73 MA - Corpo Page 73

San Beda College of Law
2010 Centralized Bar Operations

Effect of Mismanagement
The
suit
against
a
member of the board of
A partner as such can sue
directors or trustees who
a
co-partner
who
mismanages must be in
mismanages
the
name
of
the
corporation
Rights of Succession
Corporation has right of
Partnership has no right
succession
of succession
Extent of Liability To Third Persons

Partners
are
liable Stockholders are liable
personally
and only to the extent of the
subsidiarily
(sometimes shares subscribed by
solidarily) for partnership them
(limited
liability
debts to third persons
feature)
Transferability of Interest
Partner cannot transfer
his
interest
in
the
Stockholder has generally
partnership so as to make
the right to transfer his
the transferee a partner
shares
without
prior
without the unanimous
consent of the other
consent of all the existing
stockholders
because
partners because the
corporation is not based
partnership is based on
on this principle
the principle of delectus
personarum
Term of Existence
Corporation may not be
Partnership
may
be formed for a term in
established for any period excess of 50 years
of time stipulated by the extendible to not more
partners
than 50 years in any one
instance
Firm Name
Corporation may adopt
Limited partnership is any name provided it is
required by law to add the not the same as or similar
word Ltd. to its name
to any registered firm
name
Dissolution
May be dissolved at any
Can only be dissolved with
time by any or all of the
the consent of the State
partners
Governing Law
Governed
by
the
Governed by the NCC
Corporation Code
GENERAL PROVISIONS
Section 1. Title of the Code
The Corporation Code of the Philippines
Section 2. Corporation Defined
A corporation is an artificial being created by
operation of law having the right of
succession, and the powers, attributes and
properties expressly authorized by law or
incident to its existence.
Attributes of a Corporation
1. It is an artificial being with separate and
distinct personality.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attributes and properties
expressly authorized by law or incident to
its existence.
HISTORY
Corporation Code of the Philippines, pp.

2-3)
Philippine jurisprudence recognized the
concept of set-up of cuentas en
participacion.
(Villanueva,
Philippine
Corporate Law, p. 6)
During the American occupation, Act No.
1459 of 1906 was enacted aimed at
replacing the sociedades with the
concept of corporations under the
American Laws.
The Corporation Law or Act No. 1459, as
amended, virtually remained intact for
seventy four years of its effectivity, except
for some twenty seven piecemeal and
sporadic amendments made by the
Philippine Commission, the Philippine
Assembly and the Philippine Congress.
The Corporation Code of the Philippines
was passed by the Batasan Pambansa
and approved by the President on May 1,
1980, the date of its effectivity. It was
intended to supplant the Old Corporation
Code. (Lopez, The Corporation Code of
the Philippines, p. 2)
Prior to 1906, the law regulating business

entities in the Philippines was the Spanish
Code of Commerce of 1885.
These
entities were not, however, referred to as
corporations but as sociedades which
were as denominated sociedades de
cuentas participaciones, sociedades
agricolas or sociedades anonimas.
Their characteristics are different from the
corporations as we know them today
although they possess some features
quite similar to the latter. (Lopez, The
Theories on Formation of a Corporation

1. Concession Theory (also known as Fiat
Theory, Government Paternity Theory,
or Franchise Theory)
A corporation comes into existence upon
the issuance of the certificate of
incorporation. Then and only then will it
acquire juridical personality to sue and be
sued, enter into contracts, hold or convey
property or perform any legal act in its own
73

Corporation Laws
name (Ladia, Corporation Code of the
Philippines [Annotated], 2001 ed., p. 5).
may be connected and vice versa (Cease

v. CA, GR NO. 33172, October 18, 1979).
A corporation is an artificial creature

without any existence until it has received
the imprimatur of the state acting
according to law, through the SEC (Tayag
v. Benguet Consolidated, Inc., GR No. L23145, Nov. 29, 1968).
2. Right to bring actions

It may bring civil and criminal actions in its
own name in the same manner as natural
persons (Art. 46, New Civil Code).
3. Right to acquire and possess property
Property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity
and not that of the stockholders or
members (Art. 44(3), NCC).
The interest of shareholders in

corporate property is merely inchoate
and therefore does not entitle them to
intervene
in
litigation
involving
corporate property (Saw v. CA, GR
No. 90580, April 8, 1991).
While a share of stock represents

a proportionate or aliquot interest in
the property of the corporation, it does
not vest the owner thereof with any
legal right or title to any of the property
his interest in the corporate property
being equitable or beneficial I nature.
Shareholders are in no legal sense the
owners
of
corporate
property
(Magsaysay-Labrador vs. CA, GR
58168, December 19, 1989).
The
Tayag
ruling
rejects
the
Genossenschaft Theory in which the latter
treats a corporation as the reality of the
group as a social and legal entity,
independent of state recognition and
concession.
Under the Contract Theory, incorporation
is deemed to involve contracts (1) among
the members, (2) between the members
and the corporation; and (3) between the
members or the corporation and the State
(Philippine Corporate Law Compendium,
Aquino, 2006 ed. p. 27). Thus, a
corporation is entitled to right against
impairment of contracts (International
Express Travel & Tour Services, Inc. vs
CA, G.R. No. 119002, October 19, 2000).
The State cannot likewise take the life of
the corporation without due process.
2. Theory of Corporate Enterprise or
Economic Unit
The corporation is not merely an artificial
being, but more of an aggregation of
persons doing business, or an underlying
business unit (Philippine Corporate Law,
Cesar Villanueva, 2001ed).
I.
Artificial
Being
Personality
with
4. Acquisition by court of jurisdiction

Service of summons may be made on the
president, general manager, corporate
secretary, treasurer or in-house counsel
(Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership
Corporation remains unchanged and
unaffected in its identity by changes in its
individual membership (The Corporation
Code of the Philippines Annotated, De
Leon & De Leon, Jr., 2006ed).
Separate
Doctrine of Separate Personality

A corporation is a legal or juridical person with
a personality separate and apart from its
individual stockholders or members and from
any other legal entity to which it may be
connected (The Corporation Code of the
Philippines, Hector S. De Leon & Hector M.
De Leon, Jr., 2006ed).
6. Entitlement to constitutional rights

Corporations are entitled to certain
constitutional rights.
a. Due process A corporation is
considered a person under the due
process clause pursuant to Sec.1 Art.
III of the 1987 Constitution (Reviewer
in Commercial Law, Jose R. Sundiang
& Timoteo Aquino, 2006 ed p.229; see
also Albert v. University Publishing,
Inc., GR No. 19118, June 16, 1965).
b. Equal Protection of the law (see
Smith, Bell & Co. v. Natividad, 40 Phil
136, 1919).
Consequences:
1. Liability for acts or contracts
Obligations incurred by a corporation,
acting through its authorized agents are its
sole liabilities. Similarly, a corporation may
not generally, be made to answer for acts
or liabilities of its stockholders or members
or those of the legal entities to which it
74

c.
Protection against unreasonable

searches and seizures (see Stonehill
v. Diokno, GR No. 23372, June 14,
1967).
body, or, generally, from the directors as

the governing body (PNB v. CA, GR NO.
27155, May 18, 1978).
9. Liability for Crimes
Since a corporation is a mere legal fiction,
it cannot be held liable for a crime
committed by its officers since it does not
have the essential element of malice,
EXCEPT if by express provision of law
(i.e. Anti-Dummy Law and Anti-Money
Laundering Act), the corporation is held
criminally liable; In such case the
responsible officers would be criminally
liable (People v. Tan Boon Kong, GR NO.
32652, March 15, 1930).
However, it is NOT entitled to certain

constitutional rights such as political rights
or purely personal rights, not only because
it is an artificial being but also because it is
a mere creature of law. Example: The right
against self-incrimination particularly the
production of corporate documents
(Reviewer in Commercial Law, Jose R.
Sundiang & Timoteo Aquino, 2006ed).
It is not entitled to invoke the right against
self-incrimination. The State has the
reserved right to investigate its contracts
and find out whether it has exceeded its
powers. It would be a strange anomaly to
hold that a state, having chartered a
corporation to make use of certain
franchises, could not in the exercise of
sovereignty inquire how these franchises,
could not, in the exercise of sovereignty
inquire how these franchises had been
employed, and whether they had been
abused, and demand the production of the
corporate books and papers for that
purpose (Bataan Shipyard v. PCGG, GR
No. 75885, May 27, 1987).
BUT, the officers of the corporation may be

held liable. It is settled that an officer of a
corporation can be held criminally liable for
acts or omissions done in behalf of the
corporation only where the law directly
requires the corporation to do an act in a
given manner and the same law makes
the person who fails to perform the act in
the prescribed manner criminally liable.
Although the performance of an act is an
obligation
directly
imposed
on
a
corporation, the responsible officer who
performed the act must of necessity be the
one to assume criminal liability; otherwise
this liability as created by the law would be
illusory, and the deterrent effect of the law,
negated (Sia vs. People of the Philippines,
No. L-30896, April 28, 1983).
7. Moral Damages
General Rule: A corporation is not entitled
to moral damages because it has no
feelings, no emotions, no senses (ABSCBN v. Court of Appeals, GR No. 128690,
Jan. 21, 1999).
Doctrine of Piercing the Veil of Corporate

Entity
The doctrine that a corporation is a legal entity
distinct from the persons composing it is a
theory introduced for purposes of convenience
and to serve the ends of justice. But when the
veil of corporate fiction is used as a shield to
defeat public convenience, justify wrong,
protect fraud, or defend a crime, this fiction
shall be disregarded and the individuals
composing it will be treated identically (Cruz v.
Dalisay, A.M. R-181-P, July 31, 1987).
Exception: When a corporation has a

good reputation that is debased, resulting
in its humiliation in the business realm
(Coastal Pacific Trading, Inc. v. Southern
Rolling Mills Co., Inc., 28 July 2006).
A juridical person such as a corporation
can validly complain for libel or any other
form of defamation and claim for moral
damages. The SC had ratiocinated that
Art. 2219 (7) does not qualify whether the
plaintiff is a natural or a juridical person
(Filipinas Broadcasting v. Ago Medical
Center-Bicol, et. al., GR No. 141994, Jan.
17, 2005).
The doctrine requires the court to see through

the protective shroud which exempts its
stockholders from liabilities that they ordinarily
would be subject to, or distinguishes a
corporation from a seemingly separate one,
were it not for the existing corporate fiction
(Lim v. CA, GR No. 124715, January 24,
2000).
8. Liability for torts

A corporation is liable whenever a tortuous
act is committed by an officer or agent
under the express direction or authority of
the stockholders or members acting as a
75

Corporation Laws
Nature of Piercing Doctrine (Philippine
Corporate Law, Cesar Villanueva, 2001ed):
1. Has res judicata effect
When the piercing doctrine is applied
against a corporation in a particular case,
such corporation still possessed such
separate personality in any other case, or
with respect to other issues (Tantoco v.
Kaisahan ng mga Manggagawa sa La
Campana and CIR, 106 Phil 199 [1959]).
the other corporation (China Banking

Corporation v. Dyne-Sem Electronics, GR
No. 149237, June 11, 2006).
Elements:
1. There must have been fraud or evil
motive in the affected transaction and
the mere proof of control of the
corporation by itself would not
authorize piercing.
2. The main action should seek for the
enforcement of pecuniary claims
pertaining to the corporation against
corporate officers or stockholders, or
vice-versa; and
3. The corporate entity has been used in
the perpetration of the fraud or in
justification of wrong, or to escape
personal liability.
2. To prevent fraud or wrong and not

available for other purposes
The doctrine could not be employed by a
corporation to complete its claims against
another corporation and cannot therefore
be employed by the claimant who does not
appear to be the victim of any wrong or
fraud (Traders Royal Bank v. CA, GR No.
93397, March 3, 1997).
There is always an element of malice or

evil motive in fraud cases.
3. Essentially a judicial prerogative only

To pierce the veil of corporate fiction being
a power belonging to the courts, a sheriff
who has ministerial duty to enforce a final
and executory decision cannot pierce the
veil of corporate fiction by enforcing the
decision against the stockholders who are
not parties to the action (Cruz v. Dalisay,
Ibid).
B. Alter Ego Cases (or Conduit Cases)

The corporate entity is being used to
defeat public convenience, or a mere
farce, since the corporation is merely the
alter
ego,
business
conduit
or
instrumentality of a person or another
entity. Villanueva, Philippine Corporate
Law, p.86 )
4. Must be shown to be necessary and

with factual basis
To disregard the separate juridical
personality
of
a
corporation,
the
wrongdoing must be clearly and
convincingly established, it cannot be
presumed (Luxuria Homes, Inc. v. CA, GR
No. 125986, January 28, 1999).
One of the instances when the Alter Ego

Doctrine is invoked is when there is parent
company-subsidiary
company
relationship. However, the general rule is
still to the effect that if used for legitimate
functions,
a
subsidiarys
separate
existence shall be respected, and the
liability of the parent corporation as well as
the subsidiary will be confined to those
arising in their respective business.
(Philippine Corporate Law Compendium,
Timoteo Aquino, 2006 ed. p. 33). In this
connection, the Supreme Court the
circumstances which are useful in the
determination of whether a subsidiary is
but a mere instrumentality of the parent
corporation.
Mere ownership by a single stockholder or

by another corporation of all or
substantially all of the capital stock does
not justify the application of the doctrine.
There must be other circumstances that
must be present (Francisco v. Mejia, GR
No. 141617, August 14, 2001).
Classification:
A. Fraud Cases
The veil of separate corporate personality
may be lifted when such personality is
used to defeat public convenience, justify
wrong, protect fraud or defend crime; or
used as a shield to confuse the legitimate
issues; or when the corporation is merely
an adjunct, a business conduit or an alter
ego of another corporation. In such cases,
the corporation will be considered as a
mere association of persons. The liability
will directly attach to the stockholders or to
Probative factors:
1. Stock ownership by one or common
ownership of both corporations;
2. Identity of directors and officers;
3. The manner of keeping corporate
books and records; and
4. Methods of conducting the business
(Concept Builders, Inc. v. NLRC, GR
No. 108734, May 29, 1996).
76

Four Policy Bases in Piercing:
1. Even when the controlling stockholder
or
managing
officer
intends
consciously to do no evil, the use of
the corporation as an alter ego is in
direct violation of a central corporate
law
principle
of
treating
the
corporation as a separate juridical
entity from its members and
stockholders;
2. If the stockholders do not respect the
separate entity, others cannot also be
expected to be bound by the separate
juridical entity;
3. Applies even when there are no
monetary claims sought to be
enforced against the stockholders or
officers of the corporation;
4. When
the
underlying
business
enterprise does not really change and
only the medium by which that
business enterprise is changed.
Effects
In any case where the separate corporate
identity is disregarded, the corporation will
be treated merely as an association of
persons and the stockholders or members
will be considered as the corporation, that
is, liability will attach personally or directly
to the officers and stockholders (Umali v.
Court of Appeals, No. 89306, September
13, 1990).
Instrumentality or Alter Ego Rule

When one corporation is so organized and
controlled and its affairs are conducted so
that it is in fact a mere instrumentality or
adjunct of the other, the fiction of the
corporate entity to the instrumentality may
be disregarded
Where there are two corporations, they will

be merged into one, the one being merely
regarded as the instrumentality, agency,
conduit or adjunct of the other (Koppel
[Phils.] v. Yatco, GR No. 47673, October
10, 1946).
When the veil of corporate fiction is

pierced, the corporate character is not
necessarily abrogated. The corporation
continues
for
legitimate
objectives
(Reynoso IV v. Court of Appeals, GR No.
116124-25, November 22, 2000).
Bar Question (2004): How does one pierce the

veil of corporate fiction?
Answer: Upon showing that grounds exist, the
corporate fiction or veil may be lifted through
any of the following:
1. By disregarding the separate personality
of the corporation;
2.
By holding the corporate officer liable
for the corporate obligation (see Francisco
vs. Mejia, 362 SCRA 738);
3.
By regarding the corporation as an
association of persons or in case of two
corporations, treat them as one (see
Development vs. CA, 363 SCRA 307) and
hold them liable as such;
4.
It must be done with caution (see R &
E vs. Latag, 422 SCRA 698).
(Taken from Miravite, Jorge V., Bar Review
Materials in Commercial Law)
Test:
a. Control, not mere majority or complete
stock control, but complete dominion,
not only of finances but of policy and
business in respect to the transaction
attacked so that the corporate entity
as to this transaction had at the time
no separate mind, will, or existence of
its own;
b. Such control must have been used by
the defendant to commit fraud or
wrong in contravention of plaintiffs
legal rights; and
c. The aforesaid control and breach of
duty must proximately cause the injury
or unjust loss complained of (Concept
Builders Inc. v. NLRC, GR No.
108734, May 29, 1996).
II. Created by Operation of Law

How are Corporations Created?
1. By general law private corporations are
generally created under the provisions of
the Corporation Code. This is done by
filing
the
appropriate
Articles
of
Incorporation with the SEC; the life of a
corporation starts from the issuance of the
Certificate of Incorporation;
2. By special law public corporations are
created through special laws. Private
corporations cannot be created by special
laws
except
government-owned
or
controlled corporations which are actually
C. Equity Cases
When piercing the corporate fiction is
necessary to achieve justice or equity.
The dumping ground where no fraud or
alter ego circumstances can be culled to
warrant piercing.
77

Corporation Laws
private
corporations
(Reviewer
in
Commercial Law, Jose R. Sundiang &
Timoteo Aquino, 2006 ed p.238).
Primary
Secondary
Nature of Franchise
Refers to the exercise of
Refers to the franchise right or privilege. e.g.
of being or existing as a public
utility
or
corporation
telecommunication
franchise
To Whom Vested
Vested
in
the
corporation after its
Vested in the individuals
incorporation and not
who
compose
the
upon the individuals who
corporation
compose
the
corporation.
Alienability
May
be
sold
or
Cannot be sold or
transferred
under
a
transferred,
in
the
general power granted
absence of legislative
to a corporation to
authority to do so. This
dispose of its properties;
is
because
it
is
may also be subject to
inseparable from the
sale on execution or
corporation itself.
levy.
Doctrine of Corporate Entity

A corporation comes into existence upon the
issuance of the certificate of incorporation
(Sec. 19). Then and only then will it acquire a
juridical personality to sue and be sued, enter
into contracts, hold or convey property or
perform any legal act, in its own name
(Corporation Code of the Philippines, Ruben
C. Ladia, 2001ed).
Corporations cannot come into existence by
mere agreement of the parties as in the case
of business partnerships. They require special
authority or grant from the State. This power is
exercised by the State through the legislature,
either by a special incorporation law or charter
which directly creates the corporation or by
means of a general corporation law under
which individuals desiring to be and act as a
corporation may incorporate (The Corporation
Code of the Philippines, De Leon & De Leon,
Jr., 2006ed).
Tests to Determine the Nationality of

Corporations:
1. Incorporation Test determined by the
state of incorporation, regardless of the
nationality of its stockholders.
2. Domicile Test determined by the state
where it is domiciled.
Sec. 16, Article XII of the 1987 Constitution

expressly authorizes the legislature to create
government-owned
or
controlled
corporations through special charters only if
these entities are required to meet the twin
conditions of common good and economic
viability (MIAA v. CA, 20 July 2006). The intent
of the Constitution in requiring the test of
economic viability is to prevent the creation of
government-owned or controlled corporation
that cannot survive on their own in the market
place and thus merely drain the public coffers
(Ibid).
Note: The domicile of a corporation is the

place fixed by the law creating or
recognizing it; in the absence thereof, it
shall be understood to be the place where
its legal representation is established or
where it exercises its principal functions
(Art. 51, NCC).
3. Control Test determined by the
nationality of the controlling stockholders
or members. This test is applied in times
of war. Also known as the WARTIME
TEST.
Franchises of Corporation
1. Primary or corporate franchise/ General
franchise
The right or privilege granted by the State
to individuals to exist and act as a
corporation after its incorporation.
2. Secondary or special franchise
The special right or privilege conferred
upon an existing corporation to the
business for which it was created. (e.g.
use of the streets of a municipality to lay
pipes or tracks, or operation of a public
utility or a messenger and express
delivery service)
Philippine National under the Foreign

Investment Act of 1991 (R.A. No. 7042):
a corporation organized under Philippine
laws of which 60% of the capital stock
outstanding and entitled to vote is owned
and held by Filipino citizens;
a corporation organized abroad and
registered as doing business in the
Philippines under the Corporation Code of
which 100% of the capital stocks entitled
to vote belong to Filipinos.
Note: However, it provides that where a
corporation and its non-Filipino stockholders
own stocks in a SEC-registered enterprise, at
least 60% of the capital stock outstanding and
78

entitled to vote of both corporations and at
least 60% of the members of the board of
directors of both corporations must be Filipino
citizens (DOUBLE 60% RULE).
III.
Right of Succession
It is the capacity to have continuity of
existence despite the changes on the
persons who compose it. Thus, the
personality continues despite the change of
stockholders, members, board members or
officers (Reviewer in Commercial Law,
Sundiang & Aquino, 2006ed).
IV.
Powers, Attributes and Properties

1.
Section 3. Classes of Corporation

Classification under the Code
1. Stock corporation
A corporation which has capital stock
divided into shares and is authorized to
distribute to holders of such shares,
dividends or allotments of the surplus
profits on the basis of the shares held
(Sec. 3); or
For a stock corporation to exist, the above
requisites must be complied with for even
if there is a statement of capital stock, the
corporation is still not a stock corporation if
dividends are not supposed to be
declared, i.e. there is no distribution of
retained earning (CIR v. Club Filipino, Inc.
de Cebu GR No. L-12719, May 31, 1962).
Theory of Special Capacities/

Limited Capacity Doctrine
No corporation under the Code, shall
possess or exercise any corporate
power, except those conferred by law,
its Articles of Incorporation, those
implied from express powers and those
as are necessary or incidental to the
exercise of the powers so conferred
(Sec. 45). The corporations capacity is
limited to such express, implied and
incidental
powers
(Reviewer
in
Commercial Law, Sundiang & Aquino,
2005 ed).
2. Non-stock corporation
A non-stock corporation is one where no
part of its income is distributable as
dividends to its members, trustees or
officers (Sec. 87, Corporation Code).
Other Classifications
1. As to organizers:
a. Public by State only; or
b. Private by private persons alone or
with the State.
2. As to purpose:
a. Public
organized
for
the
government of a portion of the State
for the general good and welfare.
b. Private formed for some private
purpose, benefit or end
a. Government-owned
or
controlled corporation created
by the government or of which the
government is the majority
stockholder.
(i.e.,
GSIS,
NAPOCOR, PNR, PNB)
b. Quasi public corporation
private corporations which have
accepted from the State the grant
of franchise or contract involving
the performance of public duties
but which are organized for profits
(i.e., electric, water, transportation
companies).
If the act of the corporation is not one

of those express, implied or incidental
powers, the act is ultra vires (Ibid).
Ultra vires acts of the corporation
an ultra vires act is 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 (Atrium Management
Corporation vs. CA, G.R. No.109491,
February 28, 2001).
2. Theory of General Capacities
This theory provides that a corporation
may exercise any and all powers that
may be exercised by persons
(Philippine
Corporate
Law
Compendium, Timoteo Aquino, 2006
ed. p. 53).
3. As to governing law:
a. Public Special Laws and Local
Government Code; or
b. Private
Law
on
Private
Corporations.
The business entity is said to hold such

powers as are not prohibited or
withheld from it by general laws
(Miravite, Jorge V., Bar Review
Materials in Commercial Law, 12th )
79

Corporation Laws
4. As to legal right to corporate existence:
a. De jure corporation corporation
created in strict or substantial
conformity
with
the
mandatory
statutory
requirements
for
incorporation and the right of which to
exist as a corporation cannot be
successfully attacked or questioned by
any party even in a direct proceeding
for that purpose by the state; or
a. Open one which is open to any

person who may wish to become a
stockholder or member thereto; or
b. Close - those whose shares of stock
are held by limited number of persons
like the family or other closely-knit
group (Sec. 96; The Corporation Code
of the Philippines, De Leon &. De
Leon, Jr., 2006ed).
7. As to relationship of management and
control:
Holding corporation it is one which
controls another as a subsidiary by the
power to elect management. It is one
that holds stocks in other companies
for purposes of control rather than for
mere investment.
Subsidiary corporation one which
is so related to another corporation
that the majority of its directors can be
elected either directly or indirectly by
such other corporation. It is always
controlled; or
Affiliate one related to another by
owning or being owned by common
management or by a long-term lease
of its properties or other control
device. It may be the controlled or
controlling corporation, or under
common control; or
Parent and subsidiary corporation
when a corporation has a controlling
financial interest in one or more
corporations, the one having control is
the parent corporation, and the others
are the subsidiary corporations
(Philippine Corporate Law, Cesar
Villanueva, 2001ed).
b. De facto corporation organized

with a colorable compliance with the
requirements of a valid law and its
existence
cannot
be
inquired
collaterally but such inquiry may be
made by the Solicitor General in a quo
warranto proceeding.
Note: The only difference between a
de facto corporation and a de jure
corporation is that a de jure
corporation can successfully resist a
suit brought by the State challenging
its existence; a de facto corporation
cannot sustain its right to exist as
against the State.
c.
Corporation by estoppel group of

persons that assumes to act as a
corporation knowing it to be without
authority to do so, and enters into a
transaction with a third person on the
strength of such appearance. It cannot
be permitted to deny its existence in
an action under said transaction (Sec.
21). It is neither de jure nor de facto.
d. Corporation by prescription one

which has exercised corporate powers
for an indefinite period without
interference on the part of the
sovereign power, e.g. Roman Catholic
Church.
8. As to number of persons who compose

them:
a. Aggregate
corporation
a
corporation consisting of more than
one person or member; or
b. Corporation sole a corporation
consisting of only one person or
member; Under Section 110 of the
Corporation Code, for the purpose of
administering and managing, as
trustee, the affairs, property and
temporalities
of
any
religious
denomination, sect or church, a
corporation sole may be formed by the
chief archbishop, bishop, priest,
minister, rabbi or other presiding elder
of such religious denomination, sect or
church.
5. As to laws of incorporation:
a. Domestic corporation corporation
formed, organized or existing under
Philippine laws; or
b. Foreign corporation a corporation
formed, organized or existing under
any laws other than those of the
Philippines and whose laws allow
Filipino citizens and corporations to do
business in its own country or state.
6. As to whether they are open to the
public or not:
80

9. As to whether they are for religious
purposes or not:
a. Ecclesiastical corporation one
organized for religious purposes; or
b. Lay corporation one organized for
a purpose other than for religion.
date of issuance of the

certificate
of
incorporation by the
Securities
and
Exchange Commission
Powers
Partnership
may
Corporation
can
exercise any power
exercise
only
the
authorized
by
the
powers
expressly
partners (provided it is
granted by law or
not contrary to law,
implied
from
those
morals, good customs,
granted or incident to its
public
order,
public
existence
policy)
Management
The
power
to
do
When management is
business and manage
not agreed upon, every
its affairs is vested in the
partner is an agent of
board of directors or
the partnership
trustees
Effect of Mismanagement
The suit against a
member of the board of
A partner as such can
directors or trustees who
sue a co-partner who
mismanages must be in
mismanages
the
name
of
the
corporation
Rights of Succession
Corporation has right of
Partnership has no right
succession
of succession
moment of execution of
the
contract
of
partnership
10. As to whether they are for charitable

purposes or not:
a. Eleemosynary corporation one
established for or devoted to
charitable
purposes
or
those
supported by charity; or
b. Civil corporation one established
for business or profit.
Concept of Going Public and Going Private
A corporation is deemed to be going public
when it decides to list its shares in the stock
exchange. These include corporations that will
make initial public offering of its shares. A
corporation is said to be going private when it
would restrict the shareholders to a certain
group. In a sense, these also include close
and closely held corporation (Philippine
Corporate Law Compendium, Timoteo Aquino,
2006ed).
One-Man Corporation
A corporation wherein all or substantially all of
the stocks is held directly or indirectly by one
person. However, it should still follow the
formal requirements of a corporation (e.g.
number of incorporators, board of directors
composed of stockholders owning shares in a
nominal capacity) in order to validly enjoy the
attributes of the corporation, so as to avoid the
application of the doctrine of piercing the veil
of corporate entity.
Extent of Liability to Third Persons

Partners
are
liable
Stockholders are liable
personally
and
only to the extent of the
subsidiarily (sometimes
shares subscribed by
solidarily)
for
them (limited liability
partnership debts to
feature)
third persons
Transferability of Interest
Partner cannot transfer
his interest in the Stockholder
has
partnership so as to generally the right to
make the transferee a transfer
his
shares
partner
without
the without prior consent of
unanimous consent of the other stockholders
all the existing partners because corporation is
because the partnership not based on this
is based on the principle principle
of delectus personarum
Term of Existence
Corporation may not be
Partnership may be formed for a term in
established
for
any excess of 50 years
period of time stipulated extendible to not more
by the partners
than 50 years in any one
instance
Firm Name
Corporation may adopt
Limited partnership is
any name provided it is
required by law to add
not the same as or
the word Ltd. to its
similar to any registered
name
firm name
A one-man corporation enjoys the attributes of

a corporation. However, it is a precondition
that a certificate of incorporation is issued by
the SEC. The corporation should not be
treated as a mere conduit, otherwise, the
attribute that the personality of the corporation
is separate may be disregarded (Philippine
2006 ed. p.36)
Partnership
Corporation
Creation
Created
by
mere Created by law or by
agreement of the parties operation of law
Number of Incorporators
Requires at least five
May be organized by at
incorporators (except a
least two persons
corporation sole)
Commencement of Judicial Personality
Acquires
juridical Acquires
juridical
personality from the personality from the
81

Corporation Laws
There is only one set of incorporators. The
incorporators appearing as such in the
Articles of Incorporation will remain to be
incorporators up to the termination of the
life of the corporation.
Dissolution
May be dissolved at any Can only be dissolved
time by any or all of the with the consent of the
partners
State
Governing Law
Governed
by
the
Governed by the NCC
Corporation Code
Reason: The Articles of Incorporation

cannot be amended to change the names
of the incorporators because the fact that
the
persons
named
therein
as
incorporators is an accomplished fact that
can no longer be undone (Philippine
Corporate Law Compendium, Aquino,
2006 ed. p. 61).
Advantages/ Disadvantages of
Incorporation
1.
2.
3.
4.
5.
6.
7.
8.
9.
Advantages
has a legal capacity
to act and contract
as a distinct unit in
its own name;
continuity
of
existence;
its
credit
is
strengthened by its
continuity
of
existence;
centralized
management in the
board of directors;
its
creation,
management,
organization
and
dissolution
are
standardized
as
they are governed
under one general
incorporation law;
makes
feasible
gigantic
financial
undertakings due to
numerous investors;
limited liability;
shareholders
are
not the
general
agents
of
the
business;
transferability
of
shares.
1.
2.
3.
4.
5.
6.
7.
8.
Disadvantage
complicated
in
formation
and
management;
high
cost
of
formation
and
operations;
its
credit
is
weakened by the
limited
liability
feature;
lack of personal
element;
greater degree of
governmental
supervision;
management and
control
are
separated
from
ownership;
stockholders voting
rights
are
theoretical due to
proxies
and
widespread
ownership;
stockholders have
little voice in the
conduct
of
the
business.
Qualifications:
a. natural person;
b. not less than 5 but not more than 15;
c. of legal age;
d. majority must be residents of the
Philippines; and
e. in stock corporations, each must own
or subscribe to at least one share
(Sec. 10); while in non-stock
corporations,
members are not
owners of shares of stocks, and their
membership depends on terms
provided
in
the
articles
of
incorporation or by-laws (Sec. 91).
General Rule: Only natural persons can
be incorporators.
Exception: When otherwise allowed by
law, e.g., Rural Banks Act of 1992, where
incorporated cooperatives are allowed to
be incorporators of rural banks.
Note: However, corporations can
corporators.
(The Corporation Code of the Philippines, De

Leon &. De Leon, Jr., 2006ed)
Stockholders owners of shares of stock

in a stock corporation. They are holders of
shares in a corporation with interest over
the
management
(control),
income
(dividends) and assets (share upon
liquidation) of the corporation (Philippine
2006 ed. p. 61).
Members corporators of a non-stock

corporation.
Section 4. Corporations created by special

laws or charters
Section 5. Corporators and Incorporators,
Stockholders and Members
Component of a Corporation
Corporators those who compose a
corporation, whether as stockholders or
members.
Incorporators those mentioned in the
Articles of Incorporation as originally
forming and composing the corporation,
having
signed
the
Articles
and
acknowledged the same before a notary
public. They have no powers beyond
those vested in them by the statute.
be
Incorporators
Corporators
Nature of Membership
stockholder
(stock
signatory to the Articles
corporation) or member
of Incorporation
(non-stock corporation)
82

Contractual Capacity
must have contractual may be such through a
capacity
guardian
Permanence
fait
accompli;
they may cease to be
accomplished fact (the
such
if
they
Articles of Incorporation
subsequently lose their
cannot be amended to
shareholdings
replace them)
Number
number is limited to 5- No restriction as to
15
number
2. Preferred shares
Shares with a stated par value which
entitle the holder thereof to certain
preferences over the holders of common
stock. The preference may be (a) as to
asset; or (b) as to dividends; or (c) as may
be determined by the board of directors
when so authorized to do so (The
Corporation Code of the Philippines, De
Leon &. De Leon, Jr., 2006ed).
Other Components
1. Promoter - A person who, acting alone or
with others, takes initiative in founding and
organizing the business or enterprise of
the issuer and receives consideration
therefor (Sec. 3, Securities Regulation
Code [R.A. 8799]).
All preferred stock contracts are,

fundamentally attempts to endow certain
owners with rights analogous to creditor
rights. The reason why there is an effort to
extend such right is to make preferred
shares attractive to investors for they can
remain as such and at the same time
enjoy certain advantages that are
available to creditors (Philippine Corporate
Law Compendium, Aquino, 2006ed).
He is an agent of the incorporators but not

of the corporation.
Contracts by the promoter for and in
behalf of a proposed corporation generally
bind only him, subject to and to the extent
of his representations, and not the
corporation, unless and until after these
contracts are ratified, expressly or
impliedly,
by
its
Board
of
Directors/Trustees
(Cagayan
Fishing
Development Co., Inc. v. Sandiko, 65 Phil.
223).
Limitations:
1. If deprived of voting rights, it shall still
be entitled to vote on matters
enumerated in Section 6, par. 6.
2. Preference must not be violative of the
Code.
3. May be issued only with a stated par
value.
4. The board of directors may fix the
terms and conditions only when so
authorized
by
the
articles
of
incorporation and such terms and
conditions shall be effective upon filing
a certificate thereof with the SEC.
2. Subscriber A person who has agreed to

take and pay for original and unissued
shares of a corporation formed or to be
formed.
3. Underwriter A person who guarantees
on a firm commitment and/ or declared
best effort basis the distribution and sale
of securities of any kind by another
company (Sec. 3, R.A. 8799).
Kinds:
Cumulative one which entitles the
owner thereof to payment not only of
current dividends but also back
dividends not previously paid whether
or not during the past years dividends
were declared or paid.
Non-cumulative one which grants
the holders of such shares only to the
payment of current dividends but not
back dividends when and if dividends
are paid to the extent agreed upon
before any other stockholders are paid
the same.
Participating - one which entitles the
shareholder to participate with the
common shares in excess distribution
at some predetermined or at a fixed
ratio as may be determined.
Section 6. Classification of Shares

1. Common shares
The basic class of stock ordinarily and
usually issued without extraordinary rights
and privileges, and the owners thereof are
entitled to a pro rata share in the profits of
the corporation and in its assets upon
dissolution
and,
likewise,
in
the
management of its affairs without
preference or advantage whatsoever.
Represent the residual

interest in the corporation.
Have complete voting rights. They

cannot be deprived of said rights
except as provided by law.
ownership
83

Corporation Laws
the agreement (Cannon v. Handley, 12

Phil. 315).
Non-participating one which

entitles the shareholder thereof to
receive the stipulated preferred
dividends and no more.
Cumulative participating share
which is a combination of the
cumulative share and participating
share.
The escrow deposit makes the depository

a trustee under an express trust (Articles
1440 and 1441 of the New Civil Code).
4. Over-issued stock
Stock issued in excess of the authorized
capital stock. It is also known as spurious
stock. Its issuance is considered null and
void.
1. Voting shares
Shares with a right to vote.
Under the Code, whenever a vote is
necessary to approve a particular
corporate act, such vote refers only to
stocks with voting rights except in certain
cases when even non-voting shares may
also vote (Sec. 6, par. 6 and last par.).
5. Watered stock
A stock issued not in exchange for its
equivalent value either in cash, property,
share, stock dividends, or services (Sec.
65).
Water in the stock represents the
difference between the fair market value at
the time of the issuance of the stock and
the par or issued value of said stock. Both
par and no par stocks can thus be watered
stocks.
If stock is originally issued as voting stock,

it may not thereafter be deprived of the
right to vote without the consent of the
holder.
2. Non-voting shares
Shares without right to vote.
It includes stocks:
a. issued without consideration (bonus
share).
b. issued as fully paid when the
corporation has received a lesser sum
of money than its par or issued value
(discount share).
c. issued for a consideration other than
actual cash such as property or
services, the fair valuation of which is
less than its par or issued value.
d. issued as stock dividend when there
are no sufficient retained earnings to
justify it.
The law only authorizes the denial of

voting rights in the case of redeemable
shares and preferred shares, provided that
there shall always be a class or series of
shares which have complete voting rights.
These redeemable and preferred shares,
when such voting rights are denied, shall
nevertheless be entitled to vote on the
following fundamental matters:
(MA2I3DS)
1. merger or consolidation of capital
stock
2. amendment
of
Articles
of
Incorporation;
3. adoption and amendment of by-laws;
4. incurring, creating or increasing
bonded indebtedness;
5. increase or decrease of capital stock
6. investments of corporate funds in
another corporation
or another
business purpose;
7. corporate dissolution; and
8. sale or disposition of all or
substantially all of corporate property
6. Par value shares

Shares with a value fixed in the articles of
incorporation and the certificates of stock.
Purpose:
1. to fix the minimum subscription or
issue price of the shares, thus
assuring creditors that the corporation
would receive a minimum amount for
its stock
Advantages
Easily sold as the public is
more attracted to buy this
kind of share
3. Share in escrow
Share subject to an agreement by virtue of
which the share is deposited by the
grantor or his agent with a third person to
be kept by the escrow agent until the
performance of a certain condition or the
happening of a certain event contained in
Greater
creditors
84
protection
to
Disadvantages
Subscribers are liable to
the corporate creditors for
their unpaid subscription
The stated value of the
share is not an accurate
criterion of its true value

Unlikelihood of sale of
subsequently
issued
shares at a lower price
11. Promotion share

Shares issued to promoters or those in some
way interested in the company, for
incorporating the company, or for services
rendered in launching or promoting the
welfare of the company.
7. No par value shares

Shares having no par value but have issued
value stated in the certificate or articles of
incorporation.
12. Founders' shares (Sec. 7)

Shares classified as such in the articles if
incorporation and issued to organizers and
promoters of a corporation in consideration of
some supposed right or property such as
special preference in voting rights and
dividend payments. BUT if an exclusive right
to vote and be voted for as director is granted,
this privilege is subject to approval by the
SEC, and cannot exceed 5 years from the
date of approval.
No par value stockholders have the same

rights as holders of par value stock.
Advantages
Issued as fully paid and
non-assessable
Price is flexible
Enjoy wider distribution
because of it is low-priced
Tell no untruth concerning
the
value
of
the
stockholders contribution
More
easily
issued,
thereby
simplifying
accounting procedures
Disadvantages
Legalize issuance of large
stock for property
Conceal
money
or
property represented by
the shares
Promote the issuance of
watered stock
Lesser
protection
creditors
to
13. Redeemable shares (Sec. 8)

Shares of stocks issued by the corporation
which said corporation can purchase or take
up from their holders as expressly provided
for in the articles of incorporation and
certificate of stock representing said shares at
a fixed date or at the option of the issuing
corporation or the stockholder or both at a
certain redemption price.
Limitations:
1. No par value shares cannot have an
issued price of less than P5.00;
2. The entire consideration for its issuance
constitutes capital so that no part of it
should be distributed as dividends;
3. They cannot be issued as preferred
stocks;
4. They cannot be issued by banks, trust
companies, insurance companies, public
utilities and building and loan association
(BPI-TB);
5. The articles of incorporation must state
the fact that it issued no par value shares
as well as the number of said shares;
6. Once issued, they are deemed fully paid
and non-assessable (Sec. 6)
Limitations:
May be issued only when expressly
provided for in the articles of
incorporation;
The terms and conditions affecting said
shares must be stated BOTH in the
articles of incorporation and in the
certificates of stock representing such
shares;
May be deprived of voting rights in the
articles of incorporation, unless otherwise
provided in the Code.
Redeemable shares may be redeemed,
regardless of the existence of unrestricted
retained earnings (Sec. 8), provided that the
corporation has, after such redemption,
sufficient assets in its books to cover debts
and liabilities inclusive of capital stock.
8. Street certificate
A stock certificate endorsed by the registered
holder in blank and the transferee can
command its transfer to his name from the
issuing corporation.
9. Convertible share
A share that is changeable by the stockholder
from one class to another at a certain price
and within a certain period.
Redemption may not be made where the

corporation is insolvent or if such redemption
would cause insolvency or inability of the
corporation to meet its debts as they mature.
Such limitation is based on the principle that
corporate assets are a trust fund for creditors
(TRUST FUND DOCTRINE).
10. Fractional share

A share with a value of less than one full
share.
85

Corporation Laws
When redeemable shares are reacquired, the
same shall be considered retired and no
longer issuable unless otherwise provided for
in the Articles of Incorporation.
1. For tax purposes, there are cases
when redemption of shares is
considered
a
scheme
to
circumvent the tax consequences
of cash dividends. Hence, the
amounts
received
by
the
shareholders shall be treated as
cash
dividends
because
proceeds of redemption in such a
case are additional wealth and
not merely a return of the capital
(Philippine
Corporate
Law
Compendium, Aquino, 2006ed).
2. Corporations
which
issue
redeemable
shares
with
mandatory redemption features
are required by the SEC to
maintain a sinking fund (SEC
Rules Governing Redeemable
and Treasury Shares, [CCP] No.
1-1982).
Treasury shares need not be sold at par or

issued value but may be sold at the best price
obtainable, provided it is reasonable. When
treasury shares are sold below its par or
issued value, there can be no watering of
stock because such watering contemplates
an original issuance of shares.
Treasury shares have no voting rights as long
as they remain in treasury (uncalled and
subject to reissue) (Sec. 57).
Reason: A corporation cannot in any proper
sense be a stockholder in itself and equal
distribution of voting rights will be effectively
lost.
Neither are treasury shares entitled to
dividends or assets because dividends cannot
be declared by a corporation to itself.
Treasury shares may be declared as property
dividend to be issued out of the retained
earnings previously used to support their
acquisition provided that the amount of the
retained earnings has not been subsequently
impaired by losses.
14. Treasury shares (Sec. 9)

Shares of stock which have been issued and
fully paid for, but subsequently reacquired by
the issuing corporation by purchase,
redemption, donation or through some other
lawful mean.
Doctrine of Equality of Shares

Where the articles of incorporation do not provide
for any distinction of the shares of stock, all
shares issued by the corporation are presumed to
be equal and enjoy the same rights and privileges
and are also subject to the same liabilities (Sec.
6, par. 5).
Treasury shares are not retired shares. They

do not revert to the unissued shares of the
corporation but are regarded as property
acquired by the corporation which may be
reissued or resold at a price to be fixed by the
Board of Directors (SEC Rules Governing
Redeemable and Treasury Shares, CCP No.
1-1982).
Certificate of Stock
A written acknowledgment by the corporation of
the interest, right, and participation of a person in
the management, profits, and assets of a
corporation.
Note: Confers NO immediate legal right or title to
any of the property of a corporation. Merely
represents a distinct undivided share or interest in
the common property of the corporation.
If purchased from stockholders: The

transaction in effect is a return to the
stockholders of the value of their investment
in the company and a reversion of the shares
to the corporation. The corporation must have
surplus profits with which to buy the shares so
that the transaction will not cause an
impairment of the capital.
DEFINITION OF TERMS
1. Capital Stock or Legal Stock or Stated
Capital The amount fixed in the corporate
charter to be subscribed and paid in cash,
kind or property at the organization of the
corporation or afterwards and upon which the
corporation is to conduct its operation.
2. Capital The value of the actual property or
estate of the corporation whether in money or
If acquired by donation from the

stockholders: The act would amount to a
surrender of their stock without getting back
their investments that are instead, voluntarily
given to the corporation.
86

3. Authorized Capital Stock amount of
capital stock as specified in the articles of
incorporation.
4. Subscribed Capital Stock The total
amount of the capital stock subscribed
whether fully paid or not.
5. Outstanding Capital Stock - The portion of
the capital stock issued to subscribers,
whether fully paid or partially paid (as long as
there is a binding subscription contract)
except treasury shares (Sec. 137).
6. Unissued Capital Stock The portion of the
capital stock that is not issued or subscribed.
It has no rights.
7. Legal Capital The amount equal to the
aggregate par value and/ or issued value of
the outstanding capital stock.
8. Stated Capital The capital stock divided
into no par value shares.
9. Paid-up Capital The amount paid by the
stockholders on subscriptions from unissued
shares of the corporation.
2. Formal Organization And Commencement

of The Transaction of Business
These are conditions subsequent, which may
be satisfied by substantial compliance in
order that a corporation may legally continue
as such.
Formal organization:
1. Adoption of By-Laws and filing of the
same with the SEC;
2. Election of board of directors/trustees,
and officers;
3. Establishment of principal office;
4. Providing for subscription and payment of
capital stock.
Section 11. Corporate Term
Limitations:
1. The corporate term shall not exceed 50 years
2. unless sooner dissolved or unless said period
is extended.
3. The extension cannot be made earlier than 5
years prior to the expiration date.
INCORPORATION AND ORGANIZATION OF

PRIVATE CORPORATION UNDER THE
CORPORATION CODE
Exception: there are justifiable reasons for an

earlier extension, i.e. there is influx of foreign
investors who wanted to determine the stability of
the corporation.
Section 10. Number and Qualifications of

Incorporators. (5 MOAN)
The corporate term may be extended for periods

not exceeding fifty (50) years in any single
instance by an amendment of the articles of
incorporation.
1. Not less than 5 but not more than 15;

2. Majority must be residents of the Philippines;
3. Each must own or subscribe to at least one
share of the capital stock of the corporation;
4. Of legal age; and
5. Natural person
Note: Mere extension of term made before the

expiration of original term constitutes a
continuation of the old and not the creation of a
new corporation.
Steps In The Creation of A Corporation

PROMOTION A promoter is a person who,
acting alone or with others, takes initiative in
founding and organizing the business or
enterprise of the issuer and receives
consideration therefore (Sec. 3 (3.10), SRC).
Section 12. Minimum Capital Stock required of

Stock Corporations.
Capital Stock Requirement
General Rule:
No minimum authorized capital stock as long as
the paid-up capital is not less than P5,000.00.
1. INCORPORATION
Steps (DFPI):
1. Drafting and execution of Articles of
Incorporation by the incorporators and
other documents required for registration
of the corporation;
2. Filing with the SEC of the articles of
incorporation;
3. Payment of filing and publication fees;
and
4. Issuance by the SEC of the certificate of
incorporation.
Exceptions:
1. As provided for by special law; and
2. Private Development Banks
3. Investment Companies
4. Savings and Loan Corporation
5. Financing Companies
6. Insurance companies
Provided that at least 25% of the authorized
capital stock has been
87

Corporation Laws
subscribed at the time of incorporation, and at
least 25% of the total subscription has been
paid upon subscription. In no case shall the
paid-up capital be less than five thousand
(P5,000) pesos.
infrastructure/development
projects
covered in RA 7718; and
projects which are foreign funded or
assisted and required to undergo
international competitive bidding (Sec.
2a, RA 7718);
Contracts for the construction of defenserelated structures (Sec. 1, CA 541).
Section 13. Amount of Capital Stock to be

subscribed and paid for purposes of
incorporation.
Up to Thirty Percent (30%) Foreign Equity

1. Advertising (Art. XVI, Sec. 11, 1987
Constitution)
FILIPINO
OWNERSHIP
PERCENTAGE
REQUIREMENT (7th Regular Foreign Investment
Negative List/ E.O. No. 584, December 8, 2006)
Up to Forty Percent (40%) Foreign Equity

(C2AP-MO5DE)
1. Culture, production, milling, processing,
trading excepting retailing, of rice and corn
and acquiring, by barter, purchase or
otherwise, rice and corn and the by-products
thereof (Sec. 5, PD 194;Sec. 15, RA 8762)
2. Contracts for the supply of materials, goods
and commodities to government-owned or
controlled corporation, company, agency or
municipal corporation (Sec. 1, RA 5183)
3. Adjustment Companies (Sec. 323, PD 612 as
amended by PD 1814)
4. Project Proponent and Facility Operator of a
BOT project requiring a public utilities
franchise (Art. XII, Sec. 11, 1987 Constitution;
Sec. 2a, RA 7718)
5. Manufacture,
repair,
storage
and/or
distribution of products/ingredients requiring
PNP clearance (RA 7042 as amended by RA
8179)
6. Ownership of private lands (Art. XII, Sec. 7,
1987 Constitution; Ch. 5, Sec. 22 of CA 141;
Sec. 4, RA 9182)
7. Operation and management of public utilities
(Art. XII, Sec. 11, 1987 Constitution; Sec. 16,
CA 146)
8. Ownership/establishment and administration
of educational institutions (Art. XIV, Sec. 4,
1987 Constitution)
9. Operation of deep sea commercial fishing
vessels (Sec. 27, RA 8550);
10. Ownership of condominium units where the
common areas in the condominium project
are co-owned by the owners of the separate
units or owned by a corporation (Sec. 5, RA
4726);
11. Manufacture,
repair,
storage
and/or
distribution of products/ingredients requiring
DND clearance (RA 7042 as amended by RA
8179)
No Foreign Equity (100% Filipino-owned)

(CROP-FUN-SMB)
1. Cooperatives (Ch. III, Art. 26, RA 6938)
2. Cockpits (Sec.5, P.D.No. 449)
3. Retail trade enterprises with paid-up capital of
less than US$2,500,000(Sec. 5, RA 8762)
4. Ownership, operation and management of
cockpits (Sec. 5, PD 449)
5. Practice of all professions
6. Private Security Agencies (Sec. 4, RA 5487);
7. Manufacture of firecrackers and other
pyrotechnic devices (Sec. 5, RA 7183
8. Utilization
of
Marine
Resources
in
archipelagic waters, territorial sea, and
exclusive economic zone as well as smallscale utilization of natural resources in rivers,
lakes, bays, and lagoons (Art. XII, Sec. 2,
1987 Constitution);
9. Manufacture, repair, stockpiling and/or
distribution of nuclear weapons (Art. II, Sec.
8, 1987 Constitution)
10. Small-scale Mining (Sec. 3, RA 7076);
11. Mass Media except recording (Art. XVI, Sec.
11 of the 1987 Constitution; Presidential
Memorandum dated 04 May 1994)
12. Manufacture, repair, stockpiling and/or
distribution of biological, chemical and
radiological weapons and anti-personnel
mines (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines)
Up to Twenty Percent (20%) Foreign Equity
1. Private radio communications network (RA
3846)
Up to Twenty-Five Percent (25%) Foreign
Equity
Private recruitment, whether for local or
overseas employment (Art. 27, PD 442);
Contracts for the construction and repair of
locally-funded public works (Sec. 1 of CA
541, LOI 630) except:
88

12. Exploration, development and utilization of
natural resources (Art. XII, Sec. 2, 1987
Constitution)
only one, but the Secondary Purposes may be

several.
Reason for classification: To determine
which investment of corporate funds require
the authority of both the Board and
Stockholders under Section 42.
Up to Sixty Percent (60%) Foreign Equity

1. Financing companies regulated by the
Securities and Exchange Commission (Sec.
6, RA 5980 as amended by RA 8556);
2. Investment houses regulated by the SEC
(Sec. 5, PD 129 as amended by RA 8366).
Significance:
a. A person who intends to invest his money
in the business will know where and in
what kind of business or activity his
money will be invested;
b. The directors and the officers of the
corporation will know within what scope of
business they are authorized to act; and
c. A third person who has dealings with the
corporation may know by perusal of the
articles whether the transaction or dealing
he has with the corporation is within the
authority of the corporation or not.
Section 14 / Section 15. Contents/ Forms of

ARTICLES OF INCORPORATION (AOI)
The document prepared by the persons
establishing a corporation and filed with the SEC
containing the matters required by the Code.
The Articles of Incorporation have been described
as one that defines the charter of the corporation,
and the contractual relationships between the
State and the corporation, the stockholder and the
State, and between the corporation and its
stockholders (Lanuza v. CA, GR No.131394,
March 28, 2005).
A corporation the primary object of which is

without statutory authority can have no lawful
existence, even though some of its declared
purposes may be lawful.
Significance:
1. The issuance of a certificate of incorporation
signals the birth of the corporations juridical
personality; and
2. It is an essential requirement for the existence
of a corporation, even a de facto one.
3. Principal Office
The articles of incorporation must state the
place where the principal office of the
corporation is to be established or located,
which place must be within the Philippines
(Sec. 14 [3]).
Contents (Sec. 14):
Purpose:
1. To fix the residence of the corporation in a
definite place, instead of allowing it to be
ambulatory (Young Auto Supply Co. v.
CA, GR No. 104175, June 25, 1993).
2. To determine the venue of court cases
involving the corporation;
3. For purposes of stockholders or
members meeting.
1. Corporate Name (Sec. 18)

The corporation acquires juridical personality
under the name stated in the certificate of
incorporation. It is the name of the corporation
which identifies and distinguishes it from other
corporations, firms or entities.
The incorporators constitute a body politic
and corporate under the name stated in the
certificate. A corporation has the power of
succession under its corporate name. The
corporate name is essential to its existence.
The right to use its name is part of the
franchise granted to the corporation.
2. Purpose Clause
Must be grouped as either Primary
Secondary. The Primary purpose must be
4. Term of Existence (Sec. 11)

The corporate life may be reduced or
extended by amendment of the articles of
incorporation by complying with the
procedural requirements laid down in Sec. 37.
The extension of corporate term is subject
to the following limitations:
The amendment is effected before the
expiration of the corporate term of
existence, for after dissolution by
expiration of the corporation term
or
89

Corporation Laws
there is no more corporate life to extend
(Alhambra Cigar v. SEC, GR No. 23606,
July 29, 1968).
b. in close corporations where all the

stockholders are considered as members
of the board of directors thereby
effectively allowing twenty members in
the board (Corporation Code of the
Philippines, Ruben C. Ladia, 2001ed).
Note: The expiration of the term for which the

corporation was created does not, however,
produce its immediate dissolution for all
purposes (Sec. 122).
The Board of Directors is the governing body

in a stock corporation while Board of Trustees
is the governing body in a non-stock
corporation. They exercise the powers of the
corporation
(Sec.
23;
Reviewer
in
Commercial Law, Jose R. Sundiang &
Timoteo Aquino, 2005ed).
Doctrine of Relation or Relating Back Doctrine

The filing and recording of a certificate of
extension after the term cannot relate back to the
date of the passage of the resolution of the
stockholders to extend the life of the corporation.
HOWEVER, the Doctrine of Relations applies if
the failure to file the application for extension
within the term of the corporation is due to the
neglect of the officer with whom the certificate is
required to be filed or to a wrongful refusal on his
part to receive it (Philippine Corporate Law
Compendium, Aquino, 2006ed)
The non-stock or special corporations may,

through their articles of incorporation or their
by-laws, designate their governing boards by
any name other than as board of trustees
(Section 138, CC).
Matters required to be stated in the AOI:
a. Statement of the names, nationalities and
residences of the incorporating directors
and must show that at least a majority of
the incorporators are residents of the
Philippines;
b. The number of directors or trustees,
which shall not be less than 5 but not
more than 15.
Where the delay in effecting the amendment is

due to the neglect of the officer with whom the
application is required to be filed or to the
wrongful refusal on his part to receive it, the same
will be treated as having been filed before the
expiry date. The doctrine does not apply where
the delay is attributable to the corporation.
5. Incorporatos (See Section 5).
The names, nationalities and residences of
the incorporators must be stated. It must
show that at least majority of the
incorporators are residents of the Philippines;
Exceptions:
educational corporations registered as
non-stock corporation whose number of
trustees though not less than five and not
more than fifteen should be divisible by
five; and
in close corporations where all the
stockholders are considered as members
of the board of directors thereby
effectively allowing twenty members in
the board (Corporation Code of the
All incorporators must sign and subscribe or

acknowledge the Articles of Incorporation
otherwise it is defective. (Philippine Corporate
Law Compendium, Aquino, 2006ed)
6. Directors and Trustees
The statement of the number of directors or
trustees, which shall not be less than 5 but
not more than 15 in a stock corporation.
Nonetheless, the trustees in a non-stock
corporation may be more than fifteen (15) in
number as may be fixed in their articles of
incorporation or by-laws (Sec. 92, CC).
c.
The incorporating directors or trustees

shall hold office until their successors are
duly elected and qualified.
d. Must own at least one (1) share of the
capital stock of the corporation of which
he is a director.
Exceptions:
a. educational corporations registered as
non-stock corporation whose number of
trustees though not less than five and not
more than fifteen should be divisible by
five; and
90

7. Capitalization
Matters required to be stated in the AOI of
a stock corporation: (NAPS-ASSS)
a. the number of shares and kind of shares
into which it is divided;
b. the amount of its authorized capital stock
in lawful money of the Philippines;
c. in case the shares are par value shares,
the par value of each;
d. the names, nationalities and residences
of the original subscribers;
e. the amount subscribed and paid by each
original subscribers on his subscription;
f. if some or all of the shares are without
par value, such fact must be stated;
g. sworn statement of the Treasurer elected
by the subscribers showing that at least
25% of the authorized capital stock of the
corporation has been subscribed;
h. sworn statement of the treasurer elected
by the subscribers showing that at least
25% of the total subscription has been
fully paid to him in actual cash and/or in
property the fair valuation of which is
equal to at least 25% of the said
subscription; and
i. sworn statement of the treasurer elected
by the subscribers showing that such
paid-up capital being not less than five
thousand (P5,000) pesos.
by underscoring the change or changes

made;
5. a copy thereof, duly certified under oath by
the corporate secretary and a majority of the
directors or trustees stating the fact that such
amendments have been duly approved by the
required vote of the stockholders or members;
and
6. a
favorable
recommendation
of
the
appropriate government agency concerned if
required by law.
Limitations:
1. The amendment of any provision or matters
stated in the articles of incorporation is not
allowed when it will be contrary to the
provisions or requirement prescribed by the
Code or by special law or changes any
provision in the articles of incorporation
stating an accomplished fact;
2. The amendment changes any provision in the
articles
of
incorporation
stating
an
accomplished fact;
3. It must be for legitimate purposes;
4. It must be approved by the majority vote of
the board of directors or trustees and the
stockholders or members;
5. The original articles and amended articles
together must contain all provisions required
by law to be set out in the articles of
incorporation;
Section 16. Amendment of AOI

6. Such articles, as amended, shall be indicated
by underscoring the changes made, and a
copy thereof duly certified under oath by the
corporate secretary and a majority of the
directors or trustees stating the fact that the
amendments have been duly approved by the
required vote of the stockholders or members
shall be submitted to the SEC;
7. The amendments shall take effect only upon
their approval by the SEC;
Corporate Charter
An instrument or authority from the sovereign
power bestowing the right or privilege to be and
act as a corporation.
Three-Fold Nature:
1.
a contract between the State and the
corporation
2. a contract between the corporation and its
stockholders
3. a contract between the stockholder inter se.
Note: However, express approval is not

indispensable.
This
is
because
the
amendment shall also take effect from the
date of filing with the said Commission if it is
not acted upon within six (6) months from the
date of filing for a cause not attributable to the
corporation (Approval by Inaction).
Procedure in Amending AOI:

1. Resolution by at least a majority of the board
of directors or trustees;
2. Vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of
non-stock corporations.
3. Submission and filing with the SEC of:
4. the original and amended articles together
containing all the provisions required by law
to be set out in the articles of incorporation.
Such articles, as amended, shall be indicated
8. If the corporation is governed by special law,

the amendments must be accompanied by a
favorable recommendation of the appropriate
government agency;
9. No right or remedy in favor of or against any
corporation, its stockholders, members,
91

Corporation Laws
directors, trustees, or officers, nor any liability
incurred
by
any
such
corporation,
stockholders, members, directors, trustees, or
officers, shall be removed or impaired either
by the subsequent dissolution of said
corporation or by any subsequent amendment
or repeal of this Code or of any part thereof
(Section 145 of the Corporation Code).
Grounds for Suspension or Revocation of

Franchise or Certificate of Registration: (FR 2SBC) (Pres. Decree No. 902-A)
1. Fraud in procuring its certificate of registration
2. Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of, or damage to, the general public;
3. Refusal to comply or defiance of any lawful
order of the SEC restraining the commission
of acts which would amount to a grave
violation of its franchise;
4. Continuous inoperation for a period of at least
5 years after commencing the transaction of
its business (Sec.22);
5. Failure to file the by-laws within the required
period;
6. Failure to file required reports in appropriate
forms as determined by the SEC within the
prescribed period; and
7. Any grounds as provided by law.
Section 17.
Grounds when articles of
incorporation or amendment may be rejected
or disapproved.
The SEC may reject the AOI or disapproved any
amendment thereto if the same is not in
compliance with the requirements of the
Corporation Code. The following are the grounds
for such rejection or disapproval: (NOT-U)
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed therein;
2. That the required percentage of ownership of
the capital stock to be owned by citizens of
the Philippines has not been complied with as
required by existing laws or the Constitution;
3. That the Treasurers Affidavit concerning the
amount of capital stock subscribed and/or
paid is false;
4. That the purpose or purposes of the
corporation are patently unconstitutional,
illegal, immoral, or contrary to government
rules and regulations.
Note: The suspension or revocation can only be

done after proper notice and hearing.
Section 18. Corporate Name
A corporations right to use its corporate and trade
name is a property right, a right in rem which it
may assert or protect against the whole world in
the same manner as it may protect its tangible
property against trespass or conversion (Philips
Export B.V. v. CA, GR NO. 96161, February 21,
1992).
Note: These grounds are not exclusive.

Statutory Limitation:
The proposed name must not be:
1. identical; or
2. deceptively or confusingly similar to that of
any existing corporation or to any other name
already
3. protected by law; or
4. patently deceptive, confusing or contrary to
law.
Before rejecting the Articles of Incorporation or its

amendments, the SEC should give the
incorporators reasonable time within which to
correct or modify the objectionable portions of the
articles or amendments.
Any decision of the Commission rejecting the
articles of incorporation or disapproving any
amendment thereto is appealable by petition for
review to the Court of Appeals in accordance with
the pertinent provisions of the Rules of Court.
Other Limitations:
a. Must end with the word Incorporated or Inc
unless it includes the word Corporation;
b. Those prohibited under special laws;
c. Use of generic, geographical, and descriptive
terms and names
d. Use of trade name of another corporation;
All the grounds enumerated in Section 17 can be

determined on the basis of the Articles of
Incorporation itself and the other required
documents. Generally, if the Articles of
Incorporation and its supporting documents are in
order, the SEC has no recourse but to issue the
Certificate of Incorporation (Philippine Corporate
Law Compendium, Timoteo Aquino, 2006ed).
DOCTRINE OF SECONDARY MEANING

Generally, a corporation whose corporate name is
a word or phrase which is generally descriptive or
geographical cannot prevent another corporation,
92

which uses the same word or phrase as its
corporate name, from using such. However, under
the Doctrine of Secondary Meaning, the
corporation can avert another corporation from
using a similar corporate name which is generally
descriptive or geographical. Under this doctrine, a
word or phrase originally incapable of exclusive
appropriation with reference to an article on the
market because geographically or otherwise
descriptive, might nevertheless have been used
so long and so exclusively by one producer with
reference to his article that, in that trade and to
that branch of the purchasing public, the word or
phrase has come to mean that the article was his
product.
the articles of incorporation, the chief archbishop

shall become a corporation sole.
The issuance of the certificate calls the
corporation into being but it is not really ready to
do business until it is organized. The corporation
must formally organize and commence the
transaction of its business or the construction of
its works within two years from the date of its
incorporation, otherwise, its corporate powers
shall cease and it shall be deemed dissolved
(Sec. 22).
Section 20. De Facto Corporations
DE FACTO CORPORATION
A corporation which actually exists for all practical
purposes as a corporation but which has no legal
right to corporate existence as against the State.
It is one which has not complied with all the
requirements necessary to be a de jure
corporation but has complied sufficiently to be
accorded corporate status as against third parties
although not against the State.
Remedies of corporation whose name has

been adopted by another:
a. Injunction
b. De-registration
A corporation can change the name originally
selected by it after complying with the formalities
prescribed by law, to wit: amendment of the
articles of incorporation and filing of the
amendment with the SEC.
Requisites (GAVE)
The existence of a valid law under which it
may be incorporated;
A bona fide attempt in good faith to
incorporate under such law. Thus, issuance of
a certificate of incorporation by the SEC is a
minimum requirement.
Actual use or exercise in good faith of
corporate powers; and
It must act in good faith.
An authorized change does not affect the

property, rights, or liabilities of the corporation, nor
lessen or add to its obligations. It is in no sense a
new corporation, nor the successor of the original
corporation.
Section 19. Commencement of Corporate
Existence
A corporation commences to have corporate
existence and juridical personality and is deemed
incorporated only from the moment the SEC
issues to the incorporators a certificate of
incorporation under its official seal (Sec.19).
Example of Defects which will preclude the

creation of a De Facto Corporation:
1. Absence of Articles of Incorporation;
2. Failure to file articles of incorporation with the
SEC; or
3. Lack of certificate of incorporation from the
SEC.
It is the certificate of incorporation that gives

juridical personality to a corporation and
places it under the jurisdiction of the
Commission.
Instances when Creation of De Facto

Corporation Results:
1. AOI fails to state all the matters required by
the Code;
2. The name of the corporation closely
resembles that of a pre-existing corporation
that it will tend to deceive the public;
3. The incorporators or a certain number of them
are not residents of the Philippines;
4. The acknowledgement of the AOI or
certificate of incorporation is insufficient or
Note: Certain contracts may bind the

corporation even if entered into before
incorporation such as pre-incorporation
subscription agreement.
In the case of religious corporations, the Code
does not require the SEC to issue a certificate of
incorporation. In fact, Sec. 112 clearly states that
from and after the filing with the Commission of
93

Corporation Laws
defective in form or acknowledged before the
wrong officer;
5. The percentage of Filipino ownership of the
capital stock required for the business is less
than what is prescribed by law.;
6. The minimum paid-up capital stock has not
been paid to and received by the corporate
treasurer contrary to his affidavit; and
7. The failure to submit its by-laws on time.
Not Subject
Direct
Both collateral
and direct
As to creation
Has
not Absence
of
complied with all conditions
requirements
precedent
but
has needed for a de
complied
facto corporation
sufficiently
As to liabilities of officers and directors
Liable only to Same as de jure All who have
the extent of
knowledge of its
their
lack of authority
subscription
to act as such
unless acted in
are liable as
bad faith
general partners
As to capacity to sue or be sued
Can sue and be Can sue and be General
Rule:
sued
sued
Cannot sue or
be sued;
Exception: by a
third party who
relied on its
representations
in good faith
Complied with
all
mandatory
requirements for
incorporation
Note: In the case of a de facto corporation, the

only way in which its corporate existence can be
questioned is in a direct proceeding by the State,
brought for that purpose. A direct attack can only
be instituted through the Solicitor General by quo
warranto proceedings.
Generally, private individuals cannot raise the
objection in such a case, either directly or
indirectly, and nobody can raise the objection
collaterally. Rationale: On the ground of public
policy.
Exception: when the lack of right or wrongdoing
of a corporation is in issue, e.g, whether a foreign
corporation may maintain suit on the ground it is
not duly licensed to do business in the
Philippines.
Section 21. Corporation by Estoppel

All persons not stockholders or members who
assume to act as a corporation knowing it to be
without authority to do so shall be liable as
general partners for all debts, liabilities, and
damages incurred or arising as a result thereof
(Sec. 21, CC).
The officers and directors of a de facto

corporation are subject to all the liabilities and
penalties attending to officers and directors duly
chosen by a corporation de jure, including the
liability under the criminal law, and their acts are
binding when such acts would be within the power
of such officers if the corporation were one de
jure (The Corporation Code of the Philippines, De
Leon & De Leon, Jr., 2006ed).
An unincorporated association which represented

itself to be a corporation will be estopped from
denying its corporate capacity in a suit against it
by a third person who relied in good faith on such
representation. When any such ostensible
corporation is sued on any transaction entered by
it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a
defense its lack of corporate personality.
A de facto corporation is practically as good as a

de jure corporation. It is deemed to have a
substantial legal existence and ordinarily, in its
relation with all persons except the State, has the
same powers and is subject to the same liabilities,
duties and responsibilities, as a corporation de
jure, and is bound by all such acts as it might
rightfully perform if it were a corporation de jure.
C. A corporation by estoppel has no real

existence in law. It is neither a de jure nor a
de facto corporation, but is a mere fiction
existing for the particular case, and vanishing
where the element of estoppel is absent. It
exists only between the persons who
misrepresented their status and the parties
who relied on the misrepresentation. Its
existence may be attacked by any third party
except where the attacking party is estopped
to treat the entity other than as a corporation.
D. When there is no third person involved and
the conflict arises only among those
assuming the form of a corporation, who
therefore know that it has not been registered,
Differences between de jure, de facto and

corporation by estoppel
De Jure
De Facto
By Estoppel
As to who can question its corporate existence
No one not even Only the State in State or any
the State
a
direct third person who
proceeding
relied in good
faith
on
its
representations
As being subject to a direct and collateral attack
94

there is no corporation by estoppel. (Lozano
v. De Los Santos, 274 SCRA 452, [1997]).
E. A third party who, knowing an association to
be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may
be barred from denying its corporate
existence in a suit brought against the alleged
corporation (Lim Tong Lim v. Phil. Fishing
Gear Industries, Inc., GR No. 136448,
November 3, 1999).
F. Under Section 15 Rule 3 of the ROC, when
two or more persons not organized as an
entity with juridical personality, enter into a
transaction, they maybe sued under the name
they are generally or commonly known. In the
answer of defendant, the names and
addresses of persons composing said entity
must all be revealed. But it cannot sue under
the name they are generally or commonly
known.
(Philippine
Corporate
Law
Compendium, Timoteo Aquino, 2006ed)
Section 23. Board of Directors and Trustees

Qualifications:
1. For a stock corporation, ownership of at least
one (1) share of the capital stock of the
corporation in his own name, and if he ceases
to own at least one share in his own name, he
automatically ceases to be a director. For a
non-stock corporation, only members of the
corporation can be elected to the Board of
Trustees.
2. In order to be eligible as a director, what is
material is the legal title, not beneficial
ownership, of the stocks appearing on the
books of the corporation.
3. A person who does not own a stock at the
time of his election or appointment does not
disqualify him as a director if he becomes a
shareholder before assuming the duties of his
office.
4. A person who is not a stockholder cannot be
a director, but he can be an ex officio member
without voting rights in the board (Grace
Christian High School v. CA, GR No. 111155,
October 23, 1997).
5. A majority of the directors/trustees must be
residents of the Philippines (Sec. 23).
6. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding six (6)
years, or a violation of the Corporation Code
committed within five (5) years prior to the
date of his election or appointment (Sec. 27).
7. Only natural persons can be elected
directors/trustees.
8. in case of corporate stockholders or
members, their representation in the board
can be achieved by making their individual
representatives trustees of the shares or
membership
to
make
them
stockholders/members of record.
9. Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of
the corporation.
10. Must be of legal age.
Section 22. Effects of Non-use of Corporate

Charter and Continuous Inoperation of a
Corporation
1. If a corporation does not formally organize
and commence the transaction of its business
or the construction of its works within two (2)
years from the date of its incorporation, its
corporate powers cease and the corporation
shall be deemed dissolved.
2. If a corporation has commenced the
transaction of its business but subsequently
becomes continuously inoperative for a period
for at least five (5) years, the same shall be a
ground for the suspension or revocation of its
corporate
franchise
or
certificate
of
incorporation (Sec. 22. CC).
Note: If the non-use of corporate charter or
continuous inoperation of a corporation is due to
causes beyond its control as found by the
Commission, the effects mentioned shall not take
place.
Dissolution is not automatic. Proper proceedings
for revocation of the Articles of Incorporation must
be initiated. (Section 6, PD 902-A)
Term of Office
The directors or trustees shall be elected for a
term of one year but may continue to serve until
their successors are elected and qualified. If no
election is conducted or no qualified candidate is
elected, they shall continue to act as such in a
hold-over capacity until an election is held and a
qualified candidate is so elected (HOLDOVER
PRINCIPLE)
(Corporation
Code
of
the
BOARD OF DIRECTORS/ TRUSTEES/

OFFICERS
95

Corporation Laws
their
authorized
representative as such by its articles of incorporation
written proxy, must be or by-laws, must be
present at the election of present in the election.
the directors.
Manner Of Voting
Cumulative
voting
is
Cumulative
voting
is generally not available
mandatory; a matter of unless allowed by the
right granted by law to articles of incorporation or
each stockholder with by-laws,
since
each
voting rights.
member is entitled only to
one vote.
Board of Directors/ Trustees As Repository of

Corporate Powers
General Rule:
The corporate powers of the corporation shall be
exercised, all business conducted and all property
of such corporation controlled and held by the
board of directors or trustee. Section 23 of the
Corporation Code expressly provides that all
corporate powers shall be exercised by the board.
Just as a natural person may authorize another to
do certain acts in its behalf, so may the board
validly delegate some of its functions to individual
officer or agents. Absent such valid delegation,
the rule is that the declarations of an individual
director relating to the affairs of the corporation,
but not in the course of, or connected with the
performance of authorized duties of such director,
is held not binding on the corporation (AF Realty
& Devt v. Dieselman Freight Services, GR
No.111448, January 16, 2002).
As amended by RA 8799, the jurisdiction of the

SEC under Section 5, of PD No. 902-A is now
transferred to Courts of General Jurisdiction
(RTC). Thus, RTC now has jurisdiction over
election contest or those relating to any
controversy or dispute involving title or claim to
any elective office in a stock or non-stock
corporation, the validation of proxies, the manner
and validity of elections and the qualifications of
candidates, including the proclamation of winners,
to the office of director, trustee or other officer
directly elected by the stockholders in a close
corporation or by members of a non-stock
corporation where the articles of incorporation or
by-laws so provide (Section 2, Rule 6 of the
Interim Rules of Procedure for Intra-Corporate
Controversies).
Exceptions:
1. In case of an Executive Committee duly
authorized in the by-laws;
2. In case of a contracted manager which may
be an individual, a partnership, or another
corporation.
3. In case the contracted manager is another
corporation, the special rule in Sec. 44
applies.
4. In case of close corporations, the
stockholders may directly manage the
business of the corporation instead, if the
articles of incorporation so provide.
Methods of Voting
1. Straight Voting every stockholder may vote
such number of shares for as many persons
as there are directors to be elected.
2. Cumulative Voting for One Candidate a
stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal.
3. Cumulative Voting by Distribution by this
method, a stockholder may cumulate his
shares by multiplying also the number of his
shares by the number of directors to be
elected and distribute the same among as
many candidates as he shall see fit.
Note: The power to purchase real property is

vested in the board of directors or trustees. While
a corporation may appoint agents to negotiate for
the purchase of real property needed by the
corporation, the final say will have to be with the
board, whose approval will finalize the
transaction. A corporation can only exercise its
powers and transact its business through its
board of directors and through its officers and
agents when authorized by a board resolution or
by its by-laws (Spouses Constantine Firme v.
Bukal Enterprises and Development Corporation,
GR No. 146608, October 23, 2003).
Cumulative voting being a statutory right, a

corporation is without power to deprive the
stockholders of its use or even restrict the
right to vote to only one way or method. A
stockholder may or may not exercise the right
as he shall see fit (SEC Opinion, Oct. 20,
1964).
Section 24. Election of Directors or Trustees

STOCK CORPORATION
NON-STOCK
CORPORATION
Presence During Election
Owners of a majority of A majority of the members
the outstanding capital entitled to vote, in person
stock, in person or by or by proxy, if allowed in
In electing directors by cumulative voting, the total

number of votes cast by a stockholder shall not
96

exceed the number of shares owned by him as
shown in the books of the corporation multiplied
by the whole number of directors to be elected.
Where the articles of incorporation provides

for classification of shares pursuant to Sec. 6,
non-voting shares are not entitled to vote
except on the following matters as provided
for in the last paragraph of Sec. 6 known as
the eight (8) fundamental corporate acts.
a. Amendment
of
the
articles
of
incorporation;
b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge
or other disposition of all or substantially
all of the corporate property;
d. Incurring, creating or increasing bonded
indebtedness;
e. Increase or decrease of capital stock;
f. Merger or consolidation of the corporation
with another corporation/s;
g. Investment of corporate funds in another
corporation or business in accordance
with this Code; and
h. Dissolution of the corporation.
No share may be deprived of voting rights

except those classified as preferred or
redeemable shares unless otherwise provided
by the Corporation Code.
Fractional shares of stock cannot be voted.
Treasury shares have no voting rights as long
as they remain in the treasury.
Holders of stock declared delinquent by the
board of directors for unpaid subscription are
not entitled to vote or to representation at any
stockholders meeting.
A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
Note: Members of non-stock corporations may

cast as many votes as there are trustees to be
elected but may cast not more than one vote for
one candidate. This is the manner of voting in
non-stock corporations unless otherwise provided
in the articles of incorporation.
Classic Formula
S1
=
S x D1
D+ 1
+1
Where:
S1= Number of shares owned by some
shareholders of group of shareholder
D1= Number of Directors
S = Total number of directors to be elected at the
meeting
D = Total number of directors to be elected at the
meeting
Limitations on the Election of Directors/
Trustees:
1. At any meeting of stockholder or members
called for the election of directors or trustees,
there must be present either in person or by
representative authorized to act by written
proxy, the owners of a majority of the
outstanding capital stock, or if there is no
capital stock, a majority of the members
entitled to vote.
2. The election must be by ballot if requested by
any voting member or stockholder.
3. A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of the methods
of voting in the election of directors.
4. No delinquent stock shall be voted.
5. The candidates receiving the highest number
of votes shall be declared elected. A majority
vote is not necessary. However, it is
necessary that there is a quorum. And in the
absence thereof, election shall be considered
invalid.
6. In case of failure to hold an election for any
reason, meeting may be adjourned from day
to day but not indefinitely.
7. Notice must be given.
Section 25. Corporate Officers; Quorum

Quorum
Such number of the membership of a collective
body as is competent to transact its business or
do any other corporate act.
General Rule:
A majority of the number of directors or trustees
AS
FIXED
IN
THE
ARTICLES
OF
INCORPORATION shall constitute a quorum for
the transaction of corporate business, and
Limitations on the Stockholders Right to

Vote:
97

Corporation Laws
every decision of at least a majority of the
directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate
act, except for the election of officers which shall
require the vote of a majority of all the members
of the board.
Extent of Powers or Authority of Corporate

Officers:
1. The authority which he has by virtue of his
office;
2. The authority which is expressly conferred
upon him or is incidental to the effectualness
of such express authority;
3. As to third persons dealing with him without
notice of any restriction thereof, the authority
which the corporation holds the officer out as
possessing or is estopped to deny.
4. The nature of the corporate business must
also be taken into consideration; and
5. The personal act of an officer though
originally unauthorized may become binding
upon the corporation by a subsequent
ratification (The Corporation Code of the
Philippines, De Leon & De Leon, Jr., 2006ed).
Exception:
The articles of incorporation or the by-laws
provide for a greater majority.
Note: Directors or Trustees cannot validly act by
proxy (last paragraph, Sec.25)
Corporate Officers (as provided in the ByLaws)
1. President must be a director; he shall not
be concurrently the treasurer or secretary;
2. Vice-President in the absence of the
president or if the office of the president
becomes vacant, he has the authority to act in
his stead, or to perform any duty of the office
(SEC Opinion, April 18, 1985);
3. Treasurer may or may not be a director but
as a matter of sound corporate practice, must
be a resident;
4. Secretary need not be a director unless
required by the by-laws; must be a resident
and citizen of the Philippines; and
5. Such other officers as may be provided for in
the by-laws.
CORPORATE OFFICER
DOCTRINE OF APPARENT AUTHORITY

It is a familiar doctrine that if a corporation
knowingly permits one of its officers, or any
other agent, to act within the scope of an
apparent authority, it holds him out to the
public as possessing the power to do those
acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it
through such agent, be estopped from
denying the agents authority (Lapu-Lapu
Foundation Inc., v. Court of Appeals, et al.,
GR No. 126006, January 29, 2004).
This is essentially a doctrine of estoppel.
CORPORATE
EMPLOYEE
Classification of Powers or Authority
Basis
Position is provided for in Employed by the action of
the by-laws or under the the managing officer of the
Corporation Code
corporation
Jurisdiction
RTC has jurisdiction in NLRC has jurisdiction in
case of dispute
case of labor disputes
Inherent
That authority to
act and bind the
corporation
which the officer
has by reason of
his
office
although it may
not
be
sanctioned
by
express
authority
6. Any two (2) or more positions may be held

concurrently by the same person, except that
NO one shall act as president and secretary
or as president and treasurer at the same
time.
Express
Every power or
authority
expressly
conferred upon
him by law and
the by-laws of
the corporation
Apparent or Ostensible
When in the usual course
of the business , an officer
or agent is held by such
corporation or has been
permitted to act for it in
such way as to justify third
persons who deal with
him in assuming that he is
doing an act or making a
contract within the scope
of his authority
Authority of Officers is generally derived from:

1. Law;
2. By-laws; and
3. Authorization from the Board, either expressly
or impliedly by habit, custom or acquiescence
in the general course of business (Inter-Asia
Investment Industries v. CA, GR No. 125778,
June 10, 2003).
98
Implied
Includes all such
incidental
authority as is
necessary,
usual,
and
proper
to
effectuate
the
main
authority
expressly
conferred
Authority By Estoppel
When a corporation, by its
voluntary act, places an
officer or agent in such a
position or situation that
persons
of
ordinary
prudence are justified an
assuming that he has
authority to perform the
act in question

Section 26. Report of Election of Directors,
Trustees and Officers.
the disqualification as the cause of the

vacancy is sufficient (SEC Opinion, February
3, 1992).
6. The special meeting of the stockholders or
members of a corporation for the purpose of
removal must be called by the secretary on
order of the president or on the written
demand of the stockholders representing or
holding at least a majority of the outstanding
capital stock or a majority of the members
entitled to vote.
The secretary or any other officer of the

corporation shall submit to the SEC the names,
nationalities and residences of the directors,
trustees, and officers elected within thirty (30)
days after their election.
Should a director, trustee or officer die, resign or
in any manner cease to hold office, his heirs in
case of his death, the secretary, or any other
officer of the corporation, or the director, trustee
or officer himself, shall immediately report such
fact to the SEC.
The law also provides that should the secretary

fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if
there is no secretary, the call for the meeting may
be addressed directly to the stockholders or
members by any stockholder or member of the
corporation signing the demand.
The objective is to give the public information,

under sanction of oath of the nature of business,
financial condition and operational status of the
company together with information on its key
officers so that those dealing with it or intend to do
business with it may know or have means of
knowing facts concerning the corporations
financial resources and business responsibility.
(Premium Marble Resources, Inc. v. CA 264
SCRA 11)
Note: A director or trustee may resign any time

but by reason of the fiduciary nature, cannot
resign if it will prejudice the corporation. (The
Corporation Code of the Philippines, De Leon &
Section 29. Vacancies in the Office of Director
or Trustee.
Section 28. Removal of Directors or Trustees.

The law does not specify cases for removal of a
director or trustee nor even require that removal
should be for sufficient cause or reason. However,
the incumbent directors or trustees cannot be
removed merely by replacing them with a new set
of directors or trustees.
A vacancy in the office of director or trustee may

be filled as follows:
1. By the stockholders or members:
a. If the vacancy results from the removal by
the stockholders or members or the
expiration of term;
b. If the vacancy occurs OTHER than by
removal or by expiration of term, such as
death, resignation, abandonment, or
disqualification, if the remaining directors
or trustees do NOT constitute a quorum
for the purpose of filling the vacancy;
c. If the vacancy may be filled by the
remaining directors or trustees but the
board refers the matter to stockholders or
members; or
d. If the vacancy is created by reason of an
increase in the number of directors or
trustees.
2. By the members of the Board if still
constituting a quorum, at least a majority of
them are empowered to fill any vacancy
occurring in the board OTHER than by
removal by the stockholders or members or
by expiration of term.
Requisites
1. The removal should take place at a regular or
special meeting duly called for the purpose;
2. The director or trustee can only be removed
by a vote of the stockholders representing at
least 2/3 of the outstanding capital stock or
2/3 of the members entitled to vote in case of
non-stock corporations;
3. There must be a previous notice to
stockholders or members of the corporation of
the intention to propose such removal at the
meeting.
4. The 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 Sec. 24 of the Code.
5. There is no need to follow the procedure
under Section 28 if the director is disqualified.
By operation of law, such director is
disqualified to act as director thereby creating
vacancies in the Board. Mere declaration of
99

Corporation Laws
A director or trustee so elected to fill a vacancy
shall be elected only for the unexpired term of his
predecessor in office.
corporation, its stockholders or members and

other persons (Sec. 31).
3. Duty of Loyalty
The director or officer owes loyalty and
allegiance to the corporationa loyalty that is
undivided and an allegiance that is influenced
by no consideration other than the welfare of
the corporation.
Section 30. Compensation of Board Members.

General Rule:
Directors, in their capacity as such, are not
entitled to receive any compensation except for
reasonable per diems.
Basis: Directors or trustees who acquire any

pecuniary or personal interest in conflict with
their duty as such directors or trustees shall
be liable jointly and severally for all damages
resulting therefrom (Sec. 31).
Exceptions:
1. When their compensation is fixed in the bylaws;
2. When granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular or
special stockholders meeting;
When a director or trustee attempts to acquire

or acquires in violation of his duty, any
interest adverse to the corporation in respect
of any matter which has been reposed in him
in confidence as to which equity imposes a
liability upon him to deal in his own behalf, he
shall be liable as trustee for the corporation
and must account for all the profits which
otherwise would have accrued to the
corporation (Sec. 31, par. 2)
The only limitation in the granting of

compensation is that the amount to be given shall
NOT exceed 10% of the net income before
income tax of the corporation during the
preceding year.
Note: Per diems received without proper
authorization or unreasonably excessive may
ordinarily be recoverable in a stockholders or a
members suit.
Nature of Powers of Board of Directors or

Trustees (The Corporation Code of the
Philippines Annotated, Hector de Leon, 2002ed)
1. Under the Theory of Original Power, the
powers of the board of directors or trustees
are ORIGINAL and UNDELEGATED. The
stockholders or members do not confer, nor
can they revoke those powers.
2. They are DERIVATIVE only in the sense of
being received from the State in the act of
incorporation.
Section 31. Liability of Directors, trustees and

Officers.
Three-Fold Duties Of Directors (Philippine
Corporate Law, Cesar Villanueva, 2001ed)
1. Duty of Obedience
To direct the affairs of the corporation only in
accordance with the purposes for which it was
organized.
Business Judgment Rule

Courts cannot undertake to control the discretion
of the board of directors about administrative
matters as to which they have the legitimate
power of action, and contracts intra vires entered
into by the board of directors are binding upon the
corporation and courts will not interfere UNLESS
such contracts are so unconscionable and
oppressive as to amount to a wanton destruction
of the rights of the minority (Gamboa v.
Victoriano, GR No. 40620, May 5, 1979).
Basis: The directors or trustees and officers

to be elected shall perform the duties
enjoined on them by law, the Articles of
Incorporation and the by-laws (Sec. 25).
2. Duty of Diligence
Directors and officers are required to exercise
due care in the performance of their functions.
Basis: Directors or trustees who willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation shall be
liable jointly and severally for all damages
resulting
therefrom
suffered
by
the
Questions of policy or management are left solely

to the honest decision of officers and directors of
a corporation, and the court is
100

without authority to substitute its judgment for that
of the board of directors; the board is the
business manager of the corporation, and so long
as it acts in good faith its orders are not
reviewable by the courts (Montelibano v. BacolodMurcia Milling Co., Inc., GR No. 15092, May 18,
1962).
appropriate cases, the officers of the corporation,

when they (VAGWAS)
Willfully and knowingly vote for and assent to
patently unlawful acts of the corporation (Sec.
31);
Acquire any personal or pecuniary interest in
conflict with their duty (Sec. 31);
Are guilty of gross negligence or bad faith in
directing the affairs of the corporation (Sec.
31);
Consent to the issuance of watered stocks,
or, having knowledge thereof, fails to file
objections with the corporate secretary (Sec.
65);
Agree or stipulate in a contract to hold himself
personally liable with the corporation; or
By virtue of a specific provision of law.
Consequences:
1. Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders.
2. Directors and officers acting within such
business judgment cannot be held personally
liable for such acts (Philippine Corporate Law,
Cesar Villanueva, 2001ed).
SECTION 31, 2nd
paragraph
Applicable to directors,
trustees and officers
Does not allow ratification
of a transaction by a selfdealing directors, trustees
or officers
SECTION 34
Note: A director is not liable for misconduct of codirectors or other officers unless (1) he connives
or participates in it; or (2) he is negligent in not
discovering or acting to prevent it (Corporation
Code of the Philippines, Ruben C. Ladia,
2001ed).
Only
applicable
to
directors
Allows the ratification of a
transaction by a selfdealing director, i.e. by the
votes
of
stockholders
representing 2/3 of the
outstanding capital stock
When officers of a corporation exceeded their

authority, their actions are not binding upon the
corporation unless ratified by the corporation or is
estopped from disclaiming them (Reyes v. RCPI
Credit Employees Union, GR No.146535, August
18, 2006).
Limitations On Powers Of Board Of Directors/

Trustees
1. Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws.
2. It cannot perform constituent or those acts
which involve fundamental changes in the
corporation which require the approval of its
stockholders or members.
3. It cannot exercise powers not possessed by
the corporation (The Corporation Code of the
Philippines, De Leon & De Leon, Jr., 2006ed).
Remedies in case of mismanagement

(D-RID)
1. Dissolution if the abuse amounts to a ground
for the institution of a quo warranto
proceeding but the Solicitor General refuses
to act;
2. Receivership
3. Injunction, if the act has not yet been done;
and
4. Derivative suit or complaint filed with SEC.
Note: The corporate powers conferred upon the

board of directors usually refer only to the
ordinary business transactions of the corporation
and does not extend beyond the management of
ordinary corporate affairs nor beyond the limits of
its authority (SEC Opinion, May 2, 1994).
Section 32. Dealings of directors, trustees or

officers with the corporation.
Self-dealing directors, trustees or officers are
those who personally contract with the
corporation in which they are directors, trustees,
or officers.
Such contracts are VOIDABLE, at the option of
the corporation UNLESS:
1. The presence of such director/trustee in the
board meeting approving the contract was
NOT necessary to constitute a quorum for
such meeting;
Personal Liability of Directors

General Rule:
Directors and officers are NOT solidarily liable
with the corporation.
Exceptions:
In the following cases, personal liability may be
incurred by directors and trustees, or in
101

Corporation Laws
2. The vote of such director/trustee in the board
meeting approving the contract was NOT
necessary for the approval of the contract;
3. The contract is fair and reasonable under the
circumstances;
4. In the case of an officer, the contract has
been previously authorized by the board of
directors.
representing at least 2/3 of the Outstanding

Capital Stock or by the vote of the stockholders
representing at least 2/3 of the members in a
meeting called for the purpose.
Provided, That:
a. Full disclosure of the adverse interest of the
director in the meeting;
b. the contract is fair and reasonable under the
circumstances.
Although not all conditions are present, the

corporation may elect not to attack or question the
validity of the contract, without prejudice,
however, to the liability of the director/trustee for
damages under Sec. 31.
Section 34. Disloyalty of a Director.

DOCTRINE OF CORPORATE OPPORTUNITY
A director who, by virtue of his office, acquires for
himself a business opportunity which should
belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, is
guilty of disloyalty and should therefore account to
the latter for all such profits by refunding the
same.
Where any of the FIRST two conditions is

absent, said contract may be ratified by the vote
of the stockholders representing at least 2/3 of the
outstanding capital stock or of at least 2/3 of the
members in a meeting called for the purpose,
provided that full disclosure of the adverse
interest of the director/ trustee involved is made at
such meeting and the contract is fair and
reasonable under the circumstances.
Applicability
UNLESS his act is ratified, a director shall refund
to the corporation all the profits he realizes on a
business opportunity which:
1. the corporation is financially able to
undertake;
2. from its nature, is in line with corporations
business and is of practical advantage to it;
and
3. the corporation has an interest or a
reasonable expectancy.
Section 33. Contracts between Corporations

with Inter-locking Directors.
Corporation With Interlocking Directors
One, some or all of the directors in one
corporation is/are also a director in another
corporation.
Interlocking directorship by itself is not prohibited
under the Corporation Code. However, the bylaws may contain provisions that disallow
interlocking directorship.
A contract between 2 or more corporations having
interlocking directors shall not be invalidated on
that ground alone.
The rule shall be applied notwithstanding the fact

that the director risked his own funds in the
venture.
A business opportunity ceases to be corporate
opportunity
and
transforms
to
personal
opportunity where the corporation refuses or is
definitely no longer able to avail itself of the
opportunity (SEC Opinion, March 4, 1982).
These contracts are VALID, provided that:

1. There is no fraud; and
2. The contract is fair and reasonable under the
circumstances.
The inability to avail itself of business opportunity

may arise from financial insolvency or legal
restrictions or any other factor which prevents the
corporation from acting on the advantage
(Philippine Corporate Law Compendium, Timoteo
Aquino, 2006ed).
BUT if the interlocking directors interest in one

corporation or corporations is substantial
(exceeding 20% of the outstanding capital stock)
and his interest in the other corporation/s is
merely nominal, then all the conditions prescribed
in Sec. 32 on self-dealing directors must be
present with respect to the corporation in which
he has nominal interest. If either of the first two
are absent (presence not necessary for quorum
or vote not necessary), the contract can be
ratified by the vote of the stockholders
Section 35. Executive Committee

Executive Committee
A body created by the by-laws and composed of
not less than three (3) appointed members of the
board which, subject to the statutory limitations,
has all the authority of the board to the extent
102

provided in the board resolution or by-laws (The
Corporation Code of the Philippines, De Leon &
its equity securities (Rule 3 [1M], Amended

SRC Rules).
2. Corporations which are grantees of
permits/licenses and secondary franchise
from the Commission; and
The executive committee has all the authority of

the board to the extent provided for in the
resolution of the board or in the by-laws. It may
act by a majority vote of all of its members on
such specific matters within the competence of
the board, as may be delegated to it in the bylaws or on a majority vote of the board.
3. Public companies.
Corporate Governance
A system whereby shareholders, creditors and
other stakeholders of a corporation ensure that
management enhances the value of the
corporation as it competes in an increasingly
global market place, and were the rights of
minority shareholders are protected.
Its decisions are not subject to appeal to the

board. However, if the resolution of the Executive
Committee is invalid i.e. not one of the powers
conferred to it, it may be ratified by the board
(SEC Opinion, July 29, 1995).
Mandatory corporate governance rules are

necessary for 2 main reasons:
1. To overcome the collective action problem
resulting from the dispersion among
stockholders, and
2. To ensure that the interests of all relevant
constituencies are represented.
If the executive committee is not validly

constituted, the members thereof may be
considered as de facto officers (SEC Opinion,
September 27, 1993, cited in Philippine
2006ed).
POWERS OF CORPORATION
Limitations On The Powers of The Executive

Committee
Section 36. Corporate Powers and Capacity
It cannot act on the following:

a. Approval
of
any
action
for
which
shareholders approval is also required;
b. Filling up of board vacancies;
c. Amendment, repeal of by-laws or adoption of
new by-laws;
d. Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable; and
e. Distribution
of
cash
dividends
to
shareholders.
Kinds
Express those expressly authorized by the
Corporation Code and other laws, and its
Articles of Incorporation or Charter.
Incidental those that are incidental to the
existence of the corporation.
Implied those that can be inferred from or
necessary for the exercise of the express
powers.
DOCTRINE OF NECESSARY IMPLICATION:
Reference must be made to its Articles of
Incorporation and unless the power to carry a
particular business is either expressly or impliedly
conferred thereby, it does not exist.
Code of Corporate Governance

Applicability:
The Code of Corporate Governance shall be
applicable to:
Classification of Implied Powers

Acts in the usual course of business;
Acts to protect debts owing to the corporation;
Acts which involve embarking in a different
business usually to collect debts out of profits;
Acts to protect or aid employees;
Acts to increase business (The Corporation
Code of the Philippines, De Leon & De Leon,
Jr., 2006 ed).
1. Corporations whose securities are registered

or listed;
Public Company - means any corporation
with a class of equity securities listed on an
exchange or with assets in excess of Fifty
Million Pesos (P50,000,000.00) and having
two hundred (200) or more holders, at least
two hundred (200) of which are holding at
least one hundred (100) shares of a class of
103

Corporation Laws
3. Ratification by the stockholders representing
at least 2/3 of the outstanding capital stock or
2/3 of the members in case of non-stock
corporations.
4. A copy of the amended articles of
incorporation shall be submitted to the SEC
for approval.
General Powers and Capacity:

(PIMPS DO SCAB)
1. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
deal with real and personal property,
securities and bonds
2. For stock corporations: issue and sell stocks
to subscribers and treasury stocks; for nonstock corporations: admit members
3. To enter into merger or consolidation
4. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees
5. To sue and be sued
6. To make reasonable donations for public
welfare,
hospital,
charitable,
cultural,
scientific, civic or similar purposes, provided
that NO donation is given to any (i) political
party, (ii) candidate and (iii) partisan political
activity
7. To exercise other powers essential or
necessary to carry out its purposes.
8. Of succession
9. To adopt and use of corporate seal
10. To amend its Articles of Incorporation
11. To adopt its by-laws
Note: A dissenting stockholder may exercise his

appraisal right.
Section 38. Power to Increase or Decrease
Capital Stock
Ways of Increasing/ Decreasing Authorized
Capital Stock
1. By increasing/ decreasing the number of
shares and retaining the par value;
2. By increasing/ decreasing the par value of
existing shares without increasing/ decreasing
the number of shares;
3. By increasing/ decreasing
the number of
shares and increasing/decreasing the par
value.
Limitations
1.
A corporation cannot lawfully decrease its
capital stock if such decrease will have the
effect of relieving existing subscribers from
the obligation of paying for their unpaid
subscriptions without a valuable consideration
for such release.
2. Cannot issue stock in excess of the amount
limited by its AOI.
3. Must follow the manner and conditions
provided by the law.
Other Powers (SAC-D2IME)

1. Sell, dispose, lease, encumber all or
substantially all of corporate assets (Sec. 40)
2. Power to acquire own shares (Sec. 41)
3. Invest corporate funds in another corporation
or business or for any other purpose other
than the primary purpose (Sec. 42)
4. Power to Deny Pre-Emptive Right (Sec. 39)
5. Power to declare dividends out of unrestricted
retained earnings (Sec. 43)
6. Power to Increase or Decrease Capital
Stock /Power to Incur, Create or Increase
Bonded Indebtedness (Sec. 38)
7. Power to enter into management contract
(Sec. 44)
8. Extension /Shortening of Corporate Term
(Sec. 37)
Section 37. Extension/
Corporate Term
Shortening
Reasons for Increasing Capital Stock:

1. To generate more working capital;
2. To have more shares with which to pay for
acquisition of more assets;
3. To have extra shares to meet the requirement
for deduction of stock dividend (Bar Review
Materials in Commercial Law, Jorge Miravite,
2002ed).
Tools available to the Stockholders to
Replenish Capital:
1. Additional subscription to shares of stock of
the corporation by stockholders or by
investors;
2. Advances by the stockholders to the
corporation;
3. Payment of unpaid subscription by the
stockholders; and
4. Loans from third persons.
of
Procedure
1. Approval by a majority vote of the board of
directors/trustees.
2. Written notice of the proposed action and the
time and place of meeting shall be served to
each stockholder or member either by mail or
personal service.
104

Section 39. Power to Deny Pre-Emptive Right

Requirements:
1. Approval by the majority vote of the board of
directors;
2. Ratification by the stockholders holding or
capital stock at a meeting duly called for that
purpose;
3. Prior written notice of the proposed increase
or decrease of the capital stock indicating the
time and place of meeting addressed to each
stockholder must be made either by mail or
personal service;
4. A certificate in duplicate signed by a majority
of the directors of the corporation,
countersigned by the chairman and the
secretary of the stockholders meeting;
5. In case of increase in capital stock, 25% of
such increased capital must be subscribed
and that at least 25%
of the amount
subscribed must be paid either in cash or
property;
6. In case of decrease in capital stock, the same
must not prejudice the right of the creditors;
7. Filing of the certificate with the SEC; and
8. Approval thereof by the SEC.
Pre-Emptive Right
The preferential right of shareholders to subscribe
to all issues or disposition of shares of any class
in proportion to their present shareholdings.
Note: Whenever the capital stock of a corporation
is increased and new shares of stock are issued,
the new issue must be offered first to the
stockholders who are such at the time the
increase was made in proportion to their existing
shareholdings
Purpose: To enable the shareholder to retain his
proportionate control in the corporation and to
retain his equity in the surplus.
The right may be denied by the articles of
incorporation or an amendment thereto. The
corporation can only deny pre-emptive right IF the
articles of incorporation or amendment thereto
DENIES such right.
Denial of pre-emptive right extends to shares
issued in good faith in exchange for property
needed for corporate purposes or in payment of
previously contracted debts.
Note: The required 25% subscription shall be

based on the additional amount by which capital
stock is increased and not on the total capital
stock as increased.
Pre-Emptive Right
May be exercised even
when there is no express
provision of law
Power To Incur, Create Or Increase Bonded

Indebtedness (Section 38)
Pertains to unsubscribed
portion of the authorized
capital stock. A right that
may be claimed against
the corporation
Corporate Bond
An obligation to pay a definite sum of money at a
future time at fixed rate of interest, whether
secured or unsecured, evidenced by a written
debt instrument called a bond or debenture.
Secured by a mortgage
on corporate property.
(Philippine
Corporate
Law, Cesar Villanueva,
2001ed)
Exercisable
against
another stockholder of the
corporation of his shares
of stock
Instances When Pre-emptive Right Is Not

Available (PREP DeWN)
Shares to be issued to comply with laws

requiring stock offering or minimum stock
ownership by the public;
It does not apply to shares that are being

reoffered by the corporation after they were
initially offered together with all the shares.;
Shares issued in good faith in exchange

for property needed for corporate purposes;
Shares issued in payment of previously

contracted debts;
In case the right is denied in the Articles

of Incorporation;
Waiver of the right by the stockholder;
Requirements
Same with as the power to increase or decrease
capital stock.
Bonded Indebtedness
Right of First Refusal

Arises only by virtue of
contractual stipulations but
is also granted under the
provisions
on
Close
Corporation
Debenture
Serial obligations or notes
issued on the basis of the
general credit of the
corporation. Hence, they
are
not
bonded
indebtedness
Note: This power is also relevant in non-stock

corporations.
105

Corporation Laws
In case of non-stock corporations.

Section 40. Sell, dispose, lease, encumber all
or substantially all of corporate assets
3.
4.
5.
Requirements
Approval by the majority vote of the board

of directors;
Ratification by the stockholders holding or

capital stock at a meeting duly called for that
purpose;
Prior written notice of the proposed

increase or decrease of the capital stock
indicating the time and place of meeting
addressed to each stockholder must be
made either by mail or personal service;
The sale of the assets shall be subject to

the provisions of existing laws on illegal
combinations and monopolies and Bulk Sales
Law; and
Any dissenting stockholder shall have the

option to exercise his appraisal right.
The vote of the majority of the trustees in

office will be sufficient authorization for the
corporation to enter into any transaction
authorized by Sec. 40 in the case of nonstock corporations where there are no
members with voting rights.
6.
7.
purchase delinquent shares sold during said

sale;
To
pay
dissenting
or
withdrawing
stockholders;
To acquire treasury shares;
Redeemable shares regardless of existence
of retained earnings;
To effect a decrease of capital stock; and
In close corporations, when there is a
deadlock in the management of the business
Conditions for the exercise of the power:

1. That its capital is not impaired;
2. That it be for a legitimate and proper
corporate purpose;
3. That there shall be unrestricted retained
earnings;
4. That the corporation acts in good faith and
without prejudice to the rights of creditors and
stockholders; and
5. That the conditions of corporate affairs
warrant it.
Section 42. Invest corporate funds in another
corporation or for purposes other than the
primary purpose.
The other purposes for which the funds may be
invested must be among those enumerated as
secondary purposes and must further comply with
the requirements of Section 42.
Note: SEC approval is NOT required.

Sale or other disposition shall be deemed to
cover substantially all the corporate assets if:
a. the
corporation
would
be
rendered
INCAPABLE of continuing the business; o
b. accomplishing the purpose for which it was
incorporated.
Investment of funds includes not only investment

of money but also investment of property of the
corporation. Lease of the property is included in
the term investment of funds. However, the SEC
imposes the following requirements:
a. That the property is not presently used by the
company and the leasing is not made on a
regular basis;
b. That by leasing the property, it will make it
productive instead of allowing them to remain
idle;
c. There is no express restrictions in the articles
of incorporation or by-laws;
d. Leasing is not used as a scheme to prejudice
corporate creditors or result in the
infringement of the Trust Fund Doctrine; and
e. Compliance with the requirements of Section
42 (Philippine Corporate Law Compendium,
Timoteo Aquino, 2006ed).
NO ratificatory vote from stockholders/

members is needed:
1. if it is necessary in the usual and regular
course of business;
2. if the proceeds of the sale or other disposition
of such property and assets be appropriated
for the conduct of the remaining business; or
3. if the transaction does not cover all or
substantially all of the assets.
Section 41. Power to acquire own shares
Instances:
1. To eliminate fractional shares out of stock
dividends;
2. To collect or compromise indebtedness to the
corporation,
arising
out
of
unpaid
subscription, in a delinquency sale and to
Requirements
1.
Resolution by the majority of the board of
directors or trustees;
2.
Ratification
by
the
stockholders
106

capital stock or 2/3 of the members in case of
non-stock corporation;
3.
The ratification must be made at a
meeting duly called for the purposes; and
4.
Prior written notice of the proposed
investment and the time and place of the
meeting shall be made, addressed to each
stockholder or member by mail or by personal
service.
The right to dividend is based on duly recorded

stockholdings, accordingly, the corporation is
prohibited from declaring dividends in favor of
non-stockholders.
Any dissenting stockholder shall have appraisal

right because he will be exposed to a line of
business which is not being pursued when he
invested in the company.
The right of the stockholder to be paid dividends

accrues as soon as the declaration is made.
Neither the same board nor their successors can
revoke the declaration of a legally declared
dividend without the stockholders consent.
As a rule, dividends among stockholders of the

same class must always be pro rata equal and
without discrimination and regardless of the time
when the shares were acquired.
A corporation is not allowed to engage in a

business distinct from those enumerated in the
articles of incorporation without amending the
purpose clause of said article.
The right to dividend accrues even if there is no

SEC approval. However, declaration of dividend
shall be reported to the SEC within 15 days from
declaration.
Section 43. Power to declare dividends out of

unrestricted retained earnings
Declaration of dividends is discretionary upon the

board. Dividends are payable only when there are
profits earned by the corporation and as a general
rule, even if there are existing profits, the Board of
Directors has the discretion to determine whether
or not dividends are declared (Republic Planters
Bank v. Agana, GR No. 93397, March 3, 1997),
SUBJECT to the rule on non-retention of retained
earnings in excess of 100% of paid-in-capital.
ASSETS
Less LIABILITIES and LEGAL CAPITAL
= RETAINED EARNINGS
REQUIREMENTS
1. Unrestricted retained earnings
2. Resolution of the board
3. If stock dividends are declared, there must be
resolution of the board with concurrence 2/3
of outstanding capital
General Rule: Dividends cannot be declared out

of the capital.
Unrestricted Retained Earnings

The retained earnings which have not been
reserved or set aside by the board of directors for
some corporate purpose.
Exception:
Dividends
Corporate profits set aside, declared, and ordered
to be paid by the directors for distribution among
shareholders at a fixed time.
Stockholders at the time of declaration are

entitled to dividends. Dividends declared before
the transfer of shares belong to the transferor and
those declared after the transfer belongs to the
transferee (SEC Opinion, July 15, 1994).
1. Dividends from investments

wasting assets corporation
2. Liquidating dividends
Forms:
1. Cash
2. Property
3. Stock
Requirements
1. Stock dividends - Approval of stockholders
capital stock at a regular or special meeting
duly called for the purpose.
2. Other dividends - Resolution by the majority
of the quorum of the board of directors or
trustees;
While cash dividends due on delinquent shares

can be applied to the payment of the unpaid
balance, stock dividends cannot be applied as
payment for unpaid subscription. Stock dividends
shall be withheld from the delinquent stockholder
until his unpaid subscription is fully paid.
107

Corporation Laws
General Rule:
Stock corporations are prohibited from retaining
surplus profits in excess of 100% of their paid-in
capital stock.
that portion not impaired by subsequent

losses is available for dividend. (SEC
Opinions, Oct. 2, 1981 and March 19,
1992).
Exceptions (SLEx):
1. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is a need for special
reserve for probable contingencies.
2. When the corporation is prohibited under any
loan agreement with any financial institution
or creditor from declaring dividends without
its/his consent and such consent has not yet
been secured.
3.
When justified by definite corporate
expansion projects approved by the board of
directors.
3. Paid-in Surplus
Dividends can be declared out of the amount
received in excess of the par value of shares
(paid-in surplus) when:
a. They be declared only as stock
dividends and not cash;
b. No creditors are prejudiced; and
c. There is no impairment of capital.
Distribution of Dividends
4. Reduction surplus
There is such where surplus arises from the
reduction of the par value of the issued
shares of stock. They can be available for
dividend declaration provided that the rules
on paid-in surplus are complied with.
Note: Unlike par value shares, when no par

value shares are sold at a premium, the entire
consideration paid is considered capital;
hence the same cannot be declared as
dividends.
General Rule
Dividends can only be declared and paid out of
actual and bona fide unrestricted retained
earnings.
Special Rules
1. Gain from real property
Where a corporation sold its real property,
which is not being used for business, at a
gain, the income derived therefrom may be
availed of for dividend distribution.
However, there must be surplus profits.
Hence, the corporation cannot distribute if the
remaining assets after distribution are less
than the amount of legal or stated capital and
liabilities.
e.g. Such dividends can be declared out of

capital only in two instances:
liquidating dividends; and
dividends from investments in wasting
asset corporation.
It permits corporations solely or principally
engaged in the exploitation of wasting
assets to distribute the net proceeds derived
from exploitation of their holdings such as
mines, oil wells, patents and leaseholds,
without allowance or deduction for depletion.
2. Revaluation Surplus
Increase in the value of a fixed asset as a
result of its revaluation is not retained
earning. By way of exception, the SEC allows
distribution of the increase in the value of
fixed assets as a result of revaluation thereof
after the assets are depreciated and the
depreciation is charged against the operation
PROVIDED that the company:
a. Has sufficient income from operations
from which the depreciation on the
appraisal increase was charged;
b. Has no deficit at the time the depreciation
on the appraisal increase was charged to
operations; and
c. Such depreciation on appraisal increase
previously charged to operations has not
been impaired by losses, otherwise, only
5. Sale of Treasury Shares

Profits realized from sale of treasury shares
are part of capital and cannot be declared as
cash or stock dividend as purchase and sale
of such shares are regarded as contractions
and expansions of paid-in capital.
It may be declared as property dividend to be
issued out of the retained earnings previously
used to support their acquisition provided that
the amount of the said retained earnings has
not been subsequently impaired by losses.
6. Indebtedness
Money cannot be borrowed for the payment
of dividends because indebtedness is not a
retained earning of the corporation.
108

7. Corporate earnings which have not yet been
received even though they consist in money
which is due cannot be included in the profits
out of which dividends may be paid.
10. Liquidating dividends dividends which are

actually distributions of the assets of the
corporation upon dissolution or winding up of
the same.
8. Interim income
CASH DIVIDENDS
STOCK DIVIDENDS
Authority to declare
General Rule:
There can be no dividend declaration for
profits in a fiscal year that has not yet expired.
Declared only by the

board of directors at its
discretion
Exceptions:
a. the amount of dividend involved would
not be impaired by losses during the
remaining period of the year;
b. the projected income for the remaining
period shall be submitted to the SEC; and
c. should the company sustain losses during
the remaining period, the dividends
should be refunded (SEC Opinion, Oct
22, 1974 Nov. 11, 1900 and July 24,
1991).
Declared by the board

with the concurrence of
the
stockholders
representing at least 2/3
of the outstanding capital
stock at a regular/special
meeting
Disbursements of funds
Involves a disbursement
to the stockholders of
accumulated earnings
Does not involve any

disbursement of funds
Corporate capital
Does not increase the
corporate capital
Corporate
increased
capital
is
Creation of debts
Its declaration creates a
debt from the corporation
to each of its stockholders
Classes of Dividends
1. Cash Dividend- dividend payable in cash.
2. Property Dividend dividend distributed to
the stockholders in the form of property, real
or personal.
3. Stock Dividend dividend payable in
unissued or increased or additional shares of
the corporation instead of in cash or in
property out of the unrestricted retained
earnings of the corporation.
4. Optional Dividend dividend which gives
the stockholder an option to receive cash or
stock dividend.
5. Composite Dividend It is dividend which is
partly in cash and partly in stocks.
6. Preferred or preferential dividend
dividend which is payable to one class of
stockholders in priority to that to be paid to
another class.
7. Cumulative dividend dividend which is
contracted to be paid at a certain rate at
stated times and if net earnings at any
dividend period are sufficient to pay the
contract dividend, it is to be made out of
subsequent net earnings.
8. Scrip dividend dividend in the form of a
writing or certificate issued to a stockholder
entitling him to the payment of money, stock
or other benefit at some future time inasmuch
as the corporation at the time such dividends
are declared has profits not in cash or has no
sufficient cash.
9. Bond dividend dividend distributed in
bonds of the corporation to the stockholders.
No debt is created by its

declaration
Liability to corporate creditors

When declared and paid
becomes the absolute
property
of
the
stockholder and cannot
be reached by creditors of
the corporation in the
absence of fraud
Since it is still part of

corporate property, may
be reached by corporate
creditors
TRUST FUND DOCTRINE (TFD)

The subscribed capital stock of the corporation is
a trust fund for the payment of debts of the
corporation which the creditors have the right to
look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may
sue the stockholders directly for the latters
unpaid subscription.
Application of the TFD:
1. Where the corporation has distributed its
capital among the stockholders without
providing for the payment of creditors;
2. When there is payment of dividends without
unrestricted retained earnings;
3. Where it had released the subscribers to the
capital stock from their subscriptions;
4. Where it has transferred the corporate
property in fraud of its creditors; and
5. Where the corporation is insolvent.
109

Corporation Laws
Coverage of the TFD:
1. If the corporation is solvent, the TFD
extends to the capital stock represented by
the corporations legal capital.
2. If the corporation is insolvent, the TFD
extends to the capital stock of the corporation
as well as all of its property and assets.
b. where a majority of the members of the

board of directors of the managing
corporation ALSO constitute a majority of
the members of the board of directors of
the managed corporation.
The period must not be longer than 5 years for
any 1 term except those contracts which relate to
the exploration, development, exploitation or
utilization of natural resources that may be
entered into for such periods as may be provided
by pertinent laws or regulations.
Exceptions to the TFD:

The Code allows distribution of corporate capital
only in these instances:
1. Amendment of Articles of Incorporation to
reduce authorized capital stock;
2. Purchase of Redeemable shares by the
corporation regardless of existence of
unrestricted retained earnings;
3. Dissolution and eventual liquidation of the
corporation;
4. In close corporation, when there should be a
deadlock and the SEC orders the payment of
the appraised value of the stockholders
share (Sec. 104).
A management contract cannot delegate entire

supervision and control over the officers and
business of a corporation to another as this will
contravene Sec. 23.
EXECUTIVE
COMMITTEE
MANAGEMENT
CONTRACT
Creation
Its creation must be

provided for in the by-laws
Section 44. Power to enter into management

contract
Express power
corporation
of
Authority
Management Contract
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.
A governing body which

functions as the board
itself.
Note: Sec. 44 refers only to a management

contract with another corporation. Hence, it does
not apply to management contracts entered into
by a corporation with natural persons.
Management
company
must always be subject to
the superior power of the
board to give specific
directions from time to
time or to recall the
delegation of managerial
power (The Corporation
Code of the Philippines,
De Leon & De Leon, Jr.,
2006ed).
Section 45. Ultra Vires Acts of Corporation

Ultra Vires Act
An act committed outside the object for which a
corporation is created as defined by the law of its
organization and therefore beyond the powers
conferred upon it by law (Republic v. Acoje Mining
Co., Inc., GR NO. L- 18062, February 28, 1963).
Requirements:
1. Approval by a majority of the
quorum of the board of directors;

2. Ratification by the stockholders owning at
least majority of the outstanding capital stock
or the members of BOTH the managing and
the managed corporations, at a meeting duly
called for the purpose;
3. Approval by the stockholders of the
MANAGED corporation owning at least 2/3 of
the total outstanding capital stock entitled to
vote, or by at least 2/3 of the members in the
case of a non-stock corporation:
a. where a stockholder/s representing the
same interest of BOTH the managing and
the managed corporations own or control
more than 1/3 of the total outstanding
capital stock entitled to vote of the
managing corporation; OR
Also refers to acts done by a corporation outside

of the express and implied powers vested in it by
its charter and by the law (Bar Review Materials
in Commercial Law, Miravite, 2007ed).
Types of Ultra Vires Act (Philippine Corporate
Law, Cesar Villanueva, 2001ed):
1. Acts done BEYOND the powers of the
corporation as provided in the law or its
articles of incorporation;
2. Acts or contracts entered into in behalf of a
corporation by persons who have NO
corporate authority
110

Note: This is technically ultra vires acts of
officers and not of the corporation; and
3. Acts or contracts, which are PER SE
ILLEGAL as being contrary to law.
on the basis of estoppel
Test Whether Or Not A Corporation May

Perform An Act
Consider the logical and necessary relation
between the act questioned and the corporate
purpose expressed by law or in the charter. If the
act is lawful in itself and not prohibited, and is
done for the purpose of serving corporate ends,
and reasonably contributes to the promotion of
those ends in a substantial and not in a remote
and fanciful sense. The test to be applied is
whether the act in question is in direct and
immediate furtherance of the corporations
business, fairly incident to the express powers
and reasonably necessary to their exercise
(Montelibano v. Bacolod-Murcia Milling Co., Inc.,
GR No. 15092, May 18, 1962).
An ultra vires act may be that of:

The corporation;
The Board of Directors; and
The corporate officers.
Effects of Ultra Vires Act On:
1. Executed contract courts will not set aside
or interfere with such contracts;
2. Executory contracts no enforcement even
at the suit of either party (void and
unenforceable);
3. Part executed and part executory
principle of no unjust enrichment at expense
of another shall apply; and
4. Executory contracts apparently authorized
but ultra vires the principle of estoppel
shall apply.
Remedies In Case of Ultra Vires Acts

1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the
certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors
Nullification of contract in fraud of creditor
Note: Ultra vires (beyond powers) refers only to

an act outside or beyond corporate powers,
including those that may ostensibly be within such
powers but are, by general or special laws, either
prohibited or declared illegal. It is in this context
that the Code has used the term.
ULTRA VIRES ACTS
BY-LAWS
ILLEGAL ACTS
Nature
Not necessarily unlawful,

but outside the powers of
the corporation
Section 46. Adoption of By-Laws
Unlawful; against law,

morals, public policy, and
public order
By-Laws
Rules of action adopted by a corporation for its
internal government and for the regulation of
conduct, and prescribe the rights and duties of its
stockholders or members towards itself and
among themselves in reference to the
management of its affairs.
Susceptibility of ratification
Cannot be ratified,
Reason: In Civil Law,
ratification is an act of
approving
a
contract
entered into by another
without authorization. It is
required that at the time of
the ratification, the cause
of nullity has already
ceased to exist. An ultra
vires act is not within the
power of the corporation;
hence, the ground for
being such cannot cease.
(Philippine Corporate Law
Compendium,
Timoteo
Aquino, 2006ed)
Cannot
be
ratified
because they are void ab
initio
Functions
1. Supplement the articles of incorporation.
2. Define the rights and duties of corporate
officers and directors/trustees and of
stockholders/members
towards
the
corporation and among themselves.
3. Regulate business transactions of the
corporation in a particular way.
Requisites for the validity of the By-laws

1. Must not be contrary to law nor with the
Corporation Code;
Binding effect
Can bind the parties if
wholly or partly executed
Cannot bind the parties
111

Corporation Laws
2. Must not be contrary to morals and public
policy;
3. Must not impair obligations and contracts;
4. Must be general and uniform in their
operation and not directed against particular
individuals;
5. Must be consistent with the charter or articles
of incorporation; and
6. Must be reasonable, not arbitrary or
oppressive.
1. Time, place and manner of calling and

conducting regular or special meetings of the
2. Time and manner of calling and conducting
regular or special meetings of the
3. The required quorum in meetings of
stockholders or members and the manner of
voting therein;
4. The form of proxies of stockholders and
members and the manner of voting them;
5. The qualification, duties and compensation of
directors, trustees, officers and employees;
6. The time for holding the annual election of
directors or trustees and the mode or manner
of giving notice;
7. The manner of election or appointment and
the term of office of all officers other than
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner
of issuing certificates; and
10. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business.
Adoption of By-Laws
Required votes:
1. If it is adopted PRIOR to incorporation
The by laws must be signed and approved by

all the incorporators and filed with the SEC
together with the articles of incorporation.
2. If it is adopted and filed AFTER incorporation
(which must be 1 month after receipt of official
notice of the issuance of its certificate of
incorporation by the SEC) The affirmative
vote of the stockholders representing at least
a majority of the outstanding capital stock, or
of at least a majority of the members shall be
necessary. The by-laws shall be signed by the
stockholders or members voting for them.
Section 48. Amendment of By-Laws

1. The majority of the board of directors or
trustees and the owners of at least a majority
of the outstanding capital stock, or at least a
majority of the members of a non-stock
corporation, at a regular or special meeting
duly called for the purpose, may amend or
repeal any by-law or adopt new by-laws; or
Note: A copy thereof duly certified to by a

majority of the directors or trustees and
counter-signed by the secretary of the
corporation shall be filed with the SEC which
shall be attached to the original articles of
incorporation.
Effectivity
Upon the issuance by the SEC of a certification
that the by-laws are not inconsistent with the
Code
2. The owners of 2/3 of the outstanding capital

stock or 2/3 of the members in a non-stock
corporation may delegate to the board of
directors or trustees the power to amend or
repeal any by-laws or adopt new by-laws.
Until repealed or amended, a by law is a

CONTINUING RULE for the government of the
corporation and individuals composing it. (De,
Leon, 2006)
The delegated power shall be considered as

revoked whenever stockholders owning or
representing a majority of the outstanding
capital stock or a majority of the members in a
non-stock corporation shall so vote at a
regular or special meeting.
Effect of Non-Filing Within The Required

Period
Failure to submit the by-laws within 30 days from
incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension
or revocation of its charter after proper notice and
hearing. The corporation is, at the very least, a de
facto corporation whose existence may not be
collaterally attacked. (Sawadjaan v. Court of
Appeals, GR No. 142284, June 8, 2005).
Section 47. Contents of By-laws (DSQP-QAMPIO)
Note: The amended or new by-laws shall only be

effective upon the issuance by the SEC of a
certification that the same are not inconsistent
with the Code.
Binding Effects of amendments

1. As to members and shareholders
112

a. They have the force of contract between
the members themselves.
b. There is a conclusive presumption that
they know the provisions of the corporate
by-laws by the fact of their being such is
charged with notice of by-laws. If he
remains actually ignorant of the provision,
he does so at his peril. (De, Leon, 2006)
Amended by a majority of
the directors/ trustees and
stockholders representing
2/3 of the outstanding
capital stock, or 2/3 of the
members in case of nonstock corporations
Delegation of power to amend
2. As to Corporate Directors and its officers

a. they are bound by and must comply with
them unless and until they are changed.
b. subordinate employees without actual
knowledge of the by-laws are not bound
3. As to third persons
They are not bound to know the by-laws
unless they have notice, actual or
constructive (China Banking Corporation v.
CA, GR No. 117604, March 26, 1997).
Power to amend/repeal
articles
cannot
be
delegated
by
the
stockholders/ members to
the board of directors/
trustees
Power to amend or repeal

by-laws or adopt new bylaws may be delegated by
the 2/3 of the outstanding
capital stock or 2/3 of the
members in the case of
non-stock corporation
RESOLUTION
BY-LAWS
Nature and Subject matter

Merely a declaration of
will of the corporation in a
given matter and in the
nature of a manifested
act; applies only to a
single act of corporation.
Reason: By-laws have no extra-corporate

force and are not in the nature of legislative
enactments so far as third persons are
concerned.
Note: Third party with actual notice of by-laws
may expressly exclude the by-laws so that his
contract will not be affected; otherwise, he is
bound thereby. (De, Leon, 2006)
May be amended by a
majority vote of the BOD
and majority vote of
outstanding capital stock
or a majority of the
members in non-stock
corporation
Permanent rule of action

of
the
conduct
of
corporation affairs.
Rule in case of conflict

Subordinate
Prevail over resolution
Necessity of approval by SEC

No need for approval
unless required by law
By-Laws
Subject to the approval of

SEC
Nature
Condition precedent in the
acquisition of corporate
existence
By-Laws
In Relation
To Articles
of
Incorporation (The Corporation Code of the
Philippines, De Leon &. De Leon, Jr., 2006ed)
a. By-laws are subordinate to the charter of the
corporation and part of its charter is its
articles of incorporation.
b. A by-law which is not consistent with the
charter but is in conflict with it is void.
c. A by-law can neither enlarge the rights and
powers conferred by the charter nor restrict
the duties and liabilities imposed thereby, and
in case it attempts to do so, the charter will
prevail.
Condition subsequent; its

absence merely furnishes
a
ground
for
the
revocation of the franchise
Purpose
Constitutes the charter or
fundamental law of the
corporation
Merely
rules
and
regulations adopted by
the corporation
Time of execution
Executed
incorporation
before
May be executed after

incorporation. Sec. 46
allows the filing of the bylaws simultaneously with
the
Articles
of
Incorporation
MEETINGS
Section 49. Kinds of Meetings
Amendment
113

Corporation Laws
Section 50. Regular and Special Meetings of
Stockholders or Members
Kinds of Corporate Meetings
1. Meetings of stockholders or members:
a. Regular held annually on a date fixed
in the by-laws, or if not fixed, on any date
in April as determined by the board; held
principally for the purpose of electing
another set of directors or trustees.
b. Special held at any time deemed
necessary or as provided in the by-laws.
Where: in the city/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 the purpose of
Section 51, be considered a city or
municipality
In those cases in which the law determines the

number of shareholders or members whose
concurring votes are necessary to make their act
binding on the corporation, no less than such
number is necessary to constitute a quorum at a
meeting called to transact such business. In such
cases, the by-laws may provide for a greater
quorum.
Once a quorum is called, and the meeting was
called to order, even if some people walked out
and the people left are less than the majority, the
proceedings will be valid so long as there is a
quorum when the meeting was called to order. A
minority group cannot prevent corporation by
walking out (De, Leon, 2006)
For stock corporations, the quorum referred to in
Section 52 of the Corporation Code is based on
the number of outstanding voting stocks. For
non-stock corporations, only those who are
actual, living members with voting rights shall be
counted in determining the existence of a quorum
during members meetings. (Tan v. Sycip, G.R.
No. 153468, August 17, 2006)
2. Meetings of directors or trustees:

a. Regular - held by the board monthly,
unless the by-laws provide otherwise.
b. Special - held by the board at any time
upon the call of the president or as
provided in the by-laws.
Where: anywhere in or out of the
Philippines, unless the by-laws provide
otherwise
Any matter or transaction must necessarily fail if

the number of votes attained is less than what is
prescribed for the particular transaction. If an
issue to be resolved requires a majority for it to be
passed and there is a deadlock, the issue or
proposition simply loses. There, is therefore, no
need to break the deadlock. (De, Leon, 2006)
Whenever there is no person authorized to call a

meeting, the SEC, upon petition of a stockholder
or member, and on the showing of good cause,
may issue an order to the petitioning stockholder
or member directing him to call a meeting of the
corporation by giving proper notice.
Section 53. Regular and Special Meetings of

Directors or Trustees
Section 51. Place and time of meetings of

stockholders or members
Section 54. Who shall Preside at Meetings
Even if the meeting be improperly held or called,

all proceedings and any business transacted at
such meeting shall be valid if within the powers or
authority of the corporation, and provided that all
the stockholders or members of the corporation
are present or duly represented at the meeting.
Section 52. Quorum of
Shareholders or Members
Meetings
Requirements of A Valid Meeting

1. It must be held at the proper place.
2. It must be held at the stated date and at the
appointed time or at a reasonable time
thereafter.
3. It must be called by the proper person:
a. The person or persons designated in the
by-laws
have
authority
to
call
stockholders or members meeting.
b. In the absence of such provision in the
by-laws, it may be called by a director or
trustee or by an officer entrusted with the
management of the corporation.
c. A stockholder or member may make the
call on order of the SEC whenever for any
cause, there is no person authorized to
call a meeting.
of
General Rule: A quorum shall consist of the

stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock corporations.
Exception: Unless otherwise provided for in the
Code or in the by-laws
114

d. The special meeting for the removal of
directors or trustees may be called by the
secretary or by a stockholder or member.
4. There must be a previous notice.
4. Escrow shares shall not be entitled to vote

before the fulfillment of the condition imposed
thereon.
5. Unpaid shares, if not delinquent, are entitled
to all the rights of a stockholder including the
right to vote.
6. Sequestered shares: TWO TIERED TEST to
determine whether the PCGG may vote
sequestered shares:
a. whether there is prima facie evidence
showing that the said shares are ill-gotten
and thus belong to the state; and
b. whether there is an immediate danger of
dissipation thus necessitating their
continued sequestration and voting by the
PCGG while the main issue is pending
with the Sandiganbayan (Republic v.
Sandiganbayan, GR No. 107789, April
30, 2003).
As to Meetings of Stockholders/members
Regular Meeting written notice must be
sent to registered stockholders or members at
least 2 weeks before the meeting.
Special Meeting written notice must be
sent at least one (1) week
As to Meetings of Directors/Trustees
General Rule: At least one (1) day prior to
the scheduled meeting (whether regular or
special)
Exception: Unless otherwise provided by the
by-laws.
5. There must be a quorum.
Public Character Exception the two-tiered

test does NOT apply in cases involving funds
of public character. In such cases, the
government is granted the authority to vote
said shares, namely:
1. where the government shares are taken
over by private persons or entities
who/which registered them in their own
names; and
2. where the capitalization of shares that
were acquired with public funds somehow
landed in private hands (Ibid).
Note: The president shall preside at all meetings

of the directors or trustees as well as of the
stockholders or members, unless the by-laws
provide otherwise (Sec. 54). Where officer entitled
to preside is not present a stockholder or member
who takes the floor may TEMPORARILY preside
at the meeting of stockholders or members
pending the selection of presiding officer. (De,
Leon, 2006)
Notice - is the writing informing the stockholders
or members of the meeting
Pledgor, Mortgagor, or Administrator Shares

(Section 55); Pledgor/ mortgagor has the right to
attend and vote at meetings unless pledgee/
mortgagee is expressly given such right in writing,
as recorded on the books.
Requisites:
1. Must be issued by one who has authority to
issue it.
2. Must be in writing
3. Must state date, time and place unless
otherwise provided in By-laws.
4. Must state business to be transacted thereat
5. Must be sent at a certain time before
scheduled
6. Other requirements prescribed by law or
corporate by-laws.
Executors, administrators, receivers, and other

legal representatives may attend and vote in
behalf of the stockholders or members without
need of any written proxy. In Gochan v. Young,
(GR No. 131889, March 12, 2001), it was held
that heirs are not prohibited from representing the
deceased with regard to shares of stock
registered in the name of the latter, especially
when no administrator has been appointed.
Rules On Meeting/ Voting Applicable To

Certain Kinds Of Shares
1. Delinquent shares shall not be entitled to
vote.
2. Treasury shares have no voting rights while
they remain in the treasury. (Sec. 57)
3. Fractional shares shall not be entitled to
vote.
Shares Jointly Owned (Section 56); consent of

all the co-owners necessary, unless there is a
written proxy, signed by all the co-owners. If
shares are owned in an and/or capacity by the
holders thereof, any one of the joint owners can
vote or appoint a proxy thereof
115

Corporation Laws
Note: right to vote in Stock Corporation is an
incident of ownership or the property in the stock
of which the stockholder cannot be deprived
without his consent and he may vote it as he
chooses, although not in manner or for purposes
contrary to law, public policy or fraudulently. (De,
Leon, 2006)
ADVANTAGES
Manner of Voting
A stockholder or member may vote:
1. Directly (in person); or
2. Indirectly, through a representative
a. by means of a proxy;
b. by a trustee under a voting trust
agreement; or
c. by executors, administrators, receivers, or
other legal representatives duly appointed
by the court.
Note: without need of any written proxy
cause they have legal title to stock of
deceased owner or principal by virtue of
these positio
n this is an exception to
the rule in Section 24 that only
stockholders of record may vote. (De,
Leon, 2006)
Note: For non stock corporations dead member s
who are dropped from the roster in the manner
and for the cause provided in the By-laws are not
to be counted in determining the requisite vote in
corporate matters or the requisite quorum for the
annual members meeting (Tan v. Sycip GR. No.
153468. 17 August 2006)
DISADVANTAGES
Communication between
the home office and field
staff is maximized
Technical failures
equipments
People who would not

normally attend a distant
meeting can participate
Unsatisfactory for complex

interpersonal
communication
Follow-up
to
earlier
meeting can be easily
done
Impersonal, less easy to

create an atmosphere of
group rapport
Meetings are shorter and

more oriented to the
primary purpose
Lack
of
familiarity
equipment
Some routine meetings

are more effective
Acoustical problem within

the
teleconferencing
rooms
Severe climate and/or

unreliable transportation
may
necessitate
teleconferencing
Difficulty in determining
the participant speaking
order, tendency for one
person to monopolize the
whole meeting
Participants are generally

better prepared
Greater
participant
preparation time needed
Particularly
satisfactory
for
simple
problem
solving,
information,
exchange and procedural
tasks
Informal,
one-on-one
interaction is not possible
(Philippine Corporate Law
Compendium,
Timoteo
Aquino, 2006ed, pp. 286287)
with
participants
with
the
Group
members
participate more equally in
well-moderated
teleconferences
Section 57. Voting Right for Treasury Shares
Rule
On
Teleconferencing
Or
VideoConferencing (RA 8792, as implemented by
SEC Memo Circular No. 15, 30 Nov. 2001)
No voting right as long as such stock remains in

the treasury
Section 58. Proxies
Teleconferencing
interactive
group
communication (3 or more people in 2 or more
locations) through an electronic medium.
Proxy
1. A written authorization given by one person to
another so that the second person can act for
the first.
2. Also refer to the instrument which evidences
the authority of the agent
Basic Types:
1. Video
Conferencing
television-like
communication augmented with sound;
2. Computer-Conferencing
printed
communication through keyboard terminals;
and
3. AudioConferencing
verbal
communication via the telephone with
optional
capacity
for
telewriting
or
telecopying.
Requirements for validity (VSW-F5):

1. Unless otherwise provided in the proxy, it
shall be valid only for the meeting which it
was intended.
2. It shall be signed by the stockholder or
member concerned;
3. Proxies shall be in writing;
4. It shall be filed before the scheduled meeting
with the corporate secretary;
116

5. No proxy shall be valid and effective for a
period longer than 5 years at any one time.
Purposes and use of Proxies

For convenience or favor to the distant and
indifferent stockholders
1. Assures the presence of a quorum
2. Enables those who do not wish to attend a
stockholder or members meeting to protect
their interest by exercising their right to vote
through representative
3. Secure voting control or management control
in corporation.
The right to vote by proxy may be exercised in

any of the following instances:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust
agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.
Since a proxy acts for another, he may act as

such although he himself is disqualified to
vote his hares.
The same person may act as proxy for one or
several stockholders or members
Directors or trustees cannot attend or vote by
proxy at board meetings but they may act as
proxies in stockholders meetings.
A proxy in favor of several persons is
presumed by the action of the majority to
represent the givers will and the dissenting
minority of them cannot withdraw and break
up the quorum and meeting effectuate their
dissent.
A proxy, however, may be revoked when it
runs to several proxies who cannot agree on
a vote. (De, Leon, 2006)
Section 59. Voting Trusts

Voting Trust Agreement
An agreement whereby a stockholder of a stock
corporation confers upon a trustee/s the right to
vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any time.
Kinds of Proxy
General Proxy confers a general discretionary
power to attend and vote at annual meeting as
well
as
exercise
all
powers
the
stockholder/member could do if personally
present.
Limitations:
1. Cannot be entered into for a period exceeding
5 years at any one time EXCEPT when it is a
condition in a loan agreement, in which case,
said contract shall automatically expire upon
full payment of the loan.
2. The agreement must not be used for
purposes of fraud.
3. It must be in writing and notarized and specify
the terms and conditions thereof.
4. A certified copy of the agreement must be
filed with the corporation and with the SEC.
5. The agreement shall be subject to
examination by any stockholder of the
corporation.
6. Unless expressly renewed, all rights granted
in the agreement shall automatically expire at
the end of the agreed period.
Limited Proxy restricts the authority to vote to

specified matters only and may direct the manner
in which the vote shall be cast.
Specific Proxy - the authority granted is merely
for a particular meeting on a specific date.
Continuing Proxy - the authority given is to
represent the stockholders at any and all regular
or special stockholders meetings unless the
stockholder revokes the same (Lopez, The
Corporation Code,
Note: Sec. 58 imposes no limitation as to who
may be a proxy. A stockholder/member may
appoint any person he sees fit to represent him,
and by-laws restricting his right in this respect are
likewise void.
In non-stock corporations the right to vote by
proxy, or even the right to vote itself may be
denied to members in the articles of incorporation
or the by-laws as long as the denial is not
discriminatory.
VOTING TRUSTS
PROXY
Nature
The trustee
owner
votes
as
The proxy holder votes as

agent
Notarization
The agreement must be
notarized
Who May Proxy

A stockholder or member may appoint any person
he sees fit to represent him.
117
Proxy need
notarized
not
be

Corporation Laws
STOCKS AND STOCKHOLDERS
Ways to Become a Stockholder of a
Corporation
1. Subscription contract with the corporation;
2. Purchase or acquisition of shares from
existing stockholders; and
3. Purchase of treasury shares from the
corporation.
Legal title
Trustee acquires legal title
to the shares of the
transferring stockholder;
only
beneficial
title
remains
with
the
stockholder
Proxy has no legal title to

the shares of the principal
Manner of voting
The trustee may vote in
person or by proxy unless
the agreement provides
otherwise
The proxy must vote in

person
Proxy can only act at a

specified
stockholders
meeting (if not continuing)
Restrictions on voting
A trustee can vote and
exercise all the rights of
the stockholder even
when the latter is present
Period
A proxy can only vote in

the absence of the owners
of the stock
Generally, the subscriber

need not pay unless there
is a call
is
be
his
the
The stockholders who

sells his shares can
condone the obligation to
pay the purchase price
Statute of Frauds
A proxy is usually of
shorter duration although
under Sec. 58 it cannot
exceed 5 years at any one
time
The Statute of Frauds

does
not
apply
to
subscription contracts
The right to vote is

inherent in or inseparable
from
the
right
to
ownership of stock
Revocability
The
agreement
irrevocable
The purchaser under a

deed of assignment or
sale shall pay according to
agreement.
Release from obligation to pay

Subscriber cannot
released
from
obligation to pay
subscription price
Separability of ownership and voting right

The
voting
right
is
divorced
from
the
ownership of stocks
Can only be made after

incorporation
Payment
Period
An agreement must not
exceed 5 years at any
one time except when the
same is made a condition
of a loan.
PURCHASE
Can be made before or

after incorporation
Actions allowed
Trustee is not limited to
act at any particular
meeting
SUBCRIPTION
Revocable
anytime
except one coupled with
interest
Powers or Rights of Voting Trustees

1. Shall possess the right to vote and other
rights pertaining to the shares so
transferred and registered in his or their
names subject to the terms and conditions
of and for the period specified in the
agreement.
2. May vote in person or by proxy unless the
agreement provides otherwise.
3. The trustee may exercise the rights of
inspection of all corporate books and
records.
4. The trustee is the legal title holder or
owner of the shares so transferred under
the agreement. He is therefore qualified to
be a director.
The Statute of Frauds

applies if the purchase
price is not less than
P500.00.
Section 60. Subscription Contract

Subscription Contract
Any contract for the acquisition of UNISSUED
stock in an existing corporation or the shares
of a corporation still to be formed shall be
deemed a subscription (Sec. 60).
The subscription contract is a CONSENSUAL
contract that is perfected upon the meeting of
the minds of the parties. The name of the
subscriber is recorded in the stock and
transfer book, and from that time, such
subscriber becomes a stockholder of record
entitled to all the rights of a stockholder. Until
the stocks are fully paid, it continues to be a
subsisting liability that is legally enforceable.
The parties in a subscription contract are the
subscriber and the Corporation itself, since the
subject matter of the contract, i.e. shares of
stocks to be subscribed, is owned by the latter.
Consequently, the subscribers are not real
parties in interest in a case for rescission of
the subscription contract of another subscriber
because they are not parties thereto (Ong
Yong v. Tiu, GR No. 144626, April 6, 2003).
118

the period granted (SEC Rule BED No. 902-A3).
Kinds of Subscription Contract

1. Pre-incorporation subscription (Sec 61)
2. Post incorporation subscription entered into after the incorporation for the
acquisition of unissued stock.
Note: The subscriber becomes a
stockholder upon acceptance by the
corporation of the subscribers offer or by
the subscriber of the corporations offer
even though he has not paid for his shares
unless the subscription agreement or
charter otherwise provides.
3. Conditional Subscription one which is
subject to a condition. The subscriber
does not become a stockholder until the
condition is fulfilled.
4. Absolute Subscription one where the
subscriber becomes liable on the
subscription and acquires the rights of a
stockholder from the time it is accepted.
5. Subscription with a special term one
where the corporation agrees to do
something, the fulfillment of which not
being a condition precedent to the accrual
of a liability of the subscriber or the
acquisition of the rights of a stockholder.
The corporation must first secure the approval

of the SEC.
The application for authority to issue any stock
option shall be in the form of a petition under
oath signed by the President of the corporation
or any other official authorized by the board of
directors.
Note:
Subscribers who have not paid in full

unless they have been validly released
from their undertaking, are debtors of the
corporation for the balance and if the
corporation does not enforced the liability,
its creditors may do so.
Liability of a subscriber for unpaid

subscription cannot be compensated or
set-off with the value of his share nor can
a stock dividends declared be applied as
payment for the same.
Accordingly, a stockholder who

voluntarily remits an amount in excess of
that stated in the call is estopped from
claiming such excess because one
payment is accepted by the corporation, it
becomes a part of the assets of the
corporation and any reduction thereof
would necessarily constitute a violation of
the third paragraph of Section 122. Nor
has the corporation of the power to grant
such refund. (De, Leon, 2006)
There can be a subscription only with

reference to stock which has never been
issued, i.e., to an original issue of stock, OR to
an increase of a capital stock. The subscription
in case of the former may be made before or
after incorporation. But in case of the latter, it
is always made after incorporation. (De, Leon,
2006)
Rules Governing Grant of Stock Options:

1. Stock Options granted to stockholders
ratably in proportion to their shareholdings
may be allowed;
2. Stock options granted to employees or
officials who are not members of the board
may also be allowed after a review of the
scheme.
3. Stock options granted to persons who are
not stockholders may be granted only
upon showing that the board has been
duly authorized to grant the same by its
charter or by a resolution of the
stockholders owning at least two-thirds of
all the outstanding capital stock, voting or
non-voting, excluding treasury stock.
4. Directors or managing groups and officers
must be approved in a stockholders
meeting by stockholders owning at least
two-thirds of all the outstanding capital
stock, voting or non-voting, excluding
treasury stock.
5. Exercise of options must be done within a
period of three (3) years from approval
Section 61. Pre-incorporation subscription

One entered into before incorporation. Preincorporation subscription constitutes a
binding contract among the subscribers.
It shall be irrevocable for a period of at
least 6 months from the date of
subscription, UNLESS:
1. all of the other subscribers consent to the
revocation, or
2. the incorporation fails to materialize.
It shall likewise be irrevocable after the
submission of the articles of incorporation to
the SEC.
Stock Options
A privilege granted to a party to subscribe to a
certain portion of the unissued capital stock of
a corporation within a certain period and under
the terms and conditions of the grant
exercisable by the grantee at any time within
119

Corporation Laws
thereof unless sooner terminated by the
Commission.
6. No transfer of the right to an option shall
be made without the approval of the
Commission.
7. In cases under 2, 3, 4, the Commission
shall determine the reasonableness of the
plan,
scheme,
compensation
or
consideration (SEC Rule BED No.902-A3, Sec. 3).
e. The valuation is subject

approval by the SEC.
3. Labor or services actually rendered to the

corporation;
4. Previously
incurred
corporate
indebtedness;
STOCK SUBSCRIPTION
AGREEMENT
Obligation
The
signers
obligate
themselves to purchase
the shares of stock which
cannot be sold.
The obligation of the

signer to the purchasers
and to the public is
absolute.
Commission
Underwriters
commission.
are
given
There is no commission.
Becoming a stockholder
The signer can refuse to
become a stockholder/
member of the company.
the
Note: Where the consideration is other

than actual cash, OR consists of intangible
property, the valuation thereof shall initially
be determined by the incorporators or the
board of directors, subject to approval by
the SEC.
Intangible properties that may be used as
consideration include patents or copyrights
and if intellectual property will serve as a
consideration, the corporation must submit
to the SEC a copy of the Certificate of
Registration of the intellectual property
right together with an appraisal report and
a Deed of Assignment (Philippine
2006ed).
Underwriting Agreement
An agreement between a corporation and a
third person, termed the underwriter, by
which the latter agrees, for a certain
compensation, to purchase a stipulated
amount of stocks or bonds, specified in the
underwriting agreement, if such securities are
not purchased by those to whom they are first
offered.
UNDERWRITING
AGREEMENT
to
He
becomes
a
stockholder
of
the
company and is liable to
pay the amount due on
the stock.
Section 62. Consideration for stocks
Note: The indebtedness involved is one

that is acknowledged by the board.
5. Amounts transferred from unrestricted
retained earning to stated capital ,
6. Outstanding shares in exchange for stocks
in the event of reclassification or
conversion.
Note: Shares of stock shall not be issued in
exchange for promissory notes or future
services. However, there is no prohibition on
the use of checks, bills or notes in payment of
the cash consideration.
Sources of Corporate Capital
1. Funds furnished by shareholders;
2. Borrowings; and
3. Profits and stock dividends
Valid Considerations In Subscription

Agreements (CaPAL-PO)
1. Cash actually received;
2. Property, tangible or intangible, actually
received AND necessary or convenient for
its use and lawful purposes;
Section 63. Certificate

Transfer of Shares
of
Stock
and
Shares of Stock
Interest or right which owner has in the
management of the corporation, and its
surplus profits, and, on dissolution, in all of its
assets remaining after the payment of its debt.
1. The ownership of share of stock confers no
immediate legal right or title to any of the
property of the corporation. Shares of stock
constitute property distinct from the capital
or tangible property of the corporation and
belong to the different owners.
Requisites:
a. The property is actually received by
the corporation;
b. The property is necessary or
convenient for its use and lawful
purposes;
c. It must be subject to a fair valuation
equal to the par or issued value of the
stock issued;
d. The valuation thereof shall initially be
determined by the incorporators or the
board of directors; and
120

2. They do not constitute an indebtedness of
the corporation to the shareholder. (Garcia
v. Lim Chu Sing, GR No. L-39427, February
24, 1934).
3. A share of stock only typifies a proportionate
or aliquot part of the corporations property,
or the right to share in its proceeds to that
extent when distributed according to law.
Modes of Issuance of Shares
By subscription before and after
incorporation to original, unissued stock;
By sale of treasury stock after
incorporation for money, property or
service;
By subscription to new issues of stock in
case of an increase in the capital stock;
By declaring stock dividend.
of the transfer of shares should be effected,

the action to enforce the right does not accrue
until there has been a demand and a refusal
concerning the transfer. (Ponce v. Alsons
Cement Corporation, G.R. No. 139802,
December 10, 2002)
Section 64. Issuance of the Certificate of
Stock
It has been held, however, that if a fraudulently
issued stock has reached the hand of a bona
fide holder for value and the number of shares
represented thereby will not cause an over
issue, the corporation will be held bound to
make good such certificate to the extent of any
shares owned by the company, provided that
the stock was issued by officers or agents held
out by the corporation as having authority to
do so. (De, Leon, 2006)
Certificate of Stock
It is the paper representation or tangible
evidence of the stock itself and of the various
interests therein.
Requisites:
1. The certificate must be signed by the
president or vice-president, countersigned
by the secretary or assistant secretary;
2. The certificate must be sealed with the
seal of the corporation;
3. The certificate must be delivered;
4. The par value, as to par value shares or
full subscription as to no par value shares
must first be fully paid;
Basis: DOCTRINE OF INDIVISIBILITY
OF SUBSCRIPTION which espouses that
the subscription is one, entire, indivisible,
and whole contract, which cannot be
divided into portions.
5. The original certificate must be
surrendered where the person requesting
the issuance of a certificate is a transferee
from the stockholder (Bitong v. CA, et al.,
GR No. 123553, July 13, 1998).
It is not essential to the ownership and/ or

existence of the share of stock.
Where the certificate of stock reflects a
greater volume of shares than the actual
number of shares issued or to be issued,
the following rules may be considered:
1. To the extent that there is an OVER
ISSUE, the excess issuance (over the
authorized capital stock or the stated
capital) shall be VOID as being ultra vires.
2. If there is NO over issue, but NO payment
has been made to cover the par or stated
value of the excess shares, the latter
would constitute watered stocks.
3. If there is NO over issue and WATERING
of stocks, the corporation may be bound to
honor the certificate (if duly signed and
released by its authorized officers) in the
hands of a holder in good faith, reserving a
right of recourse that an aggrieved party
may pursue against the culpable or
unjustly enriched party.
SHARES OF
STOCK
CERTIFICATE OF STOCK
Nature
Unit of interest in
a corporation
Remedies Where Corporation Refuses To

Issue Certificate (MS-DR)
1. A petition for mandamus
2. A suit for specific performance of an
express or implied contract.
3. May sue for damages where specific
performance cannot be granted
4. Rescind contract of subscription and
recover the consideration paid
Evidence of the holders

ownership of the stock and of
his right as a shareholder
Classification
Incorporeal
intangible
property
Note: Considering that the law does not

prescribe a period within which the registration
121
or
Concrete and tangible

Corporation Laws
c.
Condition for issuance

May be issued by the
corporation even if the
subscription is not fully
paid.
May be issued only if

the subscription is
fully paid.
Quasi-negotiable Character of Stock

Certificate
The endorsement of the certificate of stock by
the owner or his attorney-in-fact or any other
person legally authorized to make the transfer,
shall be sufficient to effect the transfer of
shares if coupled with delivery. The delivery is
the operative act of transfer of shares from the
lawful owner to the new transferee (Bitong v.
Court of Appeals, Ibid).
To be valid to the corporation and third

persons, the transfer must be duly
recorded in the books of the
corporation (Rural Bank of Lipa v. CA,
GR No. 124535, September 28,
2001).
Effects of Unregistered Transfer of Shares

1. It is valid and binding as between the
transferor and the transferee.
2. It is invalid as to the corporation EXCEPT
when notice is given to the corporation for
purposes of registration.
3. It is invalid as against corporate creditors
and the transferor is still liable to the
corporation.
4. It is invalid as to the attaching or
executing creditors of the transferor, as
well as subsequent purchasers in good
faith without notice of the transfer.
5. Where no certificate has been issued or
for some reason it is not in the possession
of the stockholder, it may be transferred by
means of a deed of assignment but the
same must be duly recorded in the books
of the corporation.
Although it is sometimes as regarded as

quasi-negotiable, it is well settled that it is nonnegotiable, because the holder thereof takes it
without prejudice to such rights or defenses as
the registered owners or transferors creditor
may have under the law except insofar as
such rights or defenses are subject to the
limitations imposed by principles of estoppels.
(De, Leon, 2006)
Note: However, as required in the case of

Ponce v. Alsons Cement (GR No. 139802,
December 10, 2002), there must be a special
power of attorney executed by the registered
owner of the share authorizing transferor to
demand transfer in the stock and transfer
book.
Modes of Stock Transfer

1. Indorsement and delivery of stock
certificate and to issue a new certificate
unless
the
original
certificate
is
surrendered for cancellation or is clearly
shown to have been lost, stolen or
destroyed.
2. Transfer made in a separate instrument
while an assignment may be valid and
binding between the parties despite noncompliance with the requisite endorsement
and delivery, it does not necessarily make
the transfer effective for the assignee
cannot enjoy the status of a stockholder
until and unless the issue of ownership is
resolved with finality
3. Judicial or extra judicial settlement of
estate upon the death of the
stockholder, his administrator or executor
becomes vested with the legal title of the
stock until the settlement and division of
the estate is made.
1. The transferee must present the indorsed

certificate to the corporate secretary who
shall effect the transfer in the corporate
books, issue a new stock certificate in
favor of the transferee and cancel the
former certificate.
2. If there is no indorsement in favor of the
transferee, the transferee may file an
action to compel the transferor to make
such indorsement. However, the same
cannot be considered as an intracorporate controversy because the
transferee is not yet a shareholder
(Rivera, et al. v. Florendo, et al., GR No.
L-57586, October 8, 1996).
3. Only absolute transfers need be
registered. The pledge or mortgage itself
need not be recorded in the stock and
transfer book, but a chattel mortgage must
comply with the Chattel Mortgage Law,
and a pledge would require the shares to
be placed in the possession of the
creditor/pledgee. The agreement must
appear in a public instrument to take effect
against third persons (Chemphil v. CA,
Transfer of Stock
Requirements for its validity:
1. In case of shares represented by a
certificate, the transfer must strictly comply
with the following conditions:
a. There must be delivery of the
certificate;
b. The share must be indorsed by the
owner or his agent; and
122

GR Nos. 112438-39,
1995).
December 12,
The mere trustee of shares registered in his

name cannot file a derivative suit for he is not
a stockholder in his own right (Bitong v. CA,
Ibid).
a. Individual Suit an action brought by a
stockholder against the corporation for
direct violation of his contractual rights.
b. Representative Suit one brought by a
person in his own behalf and on behalf of
all similarly situated.
Actions By Stockholders Or Members

DERIVATIVE SUIT one brought by one or
more stockholders or members in the name
and on behalf of the corporation to redress
wrongs committed against it or to protect or
vindicate corporate rights, whenever the
officials of the corporation refuse to sue or are
the ones to be sued or hold control of the
corporation.
Section 65. Liability

Watered Stocks
Requisites:
1.
existing cause of action in favor of the
corporation;
1.
stockholder/member must first make a
demand upon the corporation or the
management to sue unless such a
demand would be futile;
2.
stockholder/ member must be such at
the time of the objectionable acts or
transactions unless the transactions are
continuously injurious; and
3.
action must be brought in the name of
the corporation which must be alleged
(The Corporation Code of the Philippines
Annotated, De Leon & De Leon, Jr.,
2006ed).
of
Directors
for
Watered Stock
Stock issued not in exchange for its equivalent
either in cash, property, share, stock
dividends, or services.
BASIS OF LIABILITY: Where the corporation
issues watered stocks and thereby assumed
an ostensible capitalization in excess of its real
assets, the transaction necessarily involves
the misleading of subsequent creditors and
whether done with that purpose actually in
mind or not, is at least a constructive fraud
upon creditor. (De, Leon, 2006)
It includes:
a. Issued without consideration (bonus
share);
b. Issued as fully paid when the corporation
has received a lesser sum of money than
its par or issued value (discount share);
c. Issued for a consideration other than
actual cash such as property or services
the fair evaluation of which is less than its
par or issued value; and
d. Issued as stock dividend when there are
no sufficient retained earnings or surplus
to justify it.
The Interim Rules of Procedure Governing

Intra-Corporate Controversies provides
additional requisites
- A stockholder or member may bring an action
in the name of the corporation or association
as the case may be, provided that:
1.
That he was a stockholder or member
at the time the acts or transactions subject
of the action occurred and at the time the
action was filed;
2.
He exerted all reasonable efforts, and
alleges the same with particularity in the
complaint, to exhaust all remedies
available
under
the
articles
of
incorporation, by-laws, laws or rules
governing the corporation or partnership to
obtain the relief he desires;
3.
No appraisal rights are available for
the acts complained of; and
4.
The suit is not a nuisance or
harassment suit (Section 1, Rule 8, Ibid).
Note: Refers only to original issue of stocks

but not to a subsequent transfer of such stocks
by the corporation.
Section
66.
Subscriptions
Section 67.
Subscription
Interest
Payment
on
of
Unpaid
Balance
of
Collection of Unpaid Subscription

1. Voluntary Payment
a. Upon the date specified in the
subscription contract; or
b. Upon call by the Board of Directors
2. Involuntary Payment
a. Extra-judicial
i.
Delinquency sale; or
Note: The stockholder is only a NOMINAL

party in a derivative suit. The real party in
interest is the Corporation. The corporation
should be made a party in order to make the
courts judgment binding upon it and thus bar
future litigations of the issue.
123

Corporation Laws
ii.
Application of dividends
b. Judicial action
30 days nor more than 60 days from the

date the stocks become delinquent;
5. Transfer. The stock so purchased shall be
transferred to such purchaser in the books
of the corporation and a certificate for such
stock shall be issued in his favor; and
6. Credit Remainder. The remaining shares,
if any, shall be credited in favor of the
delinquent stockholder who shall likewise
be entitled to the issuance of a certificate
of stock covering the same (Philippine
2006ed).
Note: The prescriptive period in case of

subscription of shares begins to run only from
the time the board of directors declare that the
balance is due and payable. (Garcia v.
Suarez, GR No. 45493, April 21, 1939).
Section 68. Delinquency Sale
Delinquency
1. If the subscription contract fixes the date
for payment, failure to pay on such date
shall render the entire balance due and
payable with interest. Thirty days
therefrom, if still unpaid, the shares
become delinquent, as of the due date,
and subject to sale, unless the board
declares otherwise.
2. If no date is fixed in the subscription
contract, the board of directors can make
the call for payment, and specify the due
date. The notice of call is mandatory. A
mere demand is insufficient. The failure to
pay on such date shall render the entire
balance due and payable with interest.
Thirty days therefrom, if still unpaid, the
shares become delinquent, as of the date
of call, and subject to sale, unless the
board declares otherwise (Sec. 67).
Available Remedies to a corporation if a

shareholder is in default in paying
subscription:
1. Put up the unpaid shares for sale and
dispose of it in a delinquency sale for the
account of the delinquent stockholder
2. Court action
Highest Bidder In A Delinquency Sale
1. The
person
participating
in
the
delinquency sale who offers to pay the full
amount of the balance of the subscription
together with the accrued interest, costs of
advertisement and expenses of sale, for
the smallest number of shares.
2. If there is no bidder as mentioned above,
the corporation may bid for the same, and
the total amount due shall be credited as
paid in full in the books of the corporation.
Such shares shall be considered as
treasury shares.
Call - the resolution or formal declaration of

the board that the unpaid subscriptions are
due and payable.
When Call Not Necessary:
1. When the date of payment is specified in
the subscription agreement
2. When the corporation is insolvent (Aquino,
Philippine Corporate Law Compendium, p.
339)
Note: The board is not bound to accept the

highest bid unless the contrary appears.
Procedure for the Sale of Delinquent

Stocks
1. Resolution. The board shall issue
resolution ordering the sale of delinquent
stock.
2. Notice. Notice of said sale, with a copy of
the resolution, shall be sent to every
delinquent stockholder either personally or
by registered mail;
3. Publication. The notice shall furthermore
be published once a week for 2
consecutive weeks in a newspaper of
general circulation in the province or city
where the principal office of the
corporation is located;
4. Sale. The delinquent stock shall be sold at
the public auction to be held not less than
Section 69. When Sale may be Questioned
Reason: In a public sale, the bidder is the one

making the offer to purchase which the
corporation is free to accept or reject.
Cancellation of Sale
1. When delinquent shareholder pays to the
corporation, on or before the date
specified for the sale of the delinquent
stock, the balance due on his subscription,
plus
accrued
interest,
costs
of
advertisement and expenses of sale; or
2. Upon order of the board.
Section 70. Court Action to Recover Unpaid
Subscription.
Note: Forfeiture of delinquent stock, without
the corporation paying for it under Section 68,
is not authorized under the Code. It cannot
124

forfeit in its favor delinquent shares to be taken
up in the corporations books as treasury
shares, in case no bidder in a delinquent sale.
(De, Leon, 2006)
2.
Section 71. Effects of Delinquency

3.
1. Upon the stockholder
a. Accelerates the entire amount of the
unpaid subscription;
b. Subjects the shares to interest,
expenses and costs;
c. Disenfranchises the shares from any
right that inheres to a shareholder,
except the right to dividends (but
which shall be applied to any amount
due on said shares or, in the case of
stock dividends, to be withheld by the
corporation until full payment of the
delinquent shares (Sec. 43).
4.
5.
2. Upon the director owning delinquent

shares
a. if the delinquent stockholder is a
director, the director shall continue to
be a director but he cannot run for reelection (Reviewer in Commercial
Law, Sundiang & Aquino, 2006ed).
b. A delinquent stockholder seeking to be
elected as director may not be a
candidate for, nor be duly elected to,
the board.
6.
Note: No delinquent stock shall be voted for

nor be entitled to vote or representation at any
stockholders meeting, nor shall the holder be
entitled to any of the rights of a stockholder
except the right to dividends in accordance
with the provisions of this Code until and
unless he pays the amount due on his
subscription with accrued interest, and the
cost and expenses of advertisement, if any
(Sec. 71).
share and the circumstances regarding its

loss;
Verification. The corporation shall verify
the affidavit and other information and
evidence with the books of the
corporation;
Publication. The corporation shall publish
a notice in a newspaper of general
circulation published the place where the
corporation has its principal office, once a
week for 3 consecutive weeks at the
expense of the registered owner of the
certificate of stock which has been lost,
stolen or destroyed;
One Year Waiting Period. There shall be
a waiting period of 1 year from the date of
the last publication during which a contest
can be interposed;
Contest. If the contest has been
presented to said corporation or if an
action is pending in court regarding the
ownership of said certificate of stock which
has been lost, stolen or destroyed, the
issuance of the new certificate of stock
shall be suspended until the final decision
of the court regarding the ownership of
said certificate of stock which has been
lost, stolen or destroyed; and
Replacement. If there is no contest within
the 1 year period, the corporation shall
then
replace
the
certificate.
The
replacement of share can only be made
before the expiration of the 1 year period if
a bond is posted (Philippine Corporate
Law Compendium, Aquino, 2006 ed).
Note: In an opinion, the SEC held that the

corporation may voluntarily issue new
certificates in lieu of the originals provided that
the corporation is certain as to the real owner
of the shares. This is because of the fact that,
unless proven otherwise, the stock and
transfer book of the corporation is the best
evidence to establish stock ownership
(Philippine
Corporate
Law,
Villanueva,
2001ed).
Delinquent stock shall not be included in

determining the existence of quorum.
Quo warranto proceedings may be instituted
against directors elected by delinquent
stockholders.
The prescribed procedure does not apply to a

case where the certificates are in the
companys possession when mislaid which
thereby obligates the corporation, not the
stockholder, to suffer the consequences.
Section 72. Rights of Unpaid Shares

Section 73. Lost or Destroyed Certificates
When the stock and transfer book has been

lost or destroyed, and the corporation decides
to issue new certificates of stock in lieu of the
old certificates held by existing stockholders,
the procedure or formalities prescribed under
Section 73 are not applicable for the
stockholders should not be made to suffer the
Procedure For Issuance Of New Certificate

of Stock In Lieu of Lost, Stolen or
Destroyed Ones
1. Affidavit. The registered owner shall
execute and file an affidavit regarding the
125

Corporation Laws
consequences on account of the negligence of
corporation. (De, Leon, 2006)
Additional Issues of Originally Authorized

Shares
Rights and Remedies of Stockholders (The

Corporation Code
of the
Philippines
Annotated, De Leon & De Leon, Jr., 2006ed)
General Rule:
There is no preemptive right. This is on the
theory that when a corporation at its inception
offers its first shares, it is presumed to have
offered all of those which it is authorized to
issue.
1. Rights As To Control And Management

(MEA-C-VEA)
a. To attend and vote in person/ proxy at
stockholders meetings (Secs. 50, 58);
b. To elect & remove directors (Secs. 24,
28);
c. To approve certain corporate acts
(Sec. 52);
d. To compel the calling of meetings
(Sec. 50);
e. To have the corporation voluntarily
dissolved (Secs. 118, 119);
f. To enter into a voting trust agreement
(Sec. 59); and
g. To adopt/ amend/ repeal the by-laws
or adopt new by-laws (Secs. 46,48).
Exception:
When a corporation at its inception offers only
a specified portion of its authorized capital
stock for subscription, there would be
preemptive right as to the remaining portion
thus offered for subscription.
Unless there is an express restriction in the
Articles of Incorporation, the pre-emptive right
of the stockholder is transferable.
Remedial Rights (BIRD Fur)
a. To inspect corporate books (Sec. 74);
b. To recover stock unlawfully sold for
delinquency (Sec. 69);
c. To demand payment in the exercise of
appraisal right (Secs. 41, 81);
d. To be
furnished
recent
financial
statements/ reports of the corporations
operations (Sec. 75); and
e. To bring suits
i.
Individual suit a suit instituted
by a shareholder for his own
behalf against the corporation;
ii.
Representative suit a suit filed
by a shareholder in his behalf and
in behalf likewise of other
stockholders similarly situated and
with a common cause against the
corporation; and
iii.
Derivative suit supra.
2. Proprietary Rights (TRIP-Pre)

a. To transfer of stock in the corporate
book (Sec. 63);
b. To receive dividends when declared
(Sec. 43);
c. To issuance of certificate of stock/
other evidence of stock ownership
(Sec. 63);
d. To participate in distribution of
corporate assets upon dissolution
(Sec. 118, 119); and
e. To pre-emption in the issue of shares
(Sec. 39)
Note:
Right of pre-emption extends to
treasury shares in case of their reissuance.
A stockholder who neither desires nor intends
to buy any of the stocks being offered may
waive such right. The right, however, to waive
pre-emptive right is a personal right which
should be exercised personally by the
stockholder concerned or by an authorized
person in his behalf by way of a special power
of attorney.
Liabilities of Stockholders
1. Liability to the corporation for unpaid
subscription;
2. Liability to the corporation for interest on
unpaid subscription;
3. Liability to creditors of the corporation on
the unpaid subscription
4. Liability for watered stock
5. Liability for dividends unlawfully paid; and
6. Liability for failure to create corporation
If the shares of a corporation are offered and

not subscribed or purchased by the
stockholders and the shares are being offered
again, there is no pre-emptive right with
respect to the latter offer of shares (Benito v.
SEC, G.R. No. L-56655, July 25, 1983).
126

5. Rights to financial Statements (Sec. 75).
CORPORATE BOOKS AND RECORDS
Basis of the Right to Inspection:

1. The right of stockholders to inspect the
books of the corporation rests on the fact
of beneficial ownership of the corporate
property and assets through ownership of
shares;
2. The stockholders are entitled to inspect
the books and records of a corporation in
order for the to investigate the conduct of
the management, determine the financial
condition of the corporation, and generally
take an account of the stewardship of the
officers and directors;
3. The evident purpose of the law in granting
stockholders the right is to protect small
and minority stockholders from the power
of the majority and from mismanagement
by its officers as well as to ascertain,
establish and maintain their rights and
intelligently perform their corporate duties;
and
4. The SECs power of supervision and
control over all corporations
Section 74. Books to be Kept; Stock

Transfer Agent
1. Book of all business transactions;
2. Book of Minutes of all meetings of
3. Book of Minutes of all meetings of
directors or trustees; and
4. Stock and transfer book, in case of stock
corporations.
Note: The alienation, sale or transfer of
stock that is supposed to be recorded in the
stock and transfer book refers generally to the
shares which may be alienated, and they are
those covered by certificates of stock.
Corporate records required by the SEC to
be kept and/or registered:
1. Books of Account;
2. List of Stockholders or Members; and
3. Financial Records.
Persons Given The Right To Inspect
Corporate Books
1. Any director, trustee, stockholder or
member;
2. Voting trust certificate holder;
3. Stockholder of a sequestered company;
and
4. Beneficial owner of shares.
Extent of the Right of Inspection:

The right to inspect the books and records
of the corporation includes, as an
INCIDENT thereof, the right to make
copies, abstracts and memoranda of their
contents.
The right of inspection is PERSONAL but
the inspection and examination may be
made by any proper representative or
attorney-in-fact and either with or without
the attendance of the director, etc.
Requirements
1. The records must be kept at the principal
office of the corporation;
2. Any director, trustee, stockholder or
member shall have the right to inspect the
records of all business transactions and
the minutes of any meetings;
3. The stockholder may demand a copy of
the excerpts of the records or minutes;
and
4. The refusal to allow such right to inspect
and to demand such copy shall subject the
erring officer or agent to civil and criminal
liabilities and if such refusal is by virtue of
a resolution or order of the board of
directors or trustees, the liability shall be
imposed upon the directors or trustees
who voted therefor.
Trade secrets are those which the

corporation may undoubtedly keep secret
notwithstanding the right of inspection
given to stockholders.
Limitations on the Right of Inspection:

1. The right must be exercised during
reasonable hours on business days;
2. The person demanding the right has NOT
improperly used any information obtained
through any previous examination of the
books and records of the corporation; and
3. The demand is made in good faith or for a
legitimate purpose (Sec. 74).
Rights of Stockholders to Corporate Books

and Records
1. Right of Inspection;
2. Right to demand a list of stockholders;
3. Right to Demand a detailed auditing of
business expenditures;
4. To examine books of the corporations
subsidiary;
Note: The right extends, in consonance with

equity, good faith, and fair dealing, to a foreign
subsidiary wholly-owned by the corporation.
Nos. 2 and 3 are defenses available to a
director, trustee or officer held liable.
127

Corporation Laws
Remedies if Inspection Denied:
1. Mandamus;
2. Damages;
3. Criminal Suit
executed by each of the constituent

corporations, signed by the President or
Vice-President and certified by the
secretary or assistant secretary;
4. Submission to SEC for approval Four
copies of the Articles of merger or
Consolidation (together with favorable
recommendation
of
a
pertinent
government agency in certain cases) shall
be submitted to the SEC for approval; and
5. Conduct of hearing by SEC If, upon
investigation, the SEC has reason to
believe that the proposed merger or
consolidation is contrary to or inconsistent
with the provisions of this Code or existing
laws, it shall set a hearing to give the
corporations concerned the opportunity to
be heard.
6. Issuance of certificate by SEC The
SEC shall issue a certificate of merger if it
is satisfied that the merger or
consolidation
of
the
corporations
concerned is not inconsistent with the
provisions of this Code and existing laws
(The Corporation Code of the Philippines
2006ed).
MERGER AND CONSOLIDATION

Section 76. Plan of Merger or Consolidation
Combination - used to designate an alliance
or confederation or sale or other transaction
between two or more corporation, by virtue of
which will not necessarily result in the loss of
the separate existence of the corporations.
(Aquino,
Philippine
Corporate
Law
Compendium, p. 371)
Note: A partnership may not be allowed to
merge with a corporation but the partnership
may transfer all its assets and liabilities to the
corporation which will issue its shares of stock
to be distributed to the partners in proportion
to their respective interest in the partnership,
provided the partnership shall be dissolved in
accordance with the civil code (SEC Opinion
Jan3, 1984)
Common
Forms
Combinations
a. Sale of Assets
b. Lease of Assets
c. Sale of Stock
d. Merger
e. Consolidation
of
Corporate
Note: The plan may still be amended before

the same is filed with the SEC, however, any
amendment thereto must be approved by the
majority vote of the board members or trustees
of the constituent corporations and affirmed by
the vote of 2/3 of the outstanding capital
MERGER
CONSOLIDATION
A union whereby one or

more
existing
corporations are absorbed
by another corporation
which
survives
and
continues the combined
business.
The union of two or more

existing corporations to
form a new corporation
called the consolidated
corporation.
Section 78.
Consolidation
Articles
of
Merger
or
Section 79. SECs approval and effectivity

of Merger or Consolidation
General Rule:
When one corporation buys all the shares of
another corporation, this will not operate to
dissolve the other corporation and as the two
corporations still maintaining their separate
corporate entities, one will not answer for the
debts of the other.
Section 77. Stockholders or members

approval
Procedure for Merger and Consolidation
1. Approval of Plan The Board of each
corporation shall draw up a plan of merger
or consolidation;
2. Submission
to
stockholders
or
members for approval The plan of
merger or consolidation shall be approved
by vote of stockholders representing at
least 2/3 of the outstanding capital stock,
or members in case of non-stock
corporation
3. Execution of formal contract Articles
of Merger or Consolidation shall be
Exceptions As To Non-Assumption Of
Liabilities (FEC2)
1. If the purchase was in fraud of creditors;
2. If there is an express assumption of
liabilities;
3. If there is a consolidation or merger;
4. If the purchaser is merely a continuation of
the seller.
128

De Facto Merger
One corporation acquiring all or substantially
all of the properties of another corporation in
exchange for shares of stock of the acquiring
corporation. The acquiring corporation would
end-up with the business enterprise of the
selling corporation whereas the latter would
end up with basically its remaining assets
being the shares of stock of the acquiring
corporation and may then distribute it as
liquidating dividend to its stockholders
(Philippine
Corporate
Law,
Villanueva,
2001ed).
MERGER and
CONSOLIDATION
The transferee merely continues the same

business of the transferor since he obtains
the earning capability of the venture.
The transferee is liable for the debts and
liabilities of the transferor.
3. Equity Level (Share Purchase)
The purchaser takes control and
ownership of the business by purchasing
the shareholdings of the corporate owner.
What the purchaser actually purchased is
the ability to elect the members of the
board of the corporation who run the
business.
SALE OF ASSETS
Acts involved
Sale of assets is always
involved
Merger/ consolidation is
not always involved
Transfer of title
Title to the assets are
transferred by operation
of law
Transfer of title is by virtue

of contract
Assumption of liabilities
There
is
automatic
assumption of liabilities
Purchasing corporation is
not generally liable for the
debts and liabilities of the
selling corporation
Dissolution
The
constituent
corporations
are
automatically dissolved
The selling corporation is

not dissolved by the mere
transfer of all its property
Liquidation
There is continuance of
the enterprise and of the
stockholders
The selling corporation

ordinarily contemplates a
liquidation
of
the
enterprise
Types of Acquisitions (Philippine Corporate

Law, Villanueva, 2001ed)
1. Assets-Only Level (Property Only
Purchase)
The purchaser is interested only in the raw
assets and properties of the business. He
is not interested in the entity of the
corporate owner of the assets or on the
goodwill and other factors relating to the
business itself.
The transferee would not be liable for the
debts and liabilities of his transferor since
there is no privity of contract over debt
obligations between the transferee and the
transferors creditors.
Section 80. Legal Effects of Merger and

Consolidation
1. There is automatic assumption of the
liabilities of the absorbed corporation or
constituent
corporations
which
are
dissolved.
2. The absorbed or constituent corporations
are ipso facto dissolved by operation of
law without necessity of any further act or
deed but there is no winding up or
liquidation of their assets for the surviving
corporation automatically acquires all the
liabilities of the constituent corporation.
3. Permits the transfer of the assets to the
purchaser and the distribution of the
consideration received in a single
operation.
4. Involve exchanges of properties, a transfer
of the assets of the constituent
corporations in exchange for securities in
the new or surviving corporation but
neither involves winding up of the affairs of
the constituent corporations in the sense
that their assets are distributed to the
stockholders.
5. Dissolution of the constituent corporations
cannot be made to retroact to a date prior
to the ratification of the stockholders but
the transfer of the assets and liabilities of
the constituent corporations could be
made effective retroactively as of the date
the said board of directors so resolved.
6. Consent of the creditors not necessary.
APPRAISAL RIGHT
APPRAISAL RIGHT
The right to demand payment of the fair value
of his shares, after dissenting from a proposed
corporate action involving a fundamental
change in the corporation in the cases
provided by law.
2. Business-Enterprise Level (Purchase

as On-Going Concern)
129

Corporation Laws
3. Demand for payment must be made within
30 days from the date vote is taken
thereon. Failure to make demand shall be
deemed a waiver.
4. Price must be based on fair value as of
day prior to date on which vote was taken.
5. Submission by withdrawing stockholder of
his shares to the corporation for notation
of being dissenting stockholder within 10
days from written demand.
6. Payment must be made only when the
corporation has unrestricted retained
earnings in its books.
7. Stockholder must transfer his shares to
the corporation upon payment by the
corporation.
Section 81. Instances of Appraisal Right

(ASIMA)
1. An amendment to the articles that has the
effect of
a. changing or restricting the rights of
shareholders; or
b. of authorizing preferences over those
of outstanding shares; or
c. changing the term of corporate
existence;
The changing or restriction of rights of

shareholders must be made in good
faith.
Note: If the corporation unjustifiably

refuses to pay the dissenting stockholder
despite the full compliance with all the
requirements for a valid exercise of
appraisal right and despite the fact that the
corporation has sufficient unrestricted
retained
earnings,
the
aggrieved
stockholder may file the appropriate action
before the proper Regional Trial Court to
compel the corporation to allow him to
exercise his appraisal right (SEC Opinion,
October 1, 2001).
2. Sale, encumbrance or other dispositions of

all or substantially all of the corporate
property or assets;
3. Investment of corporate funds in another
corporation or in a purpose other than the
primary purpose (Sec. 42);
4. Merger or consolidations (Sec. 81);
5. In a close corporation, a stockholder may,
for any reason, compel the corporation to
purchase his shares when the corporation
has sufficient assets in its books to cover
its debts and liabilities exclusive of capital
stock (Sec. 105).
Section 83. Effect of Demand and

Termination of Right
1. All rights accruing to such shares shall be
suspended from the time of demand for
payment of the fair value of the shares
until either the abandonment of the
corporate action.
2. The dissenting stockholder shall be
entitled to receive payment of the fair
value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen by
them.
If not paid within 30 days after the
award, his voting and dividend rights
shall be immediately restored.
Upon such payment, all his rights as
stockholder are terminated, not merely
suspended. But if before he is paid the
proposed
corporate
action
is
abandoned, his rights and status as a
stockholder shall thereupon be
permanently restored.
Note: the appraisal right does not normally

belong to a stockholder as a matter of
absolute right; otherwise, a stockholder can
withdraw from a corporation anytime by
returning his share and getting back his
capital, which is truly violative of the trust fund
doctrine (SEC Opinion; Jan. 11, 1982)
Section 82. How right is exercised
1. The dissenting stockholder shall make a
written demand on the corporation within
30 days after the date on which the vote
was taken for the payment of the fair value
of his shares;
2. If the proposed corporate action is
implemented or effected, the corporation
shall pay such stockholder, upon
surrender of the corresponding certificate
of stock within 10 days after demanding
payment of his shares;
3. Upon payment of the agreed or awarded
price, the stockholder shall transfer his
shares to the corporation.
Payment
Made only if the corporation has unrestricted
retained earnings in its books to cover the
same.
Conditions for Exercise of Appraisal Right

1. Any of the instances set forth by law must
be present.
2. Dissenting stockholder must have voted
against the proposed action.
130

Section 84. When right to Payment ceases
Requisites:
1. It does NOT have capital stock divided into
shares;
2. NO part of whose income is, during its
existence, distributable as dividends to its
members, trustees, or officers; and
General Rule:
A dissenting stockholder who demands
payment of his shares is no longer allowed to
withdraw from his decision.
Exceptions: (C-DAN)
1. The corporation
consents to the
withdrawal;
2. The proposed corporate action is
disapproved by the SEC where its
approval is necessary; and
3. The proposed corporate action is
abandoned
or
rescinded
by
the
corporation;
4. The Commission determines that such
stockholder is not entitled to appraisal
right (Sec. 84).
Section 88. Purposes (CREPS-CFL-SCSTIA-Like-Combi.)

Non-stock corporations may be formed or
organized
for
charitable,
religious,
educational, professional, cultural, fraternal,
literary, scientific, social, civic service, or
similar purposes like trade, industry,
agricultural and like chambers, or any
combination thereof.
They are governed by the same rules
established for stock corporations, whenever
pertinent, subject, however, to a number of
special features.
Valuation Date
The fair value of the shares of the dissenting
stockholder is determined as of the day
PRIOR to the date on which the vote was
taken notwithstanding any appreciation or
depreciation in value of the shares in
anticipation of such corporate action.
Rules On Conversion
1. Stock to non-stock corporation
Conversion may be made by mere
amendment of the articles of incorporation.
Section 85. Who Bears cost of Appraisal
EFFECT: The stockholders will become

the members of the non-stock corporation
and thus will no longer have any pecuniary
interest in the corporation. Neither are they
entitled to any share in the profit that may
be obtained out of the operations or
activities of the non-stock corporation.
Section 86. Notation on certificate (s); right

of transferee
Effects of Transfer of Dissenting Shares:
1. The transferee shall become a regular
stockholder with the right to receive all
dividend distributions which would have
accrued to such shares.
2. The right of the transferor as a dissenting
stockholder to be paid the fair value of the
shares shall cease.
2. Non-stock to stock corporation

A non-stock corporation cannot be
converted into a stock corporation by mere
amendment of its articles of incorporation
because the conversion would change the
corporate nature from non-profit to
monetary gain.
NON-STOCK CORPORATIONS
What the corporation should do is to

dissolve itself and its members may
decide to organize a stock corporation.
Section 87. Concept

A non- stock corporation is one where no
part of its income is distributable as dividends
to its members.
The conversion without dissolving it first

would be tantamount to distribution of its
assets or income to its members inasmuch
as after its conversion, the asset of the
non-stock corporation would now be
treated as payment to the subscriptions of
the members who will now become
stockholders of the corporation.
Even if there is a statement of capital stock, for

as long as there is no distribution of retained
earnings to its members, the corporation is
non-stock.
Any profit which it may obtain as an incident to
its operations shall, whenever necessary or
proper, be used in furtherance of the purpose
or purposes for which it was organized.
131

Corporation Laws
STOCK
NON-STOCK
Nature
Has capital stock divided

into shares and with
authority to distribute
dividends
to
its
stockholders.
Does not have shares and

may not distribute profits
to its members.
Meeting / voting of members/ stockholders

Stockholders
and
directors must act in a
meeting, except where a
mere written assent is
sufficient or a formal
meeting unnecessary.
Members may be allowed

by the by-laws to vote by
mail or other similar
means.
Manner of voting
Cumulative
voting
is
available in the election of
directors
Cumulative voting not

available unless otherwise
provided in the articles or
by-laws
Proxy
Stockholders may vote by
proxy
Members
may
be
deprived of the right to
vote by proxy in the
articles or by-laws
Non-transferability of Membership
Stockholders may transfer
their shares
Members cannot transfer

their membership unless
allowed by the articles or
by-laws
Directors / Trustees
Directors cannot exceed
15 in number
Trustees may exceed 15

in number
Term of director/ trustee

The term of a director is 1
year
The term of a trustee is 3

years; 1/3 of the Board
shall be elected annually
Election of officers
Officers are elected by the
Board of Directors
Officers may be directly

elected by the members
unless otherwise provided
in the articles or by-laws
Place of meeting
Stockholders
meetings
shall be held in the city or
municipality
where
principal
office
of
corporation is located,
and if practicable in the
principal office.
The by-laws may provide

that members of a nonstock corporation may
hold their meetings at any
place
within
the
Philippines.
CLOSE CORPORATIONS
Section 96.
Close Corporations
A special kind of stock corporation:
132
1. whose articles of incorporation should

provide that:
a. the number of stockholders shall not
exceed 20;
b. issued stocks are subject to transfer
restrictions, with a right of preemption
in favor of the stockholders or the
corporation; and
c. the corporation shall not be listed in
the stock exchange or its stocks
should not be publicly offered; or
d. whose stocks, at least 2/3 of the voting
stocks or voting rights of which are not
owned or controlled by another
corporation which is not a close
corporation
Note: Non-compliance with any of the
requirements shall not make the corporation a
close corporation within the meaning of the
Corporation Code.
The outstanding peculiarity of a close
corporation is the identity between stock
ownership and active management.
Characteristics
1. Stockholders may act as directors without
need of election and therefore are liable as
directors;
2. Stockholders who are involved in the
management of the corporation are liable
in the same manner as directors are;
3. Quorum may be greater than mere
majority;
4. Transfers of stocks to others, which would
increase the number of stockholders to
more than the maximum are invalid;
5. Corporate actuations may be binding even
without a formal board meeting, if the
stockholder had knowledge or ratified the
informal action of the others;
6. Preemptive right extends to all stock
issues;
7. Deadlocks in board are settled by the
SEC, on the written petition by any
stockholder; and
8. Stockholder may withdraw and avail of his
right of appraisal.
Note: Special rules are provided for close
corporations because it is essentially an
incorporated partnership (The Corporation
Code of the Philippines Annotated, De Leon &

unrestricted
earnings.
Section 97. Articles of Incorporation

ORDINARY STOCK
CORPORATION
Arbitration of intracorporate deadlock by

the SEC is not a
remedy in case the
directors
or
stockholders are so
divided respecting the
management of the
corporation.
CLOSE CORPORATION
Its articles must contain

the
special
matters
prescribed by Sec. 97,
aside from the general
matters in Sec. 14.
Failure
to
do
so
precludes a de jure close
corporation status.
2/3 of its voting stock or
voting rights must not be
owned or controlled by
another
corporation
which is not a close
corporation.
Classification of directors
Its
articles
cannot
classify its directors.
Its articles may classify

its directors.
Election/ appointment of officers

The corporate officers
and employees are
elected by a majority
vote of all the members
of
the
board
of
directors.
Note: A close corporation is different from a

closed corporation and a closely held
corporation.
Its articles may provide

that any or all of the
corporate
officers
or
employees
may
be
elected or appointed by
the stockholders.
Section 98. Validity of Restrictions on

Transfer of Shares
Management
Business
of
the
corporation
is
managed by the board
of directors.
Business
of
corporation
may
managed
by
stockholders
if
articles so provide,
they
are
liable
directors.
2 Conditions for the validity of restrictions

on the right to transfer shares:
1. Such restrictions must appear in the
articles of incorporation and in the by-laws,
as well as in the certificate of stock;
otherwise, they shall not be binding on any
purchaser thereof in good faith
2. They shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholders
with such reasonable terms, conditions or
period stated therein.
the
be
the
the
but
as
Pre- emptive right

The pre-emptive right
is subject to the
exceptions found in
Sec. 39.
The pre-emptive right is

subject to no exceptions
unless denied in the
articles
Appraisal right
The appraisal right
may be exercised by a
stockholder only in the
cases
provided
in
Secs. 81 and 42 of the
Code.
The appraisal right may

be
exercised
and
compelled against the
corporation
by
a
stockholder
for
any
reason.
Purchase of its own shares

Except as regards
redeemable
shares,
the purchase by the
corporation of its own
stock must always be
made
from
the
Arbitration
of
intracorporate deadlock by
the SEC is an available
remedy in case the
directors or stockholders
are so divided respecting
the management of the
corporation.
The following CANNOT be a close

corporation:
(MOSBIPEP)
1. mining companies;
2. oil companies;
3. stock exchanges;
4. banks
5. insurance companies;
6. public utilities;
7. educational institutions; and
8. other corporations declared to be vested
with public interest. (Sec. 96)
Ownership of stocks
Its
status
as
an
ordinary
stock
corporation
is
not
affected
by
the
ownership of its voting
stock or voting rights.
stockholders regardless
of the availability of
unrestricted
retained
earnings.
Remedy of arbitration
Articles of incorporation
Its
articles
of
incorporation need only
contain the general
matters enumerated in
Sec. 14 of the Code.
retained
In case of an arbitration
of an intra-corporate
deadlock by the SEC, the
corporation
may
be
ordered to purchase its
own shares from the
133
The restriction on transfer is in the nature

of a right of first refusal in favor of the
stockholders which can be waived by the
stockholder, if the latter fails to exercise
the option to purchase within the period
stated in the articles and by-laws. An
absolute restraint on transfer of stock
unlimited in time is invalid.
Any transfer made should not result in
exceeding the number of stockholders as
allowed by the Code.

Corporation Laws
Section 103. Amendment of Articles of
Incorporation
Section 99. Issuance
Qualifying Conditions
in
breach
of
Section 104. Deadlocks
It is clear under Section 99 that good faith is

not a defense because there is a conclusive
presumption of knowledge of the restriction.
Deadlock In A Close Corporation

DEADLOCK is when the directors or
stockholders are so divided respecting the
management of the business and affairs of the
corporation that the votes required for any
corporate action cannot be obtained and as a
result, business and affairs can no longer be
conducted to the advantage of the
stockholders generally.
Section 100. Agreements by Stockholders

Effects Where Stockholders Are Managers
1. No longer necessary to elect directors;
2. Stockholders concerned shall be deemed
the directors;
3. The stockholders shall have the same
liabilities as directors;
4. To the extent that the stockholders are
actively engaged in the management or
operation of the business and affairs of a
close corporation, the stockholders shall
be held to strict fiduciary duties to each
other and among themselves; and
5. The stockholders shall be personally liable
for corporate torts unless the corporation
has obtained reasonably adequate liability
insurance.
Section 101. When board meeting
unnecessary or improperly held
In this case, the SEC, upon written petition

by any stockholder, shall have the power to
arbitrate the dispute and in the exercise of
such power. The SEC shall have authority
to
1. Cancel or alter any provision in the articles
of incorporation or by-laws;
2. Cancel, alter or enjoin any resolution of
the corporation;
3. Direct or prohibit any act of the
corporation;
4. Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation
regardless of the availability of unrestricted
retained earnings;
5. Appoint a provisional director;
6. Dissolve the corporation; or
7. Grant such other relief
as the
circumstances may warrant.
is
General Rule:
Any action by the directors of a close
corporation without a meeting shall be valid if:
1. Before or after such action is taken, written
consent is signed by all the directors;
2. All the stockholders have actual or implied
knowledge of the action and make no
prompt objection;
3. The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders;
4. All the directors have express or implied
knowledge of the action in question and
make no prompt objection thereto.
The power given to the Commission by

Section 104 may be exercised notwithstanding
any provision in the Articles of Incorporation,
by-laws, or agreement of stockholders of a
close corporation to the contrary.
SPECIAL CORPORATIONS
Section 106-108
Exception:
If the by-laws provide otherwise.
Educational Corporation
It is a stock or non-stock corporation organized
to provide facilities for teaching or instruction.
A favorable recommendation of the DECS is
essential for the approval of its articles of
incorporation and by-laws.
Section102. Pre-emptive right in Close

Corporations
The right of pre-emption is a matter of
absolute right on the part of the stockholder,
except only when limited or curtailed by the
Articles of Incorporation.
It is primarily governed by special laws and

suppletorily governed by the provisions of the
Code.
134

Section 4(2), Article XIV of the 1987
Constitution provides for rules governing the
control, administration and establishment of
educational institutions.
NON-STOCK
EDUCATIONAL
CORPORATION
diocese, synod, sect, etc. (Section 116);

and
3. Ordinary
Non-Stock
Religious
Corporation (Section 88)
DISSOLUTION AND WINDING UP
EDUCATIONAL
CORPORATION
Dissolution
The extinguishment of the corporate franchise
and the termination of corporate existence.
Governing law
Governed
by
the
provisions on non-stock
corporations
and
suppletorily
by
the
provisions
on
stock
corporations
Governed by special
laws and by the
general provisions of
the Corporation Code
Section 117. Methods of Dissolution

1. Voluntary
a. Application for dissolution with the
SEC:
i.
Where no creditors are affected;
ii.
Where creditors are affected;
b. Shortening of the corporate term by
amending the articles of incorporation.
(Section 120)
Nature
A non-stock corporation
A special corporation
which may be stock or
non-stock
Number of trustees
The number of the board
of trustees should not be
less than 5 but not more
than 15.
The number of board

of trustees may be
more than 15
2. Involuntary
a. Expiration of the corporate term;
b. Failure to organize and commence
business within 2 years from the date
of issuance of the certificate of
incorporation (Section 121)
Term of office
The term of office of the
board of trustees shall be
5 years
The term of office of

the board of trustees
shall be 3 years
Note: However, the SEC has opined

that the dissolution in this case is not
automatic. The corporation continues
to exist as such, notwithstanding its
non-operational status until the SEC
orders its dissolution after notice and
hearing.
Section 109-116
Religious Corporations
A corporation composed entirely of spiritual
persons and which is organized for the
furtherance of a religion or for perpetuating the
rights of the church or for the administration of
church or religious work or property. It is
different
from
an
ordinary
non-stock
corporation organized for religious purposes.
c. Legislative dissolution;
d. Quo warranto suit against a de facto
corporation;
e. Minority
stockholders
suit
for
dissolution on justifiable grounds; or
f. SEC dissolution, upon complaint and
after notice and hearing, on the
following grounds:
i.
The corporation was illegally
organized;
ii.
Continuous inactivity (subsequent
to incorporation, organization and
commencement of business) for at
least 5 years;
iii.
Serious
dissension
in
the
corporation; or
iv.
Commission by the corporation of
illegal or ultra vires acts or
violations of the Code.
The Corporation Code does not require any

religious group to be registered as a
corporation BUT if it wants to acquire legal
personality, its members should incorporate
under the corporation Code.
Kinds
1. Corporation sole - A special form of
corporation, usually associated with the
clergy, consisting of one person only and
his successors, who is incorporated by law
to give some legal capacities and
advantages (Section 110);
2. Religious
societies/
Corporate
aggregate - A non-stock corporation
governed by a board but with religious
purposes. It is incorporated by an
aggregate of persons, e.g. religious order,
Note: According to some decisions, the

methods of effecting dissolution as prescribed
by statute are exclusive and a corporation
135

Corporation Laws
cannot be dissolved except in the manner
prescribed by law.
Liquidation
The process by which all the assets of the
corporation are converted into liquid assets
(cash) in order to facilitate the payment of
obligations to creditors, and the remaining
balance, if any, is to be distributed to the
Effects
1. Transfer of legal title to corporate property
to the stockholders who become coowners thereof;
2. Continuation of corporate business merely
as an association without juridical
personality;
3. Conveyance by the stockholders of their
respective shareholdings toward the
creation of a new corporation to continue
the business of the old;
4. Reincorporation
of
the
dissolved
corporation by re-filing new articles of
incorporation and by-laws;
5. The corporation continues as a body
corporate for 3 years for purposes of
winding up; and
6. Cessation of corporate existence for all
purposes upon the expiration of the
winding up period of 3 years (The
Corporation Code of the Philippines
2006ed).
Note: A dissolved corporation continues to be

a body corporate for 3 years from the time it is
dissolved for the purpose of liquidation or
winding up its corporate affairs.
The termination of the life of a juridical entity
does not by itself cause the extinction or
diminution of the rights and liabilities of such
entity nor those of its owners and creditors
alike (see Sec. 145).
Methods
1. By the corporation itself through its board
of directors/ trustees (Sec. 122, par. 1);
2. By a trustee to whom the corporate
assets have been conveyed (Sec. 122,
par. 2 ) ; and
3. By a management committee or
rehabilitation receiver appointed by the
SEC (Sec. 119, last par.)
Section 118. Voluntary Dissolution Where

No Creditors are Affected
Dissolution may be effected by majority vote of
the board of directors or trustees and by a
resolution adopted by the affirmative vote of
the stockholders owning at least 2/3 of the
outstanding capital stock or of at least 2/3 of
the members at a meeting called for such
purpose.
Note: The 3-year period of liquidation does not

apply to Methods 2 and 3 as long as the
trustee or the receiver is appointed within the
said period.
BUT the word trustee as used in the
corporation statute must be understood in its
general concept which could include the
counsel to whom was entrusted the
prosecution of the suit filed by the corporation
(Spouses Gelano v. CA, GR No. L-41537,
February 24, 1981).
The publication requirement is prescribed for

the protection of unknown creditors.
Section 119. Voluntary Dissolution Where
Creditors are Affected
1. A petition shall be filed with the SEC;
2. Signed by a majority of its board of
directors or trustees or other officers
having management of its affairs;
3. Verified by its president or secretary or
one of its directors or trustees;
4. Shall set forth all claims and demands
against it;
5. Resolved upon by the affirmative vote of
the stockholders representing at least 2/3
of the outstanding capital stock or by at
least 2/3 of the members at a meeting
called for that purpose.
The board of directors may also be permitted

to complete the corporate liquidation by
continuing as trustees by legal implication
(Clemente v. CA, GR No. 82407, March 27,
1995).
Indeed, if the trustee may commence a suit
which can proceed to final judgment beyond
the 3-year period, there is no reason why a
suit commenced by the corporation itself
during its existence should not be afforded
similar treatment and allowed to proceed to
final judgment and execution thereof
(Reburiano v. CA, GR No. 109840, January
21, 1999).
Section 122. Corporate Liquidation
136

The question as to the right of priority of a
claimant against the assets of a corporation
that is being dissolved and liquidated becomes
of importance only when the assets of the
corporation are not sufficient to pay all claims
(19 Am. Jur. 2d).
LIQUIDATION
HOWEVER, a petition for rehabilitation does

not always result in the appointment of a
receiver or the creation of a management
committee. Suspension of actions for claims
commences only from the time a management
committee or receiver is appointed by the
SEC. (RCBC v. IAC, December 9, 1999)
Grounds for Appointment of Management
Receiver
1. Imminent danger of loss, wastage,
dissipation or destruction of assets; or
2. Paralization of business operations of the
corporation that may be prejudicial to the
interest of minority stockholders, partylitigants or general public
REHABILITATION
Nature
Connotes a winding
up or settling with
creditors
and
debtors
Connotes a reopening or
reorganization
Continuity of corporate life

Winding up process
so that assets may
be distributed to
those entitled
Contemplates a continuance
of corporate life in an effort
to restore the corporation to
its
former
successful
operation
Grounds for Appointment of Receiver

1. Necessary to preserve rights of partylitigants; and/or
2. To protect interest of investing public and
creditors.
Rehabilitation
Upon the appointment of a management
committee or a rehabilitation receiver, all
actions for claims against the corporation
pending before any court, tribunal or board
shall ipso jure be suspended. The justification
for the automatic stay of all pending actions for
claims is to enable the management
committee or the rehabilitation receiver to
effectively exercise its/his powers free from
any judicial or extrajudicial interference that
might unduly hinder or prevent the rescue of
the corporation. (Lingkod Manggagawa sa
Rubberworld v. Rubberworld (Phils.) Inc. Jan.
29, 2007)
FOREIGN CORPORATIONS
Section 123. Definition and Rights of
Foreign Corporations
Foreign Corporation
A foreign corporation is one formed,
organized or existing under any law other than
those of the Philippines and whose laws allow
Filipino citizens and corporation to do business
in its own country or state (Sec. 123; Reviewer
in Commercial Law, Sundiang & Aquino,
2006ed).
The suspension of all actions for claims

against the corporation embraces all phases of
the suit, be it before the trial court or any
tribunal or before the Supreme Court. What
are automatically stayed or suspended are the
proceedings of a suit and not just the payment
of claims during the execution stage after the
case had become final and executory. (Garcia
v. PAL, August 29, 2007)
The definition espouses the incorporation test

and the reciprocity rule and is significant for
licensing purposes.
The rule that requires reciprocity before a
foreign corporation can be recognized is a
reflection of the basic rule that a foreign
corporation is one which owes its existence to
the laws of another State and generally, it has
no existence within a State in which it is
foreign.
The purpose for the suspension of the

proceedings is to prevent a creditor from
obtaining an advantage or preference over
another and to protect and preserve the rights
of party litigants as well as the interest of the
investing public or creditors. Such suspension
is intended to give enough breathing space for
the management committee or rehabilitation
receiver to make the business viable again,
without having to divert attention and
resources to litigations in various for fora
(Sobrejuanite v. ASB, GR No. 165675,
September 30, 2005).
Under the control test, the nationality of the

stockholders determines the corporations
nationality. In times of war, for reasons of
national security, the control test shall apply.
Section 124. Application to existing Foreign
Corporation
It is NOT permitted to transact or do business
in the Philippines until it has secured a
license for that purpose from the SEC and a
137

Corporation Laws
certificate of authority from the appropriate
government agency.
Test of Doing or Transacting Business In

The Philippines
The Corporation Code does not define the
phrase doing or transacting business.
Section 125. Application for a License

Reasons Why A License Is Necessary
1. To place them under the jurisdiction of the
courts;
2. To place them in the same footing as
domestic corporations; and
3. Protection for the public in dealing with
said corporations.
I.
A. Twin characterization test

1. Whether the foreign corporation is
maintaining or continuing in the
Philippines the body or substance
of the business for which it was
organized or whether it has
substantially retired from it and
turned it over another (Substance
Test); and
2. Whether there is continuity of
commercial
dealings
and
arrangements, contemplating to
some extent the performance of
acts or works or the exercise of
some functions normally incident
to and in progressive prosecution
of, the purpose and object of its
organization (Continuity Test).
Section 127-128 Resident Agent

Resident Agent
1. An individual, who must be of good moral
character and of sound financial standing,
residing in the Philippines, OR
2. A domestic corporation lawfully transacting
business in the Philippines, designated in
a written power of attorney by a foreign
corporation authorized to do business in
the Philippines.
Only Function: To receive in behalf of the
corporation notices, summons and other legal
processes in connection with actions against
such corporation
B. Contract Test
Whether the contracts entered into by
the foreign corporation, or by an agent
acting under the control and direction
of the foreign corporation, are
consummated in the Philippines. To be
doing or transacting business in the
Philippines for purposes of Section
133 of the Corporation Code, the
foreign corporation must actually
transact business in the Philippines,
that is, perform specific business
transactions within the Philippine
territory on a continuing basis in its
own name and for its own account.
Actual transaction of business within
the Philippine territory is an essential
requisite for the Philippines to acquire
jurisdiction over a foreign corporation
and
thus
require
the
foreign
corporation to secure a Philippine
business license (B. Van Zuiden
Bros., Ltd. v. GTVL Manufacturing
Industries, Inc., GR No. 147905, May
28, 2007).
A resident agent cannot sign the certificate of

non-forum shopping that is a requirement for
the filing of an initiatory pleading in court
because while a resident agent may be aware
of actions filed against the principal, he may
not be aware of the actions initiated by the
principal (Expert Travel & Tours Inc. v. CA,
G.R. No. 152392, May 26,2005).
Grounds For Revocation of License of A
Foreign Corporation:
1. Failure to file annual reports required by
the Code;
2. Failure to appoint and maintain a resident
agent;
3. Failure to inform the SEC of the change of
residence of the resident agent;
4. Failure to submit copy of amended articles
or by-laws or articles of merger or
consolidation;
5. A misrepresentation in material matters in
reports;
6. Failure to pay taxes, imposts and
assessments;
7. Engage in business unauthorized by SEC;
8. Acting as dummy of a foreign corporation;
and
9. Not licensed to do business in the
Philippines (Sec. 134).
JURISPRUDENTIAL TESTS (Philippine

Corporate Law, Villanueva, 2001ed)
II.
138
STATUTORY TESTS
1. Foreign Investment Act of 1991
(R.A. No. 7042)
Acts constituting doing business:
a. Soliciting
orders,
service
contracts, opening offices,

whether called liaison offices
or branches;
b. Appointing representatives or
distributors domiciled in the
Philippines or who in any
calendar year stay in the
country for a period or periods
totaling 180 days or more;
c. Participating
in
the
management, supervision or
control of any domestic
business, firm or entity or
corporation in the Philippines;
and
d. Any other act or acts that
imply
a
continuity
of
commercial
dealings
or
arrangements,
and
contemplate to that extent the
performance of acts or works,
or the exercise of some of the
functions normally incident to,
and
in
progressive
prosecution of, commercial
gain or of the purpose of the
business organization.
III.
JURISPRUDENTIAL RULES
1. Doctrine of Isolated Transactions
Foreign corporations, even unlicensed
ones, can sue or be sued on a
transaction or series of transactions
set apart from their common business
in the sense that there is no intention
to engage in a progressive pursuit of
the purpose and object of business
transaction (Eriks Pte. Ltd v. CA, GR
No. 118843, February 6, 1997).
2. In Pari Delicto Rule
In
the
case
of
Top-Weld
Manufacturing vs. ECED, S.A. (GR L44944, August, 9, 1985), the Court
denied the relief prayed for by
petitioner when it ruled that the very
purpose of the law was circumvented
and evaded when the petitioner
entered into the said agreements
despite the prohibition contained in the
questioned law. The parties were
considered as being in pari delicto
because they equally violated R.A.
5455.
2. Implementing Rules of R.A. No.

7042
Acts NOT constituting doing
business:
a. Mere
investment
as
a
shareholder in a domestic
corporation
and/or
the
exercise of rights as such
investor;
b. Appointing a representative or
distributor domiciled in the
Philippines which transacts
business in its own name and
for its own account;
c. Publication of a general
advertisement through any
print or broadcast media;
d. Maintaining a stock of goods
in the Philippines solely for the
purpose of having the same
processed by another entity in
the Philippines;
e. Consignment by the foreign
corporation of equipment with
a local company to be used in
the processing of products for
export;
f. Collecting information in the
Philippines; and
g. Performing services auxiliary
to an existing isolated contract
of sale which are not on a
continuing basis.
3. Estoppel Rule
A party is estopped from questioning
the capacity of a foreign corporation to
institute an action in our courts where
it had obtained benefits from its
dealings
with
such
foreign
corporations and thereafter committed
a breach or sought to renege on its
obligations (Merrill Lynch v. CA, G.R.
No. 978160, July 24, 1992).
Effects of Lack of License On Suits
1. Foreign corporation doing business in the
Philippines:
may not sue or intervene in any action
in any court or administrative agency
of the Philippines; but
may be sued on any valid cause of
action recognized in the Philippines
(under the doctrine of quasi-estoppel
by acceptance of benefits) (Sec. 133).
2. Foreign corporation NOT doing business
in the Philippines:
a. Generally, it may not sue and be sued
in any court or administrative agency
of the Philippines;
b. However, it may sue and be sued for
isolated transactions, as well as for
those which are casual or incidental
thereto.
139

Corporation Laws
ON CONTRACTS
The contracts contemplated are those that
satisfy the contract test or those that
make a foreign corporation as one doing
business in the Philippines.
which such corporation is authorized

under its license;
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines;
or
9. Any other ground as would render it unfit
to transact business in the Philippines
(Sec. 34).
General Rule:
The contracts are unenforceable. They are
enforceable only upon securing a license.
Exception:
However, the contracts are null and void if
they are contrary to law, morals, good
customs, public order and public policy.
Procedure:
1. The SEC shall issue a corresponding
certificate of revocation, furnishing a copy
thereof to the appropriate government
agency in the proper case;
2. The SEC shall also mail to the corporation
at its registered office in the Philippines a
notice of such revocation accompanied by
a copy of the certificate of revocation.
Instances When A Foreign Corporation May

Sue In The Philippines Whether Or Not
Licensed To Do Business
1. To seek redress for an isolated business
transaction;
2. To protect its corporate reputation, name,
and goodwill;
3. To enforce a right not arising out of a
business transaction, e.g. tort that
occurred in the Philippines;
4. When the parties have contractually
stipulated that Philippines is the venue of
actions; and
5. When the party sued is barred by the
principle of estoppel and/or principle of
unjust enrichment from questioning the
capacity of the foreign corporation; and
6. Recovery of misdelivered property.
Withdrawal Procedure
By filing a petition for withdrawal of license.
Requisites
1. All claims which have accrued in the
Philippines have been paid, compromised
or settled;
2. All taxes, imposts, assessment, and
penalties, if any, lawfully due to the
Philippine Government or any of its
agencies or political subdivisions have
been paid; and
3. The petition for withdrawal of license has
been published once a week for three
consecutive weeks in a newspaper of
general circulation in the Philippines.
Grounds For Revocation or Suspension of

License By SEC
1. Failure to file its annual report or pay any
fees as required by the Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by the
Code;
3. Failure, after change of its resident agent
or his address, to submit to the SEC a
statement of such change as required by
the Code;
4. Failure to submit to the SEC an
authenticated copy of any amendment to
its articles of incorporation or by-laws or of
any articles of merger or consolidation
within the time prescribed by the Code;
5. A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted by such corporation
pursuant to the provisions of the Code;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any
of its agencies or political subdivision;
7. Transacting business in the Philippines
outside of the purpose or purposes for
SECURITIES AND EXCHANGE

COMMISSION REORGANIZATION DECREE
(P.D. No. 902-A)
Original And Exclusive Jurisdiction of The
RTC (Sec. 5 in relation to Sec. 5.2 of RA
8799):
1. Fraudulent
devices
and
schemes
employed by directors detrimental to the
public interest and to other firms;
2. Intra-corporate disputes;
3. Disputes with the state in relation to their
franchise and right to exist as such;
4. Controversies in election, appointment of
5. Petition to be declared in a state of
suspension of payments;
6. Petition for rehabilitation; and
7. Appointment of rehabilitation receiver or
management
committee
(provisional
remedies).
140

Notes: RA 8799 effectively amended Sec. 5 of
PD 902-A, jurisdiction over intra-corporate
disputes is now vested in the RTCs. However,
while Sec. 5 was amended, there is no repeal
of Sec. 6 thereof declaring that the fraudulent
acts or schemes, which the SEC shall
exclusively investigate and prosecute, are
those in violation of any law or rules and
regulations administered and enforced by the
SEC alone. The filing of civil/intra-corporate
case before SEC does not preclude the
simultaneous and concomitant filing of a
criminal action before the regular courts; such
that a fraudulent act may give rise to liability
for violation of the rules and regulations of the
SEC cognizable by the SEC itself, as well as
criminal liability for violation of the Revised
Penal Code cognizable by the regular courts;
both charges to be filed and proceeded
independently and simultaneously (Fabia v.
CA, G.R. No. 132684. September 11, 2002).
c.
Action for recovery of corporate funds
Grounds for Suspension or Cancellation of

Certificate of Registration (Sec. 6[L])
1. fraud in procuring registration;
2. serious misrepresentation as to objectives
of corporation;
3. refusal to comply with lawful order of SEC;
4. continuous inoperation for at least 5 years;
5. failure to file by-laws within required
period;
6. failure to file reports; and
7. other similar grounds.
INTERIM RULES OF PROCEDURE FOR INTRACORPORATE CONTROVERSIES (A.M. NO. 012-04), EFFECTIVE APRIL 1, 2001
Intra-corporate controversies are ordinary civil
actions. These cases either seek the recovery
of damages or property or specific
performance of an act against a party for the
violation or protection of a right.
A corporate officers dismissal is always a

corporate act and/or an intra-corporate
controversy. However, the corporate officers
contemplated are those whose offices are
created by the Corporation Code or the bylaws.
Cases Covered
1. Devices or schemes employed by, or any
act of, the board of directors, business
associates, officers or partners, amounting
to fraud or misrepresentation which may
be detrimental to the interest of the public
and/or of the stockholders, partners, or
members of any corporation, partnership,
or association;
2. Controversies arising out of intracorporate, partnership, or association
relations,
between
and
among
stockholders, members, or associates;
and between, any or all of them and the
corporation, partnership, or association of
which they are stockholders, members, or
associates, respectively;
3. Controversies
in
the
election
or
appointment of directors, trustees, officers,
or managers of corporations, partnerships,
or associations;
4. Derivative suits; and
5. Inspection of corporate books.
Intra-Corporate Dispute
Elements
1. Status or relationship of the parties
controversy must be between and among
corporators, between corporators and the
corporation.
An intra-corporate controversy is one
which "pertains to any of the following
relationships: (1) between the corporation,
partnership or association and the public;
(2) between the corporation, partnership or
association and the State in so far as its
franchise, permit or license to operate is
concerned; (3) between the corporation,
partnership or association and its
stockholders, partners, members or
officers; and (4) among the stockholders,
partners or associates themselves."
(Yujuico v. Quiambao 29 January 2007, G.
R No. 168639)
2. Nature of the question intrinsic

connection with the regulation or the
internal affairs of the corporation.
Examples:
a. Action by a corporate officer to recover
compensation from the corporation;
b. Action by a stockholder to compel
issuance of certificate of stocks; and
141
The provisions of the rule shall also

apply to election contests in stock and
non-stock corporations.
An election contest refers to any
controversy or dispute involving title or
claim to any elective office in a stock
or
non-stock
corporation,
the
validation of proxies, the manner and
validity of elections, and
the
qualifications of candidates, including
the proclamation of winners, to the
office of director, trustee or other

Corporation Laws
officer directly elected by the

stockholders in a close corporation or
by
members
of
a
non-stock
corporation where the articles of
incorporation or by-laws so provide.
All actions covered by these Rules
shall be commenced and tried in the
Regional Trial Court which has
jurisdiction over the principal office of
the corporation, partnership, or
association concerned. Where the
principal office of the corporation,
partnership
or
association
is
registered in the Securities and
Exchange Commission as Metro
Manila, the action must be filed in the
city or municipality where the head
office is located.
A petition for rehabilitation is a special

proceeding. The status or fact sought to be
established is the inability of the corporate
debtor to pay its debts when they fall due so
that a rehabilitation plan, containing the
formula for the successful recovery of the
corporation, may be approved in the end.
Applicability
These Rules apply to petitions for
rehabilitation
filed
by
corporations,
partnerships and associations pursuant to P.D.
902-A.
Venue
Petitions for rehabilitation pursuant to these
Rules shall be filed in the RTC having
jurisdiction over the territory where the
debtors principal office is located as specified
in the Articles of Incorporation.
If the principal office is registered in
the SEC as Metro Manila, the action
must be filed in the RTC of the city or
municipality where the head office is
located.
Joint petition by group of companies
shall be filed in the RTC which has
jurisdiction over the principal office of
the parent corporation.
Nuisance and harassment suits are

prohibited. In determining whether a suit is
a nuisance or harassment suit, the court
shall
consider, among others,
the
following:
1. The extent of the shareholding or interest
of the initiating stockholder or member;
2. Subject matter of the suit;
3. Legal and factual basis of the complaint;
4. Availability of appraisal rights for the act or
acts complained of; and
5. Prejudice or damage to the corporation,
partnership, or association in relation to
the relief sought.
a. In case of nuisance or harassment
suits, the court may, motu proprio or
upon motion, forthwith dismiss the
case.
b. All decisions and orders issued under
these Rules shall immediately be
executory. No appeal or petition taken
therefrom shall stay the enforcement
or implementation of the decision or
order, unless restrained by an
appellate court. Interlocutory orders
shall not be subject to appeal.
INTERIM RULES OF PROCEDURE ON
CORPORATE REHABILITATION, EFFECTIVE
January 16 2009
Steps
1. Filing a verified petition with the
appropriate RTC by:
a. corporate debtor who foresees the
impossibility of meeting its debts when
they respectively fall due; or
b. a group of companies when one or
more of its constituent corporations
foresee the impossibility of meeting
debts when they respectively fall due,
and the financial distress would likely
adversely affect the financial condition
and/or operations of the othe
companies of the group under the
terms of the proposed rehabilitation
plan
c. creditor or creditors holding at least
20% of the debtors total liabilities
when the debtor cannot meet its debts
as they respectively fall due
2. The following shall be annexed to the
petition:
a. audited financial statements at end of
its last fiscal year;
b. interim financial statement;
c. schedule of debts and liabilities;
d. inventory of assets;
e. rehabilitation plan;
Corporate Rehabilitation
A process to conserve and administer the
corporations assets in the hope that it may
eventually be able to recover from financial
stress to solvency.
Nature
In rem, summary, and non-adversarial.
142

f.
schedule of payments and disposition

of assets effected within 3 months
preceding the filing of the petition;
g. schedule of cash flow for the last 3
months;
h. statement of possible claims;
i. affidavit of general financial condition;
j. at least 3 nominations for rehabilitation
receiver; and
k. certificate under oath that directors
and stockholders have irrevocably
approved/consented
to
all
actions/matters necessary under the
rehabilitation plan.
Upon the appointment of a management

committee or a rehabilitation receiver, all
actions for claims against the corporation
pending before any court, tribunal or board
shall ipso jure be suspended. The justification
for the automatic stay of all pending actions for
claims is to enable the management
committee or the rehabilitation receiver to
effectively exercise its/his powers free from
any judicial or extrajudicial interference that
might unduly hinder or prevent the rescue of
the corporation. (Lingkod Manggagawa sa
Rubberworld v. Rubberworld (Phils.) Inc. Jan.
29, 2007)
Note: A petition filed by the debtor must be

verified by an affidavit of a responsible
officer of the debtor.
The suspension of all actions for claims

against the corporation embraces all phases of
tribunal or before the Supreme Court. What
are automatically stayed or suspended are the
proceedings of a suit and not just the payment
of claims during the execution stage after the
case had become final and executory. (Garcia
v. PAL, August 29, 2007)
3. The court shall issue the stay order not

later than 5 days from the filing of the
petition, which among others, shall:
a. appoint a rehabilitation receiver;
b. stay all actions for claims against the
debtor, which shall cover both secured
and unsecured creditors;
c. set an initial hearing for the petition
(not earlier than 45 days but not later
than 60 days from filing of the
petition); and
d. direct the creditors to file their verified
comment or opposition not later than
10 days before the initial hearing; their
failure to do so would bar them from
any participation in the proceedings.
4. Publication of the stay order in a
newspaper of general circulation once a
week for 2 consecutive weeks;
5. Referral
of
rehabilitation
plan
to
rehabilitation receiver;
6. Initial and additional hearings
7. Meetings between corporate debtor and
creditors.
Discussions
on
the
rehabilitation plan;
8. Submission of final rehabilitation plan to
the RTC for approval;
9. The petition shall be dismissed (which
results into the automatic lifting of the stay
order unless RTC ordered otherwise) if no
rehabilitation plan is approved after 180
days from initial hearing;
10. Approval
or
disapproval
of
the
rehabilitation plan by RTC.
HOWEVER, a petition for rehabilitation does

not always result in the appointment of a
receiver or the creation of a management
committee. Suspension of actions for
claims commences only from the time a
management committee or receiver is
appointed by the SEC. (RCBC v. IAC,
December 9, 1999)
Purpose
To enable the management committee or the
rehabilitation receiver to effectively exercise its
powers free from any judicial or extrajudicial
interference that might unduly hinder or
prevent the rescue of the debtor company
(Rubberworld v. NLRC, GR No. 126773, April
14, 1999).
No definite duration; deemed to apply during
the entire period that the corporate debtor is
under management committee or the
rehabilitation receiver (BF Homes v. CA, GR
No. 30690, Nov. 19, 1982).
1. All
claims
against
corporations,
partnerships, or associations that are
pending before any court, tribunal, or
board, without distinction as to whether or
not a creditor is secured or unsecured,
shall be suspended effective upon the
appointment of a management committee,
rehabilitation receiver, board, or body in
accordance P.D. No. 902-A.
Stay Order / Automatic Stay

Effect of appointment of a management
committee or rehabilitation receiver
All actions for claims against the corporation
shall be suspended accordingly.
143

Corporation Laws
The purpose for the suspension of the
proceedings is to prevent a creditor from
obtaining an advantage or preference over
another and to protect and preserve the
rights of party litigants as well as the
interest of the investing public or creditors.
Such suspension is intended to give
enough
breathing
space
for
the
management committee or rehabilitation
receiver to make the business viable
again, without having to divert attention
and resources to litigations in various for
fora (Sobrejuanite v. ASB, GR No. 165675
, September 30, 2005).
The order prohibits the debtor from selling,

encumbering, transferring, or disposing in
any manner any of its properties except in
the ordinary course of business; and from
making any payment of its liabilities
outstanding as at the date of filing of the
petition.
The order likewise prohibits the debtors
suppliers of goods or services from
withholding supply of goods and services
in the ordinary course of business for as
long as the debtor makes payments for the
services and goods supplied after the
issuance of the stay order.
All actions and claims against the

corporation are suspended upon the
appointment by the Court of a Management
Committee or Rehabilitation Receiver (Sec.
[c], PD 902-A). The stay order shall be
effective from the time of its issuance up to
the dismissal of the petition or termination
of the rehabilitation proceedings (PAL v.
Spouses
Kurongking,
No.
146698,
September 24, 2002).
Upon motion or motu proprio, the court

may declare void any transfer of property
or any other conveyance, sale, payment,
or agreement made in violation of its stay
order or in violation of these rules.
The stay order shall be effective from the
date of its issuance until the dismissal of
the petition or the termination of the
rehabilitation proceedings.
The suspension also covers employees

claims (Lingkod ng Manggagawa sa
Rubberworld v. Rubberworld, Phils. Inc.,
GR No. 153882, January 29, 2006).
The petition shall be dismissed if no

rehabilitation plan is approved by the court
upon the lapse of 180 days from the date
of the initial hearing. The court may grant
an extension beyond this point only if it
appears by convincing and compelling
evidence that the debtor may successfully
be rehabilitated.
The suspension embraces all phases of

tribunal or before the Supreme Court. Not
just payment of claims but also
proceedings of a suit are automatically
suspended (Garcia, et. al. v. PAL, 29
August 2007).
Rehabilitation Receiver
A person appointed by the RTC, in behalf of all
the parties for the purpose of preserving and
conserving the property and preventing its
possible destruction or dissipation, if it were
left in the possession of any of the parties.
2. This suspension shall not prejudice or

render ineffective the status of a secured
creditor as compared to a totally
unsecured creditor. P.D. 902-A does not
state anything to this effect. What it
merely provides is that all actions for
claims against the corporation, partnership
or association shall be suspended. This
should give the receiver a chance to
rehabilitate the corporation if there should
still be a possibility for doing so. However,
in the event that rehabilitation is no longer
feasible and claims against the distressed
corporation would eventually have to be
settled, the secured creditors shall enjoy
preference over the unsecured creditors,
subject only to the provisions of the NCC
on Concurrence and Preferences of Credit
(RCBC v. IAC, G.R. No. 74851, December
9, 1999).
He acts in a fiduciary capacity and with

impartiality towards all interested.
He does not take over the management and
control from the debtor, but shall closely
oversee and monitor the operations of the
debtor during the pendency of the proceedings
(Bar Review Materials in Commercial Law,
Jorge Miravite, 2002ed).
He shall not be subject to any action, claim or
demand in connection with any act done or
omitted by him in good faith in the exercise of
his functions and powers conferred in the
rules.
144

He may be dismissed by the court, upon
motion or motu proprio, on account of conflict
of interest, or on any of the grounds for
removing a trustee under the general
principles of trusts.
8.
Effects of The Rehabilitation Plan

1. The plan and its provisions shall be
binding upon the debtor and all persons
who may be affected by it, including the
creditors, whether or not such persons
have participated in the proceedings or
opposed the plan or whether or not their
claims have been scheduled;
2. The debtor shall comply with the
provisions of the plan and shall take all
actions necessary to carry out the plan;
3. Payments shall be made to the creditors in
accordance with the provisions of the plan;
4. Contracts
and
other
arrangements
between the debtor and its creditors shall
be interpreted as continuing to apply to the
extent that they do not conflict with the
provisions of the plan; and
5. Any compromises on amounts or
rescheduling of timing of payments by the
debtor shall be binding on creditors
regardless of whether or not the plan is
successfully implemented.
9.
10.
11.
12.
13.
Powers and Functions of Management

Committee or Rehabilitation Receiver
1. To verify the accuracy of the petition,
including its annexes such as the
Schedule of Debts and Liabilities and the
Inventory of Assets submitted in support to
the petition;
2. To accept and incorporate, when justified,
amendments to the Schedule of Debts and
Liabilities;
3. To recommend to the court the
disallowance of claims and rejection of
amendments t the Schedule of Debts and
Liabilities that lack sufficient proof and
justification;
4. To submit to the court and make available
for review by the creditors, a revised
Schedule of Debts and Liabilities;
5. To investigate the acts, conduct,
properties, liabilities and financial condition
of the debtor, the operation of its business
and the desirability of the continuance
thereof; and, any other matter relevant to
the proceeding or to the formulation of a
6. To examine under oath the directors and
officers of the debtor and any other
witnesses that he may deem appropriate;
7. To make available to the creditors
documents and notices necessary for
14.
15.
16.
17.
18.
19.
20.
21.
145
them to follow and participate in the

proceedings;
To report to the court any fact ascertained
by him pertaining to the causes of the
debtor's problems, fraud, preferences,
dispositions, encumbrances, misconduct,
mismanagement
and
irregularities
committed by the stockholders, directors,
management,, or any other person against
the debtor;
To employ such person or persons such
as lawyers, accountants, appraisers and
staff are necessary in performing his
functions and duties as rehabilitation
receiver;
To monitor the operations of the debtor
and to immediately report to the court any
material adverse change in the debtor's
business;
To evaluate the existing assets and
liabilities, earnings and operations of the
debtor;
To determine and recommend to the court
the best way to salvage and protect the
interests of the creditors, stockholders and
the general public;
To study the rehabilitation plan proposed
by the debtor or any rehabilitation plan
submitted
during
the
proceedings,
together with any comments made
thereon;
To prohibit and report to the court any
encumbrance, transfer or disposition of the
debtor's property outside of the ordinary
course of business or what is allowed by
the court;
To prohibit and report to the court any
payments outside of the ordinary course of
business;
To have unlimited access to the debtor's
employees, premises, books, records and
financial documents during business
hours;
To inspect, copy, photocopy or photograph
any document, paper, book, account or
letter, whether in the possession of the
debtor or other persons;
To gain entry into any property for the
purpose
of
inspecting,
measuring,
surveying or photographing it or any
designated relevant object or operation
thereon;
To take possession, control and custody of
the debtor's assets;
To notify counterparties and the court as to
contracts that the debtor has decided to
continue to perform the breach;
To be notified of and to attend all meetings
of the board of directors and stockholder
of the debtor;

Corporation Laws
22. To recommend any modification of an
approved rehabilitation plan as he may
deem appropriate;
23. To bring to the attention of the court any
material change affecting the debtor's
ability to meet the obligations under the
24. To recommend the appointment of a
management committee in the cases
provided for under Presidential Decree No.
902-A, as amended;
25. To recommend the termination of the
proceedings and the dissolution of the
debtor if he determines that the
continuance in business of such entity is
no longer feasible or profitable or no
longer works to the best interest of the
stockholders, parties-litigants, creditors or
the general public;
26. To apply to the court for any order or
directive that he may deem necessary or
desirable to aid him in the exercise of his
powers and performance of his duties and
functions; and
27. To exercise such other powers as may
from time to time be conferred upon him
by the court.
2. To encourage the widest participation of

ownership in enterprises;
3. To enhance the democratization of wealth;
4. To promote the development of the capital
market;
5. To protect investors;
6. To ensure full and fair disclosure about
securities; and
7. To minimize if not totally eliminate insider
trading
and
other
fraudulent
or
manipulative devices and practices which
create distortions in the free market (Sec.
2).
Features Which Are Intended To Protect
The Investing Public
1. All securities are required to be registered
before they can be sold to the public (Sec.
8, RA 8799);
2. Rejection and revocation of registration of
securities (Sec. 13. Ibid);
3. Regulation of pre-need plans (Sec. 16);
4. Protection of shareholder interests (Sec.
19);
5. Prohibition on fraud, manipulation and
insider trading (Secs.24, 25, 26 and 27);
6. Regulations
of
Securities
Market
Professionals (Sec.28);
7. Revocation, refusal or suspension of
registration of brokers, dealers and
salesmen
and
associated
persons
(Sec.29);
8. Restrictions on over-the-counter markets
(Sec.32);
9. Self-regulation of associations of securities
brokers, dealers and other securities
related organizations (Sec. 29);
10. Registration of clearing agencies (Sec.
42);
11. Limitations on margin trading or the
amount of credit that may be extended on
any security (Sec. 49);
12. Civil liabilities arising from false statement
in the registration statement (Sec. 56);
13. Civil
liabilities
arising
from
false
statements or omissions in the prospectus,
communications and reports (Sec. 57);
14. Protection against manipulation of security
prices, manipulative and deceptive
devices (Sec. 59), fraud in pre-need plans
and commodities futures contracts (Sec.
60), fraudulent transactions (Sec. 58), and
insider trading (Sec. 61);
15. Establishment
of
trust
funds
to
compensate investors for extraordinary
losses or damage they may suffer due to
business
failure
or
fraud
or
mismanagement of the persons with
whom they transact (Sec. 36.5[a]).
Mere disagreement among stockholders as to

the affairs of the corporation would not in itself
suffice as a ground for the appointment of a
management committee. At least where there
is no imminent danger of loss of corporate
property or of any other injury to stockholders,
management of corporate business should not
be wrested away from duly elected officers,
who are prima facie entitled to administer the
affairs of the corporation, and placed in the
hands of the management committee.
However, where the dissension among
stockholders is such that the corporation
cannot successfully carry on its corporate
functions the appointment of a management
committee becomes imperative (Ramon
Jacinto and Jaime Colayco v. First Womens
Credit Corporation, GR No. 154049, August
28, 2003).
SECURITIES REGULATION CODE

(R.A. No. 8799)
Purposes
1. To establish a socially conscious, free
market that regulates itself;
146

Powers And Functions of The SEC
1. Supervision
over
corporations,
partnerships, and grantees of primary
franchise;
2. Approve,
reject
registration
statements/licensing applications;
3. Suspend, revoke, after notice and hearing,
primary franchise on grounds provided by
law:
a. Fraud;
b. Serious misrepresentation;
c. Refusal to comply or defiance of any
lawful order of the SEC;
d. Continuous inoperation for at least 5
years;
e. Failure to file by-laws; and
f. Failure to file required reports
4. Regulate/ supervise activities of persons
to ensure compliance;
5. Supervise monitor, suspend or take over,
exchanges, clearing agencies and other
SROs;
6. Recommend policies, advise, propose
legislation to Congress on securities
market;
7. Prepare, approve, amend or repeal rules,
regulations, issue opinions
8. Enlist the aid and support of and/or
deputize any and all enforcement
agencies of the Government as well as
any private institution, corporation, firm,
association
or
person
in
the
implementation of its powers;
9. Issue cease and desist orders to prevent
fraud or injury;
10. Punish for contempt of the Commission;
11. Impose sanctions for violation of laws and
rules, regulations and orders;
12. Compel the officers of any registered
corporation or association to call meetings
of stockholders or members;
13. Issue subpoena duces tecum and
summon witnesses to appear in any
proceedings of the Commission; and
14. Exercise such other powers as may be
provided by law which are necessary or
incidental to the carrying out its express
powers (Sec. 5).
stockholders or members of a corporation

involving an intra-corporate dispute under
its supervision (Yujuico v. Quiambao, GR
No. 168639, January 29, 2006).
Section 53.1 of the Securities Regulation
Code provides that, a criminal complaint
for violation of any law or rule
administered by the SEC must first be filed
with the latter. If the Commission finds that
there is probable cause, then it should
refer the case to the DOJ. A criminal
charge for violation of the Securities
Regulation Code is a specialized dispute.
Hence, it must first be referred to an
administrative
agency
of
special
competence, i.e., the SEC (Baveira v.
Paglinawan, GR No. 168380, February 8,
2007).
Reason: Under the doctrine of primary
jurisdiction, courts will not determine a
controversy involving a question within the
jurisdiction of the administrative tribunal,
where the question demands the exercise
of
sound
administrative
discretion
requiring the specialized knowledge and
expertise of said administrative tribunal to
determine technical and intricate matters
of fact. The Securities Regulation Code is
a special law.
Its enforcement is
particularly vested in the SEC (Ibid).
It is apparent that intra-corporate controversies
fall within the jurisdiction of the regular trial
courts and that issues related to proxy voting
that are intimately related to intra-corporate
controversies would necessarily fall within
such jurisdiction as well. Section 5 of Pres.
Decree No. 902-A sets forth a definitive rule on
jurisdiction, expressly granting as it does
"original and exclusive jurisdiction" first to the
SEC, and now to the regular courts.
Note: The fact that the jurisdiction of the
regular courts under Section 5(c) is confined to
the voting on election of officers, and not on all
matters which may be voted upon by
stockholders, elucidates that the power of the
SEC to regulate proxies remains extant and
could very well be exercised when
stockholders vote on matters other than the
election of directors.(GSIS v. Meralco, GR No.
183905, April 2009).
Securities
Shares, participation or interest in a
corporation or in a commercial enterprise or
profit-making ventures and evidenced by a
certificate, contract, or instrument whether
written or electronic in character (Sec. 3).
With the transfer of jurisdiction of the SEC

over intra-corporate controversies to the
RTC under RA 8799, the RTC has the
power to hear and decide the intracorporate controversies between the
parties herein. Concomitant to said power
is the authority to issue orders necessary
or incidental to the carrying out of the
powers expressly granted to it. Thus, the
RTC may, in appropriate cases, order the
holding of a special meeting of
147

Corporation Laws
Kinds
1. Shares of stocks, bonds, debentures,
notes, evidence of indebtedness, assetbacked securities;
2. Investment contracts, certificates of
interest or participation in a profit-sharing
agreement, certificates of deposit for a
future subscription
3. Fractional undivided interests in oil, gas, or
other mineral rights;
4. Derivatives like options and warrants;
5. Certificates
of
assignments
and
participation, trust certificates, voting trust
certificates or similar instruments;
6. Proprietary or non-proprietary membership
certificates in corporations; or
7. Other instruments as may in the future be
determined by the SEC (Sec. 3).
Derivative
A financial instrument, including options and
warrants, whose value depends on the interest
in or performance of an underlying security,
but which does not require any investment of
principal in the underlying security.
Kinds
1. Options contracts that give the buyer
the right, but not the obligation, to buy or
sell an underlying security at a
predetermined price, called the exercise
or strike price, on or before a
predetermined date, called the expiry date,
which can only be extended in accordance
with Exchange rules.
2. Warrants rights to subscribe or
purchase new shares or existing shares in
a company, on or before a predetermined
date, called the expiry date, which can
only be extended in accordance with
Exchange rules. Warrants generally have
a longer exercise period than options
(SRC Rule 3.1-1).
An investment contract is defined in the

Amended Implementing Rules and
Regulations of R.A. No. 8799 as a
"contract,
transaction
or
scheme
(collectively contract) whereby a person
invests his money in a common enterprise
and
is
led
to
expect
profits PRIMARILY from the efforts of
other. Thus, the Court rejected petitioners
claim that the payment of US$234 is for
the seminars on leverage marketing and
not for any product. Clearly, the trainings
or seminars are merely designed to
enhance petitioners business of teaching
its investors the know-how of its multi-level
marketing business. An investor enrolls
under the scheme of petitioner to be
entitled to recruit other investors and to
receive commissions from the investments
of those directly recruited by him. Under
the scheme, the accumulated amount
received by the investor comes primarily
from the efforts of his recruits.Therefore,
the business operation or the scheme of
petitioner constitutes an investment
contract that is a security under R.A. No.
8799. Thus, it must be registered with
public respondent SEC before its sale or
offer for sale or distribution to the public.
As petitioner failed to register the same, its
offering to the public was rightfully
enjoined by public respondent SEC.
(Powerhomes Unlimited Inc v. SEC G.R.
NO. 164182. 26 February 2008)
Registration of Securities
General Rule:
A registration statement duly filed and
approved by the SEC is necessary before
securities may be sold and offered for sale or
distribution within the Philippines. Prior to any
sale, information on the securities, in such
form and substance prescribed by the SEC,
shall be made available to each prospective
purchaser (Sec. 8).
The
requisite
license
and
marketing
agreement to engage in such transactions, as
evidenced by its registration with the SEC as a
corporation does not have retroactive effect on
securities previously sold .Petitioner argues
that when it was registered and authorized by
the SEC as broker of securities- such as the
Laguna de Boracay timeshares - this had the
effect of ratifying its October 6, 1996 purchase
agreement with respondents, and removing
any cause for the latter to rescind it. The
effectivity of a registration statement does not
cover prior sales thus, buyers of securities
previous the date of issuance of statement
may validly rescind the contact of sale of
securities. (Timeshare Realty Corp v. Lao.
G.R. No. 158941 February 11 2008)
Classes
1. Exempt securities and securities covered
by exempt transactions; and
2. Securities that are not exempt or the sale
of which is not an exempt transaction.
Exceptions:
1. Exempt securities; and
2. Exempt transactions.
148

Exempt Securities (Sec. 9)

1. Any security issued or guaranteed by the
Government of the Philippines, or by any
political subdivision or agency thereof, or
by any person controlled by and acting as
an instrumentality of said Government.
2. Any security issued or guaranteed by the
government of any country within which
the Philippines maintains diplomatic
relations, or by any state, province or
political subdivision or agency thereof on
the basis of reciprocity.
3. Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body.
4. Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau
of Internal Revenue.
5. Any security issued by a bank except its
own shares of stock.
6. Any securities added by the SEC by rule
or regulation after public hearing.
The securities listed are exempt either

because the issuer is an entity that
could be trusted not to deceive the
investor or the issuer is regulated,
supervised or monitored by another
government entity who could be
expected to protect the interest of the
investors in the same manner as the
SEC (Notes on Selected Commercial
Laws: A Guide for Bar Reviewees,
Catindig, 2003).
The security involved in an exempt
transaction is not in itself exempt but
the circumstances under which the
security is sold make the requirement
of registration under the SRC
unnecessary in the public interest or
for the protection of the investors
(Ibid).
Rejection and Revocation of Registration

of Securities
The Commission may reject a registration
statement and refuse registration of the
security thereunder, or revoke the effectivity of
a registration statement and the registration of
the security thereunder after due notice and
hearing by issuing an order to such effect,
setting forth its findings in respect thereto, if it
finds that
1. The issuer:
a. Has been judicially declared insolvent;
b. Has violated any of the provisions of
this Code, the rules promulgated
pursuant thereto, or any order of the
Commission of which the issuer has
notice in connection with the offering
for which a registration statement has
been filed;
c. Has been or is engaged or is about to
engage in fraudulent transactions;
d. Has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities;
e. Has failed to comply with any
requirement that the Commission may
impose as a condition for registration
of the security for which the
registration statement has been filed;
or
2. The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statement
of a material fact or omits to state a
material fact required to be stated therein
or necessary to make the statements
therein not misleading; or
3. The issuer, any officer, director or
controlling person of the issuer, or person
Exempt Transactions (Sec. 10)

1. Judicial sale by executor, administrator,
guardian/receiver
in
insolvency
or
bankruptcy.
2. Sale of pledged or mortgaged security to
liquidate a bona fide debt.
3. Sale on isolated transactions by owner.
4. Distribution of stock dividends.
5. Sale of capital stock exclusively to
stockholders where no commission is
paid.
6. The issuance of bonds or notes secured
by mortgage upon real estate or tangible
personal property, where the entire
mortgage are sold to a single purchaser at
a single sale.
7. Issuance of security in exchange of any
security from same issuer pursuant to right
of conversion.
8. Brokers transactions
9. Pre-incorporation
subscription
and
subscription pursuant to an increase of the
ACS.
10. Exchange of securities by issuer with
existing security holders exclusively
11. Sale to less than 20 persons during any
12- month period
12. Sale of securities to banks, registered
investment house, insurance companies,
pension
fund
or
retirement
plan
maintained by the government or other
persons authorized by the BSP to engage
in trust functions.
149

Corporation Laws
performing similar functions, or any
underwriter has been convicted, by a
competent judicial or administrative body,
upon plea of guilty, or otherwise, of an
offense involving moral turpitude and/ or
fraud or is enjoined or restrained by the
Commission or other competent judicial or
administrative body for violations of
securities, commodities, and other related
laws (Sec. 13.1).
or among the person and one or more

sellers;
2. Any person or group of persons acting in
concert, who intends to acquire 30% or
more of equity shares in a public company
in one or more transactions within a period
of 12 months (Sec. 19).
However, under the Amended IRR of the SRC,
such tender offer is mandatory in the following
circumstances:
concert, who intends to acquire thirty-five
percent (35%) or more of equity shares in
a public company pursuant to an
agreement made between or among the
person and one or more sellers;
concert, who intends to acquire thirty-five
percent (35%) or more of equity shares in
a public company in one or more
transactions within a period of twelve (12)
months; or
3. If any acquisition of even less than thirtyfive percent (35%) would result in
ownership of over fifty one percent (51%)
of the total outstanding equity securities of
a public company.
Under Section 64 of RA 8799,, there are

two essential requirements that must be
complied with by the SEC before it may
issue a cease and desist order: First, it
must conduct proper investigation or
verification; and Second, there must be a
finding that the act or practice, unless
restrained, will operate as a fraud on
investors or is otherwise likely to cause
grave or irreparable injury or prejudice to
the investing public. Here, the first
requirement is not present. Petitioner did
not conduct proper investigation or
verification before it issued the challenged
orders. The clarificatory conference
undertaken
by
petitioner
regarding
respondents business operations cannot
be considered a proper investigation or
verification process to justify the issuance
of the Cease and Desist Order. It was
merely an initial stage of such process,
considering that after it issued the said
order
following
the
clarificatory
conference,
petitioner
still sought verification from the BSP on
the nature of respondents business
activity (SEC v. Performance Foreign
Exchange Corporation, G. R. No. 154131
20 July 2006)
Note: The Amended Implementing Rules and

Regulations of the Securities Regulation Code
(Rule 19) raised the thresholds of 15% or
more for a single acquisition and 30% for
creeping acquisition to 35%.
Under existing SEC Rules 16, the 15% and
30% threshold acquisition of shares under the
foregoing provision was increased to thirty-five
percent (35%). It is further provided therein
that mandatory tender offer is still applicable
even if the acquisition is less than 35% when
the purchase would result in ownership of over
51% of the total outstanding equity securities
of the public company. (Cemco Holding, Inc. v.
National Life Insurance Co., GR No. 171815,
August 7, 2007)
A registration statement may be withdrawn

by the issuer only with the consent of the
Commission (Sec. 13.6).
Tender Offer
A publicly announced intention by a person
acting alone or in concert with other persons to
acquire equity securities of a public company.
The following are exempt from mandatory

tender offer requirements:
1. any purchase of shares from the unissued
capital stock provided that the acquisition
will not result to a fifty percent (50%) or
more ownership of shares by the
purchaser;
2. any purchase of shares from an increase
in authorized capital stock;
3. purchase in connection with foreclosure
proceedings involving a duly constituted
pledge or security arrangement where the
It is mandatory to make a tender offer for

equity shares of a public company in an
amount equal to the number of shares that the
person intends to acquire in the following
circumstances:
concert, who intends to acquire 15% or
more of equity shares in a public company
pursuant to an agreement made between
150

acquisition is made by the debtor or
creditor;
4. purchases in connection with privatization
undertaken by
government of the
Philippines;
5. purchases in connection with corporate
rehabilitation under court supervision;
6. purchases through an open market at the
prevailing market price merger or
consolidation. (Implementing Rules and
Regulation of the SRC, as amended)
3. No broker or dealer shall give any proxy,

consent or authorization, in respect of any
security carried for the account of a
customer, to a person other than the
customer, without the express written
authorization of such customer.
4. A broker or dealer who holds or acquires
the proxy for at least 10% or such
percentage as the SEC may prescribe of
the outstanding share of the issuer, shall
submit a report identifying the beneficial
owner within 10 days from such
acquisition, for its own account or
customer, to the issuer of the security, to
the Exchange where the security is traded
and to the SEC.
Under Section 20.1, the solicitation of proxies
must be in accordance with rules and
regulations issued by the SEC, such as AIRRSRC Rule 4. And by virtue of Section 53.1, the
SEC has the discretion "to make such
investigations as it deems necessary to
determine whether any person has violated"
any rule issued by it, such as AIRR-SRC Rule
4. The investigatory power of the SEC
established by Section 53.1 is central to its
regulatory authority, most crucial to the public
interest especially as it may pertain to
corporations with publicly traded shares.
(GSIS v. SEC April 16, 2009 G.R. No. 183905)
Tender offer is made:

1. By filing with the SEC a declaration to
make a tender offer;
2. By furnishing the issuer or the originator of
the security a statement containing such
information required under Sec. 17 of the
SRC:
a. Annual Report (includes balance
sheet, profit and loss statement); and
b. Periodical reports for interim fiscal
periods; and
3. By publishing all requests or invitations for
tender, or materials, making a tender offer
or requesting or inviting letters of such a
security.
The tender offer rule applies also an
indirect acquisition arising from the
purchase of the shares of a holding
company of the listed firm. In this case, the
indirect acquisition by petitioner of 36% of
UCC shares through the acquisition of the
non-listed UCHC shares is covered by the
mandatory tender offer rule. (Cemco
Holding, Inc. v. National Life Insurance
Co., GR No. 171815, August 7, 2007)
Unlawful Acts
1. For any beneficial owner, director, or
officer to sell any security if the seller or
his principal does not own or does not
deliver it within 20 days from sale (Sec.
23.3).
2. Manipulation of security prices (Sec.
24.1).
3. Employment of manipulative or deceptive
device or contrivance in connection with
purchase and sale of authorities.
Execution of short sale, stop-loss order
not in accordance with SEC rules (Sec.
24.2).
4. For any member of Exchange directly or
indirectly endorse or guarantee the
performance of any put, call, straddle,
option or privilege in relation to any
security registered (Sec. 25).
5. Fraudulent transactions in the sale of
securities (Sec.26).
6. Insider trading (Sec. 27)
7. For an insider to communicate material
non-public information about the issuer or
security (Sec. 27.3).
8. Unlawful Tender Offer (Sec 27.4).
9. Use of Extensive Credit (Sec 48.1).
Public Company
1. Any corporation with a class of equity
securities listed on an Exchange; or
2. Any corporation with assets in excess of
P50M and having 200 or more holders, at
least 200 of which are holding at least 100
shares of a class of its equity securities.
Proxy
Rules
On
Publicly
Listed
Corporations
1. Proxies must be in writing, signed by the
stockholder or his duly authorized
representative and filed before the
scheduled meeting with the corporate
secretary.
2. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for
which it is intended. No proxy shall be
valid and effective for a period longer than
5 years at one time.
151

Corporation Laws
A criminal charge for violation of the Securities
Regulation Code is a specialized dispute.
Hence, it must first be referred to an
administrative agency of special competence,
i.e., the SEC. Under the doctrine of primary
jurisdiction, courts will not determine a
controversy involving a question within the
jurisdiction of the administrative tribunal,
where the question demands the exercise of
sound administrative discretion requiring the
specialized knowledge and expertise of said
administrative tribunal to determine technical
and intricate matters of fact. The Securities
Regulation Code is a special law. Its
enforcement is particularly vested in the SEC.
Hence, all complaints for any violation of the
Code and its implementing rules and
regulations should be filed with the SEC.
Where the complaint is criminal in nature, the
SEC shall indorse the complaint to the DOJ for
preliminary
investigation.
(Baviera
v.
Paglinawan 8 February 2007 GR. No. 168380)
6. SHORT SWING TRANSACTION One

where a person buys securities and sells
the same within a period of six months.
7. FLOOR TRADER A professional trader
in securities who acts for himself and not
for the account of others, hence, receives
no commission at all.
8. BOILER ROOM SALES The use of
high-pressure sales tactics to promote
purchases and sales of securities.
9. OVER THE COUNTER TRANSACTION
Transactions which are not made at the
stock exchange, but directly between the
broker and the customer.
10. OVER-THE-COUNTER MARKET A
market created other than a registered
stock exchange for both the purchase and
sale of any security.
Prohibited Conducts
1. PAINTING THE TAPE engaging in a
series of transactions in securities that are
reported publicly to give the impression of
activity or price movement in a security.
2. MARKING THE CLOSE buying and
selling securities at the close of the market
in an effort to alter the closing price of the
security.
3. IMPROPER MATCHED ORDERS
engaging in transaction where both the
buy and the sell orders are entered at the
same time with the same price and
quantity by different but colluding parties.
4. HYPE AND DUMP engaging in buying
activity at increasingly higher prices and
then selling securities in the market at
higher securities.
5. WASH SALE the operation of
simultaneously buying and selling the
same stock. It is any transaction in any
security which involves no change in the
beneficial ownership thereof. It is the
reverse of MATCHED ORDERS wherein
there is a change in the ownership of the
securities.
6. SQUEEZING THE FLOAT taking
advantage of a shortage of securities in
the market by controlling the demand side
and exploiting market congestion during
such shortages in a way as to create
artificial prices.
Definition of Terms
1. SHORT SALE A contract for sale of
shares of stock which the seller does not
own, or certificates which are not within his
control, so as to be available for delivery at
the time when delivery must be made.
2. STOP-LOSS ORDER The direction by a
customer to his broker that if the
commodity touches the price named, the
broker shall close the trade at the best
available price.
3. PUT An option that, in consideration of a
premium paid, gives the purchaser the
right to make the seller take from him a
given number of shares of a named stock
between a given time at a stipulated price
which is usually below the prevailing
market price of the stock at the time the
put is purchased.
4. CALL An option that, in consideration of
a premium paid, entitles the buyer the right
to compel the seller to deliver to him a
certain number of shares within a given
time at a stipulated price which is usually
higher than the prevailing market price at
the time the call is bought. Call is the
reverse of put.
5. STRADDLE The double privilege of a
put and a call, and secures to the
holder the right to demand of the seller at
a certain price within a certain time a
certain number of shares of specified
stock, or to require him to take, at the price
within the same time, the same shares of
stock.
Insider Trading
The selling or buying of a security by an
insider while in possession of material nonpublic information with respect to the issuer or
the security. It is considered unlawful
UNLESS:
152

1. The insider proves that the information
was
not
gained
from
such
relationship, or
2. If the other party selling to or buying from
the insider (or his agent) is identified, the
insider proves:
a. that he disclosed the information to
the other party, or
b. that he had reason to believe that the
other party otherwise is also in
possession of the information (Sec.
27.1).
Material Non-Public Information (formerly

Fact of Special Significance)
1. Information about the issuer or the security
which has not been generally disclosed to
the public and would likely affect the
market price of the security after being
disseminated to the public and the lapse of
a reasonable time for the market to absorb
the information; or
2. Information about the issuer or the security
which would be considered by a
reasonable person important under the
circumstances in determining his course of
action to buy, sell or hold security (Sec.
27.2).
Cease and Desist Order (Section 64)

Under Section 64 of RA 8799,, there are two
essential requirements that must be complied
with by the SEC before it may issue a cease
and desist order: First, it must conduct proper
investigation or verification; and Second, there
must be a finding that the act or practice,
unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave
or irreparable injury or prejudice to the
investing public. Here, the first requirement is
not present. Petitioner did not conduct proper
investigation or verification before it issued the
challenged orders. The clarificatory conference
undertaken
by
petitioner
regarding
respondents business operations cannot be
considered
a proper investigation
or
verification process to justify the issuance of
the Cease and Desist Order. It was merely
an initial stage of such process, considering
that after it issued the said order following the
clarificatory
conference,
petitioner
still sought verification from the BSP on the
nature of respondents business activity. (SEC
v. Performance Foreign Exchange Corporation
G.R. No. 154131 20 July 2006)
Suitability Rule
The rule states that in recommending to a
customer the purchase, sale or exchange of
any security, a broker or dealer shall have
reasonable grounds to believe that the
recommendation is suitable to such costumer
based on the facts disclosed by the latter as to
his other security holdings and his financial
situations and needs.
Margin Trading
A kind of trading that allows a broker to
advance for the customer /investor part of the
purchase price of a security and to keep it as
collateral for such advance.
The credit extended must be for an amount
not greater than whichever is higher of:
1. 65% of current market price of the
security; or
2. 100% of the lowest market price of
security during the preceding 36 calendar
months, but not greater than 75% of the
current market price (Sec. 48).
Insider
1. A person who, with respect to a particular
security, may be any of the following:
2. The issuer;
3. The director or officer of, or a person
controlling the issuer;
4. A person whose relationship or former
relationship to the issuer gives him access
to material information about the issuer or
the security that is not generally available
to the public;
5. A government employee, or director, or
officer of an exchange, clearing agency
and/or self-regulatory organization who
has access to material information about
an issuer or a security that is not generally
available to the public; or
6. A person who learns such information by a
communication from any of the foregoing
insiders (Sec. 3.8).
Margin
Sum of money, or its equivalent, placed in the
hands of a broker by principal or persons on
whose account the purchase is to be made, as
a security to the former against losses to
which he may be exposed by a subsequent
depression in the market value of the stock.
Note: Trading on credit (or margin trading)
allows investors to buy more securities than
their cash position would normally allow.
Investors pay only a portion of the purchase
price of the securities; their broker advances
for them the balance of the purchase price
153

Corporation Laws
and keeps the securities as collateral for the
advance or loan. Brokers take these
securities/stocks to their bank and borrow the
balance on it, since they have to pay in full
for the traded stock.
Hence, increasing
margins i.e., decreasing the amounts which
brokers may lend for the speculative purchase
and carrying of stocks is the most direct and
effective method of discouraging an abnormal
attraction of funds into the stock market and
achieving a more balanced use of such
resources (Abacus Securities v. Ampil, GR No.
160016, February 27, 2006).
154

COPRORATE ACTS WHICH REQUIRE MAJORITY VOTE OF THE BOD ALONE

(EVP)
Corporate Act
Election of officers (Sec. 25, CC)
Vacancies in BOD if NOT due to
removal, expiration of the term or
increase in number of directors (Sec.
29, CC)
Power to acquire own shares
(Sec. 41, CC)
Salient Points
Majority vote of all the members of
BOD
Majority vote of remaining directors if
quorum still exists
Majority Vote
1.
If the directors do not constitute

a quorum, stockholders have
the right to elect
Provided
that
there
is
unrestricted retained earnings
Only for legitimate purposes
CORPORATE ACTS WHICH REQUIRE MAJORITY VOTE OF THE BOD AND VOTE OF
STOCKHOLDERS REPRESENTING MAJORITY OF THE OCS (FAM)
Corporate Act
Fixing the issued Price of
No- Par value shares (Sec.
62, last par. , CC)
Amendment or repeal of
By-laws or Adoption of new
By-laws (Sec. 48, CC)
Management
(Sec. 44, CC)
Contract
Salient Points
Majority of quorum of BOD,
if authorized by AOI or bylaws
Majority vote
Majority of OCS, if BOD is

not authorized by the AOI
Majority vote of BOD of

both
managing
and
managed corporation
Majority of OCS/members
of both managing and
managed corporation and
in some cases 2/3 of OCS/
members
Majority of OCS
Amendment may be made

by the Board only after due
delegation
by
the
stockholders.
Non-voting shares can vote
CORPORATE ACTS WHICH REQUIRE MAJORITY VOTE OF THE BOD AND VOTE OF
STOCKHOLDERS REPRESENTING 2/3 OF THE OCS (ADAM-LI3ES)
Corporate Act
Amendment of Articles of
Incorporation
Majority vote
Vote or written assent of 2/3

of OCS/ members
Dissolution of Corporation
(Secs. 118 and 119, CC)
Majority vote
2/3 of OCS/ members
Adoption
of
plan
or
distribution of assets of
non-stock corporation (Sec.
95 [2] , CC)
Merger or Consolidation
(Sec. 77, CC)
Majority vote of trustees
2/3 of members
voting rights
Majority
of
BOD
of
constituent corporations
2/3 of OCS/ members of

constituent corporations
having
155
Salient Points
Non-voting shares can
vote
Appraisal
right
is
available in certain
cases
Effective upon approval
by SEC, or date of filing
if not acted upon within
six months
Must be for a legitimate
purpose
See Sections 117-122
vote

vote
Appraisal
right
is
available, except when
the plan is abandoned
Any amendment to the
plan may be made
provided it is approved

Corporation Laws
Sale, Lease, Exchange,

Mortgage, Pledge, Dispose
of all or substantially all of
corporate assets (Sec.40,
CC)
Majority vote
2/3 of OCS/ members
Increase or decrease of
capital stock (Sec. 38, CC)
Majority vote
2/3 of OCS/ members
Incur, Create, Increase

Bonded
Indebtedness
(Sec. 38, CC)
Majority Vote
2/3 of OCS/ members
Investment of Corporate
Funds
in
another
Corporation or Business or
for any other purpose other
than primary purpose (Sec.
42, CC)
Majority vote
2/3 of OCS/ members
1.
2.
3.
4.
156
by majority vote of the

board and 2/3 of
OCS/members
Majority of the board is
sufficient
if
the
transaction does not
cover
all
or
substantially all of the
assets
of
the
corporation
vote
Appraisal
right
is
available
Notice is required
If sale is abandoned,
directors action is
sufficient, no need for
ratification
by
stockholders
Meeting is required
vote
No appraisal right
Notice requirement
SEC prior approval
Prior approval of the
SEC is necessary for it
is only from and after
the approval by the
SEC and the issuance
by the SEC of a
certificate of filing that
the capital stock shall
stand increased or
decreased
Treasurers
sworn
statement
is
necessary
No decrease of capital
stock if it will prejudice
right of creditors
Meeting is required
vote
No appraisal right
Notice is required
Registration of bonds
with the SEC is
necessary
vote
Appraisal
right
available
Notice is required
Investment
in
the
secondary purpose is
covered
Stockholders
ratification
is
not
necessary
if
the
investment
is
incidental to primary
purpose
Extension or shortening of
corporate term (Sec. 37,
CC)
Majority vote
2/3 of OCS/ members
Issuance
of
Stock
Dividends (Sec. 43 , CC)
Majority of the quorum
2/3 of OCS/ members

vote
Appraisal
right
is
available
Notice requirement
Effected through an
amendment of the AOI
There
must
be
unrestricted retained
earnings
CORPORATE ACTS WHICH REQUIRE MAJORITY VOTE OF THE STOCKHOLDERS

REPRESENTING MAJORITY OF THE OCS ALONE (FFAD)
Corporate Act
Fixing of compensation of directors
(Sec.30, CC)
Majority of OCS
Adoption of By-laws (Sec. 46, CC)

Election of Directors/ trustees (Sec.
24, CC)
Majority of OCS/ members

Majority of OCS / members
Fixing the issued Price of No- Par

value shares (Sec. 62, last par. , CC)
Majority of OCS
Salient Points
Reasonable per diems may be
given
By-laws
may
provide
for
compensation
1. Limit: not more than 10% of the
net income before income tax
2. Non-voting shares can vote
Candidates with the highest

number of votes get elected
Cumulative voting: No. of shares

x No. of directors to be elected
Non-voting shares cannot vote
Stockholders/Members shall vote

if the BOD/BOT are not
authorized by the Articles of
Incorporation and the by-laws to
fix the price
CORPORATE ACTS WHICH REQUIRE MAJORITY VOTE OF THE STOCKHOLDERS

REPRESENTING 2/3 OF THE OCS ALONE (PARDS)
Corporate Act
Denial of pre-emptive right (Sec. 39,
CC)
2/3 of OCS
Delegation of the power to Amend,

Repeal or Adopt New By-laws to BOD
(Sec. 48, CC)
2/3 of OCS
Removal of Directors/ Trustees (Sec.

28, CC)
2/3 of OCS / members
Ratification of act of disloyal director

(Sec. 34, CC)
2/3 of OCS
Salient Points
Only if the AOI or amendment
thereto denies pre-emptive right
Denial extends to shares issued
in good faith in exchange for
property needed for corporate
purposes or in payment of
previously contracted debts
Delegation can be revoked by
majority OCS
Notice and statement of purpose
are necessary
Must be made in a meeting
called by the secretary on
Presidents order or on written
demand of majority of OCS
Removal without cause cannot
be used to deprive minority
stockholders of their right of
representation
Ratification of a contract of selfdealing directors (Sec. 32, CC)
2/3 of OCS/ members
The contract must be fair and

reasonable
under
the
circumstances
Full disclosure of adverse
interest of directors/ trustees
involved is necessary
Presence of director/ trustee
must be necessary to constitute
quorum OR the vote of director/
trustee must be necessary for the
approval of the contract

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San Beda College of Law

2010 Centralized Bar Operations

Extent of Liability To Third Persons

Corporation Code of the Philippines, pp.

Prior to 1906, the law regulating business

Theories on Formation of a Corporation

San Beda College of Law

may be connected and vice versa (Cease

A corporation is an artificial creature

2. Right to bring actions

The interest of shareholders in

While a share of stock represents

4. Acquisition by court of jurisdiction

Doctrine of Separate Personality

6. Entitlement to constitutional rights

San Beda College of Law

Protection against unreasonable

body, or, generally, from the directors as

However, it is NOT entitled to certain

BUT, the officers of the corporation may be

Doctrine of Piercing the Veil of Corporate

Exception: When a corporation has a

The doctrine requires the court to see through

8. Liability for torts

San Beda College of Law

the other corporation (China Banking

2. To prevent fraud or wrong and not

There is always an element of malice or

3. Essentially a judicial prerogative only

B. Alter Ego Cases (or Conduit Cases)

4. Must be shown to be necessary and

One of the instances when the Alter Ego

Mere ownership by a single stockholder or

San Beda College of Law

Instrumentality or Alter Ego Rule

Where there are two corporations, they will

When the veil of corporate fiction is

Bar Question (2004): How does one pierce the

II. Created by Operation of Law

San Beda College of Law

Doctrine of Corporate Entity

Tests to Determine the Nationality of

Sec. 16, Article XII of the 1987 Constitution

Note: The domicile of a corporation is the

Philippine National under the Foreign

San Beda College of Law

Powers, Attributes and Properties

Section 3. Classes of Corporation

Theory of Special Capacities/

If the act of the corporation is not one

The business entity is said to hold such

San Beda College of Law

a. Open one which is open to any

b. De facto corporation organized

Corporation by estoppel group of

d. Corporation by prescription one

8. As to number of persons who compose

San Beda College of Law

date of issuance of the

10. As to whether they are for charitable

Extent of Liability to Third Persons

A one-man corporation enjoys the attributes of

San Beda College of Law