Corpo Gamita

CORPORATION LAW MIDTERM REVIEWER WWW COMPILATION AND NOTES [403 SY 2011-2012] 1
11/11/11 - Friday
Section 1. Title of the Code. - This Code shall be known as

"The Corporation Code of the Philippines".
Story of Genesis:
Before God created man, he prepared the birds in the sky, the
land...etc. to create the world. When everything was ready,
from out of mud he created Adam, but finding Adam very
lonely, despite all that he created to make him happy. God
being wise, he knows what Adam exactly needed. He put him
to sleep and out of his ribs, he made a woman.
Then, the woman found out from the snake and was deceived
by him that if they ate the fruit from the Garden, they would
become like God. They then, realized that it was a deception
from the devil, and when God, he said uyy, what happened?
They passed on the blame, from Adam to Eve and then to the
snake. ;)
So that if you will compare genesis from the course, business

organization, exactly the same. The basic form of business
organization is sole proprietorship where only one person
carries on his business. And when God created man out of
mud, then he whispered into that mud, Adam came out. Like
Genesis, its like the sole proprietorship.
Sole proprietorship needed a partner, and so partnership

came out. Just like the Genesis, when God found out Adam
lonely, he made him a partner from his ribs named Eve.
Everytime Eve gets home, he counted the ribs of Adam, to
make sure theres no other woman in this world. Thats the
beginning of their quarrel.
Now, because of the investment of Adam, the partnership

flourished, thats why Cain and Abel came out because of
their industry. DOING OVERTIME, NIGHT & DAY WORKING,
DAY & NIGHT! ;) THEN, THE corporation was born.
PARTNERSHIP CORPORATION
-at least 2 -at least 5; not less than 5 and
not more than 15
-contract and perfected by -a creation of law; derives its
mere consent power & existence from law;
law provides for the
requirements of a juridical
person and how that juridical
person would carry out its
power by electing its officers;
who has the sole authority to
manage the corporation
The corporation is different from the partnership. It is a

contract and perfected by mere consent. A corporation is not
just a contract among its stockholders, it is a tripartite
agreement.
1. Contract between stockholders and corporation;
cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

2. Contract between corporation and the state;

3. Contract between corporation and the public.
Sec. 5. Corporators and incorporators, stockholders and

members. - Corporators are those who compose a
corporation, whether as stockholders or as members.
Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called stockholders or

shareholders. Corporators in a non-stock corporation are
called members.
STOCKHOLDERS & CORPORATION

The corporation exist because the law has granted it the
power to exist, and not because the stockholders wanted to.
And the law would grant if the corporation would comply
with the requirements and other terms and conditions under
which the authority and the power was connected. Thus, THE
CORPORATION DOES NOT DERIVE ITS POWER FROM
STOCKHOLDERS, BUT FROM THE LAW.
SO that its not accurate to say, that stockholders have
authority over the corporation, although they would
constitute the corporation.
This is the reason why once the stockholders elect the board
of directors which actually manages the corporation, the
stockholders cannot say that youre decision as a board will
not be approved by us.
Once the board is elected, it is answerable to the state.

The decisions of the board are not subject to the whim of the
stockholders.
So long as the board complies with the law of the state who
granted them the powers.
The decision of the board will stand, regardless of what the
stockholders will decide.
But there are certain acts where the stockholders can opt to
review the decisions of the BOARD, by way of exception.
Although the
stockholders elect the members of the board, the board is not
answerable to the stockholders but to the LAW.
Sec. 10. Number and qualifications of incorporators. - Any

number of natural persons not less than five (5) but not
more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the
incorporators of s stock corporation must own or be a
subscriber to at least one (1) share of the capital stock of the
corporation.
The people who organized the corporation are called

incorporators. Each incorporator is a stockholder. One may be

a stockholder, but not necessarily an incorporator. But an

incorporator is necessarily a stockholder.
Incorporators refer to those who started and pioneered the

corporation. What they execute would be the articles of
incorporation.
Article of incorporation describes the substance of the
corporation itself; basic info about corporation
- with the name of the corporation; how long will
it intend to exist; to be learned later that max of
50 years and extension of another 50 years. The
name of the incorporators is important because
they would be the one to sign the articles of
incorporation.
- the portion where the state can identify who are
responsible for these corporation. The
incorporators will invest and these will represent
the stockholdings. The stocks will then form part
of the capital of the corporation.
- in the article of incorporation, the authorized
capital stock will be indicated which is actually
the maximum amount that the corporation
intends to invest and the maximum amount that
the law will allow the corporation to have as
capital.
- It does not mean that whatever is the maximum
authorized capital amount, that will be the
amount immediately invested. It is just a
maximum. It may be fully paid or subscribed
later and may not be.
- The law only requires that out of the authorized
capital stock, only 25% may be subscribed which
refer to the contract of the corporation.
- SUSCRIBED refers to the contract with the
corporation. Out of how much the individual
incorporator stockholder would be willing to
invest. That investment of the individual
incorporators and the total of all the actual
subscription should not be less than 25% of the
authorized capital stock. Does not mean that if
they make that commitment they will
immediately pay.
- The law only requires that out of the subscribed
capital stock, only need 25% of that subscription
to be actually paid as capital.
o Ex: out of the 100,000 shares, I need
not come out w/ the 100,000 shares.
Law requires that at least only 20,000
or 25%. So of out of your subscribed
capital stock, you need to subscribed,
then out of your subscription only 25%
will have to be paid.
CORPORATION & THE STATE

- AFTER THE ARTICLES OF INCORPORATION, we go
to government/state through Securities and

Exchange Commission. It processes, monitors,

regulates and even disciplines corporations and
officers.
- You have to file AOI to the SEC, have an option
to file it by itself or already include the articles
of incorporation & by-laws of the corporation.
- BY-LAWS: rules of procedure among and within
the corporation. Rules as to whom and what
officers to elect, how elected, number of votes
required, when meetings held (monthly, annual,
special), how are meetings called and who will
call. The officers, their duties and functions as
President, VP, chairman. Election process, votes
required.
- By laws may accompany the articles of
incorporation.
- SEC will check WON the contents of Art of
Incorporation are true and correct, whether the
amounts are correct.
o What is proof that payments of
subscription are made?
The treasurers affidavit.
Appoint a temporary or active
treasurer who will deposit it to
the bank and bank will issue
an acknowledgement receipt
stating that the amount of
payments of the subscription
is on deposit with them. The
certificate will be incorporated
with the treasurers affidavit.
o Once established, the SEC will issue the
Birth certificate of the corporation. The
SEC will issue the certificate of
incorporation. The official document
that shows the existence of a duly
organized corporation under Philippine
law.
o Once given, officers will call all the
stockholders. In that meeting, they will
elect board of directors. It will depend
on how many is indicated in the articles
of incorporation. Also, they may invite
other parties to become stockholders.
The parties may subscribe for certain
shares, but no longer incorporators
because their names are fixed.
o The board of directors once created will
have to organize themselves.
o BOARD OF DIRECTORS MEETING:
Members of the board will
organize themselves. Elect the
chairman, president, secretary,
treasurer and other officers
mentioned in the by-laws.

o Once organized, they are now ready to

function. Now have the BOARD to
whom management is given, then
board may appoint other officers
mentioned in the by-laws.
- Needs secretary, whom must be under ATTY.E,
10,000 per meeting! (haha)
- Function of secretary: guide the board in
meeting, assist stockholder in meeting, prepare
the issuances, stock certificates.
- Now that you are issued the certificate of
incorporation. SEC will tell you, that this is
already approved.
o Required to submit 2 books:
Stock and transfer book -
record of every movement of
stocks; one portion has ledger
which contains names of all
stockholders, certificate
number issued to them;
whenever youd like to
assign/transfer/sell stocks,
youll have to endorse the
certificates, and the
endorsement will be reflected
in this book
Who is the previous
holder, whom the
certificate was issued,
number of stocks
indicated, or carried
in the certificate
Book of stocks certificates -
like diploma, used as proof
that one is a stockholder.
o So, as a corporate secretary, youll have
to maintain these books and coordinate
with SEC and submit the annual reports
of the corporation. Annual reports
include financial statements, general
info sheet (an update, showing the
basic info of the corporation, officers,
stockholders, directors, capitalization)
- MONEY MART/ STOCK MARKET

o AS distinguished from Private
Corporation, they are called Publicly
Listed corporation. Because the
corporation is listed with the Phil stock
exchange, which means that stock is for
sale to anyone interested.
o The Phil stock exchange is just a stock
market where the sellers & brokers,
buyers and agents are there.
LIKE if they buy certain stocks
today, sell it tomorrow or wait

until price go up. Later the

broker would call back, that he
has already purchase 1,000
stocks at a certain price.
Following day, if price go up,
5cents, then you sell stocks
that have been brought
yesterday. Brought 100,000
shares and gain of 5cents,
youll have 500,000.
o Not just any corporation can sell their
shares in stock market, but has to
register with the Philippine stock
exchange. Its not a public corporation,
but a publicly listed corporation
because theres a different public
corporation which has purpose to
govern certain portions of the state like
the barangays, municipalities, cities,
province., countries, states.
o There are several types of other
corporations:
1. Private corporations
Publicly listed
corporation
Corporations engaged
in public service or
quasi-public
corporation they
render public service;
telecommunications,
power corporations,
transportations,;
governed by Public
Service Act;
Profit/non profit
o Non-profit
does not
mean that
you have to
sell without
profit, simply
means that
all profits
will not be
distributed
as dividends,
but only be
used for that
corporation
to enhance
and improve
the facilities.
The
members
will get their

share not in
the guise of
profits but in
the facilities
for their
convenience
and comfort.
Non-stock/stock
o Although
non stock is
not intended
for profit,
but there
prices are
much higher
than other
corporations
for profit.
Religious corporations
11/16/11 Wednesday
Sec. 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.
Sec. 11. Corporate term. - A corporation shall exist for a

period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period
is extended. The corporate term as originally stated in the
articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance
with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Securities
and Exchange Commission.
Sec. 19. Commencement of corporate existence. - A private

corporation formed or organized under this Code
commences to have corporate existence and juridical
personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors
shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.
Sec. 22. Effects on non-use of corporate charter and

continuous inoperation of a corporation. - 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. However, if a corporation has commenced the
transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5)
years, the same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of
incorporation.
This provision shall not apply if the failure to organize,

commence the transaction of its businesses or the
construction of its works, or to continuously operate is due
to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
Q: Definition of Corporation
A: 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. It is a creation of law, its the law which grants
authority to exist. Law requires for it to continue existing. It
must exist in compliance with all the rules and regulations.
And it is supposed to be a separate personality.
Q: So that one of the SH owes Mr. X, can he go to corporation

and demand corporation to pay debt of SH?
A: no. corporation has nothing to do with the SH debt
Q: Rights of a corporation
A: Due process. Corporation also has the right against
unreasonable search and seizure.
Q: Why this latter right? So that if an agent from DOLE wanted

to search records of a corporation, can he do that?
A: Yes. Thats an exception. There is a special provision of
labor code which gives DOLE the power to inspect records.
Only the records mentioned in the law, otherwise it will be
violative of the right against illegal search.
Q: So that if that employee was threatened by manager and

he went to labor department and claim illegal dismissal, so
that DOLE came and said, where is your gun, we want to
search for the gun, can that be done?
A: NO unless DOLE secures a Search Warrant. DOLE has right
to inspect and examine but this time its not part of your duty
to look for the gun so Search Warrant is needed.
As a juridical person, corporation is entitled to exercise its

right.
Q: SH are all residing at a condominium, where should the

office of corporation be?
A: Principal place of the business. That does not mean the
residence of SH is resident of corporation because of their
separate personality.

Q: Right to life?
A: Corporation is not entitled to right to life. Only natural
persons are entitled to right to life. Although, the corporation
has its life which refers to the term of its existence.
The corporation in so far as existence is concerned cannot be

dissolved without due process of law.
Q: Liberty?
A: Corporation is not entitled to right to liberty. You cannot
send corporation to jail, because it is only an artificial being.
Although, there are lots of laws which impose criminal liability
not to corporation but perhaps to directors or officers.
In tax laws, there could be provision there that in case a

violation is committed by corporation the officers, presidents,
and directors may be held criminally liable if they were
responsible of the approval of criminal acts. It does not mean
that corporation can just violate any law with assurance that
it will not be criminally liable.
Provisions are clear that should the act of corporation make

that corporation criminally liable then liability may be
imposed on its officers.
Q: Damages?
A: While corporation does not suffer mental anguish because
he does not have the facilities to suffer that type of damages,
it may suffer damages if its reputation is being scandalized or
besmirched. Like for ex. libelous item in newspaper and due
to this corporation suffered maybe having less number of
customers and less volume of sales, then corporation may file
for damages. Not sleepless nights, not untold worries and
mental anguish because corporation is not capable. But
besmirched reputation? yes. It refers to the good will.
Here, when we say a separate person, we are drawing the line

between SH itself and corporation. SH are mere investors of
corporation. They do not constitute the corporation itself and
so that once certificate of incorporation is granted.
Corporation begins to exist, separate personality exists and
separate from SH. Corporation extends veil of protection.
Veil of corporate fiction:
Corporation is covered by that veil. Once is the veil is placed
by the law, that veil protects whoever is under the veil. The
public will have to rely on that veil and deal with that veil. So
that any liability will not affect whoever is under that veil. Any
potential transaction that the group has entered will never
involve whoever is under that veil. You are now dealing with
the corporation not the people under it.
Q: However there are instances will allow you to lift that veil,
but perhaps to sue the individuals under that veil. In other
words, it is not absolute that the individuals will forever be
protected. Law allows instances that we can pierce the veil of
corporate fiction. Those are occasions when individual SH

composing the group supposedly protecting the veil may be

personally liable:
A: 4 instances when lifting of veil is allowed:

1. When intended to cover a fraud
2. When intended to defeat public convenience
3. Justify wrong
4. Defend a crime
Under these, SH did not have an honest intention that

corporation rather under these instances it could be proven.
And if it could be proven that corporation was formed to
commit any of above instances, then Stockholders may
become personally liable and the veil of corporate entity that
should protect them has been pierced.
Q: Example of an instance to Cover Fraud? In our situation,

we have to establish that the corporation was organized
precisely to cover up fraud. How do we demonstrate that?
11/18/11 Friday
Doctrine of Piercing the Veil of Corporate Entity
A. Instances when the lifting of the corporate veil is allowed

(4):
1. Defeat public convenience
2. Justify wrong
3. Protect fraud
4. Defend a crime
B. Examples Given (2):

1. The corporation is being used by the
stockholders as a consignee to receive the illegal
goods and they used the corporate personality
as a shield for their illegal schemes or activities.
2. An insolvent created a corporation to evade his
obligations to the creditors so he transferred his
properties to the corporation in order that those
creditors can no longer go against the properties
which were already transferred to the said
corporation.
C. In other words, there must be a clear intention of

committing a crimedefrauding othersthat intention is
there. And to achieve that intention, he decided to create
a corporation to evade any personal obligation.
Therefore, the corporate veil may be lifted and so the
officers and the directors would be personally liable.
D. The protection extended by the law covers only

legitimate objectives. Thats the purpose of the law in
covering these stockholders with the protective mantle of
corporate fiction. But if the intention is to commit a
crime, defeat public convenience, protect fraud, then it
has violated the very purpose for which the state has
created them. Because we said that it is created by the
law or the state then its existence must be in accordance

with this creation.
Definition of a Corporation, Section 2

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.
Right of Succession
Here are five stockholders of a very successful corporation.
The 5 of them were necessarily the directors. And being so
successful they decided for the first time to hold their
stockholders meeting in Singapore. So the notice of the
meeting was served, even telling them to bring along their
spouses, with everything taken care of by the board. So they
did. They chartered a 737. After the meeting which lasted for
1 hour they stayed for 1 more week together with their
spouses. Of course they were not required to present any
marriage certificate so they would not be sure xxx. After going
around in Singapore, they came home. After, the pilot
announced: We wish to inform you that we are
encounteringencounteringencountering encountering
Communications got lost and nothing has been heard of the
aircraft. Nothing has been heard of the stockholders.
What happens to the corporation?
ANS: The corporation will still exist notwithstanding
the death of the 5 stockholders since it has a right of
succession. So, their stockholdings would now be
transferred to the heirs. The corporation does not
die with the death of the stockholders. In other
words, the corporation continues to exist and this is
another advantage of a corporation. And we learned
in partnership that if a partner dies, the partnership
ceases to exist. If all the partners died, with more
reason that the partnership will be dissolved.
Here, even if all the stockholders would die of
course it has a right of succession the corporation remains
to exist.
and so, a notice for stockholders meeting was served. It so

happened that all of the stockholders who died were fairly
young. The eldest among the stockholders had an eldest son.
When he was served with the notice, he was asked, Anak
kang stockholder X? [Eldest Son] OJA! OJA! OJA! (HA! HA!)
The other stockholders did not have children.
So who will appear in the stockholders meeting?
ANS: A guardian may be appointed on the minor
sons behalf. So that it does not give us any reason
why, of course theoretically, why a corporation
ceases to exist because we learned in succession that
everybody has an heir. Of course if no heir would
come out, the property is escheated in favor of the
state.
Their death does not dissolve the corporation because we

learned in succession that the heir assumes the estate at the
moment of death. So guardians may be appointed, or

administrators could be designated, or executors, for all we
know there could be executors.
Differentiate an executor from an administrator:

1. Executor appointed in the will to administer
the properties
2. Administrator appointed by the court if there
is no will
Corporate Existence
A. It exists for 50 years; renewable for another 50 years.
So that I if you were a stockholder at the age of 21,
plus 50 = 71, plus another 50, at the age of 121, you
would still be able to renew the corporation.
B. Of course while it could be renewable for another 50
years, but if it doesnt seem to be good, it can be
dissolved. They could shorten their period. In the
articles of incorporation they could designate that
their existence would be for 50 years. If it turns out
to be unsuccessful they could shorten their existence
to 5 years.
Powers of a Corporation
Express those expressly authorized by law
Implied those incidental to its existence
Example:
So that USC, lets assume, is a corporation. Its main purpose is
to provide education so that the students would earn a
degree: a masteral degree, baccalaureate degree or any other
four year course.
However, because USC having been granted to run, operate,
and maintain an educational institution, noticed that its
assets are being underutilized. They are not earning as much
as they should. They noticed that this building for example
after 8:30 becomes idle. As a business policy, all assets as
much as possible must be earning 24/7.
[Example where the assets of a business must be earning:
(1) if you are in a transportation business, you are a
shipping company, you should worry if the ships are
anchored in the pier. They should be moving, thats
the only indication that it is earning.
(2) If you own buses, and your garage is always filled
up you cannot even park your car because all your
buses are there, you will not be happy to see those
buses in the garage. The buses should be in the
streets. Those are the indicators that they are
earning.
(3) In the pier, you see 6 container vans, it will assure
you that the company who owns those vans is not
earning money. They have more vans than what they
need. They have less cargoes than what they
expected. Those vans are just lying in the pier.
However, if the yard is empty, it means that the van
is moving, and so, it earns money. So these are the
indicators.]
So one time Father President was around after 8:30, the

building was dark and nobody was inside. Fr. President would
not be happy to see the building. They spent millions, and the
building is to be used only until 8:30. So he called a meeting
and then somebody proposed to have a USC (Universal
Songhits Corporation) KTV. They decided to use all the rooms
for KTV in line with their educational objective to teach
Cebuanos not only music but dancing as well.
Question, is the KTV incidental?
ANS: Apply the two tests in determining the implied
powers of the corporation:
a. when it is in furtherance of the business
b. when it is reasonably necessary to the exercise
of the business
Putting a KTV is not in furtherance of the business

since USC provides education. USC offers academic
courses, courses that will give you a degree. This is
not just a dancing or driving school. So its never in
furtherance of the academic courses.
USC, as we know, is engaged in operating,
maintaining and managing a hotel (SC hotel). It is a
part of the educational purpose since the staff is
composed students. It is part of the HRM course. It is
allowed since it is an activity closely related to the
courses offered. There you train the students. So the
courses offered should be related to the academic
purpose, which is the main purpose of the university.
Other Examples:
A If a railroad company would operate railways from
Carcar to Danao, they have to expropriate the parcel
of land where the railways will pass. Though none is
indicated that it can expropriate land, it should be
allowed to do so. Otherwise, the purpose of the
railroad company would be limited or useless since
they cannot operate without the rails.
B. Another case involving a cement corporation: Since a

cement factory has a huge power requirement, the
corporation brought in and assembled a big power
plant,. They installed the power plant within the
cement factory. The local power company opposed
and said that the cement corporation does not have
that power since they (the power company) were the
ones who were granted the franchise to operate
within the entire province.
In that case, the corporation should be allowed to operate

and maintain an electric plant for the purpose exclusively of
supplying electricity to its cement factory. Such is incidental
only and they have the right to provide themselves with their
own power.
Distinctions Between a Partnership and a Corporation (13)

Partnership Corporation
1. Creation Created by Created by
mere law or
agreement operation of
of the law
parties
2. Number of May be Requires at
incorporators organized by least 5
at least 2 incorporators
persons
3. Commencement of From the From the
juridical personality moment of date of
execution of issuance of
the contract the
of certificate of
partnership incorporation
by SEC
4. Powers May exercise Can exercise
any power only the
authorized powers
by the expressly
partners granted by
provided it is law or
not contra implied from
bonus mores those
granted or
incident to its
existence
5. Management When The power to
managemen do business
t is not and manage
agreed its affairs is
upon, every vested in the
partner is an board of
agent of the directors or
partnership trustees
6. Effect of A partner as The suit
mismanagement such can sue against a
a co-partner member of
who the board
mismanages who
mismanages
must be in
the name of
the
corporation
7. Rights of succession None Has
8. Extent of liability to Partners are Stockholders
third persons liable are liable
personally only to the
and extent of the
subsidiarily shares
for subscribed
partnership by them
debts to 3rd
persons
9. Transferability of Partners Stockholder

interest cannot has generally
transfer his the right to
interest in transfer his
partnership shares
so as to without prior
make the consent of
transferee a the other
partner stockholders
without the because
unanimous corporation
consent of is not based
all the on trust
existing
partners
because the
partnership
is based on
trust
10. Term of existence May be May not be
established formed for a
for any term in
period of excess of 50
time years
stipulated by extendible to
the partners not more
than 50 years
in any one
instance
11. Firm name Limited May adopt
partnership any name
is required provided it is
by law to not the same
add the as or similar
word Ltd. to any
to its name registered
firm name
12. Dissolution May be Can only be
dissolved at dissolved
any time by with the
any or all of consent of
the partners the state
13. Governing law Governed by Governed by
the NCC the
Corporation
Code
Stock and Non-Stock Corporations

Definition
Stock a corporation which has capital stock divided into
shares and is authorized to distribute to the holders of
such shares, dividends or allotments of the surplus profits on
the basis of the shares held
Non-stock a corporation which does not issue stocks nor
distribute dividends to their members

Profits of Stock and Non-stock Corporations

1. In a stock corporation, it earns profits and distributes
them as dividends to its stockholders.
2. In a non-stock corporation, it earns profits but it uses
those profits to improve its facilities or services. USC
for example uses its profits to construct buildings
and to improve its facilities.
Capitalization
Sec. 12. Minimum capital stock required of stock

corporations. - Stock corporations incorporated under this
Code shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for by
special law, and subject to the provisions of the following
section.
Sec. 13. Amount of capital stock to be subscribed and paid

for the purposes of incorporation. - At least twenty-five
percent (25%) of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the
total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by
the board of directors: Provided, however, That in no case
shall the paid-up capital be less than five Thousand
(P5,000.00) pesos.
Illustration:
Authorized Capital Php10M Maximum
Stock (ACS)
Subscribed Capital Php2.5M At least 25% of the
Stock (SCS) ACS
Paid-up Capital Stock Php625K At least 25% of the
(PCS) SCS
Authorized Capital Stock (ACS) maximum amount which

the law allows that corporation to invest.
So in this example, Php10M the most. Later on if business is
good, they could always amend the articles and maybe
increase the ACS. They could increase it anytime.
Subscribed Capital Stock (SCS) it is the amount of the

capital stock subscribed, whether fully paid or not.
Out of the entire ACS, they need not make that investment
immediately.
The law requires the incorporators that out of the Php 10M
ACS, they will subscribe only to at least 25%.

Meaning, thats the commitment of the incorporators. They

commit that out of the Php10 million, they will commit to
subscribe, that is their individual commitment.
And the law does not require you to pay that immediately,
you may pay that depending on your agreement, or according
to the decision of the board. You are only required to pay
25% Paid-up Capital Stock (PCS).
So this corporation needs only 625k to start it. The rest
depends upon their agreement or maybe depends upon the
BODs, when the BODs make a call. When we say call, the
BODs are now requiring all the stockholders to pay off any
unpaid subscription they may have. Thats the decision of the
board.
STOCK CORPORATION:
If this is a stock corporation, the capital is divided into shares
and such corporation is authorized to distribute to the holders
of such shares, dividends or allotments of the surplus profits
on the basis of the shares held.
The purpose of identifying the shares is to measure their

share in the losses or their share in the profits. So, a stock
corporation simply assigns a value to each share, so that if
Php10M is the ACS, and you want to divide this into 1 million
shares, the par value (value of the share) would be Php 10.00
per share (Php 10M ACS divided by 1 million shares). So each
share is now given a par value. The value will be used to
measure your share in the corporation.
If after 1 year of operations, we have profits amounting to

Php 1M and we wanted to distribute these assets to the
stockholders. Assuming all the 1 million shares have been
subscribed to, each share would be entitled to Php 1.00 profit
(Php 1M profits / 1 million shares). So if you have 100 shares,
you have Php 100.00 share of the profits or dividends.
You dont divide losses here unlike partnership. There is no

such thing as stock partnership. There is no need to measure
because in a partnership, you have to divide according to your
contribution. Here, you do not have to share losses because
we said that my liability is only up to the extent of my
subscription. Although I have not fully paid it yet (the
subscription), I have committed to pay it. If this is not enough
to pay all the obligations, of course, I can be compelled to pay
the SCS not because I have a share in the losses but because I
have earlier committed to pay the SCS. So this is a stock
corporation.
NON-STOCK CORPORATION:
In a non-stock corporation, there is no need for the division of
capital into shares because it is useless. Because in a stock
corporation, we purposely divided it into shares to come out
with the par value so that later on it would be used to
measure dividends. But in a non-stock corporation, we do not
have to divide them into shares because we do not distribute
profits.
Though a non-stock corporation may not distribute profits, it

does not mean that the corporation will not realize profits. As
a matter of fact, their margin of profits most of the time are
much wider than ordinary stock corporations.
Example: Membership in clubs: Country Club, Casino
Espaol, Alta Vista, etc.
The profits of these non-stock corporations are ploughed back
in terms of improved facilities for the members, better food
and more options insofar as facilities are concerned.
In non-stock corporations, there are shares issued for a fixed

price, but they are not based on capital. They are just shares
issued to those whoever would want to avail of the facilities
of the club for example. Sometimes they limit the number of
members because if it becomes too many, it might get
crowded. Eventually they have to limit the number of shares.
That is why even if you have all the millions, you would still
have to apply for membership.
In the bulletins of these places, you would have to apply for

membership and there is a committee on admission. Not just
anyone could be a member. So they have to know your
character, your behavioral patterns. Theres a membership
board and the members of the board will deliberate. They
have two balls, the white ball and black ball. The members
will decide. If you think he is to be admitted, you will drop
your white ball. If you think you have objections on this
applicant, you drop your black ball. So nobody will know who
objected to whom.
Sec. 3. Classes of corporations. - Corporations formed or

organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock divided
into shares and are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits on
the basis of the shares held are stock corporations. All other
corporations are non-stock corporations.
Sec. 4. Corporations created by special laws or charters. -

Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or
charter creating them or applicable to them, supplemented
by the provisions of this Code, insofar as they are applicable.
Classifications of a Corporation:
1. As to organizers
a. Public by State only
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
3. As to governing law
a. Public special laws and LGC
b. Private Law on private
corporations
4. As to legal right to corporate existence
a. De jure 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 stare
b. De facto 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 SolGen in quo
warranto proceeding
5. As to laws of incorporation
a. Domestic corporation formed,
organized or existing under Phil.
laws
b. Foreign a corporation formed,
organized or existing under any
laws other than those of the Phils.
6. As to whether they are open to the public or not
a. Open one which is open to any
person who may wish to become a
stockholder or member thereto
b. Close those whose shares of
stock are held by limited number
of persons like the family or other
closely-knit group
7. As to number of persons who compose them
a. Aggregate a corporation
consisting of more than one person
or member
b. Corporation sole a corporation
consisting of only one person or
member, a special form of
corporation usually associated with
the clergy
8. As to whether they are for religious purposes or not
a. Ecclesiastical one organized for
religious purposes
b. Lay one organized for a
purpose other than for religion
9. As to whether they are for charitable purposes or not
a. Eleemosynary one established
for or devoted to charitable
purposes or those supported by
charity
b. Civil one established for
business or profit
Public Corporations
A. Public Corporations are those organized for the
government of a portion of the State for the general
good and welfare.
B. DepEd, DSWD, DND, DOJ, PCGG are NOT Public
Corporations.
C. Example: LGUs, barangays, etc
11/21/11 Monday
Stock Corporations
Why should divide their capital and distribute it to shares?
-to determine their share in profits
Authorized Capital Stock (ACS)

-maximum that corporation will invest
-mentioned in Articles of Incorporation (AOI)
-cannot invest more, unless they amend the AOI
Subscribed Capital Stock (SCS)

-stocks subscribed by an individual/stockholder
-at least 25% of ACS
Paid-Up Capital Stock (PCS)

-subscribed stocks that are actually paid for
-at least 25% of SCS
Example:
ACS 10M
SCS at least 25% of ACS = 2.5M
PCS at least 25% of SCS = 625K
If we have 5 stockholders and all of them agree that they will

subscribe equally, how much will they have?
-500K each (2.5M divided by 5)
Subscriptions SCS (25% of ACS)

PCS (25% of SCS)
A 500,000 500K
125,000
B 500,000 500K
125,000
C 500,000 500K
125,000
D 500,000 500K
125,000
E 500,000 500K
125,000
Total: 2.5M
625K
-if 500,000 is their subscription, they will have to pay 25% of

SCS which is 125,000
To simplify things, the law states that in a stock corporation,

you divide your capital stock into shares.
So if ACS is 10M, and supposing you divide ACS into 10M

shares, you have a par value of 1Peso per share.
So that, if par value is 1Peso per share, and you have PCS of
125,000 each, how much share would A have?
-125,000 shares (125,000 PCS x 1Peso per share)
Purpose of dividing stocks into shares:

-to measure later on your dividends which will represent your
share in the profits
Kinds of Dividends
If there are profits later, board may decide that part of these
profits may be distributed as dividends, and these dividends
usually are declared in cash, called Cash Dividends.
But there are occasions when corporation will not have cash
but have excess properties and thus decide to distribute
properties and thus called Property Dividends.
If no property or cash dividends, we have excess shares so
instead of distributing cash or property, will just distribute
stocks, or Stock Dividends.
Distribution of Profits
If profit is worth 200,000, how many shares will this be?
-200,000 shares because it is at 1Peso per share
If we have 200,000 profit equivalent to 200,000 shares, how

much additional shares of stock will each stockholder have?
-40,000 each (200,000 shares divided by 5 stockholders)
-So, their original stockholding which is 500,000 plus 40,000
additional stocks equals 540,000 stocks for each stockholder.
-Thus, since each stockholder has 540,000 shares then total
subscribed capital stock is now 2.7M (540,000 times 5)
Distribution of Losses
But, aside from profits, we also have losses, how do we
distribute losses?
-not required to put up additional because there is still unpaid
commitment of 1,875,000
How to get unpaid commitment (stocks that were
not paid for):
Get total amount of PCS (125,000 x 5 = 625,000)
Get total amount of SCS (500,000 X 5 = 2.5M)
Subtract PCS from SCS (2.5M 625,000 = 1,875,000)
Unpaid Commitment is 1,875,000
-so, use this. Collect the unpaid commitment.
If the loss is only 200,000 and there is unpaid commitment of

1,875,000, what happens?
-stockholders still have to pay the unpaid commitment
-use the unpaid commitment to settle the 200,000 loss
-if there is extra, it goes to the corporation
If there are still losses after fully paying the subscriptions,

what happens?
-no longer liable for anything more because our liability is
limited to our subscriptions

When will they pay unpaid subscriptions?

-anytime the board calls for payment
Non-Stock Corporation
On the other hand, in non-stock corporation?
-no need for division of shares
Why no need to divide capital into stocks?

-because they do not distribute profits to the stockholders
-we could say that purpose of dividing capital into shares of
stock is to be able to measure their share in the profits
because in a non-stock corporation, there is no sharing of
profits thus there is no need to convert or divide capital into
shares
Other Classes of Corporation

De Jure: compliance with requirements
De Facto: no compliance with requirements; only exist
in fact but not in law
Close: limited to certain groups of people, i.e.

family
Open: open to the public
Parent or holding: control member of board in that other

corporation
Subsidiary: other corporation held by another
corporation who owns majority
Affiliated: one corporation stockholder of another
Sister: activities of two corporations are closely-
related
Parties of a Corporation
Corporators: compose a corporation whether
stockholders or members
Incorporators: originally forming and composing the
corporation
Stockholders: corporators in a stock corporation
Members: corporators of a non-stock corporation
Promoters: takes initiative in founding and organizing
the business
Underwriter: guarantees distribution and sale of
securities of a company
11/23/11 Wednesday
Q: Classification of Corporations as to relationship

1. Parent-holding corporation
2. Subsidiary corporation
3. Affiliated corporation
There could be several corporations operating and existing, it

is possible that one corporation is entirely owned by another,
meaning, all of these shares of stock of one corporation may
be owned by another corporation.
Example:
Here is X incorporated engaged in land transportation.

Basically, this is the business operating with hundred units of
buses. Many of these transportation corporations operate
hundreds of buses and perhaps it will save you if you supply
your own spare parts. So each incorporated may operate or
may maintain or organize another corporation, and this other
corporation could be entirely owned by an existing company,
Y corp. If Y corp has a subscribed capital stock of 10M,
perhaps X incorporated could be the owner of 9,975,000
pesos. So theres only 25k left for other parties, namely:
- M (manager) owns 2000
- S (secretary) owns 1,000
- T (treasurer) owns 1,000
- Janitor owns 1,000
Total = 10M
These are just what we called nominees. They only hold a

very small portion of the capital. So the corporation will be
under the control of X and so the business of these could be
very related. Perhaps this is engaged in spare parts or tires. So
other than selling the spare parts and tires to X incorporated,
they also sell spare parts and tires to other. Other than
realizing profits here, they also have profits in Y corp. at the
same time assuring X corporation of spare parts, that they will
never run out of tires.
On the other hand, they may further operate another one,

namely Z Corp. The same stockholdings but this time
operating machine shop where they have to repair trucks and
buses, so if their buses need repairs, they have their own
shop and at the same time, other customers may avail. So we
have profits here and there. So thats the purpose of
corporations maintained by a mother corporation.
Mother corporation may refer to operating corporation.

Holding corporation need not be an operation. It is not
engaged in specific business. It is only engaged in maintaining
corporations.
An Example could be AEV corporation which simply makes

investments to other corporation. It is into power, banks,
before shipping, condominiums and some others.
All these Stockholdings of these corporations are being
controlled by AEV. May be they owned 80% or 60%, the thing
is they control all these. All the profits go to AEV. If profits are
good, AEV is a publicly listed corporation, the prices of shares
of AEV will be going high and SH will be assured of returns of
dividends. This is a holding company because they are not
engaged in any specific business and they only holding the
majority or controlling interest of all these corporations.
Affiliates and Subsidiaries are very closely related. One owns

the other and management is the same. President of one
corporation could also be the president of the other but since
these corporations are separate from each other, one could
be president of many corporations. If Im president of many

corporations, my influence on corporations is very critical. So
those are the related corporations.
Q: Other corporations
As to number of persons
1. Corporation aggregate more than one corporators
2. Corporation sole only one corporator
Also as to State Law/citizenship
1. Domestic formed, exist under Philippine Law
2. Foreign formed, existing other than Philippine Law
Q: Who are promoters?

A: the one who initiate in founding or organizing the
business.
Sec. 6. Classification of shares. - The shares of stock of stock

corporations may be divided into classes or series of shares,
or both, any of which classes or series of shares may have
such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued
as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, That there shall
always be a class or series of shares which have complete
voting rights. Any or all of the shares or series of shares may
have a par value or have no par value as may be provided
for in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be

given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The board
of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be

deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the
value of five (P5.00) pesos per share: Provided, further, That
the entire consideration received by the corporation for its
no-par value shares shall be treated as capital and shall not
be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the

purpose of insuring compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles of incorporation

and stated in the certificate of stock, each share shall be
equal in all respects to every other share.
Where the articles of incorporation provide for non-voting

shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph,

the vote necessary to approve a particular corporate act as
provided in this Code shall be deemed to refer only to stocks
with voting rights.
Sec. 7. Founders' shares. - Founders' shares classified as such

in the articles of incorporation may be given certain rights
and privileges not enjoyed by the owners of other stocks,
provided that where the exclusive right to vote and be voted
for in the election of directors is granted, it must be for a
limited period not to exceed five (5) years subject to the
approval of the Securities and Exchange Commission. The
five-year period shall commence from the date of the
aforesaid approval by the Securities and Exchange
Commission.
Sec. 8. Redeemable shares. - Redeemable shares may be

issued by the corporation when expressly so provided in the
articles of incorporation. They may be purchased or taken up
by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings
in the books of the corporation, and upon such other terms
and conditions as may be stated in the articles of
incorporation, which terms and conditions must also be
stated in the certificate of stock representing said shares.
Sec. 9. Treasury shares. - Treasury shares are 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 means.

Such shares may again be disposed of for a reasonable price

fixed by the board of directors.
Q: what are the various types of shares?

1. Common shares entitled pro rata distribution of
profits. Fundamental forms of shares.
2. Preferred shares holder enjoys certain preferential
rights or privileges, not necessarily granted to
holders of shares.
Q: what preferences?
These preferences include distribution of
dividends.
If dividends are to be distributed
then corporation may design
certain preferences. In case of
distribution of dividends, holders
of these shares may be given
ahead or preferred as compared to
holders of common shares.
Not only dividends, they may also be given
preferences as to distribution of assets.
In time of dissolution, if there are
assets remaining after paying all
liabilities, these assets could be
distributed back to SHs. There
could be a provision that holders of
preferred shares may be given
priority in so far as assets are
concerned.
3. Par value we said capital is divided into shares and
each share is given a certain value, thats the par
value of that share. it may happen, after dividing that
share, they do not assign any value to that share.
They stop there.
Q: if that happens, how much would that
share be?
A: at least the value of that share is 5.00, it
cannot go lower than 5.00
4. Non-par value
5. Redeemable shares shares of a corporation that
may be redeemed by a corporation after a fixed
period or any other date specified in AOI.
Q: what happens in redeemable share?
A: when a corporation issues a redeemable
share, the holder is expected to be paid by
the corporation when period for payment
becomes due.
6. Founders Shares
Q: Purpose of issuing redeemable shares

A: this is necessary if a corporation intends to have or acquire
fresh capital or additional capital
Q: if the corporation needs additional capital usually want

should be done?
A: increase capital by increasing the capital

Q: and if you increase capital, who will invest?

A: the existing stockholders, that is if they want to retain
exactly the same control that they have over a corporation.
Because If there are 5 of you and you agree SCS is a certain
amount, you agree that only 5 of you will invest, the best way,
each one of you controls 20% or 1/5th of capital and in case of
voting, you have the extent of your interest over the
corporation, you have voting rights up to 20%. If there are 3
of you, you have 60%, you can already decide on what to do
with corporation and normally you want to retain this,
especially the 3 of you has been planning to keep that control
the longest that you could, you will always be watching if
other people are investing, because one day you might
discover other investors will come in without you knowing
and only to find out your 60% before has gone down to only
40% because other investors came in and acquired more
stocks. And thats very crucial in management of corporation
so you must watch.
So if you need additional capital and you want to retain the

same control, necessarily?
If they issue redeemable share, they might not have control
anymore, so you have to double subscriptions to be sure you
retain control. However they might not be ready to put up
that additional capital, existing corporation may not have the
funds needed to increase capital.
So option would be for additional capital which is the normal
option would be to borrow from bank.
If you borrow from bank, you will not think of
control. Bank is not interested in control because if
you pay the loan the bank will be happy, unless the
loan is so huge, the amount lent is so huge that there
are occasions that bank would like to closely monitor
the capital of that corporation otherwise the amount
that they have lent will go to waste, time will come
the corporation cannot pay it obligations or time will
come that the amount lent might have been used for
something else.
So there are occasions when bank wants to monitor
so that when bank allows a certain loan in millions of
pesos and bank wants to monitor the activities, the
bank as a condition of that loan will require the
corporation to issue at least 1 share in the name of
bank rep and require corporation to vote that bank
representative in the board, so any decision done,
the bank is a representative, the bank is fully aware.
Thats why in big corporations it is not unusual that a
bank representative is there every meeting of the
board because it wants to monitor its financial so if
there are indicators that a corporation is using
money for something else, bank can always demand
immediately or declare corporation in default.
So Corporation needs capital. The 1st option is to borrow.

However if we borrow it might not be easy because
1. Interest might be high

2. It requires collaterals, security. Mortgages or assets,

it might not have enough assets to secure payment
of loan in bank
Q: Other option we said is for existing stockholders is to

double investments is not available either so no bank loan,
additional capital from existing stockholders, the remaining
option is?
A: To borrow from public.
How? We issue redeemable shares. So tell the public whoever
would like to invest in our company, we will issue to you
redeemable share Meaning no guarantee interest, but if
company make good, the dividends you will received will be
much more that you expect. This is guaranteed, as long as we
have profit we will redeem. Meaning, as long as corporation
has enough retained earnings, we will buy back the shares,
after you will get more. After years, show us redeemable
share, say for your 10M, we will pay or return 11M. You are
happy, Corp is happy.
Q: There is guarantee so long as there are unrestricted

earnings. Meaning?
A: means we have extra. After determining our assets, after
determining liabilities, we have retained something, we have
profit and we will give this back to you.
Q: Treasury shares
A: they may refer any other shares which have been
reacquired by a corporation most probably the redeemable
share. Once redeemed, its taken back by a corporation, they
are now considered as treasury shares.
Or they might be shares which were outstanding before, they
may have been fully paid and corporation decided to buy
them back, Its allowed but not usual, because you have buy
back stocks which are outstanding unless you have profits, the
thing is any share which have gotten back to corporation is
called treasury shares. So called treasury shares because it
goes back to treasury of corporation and now its owned
again by corporation.
Q: Founders Shares
A: Founder shares in effect binds the other stockholders to
keep on holding holders of these founders shares and let
them stay there at least 5 years. In effect holders of founders
share enjoy special privilege to be in the board for the next
five years.
A: What could be the reason?

A: These are the people who had the vision. They know
where to go, how to go there, they know the steps to take. So
they have the entire plan on how to start the corporation
because if you don t give them that privilege, it may happen
for the 2nd year, they will vote for other people and every plan
is gone. So here intention of the law is to allow corporation
to grow during its initial stage and the only way to allow this is
to grow is to give the management a certain group to make
sure that they will be able to achieve their objectives and the
law feels 5 years is enough to nurture that corporation until

its ready to be on its own. However FS, when privilege expires
are not disqualified to be voted again but it becomes
voluntary and the rest of SH are no longer obliged to elect
them.
Q: Other shares
A: Outstanding shares.
Q: Going back to treasury shares, while they are now on the

treasury, who owns them?
A: The Corporation owns them as an asset and every share is
entitled to voting rights but no voting shares for treasury
shares.
Q: How come? What could happen to BOD who will act and
exercise the right to vote?
A: if we give voting rights to treasury shares, during elections,
who will act in behalf of corporation? The board.
So that if the board will be given that authority to exercise
votes of these treasury shares. Because if they will be given
that authority to vote in behalf of treasury shares, they will
vote for themselves. And if they are allowed to vote for
themselves, they will be there forever and perpetuate
themselves in management, thats why law says no more
voting rights.
Q: will the treasury shares be entitled of dividends?

A: NO. If Treasury Shares were entitled of dividends, money
owned by a corporation, they will just transfer it to the left
pocket. So no logic in giving them dividends.
11/25/11 Friday
Sec. 14. Contents of the articles of incorporation. - All

corporations organized under this code shall file with the
Securities and Exchange Commission articles of
incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the
corporation is being incorporated. Where a
corporation has more than one stated purpose, the
articles of incorporation shall state which is the
primary purpose and which is/are he secondary
purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which
would change or contradict its nature as such;
3. The place where the principal office of the
corporation is to be located, which must be within the
Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the
incorporators;

6. The number of directors or trustees, which shall

not be less than five (5) nor more than fifteen (15);
7. The names, nationalities and residences of
persons who shall act as directors or trustees until
the first regular directors or trustees are duly
elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its
authorized capital stock in lawful money of the
Philippines, the number of shares into which it is
divided, and in case the share are par value shares,
the par value of each, the names, nationalities and
residences of the original subscribers, and the
amount subscribed and paid by each on his
subscription, and if some or all of the shares are
without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of
the contributors and the amount contributed by
each; and
10. Such other matters as are not inconsistent with
law and which the incorporators may deem
necessary and convenient.
The Securities and Exchange Commission shall not accept

the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected
by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation
has been subscribed, and at least twenty-five (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 twenty-five (25%) percent of the said subscription,
such paid-up capital being not less than five thousand
(P5,000.00) pesos.
Sec. 15. Forms of Articles of Incorporation. - Unless

otherwise prescribed by special law, articles of incorporation
of all domestic corporations shall comply substantially with
the following form:
ARTICLES OF INCORPORATION
OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:

The undersigned incorporators, all of legal age and a
majority of whom are residents of the Philippines, have this
day voluntarily agreed to form a (stock) (non-stock)
corporation under the laws of the Republic of the
Philippines;
AND WE HEREBY CERTIFY:

FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";

SECOND: That the purpose or purposes for which such

corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is located

in the City/Municipality of .............................................,
Province of .................................................., Philippines;
FOURTH: That the term for which said corporation is to exist

is ................ years from and after the date of issuance of the
certificate of incorporation;
FIFTH: That the names, nationalities and residences of the

incorporators of the corporation are as follows:
NAME NATIONALITY RESIDENCE
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
SIXTH: That the number of directors or trustees of the

corporation shall be .............; and the names, nationalities
and residences of the first directors or trustees of the
corporation are as follows:
NAME NATIONALITY RESIDENCE
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
..................................... ..................................... ..................
...................
SEVENTH: That the authorized capital stock of the

corporation is .................................................
(P......................) PESOS in lawful money of the Philippines,
divided into ............... shares with the par value
of ................................... (P.......................) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ...........................
shares without par value. (In case some shares have par
value and some are without par value): That the capital
stock of said corporation consists of ........................ shares
of which ....................... shares are of the par value
of .............................. (P.....................) PESOS each, and of
which ................................ shares are without par value.

EIGHTH: That at least twenty five (25%) per cent of the

authorized capital stock above stated has been subscribed as
follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed
.................................. .................... ........................ .............
..........
.................................. .................... ........................ .............
..........
.................................. .................... ........................ .............
..........
.................................. .................... ........................ .............
..........
.................................. .................... ........................ .............
..........
NINTH: That the above-named subscribers have paid at least

twenty-five (25%) percent of the total subscription as
follows:
Name of Subscriber Amount Subscribed Total Paid-In
................................... ...................................... ...................
............
................................... ...................................... ...................
............
................................... ...................................... ...................
............
................................... ...................................... ...................
............
................................... ...................................... ...................
............
(Modify Nos. 8 and 9 if shares are with no par value. In case
the corporation is non-stock, Nos. 7, 8 and 9 of the above
articles may be modified accordingly, and it is sufficient if
the articles state the amount of capital or money
contributed or donated by specified persons, stating the
names, nationalities and residences of the contributors or
donors and the respective amount given by each.)
TENTH: That ....................................... has been elected by

the subscribers as Treasurer of the Corporation to act as
such until his successor is duly elected and qualified in
accordance with the by-laws, and that as such Treasurer, he
has been authorized to receive for and in the name and for
the benefit of the corporation, all subscription (or fees) or
contributions or donations paid or given by the subscribers
or members.
ELEVENTH: (Corporations which will engage in any business

or activity reserved for Filipino citizens shall provide the
following):
"No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws
shall be allowed or permitted to recorded in the proper
books of the corporation and this restriction shall be
indicated in all stock certificates issued by the corporation."

IN WITNESS WHEREOF, we have hereunto signed these

Articles of Incorporation, this ................... day
of .............................., 19 ........... in the City/Municipality
of ........................................, Province
of ................................................., Republic of the
Philippines.
............................................ .............................................
............................................ .............................................
................................................
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:

............................................ .............................................
(Notarial Acknowledgment)
TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I, ...................................., being duly sworn, depose and say:
That I have been elected by the subscribers of the

corporation as Treasurer thereof, to act as such until my
successor has been duly elected and qualified in accordance
with the by-laws of the corporation, and that as such
Treasurer, I hereby certify under oath that at least 25% of
the authorized capital stock of the corporation has been
subscribed and at least 25% of the total subscription has
been paid, and received by me, in cash or property, in the
amount of not less than P5,000.00, in accordance with the
Corporation Code.
.......................................
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for

and in the City/Municipality of ..................................
Province of .........................................., this ............. day
of ........................., 19 ........; by ............................................
with Res. Cert. No. ..................... issued at .................
on ......................, 19 ..........
NOTARY PUBLIC
My commission expires on ..........................., 19 ........
Doc. No. ...............;
Page No. ...............;
Book No. ..............;
Series of 19..... (7a)
Sec. 17. Grounds when articles of incorporation or

amendment may be rejected or disapproved. - The Securities
and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the
same is not in compliance with the requirements of this
Code: Provided, That the Commission shall give the
incorporators a reasonable time within which to correct or

modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or
disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation
are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the
amount of capital stock subscribed and/or paid if false;
4. That the 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.
No articles of incorporation or amendment to articles of

incorporation of banks, banking and quasi-banking
institutions, building and loan associations, trust companies
and other financial intermediaries, insurance companies,
public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in
accordance with law.
CONTENTS OF THE ARTICLES OF INCORPORATION

1. Name of the corporation
2. Specific purpose or purposes
3. Principal place of business
4. Term for which it is to exist
5. Names, nationalities and residences of the incorporators
6. Number of directors or trustees, which shall not be less
than 5 nor more than 15
7. Names, nationalities and residences of the persons who
shall act as directors or trustees until the first regular
directors or trustees are duly elected
8. If it be a stock corporation, the ACS, number of shares, par
value, names, nationalities and residences of the original
subscribers and the amount subscribed, and if some or all of
the shares are without par value, such fact must be stated
9. If it be a non-stock corporation, the amount of capital,
names, nationalities and residences of the contributors and
the amount contributed by each
10. Such other matters as are not inconsistent with law and
which the incorporators may deem necessary and convenient
Accompanied by a sworn statement of the Treasurer showing

that at least 25% of the ACS has been subscribed, and at least
25% of the total subscription (SCS) has been fully paid.
PRINCIPAL PLACE OF BUSINESS

The principal place of business of the corporation is located

somewhere at the mountain barangays of Cebu City. Is that
enough?
NO. It must be complete and specified so that the
SEC will be able to monitor or regulate the
corporation, and also to locate the corporation, so
that the notices or any order from the SEC will reach
the corporation.
PURPOSE
Must be specified in order that the persons who will be
transacting with the corporation would know whether or not
the corporation is acting within the purpose for which it was
constituted.
So the articles of incorporation indicated that the purpose is

to sell and offer to the public joy and fun. What do you think?
Purpose must be specific as to what kind of business.
Their purpose of selling joy and fun is dangerous
because its like an all-encompassing purpose. The
SEC will not be able to determine what kind of
activity the corporation is engaged in. Joy and fun
might be illegal, or even immoral. And that could be
questioned.
NAME
HAPYUD-HAPYUD INCORPORATED
Nothing wrong with the name since what the law
requires is that it must not be identical, or
deceptively or confusingly similar to that of any
existing corporation.
The name must not also convey a purpose which is
different from the purpose for which it was
organized.
Here, the name is merely descriptive of the purpose
of the corporation.
The only objection insofar as names are concerned is
that the name must not be identical to any existing
corporation, or that it would not deceive or confuse
the public.
HAPYUD-HAPYUD HILUT-HILUT HUWAP-HUWAP

PIK-PIK
Not confusing since they have different meanings.
EXAMPLES OF CORPORATIONS WITH CONFUSING
NAMES:
1. PLANTERS was the best salted peanuts
around, until GROWERS came. Exactly the
same packaging, color schemes, packaging,
materials. So the public became confused.
2. Efficascent Oil and Efficient Oil
These are similar names for basically the same product, and
that could trigger controversies.
Thats what the law is trying to protect.
CLOSE CORPORATIONS
A. If you want a close corporation, there should be a

provision or paragraph in the articles of
incorporation to the effect that the stockholder,
before he transfers his shares of stocks to another
person, he should first offer that among the
incumbent stockholders in that case you can control
the transfer. Thats the only way that you could make
sure that the stocks will be maintained by the
incumbent stockholders.
B. However the prohibition cannot be absolute. The

prohibition has to be relative in the sense that you
must only first offer to the other stockholders. If
none of the incumbent stockholders are interested,
then of course, you can sell it to the public. Then it
becomes OPEN.
C. That prohibition should not be absolute. Otherwise,

if it were an absolute prohibition in the sense that
you cannot sell your stocks except to the incumbent
stockholders, and you want to dispose the stocks but
the incumbent stockholders are not willing, you
could not dispose it. Its not a fair prohibition.
D. If you allow the absolute prohibition, it would violate

the very essence of a corporation because in a
corporation, transferability of the rights or stocks is
the basic consideration. You would, in effect, be
limiting or restricting the corporation.
E. It involves the right of succession, so to whomever

you should transfer, he succeeds in your rights. If you
impose the absolute prohibition, then I could no
longer transfer this property to another and
therefore, if I die, my heirs would not be able to
succeed. If all of the stockholders would die, they
cannot transfer because transfer is prohibited
absolutely. It deprives the corporation that basic
right of succession.
F. Moreover, as an owner of a property, you have the

right to dispose. You are depriving me one basic right
of ownership. As the owner, you have the right to
use, the right to dispose and the right to the fruits of
the property. And in latin, jus disponendi, jus fruendi,
and jus utendi!
G. In other words, maybe you could prohibit me

relatively, but not absolutely. Relative in the sense
that at least you have given the other stockholders
the preferential right to acquire. If you want to stay
by yourselves, if you want this corporation close,
then you buy my stocks. Otherwise, if none of you is
interested, you could not also prevent me from
offering this to others. So the prohibition may be
allowed so long as the prohibition is relative or
qualified.
CAPITALIZATION
A. The AOI must be accompanied by a sworn statement
of the Treasurer showing that at least 25% of the ACS
has been subscribed, and at least 25% of the total
subscription (SCS) has been fully paid.
B. You have to submit a proof that the paid up capital

has been duly collected.
C. We will not have any problems if the payments were

made in cash. All you have to do is to deposit the
payment with the bank and the bank will issue to
you a certificate of deposit. This is now the
passbook. It is a specific document duly
acknowledged before a notary public where the bank
officer will certify that a certain amount representing
the paid up capital of a corporation whose
incorporation is pending approval with the SEC; that
the amount is paid and is now in the bank; with an
invitation to any SEC officer if it so desires to visit the
bank and check whether indeed the money is there.
D. However, it is not always required that cash will be

used in the payment of subscription. As a matter of
fact, property may be used to pay that paid up
portion of the subscription. If property will be used,
there will be a certification from the treasurer that
the property is being used as a mode of payment for
the paid up capital stock which has the value of 25%.
E. We could prove the value by presenting a valuation

report from independent or private appraisers.
Considering the deteriorating credibility of our
government agencies or offices, very few will honor
or recognize the values that they indicated. Aware
that these officers can be easily influenced especially
insofar as monetary matters are concerned, the SEC
oftentimes rely more on private appraisers. We have
existing appraiser companies. These are companies
whose business is to appraise certain properties and
they could come out with some schemes on
appraising. You could trust that they could come out
with an accurate valuation report.
F. You will have to establish that that is the value of

your property. Because if you overvalue your
property, it would not reflect the true paid up
portion. That would show that the paid up potion is
lower than what the law requires. And if that
happens, you are misleading the public because the
paid up portion is supposed to reflect the true value
of the assets of the corporation.
LEGAL CAPITAL versus ACTUAL CAPITAL

A. When talk of capital, we are referring to the legal
capital. When we say legal capital, it would refer to
the subscribed capital which is such amount that the

stockholders committed to the public that they
would subscribe to.
B.
Cash 10K
Real Property 15k
Personal Property 12k
Total 37k*
If you sell your personal property amounting to 12k,

your capital would fluctuate depending on the price
paid for the personal property. It goes up, or it goes
down. This is the ACTUAL CAPITAL.*
But LEGAL CAPITAL, it is fixed. It stays there. Thats

the commitment of the stockholders. Thats the
capital reflected on the records. It will remain in that
amount, unless the stockholders will subscribe to
additional shares, it would increase, but in the
absence of any additional subscriptions, that legal
capital is fixed.
C. OUTSTANDING CAPITAL STOCK is what we also call

SUBSCRIBED CAPITAL STOCK. It is already out there.
Its already outstanding. But once outstanding, it
may come back as TREASURY SHARES. Its (TS) part of
the subscription because there has been an earlier
issuance, but reacquired as treasury shares. So its no
longer outstanding.
Sec. 20. De facto corporations. - The due incorporation of

any corporation claiming in good faith to be a corporation
under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit to
which such corporation may be a party. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.
DE FACTO CORPORATIONS
A. Now that everything has been submitted, we cannot
start yet because we still have to wait for the
Certificate of Incorporation from the SEC. That would
signify the birth of the corporation.
If we start operating without the certificate, it could
be considered as a de facto corporation.
B. A de facto corporation is one which actually exists for

all practical purposes as a corporation. The effect is
that the transactions that it would enter into would
still be binding upon it. And so here despite the lack
of legal capacity, the law recognizes certain acts.
If the de facto corporation is engaged in selling

trucks, and it sold a truck to buyer Mr. X, and Mr. X
later on refused to pay the balance. So the de facto
corporation sued Mr. X for the balance. Mr. X said
that the de facto corporation has no personality to

sue since it has not fully complied with the
requirements of the law. What do you think?
The de facto corporation can sue since under the law

it is given a separate juridical personality.
C. Moreover, the personality of the de facto

corporation cannot be subject to collateral attack.
What is allowed is only a direct attack. The Solicitor
General, as counsel of the State, may question the
existence of that corporation through a quo
warranto proceeding. It is the state who has the
authority to question. It was the state whose
procedure was not complied with. So it is the state
who could question the existence of that corporation
in a special quo warranto proceeding.
Otherwise, if we allow anyone to question the

existence of any corporation, then we would be
flooded with complaints. People will start to hesitate
entering into transactions with anyone. So here, the
state feels that since it was the party who was
injured by the inappropriate acts of this group, then
only the state can question.
The transaction that you have entered into with the

other party would remain to be a valid transaction
and therefore, the buyer in this case cannot file a
motion to dismiss that the corporation has no
personality to sue.
D. Requisites:
1. A valid law under which a corporation with
powers assumed might be incorporated;
2. A bona fide attempt to organize a corporation
under such law; and
3. Actual user or exercise in good faith of corporate
powers conferred upon it by law.
Sec. 21. Corporation by estoppel. - All persons who assume

to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result
thereof: Provided, however, That 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.
One who assumes an obligation to an ostensible corporation

as such, cannot resist performance thereof on the ground
that there was in fact no corporation.
CORPORATION BY ESTOPPEL
A. A corporation by estoppel is one which in reality is
not a corporation but because of its appearance or
its representations to the public it is considered as a

corporation.
B. In a corporation by estoppel, the individuals who

misrepresented themselves are not protected by the
corporate fiction. In which case, their liability is
similar to that of a general partner. In a de facto
corporation, the individuals are protected by the
corporate fiction.
C. In the case of a suit, can a corporation by estoppel

file a suit as a corporation? NO.
May the other party who is being sued by the

corporation attack directly? YES.
They were misrepresenting. Making it appear that

they were duly incorporated when in fact they were
not. The law says that misrepresentation has no
standing in law. It was bad enough that you
misrepresented yourself, it would be worse if we
grant you certain rights. Nobody should profit out of
their misrepresentation. No matter what you did,
anything you did, the law does not recognize. In the
first place, you misrepresented to the public. You
misled the public into believing that you are duly
organized when in truth you are not.
D. In a corporation by estoppel, where there was

misrepresentation, the law says you have no right at
all.
In a de facto corporation, where there was

noncompliance, the law says you have the right.
How do you explain that? Why give the right to one
and deny that right to the other?
As to a de facto corporation, there was
substantial compliance. Its not correct to
say that there was no compliance. In fact,
there was an honest intention to organize
under that law. There was a desire to
comply.
In a corporation by estoppel where there
was misrepresentation, there was no compliance at
all.
11/28/11 Monday
Q: The purpose must be indicated in the articles of

incorporation. We also said the name of the corporation as
well as the principal business. In the discussing the purpose,
why is it important to indicate the purpose?
A: This is the guide. The name of the company is something
that should describe it, although usual. Sometimes people
love their name so much that they want it the name of the
corporation but sometimes the name will indicate the nature

of the business as what we have indicated last time, and we

said Pekpek Corporation.
Q: so in the purpose, we maintain operate, manage the place

where we sell unlimited joy and excessive fun. That is our
business, unlimited joy. We said thats purpose. Could it
already pass the test?
A: No. It has to be specific, that purpose is too broad.
Q: and so our business is to maintain and manage, sell soft

drinks, pepsi, seven-up, sprite, coke, all soft drinks, pandesal.
We also sell nails. Everything is listed, what do you think of
our purpose?
A: It should not be too specific and not too broad by
expressing only the description of the business.
Q: what about the franchise? We could say that the purpose

of the corporation is to operate and maintain buses and
trucks, the route would manila jolo, cebu, bohol, siquijor and
camiguin. What should be the guide?
A: purpose has to be lawful.
Q: lets just assume that the purpose is to distribute all types

of soft drinks. In their survey, they notice that sales in other
areas is very high. In fact they ask what soft drink they prefer
and they said they prefer sprite, the only thing is there is no
road and so the soft drink company, tried to expropriate
several parcels of land, same that we have to pass here to be
able to sell here. So we have to expropriate the land. Do you
think they can expropriate the land?
A: they could not expropriate because expropriation is the
compulsory way of acquiring land.
Q: why do you think they cannot?

A: because their purpose is to sell or delivery soft drinks, and
to expropriate is not within their power. They are not engaged
into public service. They are only into delivery of soft drinks.
Q: and so the problem is settled, whether or not they could

expropriate and how did we do that?
A: we consulted the purpose
Q: what is the most important purpose of the purpose?

A: the purpose of the purpose is to guide us and find out
whether or not the power exercised is within the purpose,
because the moment it is no longer within the purpose it
might be considered ultra vires or beyond the power of the
corporation.
So thats the importance of the purpose, to guide the state,
the public and even the management of the corporation to
determine whether or not certain acts are still within its
power by consulting the purpose.
Q: then another important thing is the principal place of

business
A: important so that the public would know where the
corporation operates and in case of notices, those will be sent
out to the principal place of business of the corporation. So

that SEC will be able to send out appropriate communications
because as we said the State monitors the corporations.
Q: in occasions where cases might be filed, whats the rule on

venue? Where should the complaint be filed?
A: complaint must be filed where the plaintiff resides or the
residence of defendant at the option of the plaintiff unless
otherwise agreed. Because venue can be agreed, but not
jurisdiction.
Q: here is corporation X whose main office or principal place

of business is in Cebu City but it operates various branches in
Manila and other major cities. It filed the complaint in Manila
because it has a branch office there in Manila. So at its option
of plaintiff filed the case. So defendant who is from Cagayan
de Oro did not want to go Manila filed a motion to dismiss,
improper venue, so opposition to motion to dismiss, so
corporation X said no you are wrong because venue means
where we reside at our option. We are residing here because
we are residing here. What do you think your honor?
Corporation X we want to file it here in Manila for
convenience and practicality. Can they consider that as
residence? Is it practical?
A: convenience and practicality should be taken into
consideration. It depends on the agreement, if there was an
agreement on the venue then it should be there, otherwise
venue is the principal place of business of the corporation
12/05/11 Monday
Contents of AOI
1. Name
2. Purpose
3. Principal place of business
4. Term
5. Names, nationalities and residences of the incorporators
6. Number of directors or trustees, which shall not be less
than 5 nor more than 15
7. Names, nationalities and residences of the persons who
shall act as directors or trustees until the first regular
directors or trustees are duly elected
8. If stock corporation, the ACS, number of shares, par value,
names, nationalities and residences of the original subscribers
and the amount subscribed, and if some or all of the shares
are without par value, such fact must be stated
9. If non-stock corporation, the amount of capital, names,
nationalities and residences of the contributors and the
amount contributed by each
10. Such other matters not inconsistent with law and the
incorporators may deem necessary and convenient
Location, Place of business: Why should it be indicated?

-for SEC to send notices or communications to corporation
-for purposes of filing an action, in matters of jurisdiction
Capitalization, what is required?

-sworn statement by treasurer indicating authorized capital

stock, at least 25% is subscribed, at least 25% of subscribed is
paid
What happens to the unpaid?

-receivable by the corporation
If we want to introduce changes, what do we do?

-amend the articles of incorporation
Sec. 16. Amendment of Articles of Incorporation. - Unless

otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote
of the board of directors or trustees and the vote or written
assent of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholders in accordance
with the provisions of this Code, or the vote or written
assent of at least two-thirds (2/3) of the members if it be a
non-stock corporation.
The original and amended articles together shall contain all

provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated
by underscoring the change or 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 said amendment or amendments have been duly
approved by the required vote of the stockholders or
members, shall be submitted to the Securities and Exchange
Commission.
The amendments shall take effect upon their approval by

the Securities and Exchange Commission or from the date of
filing with the said Commission if not acted upon within six
(6) months from the date of filing for a cause not
attributable to the corporation.
Amendment of Articles of Incorporation (AOI)

-may be amended by majority vote of BOD and vote of
stockholders (or members if non-stock) representing at least
2/3 of the outstanding capital stock
-original and amended articles shall contain all provisions
required by law to be set out
-articles, as amended, shall be indicated by underscoring
changes
-copy thereof duly certified under oath by corporate secretary
and majority of directors
-submitted to SEC
-effective after approval by SEC
First step should be meeting by BOD, will discuss what should

be amended, what changes to be introduced, since they are
going to restructure a basic part of the corporation. The
deliberation and decision of amending articles is not as simple

as it appears because we are trying to change the basic

agreement or contract.
This contract is between the corporation and state; between
corporation and stockholders; and among stockholders
themselves.
After BOD meeting, they will vote. How much vote needed?
-at least majority
Once approved by majority of BOD?

-referred to stockholders
Stockholders will then discuss among themselves, how much

vote is required?
-not required that unanimous decision; law says at least 2/3
of stockholders will have to approve
If you are not among this 2/3?

-law says without prejudice to the appraisal right of dissenting
stockholders
-if you do not agree with decision of majority, it could simply
mean that you are no longer interested and you may opt to
leave; although not necessarily true to some
By exercising appraisal right, it means?

-can demand payment for their shares of stocks
-they may opt to leave the corporation
If they decide to leave the corporation, they have a lot of

options available, what are these?
-they may opt to share these shares to other stockholders, or
sell their shares to outside persons
They could sell their shares with different value, and what are
these values?
-par value of shares
Par value: value of shares as indicated in the articles
But, that might not be profitable because corporation may

have been very successful or profitable so although the par
value is fixed, we have different value which is book value,
which could be much higher than par value.
-book value: assets of the corporation divided by outstanding
shares
Example:
Par value: fixed P10M 10M
shares = 1.00/share
Book value: assets P20M 10M
shares = 2.00/share
Market value: determined by market forces
If the corporation is successful and business is good,

corporation may even decide to sell at a higher price which is
the market value.

-market value: value where seller is willing to sell and buyer is

willing to buy
-determined by market forces
As dissenting stockholder, you exercise what?

-appraisal right: meaning, tell corporation that you are
leaving and now will determine the value of his shares which
is usually determined by book value
-rights of dissenting stockholder:
a. exercise of appraisal right
b. sell your shares to outsiders
When you exercise appraisal right, do you think you will

immediately get the value of your shares?
-no because you cannot compel the corporation
-you have to wait until there are surplus profits (unrestricted
retained earnings in excess of the assets of the corporation)
This is important because we cannot touch the assets or allow

someone to leave the corporation and take part of the assets.
Can we allow dissenting stockholder to take part of the
assets?
-no, because of the trust fund doctrine (corporations are just
holding these assets in trust for the creditors)
-after determining his appraisal right and value of his shares,
he cannot demand for it right away because he has to wait
until corporation has unrestricted retained earnings
Unrestricted Retained Earnings: surplus profits of the

corporation; assets minus the liabilities; it is free from any
liability or potential expense
Thus, it is not easy to compel corporation to pay because you

have to wait for unrestricted retained earnings and it could be
prolonged because corporation may have potential expenses
Trust Fund Doctrine: assets of the corporation are not owned

by the corporation but by the creditors; corporation are just
holding these assets in trust for the creditors
Now, we have the amendments and amendments have been

approved by stockholders, what do we do next?
-original and amended articles shall contain all provisions
required by law to be set out
-articles, as amended, shall be indicated by underscoring
changes
-copy thereof duly certified under oath by corporate secretary
and majority of directors
-submitted to SEC
Finally, shall take effect upon approval by SEC. Two ways of

approval:
-by action: approved by SEC
-by inaction: not acted upon within 6 months from date of
filing for a cause not attributable to the corporation
Management of Corporation
To whom entrusted?
-board of directors
Powers of Board of Directors

-conduct business
-manage property
-exercise corporate power
-BOD has control over management of corporation; which
way corporation should go, what policies to adopt, whether
or not corporation should pursue certain activities
Can powers of BOD be delegated?

-yes
Under what circumstances?

(enumerate, cite from book)
12/07/11 Wednesday
POWERS OF CORPORATION
Powers of the Board of Directors:
manage and control the corporation,
conduct business,
adopt policies,
decide as to which activities to undertake
Sec. 23. The board of directors or trustees. - Unless

otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors or trustees to
be elected from among the holders of stocks, or where there
is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors
are elected and qualified.
Every director must own at least one (1) share of the capital
stock of the corporation of which he is a director, which
share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at
least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director.
Trustees of non-stock corporations must be members
thereof. a majority of the directors or trustees of all
corporations organized under this Code must be residents of
the Philippines.
Sec. 27. Disqualification of directors, trustees or officers. - No

person convicted by final judgment of an offense punishable
by imprisonment for a period exceeding six (6) years, or a
violation of this Code committed within five (5) years prior
to the date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation.
Q: because they have to exercise these powers, can

stockholders review their decisions?

A: No. once BOD has been elected. Law confers powers upon
the BOD.
Q: I thought the SH elected them?

A: So that here the authority of SH is limited to electing
Board, once they are elected empowered to exercise.
Management is vested by the state or by the law which
created the corporation/. The SH do not vest power upon
them.
The SH merely elects them. Once elected, SH has no authority
to review and change the decision of the board.
MATTERS TO BE REVIEWED BY STOCKHOLDERS

Decisions that according to the law as well should be incurred
by the SH, should be ratified by SH by way of specific
exceptions provided by law:
amendment of AOI,
adoption and amendment of by-laws,
sale or lease of corporate property,
bonded indebtedness
increase/decrease capital stock
merger or consolidation,
investment in another corporation
dissolution
Reason:
A: these decisions involve the very existence of the
corporation.
DIRECTORS
Example:
3 japanese, 2 Americans form a corporation in the Philippines,
can they form a corporation?
A: Yes, so long as majority are residents of the
Philippines
Q: can they also become Board of Directors?
A: yes, as long as requirements are complied. Of legal
age, majority are residents of the Philippines, must
be holder of once share Etc.
Q: board of directors must be a holder of a share, so that if he

loses this share, what happens?
A: he automatically ceases to be a director
Q: When he ceases to be a director, what happens?

A: there is a vacancy. Reason of vacancy is that he loses his
share. And so special election can be called.
RESOLUTION
Q: among 5 directors, there was an issue to be approved and
one early morning the messenger was busy hopping from
residence of director to the other and then he passed around
a resolution and each of the directors signed that resolution.
Is that resolution valid?
A: its not.
Q: what should be done?

A: There should be a deliberation, so that all directors can

participate by giving ideas, sharing ideas, raising issues,
express objections and let proponents answer, explain the
validity and importance of that issue. Thats how resolutions
should be passed because it is a deliberative body, there
should be free exchange of ideas. Everyone should be heard.
In that case, there was no deliberation. They just passed the
resolution around through the messenger. There is something
wrong. Resolution is not valid.
RATIFICATION
Q: is there anything we can do?
A: There must be ratification. in a subsequent meeting, part
of agenda is the review of minutes and in the review you
might see there that that resolution is inserted. Can we
deliberate on this? Yes.
Q: If the majority are in agreement, what may now be done?

A: then, they may pass now a resolution ratifying the
resolution.
Q: otherwise if there is no ratification, it shall not be an act of

the board. unless?
A: If the directors are themselves the stockholders. In which
case any resolution, even without the meeting, if they
themselves are the ONLY stockholders, whats the use. Ila ila
ra btaw na. bahala nag naas kan.ana or dili ebutang sa
refrigerator. If they themselves are the stockholders then
there is no need. so here, if for example they are just family
members, that formality of deliberation might be disregarded
if they themselves are just family. If anything happens to that
resolution, they themselves will suffer the consequences
because they are the SH. Although we said, the Stockholders
are not supposed to review but in a corporation where
directors are themselves stockholders, with more reason no
need for deliberation.
PROXY
Q: being a deliberate body, any director may request
someone else to request the meeting. For Ex. A general
meeting would call for discussion of the auditors report. One
director might say, dili man jud ko kasabot ani, oy accountant
man ka, ikaw adto tunga lang sa per diem. Can the director do
that? Is proxy allowed?
A: No. Precisely they were elected by the board because of
some skills, qualifications and even competence or even
integrity that is why they are elected by SH. Therefore, these
are things that a director must exercise.
Sec. 35. Executive committee. - The by-laws of a corporation

may create an executive committee, composed of not less
than three members of the board, to be appointed by the
board. Said committee may act, by majority vote of all its
members, on such specific matters within the competence of
the board, as may be delegated to it in the by-laws or on a
majority vote of the board, except with respect to: (1)
approval of any action for which shareholders' approval is
also required; (2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the adoption of new by-
laws; (4) the amendment or repeal of any resolution of the
board which by its express terms is not so amendable or
repealable; and (5) a distribution of cash dividends to the
shareholders.
EXECUTIVE COMMITTEE; MATTERS THAT MAY BE DELEGATED

BY BOARD
Q: there could be some exceptions, there are things or
instances therefore that a board may delegate to some other
parties?
A: this could be done by an executive committee. A smaller
group which law allows to be organized out of the bigger
board and which board may from time to time allow to make
decisions.
Q: these decisions usually may include?
A: routinary decisions/transactions
EXCEPT:
approval of any action where approval of SH is also
required,
filling of vacancies,
amendment, repeal, or adoption of by-laws,
amendment or repeal of board resolution which is
not amendable or repealable,
distribution of cash dividends
AMENDMENTS
Q: amendments of the articles, are they covered by the
Executive Committee?
A: they are not one of those which are considered as powers
of the Executive Committee, as a matter of fact amendments
cannot be delegated to the Executive Committee because
such matter requires the approval of majority of the board
and thereafter, it needs to 2/3 by the stockholders.
Q: what else can be delegated?

A: they may delegate portions of management. Total
delegation could be equal to abdication or abandonment of
the boards power. So that delegation may be allowed but
must be limited.
Sec. 24. Election of directors or trustees. - At all elections 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 be no capital stock, a majority of the members
entitled to vote. The election must be by ballot if requested
by any voting stockholder or member. In stock corporations,
every stockholder entitled to vote shall have the right to
vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name
on the stock books of the corporation, or where the by-laws
are silent, at the time of the election; and said stockholder
may vote such number of shares for as many persons as
there are directors to be elected or he may cumulate said
shares and give one candidate as many votes as the number
of directors to be elected multiplied by the number of his

shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit:
Provided, That the total number of votes cast by him shall
not 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: Provided, however, That
no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws,
members of corporations which have no capital stock may
cast as many votes as there are trustees to be elected but
may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall be
declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day
or from time to time but not sine die or indefinitely if, for
any reason, no election is held, or if there not present or
represented by proxy, at the meeting, the owners of a
majority of the outstanding capital stock, or if there be no
capital stock, a majority of the member entitled to vote.
Sec. 26. Report of election of directors, trustees and officers.

- Within thirty (30) days after the election of the directors,
trustees and officers of the corporation, the secretary, or any
other officer of the corporation, shall submit to the
Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees, and
officers elected. 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 Securities and Exchange
Commission.
ELECTIONS
Q: so who can vote in the election of the board?
A: Generally stockholders have voting rights.
Q: There are occasions when the owner of share of stocks

would surrender his certificate of stocks to someone else. For
ex. If Id borrow money from bank and bank would require
security or collateral from me, I could offer my certificate of
stocks because these are evidence of ownership and when I
pledge these certificate of stocks, what happens in pledge?
A: surrender possession
Q: So at time of Elections, who will be in possession of

certificates? Would it the lender or borrower?
A: lender.
Q: so who will vote, the pledgor who has possession, may he

vote for those shares? Who could vote?
A: stockholders
Sec. 25. Corporate officers, quorum. - Immediately after their

election, the directors of a corporation must formally
organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a

secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided for
in the by-laws. 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.
The directors or trustees and officers to be elected shall

perform the duties enjoined on them by law and the by-laws
of the corporation. Unless the articles of incorporation or
the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction
of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at
which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the
vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board

meetings.
QUORUM
Q: in Elections, in the board, when we have elections, we
count numbers and follow rules. What is a quorum? The
purpose of requiring quorum?
A: number required to hold or conduct a meeting. Without a
quorum, there can be no meeting. Not necessarily to decide
because you might not decide in that meeting but at least you
can hold that meeting because you have a quorum.
Q: so a majority must be a quorum, is it not? Quorum

requires majority?
A: It can be simple majority or qualified majority.
Simple majority 50% plus one.
Qualified majority specifically stated in articles of
incorporation.
The way we define quorum in a group of 5, 2 can be quorum

if that is what the articles or by laws require, why not.
Because quorum is the number required to hold a meeting. If
the articles says so they can.
Though most usually a quorum it is at least the simple
majority and in some cases in voting for example in amending
articles, how much is required to approve the amendments?
In amendment majority of the board and 2/3
Stockholders.
12/12/12 Monday
Quorum, Majority (2 types: Simple or Qualified), Voting

shares and Non-voting shares (when the very existence of
the corporation is in issue)
Ways of voting:

Viva Voce or Secret Balloting - the latter being a means of

voting where the stockholders would not want their votes to
be known (e.g. in termination/removal of a director where
they would not want the officer to know their votes, and
other cases)
Method of voting:
Cumulative voting - shares that the SH have times the no. of
directors to be voted for. The SH can apportion it as he wants.
In this kind of voting, he concentrates all his votes for one
candidate
Illustration:
Stockholders:
A - has 4 shares = 20 votes (since they are to elect 5 directors)
B - has 4 shares = 20
C - has 4 shares = 20
D - has 4 shares = 20
E- has 5 shares = 25
F - has 4 shares = 20
So that, in this illustration, where A, B, C, D, and F connived to

vote and get themselves in the board, ostracizing E in the
process, the latter can still assure himself a seat in the board
through cumulative voting (concentrating all the votes he has
on himself)
The intention of this method is to protect the minority.
Straight voting
LIABILITY
General Rule: the officers are not liable.
Exceptions: (instances when the director can be made liable)
1. When he assents or votes for a patently unlawful
act
Example: In a board meeting, the directors

agreed to sell illegal drugs
Situation provided: the wife of a director
was caught by the janitor having
extramarital affair with another director.
Liable under patently unlawful act or not?
No, it has to be unlawful act of the
corporation since there is a separate
personality.
Lets chop the problems into pieces. We are
here talking about the liability of a director,
are we not? We discussed that they are
generally not liable for corporate actions
since they are covered by the corporate veil
It is not required that damage be
sustained by the corporation, as long as the
requisites are present: that the director
consented or voted for the conduct of the
patently unlawful acts.
Another illustration: A resolution was

passed on the importation of meat and to

bribe the customs police in the process. In
this case, the consenting director would be
liable. Otherwise, (effect on the
stockholders) if the corporation would be
penalized due to the unlawful act, the
corporate fund will be affected and the
investments of the stockholders will be in
jeopardy. This could have been avoided had
the board not passed the resolution. Thus,
they should be liable for the patently
unlawful act because that is part of their
job; it is their responsibility to ensure that
the corporation will not incur such
unnecessary penalties.
2. Gross negligence- (hmmm, did not really discuss

this part not illustrated it. It was just
accepted as one of the grounds and then,
skipped na to conflict of interest where he
focused jud)
3. Conflict of interest -
Another situation, Director Alcordo: if in the
board meeting, the corporation wanted to
acquire parcels of land when one of the
directors have a land that he would like to
sell. In this case, there is a conflict of
interest because a buyer would definitely
like to buy at the lowest possible price while
a seller would like to sell at the highest
possible price. In this case, is there
something wrong?
A: There is nothing wrong with this situation
as long as your dealings are fair and
reasonable and you let the other directors
or experts assess for the fair value anyway.
So, an example where conflict of interest

occurs:
Where a director conspires with the seller
of a land where the corporation is wanting
to buy parcels of land with a certain budget.
He cajoles the seller to sell the land at the
ceiling price, instead of the much lower
price, with the intent to personally gain
from the transaction.
Is there conflict of interest already?
-Not yet. Until the next board meeting
where he pushes for/supports the
transaction to gain from it personally.
Remember:
Generally, a director can deal with or do business with the
corporation.
But even without suspicion, it is still a voidable transaction or
valid until annulled.
Circumstances it can be declared void or annulled:
When the vote of the subject director is necessary to have the

resolution passed; or
When the attendance of the subject director is necessary to
form a quorum
OR VICE VERSA: The transaction IS NOT be annulled
if:
Vote of the subject director is NOT
necessary, or
Attendance of the subject director is NOT
necessary to form a quorum.
12/14/11 Wednesday
CUMULATIVE VOTING
Q: Cumulative Voting
A: He has the option to cast all his votes in favor of one or
some or all.
Q: Purpose of cumulative voting

A: Allow minority representation
LIABILITIES OF DIRECTORS
Q: when are the directors liable?
A: when they assented to unlawful act, gross negligence,
when there is conflict of interest
Q: so here, these are instances when directors are liable to

the corporation and when we say liable, what is the measure
of their liability?
A: up to the extent of their profit which the corporation could
have gained in the transaction
DEALINGS WITH THE CORPORATION

Q: are you saying that the director could not be allowed to
deal with the corporation? What is the effect if they deal with
the corporation? Is it valid transaction?
A: voidable.
Q: because it is voidable, what could happen? What are the

conditions? Sec32
A: the corporation can annul such contract, UNLESS:
the presence of such director in the board meeting in
which the contract was approved was not necessary
to constitute a quorum for such meeting;
the vote of such director was not necessary for the
approval of the contract;
the contract is fair and reasonable under the
circumstances;
the contract has been previously authorized by BOD.
A: the contract will be invalidated if the presence of director is
necessary for the quorum, his presence is necessary to vote
In those instances, the contract is voidable.
Q: so under what circumstances may the corporation be

denied the option to declare it annulled?
A: presence of such director in the board meeting in which
the contract was approved was not necessary to constitute a
quorum for such meeting, that the vote of such director was
not necessary for the approval of the contract; that the
contract is fair and reasonable under the circumstances and
that contract has been previously authorized by BOD.
LIABILITY VS. VOIDABLE CONTRACTS

Q: so here, we now talk of liability on one hand and voidable
contracts on the other? How do we distinguish the situation?
When would one fall be liable and when would one be liable
on a voidable contract? If a director is made merely liable,
what has happened?
A: one involves that the director entered into a contract,
while in the other, he did not enter a contract
If he entered into a contract, he is liable in the second
provision but if he is guilty of fraud without entering into a
contract, the 1st provision shall apply.
INTERLOCKING DIRECTORS
Director is a director in two or more corporations.
Q: is this allowed?
A: yes
Q: is this not conflict?

A: for as long as there is no fraud
Q: so that if A were the director of Philippines Airlines and at

the same time a director of a catering company offering in
food service in airlines passengers, is that allowed? Is there
anything wrong?
A: thats allowed, nothing is wrong. So that A who may be a
director of airline company and at the same time director of
food catering service company
Q: may A be disqualified from being director of the 2

corporations?
A: cannot be disqualified. He is qualified. Unless however
there is fraud or unless contract is unreasonable
Q: illustrate a transaction tainted with fraud

A: corporation D shoe company, Corporation C department
store. Therefore here is a director who seats in the board,
makes some decisions who is also a director of a supplier
company and he tells the supplier company, the corporation
where he seats as a member of BOD, if you accept our
supplies which I am also a director, we will be giving you
discounts and I will be receiving refunds, thats clearly fraud,
once this is discovered, his being an interlocking director will
be questioned
Q: but because it involves also a director in effect dealing with

corporation where he also seats as a director, what is the
effect? Did you notice that director is a director of the same 2
corporations, corp1 and corp2 if corp 1 deals with corp2, in
effect is he dealing with his own corporation? in a way he is, is
that also valid?

A: yes unless it is unreasonable. It will under the instance

where a director will be liable for fraudulent transactions or it
will fall under voidable transactions because in effect he is
dealing with his own corporations and
Q: if the director SH deals with his own corporation what is

the effect?
A: contract is voidable
so here being an interlocking director, if he deals with either
of the corporations therefore in effect we said the contract is
voidable because that director is dealing with his own
corporation therefore we apply the rules on a director having
transaction with his own corporation.
Q: So here is a beer company, BEER GIANT in that country

and here is someone who also operates and run another beer
company, its a starting beer company but trying to get some
market shares on the existing beer giant, because he has his
own beer company he was wondering what is the secret of
that beer giant. So why are they trying to control the big
company? What do you think did this businessman do? That
owner of a small company, if he is really planning big for a
small company, what do you think will he do?
A: try steal the recipe, he will go through the main gate of
that beer company by buying shares of that company, buy as
much shares as I could which is what he did. So he tried to
acquire as many shares as he could and eventually he was
ready for the confrontation. He wanted to join elections of
board with big bundle of shares to support coz all he need will
be enough votes through shares that he own to assure him a
seat on board.
Q: Do you think Beer giant will be happy to welcome? His

objective was to steal the recipe.
A: No. they would be worried, so the beer giant consulted his
lawyers, what do we do to prevent that owner to have a seat
in the board.
Because this is a public corporation, there is no such thing as
preemptive right. And so there was no way but the lawyers
came up with an idea, Lawyers said, before elections we
amend our bylaws, we provide paragraph there that any
person who owns also a beer company in direct competition
with our company should not be qualified to be nominated as
a member of the board.
Q: Do you think that SH to wanted to steal that recipe would

be happy to to hear that amendment?
A: No.
So he went to court and argued to court, your honors, this
cannot be done, I am the owner of the several shares of
stocks and under corporation code, among my rights as
owner of these shares will be my right to vote and be voted
for, there is no way they could prevent me from being voted
upon.
BEER giant said, your honor if we allow anyone who holds a
beer company, a competitor to seat in the board that would
be very suicidal on our part, that would therefore endanger
the very existence of our corporation. Thats why we are not

allowing anyone to come in, like a stockholder of a
competitor. that competitor said but this provision is designed
solely for me, there is no other person in the country who
owns a beer company so in effect they are trying to
discriminate me as SH. Those were the arguments
Q: and how do you think the SC ruled?

A: SC ruled San Miguel vs Lucio Tan (or is this Gokongwei? Not
sure), that is a valid amendment, they cannot be forced to
allow anyone to endanger the very existence of the
corporation and so Lucio Tan was not allowed to be
nominated in the board of directors of San Miguel.
Q: however, if amendment said provided Lucio Tan should not

be nominated in the BOD? Would there have been a
difference? if amendment specifies Lucio Tan is not allowed?
A: the amendment will now be discriminatory. But Lawyer of
San Miguel was not that ignorant. He knew that if will name
Lucio Tan there, court will said discriminatory. As an owner he
has all the rights to vote and be voted upon that is why the
amendment we do not name. We simply say anyone who also
owns beer company in direct competition to the company.
Q: What should be the rule? Interlocking directors?

A: General Rule: interlocking directors are valid, UNLESS that
person who is supposed to be an interlocking director comes
from a corporation who is a competitor of the corporation
where he intends to be director in which case that cannot
be allowed. If they are directors in 2 competitive
corporations, that will have to be reviewed specifically if it will
endanger the very existence of one corporation.
Q: Because that can be very disadvantageous to the SH,

imagine if he is there, if he succeeds in carrying a seat in the
board, what will happen?
A: in a board meeting, he could easily summon some officers
of the corporations, instead of summons, invitations to
appear, like wed like to invite the comptroller of the
corporation so that in that board we Mr. comptroller we are
trying to investigate, why do we have 80% of market, we
would like to get 85% of the market, could you please submit
to these board a list of all our customers? So he gets this list
and use it to his own company and try to find who these
customers are, offer them better packages, offer them better
price and sooner or later these customers will transfer. Next
officer he will invite is chief cook or Chief chemist. He will try
to invite chief chemist, and mr. chemist, there are some
complaints that our beer is salty, why? what is really our
recipe? And then he gets the recipe. That is the
01/04/12 Wednesday
Disqualification of a stockholder to be nominated as a

member of the BOD - applies to member who is a director of
a competing corporation

PRESIDENT AND VICE PRESIDENT

President - he must be a stockholder and be a member of the
board of director.
The Vice-president on the other hand does not need to be a
member of the board of directors to become such. The law
does not require that of him.
So how may the vice president qualify if the president dies

and yet he is not a director and does not have shares of
stocks?
FACT: requirement of VP - must be elected as such. There is
no requirement that the VP must be a director or that he
must also be a stockholder.
SITUATION:
An individual who was not a director and not a stockholder
was elected as vice president. This was accepted by the
corporation because to be a vice president, there was no
requirement of being director and to own shares of stocks.
The by-laws on the other hand, stipulated that the vice
president must succeed the president in case the latter dies,
is incapacitated or resigns.
So there is a conflict now. Under the by-laws, he could
succeed the president, but under the law, he cannot.
What do we do?
There should be an election, but not an election for
the president, but an election for the vice president
to be a member of the board or to be a director. In
that case, he should also buy a share in the
corporation.
But, others may contend that there must be an election of a

new president because the vice president was not qualified to
be president under the law, before acquiring his shares. One
director may say that he may nominate himself to be
president because he had every right to have a chance to be
president since he already had shares and was already a
director even before the vice president acquired his own
shares and had become a director.
TWO CONTENTIONS:
VICE PRESIDENT: I could now buy stocks, I could be elected to
be part of the board. That way I could succeed the President
since I would already qualify for the said position.
OTHER CONTENTION: you could buy stocks, submit yourself
for election to the board, then submit yourself to the election
of president.
RESOLVING THE CONFLICT:

The provisions of the by-laws already provide that the vice
president shall succeed the president. He must just comply
with the requirement of having stocks and be a member of
the board, then he may assume the position of president by
virtue of the by-laws. In Other Words, once the vice president
becomes a member of the board and acquires shares of
stocks then being a vice president and being a director, he
may now assume the office of the president.
For the second contention: SC ruled that there is no need for

two elections, since the vice president was duly elected as the
vp. He was qualified for the position, so he was validly elected
as a vice president. He may not have been qualified to be
President, but once he complies with what was lacking then
he can validly assume the office of the president.
CORPORATE OFFICERS
Once organized as a corporation, we hold a SH meeting to
elect members of the board.
Once the board is elected the meeting is then adjourned.
Then the first organizational meeting of the board will
commence to elect the corporate officers.
SH elect the directors - directors elect the corporate officers.
Corporate officers are indicated in the by-laws. Most

important: president, secretary, treasurer. These 3 are
sufficient.
Some corporations elect other officers like the chairman, vice

chairman, CEO, chief officers, division heads, department
head, VP of department, manager, personnel.
Election of corporate officers basically means electing officers
for the entire corporation - depends on the size of the
corporation.
President vs. Chairman

Who is higher? Depends on the by-laws.
Chairman may be elected because he is the eldest of the
family or he has the most number of shares. Necessarily, the
chairman is higher than the President, but again this will
depend on the powers vested by the by-laws to the officers.
The organization of the corporation must be tailored fit to the

purpose of the corp.
Some officers may not be elected but merely appointed.
Basically, the law refers to only 3 fundamental officers -
president, secretary, treasurer.
So long as you have this, you will already function as a
corporate body.
01/06/12 Friday
Sec. 32. Dealings of directors, trustees or officers with the

corporation. - A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the
option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a quorum
for such meeting;
2. That the vote of such director or trustee was nor
necessary for the approval of the contract;

3. That the contract is fair and reasonable under the

circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set forth in the

preceding paragraph is absent, in the case of a contract with
a director or trustee, such contract may be ratified by the
vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at least two-
thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.
DEALINGS OF DIRECTORS WITH THE CORPORATION

May a director of a corporation deal with his own
corporation?
Yes. If he enters into a transaction with his
corporation, that would be perfectly valid. However,
the contract is voidable at the option of the
corporation voidable in the sense that it is valid
until the corporation decides to void such
transaction.
If it is voidable, what can be done?

Being voidable, the defect can be cured by
ratification.
So here, even if the director was involved in the
transaction, that transaction remains binding upon the
corporation.
Sec. 31. Liability of directors, trustees or officers. - 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 or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer 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
disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the
corporation.
LIABILITY OF DIRECTORS
Under what circumstances may a director become liable to a
corporation?
1. BODs would enter into illegal transactions
2. Gross negligence
3. Conflict of interest
If he was guilty of conflict of interest, he could be liable. But

at the same time, he can enter into any transaction with the
corporation, of which he is a member of the board. How do
we reconcile that? Here is a director of an airline company,
who at the same time operates and runs a catering service.
When the airline company was looking for a catering service
provider, this director offered his own catering services to that
airline company.
Can he offer and enter into a catering services agreement
with the company?
YES.
Would he not be guilty of conflict of interest?
He would not be guilty for as long as he submits a
proposition to the board. If he can submit a
proposition that is reasonable and competitive at the
same time, and the BOD decided to choose this
particular catering service, then he would not be
liable for conflict of interest.
There should not be any conflict of interest because

he should submit it to the board for approval. If they
availed of the catering services and the corporation
would then ask for a higher price, and they think it is
too much, then it is no longer fair and reasonable
and they could always have the transaction voided.
It is incumbent upon that director to prove that the

transaction is fair and reasonable. So what makes a
transaction fair and reasonable? How should a director
establish that it is fair and reasonable?
You show that the proper procedures were observed.
There was a proper bidding where everybody was
given an opportunity to offer their services. You have
to show that it went through the regular process of
approval.
More importantly, you prove that you have not
influenced the decision of the board by showing that:
a. Your presence as such director in the board
meeting in which the contract was
approved was not necessary to constitute a
quorum
b. Your vote as such director was not
necessary for the approval of the contract
Point is, there is nothing wrong with a director to entering

into any transaction with the corporation. Otherwise, if the
director would not be allowed, no one would like to become a
director.
If I happen to be a director of a land transportation company,

and I am dealing with tires, I am free to offer my tires to the
land transportation company for as long as the transaction is
fair and reasonable.

So that if I am a director of an airline company, and I own an

insurance company offering passenger insurance, I can also
deal with the airline company. So there is nothing wrong with
it so long as it is fair and reasonable. Otherwise, the
transaction is voidable.
So long as you are sure that you have complied with all the
procedural requirements on bidding for example, for as long
as you are sure that you have not influenced the decision of
your board, then that transaction is perfectly valid.
Sec. 33. Contracts between corporations with interlocking

directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a
contract between two or more corporations having
interlocking directors shall not be invalidated on that ground
alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in
the other corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding section
insofar as the latter corporation or corporations are
concerned.
Stockholdings exceeding twenty (20%) percent of the

outstanding capital stock shall be considered substantial for
purposes of interlocking directors.
INTERLOCKING DIRECTORS
Who is an interlocking director?
He is one who sits as a director in two or more
corporations.
Is there a law prohibiting a person from becoming a director

in two companies who are engaged in the same business?
No. Theres no such law. As a matter of fact, an
interlocking director is perfectly allowed. Being an
interlocking director, he could share his knowledge
and experience in one corporation with the board of
another corporation engaged in the same business. If
done in a legitimate way, indeed it is advantageous.
However, even if interlocking directors are allowed, there are

instances wherein a director in one company cannot be
allowed to be a director in another company who is a direct
competitor.
In the case of Gokongwei, Jr. v. SEC (89 SCRA 336 [1979]),
petitioner Gokongwei was a director of a new beer company.
This beer company was just starting, but because of their
price strategy, they was slowly crept into the market share of
the beer giant SMC. Here, Gokongwei bought shares of stocks
left and right of SMC until he was able to accumulate enough
stocks to put him in the board. He could concentrate all his
votes by cumulative voting to guarantee himself a seat in the
board.
SMC became aware of this because during the trading of the
stocks, they will have to monitor the shareholdings of every
stockholder. Usually, publicly listed corporations engage the
services of stock and transfer agents who monitor every

movement of every share of stock. However, there are ways
of avoiding them. You could always let someone assume
ownership of your stocks but eventually, in an election, you
can only cast votes according to the volume of stocks listed
under your name. But here, they were able to identify
through the stock and transfer agents and spies. They learned
that Gokongwei already has enough stocks to put himself in
the board.
So, the legal team of SMC was consulted. They want to know
what they can do to prevent Gokongwei from becoming a
director. And so, the legal team decided to amend the by-laws
of the corporation, which they did before the elections. They
were able to introduce the amendment by indicating there
something to this effect:
That no person who is a director of another
corporation engaged in a business similar to our
business should be qualified to be nominated to the
board.
That was the provision. No name was mentioned. No person
was specified.
And so this director from this new beer company questioned
that amendment, claiming that the amendment violates his
right of ownership. As an owner of stocks, we have learned
that his ownership carries, among others, the right to vote
and to be voted upon. That was what he questioned.
Now, the case was brought to the SC, who ruled that the
amendment was valid. Both parties presented their evidence
and SMC was able to convince the SC. Because truly, once this
guy is already in the board, nothing could prevent this guy
from inviting the officers of SMC to the board meeting in the
guise of inquiring, he might just say, Id like to invite our VP
for marketing, why is our sales going down? So during that
meeting, he also requested that the list of customers be
brought and presented to the board. Once you have that list
of customers, he could always share that with the other
company, Now these are the customers of our competitor.
Go! Visit these customers and offer them attractive packages
of our products. It could be that, or it could call on the brew
master and try to inquire in the board meeting under the
guise of improving the quality of the beer, so hell inquire
from the brew master, Whats happening to the quality of
our beer? Where is the formula? Id like you to explain the
formula.
Thats what they were afraid of and so it was discouraged.
There was a danger that in the entry of this director, there is a
possibility that the very existence of the corporation would be
affected.
So, interlocking directorship is allowed, unless, the

corporation itself through its by-laws will prevent or try to
prohibit the nomination of any person who could cause or
jeopardize the very existence of the corporation.
DISLOYALTY
When we talk of disloyalty, the director, by virtue of his office,
acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the

prejudice of such corporation.
EXAMPLE:
A corporation is engaged in the distribution of beer in Cebu
City. And this guy was a director in that corporation. It so
happened that in Mandaue City, the distributor of beer in that
city decided to give up his franchise. So the beer company
offered the franchise to the corporation. The director tried to
influence his fellow directors in the board, saying that, You
know we should not take this opportunity because its bad,
blah blah blah So the board decided not to take the
opportunity. But then, the next day, he formed his own group
and they took the franchise. So he used his influence to get
the franchise for himself.
01/11/12 Wednesday
Sec. 28. Removal of directors or trustees. - Any director or

trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing at least
two-thirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of at least
two-thirds (2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for
the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention
to propose such removal at the meeting. A special meeting
of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them,
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, if it be a non-stock corporation, on the written demand
of a majority of the members entitled to vote. 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. Notice of
the time and place of such meeting, as well as of the
intention to propose such removal, must be given by
publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided, That
removal without cause may not be used to deprive minority
stockholders or members of the right of representation to
which they may be entitled under Section 24 of this Code.
Sec. 34. Disloyalty of a director. - Where a director, by virtue

of his office, acquires for himself a business opportunity
which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he must account
to the latter for all such profits by refunding the same,
unless his act has been ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own

funds in the venture.
REMOVAL
Consequence of being disloyal:
suffer all the liabilities and return the profit
And because of this disloyalty his behavior calls for more

drastic action from the SH, SH could move for removal.
Necessarily if he is removed, what could happen?
There could be vacancy.
To remove a director what is supposed to be done?
A meeting will be called and there is due process?
Notice should be served.
Notice of hearing of the possible items to be
discussed and which most likely to indicate the removal of the
director.
Notice of meeting is done how? that
removal of director may be done with or without
cause.
Would be a director would be entitled to stay like any other
government official?
NO. He could be removed even without cause of course that
there should be notice for him to be able to know the reason
for the removal. Although in practice this seldom happens, it
is seldom to meet and just removed somebody but law is
clear, with or without cause simply indicates that the director
serves at the pleasure of fellow members of board or SH.
There is actually no requirement to find cause for removal. In
practice, there is a cause for removal, otherwise the
consequence if there is no cause for removal, the power to
remove a fellow director might be abused in a way that the
right of the minority to be represented in the board might
suffer. Once that minority is represented they might have one
member of the board, if there was no limitation, he could be
removed even w/o cause
Intention of law, protect minority at the same time members
of board based on trust and confidence.
That right should not be exercised if the minority could be
deprived of his representation. If board member minority is
party guilty of abused, he can be removed. Once removed
there could be vacancy. Removal creates a vacancy.
VACANCY
Once vacancy occurs what could happen?
- filling up of vacancy would depend upon the cause.
- may be filed majority of the SH or directors.
So how is vacancy created again?
Vacancy is created when director abandons, retires,
removal, disqualification, resignation.
If vacancy occurs by removal or expiration, may be filled by

SH.
Other than removal or expiration, vacancy may be filled up by
BOD.
Vacancy may be filled up by SH if there is increase in the
number of directors.
Increase in the number of directors by the amendment of

AOI. There is a need to amend, because the number of
directors are indicated in the articles. Amendment is
necessary and if that creates a vacancy in the board, vacancy
is filled depends on the reason for vacancy.
When are SH required to fill up vacancy

- removal
- expiration
- increase in number of directors
Creation of vacancy would depend upon the cause so that if
vacancy occurs and director is unable to finish his term, the
successor or the replacement will serve for the unexpired
term.
EXECUTIVE COMMITTEE
When may a matter be referred to the board, when may a
particular be referred to an executive committee?
The executive committee can act of matters which a
board which supposed to act.
Executive committee can act in routinary matters.
In hiring a president?
hiring a president is not a routinary act;
necessarily law requires that it must be the board
who should elect president and law further requires
that the president be elected.
Law requires during organizational meeting that
president must be elected by the board of directors.
If executive committee can elect president, they are
in effect amending the by-laws. They cannot do that;
this is a limitation. They cannot even amend
resolution unless that resolution allows amendment.
So when do we give it to executive committee?

- day to day transactions.
Exceptions:
a) approval of any action for which shareholders'
approval is also required
b) filling of vacancies in the board
c) amendment or repeal of by-laws or adoption of
new by-laws
d) amendment or repeal of any resolution of the
board
e) distribution of cash dividends to the shareholders
Are we not allowing absolute delegation?

NO, that is tantamount abandonment of office as
directors. So here, Executive committee was created
by law and that creation must be indicated in the by-
laws.
Objective of law of creating Executive committee:

to give BOD opportunity to focus on more relevant
matters, to compliment functions of board, without
bod abdicating their functions.
POWERS OF CORPORATION
Which is more powerful? corporation or partnership?

- partnership is more powerful, corporation owes its
existence by state, so corporation can only perform
powers provided for by corporation.
- a partnership theoretically holds more power than
a corporation simply because the corporation is a
creation of state and being a creation of state, state
limits its powers and distinguish by partnership.
- the partnership is a contract by agreement of
powers, can partners stop business anytime?
yes. Although same with corporation, but there are
certain requirements to follow.
As to partnership, they can stop corporation so long
as they take care of creditors, thats the only
concern.
If they want to donate? Corporation can donate but not to a
political party.
A partnership may also be prohibited. In other aspects of

donation, they are allowed to donate, as long as no creditors
are affected, they could donate, unlike a corporation,
necessarily there are instances when you have to consult SH
themselves which are inconvenient.
In other words, the decision making in partnership is much

faster, they exercised their power is much faster than that of a
corporation.
In corporation, the exercise of its power would be referred to
SH most especially existence of corporation.
Theoretically partnership, because they decide faster, would
be more powerful than corporation.
Although in terms of capital, partnership has the leeway to
increase its capital, for corporation, they still have to go
through process. In so far as source of capital, in corporation
it is unlimited.
In partnership, once parties agree to put in more capital, then
the requirement are not as much and as cumbersome of that
corporation.
In corporation, we have to go through securing permission
from SEC for issuing of shares of stock.
What could be some power of corporation?

1. express powers
2. implied powers
3. incidental to existence.
Express powers: those laid down by law
Implied powers: tools to carry out what is expressly created;
gives tooth to the powers already exercised by the
corporation
01/13/12 Friday
CLASSIFICATIONS OF POWERS
The three classes of powers of a corporation:
Express powers directly conferred by law
Implied powers reasonably necessary to carry out
the express powers
Incidental powers inherent to a corporation;

incidental to the existence of the corporation
How would we know whether or not a corporation has this

certain power?
Express we just have to inquire from the law or
statute that granted the express powers of the
corporation
Implied the test is whether or not these powers are
reasonably necessary to carry out those powers expressly
conferred
Sec. 36. Corporate powers and capacity. - Every corporation

incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the
period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in
accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit
members to the corporation if it be a non-stock
corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including
securities and bonds of other corporations, as the
transaction of the lawful business of the
corporation may reasonably and necessarily
require, subject to the limitations prescribed by law
and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those
for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or
candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
POWERS OF THE CORPORATION, Section 36

Corporate powers and capacity
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the

period of time stated in the articles of
incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend the articles of incorporation in
accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same
in accordance with this Code;
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell treasury stocks
in accordance with the provisions of this Code;
and to admit members to the corporation if it be
a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including
securities and bonds of other corporations, as
the transaction of the lawful business of the
corporation may reasonably and necessarily
require, subject to the limitations prescribed by
law and the Constitution;
8. To enter into with other corporations merger or
consolidation as provided in this Code;
9. To make reasonable donations, including those
for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or
foreign, shall give donations in aid of any
political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in its articles of
incorporation.
POWER TO MAKE REASONABLE DONATIONS, Section 36(9)

Why are corporations prohibited from making donations to
political parties especially during election time? Such that if
Estrada had won for example, and let us just assume that
Estrada was able to receive a donation from a big corporation,
then this corporation wanted to recover what it donated to
Estrada. So, they will engage in smuggling, they will smuggle
in some items which are not allowed, and when the Bureau of
Customs apprehended them, what do you think he might do?
Estrada as a president might be extending them
favors; he might be giving them a chance or
opportunity to circumvent the law.
That would be a source of corruption. That is
precisely the reason why the law does not allow it.
Thats in the law but whether or not the law would
be able to address it is a big question. The culture of
corruption is deeply entrenched in the system.
Thus, the donations in aid of any political party or candidate,

or for the purposes of partisan political activity are prohibited
so as the officials who would be elected sooner or later will
not be given the opportunity to circumvent the law or make
illegal transactions with the corporation in consideration for
the help that has been given by such corporation.
POWER OF SUCCESSION, Section 36(2)

What is the power of succession?
Succession is one of the features of the corporation
wherein in case of death or retirement, the right to
succession is given to those remaining Board of
Directors or stockholders.
Succession is the power of the corporation where its
existence is continued despite death of its directors
or stockholders; the right transmits to the heirs who
will in turn become stockholders themselves
POWER TO SUE AND BE SUED, Section 36(1)

If you were the lawyer of a corporation who filed a case
against somebody else, a simple collection case for example,
what do you think should you first prepare?
The first thing that lawyer should do is to ask for a
board resolution authorizing him to represent the
corporation.
Without that board resolution, he does not have the
authority to represent the corporation
If you were also the adverse counsel, what will you do?
You can inquire if the opposing counsel has with him
the board resolution. So, the opposing counsel
should be able to present the appropriate resolution
or authority from the corporation, authorizing him to
represent the corporation. Without the resolution,
the lawyer can never represent the corporation.
So now, what would the counsel for the defendant do (if there
is no board resolution)?
He can file a motion to dismiss on the ground that
the counsel is the improper party that the case was
not filed on behalf of the real party. So, he has no
authority to file a case.
Subsequently, the case was dismissed and in another case

which was re-filed, everything was already supported with
proper authority. Alright, so there was proper complaint. And
because the defendant was also a corporation, the defendant
filed an answer on behalf of the corporation. The pretrial is
set and both parties were called for a pretrial conference.
During the pretrial what could happen?
There could be a stipulation of facts.
So, in the pretrial order, the counsel should be ready
to participate in the pretrial conference and they
should have the authority to, among others, stipulate
facts or admissions, and most importantly, enter in
to a compromise agreement or an amicable
settlement. That authority must be specific, for

without that authority, the compromise agreement is
not binding upon the corporation. As a matter of
fact, they could not enter in to a compromise
agreement because they do not have the authority
during pretrial.
If he has no authority to attend the pretrial, the

effect is that the party could be declared in default.
So those are the things that we have to prepare. To prove that

we have the authority to sue and be sued, we present a board
resolution.
Sec. 37. Power to extend or shorten corporate term. - A

private corporation may extend or shorten its term as stated
in the articles of incorporation when approved by a majority
vote of the board of directors or trustees and ratified at a
meeting by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-
thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to
each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal
right under the conditions provided in this code. (n)
POWER TO EXTEND OR SHORTEN CORPORATE TERM, Section

37
Why should a corporation shorten its term?
The Board of Directors or the stockholders probably
realized that the business is no longer profitable.
So, if the corporate term is reduced, then the

corporate property or assets may be disposed and there is a
possibility that the corporate assets would not be
enough to satisfy its liabilities to the creditors.
In effect, they are liquidating. If they have to
liquidate or dissolve, they will dispose or distribute
their assets. And if they have to dispose their assets,
the creditors may be affected as it involves their (the
creditors) rights.
Thats why although it is allowed to shorten its
corporate term, the law requires that it should not
affect or it should not prejudice the rights of its
creditors. It should address the concerns of the
creditors first.
It cannot be allowed to terminate its existence
without addressing its creditors interests or rights.
On the other hand, why is the corporation also given the

power to extend its corporate term?
If the business is doing well, there is a good reason
to extend its term.
So again, although allowed, what are our concerns if we

extend our term?
There might be some SH who are no longer
interested to remain in the corporation or who might
want to disengage themselves from the corporation.
So we have to address their concerns.

Thats why the law requires that there should be a meeting
and it should be duly approved by a majority vote of the
Board of Directors and ratified at a meeting by the
stockholders representing at least 2/3 of the outstanding
capital stock.
These changes must also be indicated in the articles of
incorporation.
POWER TO ENTER INTO WITH OTHER CORPORATIONS

MERGER OR CONSOLIDATION, Section 36(8)
Distinguish Merger from Consolidation
Merger is a form of business combination wherein
an entity is acquired by another corporation and
there is only one surviving entity. If corporation A
would merge with corporation B then the surviving
entity would either be corporation A or corporation
B. So, one corporation is dissolved and the other
corporation survives.
Consolidation is also a form of business

combination wherein two or more corporations
would combine and they are forming an entirely
new corporation or entity. So for example if
corporation A and B would consolidate, a new
corporation, corporation C, is created.
MERGER CONSOLIDATION
When two or more Two or more corporations
corporations merge together, consolidate themselves
one will be dissolved and the together (with all of their
other will survive. assets and all of their
liabilities) and all of these
constituting corporations will
be dissolved and a new one
will be born or created.
Why should corporations form mergers or consolidations?

Corporations merge or consolidate probably because
they want to expand their market or expand their
operations. For example you are a corporation
engaged in selling cars then probably you will enter
into a merger or consolidation with another
corporation which is engaged in the production of
cars so it would be easier to control the quality of
your cars.
Sec. 38. Power to increase or decrease capital stock; incur,

create or increase bonded indebtedness. - No corporation
shall increase or decrease its capital stock or incur, create or

increase any bonded indebtedness unless approved by a

majority vote of the board of directors and, at a
stockholder's meeting duly called for the purpose, two-
thirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written
notice of the proposed increase or diminution of the capital
stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing
of any bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of residence as
shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a majority of the

directors of the corporation and countersigned by the
chairman and the secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock
thereof actually subscribed, the names,
nationalities and residences of the persons
subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the amount
paid by each on his subscription in cash or property,
or the amount of capital stock or number of shares
of no-par stock allotted to each stock-holder if such
increase is for the purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be incurred,
created or increased;
(5) The actual indebtedness of the corporation on
the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or diminution
of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the

incurring, creating or increasing of any bonded indebtedness
shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the

office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the
original articles of incorporation. From and after approval by
the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock
shall stand increased or decreased and the incurring,

creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided,
That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the
treasurer of the corporation lawfully holding office at the
time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock has
been subscribed and that at least twenty-five (25%) percent
of the amount subscribed has been paid either in actual cash
to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to
twenty-five (25%) percent of the subscription: Provided,
further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
Non-stock corporations may incur or create bonded

indebtedness, or increase the same, with the approval by a
majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.
(17a)
POWER TO INCREASE OR DECREASE THE CAPITAL STOCK,

Section 38
Reason for the increase of capital stock:
Probably they want to acquire more capital. So by
increasing their capital stock, they can issue more
shares thereby increasing their resources to finance
their operations.
Do we have any problem there?

One stockholder may not be able to maintain his
interest or control in the corporation.
If you increase the capital stock, then subsequently
the corporation would issue new shares and of
course being a stockholder, you should protect your
interest. So if you had 30% shareholdings then by
increasing the capital stock, probably your 30
percent would now be 25 %.
Most likely, if you have the money, you could make

additional subscriptions and protect your current
interest. You have 30% holdings, you want to protect
that 30, then subscribe to the increase. Anyway you
are assured of that because of your preemptive right.
Problem is, if you dont have the resources to buy
the shares, be ready for a reduction of your control.
You r shareholdings will be diluted.
On the other hand, a decrease or capital, what could be the

effect? Would we have a problem?
The creditors would be prejudiced since we said that

the capital is held in trust for the creditors. So if the
corporation decreases it, then there would
be no more guarantee for the creditors, in violation
of the trust fund doctrine.
Why would the law allow decreasing if indeed it would

jeopardize the interest of the creditors? Are there protections
which would address their concerns?
There are protections given by the law, so when the
corporation decides to decrease its capital, it should
be approved by the SEC.
There must be an approval by a majority vote of the
BOD and, at a stockholders meeting duly called for
the purpose, by a vote of the stockholders
representing at least 2/3 of the outstanding capital
stock (CS).
There must also be a certification signed by a

majority of the BOD and countersigned by the
chairman and the secretary, stating that no creditors
would be prejudiced by such move. Even if there
were, at least these creditors concern has been
duly addressed. Maybe there were some
arrangements. The thing is you must prove to the
SEC that the creditors concern has been addressed.
Either the creditors were paid, or that the creditor
were assured of something else to protect their
interest in the corporation.
POWER TO INCUR, CREATE, OR INCREASE BONDED

INDEBTEDNESS, Section 38
This is a bonded indebtedness and not just a plain loan
because the principal debt has a security which is the bond.
Here, the corporation obligates itself to pay a definite sum of
money at a fixed time with a fixed interest.
The corporation might need additional cash or capital, and

they would rather not go the bank because the bank
sometimes imposes excessive charges and interests. So what
they usually do is borrow from the public. They would first
secure authority from the SEC, allowing them to issue bonds
to the public. So these bonds are more or less mere
promissory notes, with an undertaking to pay after a certain
period with a certain interest. This is what we call floating
bonds; this is what we refer to when the law says bonded
indebtedness.
So if I were the corporation needing capital, I would issue

bonds, and these bonds contain some serial numbers. The
terms and conditions of these bonds are also indicated on the
bond itself. If you are interested to buy these bonds, you just
go to the corporation, but usually, corporations would
endorse these bonds to a bank, and the bank will be the one
to issue the bonds in the name of the corporation.

So, depending on the term of these bonds, perhaps after 5

years, you go to the bank and present the bond, and the bank
will pay you plus interest. So these are what we call bonded
indebtedness.
Sec. 39. Power to deny pre-emptive right. - All stockholders

of a stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such
right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right
shall not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith with the
approval of the stockholders representing two-thirds (2/3)
of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously
contracted debt.
POWER TO DENY PRE-EMPTIVE RIGHT, Section 39

Basically, when a corporation issues shares, the stockholders
have the preemptive right which means that they have the
right to initially subscribe to these shares before they are
offered to the public. But there are circumstances wherein
these preemptive rights are denied.
Instances when Pre-Emptive right is not available:

1. Shares to be issued to comply with laws
requiring stock offering or minimum stock
ownership by public
2. It does not apply to shares that are being
reoffered together with all the shares.
3. Shares issued in good faith in exchange for
property needed for corporate purposes.
4. In case the right is denied in the articles of
incorporation
5. Waiver of the right by the stockholder
Sec. 40. Sale or other disposition of assets. - Subject to the

provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon
such terms and conditions and for such consideration, which
may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its
board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, or in
case of non-stock corporation, by the vote of at least to two-
thirds (2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any

dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover

substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of continuing
the business or accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the stockholders or

members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property
and assets, subject to the rights of third parties under any
contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of

any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its property and assets
if the same is necessary in the usual and regular course of
business of said corporation or if the proceeds of the sale or
other disposition of such property and assets be
appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with

voting rights, the vote of at least a majority of the trustees
in office will be sufficient authorization for the corporation
to enter into any transaction authorized by this section. (28
1/2a)
SALE OR OTHER DISPOSTION OF ASSETS, Section 40

It involves the capital assets of the corporation, and so it must
be approved by the BOD and ratified by the stockholders
representing at least 2/3 of the outstanding capital stock.
The disposition of those assets is leading to the cessation of
operations of the corporation as it already involves the
capital.
If a corporation engaged in a transportation business has 10

buses, and it disposed 6 of their buses, would this already be
tantamount to disposal?
The disposal should be substantial and the SC in a decision

stated that substantial is 80% and 6 is not 80% yet so it
cannot be considered substantial disposition of the assets.
Although the law says that the disposition of substantially
all of its assets should be to the effect that it would not be
able to pursue or perform further its business or objectives.
Sec. 41. Power to acquire own shares. - A stock corporation

shall have the power to purchase or acquire its own shares
for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the

corporation has unrestricted retained earnings in its books

to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent
shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code. (n)
POWER TO ACQUIRE OWN SHARES, Section 41

Example, the corporation needs additional capital, so it can
sell some shares with the promise that it can buy them back
later with interest, and that is what we call redeemable
shares. Once we reacquired those redeemable shares, they
now become treasury shares, which can be resold by the
corporation back to the stockholders.
The corporation used its own funds to reacquire these

treasury shares and if it sells back these treasury shares, the
proceeds of the sale would necessarily go back to the
corporation.
Sec. 42. Power to invest corporate funds in another

corporation or business or for any other purpose. - Subject to
the provisions of this Code, a private corporation may invest
its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was
organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members
in the case of non-stock corporations, at a stockholder's or
member's meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members
shall not be necessary. (17 1/2a)
POWER TO INVEST CORPORATE FUNDS IN ANOTHER

CORPORATION, Section 42
If we invest in another corporation, it is required that it must
be in furtherance of the primary purpose of the business but
like the other powers, there must be a written notice to the
stockholders, and it must be approved by a majority vote of
the BOD and ratified by a vote of the stockholders
representing at least 2/3 of the outstanding capital stock, in a
meeting duly called for the purpose.
That was my concern, because I thought management is

vested in the board. Here we are just trying to invest but why
should we bother ourselves to inform the stockholders?
Here, the requirement is in relation to making investments for

purposes other than the primary purpose of the
corporation. If it is for the primary purpose, then those
requisites do not apply. So, not all investments of the
corporation should be referred to the stockholders. We refer
to the stockholders only if we invest for other than the
primary purpose.
So that if the corporation is engaged in farming, could it invest

in a corporation which is engaged in airlines?
The requisites under section 42 must be complied
with because it is not in relation to its primary
purpose. Its primary purpose is farming.
If for example there are thousands of hectares to farm and

the farm manager wants to take a look at every square inch of
the farm, so he needs an aircraft to survey the area. Is it
related?
It is still not related. Thats stretching too far as it is
not related at all.
Of course, it can be justified. In a banana plantation in Davao

for example they have aircrafts spreading the fertilizers. They
spread the fertilizers in their plantation through the use of an
aircraft. Sometimes they engage the services of private
aircraft companies or sometimes they have their own private
planes to spread the fertilizers. Sometimes, the passengers of
the aircraft would not use the fertilizers and instead of
spreading the fertilizers, if they want to relieve themselves,
they could use their (HA! HA!)
Sec. 43. Power to declare dividends. - The board of directors

of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis
of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to
the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing
not less than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the
purpose. (16a)
Stock corporations are prohibited from retaining surplus

profits in excess of one hundred (100%) percent of their
paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends

without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining
in the corporation, such as when there is need for special
reserve for probable contingencies. (n)
POWER TO DECLARE DIVIDENDS, Section 43

What are dividends?
Dividends are given to the stockholders as a return of
their investments. It is their share of the profits of
the corporation. The source of the dividends is
nothing else but the profits of the corporation and
without profits, the corporation could not distribute
dividends.
Otherwise, if they declare cash dividends without
profits, it will be taken from the capital and
therefore, it would be in violation of the trust fund
doctrine.
If they send back part of the capital to the
stockholders, they are not distributing dividends but
rather they are distributing the assets.
Types of Dividends:
1. Property Dividends
2. Stock Dividends
3. Cash Dividends
Property Dividends
We issue property dividends when the earnings of
the corporation are not in cash so you issue these
property dividends to the stockholders because the
corporation cannot issue cash.
So when we distribute property dividends, are we

not distributing assets in violation of the trust fund doctrine?
No. We cannot distribute assets which are part of
the capital but sometimes these properties are
considered as profits or earnings in the books of the
corporation so it is lawful to distribute them.
In effect we are still distributing portions of the

profits but because we do not have cash but we have
excess property, we could decide to distribute the
properties instead. Especially if we have a lot of
treasury stocks, we do not need the treasury stocks,
we could distribute them as property dividends.
As we said, we cannot distribute these unless we

have profits.
Stock Dividends
Stock dividends are given when a corporation wants
to distribute dividends in the form of stocks.
This is especially true if the corporation needs these
profits to be invested again to the corporation.
Basically, in the books of the corporation, the
distribution of stock dividends is simply a transfer

from the profits to the capital account.
So, instead of distributing cash, we retain the cash

and issue stocks to the stockholders. And these cash
will no longer be part of the profits, it will be
dragged out of the profits into the assets of the
corporation, as if the stockholders themselves had
invested fresh capital. But it is not fresh capital, it is
the same money that ought to go to the
stockholders, and the stockholders decided to put it
back to the corporation. Instead of giving them cash,
you give them stocks.
Therefore, the stockholders are richer, not in cash,

but in stocks.
Cash Dividends
The corporation gives dividends by way of cash to
the stockholders based on their shareholdings.
What is required in cash dividends?

Only the approval of the board.
When would the stockholders conformity be

required?
Only in case of stock dividends.
Once the corporation declares cash dividends, it

distributes cash to its stockholders. Every end of the
year, in the filing of the income tax return, the
stockholders would declare in their Income Tax
Return that they have received income from the
corporation by way of cash dividends. That will be
part of the taxable income.
But when this money was earned by the corporation, there

was income to the corporation. What did the BIR do there?
It was already taxed by the BIR as corporate income.
The same money was again taxed by the BIR when it
was distributed to the stockholders. So
double taxation. But this is allowed because this is
income. Thats why the corporate stockholders
would not be happy about this, so the corporation
would not always issue cash dividends. They would
not issue cash dividends because they do not want
to be subjected to double taxation, especially the
family corporations.
Here, the corporation, as much as possible would try to avoid

a second tax on the same money. What would they do every
year?
The corporation will say it will not have dividends but
it will have a stockholders meeting in Europe.
Arriving at Amsterdam, proceeding to Switzerland,
then on to Germany, passing by Rome, and then to
Singapore. Thats the amount that the corporation
will distribute. No tax there. As a matter of fact,

if they buy tickets, they would charge those
as expenses, so deductible. No tax, instead expense.
Thats what they do. Because this was already
becoming an irritant, what did the code provide?
The corporation code provides that
corporations are now prohibited from
retaining surplus profits in excess of 100%
of their paid-in capital stock. Beyond 100%,
they must declare cash dividends.
Otherwise, if you do not declare, BIR says,
the corporation would be penalized with
improperly accumulated earnings tax.
However, the law allows 3 exceptions:
1. When justified by definite corporate
expansion projects or programs;
2. When the corporation is prohibited
under any loan agreement with any
financial institution or creditor from
declaring cash dividends without
securing its/his consent; or
3. When it can be clearly shown that such
retention is necessary under special
circumstances, such as when there is a
need for special reserve for probable
contingencies.
Once these dividends are declared, they become due. But can
the stockholders demand that the board should now issue or
declare dividends?
No. Stockholders do not have the right to demand as
the declaration or issuance of dividends is
discretionary on the part of the board.
However, it becomes a right to the stockholders once

the surplus profits exceed 100% of their paid-in
capital stock. In which case, they can now demand
for the dividends.
RULE ON SET-OFF OF DIVIDENDS WITH UNPAID

SUBSCRIPTIONS:
If cash dividends are issued, and you have an unpaid
subscription, you are not entitled to payment unless it should
be first applied to the unpaid subscription.
If stock dividends are declared instead and there is an unpaid
subscription, such stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully
paid.
RULE ON FALSE DECLARATION OF DIVIDENDS (DECLARED

BUT LATER ON DISCOVERED THAT NO UNRESTRICTED
RETAINED EARNINGS); SOLVENT VS INSOLVENT:
One day, the board declared cash dividends. It was Christmas
time and the board wanted the stockholders to be happy so
they declared cash dividends. When the auditor reported for
work the following year, it was discovered that there was no
profit at all.
So what happens to the cash dividends?

It depends if the corporation is solvent or insolvent:
INSOLVENT:
If the cash dividends were declared at a point of time
when the corporation was insolvent, they will have
to return because clearly it was unfair. Not only did
the corporation not have any profit, it was insolvent.
In other words, its assets were less that the
liabilities.
SOLVENT:
On the other hand, if the corporation was solvent,
but the only thing was that it did not have profits,
there are conflicting views:
1. One says, yes they should return.
2. The other says no, they should not return.
Atty. Espedido is inclined to believe that it should be
returned because it violates the trust fund doctrine.
1/18/12 Wednesday
Power of succession
In partnership when one partner dies, the partnership is
dissolved.
In corporation, when one of the stockholders die, the
corporation is not dissolved; continues to exist for a period
stated in the articles of incorporation.
The death of the stockholder does not dissolve the
corporation.
What happens to the stocks of the dead stockholder?

- The heirs of the stockholder who dies will become the
stockholders themselves.
- In that plane crash when all the stockholders die, the
corporation still survive bec of the power of succession.
Pre-emptive rights
The preferential rights of the stockholders to subscribe for
new shares
Purpose: to retain the extent of controlling interest
Power to deny pre-emptive rights: (Instances)

1. This is not provided in the AOI.
2. If the law requires the minimum initial public offering.
3. If in good faith and is ratified by SH representing 2/3 of the
outstanding capital stock, issuance is made in exchange for
property needed for corporate purposes
4. If in good faith and is ratified by SH representing 2/3 of the
outstanding capital stock, issuance is made in payment of a
previously contracted debt
Power to issue dividends

3 types of dividends:
1. Property dividends if no enough cash for the corporation,
it is allowed to issue property dividends in lieu of cash.
a. Before dividends are issued, it is required that there must
be profits.
2. Cash dividends - dividend payable in cash
3. Stock dividends 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.
Exceptions if the corporation has accumulated earnings in

excess of 100%:
1. When justified by definite corporate expansion projects or
programs;
2. When the corporation is prohibited under any loan
agreement with any financial institution or creditor from
declaring cash dividends without securing its/his consent; or
3. When it can be clearly shown that such retention is
necessary under special circumstances, such as when there is
a need for special reserve for probable contingencies.
Declaration of dividends vs. Payment of unpaid subscription

Only the board may demand to declare dividends.
Cannot compel the board to declare dividends because it is
DISCRETIONARY on the part of the board
GENERAL RULE:
SH cannot compel the board to declare dividends
EXCEPTION:
When there is excess accumulated earnings or unrestricted
retained earnings
this is not based on the assumption that the
stockholders can compel them to declare, but
because the LAW requires them to declare.
The moment the unrestricted retained earnings
exceeds 100%, then, the stockholders can compel
because the LAW requires
The stockholders cannot be compelled to pay unpaid

subscriptions.
But the dividends can be offsetted to the stockholders
liability to the corporation.
Otherwise, if the stockholder refuses to pay the unpaid
subscriptions, their shares will be declared delinquent and
offered to be sold in public.
The stockholders cannot compel the board declare dividends.

Otherwise, they cannot be compelled to pay their unpaid
subscriptions. They will merely rely on the declaration of
dividends and apply it later in payment of unpaid
subscriptions.
WHY CAN THE CORPORATION COMPEL THE STOCKHOLDERS

TO PAY UNPAID SUBSCRIPTIONS WHILE THE STOCKHOLDERS
CANNOT COMPEL THE BOARD TO DECLARE DIVIDENDS?
The power of the corporation to compel the stockholders to
pay unpaid subscriptions because their relationship is based
on a contract (the subscription agreement entered into by the
stockholder with the corporation)
On the part of the stockholders, it becomes their obligation to
pay the unpaid subscriptions since at the inception of the
corporation, they have made their commitment to pay their
subscriptions.
The source of their obligation is the CONTRACT named as the

Subscription Agreement. When you subscribed you enter into
a contract with the corporation which is called the
subscription agreement.
When the stockholders enter into a contract, they have
entered in a subscription agreement.
When one entered in such agreement, the stockholders
became the debtor.
He owes the corporation the remaining unpaid subscription.
The payment of unpaid subscriptions is a mandatory
obligation.
In effect, the corporation now becomes the creditor.
A debtor- creditor relationship arises between the
corporation and the stockholders.
On the other hand, the declaration of dividends cannot be
compelled.
Dividends are sourced from profits. It is like an investment of
the stockholder.
In this case, there is no debtor-creditor relationship.
The stockholders are now considered investors. They took the
risk of losing or gaining profits.
INVESTOR vs. DEBTOR

The investor took the risk of losing. While in a debtor, he has
the obligation to pay. Whatever happens, the debtor is liable
whether there are profits or not. The investor is entitled only
if there are profits in the same manner he is liable for losses.
With respect to dividends, the stockholder is an investor.
While in unpaid subscriptions, the stockholder is a debtor.
1/20/12 Friday
Sec. 44. Power to enter into management contract. - No

corporation shall conclude a management contract with
another corporation unless such contract shall have been
approved by the board of directors and by stockholders
owning at least the majority of the outstanding capital
stock, or by at least a majority of the members in the case of
a non-stock corporation, of both the managing and the
managed corporation, at a meeting duly called for the
purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the
managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2)
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, then the management contract must be
approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation. No
management contract shall be entered into for a period
longer than five years for any one term.

The provisions of the next preceding paragraph shall apply

to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of
another corporation, whether such contracts are called
service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating
agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
POWER TO ENTER INTO MANAGEMENT CONTRACT

MANAGEMENT CONTRACT
an agreement under which a corporation delegates the
management of its affairs to another corporation for a certain
period.
Is it therefore pointless for the code to say that management

is vested in the board of directors? NO.
Under what circumstances can the corporation enter into

management contract?
as long as it is for routinary acts of the corporation, that
requires technical or special skills, and not totally an
abdication of its power, it may enter into management
contracts
Power of the board may not be delegated to the managing

corporation:
Power to declare dividends because this power can be
exercised solely by the board.
Demonstrate how this management agreement would exist:

If you are an airline company and your core business will
definitely be transportation of passengers. You sell tickets,
conduct the check-in process, take care of passengers, give
them the convenience while on board.
When the airline would require maintenance and repairs, do
you have to know how to repair your aircraft? Not necessarily.
This will just divert your attention to activities which many of
your people will not be able to carry out. Instead of focusing
on core business your attention is shifted. So the airline
company might decide to engage the services of another
company who is skilled in maintenance of aircrafts. So you
can focus on selling your tickets. This is how the need to
engage the services of management company may come into
play.
So that if this airline company decides to engage in land

transportation buses, can it engage the services of an
existing bus company to manage this new venture?
NO, because this is a totally foreign business. It has nothing to
do with the airline business. You might exceed the powers or
primary purpose of your company which is to engage in the
airline business. Airline is totally different from land
transportation.
You cannot justify this by claiming that you are entering into a
management agreement because this is a total deviation from
your principal purpose as a corporation.
YOUR GUIDE IS: WILL THAT MANAGEMENT AGREEMENT GO

IN CONFLICT WITH THE PRINCIPAL BUSINESS OF THE CORP?
If yes, then it might not be allowed.
Circumstances can the corporation increase its capital:

If we increase our capitalization what is the effect insofar as
the SH are concerned?
New stocks are issued. The existing SH can exercise their pre-
emptive right.
Otherwise this will cause the dilution of their stockholdings if
they dont give them their pre-emptive right.
If we decrease the capital, creditors should not be prejudiced.
CLASSIFICATION OF POWERS OF THE CORPORATION

1.express
2.implied
3.incidental
Sec. 45. Ultra vires acts of corporations. - No corporation

under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its articles
of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred. (n)
ULTRA VIRES ACTS

If a corporation executes an act which is beyond these
powers, what is the effect?
It is considered as ULTRA VIRES ACTS.
ULTRA VIRES ACTS are acts not within the express, implied,
and incidental powers of the corporation conferred by the
Corporation Code or articles of incorporation.
So that if a director executes an act selling a property of the

corporation without any authority. How should that
transaction be treated?
VOIDABLE
This is not ultra vires but there is defect. The defect is lack of
authority to sell on the part of the director. So it is not ultra
vires although defective.
In an ultra-vires acts the defect is the lack of power on the
part of the corporation.
If it is ultra vires act, the defect is the lack or absence of

power on the part of the corporation.
So here if the lack of authority was the defect, can it be

cured?
YES. Ratification.
Upon the other hand, here is another director who also

decided to sell another property of the corporation. He was
given the authority however the authority given was a verbal

authority. Since it involves a real property, to be able to
convey real property what is needed when we talk of agency?
The authority must be in writing SPA.
This was not given. Is the sale valid?
No. it will not bind the corporation.
Why?
The defect is in the lack of formalities required. And if this is
the defect, it is not an ultra vires act.
The 3rd director while driving on a clients call, he was about

to consummate a transaction that will give the corporation
profits, he hit a pedestrian who died. Is the corporation
liable?
Ultra vires because all torts and crimes committed are ultra
vires.
And because it is ultra vires, if the parents of the deceased
corporations will sue the corporation, the corporation will
raise the defense of ultra vires?
No! The corporation is still liable.
Acts of negligence are ultra vires. But if it is ultra vires why is

the corporation liable?
Sources of liability:
Law
Contracts
Delicts
Quasi-delicts
Hitting a pedestrian is a quasi-delict. If quasi-delict is

committed by its agents, yes the corporation is liable.
Respondeat Superior.
The corporation is liable not because it was guilty of ultra

vires but because of the negligence of its agent. From this
therefore when we talk of ultra vires acts, do we talk of
laibilities of quasi-delicts?
NO.
When we talk of ultra vires we refer to CONTRACTS.
Because ultra vires are acts of corporation beyond its express,
implied, incidental powers.
So we cannot talk of ultra vires acts if not contracts.
Ultra vires acts are always illegal?

NO.
Ultra vires acts are not necessarily illegal acts?
YES.
Illegal acts are not necessarily ultra vires acts?
NO.
Illegal acts are always ultra vires act.
But was hitting a pedestrian an illegal act?
YES.
But because it is illegal, it is ultra vires?
NO, because when we talk of ultra vires we always refer to
acts arising from contracts.
Thats why we say ultra vires acts are not necessarily illegal.

Many ultra vires are not only legal but rather praiseworthy.
They are even admirable, but cannot bind the corporation but
no matter how legal or praiseworthy, the corporation has no
power.
Ex. Donating 100M to Pnoy is very admirable. But it is ultra
vires. No authority.
In another angle, there are defective acts.

What are these defective acts?
when we say ultra vires acts the defect is lack of power on the
part of the corporation. IT IS THE CORPO THAT HAS NO
POWER.
NOT ULTRA VIRES ACTS

An act could be defective because it did not comply
formalities. Inability to comply with formalities.
Another act could be defective because the party acting has
no authority.
In all of these we said in an ultra vires act what happens? How

do we resolve ultra vires acts?
If we simply follow, or in every transaction of the corporation
we always question the acts of that corporation, what
happens to the transaction?
It will not bind the corporation.
So if we have to be very strict, everytime a corporation does
something beyond its powers, so that in every transaction,
the other party always has always to examine the law, AOI,
this is if we strictly follow the law on ultra vires. If we follow
this there would be endless review of the transactions. Many
transactions would be invalidated if the lack of power is
discovered.
If many transactions are invalidated, there will be chaos in the
business community.
RULES ON RESOLVING ULTRA VIRES ISSUES:

When there is an ultra vires issue in a problem how do we
resolve this?
1. An ultra vires contract, while executory on both
sides, cannot be enforced by either party thereto.
Neither can compel the other to proceed with the
transaction.
2. When an ultra vires contract has been fully
performed on both sides, neither party can maintain
an action to set aside the transaction or to recover
what has been parted with. The law leaves them as
they are.
Example: Fishing corp bought farming
equipment and farms. They have
consummated the deed. Later on a SH
discovered this because they did not have
power and authority to do this. Farming and
fishing are 2 different business. Can the SH
still question the transaction and demand
return of the money? NO. because it has
already been cosummated. And the law

says, ultra vires and consummated, leave

them where they are.
3. When an ultra vires contract has been performed on
one side and the other has received benefits by
reason of such performance, no one can be
compelled to perform.
The corporation who paid while the other party has not done
its part can demand the return of payment.
So those are the rules when an ultra vires issue would arise.
So here, if that is the case whats the use of the concept of
ultra vires? Especially in the situation when the transaction
has already been consummated.
Because these are defective transactions how can they be
cured? By Ratification.
If one has the opportunity the question the act, what are the
condiitons under which one may question the ultra vires act?
Who could invoke or question an ultra vires act:

State
SH
Prejudiced creditors
Questioning an act as ultra vires is discouraged. As we said

the ultimate objective of providing the law on ultra vires is TO
GIVE ALL THOSE CONCERNED THE OPPORTUNITY TO SEEK
JUSTICE.
But without necessarily causing any disruption in the business
community.
It is true that being a corporation, the powers are limited. It
cannot perform acts beyond these powers and yet from here,
although utlra vires clearly, the law tells us, leave them where
they are, we have to close our eyes.
As a matter of fact, even if ultra vires, not just any person can
question the act. Only certain parties can question because as
much as possible we want to preserv the stability of the
business commmunity otherwise there will be chaos. We
cannot compel everybody to open and question.
If we do question, it should be the ultimate remedy.

Though ultra vires not just anyone can invoke this.
This can be invoked only by:

1. state because it was the state that created the
corp.
2. Stockholder being a SH, he has the responsibility to
see to it that the corp will comply with exisitng
regulations. He should questions this only under
certain circumstances:
a. it must be PROMPTLY. As soon the opportunity
to question it arises. = he is not guilty of laches.
b. When he is not guitly of estoppel. = if he was
part of the one who approved it, he has no right
to question it.
3. Creditors are not strangers. But they should be
PREJUDICED CREDITORS in order to invoke this.
Who cannot invoke:

Stranger cannot question. They must go to the state and
the state will question.
Competitors cannot question. They are also strangers. If
they are allowed, it will be to the detriment of the
corporation.

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CORPORATION LAW MIDTERM REVIEWER WWW COMPILATION AND NOTES [403 SY 2011-2012] 1

Section 1. Title of the Code. - This Code shall be known as

So that if you will compare genesis from the course, business

Sole proprietorship needed a partner, and so partnership

Now, because of the investment of Adam, the partnership

The corporation is different from the partnership. It is a

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

2. Contract between corporation and the state;

Sec. 5. Corporators and incorporators, stockholders and

Corporators in a stock corporation are called stockholders or

STOCKHOLDERS & CORPORATION

Once the board is elected, it is answerable to the state.

Sec. 10. Number and qualifications of incorporators. - Any

The people who organized the corporation are called

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

a stockholder, but not necessarily an incorporator. But an

Incorporators refer to those who started and pioneered the

CORPORATION & THE STATE

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

Exchange Commission. It processes, monitors,

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

o Once organized, they are now ready to

- MONEY MART/ STOCK MARKET

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

until price go up. Later the

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

Sec. 2. Corporation defined. - A corporation is an artificial

Sec. 11. Corporate term. - A corporation shall exist for a

Sec. 19. Commencement of corporate existence. - A private

Sec. 22. Effects on non-use of corporate charter and

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

years from the date of its incorporation, its corporate

This provision shall not apply if the failure to organize,

Q: So that one of the SH owes Mr. X, can he go to corporation

Q: Why this latter right? So that if an agent from DOLE wanted

Q: So that if that employee was threatened by manager and

As a juridical person, corporation is entitled to exercise its

Q: SH are all residing at a condominium, where should the

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

The corporation in so far as existence is concerned cannot be

In tax laws, there could be provision there that in case a

Provisions are clear that should the act of corporation make

Here, when we say a separate person, we are drawing the line

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

composing the group supposedly protecting the veil may be

A: 4 instances when lifting of veil is allowed:

Under these, SH did not have an honest intention that

Q: Example of an instance to Cover Fraud? In our situation,

Doctrine of Piercing the Veil of Corporate Entity

A. Instances when the lifting of the corporate veil is allowed

B. Examples Given (2):

C. In other words, there must be a clear intention of

D. The protection extended by the law covers only

law or the state then its existence must be in accordance

Definition of a Corporation, Section 2

and so, a notice for stockholders meeting was served. It so

Their death does not dissolve the corporation because we

moment of death. So guardians may be appointed, or

Differentiate an executor from an administrator:

So one time Father President was around after 8:30, the

Putting a KTV is not in furtherance of the business

B. Another case involving a cement corporation: Since a

In that case, the corporation should be allowed to operate

Distinctions Between a Partnership and a Corporation (13)