in the cases allowed by this Code, the holders of such shares shall 1. Cumulative or non-cumulative
nevertheless be entitled to vote on the following matters:  Cumulative – payment of current dividends and back dividends
1. Amendment of the articles of incorporation;  Non-cumulative – no need to make up for undeclared
2. Adoption and amendment of by-laws; dividends (current dividends only)

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2. Participating or non-participating  Result by virtue of a transaction to place shares in escrow until

 Participating – entitled to participate with the common shares the happening of an event or fulfillment of a condition
in excess distribution  May be common or preferred shares
3. Preferred as to dividends and / or preferred as to assets upon
distribution Section 7. Founders’ shares. – Founders’ shares classified as such in
 Preferred shares as to assets – share which gives the holder the articles of incorporation may be given certain rights and
preference in the distribution of the assets of the corporation in privileges not enjoyed by the owners of other stocks, provided that
case of liquidation where the exclusive right to vote and be voted for in the election of
 Preferred shares as to dividends – share the holder of which is directors is granted, it must be for a limited period not to exceed
entitled to receive dividends on said share to the extent agreed five (5) years subject to the approval of the Securities and Exchange
upon before any dividends at all are paid to the holders of Commission. The five-year period shall commence from the date of
common stock the aforesaid approval by the Securities and Exchange Commission.
2. Voting or Non-voting shares
3. Par value or non-par value shares
 Par value – with fixed value stated in the Articles of RATIONALE
Incorporation and the share certificate (does not reflect the  Founders share are given to those who helped organized the
true market value) corporation
 No par value – shares without an arbitrary amount  May be a form of reward to the founders
4. Treasury shares
5. Redeemable shares APPROVAL OF SEC
6. Founder’s shares  Subject to the approval of SEC to prevent abuse

RECLASSIFICATION NATURE OF THE 5 YEAR LIMIT

 Shares that are originally common shares may be reclassified  Refers only to the right to vote and be voted for in the election
into preferred shares of directors
 No substantial alteration in the subscriber’s proportional
interest Section 8. Redeemable shares. – Redeemable shares may be issued
by the corporation when expressly so provided in the articles of
OTHER VALUES THAT ARE COMMONLY ASSOCIATED WITH SHARES incorporation. They may be purchased or taken up by the
OF STOCK corporation upon the expiration of a fixed period, regardless of the
1. Market Value –the price at which shares of capital stock is existence of unrestricted retained earnings in the books of the
bought and sold by investors in the market corporation, and upon such other terms and conditions as may be
2. Book Value – the amount per share that each shareholder stated in the articles of incorporation, which terms and conditions
would receive if the corporation were liquidated without must also be stated in the certificate of stock representing said
incurring any further expenses shares
3. Liquidation value – the amount a stockholder would receive
upon the dissolution and liquidation of the corporation REDEEMABLE SHARES – shares of stocks issued by a corporation
4. Redemption value – the price per share at which the which said corporation can purchase or take up from their holders as
corporation may redeem its share expressly provided for in the AOI and certificates of stock
5. Issue (Stated) value –the selling price of the shared fixed by the representing said shares.
Board or Art. Of Incorporation  Sec 8 provides for the formal requirements for redeemable
NOTE: Shares without par value may be converted to par value shares (must be expressly stated in the AOI and certificates of
shares and vice versa by amending the AOI stock)
 Basis of conversion  based on the latest book value of the no  Likened to temporary borrowings that enables a corporation to
par value shares adjust its capital structure to meet varying conditions
RATIONALE
CONDITIONS FOR ISSUANCE OF NO PAR VALUE SHARES  To eliminate the market volatility risks on the side of the share
1. Shares of capital stock issued without par value shall be owners
deemed fully paid and non-assessable  Will facilitate the raising of badly needed capital by the
2. The shares without par value may not be issued for a corporation but at the same time would not deceive creditors
consideration less than 5php per share
3. The entire consideration received by the corporation shall be UNRESTRICTED RETAINED EARNINGS NOT REQUIRED
treated as capital and not available for distribution as dividends  Payment may come from the capital
 UNRESTRICTED RETAINED EARNINGS  the amount of
SHARES THAT CANNOT BE NO PAR VALUE SHARES (trust) accumulated profits and gains realized out of the normal and
1. Preferred shares continuous operations of the company after deducting
2. Shares in banks distributions of stockholders and transfers to capital stock or
3. Shares in trust companies other accounts which is:
4. Shares in insurance companies 1. Not appropriated by the Board of Director for corporate
5. Shares in public utilities expansion projects or programs
6. Shares in building and loan associations 2. Not covered by a restriction for dividend declaration under
ESCROW SHARES – not reflected in the AOI a loan agreement

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3. The corporation such as when there is a need for a special 2. the rights enjoyed by the corporation as the holder of treasury
reserve for probable contingencies shares are restricted
 Redemption may not be made where the corporation is 3. Disposition of treasury shares
insolvent or is such redemption will cause insolvency or
inability of the corporation to meet its debts as they mature. LIMITATIONS
1. They may be re issued or sold again as long as the corporation
MANDATORY REDEMPTION holds them as treasury shares
 Must be made within a certain period; not against public policy 2. TS cannot participate in dividends because dividends cannot be
o Anybody who acquires mandatory redeemable share is declared by the corporation to itself
forewarned that the redeemable shares may be purchased out 3. TS cannot be represented during the stockholder’s meetings for
of capital otherwise equal distribution of voting powers among
 Requires the issuing corporation to redeem or repurchase its stockholders will be effectively lost and the directors will be
preferred shares at a fixed date or at the option of the holder able to perpetuate their control of the corporation
giving the shareholder the right to the return of their 4. The amount of unrestricted retained earnings equivalent to the
investment cost of TS being held shall be restricted from being declared
 All corporations who issue redeemable shares with mandatory and issued as dividends
redemption are required to set up and maintain a “Sinking
Fund” (a fund set up by the corporation where cash is gradually NATURE AND EFFECTS
set aside in order to accumulate the amount necessary to meet  TS may be common or preferred share
the redemption price of redeemable shares at specified dates  May be held indefinitely, resold or retired
in the future o While held in the company’s treasury, the stock earns no
dividends and has not voted in the company affairs
EFFECT OF REDEMPTION a. TS are different from the authorized but unissued share
 REDEMPTION – repurchase or reacquisition of stock by a b. The corporation has the option to retire the treasury shares
corporation which issued the stock in exchange for property, c. TS may be declared as property dividend to be issued out of the
WON the acquired share is cancelled, retired or held in treasury retained earnings previously used to support their acquisition
 EFFECT  shall be considered retired and no longer issuable provided that the amount of the retained earnings has not
unless otherwise provided in the AOI been subsequently impaired by losses
o Redeemed share will not be considered retired and will become d. If TS are not considered as outstanding capital stock, the corpo
treasury shares if the AOI expressly provides that once is not entitled to any right or privilege of a shareholder
redeemed, the redeemable shares shall be classified as treasury e. The Board of Directors is empowered to re issue the TS
shares
o If the shares are considered retired, the capital stock of the TITLE II INCORPORATION AND ORGANIZATION OF PRIVATE
corpo is in effect reduced by the corresponding number of CORPOATIONS
shares because the redeemed shares can no longer be reissued INCORPORATION  the performance of conditions, acts, deeds and
writings by incorporators and the official acts, certification or
TAX CONSEQUENCE records which give the corporation its existence
 Cases when redemption is used as veil for constructive
distribution of cash dividends EFFECT IF N0T INCORPORATED
o The amounts received by the shareholder will be treated as  It is only through incorporation and registration with SEC that
cash dividends because the proceeds of redemption in such private corporations can acquire juridical personality
case are additional wealth  The life of a corporation will not commence if the SEC will not
issue a Cert of incorporation even if the supposed incorporators
Section 9. Treasury shares. – Treasury shares are shares of stock already signed and filed the AOI with the SEC
which have been issued and fully paid for, but subsequently NOTE:
reacquired by the issuing corporation by purchase, redemption, X incorporation is not necessary for an association to function as a
donation or through some other lawful means. Such shares may group and not necessary for liability to attach under the rule on
again be disposed of for a reasonable price fixed by the board of corpo by estoppel
directors
DOCUMENTARY REQUIREMENTS FOR INCORPORATION
TREASURY SHARES  shares of stock that have been issued and  The application together with supporting docs shall be filed by
fully paid for, but subsequently reacquired by the issuing the incorporators with the SEC
corporation by purchase, redemption and donation or through some o It is only upon their approval and issuance of certificate of
other lawful means incorporation by the SEC that the applicant corpo becomes a
 Issued shares but being in the treasury, they do not have the juridical person
status of outstanding shares
 Represent paid for interest in the property of the corporation A. FOR STOCK CORPORATION
1. Name Verification Slip
STAGES IN THE LIFE OF TREASURY SHARES 2. Articles of Incorporation and By-laws
1.How treasury shares are created 3. Treasurer's Affidavit
 Can be created not only through redemption but also through
other modes of acquisition like purchase, donation

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4. Joint affidavit of two incorporators to change corporate name  Until organized as authorized by the charter there is no
(if there is someone who acquired a prior right to use the corporation and do not possess franchises or others to
name) exercise, until it acquires a complete existence
 Not required if stated in the AI
Section 10. Number and qualifications of incorporators. – Any
ADDITIONAL REQUIREMENTS number of natural persons not less than five (5) but not more than
1. Indorsement/clearance from other government agencies, if fifteen (15), all of legal age and a majority of whom are residents of
applicable the Philippines, may form a private corporation for any lawful
2. For corporations with foreign equity: Proof of remittance by purpose or purposes. Each of the incorporators of s stock
non resident aliens and foreign corporate subscribers to corporation must own or be a subscriber to at least one (1) share of
register their investment with BSP or an affidavit that they will the capital stock of the corporation.
not register their investment with BSP
3. For Corporations with more than 40% foreign equity: BASIC QUALIFICATIONS OF INCORPORATORS
Application Form for registration under the Foreign 1. They must be natural persons
Investments Act of 1991 2. There must be not less than 5 incorporators but not more than 15
4. Endorsement/clearance from: (a) Philippine Economic Zone 3. They must be of legal age
Authority (PEZA) for applicant under R.A. 7916, (b) Subic Bay 4. The majority must be resident s of the Philippines
Metropolitan Authority (SBMA) or Clark Development 5. If the corporation is a stock corporation, each incorporator must
Corporation (CDC) for applicant under R.A. 7227 and (c) own or be a subscriber to at least one share
Cagayan Economic Zone Authority (CEZA) for applicant under
R.A. 7922 JURIDICAL PERSONS
5. Cash or such other additional requirements of paid up capital is  Corporations and other juridical persons cannot be
not cash incorporators because of the express provision in Sec10 that
the incorporators must be natural persons
B. FOR NON STOCK CORPORATIONS o REASON: it is much easier to deal with natural persons as
1. Name Verification Slip incorporators
2. Articles of Incorporation (AI) and By-laws (BL) o If a corporation will be an incorporator, there will be a lot of
3. Joint affidavit of two incorporators to change corporate name documentation that will be required
(not required if already stated in AI)
4. List of members certified by the corporate secretary, unless NUMBER OF INCORPORATORS AND SHARES
already stated in the Articles of Incorporation; and  Not less than 5 but not more than 15
5. List of the names of contributors or donors and the amounts o In a stock corporation, the directors need not own a substantial
contributed or donated certified by the treasurer. There is no number of shares because the law requires only that they own
fixed amount of contribution required but only such reasonable at least one share
amount as the incorporators and trustees may deem sufficient X Not correct to assume that incorporators are always the only
to enable the corporation to start operation, except in the case original subscribers
of foundations which must have a minimum contribution of at o Not in all cases
least One Million Pesos (P1,000,000.00) / While the law limits the number of incorporators, the law does
6. Registration Date Sheet not limit the number of original subscribers
o The incorporators may each own one share and the rest of the
ADDITIONAL REQUIREMENTS shares may be subscribed originally by other persons
1. For Foundations: Notarized certificate of bank deposit of the o REASON (ownership of at least 1 share): to indicate who really
contribution which shall not be less than P1,000,000.00 and represent the corporation at its inception
statement of willingness to allow the Commission to conduct an
auditnd an affidavit of affirmation or verification by the chief CAPACITY
priest, rabbi, minister or presiding elder  An incorporator must have the capacity to act (power to do
2. For Religious corporations: Refer to Sections 109-116 of the acts with legal effect)
Code, and an affidavit of affirmation or verification by the chief GENDER
priest, rabbi, minister or presiding elder  Married women can be incorporators
3. For Federations: Certified list of member-associations by RESIDENCE
corporate secretary or president  Non residents may be incorporators because the law requires
4. For Condominium corporations/associations: Master Deed with only the majority to be residents of the Philippines
primary entry of the Register of Deeds and Certification that CITIZENSHIP
there is no other existing similar condominium association  There is not requirement that the majority must be citizens of
within the condominium projectds and certification that there the Philippines but subject to the requirements of pertinent
is no other existing similar condominium association within the nationalization
condominium project ACCOMPLISHED FACT
 An incorporator remains to be an incorporator even if he will
ORGANIZATION later on cease to be a corporator or shareholder. Being an
 A corporation should have a full and complete organzaition as incorporator is an accomplished fact
an entity before it can enter into any kind of a contract or Section 11. Corporate term. – A corporation shall exist for a period
transact business

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not exceeding fifty (50) years from the date of incorporation unless absence of a fixed date or dates, upon call for payment by the board
sooner dissolved or unless said period is extended. The corporate of directors: Provided, however, That in no case shall the paid-up
term as originally stated in the articles of incorporation may be capital be less than five Thousand (P5,000.00) peso.
extended for periods not exceeding fifty (50) years in any single
instance by an amendment of the articles of incorporation, in MINIMUM AUTHORIZED CAPITAL
accordance with this Code; Provided, That no extension can be  No minimum authorized capital
made earlier than five (5) years prior to the original or subsequent  However, if the minimum paid up capital of 5000 prescribed
expiry date(s) unless there are justifiable reasons for an earlier under Sec14 is considered, the initial authorized capital cannot
extension as may be determined by the Securities and Exchange be less than the amount
Commission.
AUTHORIZED CAPITAL – amount fixed in the articles of
BASIC RULES incorporation to be subscribed and paid by the stockholders of the
1. The corporate term is not more than 50 years corporation
2. The 50 year corporate term may be shortened or may be SUBSCRIBED CAPITAL—portion of the authorized capital stock that
extended is covered by subscription agreements WON fully paid
3. The corporation may be dissolved thereby shortening the term PAID UP CAPITAL – amount of outstanding capital stock and
4. The 50 year period may be extended for another 50 years in any additional paid on capital or premium paid over the par value of the
single instance shares
5. No extension can be made earlier than 5 years prior to the original OUTSTANDING CAPITAL STOCK – total shares of stock issued to
or subsequent expiry subscribers or stockholders WON fully or partially paid except TS
CAPITAL – includes properties and assets of the corporation that are
RATIONALE FOR TERM LIMIT used for its business or operation
 To permit the stockholders to decide at the end of 50 years STATED CAPITAL – sum of the par value of all issued par value
WON to continue with the corporation shares, the entire amount received for no par value shares and any
amount transferred by a stock dividend or other corporate action
ARBITRARY LIMIT from surplus to stated capital
 The limit of corporate life is arbitrary INITIAL SUBSCRIBED AND PAID UP CAPITAL REQUIREMENTS (SEC
 Unless its existence is renewed or extended by proper 13)
proceedings, it dies forever a. Minimum Subscribed Capital – 25% of authorized capital
b. Minimum Paid up capital – 25% of Subscribed Capital but must
EXTENSION OF TERM not be less than 5000
 Must be made within the time and manner prescribed by the NOTE: The limitation does not prevent subscribers from paying in
CC otherwise, the corporation’s personality will cease full the subscription price

DOCTRINE OF RELATIONS Section 14. Contents of the articles of incorporation. – All

 GR: The filing of a certificate of extension after the term cannot corporations organized under this code shall file with the Securities
relate back to the date of the passage of the resolution of the and Exchange Commission articles of incorporation in any of the
stockholders to extend the life of the corporation official languages duly signed and acknowledged by all of the
 However under this doctrine, relating back applies if it was due incorporators, containing substantially the following matters, except
to the neglect of the officer with whom the certificate is as otherwise prescribed by this Code or by special law:
required to be filed or to a wrongful refusal on his part to
receive it 1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is
being incorporated. Where a corporation has more than one
NO ANNUAL RENEWAL stated purpose, the articles of incorporation shall state which is
 The SEC cannot require the annual renewal of certificate of the primary purpose and which is/are the secondary purpose or
registration of a corporation purposes: Provided, That a non-stock corporation may not
include a purpose which would change or contradict its nature
Section 12. Minimum capital stock required of stock corporations. – as such;
Stock corporations incorporated under this Code shall not be 3. The place where the principal office of the corporation is to
required to have any minimum authorized capital stock except as be located, which must be within the Philippines;
otherwise specifically provided for by special law, and subject to the 4. The term for which the corporation is to exist;
provisions of the following section. 5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less
Section 13. Amount of capital stock to be subscribed and paid for than five (5) nor more than fifteen (15);
the purposes of incorporation. – At least twenty-five percent (25%) 7. The names, nationalities and residences of persons who shall
of the authorized capital stock as stated in the articles of act as directors or trustees until the first regular directors or
incorporation must be subscribed at the time of incorporation, and trustees are duly elected and qualified in accordance with this
at least twenty-five (25%) per cent of the total subscription must be Code;
paid upon subscription, the balance to be payable on a date or dates 8. If it be a stock corporation, the amount of its authorized
fixed in the contract of subscription without need of call, or in the capital stock in lawful money of the Philippines, the number of

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shares into which it is divided, and in case the share are par 2. Purpose Clause -- in order to assure that persons who invest in
value shares, the par value of each, the names, nationalities corporate entities would be aware of the business the
and residences of the original subscribers, and the amount corporation is designed to engaged in
subscribed and paid by each on his subscription, and if some or o The person who intends to invest his money in the business will
all of the shares are without par value, such fact must be know where and in what kind of business or activity his money
stated; will be invested
9. If it be a non-stock corporation, the amount of its capital, the o The directors and officers will be informed regarding the scope
names, nationalities and residences of the contributors and the of business they are authorized to act
amount contributed by each; and o A third person will be aware if the transaction he has with the
10. Such other matters as are not inconsistent with law and corporation is within the authority of the corporation
which the incorporators may deem necessary and convenient.  Must not be unlawful
 Collateral attack on the legality of the purpose of the
The Securities and Exchange Commission shall not accept the corporation is not allowed (should be direct attack)
articles of incorporation of any stock corporation unless a. Primary Purposes – must be only one; determines the
accompanied by a sworn statement of the Treasurer elected by the classification of a corporation
subscribers showing that at least twenty-five (25%) percent of the o Vague and general terms are to be avoided
authorized capital stock of the corporation has been subscribed, and b. Secondary purposes – may be several
at least twenty-five (25%) of the total subscription has been fully 3. Principal Office – must be within the Philippines; considered as
paid to him in actual cash and/or in property the fair valuation of the place of residence
which is equal to at least twenty-five (25%) percent of the said  “Metro Manila” is no longer allowed
subscription, such paid-up capital being not less than five thousand  St number, St name, Brgy, City or Municipality and address of
(P5,000.00) pesos. incorporator, directors and trustee (must be specific)
4. Term – must not exceed 50 years from and after the date of
incorporation
Section 15. Forms of Articles of Incorporation. – Unless otherwise
 Extension 50 years; if unable to extend, file a new AOI and
prescribed by special law, articles of incorporation of all domestic secure a new term
corporations shall comply substantially with the following form: (see 5. Incorporators -- must sign and must subscribe or acknowledge
Sec15) the Articles of Incorporation
6. Directors – shall not be less than 5 nor more than 15
ARTICLES OF INCORPORATION AS CHARTER AND CONTRACT 7. Names, nationalities and residences who shall act as directors
AOI  one that defines the charter of the corporation and the or trustees until the first regular directors or trustees are duly
contractual relationships between the State and the corporation, elected and qualified
the stockholders and the State and between the corporation and its 8. Capital Stock – It is mandatory to state the authorized capital
stockholders stock, the number of shares into which it is
 Contents are biding not only on the corporation but also to its divided and the par value of the shares in alwful money of the
shareholders Philippines. If the shares have no par value, only the number of
 AOI also binds the State – it cannot disregard the provisions shares need be stated
without any valid reason  It is necessary that there is a treasurer elected by the
 Constitution of a corporation subscribers authorized to receive for and in the name and
benefit of the corporation all subscriptions paid or given by the
SUBSTANTIAL COMPLIANCE subscribers
 May not affect the de jure existence of the corporation REASON FOR REQUIRING A MINIMUM SUBSCRIBED CAPITAL AND
 AOI must contain “substantially” the matters indicated therein PAID UP CAPITAL
1. To serve as an assurance that there will be successful
TREASURER’S AFFIDAVIT prosecution of the business of the corporation
 Relates to the minimum subscribed capital and the minimum 2. To assure the creditors that they have means of obtaining
paid up capital satisfaction of their claims to the extent of their
 The treasurer may be made liable if the corporation does not subscription
comply with the requirements of law and may be prosecuted 9. Paid up Capital – portion of the authorized capital stock that
for perjury has been subscribed and paid
1. Name – necessary for identification purposes and part of the 10. Other provisions – as long as not contrary to law, morals, good
franchise granted to the corporation customs, public order and public policy
o Can use trade mark or trade name nut cannot assume at
pleasure as unregistered trade name, the name of another EFFECT IF SOLE PROPRIETORSHIP IS ORGANIZED
corporation.  CONFUSION/ FRAUD  There must be a Deed of Assignment that must specify the
o Advisable to verify with SEC if still available for registration. liabilities of the sole proprietorship that are being assumed by
(can be made for a limited period after payment of the required the new corporation
fees)  The corporation would not be liable if there is no assumption of
o Reservation and notice of availability of the corporate obligation
name shall not constitute an approval of the use of name
FOREIGN EQUITY

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 For corporations that will engage in any business that is fully or the date of filing for a cause not attributable to the corporation.
partly reserved for Filipinos, the ff provisions must be included: AMENDMENTS – amendments in general
“ No transfer of interest which will reduce the ownership of REQUIREMENTS:
Filipino Citizens to less than the required percentage of the 1. Must be for legitimate purpose and must not be contrary to
capital shall be allowed or permitted to be recorded in the other provisions of the CC and Special laws
proper books. These restriction shall be printed in all the stock 2. Must be approved by a majority vote of the board of directors
certificates if the corporation” or trustees
3. There must be a vote or written assent of the stockholders
DOMESTIC MARKET ENTERPRISE representing at least 2/3 of the outstanding capital stock or the
 An enterprise that produces goods for sale, renders service or vote or written assent of at least 2/3 of the members of a non-
otherwise engages in any business in the Philippines stock corporation
o Subject to minimum capitalization in the amount of US200K 4. The original and amended articles together shall contain all
o Threshold capital is US100K if the DME involves advance provisions required by law to be set out in the AOI
technology 5. A copy of the duly certified under oath by the corporate
 HOLDING COMPANIES – included within the term DME secretary and a majority of the directors or trustees stating the
fact that said amendment/s have been duly approved by the
RETAIL BUSINESS required vote of the stockholders or members shall be
 Limited to Filipinos depending on the capitalization submitted to SEC
 RETAIL TRADE (requisites)– any act, occupation or calling of 6. The amendment must be approved by the SEC
habitually selling direct to the general public merchandise,  The corporation cannot provide for a different procedure for
commodities or good for consumption. the amendment of AOI
 Sale of goods is not retail if it is a mere incident to the primary
purpose as in the case of sale of food in a restaurant inside a EXPRESS AND IMPLIED APPROVAL
hotel  Amendments shall take effect upon their approval by the SEC
Consumer goods – goods that are used or bought for use  It shall take effect from the date of filing if not acted upon
primarily for personal, family or household purposes. within 6 months from the date of filing for a casue not
Producer goods – by their nature, not sold ti the public for attributable to the corporation
consumption
DOCUMENTARY REQUIREMENTS FOR REGISTRATION FOR
MASS MEDIA AMENDED AOI
 Embrace the print medium, radio, television, film, movies, wire 1. Amended AOI
and radio communication services 2. Director’s or Trustee’s Certificate – notarized document signed
buy majority of the Directors or Trustees and corporate
REAL ESTATE COMPANIES secretary
 Only corporations with at least 60% of the outstanding capital 3. Monitoring clearance issued by the Compliance Monitoring
stock belongs to Filipinos can own real properties Division
o Prohibition is limited to private land and land of public domain 4. Secretary’s Certificate – notarized document signed by the
Section 16. Amendment of Articles of Incorporation. – Unless corporate secretary certifying that no action or proceeding has
otherwise prescribed by this Code or by special law, and for been filed or is pending involving an intre-corporate dispute or
legitimate purposes, any provision or matter stated in the articles of claim
incorporation may be amended by a majority vote of the board of PROVISIONS TO BE AMENDED
directors or trustees and the vote or written assent of the  May involve amendment of the corporate name, increase in the
stockholders representing at least two-thirds (2/3) of the authorized capital stock and other similar changes
outstanding capital stock, without prejudice to the appraisal right of  EXCEPTION: Accomplished facts (names of incorporators) and if
dissenting stockholders in accordance with the provisions of this it would go against the nature of the corporation
Code, or the vote or written assent of at least two-thirds (2/3) of the
members if it be a non-stock corporation. EFFECT OF AMENDMENT OF THE CC
 No right or remedy in favour of or against any corporation, its
The original and amended articles together shall contain all stockholders, members , directors trustees or officers nor any
provisions required by law to be set out in the articles of liability incurred by any such corporation, stockholders etc.
incorporation. Such articles, as amended shall be indicated by shall be removed or impaired either by the subsequent
underscoring the change or changes made, and a copy thereof duly dissolution of said corporation or by amendment of repeal of
certified under oath by the corporate secretary and a majority of the the Code
directors or trustees stating the fact that said amendment or  Must not remove or impair the right or remedy in favour of any
amendments have been duly approved by the required vote of the corporation, stockholders, etc. and must not remove any
stockholders or members, shall be submitted to the Securities and liability incurred
Exchange Commission.
WRITTEN ASSENT OF STOCKHOLDERS
 Silence or failure to object cannot be construed as approval by
The amendments shall take effect upon their approval by the
stockholders
Securities and Exchange Commission or from the date of filing with
the said Commission if not acted upon within six (6) months from o Express approval

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WHO CAN QUESTION AMENDMENTS Non chartered GOCCS Governance Commission for
 Can be questioned only by a real party in interest like a GOCC
shareholder or member Professional Assoc PRC
Radio, TV, etc NTC
Section 17. Grounds when articles of incorporation or amendment Recruitment for overseas POEA
may be rejected or disapproved. – The Securities and Exchange employment
Commission may reject the articles of incorporation or disapprove Security Agency PNP
any amendment thereto if the same is not in compliance with the Tobacco Related Business Natl Tobacco Administration
requirements of this Code: Provided, That the Commission shall give Volunteer Fire Brigade BFP
the incorporators a reasonable time within which to correct or Water Transport, Ship Maritime Industry Authority
modify the objectionable portions of the articles or amendment. The building and ship repair
following are grounds for such rejection or disapproval: Waterworks corporations Local Waterworks Utilities
1. That the articles of incorporation or any amendment Administration
thereto is not substantially in accordance with the form
prescribed herein;
Section 18. Corporate name. – No corporate name may be allowed
2. That the purpose or purposes of the corporation are
by the Securities and Exchange Commission if the proposed name is
patently unconstitutional, illegal, immoral, or contrary to
identical or deceptively or confusingly similar to that of any existing
government rules and regulations;
corporation or to any other name already protected by law or is
3. That the Treasurer’s Affidavit concerning the amount of
patently deceptive, confusing or contrary to existing laws. When a
capital stock subscribed and/or paid is false;
change in the corporate name is approved, the Commission shall
4. That the percentage of ownership of the capital stock to
issue an amended certificate of incorporation under the amended
be owned by citizens of the Philippines has not been
name
complied with as required by existing laws or the
Constitution.
BASIC POLICY
 If any corporation could assume at pleasure as an unregistered
No articles of incorporation or amendment to articles of trade name the name of another corporation, this practice
incorporation of banks, banking and quasi-banking institutions, would result in confusion and open the door to frauds and
building and loan associations, trust companies and other financial evasions and difficulties of administration and supervision
intermediaries, insurance companies, public utilities, educational
institutions, and other corporations governed by special laws shall WHAT MUST BE PROVED BY OPPOSITOR
be accepted or approved by the Commission unless accompanied by 1. The corporation has acquired a prior right over the use of such
a favorable recommendation of the appropriate government agency a corporate name
to the effect that such articles or amendment is in accordance with 2. Or the name is identical, deceptively or confusingly similar to
law. that of any existing corporation including internationally known
foreign corporation though not used in the Phil; the name is
already protected by law; the name is contrary to law, morals,
public policy or is patently deceptive or confusing
MINISTERIAL DUTY
 The SEC duty to approve an application for registration is SIMILAR NAMES
ministerial provided all the requirements of law are complied  A corporation has an exclusive right to use its name
with  To avoid fraud or mislead
 SEC has the power to reject the AOI or any proposed
amendment if the provisions of the CC are violated DOMINANCY TEST  there will be infringement if the mark
contains dominant feature of the mark of a trademark belonging to
ENDORSEMENT BY GOVT AGENCIES another
 SEC will not approve the AOI if it is not accompanied by the  Applies to corporate names
required endorsement of a govt agency  As a rule, generic, descriptive and geographical terms cannot be
TYPE OF BUSINESS GOVT AGENCY appropriated
Air transport Civil Aeronautics Authority
Banks, Pawnshops other BSP DOCTRINE OF SECONDARY MEANING
Financial Intermediaries  A word or phrase which is originally incapable of exclusive
with Quasi Baking Functions appropriation because the word or phrase is geographic or
Charitable Insitutions and DSWD descriptive, might have been used for so long and exclusively by
Social Welfare Org one producer with reference to an article and the purchasing
Educational Institutions DEPED, CHED, TESDA public has considered the word as associated to his product
Electric power plants/ Dept of Energy o Cannot register said name as a corporate name
trading of petroleum
products REGISTRATION SUBJECT TO PRIOR RIGHT
 The corporate name is a property right that cannot be impaired
Hospitals/ Dentals/ Clinics DOH
or defeated if another corporation will appropriate the same
Insurance / Mutual Benefit Insurance Commission
 Right in rem that can be asserted against the whole world
Assoc

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1. Discovery – finding the business opportunity to be developed

NAME IN AOI 2. Investigation – analysis of the proposed business to determine
 A corporation cannot use any other corporate name other than WIN it is economically feasible
what is reflected in the AOI 3. Assembly -- bringing together of the necessary personnel,
 A corporation may use a trade name or trade mark different property and money to set the business in motion
from its corporate name
UNDERWRITERS
SEC RULES (see SEC MC 21)  A person who guarantees on firm commitment and/ or
declared best effort basis the distribution and sale of securities
CHANGE OF NAME of any kind by another company
 May apply for change of name if there is no express prohibition
in the statute Section 20. De facto corporations. – The due incorporation of any
 It is the same corporation with a different name and its corporation claiming in good faith to be a corporation under this
character does not change Code, and its right to exercise corporate powers, shall not be
 Does not affect the identity, rights and obligations of the inquired into collaterally in any private suit to which such
corporation unlike natural persons corporation may be a party. Such inquiry may be made by the
 The old name shall be indicated in the Cert of Filing of Solicitor General in a quo warranto proceeding
Amended AOI and cannot be used by another
DEFECTIVE CORPORATIONS
Section 19. Commencement of corporate existence. – A private 1. Non-compliance with directory provisions of law or regulations
corporation formed or organized under this Code commences to will not affect the de jure existence if a corporation
have corporate existence and juridical personality and is deemed 2. Non-compliance with mandatory provisions will affect the de
incorporated from the date the Securities and Exchange Commission jure existence. However, only the substantial compliance is
issues a certificate of incorporation under its official seal; and required and mere colourable compliance may result in a de
thereupon the incorporators, stockholders/members and their facto corporation
successors shall constitute a body politic and corporate under the 3. Non – compliance with condition precedent to incorporation
name stated in the articles of incorporation for the period of time may affect the de jure existence of the corporation.
mentioned therein, unless said period is extended or the 4. Non-complaince with condition subsequent to incorpaotion
corporation is sooner dissolved in accordance with law. may not affect the existence of a corporation but may be a
ground for revocation of the certificate of incorporation
5. Condition precedent to carry on the business will not affect the
corporation’s de jure status but non-compliance may be a
CERTIFICATE OF INCORPORATION ground to revoke the certificate of incorporation
 Its issuance by the SEC marks the commencement of the
corporate terms of corporations incorporated under the CC REQUISITES OF DE FACTO CORPORATION
 Indispensable requirement before the corporate life can ensue 1. A valid law under which it was organized
 NOTE : A Cert of Incorporation from the SEC is not necessary if  REASON: To be a de facto corporation, it must be possible to be
it was created through special law a corporation de jure
ORTHODOX VIEW -- if the law under which the corporation is
CONTRACT LAW UNDER CC organized is void, there is no resulting de facto corporation
 Only after the issuance of the certificate of registration that a OPERATIVE FACT – an unconstitutional law does not bar the
corporation can transact business exercise of a de facto corporation
 XPN: The law makes the pre incorporation subscription 2. An attempt in good faith to incorporate
agreement binding even if one of the corporation is still legally  There must be colorable compliance with the law
inexistent 3. An assumption of corporate powers

PROMOTERS DISTINGUISHED FROM DE JURE CORPORATIONS

 Persons who, acting alone or with others, take initiative in  Has a right to corporate existence even against the State
founding and organizing the business or enterprise  DE FACTO  has a right to corporate existence even against
o Certain contracts entered by the promoters may bind a the State if the attack is collateral but not if the attack is direct
corporation The powers and rights of a de facto may be forfeited by the
o GR: The acts of the promoter are not binding on the State
corporation that will be organized
 Cannot act as agents for a projected corporation since that
which has no legal existence could have no agent
o XPN: Ratified POLICY CONSIDERATION
 Stockholders cannot be held personally liable for the  The de facto corporation doctrine prevents collateral attack on
compensation claimed by the promoter the personality of the corporation
o Any benefit derived by the promoter for the corporation should 1. The merits of the controversy seldom are affected by corporate
be given to the corporation existence of a party to the action where the de facto doctrine is
applicable
PROMOTIONAL ACTIVITIES:

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2. If any rights and franchises have been usurped, they are rights organize and commence the transaction of its business or the
and franchises of the State and the State alone can object construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall
NATURE AND STATUS OF DE FACTO CORPORATIONS be deemed dissolved. However, if a corporation has commenced the
 Subject to attack by the State in a proper proceeding transaction of its business but subsequently becomes continuously
 Enjoys the attributes of a corporation until the State questions inoperative for a period of at least five (5) years, the same shall be a
its existence ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.
DISSOLVED CORPORATION
 A group of employees who continued the operations of a This provision shall not apply if the failure to organize, commence
dissolved corporation whose registration has been revoked the transaction of its businesses or the construction of its works, or
cannot acquire the status of a de facto corporation to continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
EFFECT OF NON-FILING OF BY LAWS Commission.
 Condition subsequent and non compliance therewith may not
affect the existence of a corporation and is only a ground for CONDITIONS SUBSEQUENT
revocation of the Certificate of incorporation Two violations:
1. Failure to organize and commence business within 2 years from
Section 21. Corporation by estoppel. – All persons who assume to incorporation
act as a corporation knowing it to be without authority to do so shall 2. Becoming continuously inoperative for a period of at least 5
be liable as general partners for all debts, liabilities and damages years
incurred or arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction entered PERIOD TO ORGANIZE
by it as a corporation or on any tort committed by it as such, it shall  While the 2 year period is counted from incorporation, the 5
not be allowed to use as a defense its lack of corporate personality. year period may commence thereafter
 Organization and commencement of transaction of corporate
On who assumes an obligation to an ostensible corporation as such, business are but conditions subsequent and not pre requisites
cannot resist performance thereof on the ground that there was in for acquisition of corporate personality
fact no corporation.
EFFECT OF NON-OPERATION
ESTOPPEL  One who assumes an obligation to an ostensible  Could be suspended or its franchise or certificate of
corporation as such cannot resist performance thereof on the incorporation revoked, in which case, there must be a positive
ground that there was in fact no corporation action on the part of the government

LIABILITY AS GENERAL PARTNER EFFECT OF FAILURE TO ORGANIZE

 Those who assume to act as a corporation knowing it to be  Deemed dissolved but if it exercises corporate powers after
without authority to do so shall be liable as a general partner such period, the corporation is deemed to be exercising its
and shall be liable even beyond their investment power illegally
 A person acting on behalf of a corporation and had no valid  Not automatic; proper proceedings for revocation of the AOI
existence becomes personally liable. A person who acts as an must be initiated
agent without authority or without a principal is himself
regarded as principal, possessed of all the right and subject to ORGANIZATION
all liabilities  Election of officers, providing for the subscription and payment
of the capital stock, the adoption of by-laws, and such other
ENTERPRISE LIABILITY similar steps
1. The enterprise contracts with an outsider, who later brings  Systemization and orderly arrangement of the internal and
action against the enterprise as though it were a corporation managerial affairs and organs of the corporation
2. The enterprise contracts with the outsider, and subsequently
brings action in corporate form against the outsider
3. The enterprise contracts with an outsider, and this outsider
brings action against the component individuals
4. The enterprise contracts with an outsider, and the component
individuals seek to hold the outsider liable on his contract

RULES OF COURT PROVISION

 When 2 or more persons not organized as an entity with
juridical personality enter into a transaction, they may be sued
under the name by which they are generally or commonly
known
Section 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation. – If a corporation does not formally

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TITLE III 4. Sui Generis Theory – the directors derive their power from the
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS State through the Statute under which the corporation is
organized yet do not qualify as Patonic Guardians
Section 23. The board of directors or trustees. – Unless otherwise
provided in this Code, the corporate powers of all corporations INDEPENDENCE
 In the management of affairs, the directors are dependent
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the solely on their own knowledge of the business and judgment
 Stockholders do not control their actions UNLESS the CC, AOI,
board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of By laws provides
the corporation, who shall hold office for one (1) year until their
BUSINESS JUDGMENT RULE
successors are elected and qualified. (28a)
 The will of the majority controls in corporate affairs and
contracts intra vires entered by the BOD are binding and courts
Every director must own at least one (1) share of the capital stock of will not interfere UNLESS such contracts are so unconscionable
the corporation of which he is a director, which share shall stand in  Judges cannot replace the judgment of the directors on
his name on the books of the corporation. Any director who ceases business matters
to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a Directors shall not be liable in making decisions using their own
director. Trustees of non-stock corporations must be members judgment is such decisions lie within the powers of the corporation
thereof. A majority of the directors or trustees of all corporations and was made in good faith
organized under this Code must be residents of the Philippines.  Not liable even if the corpo will suffer losses
 As long as there is no showing of bad faith and negligence
CORPORATE MANAGEMENT
 All businesses of the corporation shall be conducted and all its REASONS FOR RARELY IMPOSING LIBAILITY FOR BAD JUDGMENT
properties controlled and held by the Board of Directors or ACCORDING TO ONE AUTHORITY
trustees 1. Shareholders to a very real degree voluntarily undertake the
o BOD/ Trustees – executive representatives of the corporation risk of bad business judgment
charged with the administration of its internal affairs and 2. Courts recognize that after-the- fact litigation is a most
management imperfect device to evaluate corporate business decision
 BOARD 3. Potential profit often corresponds to the potential risk
a. Exercises all powers provided for under the CC
b. Conducts all business of the corp RATIONALE FOR BUSINESS JUDGMENT RULE
c. Controls and holds all property of the corp 1. If management were liable for mere good faith errors in
 Stockholders – basically investors and do not have a hand in judgment, few capable individuals would be willing to incur the
running the business operations of the corpo UNLESS at the financial and emotional risks of serving in such roles
same time directors/officers of the corpo 2. Courts are generally ill equipped to evaluate business
judgments
A corpo can act only through its directors and officers 3. Management has the expertise to discharge the responsibility
of making such determinations
REASON FOR CONCENTRATION OF POWER
 Necessary for efficiency in a large organization RESOLUTION
o Stockholders are numerous and unfamiliar with the business of  The Board must act, not individually or separately but as a body
the corpo to conduct it directly in a lawful meeting
A QUESTION OF: (CONCENTRATION OF POWER OF BOARD)  Their actions are expressed in resolutions passed in its
1. Speed and cost meetings
2. Expertise  The action of one director or trustee does not bind the
3. Motivation corporation
o Absent any valid delegation or authorization from the board, it
DESIRABILITY OF CONCENTRATION OF POWERS IN DIRECTORS will not be binding
 Material only when there is separation of management and
ownership and if numerous shareholders hold ownership PROOF OF RESOLUTION
1. A SECRETARY’S CERTIFICATE – certificate issued by the
THEORIES ON SOURCE OF POWER Corporate Secretary of the Corporation is sufficient proof of the
1. Agency theory – all powers reside in the stockholders and are existence of a resolution from the Board
just delegated to the directors as agents o Truthfulness is presumed
2. Concession Theory – power of the directors is derived from the o Will not be rendered invalid despite the absence of the Corpo
State Sec before the notary public
3. Platonic Guardian Theory – every corpo must have a board and 2. Minutes of Meeting of the Board
the board is an aristocracy or group of platonic guardians
(inviolable institution) QUORUM (Sec25)
Unless the AOI or By laws provide for a greater majority, a majority
of the number of directors or trustees as fixed in the AOI shall

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constitute a quorum for the transaction of corporate business and FOREIGNERS

every decision of at least a majority of the directors or trustees  Can be elected as directors subject to special laws
present at a meeting at which there is a quorum shall be valid as a o Ex. Nationalized activities – (Anti Dummy Law) – foreigners
corporate act. can be elected as directors only in proportion to their allowable
equity participation in the capital of the said activities
 Stockholders may elect less than the total number of directors
specified in the AOI DUAL CITIZENS
 A disqualified director losses his capacity as director and as  They can be directors and officers even for corporations
such cannot be counted for purposes of establishing a quorum engaged in partly nationalized or nationalized industries

SPECIAL LAWS
PROXY NOT ALLOWED  Other laws may provide for qualifications and disqualifications
 D/T cannot attend or vote by proxy at board meetings
 Cannot delegate his powers as director to another BY LAWS
 A corpo is empowered to provide in its by laws the
TERM qualifications and disqualifications of members of the Board
 The term of the members of the Board of Directors shall be o To protect the interest of the corporation (adverse interest)
only for one year and expires one year after election to office  Not acceptable if the by-laws will provide that the
 By laws cannot provide for a longer term disqualifications are subject to the judgment of the directors
o RATIONALE – to protect the corporation as well as its creditors  D/T shall come from the stockholders or members.
and the public dealing with it so that if a wrongful act is o A proposal that the D/T shall come from the officers Is not in
committed by the BDs, the subsequent board can redress the accordance with law
perpetration of the wrong and thereby protect its stockholders,
creditors and the public dealing with it EFFECT OF DISQUALIFICATION
 Does not apply to the incorporating directors who shall act only  A disqualified stockholder cannot run for election as director
as such until the first regular directors are duly elected  If the ground for disqualification was present at the time of
election, but the disqualified stockholder wa elected director,
QUALIFICATIONS FOR DIRECTORS/ TRUSTEES the subsequent disqualification of director would not render
1. He must own at least 1 share of the capital stock of the the Board incapable of transacting business for as long as the
corporation in his own name or if the corporation is a non-stock remaining directors still constitute a quorum
corpo, he must be a member thereof o Merely gives rise to a vacancy in the Board
2. Majority of the D/T must be residents of the Philippines  Same rule should be applied if the stockholder was not
3. Must not have been convicted by final judgment of an offense disqualified at the time of election but he became disqualified
punishable by imprisonment for a period not exceeding 6 years thereafter
or a violation of the CC committed within 5 years prior to the
date of his election TERM TENURE
4. Legal age Time during which the Term during which the
5. Possess other qualifications as may be prescribed in special officer may claim to hold incumbent actually holds
laws or regulations or in the by laws of the corpo the office as of right office

NATURAL PERSONS RE-ELECTION

 D/T must be a natural person  Unless there is a provision in the AOI or By laws that disqualifies
o XPN: In case of condominium corporations an incumbent director or officer from seeking another term of
office, the incumbent is not prevented from seeking re-election
SHARES OR MEMBERSHIP
 The shares must stand in the director’s name in the books of HOLD-OVER
the corporation  If no election is held, the directors and officers shall hold over
 In case of non stock, the trustee must be a member of record until their successors are elected
For the protection of corpo so that it may have means of knowing at  Term of office does not change even if the office have become
any time who are the stockholders who may participate in the vacant
management of the corpo  Hold over period is not part of the director’s original term of
 The one share requirement is only the minimum office nor a new term but constitutes as part of his tenure
o AOI may provide that a Director must have more than one
share so long as it is reasonable CORPORATE GOVERNANCE
RESIDENCE  Framework of rules, systems and processes in the corporation
 Equivalent to domicile, physical presence in the State and an that governs the performance by the BOD and Management of
intention to remain their respective duties and responsibilities to the stockholders
and stakeholders
AGE
 No express statement requiring directors to be of legal age ALTERNATIVE THEORIES ON CORPORATE GOVERNANCE
o Minority restricts an individual’s capacity to act 1. Shareholder Primacy Theory / Shareholder-Wealth
Maximization Theory

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o Conservative school of thought a. Requirement that qurom must be present cannot be

o The corporation should be run for the exclusive benefit of dispensed with
shareholders b. Automatic membership in the Board is not allowed
2. Social Responsibility Theory / Stakeholder Protection Theory c. Stockholders elect directors at large not by region
o Progressive school of thought o Election by region is feasible only in a non-stock corporation
o Prefers the limitation on excessive pursuit of profit and d. Staggered election of directors is not allowed in a stock
promotion of employee, customer corporation
o Focus on the stakeholders e. An agreement wherein the selection of corporate directors
is reposed in anybody except the stockholders is in
CORPORATE SOCIAL RESPONSIBILITY (CSR) violation of public policy

INDEPENDENT DIRECTORS PLURALITY OF VOTES

 A person who, apart from his fees and shareholdings, is  Majority of votes is not necessary for the election of each
independent of management and free from business or other director or trustee
relationship which could materially interfere with his exercise  The candidate who shall have the highest number of votes shall
of independent judgment be declared as duly elected
 Unhampered by day to day involvement and self interest in
exercising independent judgment QUORUM
1. Issuers of registered securities to the public WON listed in  Necessary that there is a quorum and in the absence thereof,
the PSE the election shall be invalid
2. Finance companies  QUORUM FOR ELECTION PURPOSES  Stockholders
3. Investment houses representing a majority of the outstanding capital stock
4. Brokers and dealers of securities o REASON: to prevent railroading of election of directors
5. Pre-need companies  Not necessary that the candidate stockholder be present
ETC during the meeting before he can be elected as director
o A director can be elected in absentia
Section 24. Election of directors or trustees. – At all elections of o But the by-laws may require his presence
directors or trustees, there must be present, either in person or by  In determining the quorum, all stockholders at the time of the
representative authorized to act by written proxy, the owners of a election should be considered
majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. The election must CUMULATIVE VOTING
be by ballot if requested by any voting stockholder or member. In  Method of concentrating votes devised to give sufficient
stock corporations, every stockholder entitled to vote shall have the opportunity to minority shareholders to secure representation
right to vote in person or by proxy the number of shares of stock in the Board
standing, at the time fixed in the by-laws, in his own name on the  Stock / Non stock (if only provided in the AOI)
stock books of the corporation, or where the by-laws are silent, at ADVANTAGES:
the time of the election; and said stockholder may vote such number 1. It is democratic in that persons with large holdings would
of shares for as many persons as there are directors to be elected or have a voice in the conduct of the corporation
he may cumulate said shares and give one candidate as many votes 2. It is desirable to have as many viewpoints as possible
as the number of directors to be elected multiplied by the number represented in the BOD
of his shares shall equal, or he may distribute them on the same 3. The presence of minority director may discourage conflicts
principle among as many candidates as he shall see fit: Provided, of interest by management since discovery is considerably
That the total number of votes cast by him shall not exceed the more likely
number of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be GROUNDS TO OPPOSE CUMULATIVE VOTING
elected: Provided, however, That no delinquent stock shall be voted. 1. Introduction of a partisan on the Board is inconsistent with the
Unless otherwise provided in the articles of incorporation or in the notion that the Board should represent all interests in the
by-laws, members of corporations which have no capital stock may corpo
cast as many votes as there are trustees to be elected but may not 2. A partisan director may cause disharmony which reduces the
cast more than one vote for one candidate. Candidates receiving the efficiency of the boar
highest number of votes shall be declared elected. Any meeting of 3. A partisan director may criticize management unreasonably so
the stockholders or members called for an election may adjourn as to make it less willing to take risky but desirable actions
from day to day or from time to time but not sine die or indefinitely 4. A partisan director may leak confidential information
if, for any reason, no election is held, or if there are not present or 5. It may be used to further narrow partisan goals
represented by proxy, at the meeting, the owners of a majority of
the outstanding capital stock, or if there be no capital stock, a DISTINGUISHED FROM STRAIGHT VOTING
majority of the members entitled to vote  A stockholder can cast one vote per share for each director
FORMULA
MANNER OF ELECTION  Number of shares needed to elect One Director
 Cannot adopt a procedure than what is prescribed in Sec24 for
stock corporations ___S (total number of shares voting)____ +1
D (number of directors to be elected) +1

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 Officers who are designated or specified as such or given that

 Number of shares necessary to elect a desired number of character in law, the AOI and the By laws of the corporation
directors  CO can by elected by the majority of all the members of the
BOD/T and not merely by the majority of those who are present
S (total number of shares voting)_x during the meeting
(Desired number of directors)
+1
D (number of directors to be elected) +1
THREE OFFICERS:
 Number of directors that can be elected by a shareholder 1. President
holding a specific number of shares 2. Treasurer
3. Secretary
(N [number of shares of shareholders] – 1) x
(D [number of directors to be elected]+1) OFFICERS SPECIFIED IN BY LAWS
S (total number of shares to be voted by all shareholders  May also provide other specified officers or corporate office as
necessary
ELECTION OF INCOMPLETE DIRECTORS
 Still valid and the directors though incomplete, can still perform Office Officer Employee
their functions provided that a quorum remains A creation of the Person elected by Occupies no
charter of a the directors or office
FAILURE TO HOLD AN ELECTION corporation stockholders
 May ask assistance from SEC to compel the holding of the
election QUALFICATION AND FUNCTIONS
1. President
a. Must be a director and stockholder
ELECTION CONTESTS b. May not be concurrently the treasurer or secretary
 Filed in the RTC  Not covered by compulsory retirement age
 Covers any controversy or dispute involving title or claim to any  Given general supervision and control over corporate
elective office in a stock or non stock corporation operations
COMPLAINT must state: 2. Vice President
1. The case was field 15 days from the date of the election if the  In case the office of the President becomes vacant, the VP has
by laws of the corporation do not provide for resolution of the authority to act in his stead
controversy or within 15 days from the resolution of the 3. Chairman
controversy by the corpo  May be concurrently the President and may be designated as
2. The plaintiff has exhausted all intra corporate remedies in the CEO of the corpo
election cases 4. Secretary
a. Must be resident and citizen of the Philippines
Section 25. Corporate officers, quorum. – Immediately after their o Must not be a foreigner
election, the directors of a corporation must formally organize by  Duty bound to keep the corporate records
the election of a president, who shall be a director, a treasurer who  Must sign the Cert of stocks
may or may not be a director, a secretary who shall be a resident  Prepares the minutes of the meeting
and citizen of the Philippines, and such other officers as may be  Passes a “SECRETARY’s CERTIFICATE”  binding effect of a
provided for in the by-laws. Any two (2) or more positions may be board resolution
held concurrently by the same person, except that no one shall act 5. Treasurer
as president and secretary or as president and treasurer at the same  Takes care of the funds of the corporation
time.
CONCURRENCE
The directors or trustees and officers to be elected shall perform the  Any 2 or more positions may be held concurrently by the same
duties enjoined on them by law and the by-laws of the corporation. person
Unless the articles of incorporation or the by-laws provide for a o XPN: The positions of secretary and treasurer is inconsistent
greater majority, a majority of the number of directors or trustees as with the position of the President
fixed in the articles of incorporation shall constitute a quorum for
the transaction of corporate business, and every decision of at least CORPORATE OFFICER CONCURRENTLY AN EMPLOYEE
a majority of the directors or trustees present at a meeting at which  A corpo is not prohibited from hiring a corporate officer to
there is a quorum shall be valid as a corporate act, except for the perform services under circumstances that will make him an
election of officers which shall require the vote of a majority of all employee
the members of the board. ANTI DUMMY LAW
 Foreigners cannot be officers in wholly or partly nationalized
Directors or trustees cannot attend or vote by proxy at board corporation
meetings.  A foreigner maybe a director in a partly nationalized activity in
proportion to the equity participation allowed to foreigners
CORPORATE OFFICERS  DIFFERENCE: Director cannot act on his own while an Officer
acts individually for the corporation

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 A foreigner may not appointed as President in a corpo that is has in good faith dealt with the corporation through such
engaged in partly nationalized activity allowing only 40% of agent, be estopped from denying his authority
foreign equity  Principal’s liability is limited only to third persons who have
o XPN: If limited only to that of a presiding officer during board been led to believe by the conduct of the principal that such
meetings actual authority exists although none was given
SEC2A
Foreigners cannot intervene in the management, operation, DE FACTO OFFICERS
administration or control whether as an officer, ee, laborer with or  Acts under color of authority (derived from election or
without remuneration except technical personnel whose appointment)
employment may be authorized by the President
 Applies only to corporations with businesses that are reserved COMPENSATION
by the Constitution or law to Filipino citizens or 60% of the  The by laws may provide that the board shall fix the
capital is owned by Filipinos compensation of corporate officers
 NO PROHIBITION for a foreigner to assume managerial position  The fixing of the compensation is part of the regular business of
in a corporation engaged in partly nationalized or nationalized the corporation that the Board conduct
country
Section 26. Report of election of directors, trustees and officers. –
AUTHORITY OF OFFICERS Within thirty (30) days after the election of the directors, trustees
Derived by: and officers of the corporation, the secretary, or any other officer of
1. Law the corporation, shall submit to the Securities and Exchange
2. AOI Commission, the names, nationalities and residences of the
3. Corporate By laws directors, trustees, and officers elected. Should a director, trustee or
4. Authorization from the Board officer die, resign or in any manner cease to hold office, his heirs in
5. Inherent in office case of his death, the secretary, or any other officer of the
 In the absence of a law, the corporate officers and its agents corporation, or the director, trustee or officer himself, shall
can act for the corpo only if authorized by the Board or By laws immediately report such fact to the Securities and Exchange
 Principles of agency govern the relation between the Commission.
corporation and its officers
o When authorized  binding on the corporation
RATIONALE
 To give the public information of the nature of the business,
IMPLIED AUTHORITY
financial condition and operational status of the company
 A corporate officer who is entrusted with the general
together with information on its key officers or managers so
management and control of its business, has implied authority
that those dealing with it may know the facts regarding the
to make any contract or do any other act that is necessary or
corpo’s financial resources and business responsibility
appropriate to the conduct of the ordinary business of the
corporation
REPORT AFTER ANNUAL ELECTION
 He may do acts (w/o authority) that are of an ordinary nature
 Required to submit to SEC within 30 days after the election, the
names, nationalities and residences of the elected D/T/O of the
corporation
PRACTICE, CUSTOM AND POLICY
o To keep stockholders and public informed
 Where the BOD approve similar acts as a matter of general
 GIS
practice, custom and policy, the officer may bind the company
without formal authorization of the BOD
GIS AS EVIDENCE
 Indicates who and who is not a corporate officer ir director or
RATIFICATION
stockholder
 The acts of the corporate officers within the scope of their
authority are binding on the corporation but when these
REPROT IN CASE OF VACANCY
officers exceed their authority, their actions cannot bind the
 If a new director is elected because of a vacancy in the Board,
corporation, unless the Baord ratifies such acts
the Corporate Secretary must submit an amended GIS
 Voluntarily adopting the unauthorized act of its agent in its
indicating the change of director within 30 calendar days from
behalf
the occurrence of such change
AGENCY BY ESTOPPEL
 Applied to corporations and the corporation may be estopped Section 27. Disqualification of directors, trustees or officers. – No
from claiming that corporate officers are not agents with person convicted by final judgment of an offense punishable by
respect to specific transactions imprisonment for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the date of his
APPARENT AUTHORITY election or appointment, shall qualify as a director, trustee or officer
 An officer may also bind the corporation if he has apparent of any corporation.
authority
 Holds the officer or agent out to the public as possessing power GROUNDS FOR DISQUALIFICATION TO HOLD THE POSITION OF
to do those acts, the corporation will, as against any one who DIRECTOR

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1. If convicted by final judgment of an offense punishable by 2. There must be previous notice to the stockholders or
imprisonment exceeding 6 years members of the intention to remove a director
2. If he is convicted by final judgment of a violation of the 3. The removal must be by a vote of the stockholders
Corporation Code committed within 5 years prior to the
representing 2/3 of Outstanding Capital Stock or 2/3 of
date of his election or appointment
RATIONALE members
 Meant to assure that only persons of rectitude can act as 4. A director who was elected by the MINORITY must be
directors removed only for cause
 A director who was elected by the MAJORITY may actually
NON EXCLUSIVE be removed with or without cause
 Additional grounds are contemplated in the other provisions of
the code Minority shareholder – equity holder who does not have the voting
control
GROUNDS IN ARTICLES AND BY LAWS
 Other grounds may be provided for in the AOI or by laws
There is no need to follow the procedure of removal
required under Section 28 if the director is disqualified. By
Section 28. Removal of directors or trustees. – Any director or
trustee of a corporation may be removed from office by a vote of operation of law, such director is disqualified to act as
the stockholders holding or representing at least two-thirds (2/3) of director thereby creating vacancies in the Board
the outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the members Effect on shares
entitled to vote: Provided, That such removal shall take place either
at a regular meeting of the corporation or at a special meeting called  The removal of the director does not result in the transfer
for the purpose, and in either case, after previous notice to of his shares; the removed director remains a shareholder
stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the Section 29. Vacancies in the office of director or trustee. – Any
stockholders or members of a corporation for the purpose of vacancy occurring in the board of directors or trustees other than by
removal of directors or trustees, or any of them, must be called by removal by the stockholders or members or by expiration of term,
the secretary on order of the president or on the written demand of may be filled by the vote of at least a majority of the remaining
the stockholders representing or holding at least a majority of the directors or trustees, if still constituting a quorum; otherwise, said
outstanding capital stock, or, if it be a non-stock corporation, on the vacancies must be filled by the stockholders in a regular or special
written demand of a majority of the members entitled to vote. meeting called for that purpose. A director or trustee so elected to
Should the secretary fail or refuse to call the special meeting upon fill a vacancy shall be elected only or the unexpired term of his
such demand or fail or refuse to give the notice, or if there is no predecessor in office.
secretary, the call for the meeting may be addressed directly to the Any directorship or trusteeship to be filled by reason of an increase
stockholders or members by any stockholder or member of the in the number of directors or trustees shall be filled only by an
corporation signing the demand. Notice of the time and place of election at a regular or at a special meeting of stockholders or
such meeting, as well as of the intention to propose such removal, members duly called for the purpose, or in the same meeting
must be given by publication or by written notice prescribed in this authorizing the increase of directors or trustees if so stated in the
Code. Removal may be with or without cause: Provided, That notice of the meeting.
removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which
they may be entitled under Section 24 of this Code.
Filling up of vacancies in the Board

 Vacancies may be filled either by the stockholders (or

Right to Remove
members) or by the remaining directors (or trustees)
constituting quorum depending in the reason for the
Common Law – stockholders have the traditional inherent power to
vacancy
remove a director for cause, which is known as “amotion”
When stockholders or members shall replace/elect the director if
Corporation Code – the authority to remove the directors is the
vacancy is due to:
prerogative of the stockholders or members of the corporation
reposed under the above provision. Hence, the directors cannot
a. Removal
indirectly usurp or disregard the said power of the stockholders
b. Expiration of term
c. A ground other than removal or expiration of term (death,
Requisites of Removal P-N-V-M
resignation, abandonment) where the remaining directors
1. It must take place either at a regular meeting or special do not constitute a quorum
meeting of the stockholders or members called for the d. Increase in the number of directors
purpose

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before income tax of the corporation during the preceding year.

If vacancy is due to causes other than those specified
above, the board can fill the vacancy, if the remaining
directors constitute a quorum – this is onlyt permissive Rules on Compensation
and not mandatory
a. The by-laws may provide for a fixed compensation of the
Two ways corporations can fill the vacancy: members of the board of directors
b. If the by-laws does not provide for a compensation,
1. by the remaining directors constituting a quorum; compensation may be granted to the directors by the vote
2. or by stockholders or members n a regular special meeting of the stockholders representing at least a majority of the
called for the purpose outstanding capital stock
c. Even f the by-laws does not provide for compensation, the
The board may still function provided that there is still a directors are entitled to reasonable per diems
quorum d. The total compensation of directors shall not exceed 10%
The power of the Board of Directors is not suspended by of the net income before income tax of the corporation
vacancies unless the number is reduced to below a during the preceding year
quorum
Vacancy may occur if the director abandoned his position No Salary

Abandoned – where a director accepts a position in which  Directors or trustees are not entitled to salary or other
his duties are incompatible with and which will render him compensation when they perform nothing more than
physically incapable of performing his duties as director usual and ordinary duties of their office
 This rule is founded upon a presumption that
 The by-laws may provide for the procedure for the filling directors/trustees render service gratuitously, ad that the
up of vacancy. However such provisions must be return upon their shares adequately furnishes the motives
consistent with the other provisions of the Corporation for service, without compensation
Code
Per Diem
Hold-over Directors
 Is limited to pay for a day’s service
 If a director resigns after the expiration of the term of the  They are allowances of money for expenses each day
directors, and while the latter continue to function in a  Compensation does not imply immediate payment, it is
hold-over capacity, the position of the resigning director treated as synonymous with “salary”, therefore it includes
cannot be filled but he remaining hold-over director, salaries, remunerations, bonuses, gifts or any incentive for
because the vacancy in legal effect, is not due to services rendered for the corporation, and also Christmas
resignation but to expiration of the term gifts
 Vacancy is created the moment the term of the directors  In the absence of provisions in the by-laws, the board may
expires. Hence, only stockholders can fill the vacancy fix the amount of their per diems. They vary from year to
 Theory of delegated power of the board of directors year provided the same is reasonable
 The successor so elected to fill a vacancy shall be elected
only for the unexpired term of his predecessor in office 10% limit

Term  Means that the compensation can be given only if there

are profits
 The director who will fill up the vacancy will not serve for  It is intended for the protection not only f the stockholders
another year term. The replacement does not change the but also of the corporate creditors and prospective
length of the term investors

Section 30. Compensation of directors. – In the absence of any Net income of the preceding year
provision in the by-laws fixing their compensation, the directors
shall not receive any compensation, as such directors, except for  Refers to the net income of the year during which the
reasonable per diems: Provided, however, That any such director served
compensation other than per diems may be granted to directors by
the vote of the stockholders representing at least a majority of the Trustees
outstanding capital stock at a regular or special stockholders’
meeting. In no case shall the total yearly compensation of directors,
as such directors, exceed ten (10%) percent of the net income

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 The rules provided for apply to the members of the board  Makes an officer liable for damages that the principal may
of trustees. While members of non-stock non-profit have suffered through his non-performance of his duty
corporations are not supposed to receive part of the
income of corporation, they may be given compensation Shareholder is voting strictly as a shareholder v Shareholder is
of they actually render services to the corporation as when voting strictly as a shareholder
they are acting as directors, officers or employees of the
Shareholder is voting strictly as Shareholder is voting strictly as
corporation
a shareholder a shareholder
He represents himself. He He represents all the
Compensation of Officers
exercises his legal right to vote stockholders in his capacity as
with a view of his own benefits trustee of the stockholders
 The board may fix their compensation, it is within their
as owner of the shares
power to fix salaries of the officers by way of a resolution
 The salaries of officers are not covered by the 10% limit
 A director is also entitled to receive salaries if he is Standard of care – standard of an ordinarily prudent director under
performing functions as an officer similar circumstances or an ordinarily prudent person under similar
circumstances in one’s affair
Section 31. Liability of directors, trustees or officers. - Directors or
trustees who willfully and knowingly vote for or assent to patently Directors and officers are not required to personally
unlawful acts of the corporation or who are guilty of gross conduct an audit, due diligence dictates that they must
negligence or bad faith in directing the affairs of the corporation or
maintain familiarity with the financial status of the
acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and severally for corporation
all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. Section 3 of SEC Memorandum Circular No. 6, Series of 2006
When a director, trustee or officer attempts to acquire or acquire, in
violation of his duty, any interest adverse to the corporation in  The president or chief executive officer and the treasurer
respect of any matter which has been reposed in him in confidence, of the corporation is required to sigh a Management
as to which equity imposes a disability upon him to deal in his own Representation under oath that the information in
behalf, he shall be liable as a trustee for the corporation and must financial statements, that accompany certain applications,
account for the profits which otherwise would have accrued to the
are correct
corporation.
Loyalty
Three paramount duties of management
 The director or officer owes loyalty and allegiance to the
corporation 0 a loyalty that is undivided and an allegiance
1. Obedience
that is influenced by no consideration other that the
2. Diligence
welfare of the corporation
3. Loyalty
 The director as a fiduciary, cannot serve himself first and
his cestuis second
 These duties especially the duties of diligence and loyalty,
 Requires the agent to avoid conflict of interest
are rooted in the fiduciary nature of directors
 Directors of business corporation are not strictly speaking
Directors and officers owe fiduciary duty to the corporation and to
trustees and are not held to strict accountability as such
the shareholders. Hence, the Corporation Code provides for rules
 Directors are agents; they are fiduciaries
on:
Obedience
1. Self-dealing directors
2. Contracts between corporation with inter-locking
 Requires compliance with law and rules. In relation to this
directorship
duty, directors, trustees and officers have the duty to act
3. Usurpation of the corporations business opportunity
intra vires and within authority
4. Oppression of the minority shareholders
 Requires the agent to act within the authority given to him
5. Conflict of interest
by the Board, the by-laws or the Articles of Incorporation

Diligence There must also be loyalty to other stake holders like

creditors
 The directors and officers are required to exercise due When the corporation is insolvent, its directors who are its
care in the performance of their functions, negligence on creditors cannot secure to themselves any advantage or
their part will make them liable preference over other creditors

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Liability of Directors/Officers  Bad faith must be established because it cannot be

presumed
 As a rule, directors and officers are not solidarily liable  Fraud refers to all kinds of deception
with the corporation. Obligations incurred by them, acting
as such corporate agents, are not theirs but the direct Gross negligence
accountabilities f the corporation they represent
 For a director or officer to be made liable for negligence,
Criminal Liability the negligence must be so gross that it could amount to
bad faith
 Corporate officers or employees, through whose act,  Simple negligence is not enough
default or omission the corporation commits a crime, may  Is one that is characterized by the want of even slight care,
themselves be individually held answerable for the crime acting or omitting to acts= in a situation where there is a
duty to act, not inadvertently but willfully and intentionally
Solidary liability
with a conscious indifference to consequences insofar as
other persons may be affected
The liability of the directors and officers is solidary with the
corporation if:
Watered Stocks
1. When directors and trustees or in appropriate cases the
 Stocks of a corporation issued for less that their par or
officers of the corporation
issued value or in any other form other than cash valued in
excess of its fair value
a. Vote for or assent to patently unlawful acts of the
corporation Contractual assumption of liability
b. Act in bad faith or with gross negligence in directing the
affairs of the corporation  A director or officer is personally liable for the
c. Are guilty of conflict of interest to the prejudice of corporation’s debt if they so contractually agree or
corporation, its stockholders or members and other stipulate
persons
Liability Imposed by law
2. When a director has consented to the issuance of watered
 A specific provision of law may make the director or officer
stocks or who, having knowledge thereof , id not forthwith
personally liable for corporate obligations
file with the corporate secretary his written objection
thereto
Conflict of Interest
3. When the director trustee or officer has contractually
agreed or stipulated to hold himself personally and 1. Who acquire any personal or pecuniary interest in conflict
solidarily liable with the corporation with their duty as such
4. When a director, trustee or officer is made, by specific 2. One who violates his or her duty and he or she shall be
provisions of law, personally liable for his corporate liable as a trustee for the corporation and must account
actions for the profits which otherwise would have accrued to the
The cases when the directors and officers are made corporation if the ff reqs are present
personally liable under Section 31 is not the same as the
cases that are covered by the main strain of the Doctrine a. Attempts to acquire or acquires, any interest adverse to
of Piercing the Veil of Corporate fiction the corporation in respect f any matter
Probative factors need not be established b. The matter must have been reposed in him in confidence
c. Equity imposes a disability upon him to deal in his own
Patently Unlawful Acts
behalf
 Is one declared unlawful by law that imposes penalties for
Agency Rules on the duty of loyalty
commission of such unlawful acts
Article 1889. The agent shall be liable for damages if, there being a
Bad Faith and Fraud
conflict between his interests and those of the principal, he should
prefer his own.
 Bad faith imports a dishonest purpose, it is a breach of a
known duty through some ill motive or interest, it partakes
Article 1891. Every agent is bound to render an account of his
the nature of fraud
transactions and to deliver to the principal whatever he may have

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received by virtue of the agency, even though it may not be owing to ratified by a vote of stockholders representing atleast 2/3
the principal. of outstanding capital stock or by the vote of atleast 2/3 of
the members in a meeting called for the purpose
Every stipulation exempting the agent from the obligation to render
an account shall be void. Conditions:

Section 32. Dealings of directors, trustees or officers with the a. There must be full disclosure of the adverse interest of the
corporation. – A contract of the corporation with one or more of its directors involved that is made at such meeting
directors or trustees or officers is voidable, at the option of such b. The contract is fair and reasonable under the
corporation, unless all the following conditions are present: circumstances
1. That the presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to constitute Fair and Reasonable
a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
Fairness – requires that the transaction reflect terms one would
approval of the contract;
expect in an arm’s length transaction
3. That the contract is fair and reasonable under the circumstances;
and
4. That in case of an officer, the contract has been previously Disclosure is sine qua non; the efficacy of the approval of the
authorized by the board of directors. impartial directors is necessarily dependent on the Board’s
Where any of the first two conditions set forth in the preceding knowledge of all material facts
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the Section 33. Contracts between corporations with interlocking
stockholders representing at least two-thirds (2/3) of the directors. – Except in cases of fraud, and provided the contract is fair
outstanding capital stock or of at least two-thirds (2/3) of the and reasonable under the circumstances, a contract between two or
members in a meeting called for the purpose: Provided, That full more corporations having interlocking directors shall not be
disclosure of the adverse interest of the directors or trustees invalidated on that ground alone: Provided, That if the interest of
involved is made at such meeting: Provided, however, That the the interlocking director in one corporation is substantial and his
contract is fair and reasonable under the circumstances. interest in the other corporation or corporations is merely nominal,
he shall be subject to the provisions of the preceding section insofar
as the latter corporation or corporations are concerned.
Self-dealing directors, trustees or officers Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
 Who personally contract with the corporation in which interlocking directors.
they are directors, trustees or officers
 It is discouraged because the directors, trustees or officers
have fiduciary relationship with the corporation, and there Interlocking Directorship
can be no real bargaining where the same is acting on both
 There is an interlocking in a corporation when one of the
sides of the trade
directors in one corporation is a director in another
Status of Contract corporation
 It is by itself not prohibited under the Corporation Code,
 The contract between the corporation and the self-dealing however, the by-laws may contain provisions that disallow
directors, trustees or officers is voidable interlocking-directorship

Valid contract Requirements: Interest is Substantial – if his stockholdings exceed 20% of the
outstanding capital stock
1. The presence of such director in the board meeting
approving the contract was not necessary for constituting Interest is Nominal – if his equity is less than 00% or less of the
a quorum for such meeting outstanding capital stock
2. The vote of such director in the board meeting approving
the contract was not necessary Effect on Contracts
3. The contract is fair an reasonable under the circumstances
 If the interest of the interlocking director in one of the
4. In the case of an officer, there was previous authorization
corporations is nominal in one and substantial in the
by the board of directors or trustees
other, a contract between the two corporations shall be
Ratification valid if the ff conditions are present:
a. The presence of the interlocking director in the board
 Even if not all the requirements are met, the contract with meeting (nominal) in which the contract was approbed
the self-dealing directors, trustees or officers may still be

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was not necessary to constitute a quorum for such

meeting Line of Business Test
b. That the vote of such director was not necessary for the  Characterizes an opportunity as corporate
approval of the contract whenever a managing officer becomes involved
c. That the contract is fair and reasonable under the in an activity intimately or closely associated
circumstances with the existing or prospective activities of the
corporation
Ratification  Has a flexible meaning that is to be applied
reasonable and sensibly to the facts and
 If the contract is fair and reasonable, the absence o either
circumstances of the particular case
first or second condition makes the contract voidable and
capable of ratification
Fairness Test
a. There must be full disclosure of the adverse interest
 Determines the existence of a corporate
of the directors involved at such meeting
opportunity by applying ethical standard of what
b. The contract must be fair and reasonable under the
is fair and equitable under the circumstances
circumstances
 The basis of the doctrine of corporate
opportunity rests fundamentally on the
Section 34. Disloyalty of a director. – Where a director, by virtue of
unfairness in the particular circumstances of a
his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice director, whose relation to the corporation is
of such corporation, he must account to the latter for all such profits fiduciary
by refunding the same, unless his act has been ratified by a vote of
the stockholders owning or representing at least two-thirds (2/3) of Mixed Test
the outstanding capital stock. This provision shall be applicable,  Applying any two or all the tests
notwithstanding the fact that the director risked his own funds in
the venture NOTE: The line of business test cannot be strictly applied because
there is no wholesale prohibition against a director to engage in the
same line of business as the corporation
Doctrine of Corporate Opportunity
Burden of Proof rests u[on the officer who appropriated the
 Section 34 is consistent with the duty of loyalty of a
business opportunity for his own advantage
director. The duty of loyalty mandates that directors
should not give preference to their own personal Profits
amelioration by taking the opportunity belonging to the
corporation  The provision provides that a director who, by virtue of his
 Recognizes that the fiduciary standards could not be office, acquires for himself a business opportunity which
upheld where the fiduciary was acting for 2 entities with should belong to the corporation, must account to the
competing interests latter for all such profits by refunding the same
 Applies if there is presented to a corporate director a
business opportunity which NOTE: Property or business opportunity ceases to be a corporate
opportunity and is transformed into personal opportunity where the
a. The corporation is financially able to undertake corporation is definitely no longer able tp avail itself of the
b. From its nature, is in line with corporations business and is opportunity
of practical advantage to it
c. Is one in which the corporation has an interest or a Trustees and officers are not included because non-stock
reasonable expectancy corporations are not supposed to be engaged in business
as a main purpose
Tests: Although they are not covered they are nevertheless
prevented from unduly taking corporate opportunity
Interest or Expectancy Test under section 31
 Precludes acquisition by corporate officers of the The difference is that the ratification need not be by a vote
property of a business opportunity in which the of the stockholders owning or representing at least 2/3 of
corporation has a beachhead in the sense of a the outstanding capital stock
legal or equitable interest or expectancy growing Unless there is a specific statutory provision requiring
out of pre-existing right or relationship stockholder’s ratification, the Board ratification is
 More restrictive and inflexible sufficient to cure any defect in the transaction

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Section 35. Executive committee. – The by-laws of a corporation may If the executive committee was not validly constituted, the
create an executive committee, composed of not less than three members thereof maybe considered de facto officers
members of the board, to be appointed by the board. Said The board in the exercise of its business judgemnet ca
committee may act, by majority vote of all its members, on such creates committees that can give its assistance in the
specific matters within the competence of the board, as may be
performance of their functions. These are not executive
delegated to it in the by-laws or on a majority vote of the board,
except with respect to: (1) approval of any action for which committees
shareholders’ approval is also required; (2) the filing of vacancies in
the board; (3) the amendment or repeal of by-laws or the adoption Corporations that ate covered by the Code of Corporate
of new by-laws; (4) the amendment or repeal of any resolution of Governance are required to create:
the board which by its express terms is not so amendable or
repealable; and (5) a distribution of cash dividends to the a. An Audit Committee
shareholders. b. Nominations Committee
c. Remuneration or Compensation Committee

Executive Committee

 Is a corporate body with standing in law, although in a

sense, it is an agent of the Board of Directors because it
performs what otherwise is vested by law in the Board of
Directors
 Creation of such is allowed because the board may not
readily face contingency of confronting urgent matters
that requires its attentions
 Can only be created by virtue of a provision in the by-laws
 The board cannot by itself create an executive committee
if nothing is stated in the by-laws
 Within the limits of its authority, as powerful as the board
as it actually performs certain duties of the board and in
effect, it s acting as the Board itself
 May manage the day-to-day operation of the business BUT
the business and affairs shall be managed and all
corporate powers shall be exercised under the ultimate
direction of the Board
 The decision of the executive committee is not subject to
appeal to the board. They are valid and unappelable.
However the board may ratify the resolution if it is invalid
 As powerful as the board of directors and in effect acting
for the board itself

Composition

 Must be composed of not less than three members of the

board, to be appointed by the board
 There can be members who are not directors provided
that at least 3 members are directors
 A foreigner can be a member of the executive committee
in proportion to the foreign shareholdings in the
corporation

Quorum – same as that for directors. A majority of the group

constitutes a quorum

Majority vote requirement shall be interpreted to mean

majority of all the committee members, regardless of the
classification if the membership

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TITLE IV  The powers expressly provided for in the Code are deemed
POWERS OF CORPORATIONS part of the Articles of Incorporation even if such powers
are not enumerated therein
Section 36. Corporate powers and capacity. – Every corporation
incorporated under this Code has the power and capacity: Implied Powers
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated  Include all powers that are reasonably necessary or proper
in the articles of incorporation and the certificate of incorporation; for the execution of the powers expressly granted and are
3. To adopt and use a corporate seal; not expressly or impliedly excluded
4. To amend its articles of incorporation in accordance with the
 One which the law will regard as existing by implication;
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, such power must be one in a sense necessary, that is,
and to amend or repeal the same in accordance with this Code; needful, suitable and proper to accomplish the object of
6. In case of stock corporations, to issue or sell stocks to subscribers the grant
and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members Incidental Powers
to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease,  Powers that are deemed conferred on th corporation
pledge, mortgage and otherwise deal with such real and personal because they are incidental to the existence of the
property, including securities and bonds of other corporations, as corporation
the transaction of the lawful business of the corporation may
 Corporations are deemed given such powers because they
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution; are the consequences of the fact that they exist as juridical
8. To enter into merger or consolidation with other corporations as persons
provided in this Code;
9. To make reasonable donations, including those for the public Include:
welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall a. Right to succession
give donations in aid of any political party or candidate or for  Section 36 is explicit that the power of
purposes of partisan political activity; succession of a corporation by its corporate
10. To establish pension, retirement, and other plans for the benefit
name is only for the period of time stated I the
of its directors, trustees, officers and employees; and
Articles of Incorporation and the Certificate of
11. To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of Incorporation
incorporation. b. Right to have a corporate name
c. Right to make by-laws for its government
 A corporation may exist even without by-laws.
Special Capacities the existence of the power in the corporation to
adopt by-laws does not ordinarily and of
 It is a fundamental principle that a corporation is a juridical necessity makes the exercise of such power
entity created by law and, therefore, possesses no power essential to its corporate life or to the validity of
or authority other than what is vested by law its acts
 It can only do that which the law authorizes it to perform  By-laws are l=meant to regulate the manner of
conducting the internal affairs of the corporation
Kinds of Powers
d. Right to sue and be sued
1. Express powers  One of the incidental powers of a corporation
2. Implied powers  It is granted to a duly recognized corporation,
3. Incidental powers unless specifically revoked by another law
 The power to sue is exercised by the corporation
Express power through the board an/or its duly authorized
officers and agents
 Powers expressly provided by the Corporation Code  There must be board resolution giving such
applicable special laws, administrative regulations, and the authority
Articles of Incorporation of the corporation  In exceptional cases, certain officers have
 The express powers under the Corporation Code include implied authority to sigh the certification against
o The general powers under section 36 forum shopping
o Specific powers under section 11, 16 and 37 to e. Right to acquire and hold properties for the purposes
44 authorized by the charter

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General Rule: when the charter of a corporation confers certain  It is vested in the Board of Directors, it ca exercise this
enumerated powers, it is to be construed as including powers power without concurrence of the stockholders
reasonable necessary for the proper exercise of the enumerated  Stockholder’s approval is necessary only in cases covered
powers and excluding all other non-0enumerated powers by 40 and 42
 Absence of restrictions in the Articles of Incorporation and
Stretching the purpose clause By-laws, a corporation may, through valid board
resolution, validly ease or acquire real property
 It is legal to stretch the meaning of the purpose clause to
cover new and unexpected situations 2 requirements for the corporation to validly deal with personal
property
Specific Powers
1. It must be reasonably and necessarily required by the
1. To extend or shorten the corporate term
transaction of the lawful business of the corporation
2. To amend articles of Incorporation
2. It is subject to limitations prescribed by law and the
 Must be in accordance with the provisions of the
constitution
Corporation Code
3. To increase or decrease capital stock Requirements for temporary lease
4. To incur or create bonded indebtedness
5. To deny pre-emptive right 1. The property is not presently used by the corporation and
6. To sell or dispose all or substantially all of the assets of the leasing the property is not made n a regular basis
corporation 2. Leasing the property will make it productive instead of
7. To acquire its own shares allowing to remain idle
8. To invest corporate funds in another corporation, business 3. There is no express restrictions in the Articles of
or for any other purpose Incorporation and By-laws
9. To declare dividends 4. Leasing the property is not used as a scheme to prejudice
corporate creditors or result in the infringement of the
General Powers trust fund doctrine

 Generally, the board exercises general power of the

 A corporation can acquire usufruct over an immovable
corporation. Approval of a resolution by the Board is
property. It can be extended
enough for the exercise of such powers
To enter into merger or consolidation
Power to adopt and use a corporate seal
Merger – when two or more corporations merge into a single
 Can be traced in ancient common law where all actions of
corporation that shall be one of the constituent corporations
the corporation were required to be under seal
 A seal is not indispensible for the transactions Consolidation – when two or more corporations form a new single
 Seal is only necessary with respect to certificate of stock as corporation
provided under Section 63
To make reasonable donations
Powers regarding shares and membership
 Without an express grant of power, a stock corporation is
1. Power to issue previously unsubscribed shares generally not allowed t donate portions of its assets
2. The power to sell treasury stocks
3. The power to sell delinquent shares Corporate Social Responsibility Theory, the corporation code
4. The power to acquire its own shares in proper cases now allows corporations to make donations
5. The power to redeem redeemable shares
6. The power to increase or decrease the par value shares Requisites:
7. To resort to stock split
1. The donation must be reasonable
To acquire, sell, lease or otherwise deal with real or personal 2. The donation must be for valid purposes including public
properties welfare or for hospital, charitable, cultural, scientific, civic
or similar purposes
 A corporation has the power to purchase, receive, take or 3. The donation must not be in aid of any political party or
grant, hold covey, sell lease, pledge, mortgage and candidate or for purposes of partisan political activity
otherwise deal with such real and personal property,
including securities and bonds of other corporations
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 The donation must bear reasonable relation to the To enter into a Joint Venture
corporation’s interest and not be so remote and fanciful
 A corporation is likewise empowered to accept donations  A corporation can enter into a joint venture agreement
when it is necessary to carry out iys express powers, but  Joint venture is an organization formed for some
there must be compliance with Act No. 4075 temporary purpose – same elements with partnership
 Donation is PROHIBITED IF made within the context of a
To borrow Funds
partisan political activity
 The power to borrow oney is auxiliart to the primary
To establish pension, retirement and other plans
purposes of the corporation
 The power of the corporation to grant gratuity pay to  A board resolution is necessary for such purpose
employees is covered by such provision. Stockholders’  It is only duly authorized representatives that must secure
approval is not necessary loans in behalf of the corporation
 The retirement fund may gain tax exempt status
To act as surety or guarantor
Other powers
GENERAL RULE: a corporation may not ordinarily be
 The corporation is empowered to exercise such other bound by a contract of guarantee or surety for the benefit of thir
powers as may be essential or necessary to carry out its persons.
purpose as stated in the Articles of Incorporation
 In the absence of a express power in the Articles of
Incorporation, the power to act as a surety or guarantor
To enter into partnership cannot be justified
 Such power is not a necessary or incidental power
 A corporation cannot enter into a contract of partnership  A corporation cannot act an an accommodation party in a
 This limitation is based on public policy, since in a negotiable instruiments
partnership, the corporation would be bound by the acts
of the persons who are not its duly appointed and To Mortgage
authorized agents
 Corporate assets may be mortgaged by authorized
Justification of the prohibition directors or officers o behalf of the corporation as owner,
as the transaction of the lawful business of the corporation
1. The mutual agency between the partners woulld be may reasonable and necessarily require
inconsistent with the policy of the law that the corporation  Corporation CANNOT mortgage its properties to secure
shall manage its own affairs separately and exclusively the obligation of third persons
2. Such arrangement would improperly allow corporate  Corporation CAN mortgage its properties to SECURE the
property to become subject to risks not contemplated by obligation of a subsidiary
the stockholders when they originally invested in the
corporation Requirements where a corporation can mortgage its
properties for the obligations of another which is not its
Exceptions: subsidiary

1. The authority to enter into a partnership relation is 1. There is no express restriction

expressly conferred by the charter or Articles of 2. The purpose of the mortgage is legal
Incorporation, and the nature of the business venture to 3. Consent of all corporate creditors and stockholders must
be undertaken by the partnership is in line with the be secured
business authorized by the charter 4. The transaction is not used as a scheme to defraud or
2. The partnership must be a limited partnership and the prejudice corporate creditors
corporation must be a limited partner 5. The mortgage will not hamper the continuous business
3. If it is a foreign corporation, it must obtain a license to operation o the corporation
transact business in the country 6. The accommodated third party involved in the mortgage is
financially solvent and capable of paying its obligation
 By entering into a limited partnership, a corporation could
continue to manage its own corporate affairs while validly Practice of Profession
abstaining from participation in the management of the
 Only architect can organize a corporation for the practice
entity in which it has invested
of their profession
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1. Only Filipino ctisens  The three-year liquidation period shall likewise be

2. Registered and licensed architect shall compose at least reckoned from the date of the SEC approval of the
75% of the owners, shareholders, members incorporators, Amended Articles of Incorporation
directors, executive officers
3. Responsible for their individual and collective acts as an Section 38. Power to increase or decrease capital stock; incur, create
entity or increase bonded indebtedness. – No corporation shall increase or
4. Registered in SEC decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder’s meeting duly called for the purpose,
Section 37. Power to extend or shorten corporate term. – A private two-thirds (2/3) of the outstanding capital stock shall favor the
corporation may extend or shorten its term as stated in the articles increase or diminution of the capital stock, or the incurring, creating
of incorporation when approved by a majority vote of the board of or increasing of any bonded indebtedness. Written notice of the
directors or trustees and ratified at a meeting by the stockholders proposed increase or diminution of the capital stock or of the
representing at least two-thirds (2/3) of the outstanding capital incurring, creating, or increasing of any bonded indebtedness and of
stock or by at least two-thirds (2/3) of the members in case of non- the time and place of the stockholder’s meeting at which the
stock corporations. Written notice of the proposed action and of the proposed increase or diminution of the capital stock or the incurring
time and place of the meeting shall be addressed to each or increasing of any bonded indebtedness is to be considered, must
stockholder or member at his place of residence as shown on the be addressed to each stockholder at his place of residence as shown
books of the corporation and deposited to the addressee in the post on the books of the corporation and deposited to the addressee in
office with postage prepaid, or served personally: Provided, That in the post office with postage prepaid, or served personally.
case of extension of corporate term, any dissenting stockholder may A certificate in duplicate must be signed by a majority of the
exercise his appraisal right under the conditions provided in this directors of the corporation and countersigned by the chairman and
code. the secretary of the stockholders’ meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
Not inherent right (3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
 Since the life of the corporation is just a concession of the names, nationalities and residences of the persons subscribing, the
State, the power to extend the corporate term is not an amount of capital stock or number of no-par stock subscribed by
inherent right each, and the amount paid by each on his subscription in cash or
 Section 120 provides that “voluntary dissolution be property, or the amount of capital stock or number of shares of no-
par stock allotted to each stock-holder if such increase is for the
effected by amending the Articles of Incorporation to
purpose of making effective stock dividend therefor authorized;
shorten the corporate term pursuant to the provisions of (4) Any bonded indebtedness to be incurred, created or increased;
this code” (5) The actual indebtedness of the corporation on the day of the
meeting;
Requirements: (6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
1. The action must be approved by a majority vote of the stock, or the incurring, creating or increasing of any bonded
board of directors or trustees indebtedness.
2. The action must be ratified at a meeting by the Any increase or decrease in the capital stock or the incurring,
stockholders representing at least 2/3 of the outstanding creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission.
capital stock or by at least 2/3 of the members in case of
One of the duplicate certificates shall be kept on file in the office of
non-stock corporations the corporation and the other shall be filed with the Securities and
3. Written notice of proposed action shall be addresses Exchange Commission and attached to the original articles of
4. A copy of the amended articles of incorporation shall be incorporation. From and after approval by the Securities and
submitted to the Sec for its approval Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or
Appraisal Right decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare:
 In case of extension of corporate term, any dissenting Provided, That the Securities and Exchange Commission shall not
stockholder may exercise his appraisal right accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the
Dissolution corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-
 The dissolution takes effect on the date of approval of the
five (25%) percent of the amount subscribed has been paid either in
Amended Articles of Incorporation by the SEC actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-
five (25%) percent of the subscription: Provided, further, That no

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decrease of the capital stock shall be approved by the Commission if  There is also no need to get the approval of the SEC for the
its effect shall prejudice the rights of corporate creditors. creation of additional paid-in capital
Non-stock corporations may incur or create bonded indebtedness,
or increase the same, with the approval by a majority vote of the SEC approval is required for the issuance of additional shares
board of trustees and of at least two-thirds (2/3) of the members in
a meeting duly called for the purpose. Shares of stock are not exempt securities
Bonds issued by a corporation shall be registered with the Securities
and Exchange Commission, which shall have the authority to Exempt from registration Requirement of SEC
determine the sufficiency of the terms thereof.
1. The sale of capital stock of a corporation to its own
Increase or decrease of Capital Stock stockholders exclusively, where NO COMMISSION or
remuneration is paid or given directly or indirectly in
 The exercise of the power to increase or decrease the
connection with the sale of such capital stock
authorized capital stock of the corporation results in the
2. Subscriptions for shares of the capital stock of a
amendment of the Articles of Incorporation
corporation prior to the incorporation thereof or in
 Mere increase of subscribed capital stock of paid-up
pursuance of an increase in its authorized capital stock
capital does not require amendment
under the Corporation Code
How to increase capital stock? 3. The exchange f securite by the issuer with its existing
security holders exclusiveky
1. By increasing the number of shares and retaining the par 4. The sale of securities by an issuer to fewer that 20 persons
value in the Philippines during 12-month period
2. By increasing the par value of existing shares without 5. The sale of securities to any number of the following:
changing the umber of shares i. Bank
3. By increasing the number of shares and increasing the par ii. Registered investment house
value iii. Insurance company
iv. Pension fund or retirement plan
Decrease? Do the opposite v. Investment company
vi. Such other person as the Commission may rule
The formal procedure provided for under Section 38
clearly reveals that a decrease of the capital stock NOTE: 1and 2, notice of or application for exemption need not be
consequently amends the underlying contractual filed. 4 and notice of exemption is necessary if persons other than
relationship between the corporation and the existing shareholders will purchase shared from the corporation
shareholders provided that the sale is fewer than 20 persons in the Philippines

Stock split – a share is divided or converted into two or more shares Requirements for increase or decrease of the authorized capital
but the amount of the outstanding capital remains the same stock
because the par value is also divided in as many shares
1. It must be approved by a majority vote of the board of
Reverse stock split – it is the pro-rata combination of all outstanding directors
shares of a specified class into smaller number of shares of that class 2. At a shareholder’s meeting duly called for the purpose, 2/3
of the outstanding capital stock must favor te increase or
Increase of subscribed Capital diminution of the capital stock
3. Written notice
 Necessary when additional funds are required by the
4. A certificate in duplicate must be signed by a majority of
operation and the corporation opted to raise funds
the directors of the corporation and countersigned by the
through additional investments
chairman and the secretary of the stockholder’s meeting,
 Need not go through the process above mere approval of
setting forth:
the board is sufficient
An increase in the AUTHORISED CAPITAL STOCK is required
of the additional subscription cannot be covered by the (1) That the requirements of this section have been complied with;
original authorized capital or if the original authorized
capital is already exhausted (2) The amount of the increase or diminution of the capital stock;

Increase in Paid-Up Capital (3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the

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amount of capital stock or number of no-par stock subscribed by  Right is available to existing shareholders with respect to
each, and the amount paid by each on his subscription in cash or unsubscribed but previously issued shared
property, or the amount of capital stock or number of shares of no-  NOT available when shares are issued in exchange for
par stock allotted to each stock-holder if such increase is for the shares in another corporation if the same is the result of a
purpose of making effective stock dividend therefor authorized; merger to which the corporations are parties

(4) The amount of stock represented at the meeting; and Waiver

(5) The vote authorizing the increase or diminution of the capital  A stockholder neither desires nor intends to buy any of the
stock, or the incurring, creating or increasing of any bonded stocks being offered may waive such right
indebtedness.  The right to waive is a personal right, hence, the
stockholders concerned should give such waiver
With respect to the increase of capital stock, the individually or he can authorize somebody to execute the
application to be filed with SEC shall be accompanied by same an in his behalf by way of a special power of
the sworn statement of the treasurer, showing that at attorney
least 25% of such increased capital stock has been
subscribed and paid Transfer
 25% is based on the additional amount by which the
capital stock is increased and not on the total capital stock  The right to subscribe to new issues and disposition may
as increased be transferred by the shareholder. Unless there is an
express restriction in the Articles of Incorporation, the pre-
Documentary requirement; page 362 emptive right is transferable

Bonded indebtedness – refers to secured indebtedness or those When not available:

secured by real or personal property that are covered by certificates
1. When the right is denied in the Articles of Incorporation
Section 39. Power to deny pre-emptive right. – All stockholders of a 2. When shares are issued in compliance with laws requiring
stock corporation shall enjoy pre-emptive right to subscribe to all stock offerings or minimum stock ownership by the public
issues or disposition of shares of any class, in proportion to their 3. When shares are issued in good faith with the approval of
respective shareholdings, unless such right is denied by the articles the stockholders representing 2/3 of the outstanding
of incorporation or an amendment thereto: Provided, That such pre-
capital stock, in exchange for property needed for
emptive right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock ownership by corporate purposes or in payment of previously
the public; or to shares to be issued in good faith with the approval contracted debt
of the stockholders representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for corporate Section 40. Sale or other disposition of assets. – Subject to the
purposes or in payment of a previously contracted debt. provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise
Pre-emptive right – is the right of shareholders to subscribe to all dispose of all or substantially all of its property and assets, including
issues or disposition of shares of any class in proportion to their its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
shareholdings
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
 The underlying basis of this right is to maintain the relative expedient, when authorized by the vote of the stockholders
and proportionate voting strength and control of existing representing at least two-thirds (2/3) of the outstanding capital
shareholders stock, or in case of non-stock corporation, by the vote of at least to
two-thirds (2/3) of the members, in a stockholder’s or member’s
Issues and Dispositions meeting duly called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be addressed
 Include issuance of the unsubscribed shares that are part to each stockholder or member at his place of residence as shown
of the original capital stock and the increase of capital on the books of the corporation and deposited to the addressee in
stock the post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder may exercise his appraisal right
 The right is available in case the corporation decides to
under the conditions provided in this Code.
dispose its treasury shares A sale or other disposition shall be deemed to cover substantially all
 Include new shares issued pursuance o an increase of the corporate property and assets if thereby the corporation would
capital stock or shares form the unissued shares be rendered incapable of continuing the business or accomplishing
the purpose for which it was incorporated.

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After such authorization or approval by the stockholders or Effect of Creditors

members, the board of directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange, mortgage, pledge or General Rule: The transferee-corporation of all or substantially all of
other disposition of property and assets, subject to the rights of the assets of the transferor will not be liable for the debts of said
third parties under any contract relating thereto, without further transferor-corporation
action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any Exceptions:
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise 1. if there is an express or implied assumption of liabilities
dispose of any of its property and assets if the same is necessary in
2. There is a consolidation or merger or a de facto merger
the usual and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property and assets 3. If the purchase was in fraud of creditors
be appropriated for the conduct of its remaining business. 4. If the purchaser becomes a continuation of the seller
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be If there is a written document, the liabilities assumed may
sufficient authorization for the corporation to enter into any be limited by express stipulation
transaction authorized by this section. If the creditor did not consent, the only way the transfer
Requisites: can proceed without prejudice is to hold the assignee
liable for the obligations of the assignor
1. It must be approved by the majority f the
Creditors are protected by the provisions of the New Civil
directors/trustees
Code, a creditor who is not a party to a contract can sue to
2. There must be assent of stockholders representing 2/3 of
rescind the contract
outstanding capital stock or 2/3 members in a meeting
Bulk Sales Law – not binding on the creditors
 The sale is VOID if these requirements are not complied
with There is a sale in bulk if there is any sale, transfer,
mortgage or assignment of:
If the transaction does not cover all or substantially all of
the assets, the decision of the board is sufficient and it is 1. Stock of goods, wares, merchandise provisions or
not necessary to get the approval of the stockholders materials otherwise in the ordinary course of trade and
If substantially ALL of the assents were already previously regular prosecution of business of the vendor, mortgagor,
mortgaged by the corporation wuth proper board and transferor or assignor
stockholders’ approval as evidenced by MORTGAGE TRUST 2. The trade or business conducted by the vendor,
INDENTUR, the subsequent appointment of new trustee mortgagor, transferor or assignor
should be considered a regular business transaction 3. All or substantially all of the fixtures and equipment used
in and bout the business of the vendor, mortgagor,
transferor or assignor

Kinds of corporate Acquisitions: Effect on Employees of Corporate Acquisitions

1. Asset sales – the corporate entity sells all or substantially  Dismissal of employees in good faith is justified if the
all of its assets to another entity corporate entity sells all or substantially all of its assets
2. Stock sales – the individual or corporate shareholders sell  In asset sales, the rule is that the seller in good faith is
a controlling block of stock to new or existing shareholders authorized to dismiss the affected employee; the buyer in
good faith, is not obliged to absorb the employees
Substantially all –if the corporation would thereby be rendered affected by the sale
incapable of continuing the business or accomplishing the purpose
 Stock sales takes place at the shareholder level, because
for which it was incorporated the corporation possesses a personality separate from its
shareholders, a shift in the composition of its shareholders
 There is an implied contract among stockholders, there
will not affect its existence and continuity
should be no disposition of the property used by the
corporation until its dissolution
Section 41. Power to acquire own shares. – A stock corporation shall
 To avoid loss or inability of the corporation to make have the power to purchase or acquire its own shares for a
further profits legitimate corporate purpose or purposes, including but not limited
 It can be exercised when there is a just and reasonable to the following cases: Provided, That the corporation has
cause unrestricted retained earnings in its books to cover the shares to be
 Does not necessarily dissolve the corporation purchased or acquired:

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1. To eliminate fractional shares arising out of stock dividends; 1. The capital of the corporation must not be impaired
2. To collect or compromise an indebtedness to the corporation, 2. A legitimate and proper corporate objective is advanced
arising out of unpaid subscription, in a delinquency sale, and to 3. The condition of corporate affairs warrants it
purchase delinquent shares sold during said sale; and 4. The transaction is designed and carried out in good faith
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
Section 42. Power to invest corporate funds in another corporation
or business or for any other purpose. – Subject to the provisions of
this Code, a private corporation may invest its funds in any other
Requirements for acquisition: corporation or business or for any purpose other than the primary
purpose for which it was organized when approved by a majority of
1. The acquisition is for legitimate corporate purpose or the board of directors or trustees and ratified by the stockholders
purposes representing at least two-thirds (2/3) of the outstanding capital
2. The corporation has unrestricted retained earnings in its stock, or by at least two thirds (2/3) of the members in the case of
books to cover shares to be purchased or acquired non-stock corporations, at a stockholder’s or member’s meeting
duly called for the purpose. Written notice of the proposed
SEC Requirements: investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence
1. The capital is not impaired as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
2. A legitimate and proper corporate purpose or objective is
personally: Provided, That any dissenting stockholder shall have
advanced appraisal right as provided in this Code: Provided, however, That
3. The corporate affairs warrant it where the investment by the corporation is reasonably necessary to
4. The transaction is designed and carried out in good faith accomplish its primary purpose as stated in the articles of
5. There is intended and there results no undue advantage to incorporation, the approval of the stockholders or members shall
a favored stockholders at the expense f the remainder not be necessary.
6. The creditors are not prejudiced
7. The corporation acts in good faith and without prejudice
Pursuing Primary Purpose
to the rights of creditors and stockholders
8. There must be an unrestricted retained earnings to
 Where the investment by the corporation is reasonably
purchase the same
necessary to accomplish its primary purpose as stated in
the Articles of Incorporation, the approval of the
The legitimate purposes under the code are:
stockholders or members shall not be necessary
1. To eliminate fractional shares arising out of stock
Pursuing Secondary Purpose
dividends;
2. To collect or compromise an indebtedness to the
Requirements:
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold 1. There must be approval by a majority of the board of
during said sale; and directors or trustees
3. To pay dissenting or withdrawing stockholders entitled to 2. The approval of the board must be ratified by the
payment for their shares under the provisions of this Code stockholders representing at least 2/3 of the outstanding
capital stock
General Rule: in the absence of statutory authority, the corporation
3. Written notice
cannot acquire its own shares. The investments of the shareholders
are generally locked-in until the liquidation Appraisal Right

Reasons:  A dissenting stockholder is given this right whenever the

corporation decides to pursue it secondary corporate
1. The corporation cannot increase or diminish its capital
business
without sanction of the legislature
 It is granted because the stockholder will be exposed to a
2. The transaction is a fraud upon creditors
line of business that is not being pursued when he
3. It is foreign to the purposes for which the corporation is
invested in the company
created
4. Purchase of shares can be considered a violation of the Investment of Funds
Trust Fund Doctrine because portion of the capital is taken
to the prejudice of the creditors  Includes not only investment of money but also
investment of property of the corporation
SEC conditions:

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 Lease of the property is included in the term “investment  Those that are paid in property instead of cash where the
of funds” surplus is I that form and it is practicable to so distribute
them among the shareholders
Investment in shares  Property to be distributed shall consist only of property
which no longer intended to be used in the operation of
 Section 42 does not cover passive investment
business of the corporation and which are practicable to
 A corporation with idle funds may invest in shares for the
be distributed as dividends
purpose of generating income
 A corporation can invest its idle funds in corporate notes Stock Dividends
issued by private corporations and government-owned or
controlled corporations  When stock dividends are declared, the earnings are
distributed to the stockholders in the form of shares of
Section 43. Power to declare dividends. - The board of directors of a stock
stock corporation may declare dividends out of the unrestricted  It involves the conversion of surplus or undivided profits
retained earnings which shall be payable in cash, in property, or in into capital
stock to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock
Reasons:
shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the
1. The corporation simply desires a larger permanent
delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the capitalization
approval of stockholders representing not less than two-thirds (2/3) 2. The market price may have increased above a desirable
of the outstanding capital stock at a regular or special meeting duly trading range and stock dividend will generally reduce the
called for the purpose. (16a) per share market value of the company’s stock
Stock corporations are prohibited from retaining surplus profits in 3. The corporation may wish to have more stockholders
excess of one hundred (100%) percent of their paid-in capital stock,
4. Stock dividends may be used to satisfy stokcholders’
except: (1) when justified by definite corporate expansion projects
demands for cash dividends
or programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any
financial institution or creditor, whether local or foreign, from Dividends are payable only when there are profits earned
declaring dividends without its/his consent, and such consent has by the corporation and as a general rule, even if there are
not yet been secured; or (3) when it can be clearly shown that such existing profits, the Board of Directors has the discretion
retention is necessary under special circumstances obtaining in the to determine whether or not to declare them
corporation, such as when there is need for special reserve for
probable contingencies. Exception:

 Stock corporations are prohibited from retaining surplus

Board of Directors profits in excess of 100% of their paid-in capital

 Has the discretion to declare dividends, the decision of the Exception to the exception:
board alone is necessary to declare cash or property
dividends 1. It is justified by definite corporate expansion projects
 In case of STOCK DIVIDENDS, the decision of the Board is approved by the board
subject to approval of the stockholders representing 2/3 of 2. The corporation is prohibited under any loan agreement
the outstanding capital of the corporation 3. It can be clearly shown that such retention is necessary
 It is still up to the board to declare stock dividends, the under special circumstances obtaining in the corporation
stockholders cannot compel them to do so
Retained Earnings and Unrestricted Retained Earnings
Requirements:
Retained Earnings - accumulated profits realized out of normal and
1. Unrestricted retained earnings continuous operations of the business AFTER deducting therefrom
2. Resolution of the board distributions to stockholders and transfers to capital stock or other
3. If stock dividends are declared, there must be resolution of accounts
the boast with the concurrence of 2/3 of outstanding
capital Unrestricted Retained Earnings – AFTER deducting distributions of
stockholders and transfers to capital stock or other accounts and
Property Dividends which is:

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1. Not appropriated by its Board of Directors for corporate  Cannot be declared as stock dividends or cash dividends
expansion projects or programs because they are not considered part of earned surplus
2. Not covered by a restriction for dividend declaration under profits
a loan agreement  If it be allowed, the corporation would be converted into
3. Not required to be retained under special circumstance both a debtor and creditor for the same amount of time

Dividends cannot be declared out of capital Interim Income

Exception: (will not violate trust fund doctrine) General Rule: there can be no dividend declaration for profits in a
fiscal year that has not yet expired
1. Liquidating dividends
2. Dividends from investments in wasting assets corporation Exceptions:

What is included in Retained Earnings? SECTION 5, Memo 1. The amount of dividends involved would not be impaired
by losses
Paid-in surplus – cannot be declared as dividends because they are 2. The projected income for the remaining period shall be
part of capital submitted to SEC
3. Should the company sustain losses during the remaining
 It is the difference between the par value and the issued period, the dividends should be refunded
value or selling price of the shares and are not therefore
considered profits earned in the conduct of the business of Who is entitled?
the corporation
 Also called PREMIUM  Stockholders are entitled to dividends pro rata based on
the total number of shares and not on the amount paid for
Exceptions: the shares
 Even unpaid subscribers are entitled to dividends
1. When they be declared only as stock dividends and not as
cash dividends Vesting
2. No creditor shall be prejudiced therefrom
3. There is no resulting impairment of capital  The right of the stockholders to be paid dividends accrues
as soon as the declaration is made in accordance with 43.
NOTE: There should be no dividend declaration if there is a From that time, the stock holder can already demand
reduction surplus. There is reduction surplus where surplus arises payment
from the reduction of the par value of the issued shares of stocks
Amount
Revaluation surplus – if there is an increase in the value of assets
 The amount to be declared as dividends depends upon the
 They cannot be declared as dividend amount of the unrestricted retained earnings
 When it comes to stock dividends, the corporation is not
Exception: required to pay dividend according to their par value
 Stock dividends can be declared at a premium (value
1. The company has sufficient income from the operations
higher than par)
from which the depreciation on the appraisal increase is
charged Section 44. Power to enter into management contract. – No
2. The company has no deficit at the time the depreciation corporation shall conclude a management contract with another
on the company has no deficit at the time the depreciation corporation unless such contract shall have been approved by the
on the reappraisal increase was charged board of directors and by stockholders owning at least the majority
3. Such depreciation on the appraisal increase previously of the outstanding capital stock, or by at least a majority of the
charged to operations is not erased or impaired members in the case of a non-stock corporation, of both the
managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders
Gain from sale of real property
representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of
 Available for dividend declaration because they are part of
the total outstanding capital stock entitled to vote of the managing
retained earnings corporation; or (2) where a majority of the members of the board of
directors of the managing corporation also constitute a majority of
Treasury Shares the members of the board of directors of the managed corporation,
then the management contract must be approved by the

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stockholders of the managed corporation owning at least two-thirds

(2/3) of the total outstanding capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all
or substantially all of the business of another corporation, whether
such contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or
operating agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be entered into
for such periods as may be provided by the pertinent laws or
regulations.
Management Contract – is an agreement whereby one undertakes
to manage or operate all or substantially all of the business of
another, whether such contracts are called service contracts,
operating agreements or otherwise

 Applies to situations where the contract is between two

corporations
 Partnership and private individuals are not subject to the
requirements of the provisions
 Maximum term is 5 years and subject to renewal

Section 45. Ultra vires acts of corporations. – No corporation under

this Code shall possess or exercise any corporate powers except
those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the
powers so conferred.

Ultra vires acts – are those powers that are not conferred to the
corporation by-laws, by its Articles of Incorporation and those that
are not implied or necessary or incidental to the exercise of the
powers so conferred

 One committed outside the object for which a corporation

is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law
 An act outside or beyond express, implied and incidental
powers

Effects of Ultra Vires Acts

 If the act is ultra vires not because it is illegal but because

it is not an express, implied or incidental power, the same
may in certain cases be enforced
1. A corporation that is engaged in ultra vires business is
liable for torts committed by its agents
2. The validity of torrens title cannot be questioned
3. Contract is effective
4. The party received benefits is estoppels from claiming that
the contract is ulta vires

 Ultra vires contract cannot be ratified

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TITLE V By-laws of a corporation are the rules and regulations

enacted by the corporation to regulate, govern and control
BY-LAWS its own actions, affairs
By-laws are relatively permanent and continuing rules of
Sec. 46. Adoption of by-laws. - Every corporation formed under this action
Code must, within one (1) month after receipt of official notice of
By-laws are written into the charter and in this sense, they
the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government become part of the fundamental law of the corporation
not inconsistent with this Code. For the adoption of by-laws by the Every corporation has the inherent power to adopt by-
corporation the affirmative vote of the stockholders representing at laws for its internal government as one of its necessary
least a majority of the outstanding capital stock, or of at least a and inseparable legal incidents
majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or BY-LAWS v RESOLUTIONS
members voting for them and shall be kept in the principal office of
the corporation, subject to the inspection of the stockholders or BY-LAWS RESOLUTIONS
members during office hours. A copy thereof, duly certified to by a A provision is a permanent rule Provision ordinarily applies to a
majority of the directors or trustees countersigned by the secretary of action and mode of conduct single act of a corporation
of the corporation, shall be filed with the Securities and Exchange of corporate affairs
Commission which shall be attached to the original articles of Internal government
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such
Effect of Non-Adoption
by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together
 Every corporation must, within 1 month after receipt of
with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the official notice of the issuance of its Certification of
Securities and Exchange Commission of a certification that the by- Incorporation by the SEC adopt a by-laws
laws are not inconsistent with this Code.  The corporation is NOT automatically dissolved if no by-
The Securities and Exchange Commission shall not accept for filing laws are adopted within such period
the by-laws or any amendment thereto of any bank, banking  The law itself reflects the intent to attach a directory, and
institution, building and loan association, trust company, insurance
not mandatory meaning
company, public utility, educational institution or other special
 Section 46 also allows the filing of the by-laws even prior
corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that to incorporation
such by-laws or amendments are in accordance with law. (20a)  By-laws are not necessary either to the existence of a
corporation or to the valid exercise of the powers
Sec. 47. Contents of by-laws. - Subject to the provisions of the conferred to it,
Constitution, this Code, other special laws, and the articles of  the failure to exercise the power will be ascribed to mere
incorporation, a private corporation may provide in its by-laws for:
non-action which will not render void any acts of the
1. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees; corporation which would otherwise be valid
2. The time and manner of calling and conducting regular or special  adoption of by-laws is a matter of practical, if not one of
meetings of the stockholders or members; legal
3. The required quorum in meetings of stockholders or members  the corporation Code does not provide for the
and the manner of voting therein; consequences of the non-filing of the same within the
4. The form for proxies of stockholders and members and the period provided
manner of voting them;
 the SEC has the power to suspend or revoke, after proper
5. The qualifications, duties and compensation of directors or
trustees, officers and employees; notice and hearing the franchise or certificate of
6. The time for holding the annual election of directors of trustees registration of corporations
and the mode or manner of giving notice thereof;  A corporation that failed to submit the by-laws “may be
7. The manner of election or appointment and the term of office of considered a de facto corporation”
all officers other than directors or trustees;
8. The penalties for violation of the by-laws; Procedure
9. In the case of stock corporations, the manner of issuing stock
certificates; and  The by-laws may be adopted before or after incorporation.
10. Such other matters as may be necessary for the proper or  It shall be effective only upon the issuance by the SEC of a
convenient transaction of its corporate business and affairs.
certification that the by-laws are not inconsistent with the
Code

Pre-Incorporation

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 Shall be signed by all incorporators and submitted to the 5. The time for holding the annual election of directors of
SEC together with the Articles of Incorpoaration trustees and the mode or manner of giving notice
thereof;
Post Incorporation  Absence of provision the rules provided for under Section
53 apply
 After incorporation, the By-law shall be dopted by the
corporation by the affirmative vote of the stockholders
6. The manner of election or appointment and the term of
representing at least a majority of the outstanding capital
office of all officers other than directors or trustees;
stock
 Non-stock – majority vote of members
7. The penalties for violation of the by-laws;
Requisites

1. It must be consisted with Corporation Code, other 8. In the case of stock corporations, the manner of issuing
pertinent laws and regulations stock certificates; and
2. It must be consistent with Articles of Incorporation
3. It must not disturb vested rights, impair contract or Sec. 48. Amendments to by-laws. - The board of directors or
trustees, by a majority vote thereof, and the owners of at least a
property rights of stockholders or members or create
majority of the outstanding capital stock, or at least a majority of the
obligations not sanctioned by law members of a non-stock corporation, at a regular or special meeting
duly called for the purpose, may amend or repeal any by-laws or
Articles of Incorporation > By-laws. in case of conflict, adopt new by-laws. The owners of two-thirds (2/3) of the
articles of incorporation shall prevail outstanding capital stock or two-thirds (2/3) of the members in a
non-stock corporation may delegate to the board of directors or
Biding effect trustees the power to amend or repeal any by-laws or adopt new by-
laws: Provided, That any power delegated to the board of directors
 Binding not only upon the corporation but also on its or trustees to amend or repeal any by-laws or adopt new by-laws
stockholders, members and those having direction, shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority
management and control of its affairs
of the members in non-stock corporations, shall so vote at a regular
 NOT binding on subordinate employees or special meeting.
Whenever any amendment or new by-laws are adopted, such
Contents amendment or new by-laws shall be attached to the original by-laws
in the office of the corporation, and a copy thereof, duly certified
 By-laws may provide such other matters as may be under oath by the corporate secretary and a majority of the
necessary for the proper or convenient transaction of its directors or trustees, shall be filed with the Securities and Exchange
corporate business and affairs Commission the same to be attached to the original articles of
incorporation and original by-laws.
1. The time, place and manner of calling and conducting The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
regular or special meetings of the directors or trustees;
certification that the same are not inconsistent with this Code
 In default of the provisions in the by-laws, the rules
provided for in Sections 50 and 51 shall govern
Two ways to Amend By-laws
2. The required quorum in meetings of stockholders or
members and the manner of voting therein; 1. Amendment can be made by the stockholders together
 Absence of a provisions the quorum shall consist f the with the Board
stockholders representing a majority of the outstanding 2. Amendment can be made by the Board only after due
capital stock or a majority of the members in case of non- delegation by the stockholders
stock corporations
1. Amendment by the Board and Stockholders
3. The form for proxies of stockholders and members and
the manner of voting them; General Rule: the amendments must be done by the board of
directors or trustees, by a majority vote, and the owners of at
4. The qualifications, duties and compensation of directors least a majority of the outstanding capital stock, or at least
or trustees, officers and employees; majority of members in case of non-stock corporate

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Absence of an express provision denying the right to vote

by proxy in the Articles of Incorporation of by-laws, proxies
may validly amend the corporation’s by-laws

2. Amendment by the Board after due delegation by the

stockholders
 The owners of 2/3 of the outstanding capital stock or 2/3
of the members may delegate to the board the power to
amend or repeal the by-laws

Revocation of delegated power

 It is considered revoked whenever stockholders, shall vote

at a regular or special meeting

Stockholders’ meeting is necessary both for the delegation

of the power and the revocation of the delegated power
The required vote of the stockholders and members under
Section 48 must be followed. These minimum
requirements cannot be lowered to a mere vote of 25% or
¼ of the members. The by-laws, may, however provide for
a greater number of votes but a UNANIMOUS vote is
NEVER required
The amended by-laws shall be filed with SEC and original
Articles of Incorporation and original by-laws attached

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TITLE VI the by-laws; period provided

or in the by-laws;
MEETINGS 2. If there is no or
date in the by- 2. In the absence of
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, laws – any provision in the
stockholders, or members may be regular or special. (n) date in april as by-laws – 2
determined by weeks prior to
Sec. 50. Regular and special meetings of stockholders or members. the board the meeting
- Regular meetings of stockholders or members shall be held Special Meetings 1. Any time 1. Within the
annually on a date fixed in the by-laws, or if not so fixed, on any date deemed period provided
in April of every year as determined by the board of directors or necessary in the by-laws
trustees: Provided, That written notice of regular meetings shall be 2. As provided in 2. If there is no
sent to all stockholders or members of record at least two (2) weeks the by-laws provision in the
prior to the meeting, unless a different period is required by the by- by-laws – 1 week
laws. prior the
Special meetings of stockholders or members shall be held at any meeting
time deemed necessary or as provided in the by-laws: Provided,
however, That at least one (1) week written notice shall be sent to
all stockholders or members, unless otherwise provided in the by- GENERAL RULE: when the by-laws provide for the time of holding an
laws. annual meeting, the same should be held at such regular appointed
Notice of any meeting may be waived, expressly or impliedly, by any time
stockholder or member.
Whenever, for any cause, there is no person authorized to call a As a rule, the annual meeting cannot be postponed
meeting, the Secretaries and Exchange Commission, upon petition of
If the annual meeting of stockholders is postponed for a
a stockholder or member on a showing of good cause therefor, may
issue an order to the petitioning stockholder or member directing valid reason, the adjournment of the meeting for purposes
him to call a meeting of the corporation by giving proper notice of electing the new directors must be from day to day and
required by this Code or by the by-laws. The petitioning stockholder not sine die
or member shall preside thereat until at least a majority of the For PUBLIC COMPANIES and stockholders meetings
stockholders or members present have been chosen one of their governed by SRC. Written notice should be given to the
number as presiding officer. (24, 26) SEC within 10 days from the date of postponement for a
justifiable an valid reason
Sec. 51. Place and time of meetings of stockholders or members. -
Stockholders' or members' meetings, whether regular or special,
Notice
shall be held in the city or municipality where the principal office of
the corporation is located, and if practicable in the principal office of
the corporation: Provided, That Metro Manila shall, for purposes of  the rule is that, where the law expressly requires notice of
this section, be considered a city or municipality. meeting of a particular transaction no meeting can be
Notice of meetings shall be in writing, and the time and place validly held unless the notice of such meeting specifies
thereof stated therein. corporate transaction to be resolved, EXCEPT if all the
All proceedings had and any business transacted at any meeting of stockholders are present or duly represented during the
the stockholders or members, if within the powers or authority of meeting and do not object
the corporation, shall be valid even if the meeting be improperly
 Written notice is MANDATORY and therefore SEESENTIAL
held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting. for the validity of the stockholders’ meeting.
 Notice in writing to each stockholders of record
 If a stockholder is unknown, all available means of
identifying shall be resorted
Requisites  Must indicate the matters to be take up durig the meeting

1. It must be held on the proper date which is the date fixed How notice is given
in the by-laws or in the absence of a provision therein on
the date fixed in Section 50  The notice may be given through personal service.
2. There must be previous notice Published notice is INSUFFICIENT because the law requires
3. It must be called by the proper person written notice to each stockholders
4. It must be held in the proper place  By-laws may provide the mode or manner of giving notice
5. There must be quorum of meetings
 By-laws may provide than an email notice is sufficient
KIND OF MEETING DATE OF MEETING REQUIRED NOTICE notice because an email notice is considered to be in
Regular meeting 1. The date in 1. Within the writing

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 ABSENT such provisions, the heneral/default rule –  Only stock ACTUALLY issued and outstanding may be
WRITTEN NOTICE SENT THROUGH REGUALR POST MAIL voted
applies  Neither the stockholders nor the corporation can vote or
represent shares that have never passed to ownership of
Waiver of Notice stockholders or having so passed have again been
purchased by the corporation
 Notice may be waived expressly or impliedly, by any
 When the law speaks of a given proportion of the stock, it
stockholder or member
must be construed to mean the shares that have passed
 There is a waiver if all the stockholders or members are
from the corporation, and that may be voted
present or duly represented during the meeting and do
not object to the absence of notice One share-one Vote policy
 The mode of sending of notice may also be waived
 Voting shall always be on the basis of the number of
Call of meeting shares and not on the number of stockholders present In
stockholders’ meeting
 The person authorized to call a stockholders’ meeting may
 Common shares shall have complete voting rights and
be fixed in the by-laws
such shares cannot be deprived of such rights except as
 Absence of such provision, the power to call the meeting
provided by law
rests with the BOARD
 The SEC upon petition of stockholder on a showing of good Non-stock Corporation
cause may issue an order to petitioning stockholder
directing him to call a meeting General rule: one member one-vote.
 Only SEC may direct the calling of the meeting if there is
no person authorized to do so or if the person authorized Exception: Section 89 of the Corporation Code allows non-stock
refuses t do so corporations to limit, broaden or deny in its Articles and By-
laws the right of the member to vote
Place of meeting
Effect of failure to call
 Whether regular or special, shall be held in the city where
the principal office is located  Officers of the corporation, whose duty is to call the
 If conducted in a improper place, meeting shall not be stockholder’s meeting for purpose of holdig an election,
invalidated if all stockholders re present or duly but who shall deliberately avoid shall be punishable as
represented during the meeting officers of the corporation

Joint meeting
All stockholders and members have the right to attend the
special and regular meetings. With respect to
 There is no express provision of law or ruling prohibiting
stockholders, the best evidence in determining who the
the holding of a joint meeting of stockholders and
stockholders who can attend the meeting s the STOCK
directors of different corporations
AND TRANSFER BOOK. . mere general information sheet is
 Prepare separate minutes of meetings for different
insufficient
corporations
A delinquent stockholder within purview o section 68
CANNOT attend the stockholders’ meeting Sec. 52. Quorum in meetings. - Unless otherwise provided for in this
A member who is suspended or who is otherwise validly Code or in the by-laws, a quorum shall consist of the stockholders
declared delinquent or not in good standing CANNOT representing a majority of the outstanding capital stock or a majority
attend the meeting of the members of the members in the case of non-stock corporations

Right to vote
Quorum – means the number of the members of the corporation,
General Rue: Every member of a non-stock corporation and every board, or committee who must be present in order to take action
legal owner of shares in a stock corporation have a right to be
present and to vote in all corporate meetings Quorum for stockholders’ meeting generally consists of
the stockholders representing a majority of the
 Unissued stocks may not be voted or considered in outstanding capital stock entitled to vote
determining whether a quorum is present in a Different quorum may be provided in the buy-laws
stockholders’ meeting The provision in the by-laws relative to quorum will not
necessarily hold true in instances when the Corporation

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Code or applicable law explicitly prescribes the proportion Notice

of stockholders r embers necessary to resolve or carry out
a particular corporate proposal  Notice of regular or special meetings states the date, time,
Fees are not pre condition and place of the meeting must be sent to every director or
trustee at least ONE DAY prior to the scheduled meeting,
Bases of Quorum unless otherwise provided by the by-laws
 A special meeting conducted without notice is INVALID
 In stock corporations, the presence of a quorum is  A director or trustee may waive this requirement, either
ascertained and counted on the basis of he outsanding expressly or impliedly
capital stock  Unless an extraordinary measure shall be passed during
 In non-stock corporations, the voting rghts attach to the regular meeting the notice need nt indicate the
membership “agenda”
 The majority of the members representing the actual  Agenda is included in the notice of special meeting
number of voting rights  It may be held ANYWHERE in or outsue the Philippines,
unless the bu-laws provide otherwise
Sec. 53. Regular and special meetings of directors or trustees. -
Regular meetings of the board of directors or trustees of every Teleconference of video-conference
corporation shall be held monthly, unless the by-laws provide
otherwise. Teleconferencing – is an interactive group communication through
Special meetings of the board of directors or trustees may be held at
an electronic medium. It can bring people together under one roof
any time upon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held even though they are separated by hundreds of miles
anywhere in or outside of the Philippines, unless the by-laws provide
otherwise. Notice of regular or special meetings stating the date, 1. Video conferencing – television like communication
time and place of the meeting must be sent to every director or augmented with sound
trustee at least one (1) day prior to the scheduled meeting, unless 2. Computer conferencing – printed communication through
otherwise provided by the by-laws. A director or trustee may waive keyboard terminals
this requirement, either expressly or impliedly 3. Audio-conferencing – communication via the telephone
The Board must comply with required quorum, notice and with optional capacity for telewriting or telecopying
other similar formalities
The directors must act as a body in a meeting called Sec. 54. Who shall preside at meetings. - The president shall
pursuant to law, or the corporation’s by-laws, otherwise, preside at all meetings of the directors or trustee as well as of
any objecting director or shareholder may question any the stockholders or members, unless the by-laws provide
action taken therein otherwise.
The directors are generally required to meet monthly.
However, the Corporation Code allows corporations to
The office of the chairman of the board is not expressly
specify the frequency of the regular meetings of their
provided in the Cororatio Code. However, the by-laws may
directors as they may deem necessary
create the officer of the Chairman who may be designated
Quorum of the Board as the presiding officer of the Board

 The majority of directors constitute the quorum to do Sec. 55. Right to vote of pledgors, mortgagors, and administrators.
business - In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at
 By-laws may require more than the majority
meetings of stockholders, unless the pledgee or mortgagee is
 In the absence of a different quorum in the by-laws, the expressly given by the pledgor or mortgagor such right in writing
quorum is ½ plus 1 of the total number of members of the which is recorded on the appropriate corporate books. (n)
board I the Articles of Incorporation Executors, administrators, receivers, and other legal representatives
 Quorum is the same even if there is a vacancy in the board duly appointed by the court may attend and vote in behalf of the
stockholders or members without need of any written proxy.
Proxy not allowed

 A director cannot participate in a meeting by proxy or any When shares are pledged or mortgaged
representative or alternate
 Voting by proxy is allowed in all meetings of stockholders,  The stockholders whose stock certificates were used as
the same is explicitly prohibited under Section 25 with collaterals for a loan have the right to vote unless said
respect to directors stockholders authorized the bank in writing to vote the
pledged or mortgaged shares

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 The stockholder retains the right to vte because he retains stockholder must be allowed to vote irrespective of any
ownership of the property mortgaged question bonafide
 By-laws may provide for a record date
The second paragraph of the section allows executors,  Non-stock corporations, the member must necessarily be a
administrators and other representatives to attend and member of record
vote even without a proxy
Stocks deposited in trust or in escrow can vote as other Proxy
trust stocks, whenever a votable title and ownership vest
 It is not required however that the shareholder must vote
in some the designate certain persons
in person
Sec. 56. Voting in case of joint ownership of stock. - In case of  It is a written authorization given by one person to
shares of stock owned jointly by two or more persons, in order to another so that the second person can act for the first
vote the same, the consent of all the co-owners shall be necessary, such as that given by the shareholder to someone else to
unless there is a written proxy, signed by all the co-owners, represent him and vote his shares at a shareholders
authorizing one or some of them or any other person to vote such meeting
share or shares: Provided, That when the shares are owned in an
"and/or" capacity by the holders thereof, any one of the joint Requisites:
owners can vote said shares or appoint a proxy therefor.
1. Proxies shall be in writing
2. The proxy shall be signed by the stockholder or
GENERAL RULE: the consent of all the co-owners in order to vote a
member
share that is owned jointly by two or more persons is required
3. The proxy shall be filed before the scheduled meeting
with the corporate secretary
 Unanimity is not required when:
4. Unless otherwise provided in the proxy, it shall be
1. There is a written proxy signed by all the co-owners
valid only for the meeting for which it is intended
authorizing any or some to vote
The formalities of a proxy may be provided for in the by-
2. The shares are owned in an and/or capacity
laws, in the absence thereof, the proxy eed only comply
Sec. 57. Voting right for treasury shares. - Treasury shares shall with the minimum requirements provided in section 58
have no voting right as long as such shares remain in the Treasury.
(n) Duration of proxy

Specific Proxy – one where the authority granted the

Treasury shares are not part of the outstanding capital. proxy holder is merely for a particular meeting on a
Hence, they shall have no voting rights specific date
When a corporation re-acquires its own shares, it does not - Can only be used on the date and purpose
become a subscriber thereof and the only right that a specified in the proxy
corporation has over the treasury shares is to reissue the
Continuing proxy - not limited to a specific meeting and it
same for valuable consideration
continues for a certain period. The period for a continuing
Not considered outstanding for the determination of the
proxy is not more than 5 years at any one time. It can be
quorum at any meeting to act upon any matter
extended provided that the extension period is not more
than 5 years
Sec. 58. Proxies. - Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members. Proxies shall in
writing, signed by the stockholder or member and filed before the By-laws may provide for a shorter duration
scheduled meeting with the corporate secretary. Unless otherwise The power to appoint a proxy is purely personal, to be
provided in the proxy, it shall be valid only for the meeting for which valid a proxy must be given by the person who is the legal
it is intended. No proxy shall be valid and effective for a period owner of the stock and s entitled to vote
longer than five (5) years at any one time. The by-laws may impose restrictions as to the person who
can be proxies and the manner of voting them
A proxy can be given to two or more persons jointly
Right to Vote
Quorum
 The right to vote a a stockholders’ meeting depends upon
the ownership of the stock as disclosed by the Stock and  The proxy should be filed or registered with the corporate
Transfer Book of the corporation and a registered secretary before the meeting

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GENERAL RULE: one who has given a proxy the right to vote may - It is not revocable at will
revoke the same at anytime, unless said proxy is coupled with
interest, eve though it may appear by its terms to be irrevocable. Purpose
May be revoked in writing orally or by conduct
A voting trust agreement may be used for disparate purposes
Sec. 59. Voting trusts. - One or more stockholders of a stock including:
corporation may create a voting trust for the purpose of conferring
upon a trustee or trustees the right to vote and other rights 1. It is a device to concentrate shareholder control in one or
pertaining to the shares for a period not exceeding five (5) years at few persons who, primarily through election of directors,
any time: Provided, That in the case of a voting trust specifically can control corporate affairs
required as a condition in a loan agreement, said voting trust may be 2. It is also used in corporate reorganization here it may be
for a period exceeding five (5) years but shall automatically expire used to give control to former creditors reduced to
upon full payment of the loan. A voting trust agreement must be in
stockholder status
writing and notarized, and shall specify the terms and conditions
3. It may also be used by founders or incorporators to retain
thereof. A certified copy of such agreement shall be filed with the
corporation and with the Securities and Exchange Commission; control
otherwise, said agreement is ineffective and unenforceable. The 4. It may be used to distribute voting power
certificate or certificates of stock covered by the voting trust disproportionately or share ownership
agreement shall be canceled and new ones shall be issued in the
name of the trustee or trustees stating that they are issued pursuant Limitations
to said agreement. In the books of the corporation, it shall be noted
that the transfer in the name of the trustee or trustees is made 1. Must not exceed 5 years
pursuant to said voting trust agreement. 2. In the case of a voting trust specifically required as a
The trustee or trustees shall execute and deliver to the transferors
condition in a loan agreement, said voting trust may be for
voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock. a period exceeding 5 years but shall automatically expire
The voting trust agreement filed with the corporation shall be upon full payment of loan
subject to examination by any stockholder of the corporation in the 3. It must be in writing and notarized
same manner as any other corporate book or record: Provided, That 4. It shall specify terms and conditions
both the transferor and the trustee or trustees may exercise the
right of inspection of all corporate books and records in accordance The trustee in a voting trust agreement acquires the right
with the provisions of this Code.
to vote and other rights pertaining to the shares
Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust It may also exercise the right of inspection f all corporate
agreement, and thereupon shall be bound by all the provisions of books and records in accordance with the provisions of the
said agreement. Corporation Code
No voting trust agreement shall be entered into for the purpose of Legal title is acquired by the trustee, hence he can be
circumventing the law against monopolies and illegal combinations elected as a director in the company
in restraint of trade or used for purposes of fraud. The stockholder does not have such right during the life of
Unless expressly renewed, all rights granted in a voting trust
the voting trust agreement
agreement shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the certificates of Automatically expore at the end of the agreed period, and
stock in the name of the trustee or trustees shall thereby be deemed the voting certificates as well as the certificates of stock in
canceled and new certificates of stock shall be reissued in the name the name f the trustee shall be canceled
of the transferors.
The voting trustee or trustees may vote by proxy unless the VOTING TRUST AGREEMENT v PROXY
agreement provides otherwise.
VOTING TRUST AGREEMENT PROXY
Irrevocable Generally revocable
Voting Trust – is an agreement whereby a stockholder of a stock Legal title is transferred to the No transfer title
corporation confers upon a trustee or trustees the right to vote and trustee
other rights pertaining to the shares for a period not exceeding 5 The share certificate shall be No cancellation of the certificate
years at any time cancelled and transferred to the shall be made
trustee
- It is created by the transfer if voting shares It must be notarized It need not be notarized
The trustor—shareholder cannot The shareholder retains his right
by shareholders to a voting trustee or
vote to vote
trustees, to hold and vote them, until the
It cannot be for a specific It can be for a specific meeting
purpose is fulfilled or for a specified period, meeting
usually pursuant to voting trust agreement The trustee can vote by proxy The proxy cannot further
- It is NOT governed by law on agency delegate his authority to vote

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and must therefore vote in

person
The trustee votes in his own The proxy is the agent of the
right as holder of legal title shareholder
The trustee can be elected as a The proxy as such cannot be
director elected as director

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TITLE VII Other modes of owning a share:

STOCKS AND STOCKHOLDERS
1. Succession
Section 60. Subscription contract. – Any contract for the acquisition 2. Transfer i.e transfer by donation
of unissued stock in an existing corporation or a corporation still to
be formed shall be deemed a subscription within the meaning of this Subscription contract – is a contract by which the subscriber agrees
Title, notwithstanding the fact that the parties refer to it as a to take a certain number of shares of the capital stock of a
purchase or some other contract. corporation, paying the consideration therefor or expressly or
impliedly promising to pay for the same
Voluntary onerous acquisition
 Any contract for the acquisition of unissued stocks in an
a. Purchase (from the corporation itself of from other existing corporation or a corporation still to be formed
stockholders
b. Through subscription How formed?

PURCHASE v SUBSCRIPTION  A subscription contract is formed by an offer by one

parties, the corporation or the subscriber, as the case may
PURCHASE POINT OF SUBSCRIPTION be, and an acceptance of this offer by the other
DISTINCTION
Made only after AS TO THE TIME Can be made before When can there a contract?
incorporation WHEN THEY ARE or after
ENTERED INTO incorporation  There can be a binding contract of subscription as soon as
The purchaser under NO AGREEMENT AS Subscriber need not the offer to take shares made by a person to a corporation
a deed of absolute TO TIME pay unless there is a is accepted by the corporation, or as soon as the person to
assignment or sale call
whom the offer is made accepts an offer of shares by a
must fully pay the
corporation
purchase price at
the time the shares
are transferred Stock Options
A stockholder who OBLIGATION The subscriber
sells his shares can cannot be released  Privilege granted to a party to subscribe to a certain
condone the from his obligation portion of the unissued capital stock of a corporation
obligation to pay to pay the within a specified period and under the terms and
subscription price conditions of the grant, exercisable by the grantee at any
Applies to purchase APPLICATION OF does not apply time within the period granted
if the price is not STATUTE OF
less than 500 pesos FRAUDS Warrant

 It is a type of security which entitles the holder to the right

Only persons whose ownership are registered in the stock to subscribe to the unissued capital stock of a corporation
and transfer book are considered stockholders of record. or to purchase issued shares in the future
The rights of a shareholder accrue only upon entry of his  It is evidenced by a warrant certificate, which may be sold
name in the books of the corporation or offered for sale to the public
If a person wants to be recognized as stockholder, he must  Does not apply to a right granted under an option plan
secure his standing by having his ownership of shares duly approved by the SEC for the benefit of the
recorded in the corporate books employees, officers and/or directors of the issuing
A person CANNOT be recognized as a stockholder by mere corporation
presentation of dividend coupons if his ownership is not
recorded
Mere inclusion in the GIS is insufficient
ORIGINAL SUBSCRIBERS become shareholders from the
time of the issuance of the Certificate of Incorporation by Different types of Warrants
the SEC
 Even if the Corporate Secretary failed to reflect such a fact a. Subscription warrants – it entitles the holder to the right
in the book, the original subscribers whose names appear to subscribe to a pre-determined number of shares out of
in the AIO are already stockholders who are entitled to all the unissued capital stock of the issuer
the rights as such

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b. Covered warrant – it entitles the holder to the right to What shares does Subscription contract refer to?
purchase from the Issuer a pre-determined number of
shares that are already issued  It may pertain to shares that are part of the original
c. Warrant Certificate –representing the right to a Warrant, Authorized Capital Stock appearing in AOI
which may be deductable or not, duly issued by the Issuer  Those that involve shares in the increase of capital
to the Warrant holder stock
d. Warrant Instrument –written document or deed
Conditional – is a subscription that does not take effect so
containing the terms and conditions of the issue and
as to make subscriber a stockholder, or confer rights until
exercise of a Warrant; includes, the max shares that can be
the condition is satisfied
purchased; exercise period; other terms and conditions
e. Detachable warrant – warrant that may be sold,
Trust Fund Doctrine
transferred or assigned to any person by the Warrant
holder separate from, and independent of, the  The subscribed capital stock of the corporation is a trust
corresponding Beneficiary Securities fund for the payment of debts of the corporation which
f. Non detachable Warrant – may not be sold the creditors have the right to look up to satisfy their
g. Beneficiary Securities – shares of stock and other credits
securities of the Issuer which form the basis of the  The corporation may not dissipate this and the creditors
entitlement in a warrant may sue stockholders directly for the unaid subscription
h. Underlying shares – means the unissued shares of a  NOT limited to reaching the stockholder’s unpaid
corporation that may be purchased by the Warrant holder subscription
upon the exercise of the right granted under the Warrant  The scope when the corporation is insolvent encompasses
not only the capital stock, but also their property and
Parties
assets generally regarded in equity as a trust fund for the
payment of corporate debts
1. Subscriber
 Money received for subscription of increase of ACS is NOT
2. Corporation
covered by the doctrine
NOTE: In subscription contract involves the corporation
When violated?
because it owns the subject matter of the transaction
1. When the corporation releases or condones payment
A subscription contract is also a contract among
of the unpaid subscription and the stockholder has
subscribers, an original subscriber CANNOT withdraw
nor right to demand the refund f his investment
from the pre-incorporation subscription agreement
2. When there is payment of dividends without URE
without the consent of ALL shareholder
3. When properties are transferred in fraud of creditors
Number of Shares Covered 4. When properties are disposed or undue preference is
given to some creditors even if the even if the corpo
 May cover one or more shares is insolvent
 The subscription agreement is considered as indivisible 5. When the capital stock is decreased which has the
contract effect of relieving the stockholders of the obligation
 A subscriber need not enter into only one subscription to pay their respective subscription
agreement if he will take 2 or more shares
A corporation has no legal capacity to release an
As to form original subscriber to its capital stock from the
obligation of paying for his shares, in whole or in part,
 There is no law or rule requiring a form of subscription to
without a valuable consideration, or fraudulently, to
capital stock as a requisite for its validity
the prejudice of creditors
 NEED NOT BE IN WRITING
Subscriptions to the capital stock of a corporation
 It can arise out of mutual dealings between a individual
constitute a fund to which the creditors have a right
and the corporation
to look for the satisfaction of their claims
Kinds of Subscription contract
When can the corporate capital be distributed?
a. Post-incorporation – one entered into after the issuance
1. Amendment of the AOI to reduce the capital stock
of the certificate of incorporation
2. Purchase of redeemable shares by the corporation
b. Pre-incorporation – one entered before incorporation
regardless of the existence of URE

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3. Dissolution and eventual liquidation of the Corporate Coeditors who supply additional funds
corporation
1. Commercial creditors – normally short-term creditors ie
A stockholder has NO right to demand fo the retirn of his banks
investment. His investment is locked-in until liquidation of 2. Investment creditors – those who acquire bonds or
the corporation. WHY? Because the necessity o assets and debentures issued by the corporation
the impairment of its capital needed for the protection of
Section 61. Pre-incorporation subscription. – A subscription for
its creditors
shares of stock of a corporation still to be formed shall be
Fraud Theory irrevocable for a period of at least six (6) months from the date of
subscription, unless all of the other subscribers consent to the
If shares are issued to shareholders who have not yet paid revocation, or unless the incorporation of said corporation fails to
the subscription price, the corporate creditors have the materialize within said period or within a longer period as may be
right to go after the shareholders in case of insolvency stipulated in the contract of subscription: Provided, That no pre-
The liability of the shareholders is explained by submitting incorporation subscription may be revoked after the submission of
to the proposition that there is deemed to be the articles of incorporation to the Securities and Exchange
representation to the creditor to the effect that the shares Commission.
were paid before their issuance
The concept of a pre-incorporation subscription is
NOTE: Treasury shares are NOT subject to subscription contracts departure from basic civil law percept on OBLICON
because above article covers only acquisition of unissued shares. The presence of at least two contracting parties is
The corporation may impose the condition that the shares to be presupposed. In pre-incorporation, not all the parties can
issued shall be held in escrow until actual payment is received by the give their consent because one of the parties –
corporation corporation – is still non-existent
Despite the non-exitet of the corporation, the subscription
Sources of Capital contract before incorporation is valid and binding and
irrevocable for a period of 6 months (after filing of the
“Capital” includes all properties and assets of the
AOI)
corporation that are used for its business or operation
ACS – is the amount fixed in the AIO to be subscribed and
paid by the SH
Subscribed Capital – that portion of the ACS that us When can be revoked?
covered by subscription agreements whether fully paid or
not 1. If all the other subscribers consent to the revocation
Paid-up – portion of the ACS that has been subscribed and before the expiration of 6 month
actually paid 2. Upon the expiration of the 6 month period (before filing of
the AOI) even without the consent of the other subscribers
How to increase subscribed Capital? or within a longer period as may be stipulated in the
subscription agreement
a. Issue the remaining balance of the ACS
b. Increase the ACS that necessarily involves additional Section 62. Consideration for stocks. – Stocks shall not be issued for
subscription a consideration less than the par or issued price thereof.
In both cases, additional capital in the form of Consideration for the issuance of stock may be any or a combination
shareholder’s investment is likewise infused to the of any two or more of the following:
corporation thought post-incorporation subscription
1. Actual cash paid to the corporation;
NOTE: The issuance of shares out of the unsubscribed shares of
the ACS does NOT need SH approval. Only resolution of the 2. Property, tangible or intangible, actually received by the
BoD approving the same corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
Debt as Source of Capital stock issued;

The corporation may get funds not only from SH but also 3. Labor performed for or services actually rendered to the
from creditors in the form of debts corporation;
Funds may also come from the income of the corporation
as a result of his operation 4. Previously incurred indebtedness of the corporation;

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5. Amounts transferred from unrestricted retained earnings to Requisites for property to be used as consideration:
stated capital; and
1. The property is actually received by the corporation
6. Outstanding shares exchanged for stocks in the event of 2. The property is necessary or convenient for its use and
reclassification or conversion. lawful purposes
3. It must be subject to a fair valuation equal to the par or
Where the consideration is other than actual cash, or consists of issued value of the stock issued
intangible property such as patents of copyrights, the valuation 4. The valuation thereof shall initially be determined by the
thereof shall initially be determined by the incorporators or the incorporators or the BOD
board of directors, subject to approval by the Securities and 5. The valuation is subject to approval by the SEC – Necessary
Exchange Commission. in order to prevent watering of stocks

Shares of stock shall not be issued in exchange for promissory notes Re Intellectual property
or future service.
The corporation must submit to the SEC a copy of the
The same considerations provided for in this section, insofar as they Certificate of Registration of the intellectual property right
may be applicable, may be used for the issuance of bonds by the with an appraisal report not more than 6 months old and a
corporation. deed of assignment in favor of the corpo

The issued price of no-par value shares may be fixed in the articles Mining Claim
of incorporation or by the board of directors pursuant to authority
conferred upon it by the articles of incorporation or the by-laws, or Also acceptable because it is an intangible property
in the absence thereof, by the stockholders representing at least a capable of valuation. However it must be necessary and
majority of the outstanding capital stock at a meeting duly called for convenient for use by the acquiring corpo in carrying out
the purpose. (5 and 16) its lawful purpose

Conditions for the acceptance of the undivided interest in real

property:
Consideration for the issuance of stock:
1. The property must be something that the corporation may
1. Stocks shall not be issued for a consideration less than the acquire and hold in carrying out its purpose
par or issued price thereof fixed in AOI 2. The interest in the co-ownership must have a pecuniary
2. Shares of stock shall not be issued in exchange for value capable of ascertainment
promissory notes or future service 3. The right over the property must actually be transferred to
3. Where the consideration is property whether patents of the corpo
copyrights, the valuation thereof shall initially be 4. The transfer shall have Waiver of Rights signed by all
determined by the incorporators or the BOD, subject to possible co-owners stating that they waive their right of
approval by SEC redemption or pre-emption in relation to transfer

ARTICLE 1350 NCC SECTION 62 CorCo Labor performed for services actually render to the
A contract for valuable What is being referred to is not corporation are acceptable
consideration means value is the stipulated value but the Future services are NOT acceptable
stipulated in the contract PROPERTY or RIGHT or SERVICE Previously incurred indebtedness of the corporation may
to be actually exchanged or also be used as a consideration atleast equal to the par
received value of the shares of stock which the corporation intends
to issue
It is legally acceptable for one block of SH to be allowed to
NOTE: With respect to pre-incorporation subscription involving cash pay through a previously incurred indebtedness while
payments, the SEC no longer requires the submission of a Bank other will pay in cash
Certificate of deposit of paid up capital Amounts transferred from URE
The corpo CANNOT agree that the subscription price shall
A bank certificate in the form prescribed by the BSP to be paid only through the dividends that will be declared
prove the existence of inward remittance is required but later
only with respect to those corporations with foreign
subscribers who want to register their investment with the Conversion
BSP

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 The corporation may accept as consideration the  It is said that stock certificates are quasi-negotiable
outstanding shares exchanged for stocks in the event of because they can be transferred by endorsement coupled
reclassification or conversion with delivery
 The transferee of the stock certificate takes it subject to
Conversion – includes conversion of a single proprietorship or such rights or defenses as the registered owner or
partnership into a corporation or a spin-off of one or more division transferor’s creditors may have under the law except
of the company. The consideration in these cases is actually the net insofar as such rights or defenses are subject to limitations
assets of those enterprise or units imposed y the principles governing estoppels

articles of incorporation or by the board of directors pursuant to Street Certificate – a stock certificate endorsed in blank by the
authority conferred upon it by the articles of incorporation or the owner thereof, upon its face the holder is entitled to demand its
by-laws, or in the absence thereof, by the stockholders representing transfer into his name from issuing corporation
at least a majority of the outstanding capital stock at a meeting duly
called for the purpose.  It is deemed quasi-negotiable

How issued price is fixed? How transfer is made?

1. articles of incorporation 1. There must be delivery of the certificate

2. in a resolution issued by the BOD pursuant to authority 2. The share must be indorsed b the owner or his agent
conferred upon it by the articles of incorporation or the 3. To be valid to the corporation and third parties, the
by-laws transfer must be recorded in the books of the corporation
3. in the absence thereof, or if the power is not delegated to
the board, stockholders representing at least a majority of Who will transfer?
the outstanding capital stock at a meeting duly called for
the purpose  The SH of record in the books of the corpo has the right to
transfer the shares
Issued Value – may be higher that its par value. A share is a property
that may also appreciate in value. Hence, it may happen that the fair NOTE: shares may be held in trust by an employee of a corpo wit the
market value or the book value may be greater than the par value
condition that the trust is terminated when he is separated from
employment from the corpo for any reason
Deposit on Subscription – refers to an amount of money received by
the corporation as a deposit with the possibility of applying the No certificate
same as payment for the future issuance of capital stock
 The transferee cannot demand for the issuance of the
 it is merely an amount of money received by a corporation certificates of stock in his name
with a view of applying the same as payment for additional
 A transfer of shares of stock not recorded in the book is
issuance of shares in the future
non-exitent as far as the corpo is concerned
 Mandamus should not issue to complel the secretary of
Section 63. Certificate of stock and transfer of shares. – The capital
stock of stock corporations shall be divided into shares for which the corpo to make a transfer of the stock on the books of
certificates signed by the president or vice president, countersigned the corpo unless he has the name there
by the secretary or assistant secretary, and sealed with the seal of  None yet? It can be transfer by means of deed of
the corporation shall be issued in accordance with the by-laws. assignment
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by Rationale of Registration Requirement
the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as 1. To enable the corporation to know at all times who its
between the parties, until the transfer is recorded in the books of actual SH are, bec mutual rights and obligations exists bet
the corporation showing the names of the parties to the transaction,
corpo and SH
the date of the transfer, the number of the certificate or certificates
and the number of shares transferred. 2. To afford to the corpo an opportunity to object or refuse
its consent to the transfer
No shares of stock against which the corporation holds any unpaid 3. To avoid fictitious or fraudulent transfers
claim shall be transferable in the books of the corporation.
Transfer – any act by which property of person is vested in another
Quasi-Negotiable and “transfer of shares” implies any means whereby one may be
divested of and another acquire ownership of stock

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Unpaid Claim – refers to any unpaid claim arising from unpaid

subscription and not to any indebtedness which a subscriber may Stock Certificate
owner the corporation arising from any other transaction  Paper representation or tangible evidence of the share but it is
not the share itself
Transfer through other Modes  Merely the evidence of the holder’s interest in the corpo
 The transfer of title by means of succession though valid  Prima facie evidence that the holder is a shareholder of the
between the parties involved (i.e, between he decedent’s estate corporation
and her heirs), does not bind the corpo and third parties
o The transfer must be registered in the books of Requirement for issuance
corporation to make the transferee-heir a stockholder  The stock cert is not validly issued if it does not comply with the
entitled to recognition as such both by the corpo and by prescribed form and conditions
third parties  A cert of stock can only be issued upon compliance with:
a. The cert must be signed by President or VP, countersigned
Execution Sale by the Secretary or Asst Sec
 A third party buyer of shares that were sold in an execution sale b. Must be sealed with the seal of the corpo
is entitled to registration in the books of the corpo c. Must be delivered
 The pendency of the case between the judgment debtor and d. Par value sahres or full subscription as to no apr values
judgment creditor is not a bar to such registration sahres, must first be full paid
e. The orig cert must be surrendered where the person
Regulation of Transfer requesting the issuance of a cert is transferee from a
 Shares of corporate stock being regarded as property, may be stockholder
disposed by the owner as he sees fit unless the corpo is
dissolved, or unless the right is hampered by his actions  A stock cert must be issued to a named subscriber.
o Although considered quasi-negotiable, it cannot be
Remedies issued to bearer
 The right of a transferee or assignee to have the stocks o Certificates must be issued only to registered owners of
transferred to his name is an inherent right flowing from his stock in a corporation
ownership of the stocks  The stock certificate itself once issued is a continuing
o MANDAMUS will lie against the corporate officers who affirmation or representation that the stock described there is
unduly bar the registration of the transfer. If the transfer valid and genuine and is at least prima facie evidence that it
in the books is not duly made upon request, he has the was legally issued in the absence of evidence to the contrary
remedy to compel it to be made
o MANDAMUS will not lie against the corpo where the Authority to issue
shares of stock are not indorsed by the registered owner  The corpo must be authorized to issue stocks
who is resisting registration in the Stock and transfer o i.e the corpo cannot issue a stock cert if there are no
book unissued shares in the company.
 Right to rescind in some cases  A stock issued without authority and in violation of law is void
o Not permitted if only slight or casual breach and confers no rights on the person to whom it is issued and
 Annulled on the ground that fraud was exerted in securing the subjects him to no liabilities
consent of transferee

Prescription Stockholder’s right to stock Certificate

 The action to enforce the right does not accrue until there has  While the issuance of a stock certificate is not a condition
been a demand and refusal concerning the transfer precedent to render one a stockholder, every stockholder has
 The action can be filed even 24 years after the transfer a right to have a proper certificate issued to him by a corpo,
upon demand, as soon as he has complied with the conditions
Tax which entitle him to said certificate
 The documentary stamp tac (DST) and the applicable gains tax  The corpo is duty bound to issue stock certs to their
should be paid before the transfer of share is registered and stockholders as soon as their subscription prices are fully paid
issuance of new certificate
 The corpo secretary must require the submission of the Partial Payment
certificate of authority to register (CAR) issued by BIR before  A subscription is one, entire and indivisible whole contract
transfer in the books of the corpo is made o It cannot be divided into portions so that the stockholder
shall not be entitled to a certificate of stock until he has
Right of first refusal remitted the full payment of his subscription together
 The AOI may provide a right of first refusal to stockholders as a with any interests and expenses, if any due.
limitation on transfer  All partial payments on one subscription shall be deemed
applied proportionately among the number of shares
Section 64. Issuance of stock certificates. – No certificate of stock o To permit the issuance of a stock certificate for payment
shall be issued to a subscriber until the full amount of his of a subscription that does not cover the entire number
subscription together with interest and expenses (in case of and value of the shares subscribed would be a violation
delinquent shares), if any is due, has been paid of Sec64

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Remedies for non-issuance

1. Action for specific performance
2. Action for damages if specific performance is not available
3. Petition for mandamus for the issuance of the certificate
4. Rescind the subscription agreement with the consequent
mutual restitution

Forged or Spurious Certificates

 Void certificate
 If the officers in Sec63 (Pres, VP, Sec, Asst Sec) do not sign the
certificate or if the signatures are forged, the certificate is not
valid even if the present holder is a holder in good faith and for
value.

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Section 65. Liability of directors for watered stocks. – Any director or the subscription price may be subject to garnishment or
officer of a corporation consenting to the issuance of stocks for a may sued for the recovery of indebtedness ROC Rule 39
consideration less than its par or issued value or for a consideration
in any form other than cash, valued in excess of its fair value, or CALL
who, having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary,  Resolution or formal declaration of the board that the
shall be solidarily, liable with the stockholder concerned to the unpaid subscriptions are due and payable
corporation and its creditors for the difference between the fair  The unpaid subscription is NOT due and payable without
value received at the time of issuance of the stock and the par or the call. XPN: in case of insolvency, when a insolvency
issued value of the same. supervenes, all unpaid stock subscriptions become payable
on demand and are at once recoverable in action
instituted by the assignee or receiver appointed by the
WATERED STOCKS
court
 Stocks that are issued for a consideration less than the par  A corporation cannot file an action to recover the unpaid
or issued price price if the action is not preceded by a call
 Bonus Stocks – issued without any valuable consideration  No call = no cause of action

RATIONALE When necessary:

1. When the date of payment is specified in the
 The prohibition against watered stocks is consistent with subscription agreement
the general rule that an agreement between the 2. When the corporation becomes insolvent
corporation and a particular subscriber by which the
subscription is not to be payable or is t be payable in part NO SET-OFF
only cannot be either enforced by the subscriber or
interposed as a defense in an action on subscription  A corporation cannot deduct from any amount due to an
employee, the latter;s unpaid subscription of shares
Section 66. Interest on unpaid subscriptions. – Subscribers for stock  There can be no set off if there is no notice or call for the
payment of unpaid subscription
shall pay to the corporation interest on all unpaid subscriptions from
the date of subscription, if so required by, and at the rate of interest
fixed in the by-laws. If no rate of interest is fixed in the by-laws, such Section 68. Delinquency sale. – The board of directors may, by
rate shall be deemed to be the legal rate. (37) resolution, order the sale of delinquent stock and shall specifically
state the amount due on each subscription plus all accrued interest,
and the date, time and place of the sale which shall not be less than
Section 67. Payment of balance of subscription. – Subject to the thirty (30) days nor more than sixty (60) days from the date the
provisions of the contract of subscription, the board of directors of stocks become delinquent.
any stock corporation may at any time declare due and payable to
the corporation unpaid subscriptions to the capital stock and may
collect the same or such percentage thereof, in either case with Notice of said sale, with a copy of the resolution, shall be sent to
accrued interest, if any, as it may deem necessary. every delinquent stockholder either personally or by registered mail.
The same shall furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the
Payment of any unpaid subscription or any percentage thereof, province or city where the principal office of the corporation is
together with the interest accrued, if any, shall be made on the date located.
specified in the contract of subscription or on the date stated in the
call made by the board. Failure to pay on such date shall render the
entire balance due and payable and shall make the stockholder Unless the delinquent stockholder pays to the corporation, on or
liable for interest at the legal rate on such balance, unless a different before the date specified for the sale of the delinquent stock, the
rate of interest is provided in the by-laws, computed from such date balance due on his subscription, plus accrued interest, costs of
until full payment. If within thirty (30) days from the said date no advertisement and expenses of sale, or unless the board of directors
payment is made, all stocks covered by said subscription shall otherwise orders, said delinquent stock shall be sold at public
thereupon become delinquent and shall be subject to sale as auction to such bidder who shall offer to pay the full amount of the
hereinafter provided, unless the board of directors orders otherwise balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of
shares or fraction of a share. The stock so purchased shall be
LIABILITY transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor. The remaining
 A stock subscription is a subsisting liability from the time shares, if any, shall be credited in favor of the delinquent
the subscription is made stockholder who shall likewise be entitled to the issuance of a
 The right of the corporation to demand payment is no less certificate of stock covering such shares.
incontestable
 Stock subscription is considered a debt of a shareholder to Should there be no bidder at the public auction who offers to pay
the corporation, the shareholder who has not fully paid the full amount of the balance on the subscription together with
accrued interest, costs of advertisement and expenses of sale, for

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the smallest number of shares or fraction of a share, the corporation WINNING BIDDER
may, subject to the provisions of this Code, bid for the same, and the
total amount due shall be credited as paid in full in the books of the a. Offer to pay the full amount of the balance on the
corporation. Title to all the shares of stock covered by the subscription together with accrued interest, costs of
subscription shall be vested in the corporation as treasury shares advertisement, and expenses of sale
and may be disposed of by said corporation in accordance with the b. For the smallest number of shares or fraction of a share
provisions of this Code.
CANCELLATION OF SALE
Section 69. When sale may be questioned. – No action to recover  The delinquent shareholder may actually stop the
delinquent stock sold can be sustained upon the ground of delinquent sale IF he pays to the corporation, on or before
irregularity or defect in the notice of sale, or in the sale itself of the the date specified for the sale of the delinquent stock, the
delinquent stock, unless the party seeking to maintain such action balance due on his subscription, interests, costs of
first pays or tenders to the party holding the stock the sum for which advertisement and expenses of sale
the same was sold, with interest from the date of sale at the legal  Payment made by the delinquent shareholder
rate; and no such action shall be maintained unless it is commenced AUTOMATICALLY stop the sale
by the filing of a complaint within six (6) months from the date of  Sale may be stayed upon the order of BoD
sale. (47a)
ACTION TO RECOVER
Section 70. Court action to recover unpaid subscription. – Nothing in
this Code shall prevent the corporation from collecting by action in a  After the sale, the delinquent shareholder may file an
court of proper jurisdiction the amount due on any unpaid action to recover the delinquent stock
subscription, with accrued interest, costs and expenses. REQS:
1) The ground must be of irregularity or defect in
the notice of sale, or I the sale itself of the
AVAILABLE REMEDIES delinquent stock
2) The party seeking to maintain such action first
1. Permitting the corporation to put up the unpaid shares for pays r tenders to the party holding the stock the
sale and dispose of it in a delinquency sale for the account sum for which the same was sold, with interest
of the delinquent subscriber from the date of sale at the legal rate
2. Court action as recognized under Section 70 3) The complaint is filed within 6 months from the
date of sale
 A stockholder’s indebtedness to a corporation cannot be
compensated with the amount of his shares in the same Section 71. Effect of delinquency. – No delinquent stock shall be
institution, there being no relation of creditor and debtor voted for or be entitled to vote or to representation at any
with regard to such shares stockholder’s meeting, nor shall the holder thereof be entitled to
any of the rights of a stockholder except the right to dividends in
DELINQUENCY SALE accordance with the provisions of this Code, until and unless he pays
the amount due on his subscription with accrued interest, and the
Steps in delinquency sale: costs and expenses of advertisement, if any.

1. Resolution – BoD shall issue resolution ordering the sale of

delinquent sale UNAVAILABLE RIGHTS OF DELINQUENTS
2. Notice – shall be sent to every delinquent stockholder
either personally or by registered mail 1) Delinquent stockholder is not entitled to any right of a
3. Publication – once a week for 2 consecutive weeks, in a stockholder
news paper of general circulation in the province or city 2) He cannot vote for and he is not entitled to representation
where the principal office of the corporation is located during meetings
4. Sale – sold to a public auction not less than 30 days not 3) Cannot be elected as a director and he cannot continue
more than 60 days serving as such
5. Transfer – the stock purchased shall be transfers to the
purchaser in the books of the corporation and a certificate XPN: Right to dividends, if cash dividends are declared, the
for such stock shall be issued in his favor dividends shall be applied to the subscription price that is due
6. Credit Remainder – remaining shares shall be credited in to the corporation
favor of the delinquent stockholder who shall be entitled
to the issuance of a certificate of stock NOT INCLUDED I QUORUM

CONTENTS OF RESOLUTION  Delinquent stockholders hall not be included in

determining the existence of the required quorum
a. Amount due on each subscription
b. All accrued interest ASSIGNMENT OF RIGHTS NOT ALLOWED
c. The date, time, and place of sale

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 Delinquent stockholders are not entitled to vote. Hence, DERIVATIVE ACTIONS

voting rights cannot be delegated. Assignment of voting
rights is therefore not permitted  Suits brought by one or more stockholders/members in
the name and on behalf of the corporation to redress
Section 72. Rights of unpaid shares. – Holders of subscribed shares wrongs committed against it
not fully paid which are not delinquent shall have all the rights of a  Protect or vindicate corporate rights whenever official of
stockholder. the corporation refuse to sue

GR: where a corporation is an injured party, its power to sue is

ACCRUAL OF RIGHTS OF SHAREHOLDERS lodged with its BoD or trustees

 A pre-incorporation subscriber becomes a shareholder XPN: An individual stockholder is permitted to institute a

from the moment the Certificate of Incorporation is issued derivative suit on behalf of the corporation wherein he holds
– shareholder from the inception stocks
 A post-incorporation subscriber becomes a shareholder
from the perfection of the subscription contract –  The suing stockholder is regarded as a nominal party
shareholder the moment he hold the shares by virtue of a  Relief that is granted is a judgment against a third person
subscription contract in favor of the corporation
 Has all the rights of a shareholder, not necessary that REQS:
subscription price is fully paid, not also necessary that a 1. He was a stockholder or member at the time the
certificate of stock is issued acts or transactions subject of the action
occurred and the time the action was filed
Shares not fully paid? No right to secure a stock certificate 2. He exerted all reasonable efforts, and alleges the
or to have any subsequent transfer registered in the books same with particularity in the complaint
of the corporation 3. No appraisal rights are available for the act or
acts complained of
BASIC RIGHTS 4. The suit is not a nuisance of harassment suit
 A stockholder may sue for mismanagement, waste or
1. Voting rights dissipation of corporate assets because of a special injury
2. Right to remove directors to him for which he is otherwise without redress
3. Right to dividends  Proper for action based on the devices and schemes
4. Appraisal right employed by the BoD that amounts to mismanagement,
5. Right to issuance of stock certificate for fully paid shares misrepresentation, fraud and bad faith
6. Proportionate participation in the distribution of assets in  Distinct and different from liquidation proceedings
liquidation  Improper if the complainants, were former directors
7. Right to transfer of stocks in corporate books questioning the election of new set of directors
8. Pre-emptive right
9. Right to inspect books and records RATIONALE
10. Right to be furnished of the most recent financial
statement/report  Not based on any express provision of the corporation
11. Right to recover stocks unlawfully sold for delinquent code but is impliedly recognized when the law makes
payment of subscription corporate directors or officers liable for damages suffered
12. Right to file individual suit, representative suit and by the corporation and its stockholders for violation of
derivative suit their fiduciary duties

OBLIGATIONS EXHAUSTION OF INTRA-CORPORATE REMEDIES

1. Liability to the corporation for unpaid subscription  Must be alleged with some particularity in his complaint
2. Liability to the corporation for interest, on unpaid that he has exhausted his remedies within the corporation
subscription if so required by the by-laws
INDIVIDUAL ACTIONS
3. Liability to the creditors of the corporate for unpaid
subscription
 Actions brought by the shareholder in his own ame against
4. Liability for watered stock
the corporation when a wrong directly inflicted against
5. Liability for dividends unlawfully paid
him personally and to determine his individual right
 Protect shareholder’s interest
RIGHT TO FILE AND ACTION
 Can be filed against SH or CORP
1. Derivative actions
REPRESENTATIVE ACTIONS
2. Individual actions
3. Representative actions
 Actions brought by SH in behalf of himself ac=and all other
Meant to directly protect his interest but also the
SH similarly situated when a wrong is committed against a
corporation as well
group of SH

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CODE OF CORPORATE GOVERNANCE  No action may brought against the corporation which shall
have issued certificate of stock in lieu of those lost, stolen
 SH’s rights and protection of the minority SH are given or destroyed except fraud, bad faith or negligence cases
ample attention under the 2009 code of corporate
governance. WHEN APPLICABLE

Section 73. Lost or destroyed certificates. – The following procedure  Applies only if the certificates are lost, stolen or destroyed.
shall be followed for the issuance by a corporation of new If just worn out, not applicable
certificates of stock in lieu of those which have been lost, stolen or  Certificate was never issued because it was not delivered
destroyed: by the corporation? Not applicable
 Certificates are lost by the corporation before delivery?
Not applicable
1. The registered owner of a certificate of stock in a corporation or
his legal representative shall file with the corporation an affidavit in
OUTLINE PROCEDURE
triplicate setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of shares
1. Affidavit –
represented by such certificate, the serial number of the certificate 2. Verification -
and the name of the corporation which issued the same. He shall
3. Publication
also submit such other information and evidence which he may 4. One-year waiting period
deem necessary; 5. Contest
6. Replacement
2. After verifying the affidavit and other information and evidence
with the books of the corporation, said corporation shall publish a Section 74. Books to be kept; stock transfer agent. – Every
notice in a newspaper of general circulation published in the place corporation shall keep and carefully preserve at its principal office a
where the corporation has its principal office, once a week for three record of all business transactions and minutes of all meetings of
(3) consecutive weeks at the expense of the registered owner of the stockholders or members, or of the board of directors or trustees, in
certificate of stock which has been lost, stolen or destroyed. The which shall be set forth in detail the time and place of holding the
notice shall state the name of said corporation, the name of the meeting, how authorized, the notice given, whether the meeting
registered owner and the serial number of said certificate, and the was regular or special, if special its object, those present and absent,
number of shares represented by such certificate, and that after the and every act done or ordered done at the meeting. Upon the
expiration of one (1) year from the date of the last publication, if no demand of any director, trustee, stockholder or member, the time
contest has been presented to said corporation regarding said when any director, trustee, stockholder or member entered or left
certificate of stock, the right to make such contest shall be barred the meeting must be noted in the minutes; and on a similar demand,
and said corporation shall cancel in its books the certificate of stock the yeas and nays must be taken on any motion or proposition, and
which has been lost, stolen or destroyed and issue in lieu thereof a record thereof carefully made. The protest of any director, trustee,
new certificate of stock, unless the registered owner files a bond or stockholder or member on any action or proposed action must be
other security in lieu thereof as may be required, effective for a recorded in full on his demand.
period of one (1) year, for such amount and in such form and with
such sureties as may be satisfactory to the board of directors, in
The records of all business transactions of the corporation and the
which case a new certificate may be issued even before the
minutes of any meetings shall be open to inspection by any director,
expiration of the one (1) year period provided herein: Provided, That
trustee, stockholder or member of the corporation at reasonable
if a contest has been presented to said corporation or if an action is
hours on business days and he may demand, in writing, for a copy of
pending in court regarding the ownership of said certificate of stock
excerpts from said records or minutes, at his expense.
which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the final
decision by the court regarding the ownership of said certificate of Any officer or agent of the corporation who shall refuse to allow any
stock which has been lost, stolen or destroyed. director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such
Except in case of fraud, bad faith, or negligence on the part of the
director, trustee, stockholder or member for damages, and in
corporation and its officers, no action may be brought against any
addition, shall be guilty of an offense which shall be punishable
corporation which shall have issued certificate of stock in lieu of
under Section 144 of this Code: Provided, That if such refusal is
those lost, stolen or destroyed pursuant to the procedure above-
made pursuant to a resolution or order of the board of directors or
described. (R.A. 201a)
trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal:
and Provided, further, That it shall be a defense to any action under
RATIONALE this section that the person demanding to examine and copy
excerpts from the corporation’s records and minutes has improperly
 Designed to protect not only the real owner but the
used any information secured through any prior examination of the
corporation as well
records or minutes of such corporation or of any other corporation,
 Real owner is protected against improvident issuance of
or was not acting in good faith or for a legitimate purpose in making
another certificate

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his demand. Based upon his interest over the assets and properties of
the corporation
It is an incident of such interest though the interest is only
Stock corporations must also keep a book to be known as the "stock
inchoate in character
and transfer book", in which must be kept a record of all stocks in
the names of the stockholders alphabetically arranged; the Right to inspect covers all the books of the corporation
He can also make copies, extracts and memoranda of
installments paid and unpaid on all stock for which subscription has
been made, and the date of payment of any installment; a pertinent records
statement of every alienation, sale or transfer of stock made, the
Improper purpose:
date thereof, and by and to whom made; and such other entries as
the by-laws may prescribe. The stock and transfer book shall be kept a. Learning business secrets to aid a competitor corporation
in the principal office of the corporation or in the office of its stock b. To secure prospects of personal business
transfer agent and shall be open for inspection by any director or
c. To look for defects to blackmail and extortion purpose
stockholder of the corporation at reasonable hours on business d. T pursue one’s social or political goals
days.
Section 75. Right to financial statements. – Within ten (10) days
No stock transfer agent or one engaged principally in the business of from receipt of a written request of any stockholder or member, the
registering transfers of stocks in behalf of a stock corporation shall corporation shall furnish to him its most recent financial statement,
be allowed to operate in the Philippines unless he secures a license which shall include a balance sheet as of the end of the last taxable
from the Securities and Exchange Commission and pays a fee as may year and a profit or loss statement for said taxable year, showing in
be fixed by the Commission, which shall be renewable annually: reasonable detail its assets and liabilities and the result of its
Provided, That a stock corporation is not precluded from performing operations.
or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of
At the regular meeting of stockholders or members, the board of
a license fee herein provided, shall be applicable. (51a and 32a; P.B.
directors or trustees shall present to such stockholders or members
No. 268.)
a financial report of the operations of the corporation for the
preceding year, which shall include financial statements, duly signed
and certified by an independent certified public accountant.
CORPORATE BOOKS

1. Book of minutes of SH meetings However, if the paid-up capital of the corporation is less
2. Book of minutes of BOD meetings than P50,000.00, the financial statements may be certified under
3. Record or book of all business transactions oath by the treasurer or any responsible officer of the corporation.
4. Stock and transfer book

Must be stated in the Book of Minutes: SUBMISSION TO SEC

1. The time when any director, trustee, SH or member Corporations that are required to submit AAF
entered or left the meeting 1. Stock corporations with paid-up capital stock
2. A carefully made record of yeas and nays on any motion or each of 50k or more
proposition 2. Non-stock corporations with total assets each of
3. The protest of any director, trustee SH or member on any 500k or more or with gross annual receipts of
action or proposed action must be recorded in full on his 100k or more
demand
TITLE IX
STOCK AND TRANSFER BOOK MERGER AND CONSOLIDATION

 Only the secretary is duly authorized to make entries Section 76. Plan or merger of consolidation. – Two or more
 Entries made by the President or Chairman are invalid
corporations may merge into a single corporation which shall be one
 Best evidence of the transactions that must be entered or of the constituent corporations or may consolidate into a new single
stated therein
corporation which shall be the consolidated corporation.
 AOI prevails

STOCKHOLDER’S RIGHT TO INSPECT The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approve a plan of merger or
REQS: consolidation setting forth the following:

1. It must be exercised at reasonable hours on 1. The names of the corporations proposing to merge or consolidate,
business days hereinafter referred to as the constituent corporations;
2. The SH has not improperly used any information
he secured through ay previous examination
2. The terms of the merger or consolidation and the mode of
3. Demand is made I god faith or for a legitimate
purpose

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carrying the same into effect; Commission in quadruplicate for its approval: Provided, That in the
case of merger or consolidation of banks or banking institutions,
3. A statement of the changes, if any, in the articles of incorporation building and loan associations, trust companies, insurance
of the surviving corporation in case of merger; and, with respect to companies, public utilities, educational institutions and other special
the consolidated corporation in case of consolidation, all the corporations governed by special laws, the favorable
statements required to be set forth in the articles of incorporation recommendation of the appropriate government agency shall first
for corporations organized under this Code; and be obtained. If the Commission is satisfied that the merger or
consolidation of the corporations concerned is not inconsistent with
the provisions of this Code and existing laws, it shall issue a
4. Such other provisions with respect to the proposed merger or
certificate of merger or of consolidation, at which time the merger
consolidation as are deemed necessary or desirable. (n)
or consolidation shall be effective.

Section 77. Stockholder’s or member’s approval. – Upon approval by

If, upon investigation, the Securities and Exchange Commission has
majority vote of each of the board of directors or trustees of the
reason to believe that the proposed merger or consolidation is
constituent corporations of the plan of merger or consolidation, the
contrary to or inconsistent with the provisions of this Code or
same shall be submitted for approval by the stockholders or
existing laws, it shall set a hearing to give the corporations
members of each of such corporations at separate corporate
concerned the opportunity to be heard. Written notice of the date,
meetings duly called for the purpose. Notice of such meetings shall
time and place of hearing shall be given to each constituent
be given to all stockholders or members of the respective
corporation at least two (2) weeks before said hearing. The
corporations, at least two (2) weeks prior to the date of the meeting,
Commission shall thereafter proceed as provided in this Code. (n)
either personally or by registered mail. Said notice shall state the
purpose of the meeting and shall include a copy or a summary of the
plan of merger or consolidation. The affirmative vote of stockholders Section 80. Effects of merger or consolidation. – The merger or
representing at least two-thirds (2/3) of the outstanding capital consolidation shall have the following effects:
stock of each corporation in the case of stock corporations or at
least two-thirds (2/3) of the members in the case of non-stock 1. The constituent corporations shall become a single corporation
corporations shall be necessary for the approval of such plan. Any which, in case of merger, shall be the surviving corporation
dissenting stockholder in stock corporations may exercise his designated in the plan of merger; and, in case of consolidation, shall
appraisal right in accordance with the Code: Provided, That if after be the consolidated corporation designated in the plan of
the approval by the stockholders of such plan, the board of directors consolidation;
decides to abandon the plan, the appraisal right shall be
extinguished. 2. The separate existence of the constituent corporations shall
cease, except that of the surviving or the consolidated corporation;
Any amendment to the plan of merger or consolidation may be
made, provided such amendment is approved by majority vote of 3. The surviving or the consolidated corporation shall possess all the
the respective boards of directors or trustees of all the constituent rights, privileges, immunities and powers and shall be subject to all
corporations and ratified by the affirmative vote of stockholders the duties and liabilities of a corporation organized under this Code;
representing at least two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of each of the
4. The surviving or the consolidated corporation shall thereupon and
constituent corporations. Such plan, together with any amendment,
thereafter possess all the rights, privileges, immunities and
shall be considered as the agreement of merger or consolidation. (n)
franchises of each of the constituent corporations; and all property,
real or personal, and all receivables due on whatever account,
Section 78. Articles of merger or consolidation. – After the approval including subscriptions to shares and other choses in action, and all
by the stockholders or members as required by the preceding and every other interest of, or belonging to, or due to each
section, articles of merger or articles of consolidation shall be constituent corporation, shall be deemed transferred to and vested
executed by each of the constituent corporations, to be signed by in such surviving or consolidated corporation without further act or
the president or vice-president and certified by the secretary or deed; and
assistant secretary of each corporation setting forth:
5. The surviving or consolidated corporation shall be responsible and
1. The plan of the merger or the plan of consolidation; liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
2. As to stock corporations, the number of shares outstanding, or in corporation had itself incurred such liabilities or obligations; and any
the case of non-stock corporations, the number of members; and pending claim, action or proceeding brought by or against any of
such constituent corporations may be prosecuted by or against the
3. As to each corporation, the number of shares or members voting surviving or consolidated corporation. The rights of creditors or liens
for and against such plan, respectively. (n) upon the property of any of such constituent corporations shall not
be impaired by such merger or consolidation.
Section 79. Effectivity of merger or consolidation. – The articles of
merger or of consolidation, signed and certified as herein above
required, shall be submitted to the Securities and Exchange

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CONCEPT OF MERGER AND CONSOLIDATION EFFECTS

Merger – one where a corporation absorbs another 1. The constituent corporations shall become a single
Corporation and remains in existence while the other is corporation which
dissolved. Signifies the absorption of one corporation by 2. The separate existence of the constituent corporations
another which retains its name and corporate identity shall cease, except that of the surviving or the
with the added capital, franchises and powers of a merged consolidated corporation;
corporation 3. The surviving or the consolidated corporation shall possess
Consolidation – one where a new corporation is created, all the rights, privileges, immunities and powers and shall
and consolidating corporations are extinguish. Signifies a be subject to all the duties and liabilities of a corporation
union that necessarily results in the creation of a new 4. The surviving or the consolidated corporation possess all
corporation and the termination of the constituent ones the rights, privileges, immunities and franchises of
constituent corporations and all properties shall be
When effective?
deemed transferred to the surviving or consolidated
corporation
 There must be an express provision of law authorizing
5. All liabilities of the constituents shall pertain to the
them, since this involves fundamental changes in the
surviving or the consolidated corporation
corporation, as well as in the rights of stockholders and
creditors
 Upon the issuance by the SEC of Certificate of merger or  Although there is dissolution of the absorbed corps, there
consolidation is no winding up of their affairs or liquidation of their
assets
Triangular Merger  Receivables of the dissolved corp are transferred to the
surviving corpo
 The purchasing corporation creates a subsidiary
corporation and transfers to the subsidiary shares in the EFFECT ON EMPLOYEE
parent company which will be used for the share exchange
that will be provided for in the merger plan. The actual
 The surviving corp shall assume the employees of the
merger is between the newly formed subsidiary and the
dissolved corp
target corporation
 The employees of the constituent corp shall become the
RATIONALE employees of the new corpo consolidated…

 Resorted to for economic reasons OUTLINE OF PROCEDURE

1. Economies of scale, meaning, a combination of
two production units enlarges the production 1. The board of each corpo shall draw up a plan of merger or
output over which the fixed cost of production consolidation
spread and thereby reducing the average foxed 2. The plan of merger or condol shall be approved by
cost per unit of output majority vote of each of the board of the concerned corpo
2. Economies of scope meaning the costs- and even at separate mtgs
management talent – are spread across a 3. The plan of M or C shall be approved by 2/3 of the OCS or
broader range of related activities members for nonstick
3. Costs are reduced through vertical integration, 4. Articles of merger or atrticles of consolidation shall be
meaning there is a merger with a supplier or a executed by each of the constituent corpo, signed by the P
customer and VP and certified by the secretary of assistant secretary
5. 4 copies of the AM or AC shall be submitted for approval
DISTINGUISHED FROM TRANSFER OF PROPERTY to SEC
6. SEC shall issue cert of merger
 Simple sale of property by one corporation to another is
not a merger or consolidation
 The plan may still be amended before the same is filed
DISTINGUISHED FROM COMBINATIONS with SECC

 Combination is used to designate an alliance or RELIGIOUS CORPORATIONS

confederation or sale or other transaction between two or
more corporations, by virtue of which will not necessarily
 May be merged with another religious corp
result in the loss of the separate existence of the
corporations
 Partnership can enter into a combination with a REORGANIZATION
corporation but a partnership cannot merge or consolidate
with a corporation 1. Statutory M or C

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2. The acquisition by one corp of the stock of another corp,

solely in exchange for its voting stock or the voting stock of
its parent
3. Acquisition of all assets
4. Transfer of assets
5. Recapitalization
6. Change in identity, form or place of organization
7. Bankruptcy

QUASI-REORGANIZATION

 Refers to the accounting process or principle where

1. Reappraisal surplus is used to wipe out the deficit

2. The AOI is amended reducing capital and the reduction of
the capital stock is used to wipe out the deficit

DE FACTO MERGER AND CONSOLIDATION

 Reorganization involving at least two corporations which

has the effect of M or C and which entitles the dissenting
SH to an appraisal right

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TITLE X EXCLUSIVITY OF GROUNDS

APPRAISAL RIGHT  AR is neither an inherent right of SH nor a matter of
absolute right
Section 81. Instances of appraisal right. – Any stockholder of a  It is only allowed under the instances provided in the CC
corporation shall have the right to dissent and demand payment of  If SH is not allowed the remedy is to transfer his shares as
the fair value of his shares in the following instances: provided in Sec 63
 Section 81 is not exclusive, because there are other
1. in case any amendment to the articles of incorporation has provisions in the CC that provide for AR – AR may be
the effect of changing or restricting the rights of any allowed if there is a substantial change in the corporate
stockholder or class of shares, or of authorizing purpose
preferences in any respect superior to those of  By-laws cannot provide for an appraisal right
outstanding shares of any class, or of extending or
shortening the term of corporate existence; EXTENSION AND SHORTENING
2. In case of sale, lease, exchange, transfer, mortgage,  Section 81 provides for the shortening and extending of
pledge or other disposition of all or substantially all of the corporate term, however in section 37, it only provides fr
corporate property and assets as provided in the Code; extension. Sec. 81 prevails because it specifically deals
and with pre-emptive right
3. In case of merger or consolidation.
Section 82. How right is exercised. – The appraisal right may be
APPRAISAL RIGHT exercised by any stockholder who shall have voted against the
 Right of a SH to dissent and demand payment of the fair proposed corporate action, by making a written demand on the
value of his shares in the instances provided for under CC corporation within thirty (30) days after the date on which the vote
 It is more extensive when it comes to close corporations. was taken for payment of the fair value of his shares: Provided, That
Section 105 allows it for any reason as log as the failure to make the demand within such period shall be deemed a
corporation has sufficient assents to cover its debts and waiver of the appraisal right. If the proposed corporate action is
liabilities, exclusive of capital implemented or affected, the corporation shall pay to such
RATIONALE stockholder, upon surrender of the certificate or certificates of stock
 To remove doubt regarding the constitutionality of representing his shares, the fair value thereof as of the day prior to
statutes authorizing fundamental changes as to existing the date on which the vote was taken, excluding any appreciation or
corporations and the contract rights of SH depreciation in anticipation of such corporate action.
 Appraisal right gives dissenters a simple and direct remedy
not only where there is a harmful change in the share If within a period of sixty (60) days from the date the corporate
contract but also where they simply do not desire to action was approved by the stockholders, the withdrawing
accept shares in a different corpo or shares different from stockholder and the corporation cannot agree on the fair value of
those they purchased the shares, it shall be determined and appraised by three (3)
JUSTIFICATION FOR THE GRANT OF AR TO MINORITY SH disinterested persons, one of whom shall be named by the
 SH who voted and dissented against the proposed stockholder, another by the corporation, and the third by the two
corporate action, may choose to get out of the corpo by thus chosen. The findings of the majority of the appraisers shall be
demanding payment of the fair market value of his shares final, and their award shall be paid by the corporation within thirty
 Major change in his contract of investment with which he (30) days after such award is made: Provided, That no payment shall
does not agree and which the law presumes he did not be made to any dissenting stockholder unless the corporation has
foresee when he bought his shares unrestricted retained earnings in its books to cover such payment:
and Provided, further, That upon payment by the corporation of the
NOTE: The presence of AR prevents delay of the completion of agreed or awarded price, the stockholder shall forthwith transfer his
projects that would otherwise be impeded by the dissent of MSH shares to the corporation. (n)

WHEN AVAILABLE Section 83. Effect of demand and termination of right. – From the
1) In case any amendment to the AOI has the effect of time of demand for payment of the fair value of a stockholder’s
changing or restricting the rights of any SH or class of shares until either the abandonment of the corporate action
shares involved or the purchase of the said shares by the corporation, all
2) In case any amendment to the AOI authorizing preferences rights accruing to such shares, including voting and dividend rights,
in any respect superior to those of OS of any class shall be suspended in accordance with the provisions of this Code,
3) Amendment to AOI shortening or extending the corporate- except the right of such stockholder to receive payment of the fair
term value thereof: Provided, That if the dissenting stockholder is not
4) In case of sale, lease, exchange, transfer mortgage, pledge paid the value of his shares within 30 days after the award, his
or other disposition of all or substantially all of the voting and dividend rights shall immediately be restored. (n)
corporate property and assets as provided
5) In case of merger or consolidation Section 84. When right to payment ceases. – No demand for
6) If the corporation will invest its funs in another corpo or payment under this Title may be withdrawn unless the corporation
business or for any purpose other than its primary consents thereto. If, however, such demand for payment is
7) In a close corpo under Sec 105 withdrawn with the consent of the corporation, or if the proposed
corporate action is abandoned or rescinded by the corporation or

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disapproved by the Securities and Exchange Commission where such 1) Where the demand for payment is withdran with the
approval is necessary, or if the Securities and Exchange Commission consent of the corporation
determines that such stockholder is not entitled to the appraisal 2) If the proposed corporate action is abandoned or
right, then the right of said stockholder to be paid the fair value of rescinded by the corpo
his shares shall cease, his status as a stockholder shall thereupon be 3) If the proposed corporate action is disapproved by the SEC
restored, and all dividend distributions which would have accrued where such approval is necessary
on his shares shall be paid to him. (n) 4) If the SEC determines that such SH is not entitled to the ar

Section 85. Who bears costs of appraisal. – The costs and expenses NOTE: the SH is not allowed by law to unilaterally withdraw his
of appraisal shall be borne by the corporation, unless the fair value demand for payment. Consent of the corpo is indispensable
ascertained by the appraisers is approximately the same as the price  When the right of SH to be paid ceases, his status as SH
which the corporation may have offered to pay the stockholder, in shall be restored, and all dividend distributions which
which case they shall be borne by the latter. In the case of an action would have accrued on his shares shall be paid to him
to recover such fair value, all costs and expenses shall be assessed  Payment cannot be made if the corpo has funds but those
against the corporation, unless the refusal of the stockholder to funds represent amounts necessary to pay indebtedness;
receive payment was unjustified. (n) the corpo cannot borrow money to pay dissenting SH

Section 86. Notation on certificates; rights of transferee. – Within EFFECT OF TRANSFER

ten (10) days after demanding payment for his shares, a dissenting  Abandonment of the AR; the AR is not transferred to the
stockholder shall submit the certificates of stock representing his transferee or assignee of the shares
shares to the corporation for notation thereon that such shares are
dissenting shares. His failure to do so shall, at the option of the TITLE XI
corporation, terminate his rights under this Title. If shares NON-STOCK CORPORATIONS
represented by the certificates bearing such notation are
transferred, and the certificates consequently cancelled, the rights Section 87. Definition. – For the purposes of this Code, a non-stock
of the transferor as a dissenting stockholder under this Title shall corporation is one where no part of its income is distributable as
cease and the transferee shall have all the rights of a regular dividends to its members, trustees, or officers, subject to the
stockholder; and all dividend distributions which would have provisions of this Code on dissolution: Provided, That any profit
accrued on such shares shall be paid to the transferee. (n) which a non-stock corporation may obtain as an incident to its
operations shall, whenever necessary or proper, be used for the
CONDITIONS FOR EXERCISE furtherance of the purpose or purposes for which the corporation
was organized, subject to the provisions of this Title.
1) Any instaces set forth by law
2) The dissenting SH must have voted against the proposed The provisions governing stock corporation, when pertinent, shall be
corporate act applicable to non-stock corporations, except as may be covered by
3) The demand for payment must be made by the dissenting specific provisions of this Title. (n)
SH within 30 days from the date a vote is take thereto.
FAILURE is a waiver Section 88. Purposes. – Non-stock corporations may be formed or
4) The price of the share must be based on the FAIR VALUE as organized for charitable, religious, educational, professional,
of the day prior to the date in which the vote was taken cultural, fraternal, literary, scientific, social, civic service, or similar
5) Submission by the withdrawing SH of his share certificate purposes, like trade, industry, agricultural and like chambers, or any
to the corpo for notation as dissenting shares within 10 combination thereof, subject to the special provisions of this Title
days from written demand governing particular classes of non-stock corporations. (n)
6) Payment of shares must be made only when the corpo has
unrestricted retained earnings in its books cover such NON-STOCK CORPORATION\
payments  One where no part of its income is distributable as
7) The SH must transfer his shares to the corpo upon such dividends to its members
payment by the corpo  Even if there is a statement of capital stock, the corpo is
still not a stock corpo if dividends are not supposed to be
REMEDY declared, there is no distribution of retained earnings
 If the corpo unjustifiablt refuses to pay the dissenting SH REQ:
despite full compliance; the aggrieved SH may file the 1) It does not have a capital stock divided into shares
appropriate action before the RTC to compel the corpo to 2) No part of its income is distributable as dividends to its
allow him to exercise his AR members
3) Non-stock corpo must be formed or organized for
SUSPENSION OF RIGHTS charitable, religious, educational, professional, cultural,
 The SH is still a SH even if he demanded payment of the fraternal, literary, scientific, social, civil service, or similar
fair value of his shares in the exercise of his AR. He purposes, like trade industry, agricultural and like
becomes a mere creditor only in the sense that he is chambers, or any combination thereof
entitled to the value of his shares
NOTE: An ordinary non-stock corpo cannot at the same time be a
CASES WHEN PAYMENT SHOULD NOT BE MADE cooperative

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XPN: It is only allowed as an incident to its operations, whenever

FOUNDATION necessary or proper for the furtherance of the purpose or purposes
 A foundation is a non-stock, non-profit corporation for which the corpo was organized
established for the purpose of extending grants and
endowments to support its goals or raising funds to Supreme Court: it does not follow that because a corpo is registered
accomplish charitable, religious, educational etc as a non stock corpo and thus exists for a purpose other than profit,
the company can no longer make any profits. Earning profits is
2006 SEC Guidelines on foundations merely secondary and not primary
 In fact, it may not lawfully engage in any business activity
CAPITAL for profit
 A NSC must state the amount of its capital, the names,  It may, however, invest its corporate funds in order to
nationalities and residences of the contributors and the earn additional income for paying its operating expenses
amount contributed by each and meeting benefit claims
 The capital is to be used for the operation of the corpo Example:
 The capital may be increased if there will be additional 1) A non-stock corpo that is organized for social purposes
contributors NO NEED TO AMEND THE AOI may operate a restaurant to cater to its members if the
revenues will be used to defray the overhead expenses of
NON-PROFIT the corpo
 If it does not distribute any part of its income to SH or 2) For religious purposes can engage in the retail of bibles
members and other religious literature as the said activity can be
 Non-profit is not the same oas charitable said to be reasonably necessary and incidental to its
purpose; it cannot engage in franchising because this is
NATIONALITY primarily a business function
 Is computed on the basis of the nationality of its members Franchising – is an arrangement where one party grants
and not premised on the membership contribution another party, called the franchise, the right to use its
 Anti-dummy does not allow foreigners to hold trademark , with latter paying a franchise fee plus a
management or executive positions in a corporation percentage f sales revenue as royalty
engaged in partly nationalized activity – non-stock is not
considered as partly nationalized DISTRIBUTION OF INCOME
 Distribution need not be cash. Members of NSC do not
PURPOSE receive dividends, they however receive benefits in the
a. Charitable form of commissary privileges, such as the importation of
b. Religious goods duty-free, purchase of food and other items at
c. Educational minimum or reduced prices, and return or refund of the
d. Professional capital at the end of membership or upon dissolution if the
e. Cultural corpo
f. Fraternal
g. Literary CONVERSION
h. Scientific  A NSC cannot be converted into a stock corpo by mere
i. Social amendment of the AOI; the amendment will be
j. Civis service inconsitednt with the nature of a NSC because the same
k. Similar purposes, like trade, industry, agricultural and like wil have the effect of distributing the assets of the NSC to
chambers its members so that the latter can become its SH
l. Any combination  It might dfraud the public who donated
 What the NSC should do is to dissolve itself and the
 Recreational purpose is not included; thus, sports club members may decide to organize a stock corpo
which are meant primarily for income generation, cannot
organize as a non-stock corpo; but only for fraternal NOTE: a stock corpo can be converted to NSC by mere amendment
purposes of the AOI. SH are now members will no longer have pecuniary
interest
Charity – a gift, to be applied consistently with existing laws, for the CHAPTER I
benefit of an indefinite number of persons. Either by bringing their MEMBERS
heart and mind under the influence of education or religion; they
provide free goods and services to the public that would otherwise Section 89. Right to vote. – The right of the members of any class or
fall on the shoulders of the government classes to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws. Unless so
PROFITABLE BUSINESS limited, broadened or denied, each member, regardless of class,
GENERAL RULE: They are not empowered to venture in profitable shall be entitled to one vote.
business. It cannot be permitted to engage in business with the
object of making income or profit directly or indirectly
Unless otherwise provided in the articles of incorporation or the by-
laws, a member may vote by proxy in accordance with the

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provisions of this Code. (n)  The heirs of deceased member will not acquire the
membership unless the AOI or by-laws of the non-stock
corporation provides for such transfer
Voting by mail or other similar means by members of non-stock
corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which Section 91. Termination of membership. – Membership shall be
may be prescribed by, the Securities and Exchange Commission. terminated in the manner and for the causes provided in the articles
of incorporation or the by-laws. Termination of membership shall
VOTING RIGHTS have the effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise provided in the
 Member’s right to vote in a NSC may be limited,
broadened or denied. articles of incorporation or the by-laws. (n)
 Must be done expressly in the AOI or the by-laws.
 Without any limiting provision, the rule is still the same, ACCEPTANCE OF MEMBERSHIP
one-member, one-vote unless otherwise provided in the  May accept or refuse members as the choose, subject to
AOI or by-laws the provisions of its AOI and by-laws
 Voting rights may be denied by stating in the by-laws that  NCS is free to fix the qualifications for membership and in
members who are delinquent in the payment of dues may the absence of restrictions, the courts may not intervene
not be allowed to vote  NCS may also provide for termination of members
 It may be limited to a proprietary member
TERMINATION OF MEMBERSHIP
GENERAL RULE: every member of a non-stock corpo has a right to  The board of trustees in the absence of any provision in
be present and to vote in all corporate meetings the AOI and by-laws has the power to terminate a
membership
RIGHT TO VOTE  Standards must be fixed in the AOI or the by-laws
 Voting is attached to membership. Members vote as  Procedure can be either in the AOI or the by-laws
persons, in accordance with the law and the by-laws of the  The members are duty-bound to comply the moment the
corporation standards are provided for in the AOI or by-laws
 A member shall be entitled to one vote unless limited,  Members may be expelled for non-payment of dues and
broadened or denied for o-attendance of meetings as expressly sanctioned by
 The limitation that may be imposed is regional elections the by-laws
for trustees so long as such modes of election is provided  Validity of expulsion is made by virtue of a board
in the by-laws resolution and after according the member the right to
due process
QUORUM OF MEMBERS’ MEETING
 Only those who are actual members with voting rights WHEN PROPERTY RIGHTS ARE INVOLVED
should be counted  Termination of membership must be dne in accordance
 SEC 52 majority of the members representing the actual with substantial justice
number of voting rights, not the number or numerical  The rule on prescriptive period is applicable; he can file an
constant that may originally be specified in the AOI action within the period of 8 years
constitutes the quorum  Property rghts are involved if the shares are the so called
“proprietary shares”
Section 90. Non-transferability of membership. – Membership in a Proprietary share or certificate – evidence or interest or
non-stock corporation and all rights arising therefrom are personal participation or privilege in a corporation which not ony entitles the
and non-transferable, unless the articles of incorporation or the by- holder to enjoy the use of a specific property but also to dividends
laws otherwise provide. (n) or earnings of said company

RATIONALE OF NON-TRANSFERABILITY NON-PAYMENT OF DUES

 May be a ground for termination or suspension of
GENERAL RULE: membership in a NSC and the rights arising thereto membership
are not transferable  NSC may collect from its members reasonable fees or dues
 Membership in a non-stock corporation has personal that are necessary to accomplish the purpose of the corpo
elements that require qualification by social and other ties  Dues may be collected even in the absence of a provision
XPN: AOI may provide for transferability of membership in the by-laws
NOTE: for the transfer to be valid, such terms and conditions must
be strictly complied with, the transfer being the exception and not UNPAID DUES AS LIEN
the general rule  AOI or by-laws may provide that unpaid dues shall
constitute a lien on the member’s share
MEANING OF TRANSFER  The member had already fully paid for the share and no
 All transactions whereby the property of one person longer had any outstanding obligation to deprive him of
becomes that of another, whether by descent and full title to his share
purchase. Hence, it includes transfer by inheritance  Under the civil code, kens can be constituted over the
membership shares only through pledge or chattel
mortgage

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special meetings at any place even outside the place where the
OTHER GROUNDS principal office of the corporation is located: Provided, That proper
1) When and offense is committed which, although it has no notice is sent to all members indicating the date, time and place of
immediate relation to a member’s duty as such, is of so the meeting: and Provided, further, That the place of meeting shall
infamous a nature as to render him unfit for the society of be within the Philippines. (n)
honest men, and which is indictable
2) When the offense is a violation of his duty as a member NUMBER OF TRUSTEES
3) Violation of a mixed nature, being both against his duty as  A non-stock corporation may have more than 15 trustees
a member and indictable under Section 92
4) Disloyalty for making or reporting fictitious or false  There is no maximum number of members of the
matters corporation
5) Bad faith, dishonesty or dishonorably NOTE: While the code expressly allows more than 15 members, the
SEC may question the propriety of a large number if it feels that the
NOTICE number is unreasonable under the surrounding circumstances

VALID TERMINATION REQS: ELECTION OF OFFICERS

1) Reasonable notice to the member concerned and;  The provisions of the AOI and by-laws shall be followed.
2) A fair opportunity to be heard in his defense  By-laws may provide that the officers shall be elected by
3) If the by-laws indicate the manner of giving notice, the the Board. If the AOI and by-laws are silent on the matter,
same should be complied with the officers may be elected directly by the members
 Section 92 is and exception to Section 25 ht requires that
LIABILITY FOR DAMAGES the corporate officers shall be elected by the Board
 NSC may be liable for damages by a member for the
termination of his membership that was done in bad faith QUALIFICATIONS
 The only qualification of a trustee is membership in the
EFFECT OF DEATH OF MEMBER corporation
 Determination of WON dead members are entitled to  A trustee who ceases to be a member of the corpo can no
exercise their voting rights through executor or longer act as trustee
administrator, depends on those AOI or by-laws
TERM
EFFECT OF DEATH ON QUORUM  NSC may provide for a desired term of office of the
 The by-laws of a non-stock corporation may provide that trustees in the by-laws. The AOI or by-laws may provide
membership in the corporation shall be terminated by the for a two-year tr of office
death of the member  Lifetime or unlimited trustee is not allowed
 Not to be counted in determining the requisite vote in
corpo maters or the requisite quorum MODE OF ELECTION
 The stipulation providing for the election of the BOD by
district is a form of limitation on the voting rights
CHAPTER II  Sec. 24 which requires the presence of majority of the
TRUSTEES AND OFFICES members entitled to vote in the election of the BOD,
applies only when the directors are elected by the
Section 92. Election and term of trustees. – Unless otherwise members at large
provided in the articles of incorporation or the by-laws, the board of
trustees of non-stock corporations, which may be more than fifteen VACANCY
(15) in number as may be fixed in their articles of incorporation or  Trustees may fill vacancies I the board, provided that those
by-laws, shall, as soon as organized, so classify themselves that the remaining still constitute a quorum – permissive and not
term of office of one-third (1/3) of their number shall expire every mandatory
year; and subsequent elections of trustees comprising one-third  Corpos may choose how vacancies in their respective
(1/3) of the board of trustees shall be held annually and trustees so boars may be filled up – either by the remaining trustees
elected shall have a term of three (3) years. Trustees thereafter constituting quorum, or by the members on a regular or
elected to fill vacancies occurring before the expiration of a special meeting called for the purpose
particular term shall hold office only for the unexpired period.  The by-laws may prescribe the specific mode of filling up
existing vacancies in its borad of directors; that is by a
No person shall be elected as trustee unless he is a member of the majority vote of the remaining membership of the board
corporation.
Section 94. Rules of distribution. – In case dissolution of a non-stock
Unless otherwise provided in the articles of incorporation or the by- corporation in accordance with the provisions of this Code, its assets
laws, officers of a non-stock corporation may be directly elected by shall be applied and distributed as follows:
the members. (n)
1) All liabilities and obligations of the corporation shall be
Section 93. Place of meetings. – The by-laws may provide that the
paid, satisfied and discharged, or adequate provision shall
members of a non-stock corporation may hold their regular or

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be made therefore; religious, benevolent, educational or similar purposes, but

2) Assets held by the corporation upon a condition requiring not held upon a condition requiring return, transfer or
return, transfer or conveyance, and which condition conveyance by reason of the dissolution, shall be
occurs by reason of the dissolution, shall be returned, transferred or conveyed to one or more corporations,
transferred or conveyed in accordance with such societies or organizations engaged in activities in the
requirements; Philippines substantially similar to those of the dissolving
3) Assets received and held by the corporation subject to corporation according to a plan of distribution
limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes, but
not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
4) Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with
the provisions of the articles of incorporation or the by-
laws, to the extent that the articles of incorporation or the
by-laws, determine the distributive rights of members, or
any class or classes of members, or provide for
distribution; and
5) In any other case, assets may be distributed to such
persons, societies, organizations or corporations, whether
or not organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter. (n)

Section 95. Plan of distribution of assets. – A plan providing for the

distribution of assets, not inconsistent with the provisions of this
Title, may be adopted by a non-stock corporation in the process of
dissolution in the following manner:

The board of trustees shall, by majority vote, adopt a resolution

recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members having
voting rights. Written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time and place of
such meeting shall be given to each member entitled to vote, within
the time and in the manner provided in this Code for the giving of
notice of meetings to members. Such plan of distribution shall be
adopted upon approval of at least two-thirds (2/3) of the members
having voting rights present or represented by proxy at such
meeting. (n)

DISTRIBUTION OF ASSETS
 Distribution of assets to members upon dissolution is
allowed if expressly provided for in the AOI or by-laws. In
the absence of any provision, the assets may be
distributed in accordance with the plans of distribution

THE ASSETS THAT SHOULD BE DISTRIBUTED TO THE MEMBERS DO

NOT INCLUDE THE ASSETS THAT ARE INCLUDED IN OR WILL
ANSWER FOR THE FOLLOWING:
1) All liabilities and obligations of the corporation
2) Assets held by th corpo upon a condition requiring retur,
transfer or conveyance, and the condition occurs by
reason of the dissolution. They shall be returned, or
conveyed in accordance with such requirements
3) Assets received and held by the corporation subject to
limitations permitting their use only for charitable,

ATTY. ORTHA | AUF – SOL 2015 Page 68 | CATANDUANES