CORPORATION LAW NOTES

Zarah Villanueva-Castro

CORPORATION CODE (BP BLG 68)

*Corporation Code is the general law on Private Corporation

regarding to its creation, formation and powers.

INTRODUCTION:

A. Historical Background

Effectivity: May 1, 1980

Article XII Section 16 of the 1987 Constitution: “The Congress

shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established
by special charters in the interest of the common good and
subject to the test of economic viability.”

*Congress has limited powers in the formation, creation and

regulation of a private corporation.

Purposes:

1. Uniformity

2. To avoid corruption

General Rule: Congress is prohibited to enact a law directly

forming a private corporation.
Exception: GOCC may be created by special charter.

*GOCC is a private corporation with regard to function and in

the meantime a public corporation with regard to ownership.

Twin Conditions must be present in forming a GOCC:

1. Interest in the common good
2. Subject to the test of economic viability
- Means can survive alone in the market; can generate
income which they can use for their operating expenses

CONCEPT AND ATTRIBUTES OF A CORPORATION:

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A. Statutory definition of a Corporation
Section 2 of the Corporation Code: “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.”
B. Attributes of a Corporation
• Artificial Being

- It exist by fiction of law only, hence it is subject to

limitations that are inherent because of its nature

- A corporation is a juridical person which exists by process

of legal fiction

Doctrine of Corporate Entity/Doctrine of Separate

Personality - A corporation is a legal or juridical person
with a personality separate and apart from its individual
stockholders or members and from any other legal entities
to which it may be connected

Consequences/Implications of Separate Personality:

1. It is entitled to own properties in its own name and its

properties are not the properties of its stockholders,
directors and officers.

Cases: Magsaysay-Labrador v CA; Sulo ng Bayan v

Araneta

*The interest of the stockholders over the properties of

the corporation is merely inchoate.

*Merely inchoate because there are still condition

precedents before the shareholders get their share, viz, in
Asset, there are dissolution and satisfaction of claims; in
profit-sharing, there are unrestricted retained earnings
and declaration by the Board of Directors.

2. It can incur obligations and its obligations are not the

obligations of its stockholders, directors and officers.

Case: Francisco v CA

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3. The rights belonging to the corporation cannot be
invoked by the stockholders, directors and officers and
vice versa.

4. Corporations are entitled to certain constitutional rights,

i.e., right against unreasonable searches and seizure, due
process clause.

*It is not entitled to certain constitutional right, i.e., right

against self-incrimination particularly production of
corporate documents.

*Right against self-incrimination is applicable only to

natural persons.

General Rule: Constitutional guarantees are applicable

to corporations.

Exceptions:

1. Right against self-incrimination

2. Freedom to travel

Case: Bataan Shipyard v PCGG

5. It is liable for tort. It is liable when the act was

committed by the officer or agent under express
direction or authority from the stockholders or members
acting as a body or generally from the directors as the
governing body.

6. Generally, the corporation is considered a national of the

country where it was incorporated (Place of
incorporation test)

*Exceptions: 1. In times of war, the nationality of a

corporation is determined by the nationality of the
controlling stockholders; 2. Under the Foreign
Investment Act of 1991

7. Corporations are incapable of intent, hence, they cannot

commit felonies that are punishable under the RPC.
They cannot commit crimes that are punishable under

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 special laws because crimes are personal in nature
requiring personal performance of overt acts. In
addition, the penalty of imprisonment cannot be
imposed.

*Criminal liability falls upon to responsible officers.

*Responsible officers cannot invoke the doctrine of

separate personality.

*Corporations cannot be incarcerated.

8. Moral damages cannot be awarded in favor of

corporations because they do not have feelings and
mental state.

*Corporations can claim damages such as actual,

compensatory, exemplary, loss of earning capacity.

General Rule: Corporation cannot claim moral

damages.

Exception: If the corporation has a good reputation and

such reputation was destroyed.

Case: Coastal Pacific Trading v Southern Rolling Mills,

Co.

*In Filipinas Broadcasting Network Inc. v. Ago Medical

and Educational Center, the SC ruled that a corporation
can recover moral damages under Article 2219(7) if it
was the victim of defamation.

Doctrine of Piercing the Veil of Corporate Entity – The doctrine that

a corporation is a legal entity distinct from the persons composing it.
It is a theory introduced for the purposes of convenience and to serve
the ends of justice. But when the veil of corporate fiction is used as a
shield to perpetuate fraud, to defeat public convenience, justify
wrong, or defend crime, this fiction shall be disregarded and the
individuals composing it will be treated identically.
Cases: Times Transportation Co. v Santos Sotelo; Concept Builders
v NLRC

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*The doctrine of piercing the veil of corporate entity is the exception to
the doctrine of corporate entity.
*The users of this doctrine are: 1. Stockholder; 2. Group of
stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation are in effect jointly
liable; 2. In case of two corporations, they will be treated as one
wherein they will be both solidarily liable. (Instrumentality rule)
*There is no effect on the existence of each corporation as long as their
separate entity is used for legitimate purposes.

Instrumentality Rule – When one corporation is so organized and

controlled and its affairs are conducted so that it is in fact a mere
instrumentality or adjunct of the other, the fiction of the corporate
entity to the instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
Requisites: 1. Control, not mere majority or complete stock control,
but complete dominion, not only of finances but of policy and
business in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will
or existence of its own; 2. Such control must have been used by the
defendant to commit fraud or wrong in contravention of plaintiff’s
legal rights; 3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
Three cases of piercing the veil:
1. Fraud Cases – when a corporation is used as a cloak to cover
fraud, or to do wrong;
2. Alter Ego Cases – when the corporate entity is merely a farce
since the corporation is an alter ego, business conduit or
instrumentality of a person or another corporation;
3. Equity cases – when piercing the corporate fiction is necessary to
achieve justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and equipments;
4. Engage practically in the same business; 5. The same manner of
keeping books and records.

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*The probative factors of identity are not conclusive but may be
considered as strong evidence.
• Creature of Law
Article XII Section 16 of the 1987 Constitution: “The
Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be
created or established by special charters in the interest of the
common good and subject to the test of economic viability.”
Concession Theory – It is a principle in the creation of
corporations, under which a corporation is an artificial
creature without any existence until it has received the
imprimatur of the State acting according to law, through the
SEC. The life of the corporation is a concession made by the
State.
• Right of Succession

- Capacity to have continuity of existence despite the

changes on the persons who compose it. Thus, the
personality continues despite the change of stockholders,
members, board members or officers; death or disability.

- Also known as Principle of Perpetual Succession

Reason: To make the corporation more stable
• Creature of enumerated powers, attributes and properties

Doctrine of Limited Capacity – No corporation under the

Corporation Code, shall possess or exercise any corporate
powers, except those conferred by law, its Articles of
Incorporation, those implied from express powers and those
as are necessary or incidental to the exercise of the powers so
conferred. The corporation’s capacity is limited to such
express, implied and incidental powers.

*Corporation may be restrained from engaging a particular

transaction because it is beyond their powers.

*General Capacity – a corporation can perform any act for as

long as it is lawful, moral and not contrary to public policy or
order.
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 Ultra Vires Doctrine – Even if the act is lawful, moral and not
contrary to public order or policy but such act is not within
the express, implied and incidental powers of the corporation
such act shall be void for being ultra vires.

*These doctrines are based on Section 2 and Section 45 of the

Corporation Code.

C. Classification of Private Corporations:

1. As to existence of Stocks:
Stock Corporation – 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. (Sec. 3)

Non-stock Corporation – A corporation where no part of its

income is distributable as dividends to its members, trustees, or
officers, subject to the provisions of this Code on dissolution.
(Sec. 87)

Q: Is it correct to say that a Non-stock corporation cannot

generate income on their own?

A: NO

2. As to function/organizers:

Public Corporation – for public purpose and organized by the

State.

Private Corporation – for profit making functions and organized

by private persons alone or with the State

3. As to laws of Incorporation (Place of Incorporation) :

Domestic Corporation – corporation formed, organized or

existing under the Philippine Laws.

Foreign Corporation – corporation formed, organized or

existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do
business in its own country or state. (Sec. 123)

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*License is necessary for; 1. Regulation purposes and 2. Access to
local courts.

4. As to legal status:

De Jure Corporation – corporation created in strict or substantial

compliance with the mandatory requirements for incorporation
and the right of which to exist as a corporation cannot be
successfully attacked or questioned by any party even in a direct
proceeding for that purpose by the state.

De Facto Corporation – the due incorporation of any

corporation claiming in good faith to be a corporation under the
Corporation 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
Solicitor General in a quo warranto proceeding. (Sec. 20)

- organized with a colourable compliance with the

requirements of a valid law and its existence cannot be
inquired collaterally.

- There is an irregularity or defect in the constitution or

organization.

Can be compared to a voidable contract, i.e., valid until

annulled.
*Can be challenged by the State later on.
Cases: Hall v Piccio; Seventh Adventist v Northeastern
Mindanao Mission
*The filing of the Articles of Incorporation and the issuance of
the certificate of registration are the essential requisites for the
existence of a de facto corporation.
Requisites:
1. The existence of a valid law under which it may be
incorporated;
2. An attempt in good faith to incorporate; 3. Use of corporate
powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the requirement of law.

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 *In both corporations, there must be a certificate of
registration issued.

Doctrine of 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 an result thereof: Provided,
however, that when any such ostensible corporation is sued on any
transaction entered into 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 or corporate personality. (Sec. 21)
- Group of persons which holds itself out as a corporation
and enters into a contract with a third person on the
strength of such appearance cannot be permitted to deny
its existence in an action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited from the transaction.
Remedy: To ran after those persons responsible for the
representations
Essence: They are precluded from denying their existence by
their previous act or conduct
Holding Corporation – it is one which controls another as a
subsidiary by the power to elect management. It is one that holds
stocks in other companies for purposes of control rather than for mere
investment.

Affiliate – one related to another by owning or being owned by

common management or by a long-term lease of its properties or
other control device. It may be the controlled or controlling
corporation, or under common control.

Subsidiary Corporation – one which is so related to another

corporation that the majority of its directors can be elected either
directly or indirectly by such other corporation. It is always
controlled.

Open Corporation – one which is open to any person who may wish
to become a stockholder or member thereto.

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Close Corporation – those whose shares of stock are held by limited
number of persons like the family or other closely knit group. (Sec. 96)

FORMATION AND ORGANIZATION OF A PRIVATE

CORPORATION:

A. Submission of Articles of Incorporation; contractual significance

*The life of a corporation commences from the issuance of the

Certificate of Registration by the SEC upon filing of the Articles
of Incorporation and other documents.

Article of Incorporation – is the charter of the corporation, and

the contractual relationships between the State and the
corporation, the stockholder and the State, and between the
corporation and its stockholders.

Contractual Significance:

1. The issuance of a certificate of incorporation signals the birth

of the corporation’s juridical personality;

2. It is an essential requirement for the existence of a corporation,

even a de facto one.

B. Contents and Form of the Articles of Incorporation (Secs. 14 and

15)

Contents of Articles of Incorporation:

1. Corporate Name;

2. Purpose Clause;

3. Principal office;

4. Term of existence;

5. Incorporators;

6. Directors or trustees;

7. Capitalization;

8. Shares of stock;

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9. Treasurer’s Affidavit.

• Corporate Name

Purpose: Identification

*Corporation can not adopt any name or group of words at its

pleasure because of statutory limitation, viz., Sec. 18 of the
Corporation Code which provides that: “No corporate name
may be allowed by the SEC if the proposed name is identical
or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or
is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the
Commission shall issue an amended certificate of
incorporation under the amended name.

SEC Guideline ”x x x b. In order to prevent confusion and

difficulties of administration, supervision and control, if the
proposed name contains a word already use as a part of the
firm name or style of a registered entity, the proposed name
must contain two other words different and distinct from the
name of the company already registered or protected by law. x
x x”

Case: Ang Mga Kaanib Ni Jesus Cristo

*The phrase “Ang Mga Kaanib” are words merely descriptive

of membership while the phrase “Sa Bansang Pilipinas” are
merely descriptive of the place.

*Both parties are religious institutions

*Both use the acronym H.S.K.

As a rule, generic name or descriptive word may be used as a

corporate name.

Reason: public domain; can be used by anyone; public use.

Exception: Doctrine of Secondary Meaning – a word or

phrase originally incapable of exclusive appropriation with

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 reference to an article on the market, because geographically
or otherwise descriptive, might nevertheless have been used
so long and so exclusively by one producer with reference to
his article that in that trade and to that branch of the
purchasing public, the word or phrase has come to mean that
the article was his product.

Requisites:

1. Period of use;

2. The use must be exclusive.

Case: Lyceum of the Philippines

*The exclusivity requirement was not satisfied by Lyceum of

the Philippines.

*In case of change of name, the corporation is not dissolve nor

create a new corporation; it also does not extinguish the
corporate liability.

*Change of name can be done by amending the Articles of

Incorporation.

Procedure:

1. Obtain approval of majority of the Board and 2/3

stockholders;

2. Submission to the SEC for approval.

• Purpose Clause

*Only one primary purpose. Primary purpose defines the

business activities of the corporation. It is the ordinary course
of business of the corporation.

*Secondary Purpose is for future expansion. There is no limit

on the secondary purpose.

*In case the primary purpose is not viable then secondary

purpose may be used.
• Principal Office

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 *The principal place of business may determine the venue of
court cases involving corporations. It may also determine if
service of summons and notices was properly made. It is also
important for tax purposes (local taxation).

*The SEC requires the exact address to be indicated in the

Articles of Incorporation.

*It is the residence of the corporation. It is where the

corporation maintains its books and records and where
normally the bulk of its business is being conducted or
undertaken.

*For personal action, venue is the residence.

• Term of Existence

*A corporation has a maximum term of 50 years. It may be

extended for a period not exceeding 50 years in any single
instance.

As a rule, no extension can be made earlier than 5 years prior

to the expiration of the term.

*No limitations regarding number of extension can apply.

Reason: To compel the stockholders to meet the corporation’s

term.

Exception: If for compelling reasons, earlier extension will be

allowed.

*During the three year winding up period, the corporation

still has personality but activities are limited to the liquidation
of the corporation affairs and not to transact further business.

As a rule, after the term has expired, no more extensions be

allowed or entertained by the SEC.

Reason: No more period to extend.

Exception: Doctrine of Relation – The filing and recording of

a certificate of extension after the term cannot relate back to
the date of the passage of the resolution of the stockholders to
extend the life of the corporation. However, the doctrine of
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 relations applies if the failure to file the application for
existence within the term of the corporation is due to neglect
of the officer with whom the certificate is required to be filed
or to wrongful refusal on is part to receive it.

*The delay in submitting the application for extension is

justifiable.

Keywords:

1. Excusable delay;

2. Beyond the control of the corporation (insuperable

intervening causes)
• Incorporators

*Once an incorporator always an incorporator. (Fait accompli

– an accomplished fact which cannot be altered)

*They are the signatories to the Articles of Incorporation.

*They are originally forming the corporation

Q: What is the reason behind the phrase that an incorporator

is not always a corporator?

A: To be an incorporator it is not necessary to own a share

unlike as a corporator.

*Number is limited to 5 to 15.

*They must have a contractual capacity.

*Juridical person cannot create another juridical person.

*There is no citizen requirement but special laws may require

otherwise.

*Majority must be a resident of the Philippines.

• Directors and trustees

*The Board of Directors is the governing body in a stock

corporation while Board of Trustees is the governing body in
a non-stock corporation.

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 *They exercise the powers of the corporation.

Qualifications:

1. Every director must own at least one (1) share of the capital
stock;

2. Majority of the directors or trustees must be residents of the

Philippines.

*Any director who ceases to be the owner of at least one 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.

*Initial directors/trustees shall hold office for one year until

their successors are elected and qualified.
• Capitalization

Section 14(8) states that: “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.”

*It is required that at least 25% of the subscribed capital must

be paid and in no case may be paid-up capital be less than
P5,000.

Authorized Capital Stock – the amount fixed in the articles of

incorporation to be subscribed and paid by the stockholders
of the corporation.

*Shows the total number of shares

Subscribed Capital – that portion of the authorized capital

stock that is covered by subscription agreements whether
fully paid or not.

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 Paid-Up Capital – the portion of the authorized capital stock
which has been subscribed and actually paid.

Outstanding Capital Stock – the total shares of stock issued

to subscribers or stockholders, whether or not fully or
partially paid except treasury shares so long as there is a
binding subscription agreement.
• Shares of stock

Q: Why shares of stock?

A: Because there is a share on the capitalization.

Economic Value:

1. expectancy on the share in the profits

2. expectancy on the share of assets in case of dissolution/

liquidation.

Political Value:

1. vote

2. control in the management of the corporation.

Doctrine of Equality of Shares – “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.”

- Provides that where the Article of Incorporation do not

provide for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be equal and enjoy
the same rights and privileges and are also subject to the same
liabilities.

Classes of Shares:

1. Par Value Share – shares that have a nominal value in the

certificate of stock.

Contractual Significance: The minimum price at which the

shares are to be issued.

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 *The price is fixed. It is stated in the Articles of
Incorporation.

2. No Par Value Share – those shares which do not have

nominal value. However, they have issued value stated in
the certificate or articles of incorporation.

*There is flexibility in the price.

*The price is determined by the Board.

Limitations:

1. No par value shares cannot have an issued price of less

than P5.00;

2. The entire consideration for its issuance constitutes

capital so that no part of it should be distributed as
dividends;

3. They cannot be used as preferred stocks;

4. They cannot be issued by banks, trust companies,

insurance companies, public utilities and building and loan
association (Reason: imbued with public interest);

5. The articles of incorporation must state the fact that it

issued no par value shares as well as the number of said
shares;

6. Once issued, they are deemed fully paid and non-

assessable.

3. Voting Shares – shares with the right to vote. They have

the right to participate in the management of the
corporation through the exercise of such right.

4. Non-voting Shares – shares without the right to vote.

*Has only a limited right to vote.

General Rule: Shareholder owning non-voting shares has

no right to vote.

Exceptions:

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 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 the Corporation Code; 8.
Dissolution of the corporation.

*The exceptions are exclusive; the list is a closed list

Statutory Constraint: Sec. 6 of the Corporation Code

*The corporation cannot provide for shares with no voting

right

General Rule: Only redeemable and preferred shares are

deprived of voting right.

Exception: Common shares may be denied of its voting

right in the following instances: 1. Delinquent in paying the
subscription; 2. If there was a founder’s share where it was
given the right to vote exclusively for 5 years (Sec. 7).

5. Common Shares – the most common type of shares which

enjoy no preference.

*The basic class of stock ordinarily and usually issued

without extraordinary rights and privileges, and the
owners thereof are entitled to a pro rata share in the profits
of the corporation and in its assets upon dissolution and,
likewise, in the management of its affairs without
preference or advantage whatsoever.

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6. Preferred Shares- shares which enjoy preference as to
dividends or assets upon dissolution as stated in the
Articles of Incorporation.

Reason: To attract investors.

*Preference does not give them a lien upon the property

nor make them creditors of the corporation.

*Characterized as redeemable shares.

Kinds:

1. Preferred shares as to assets – share which gives the

holder thereof preference in the distribution of the assets of
the corporation in case of liquidation;

2. Preferred shares as to dividends – share which gives the

holder thereof preference in the distribution of the
dividends to the extent agreed upon before any dividends
at all are paid to the holders of common shares;

3. Participating preferred shares – the holders thereof are

still given the right to participate with the common
stockholders in dividends beyond their stated preference;

4. Non-participating preferred shares – where there is no

such participation;

5. Cumulative preferred shares – the shareholder is

entitled to recover dividends in arrears. While dividend
declaration may not be compelled, once it is declared, the
shareholder is entitled to the said arrears;

6. Non-cumulative preferred shares – not entitled to

arrears only to present dividends.

7. Redeemable Shares – are those which permit the issuing

corporation to redeem or purchase its own shares.

Limitations:

1. Redeemable shares may be issued only when expressly

provided for in the Articles of Incorporation;

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 2. The terms and conditions affecting said shares must be
stated both in the certificate of stock representing such
share;

3. Redeemable shares may be deprived of voting rights in

the Articles of Incorporation, unless otherwise provided in
the Corporation Code;

4. The corporation is required to maintain a sinking fund to

answer for redemption price if the corporation is required
to redeem;

5. The redeemable shares are deemed retired upon

redemption unless otherwise provided in the Articles of
Incorporation;

6. Unrestricted retained earnings is not necessary before

shares can be redeemed but there must be sufficient assets
to pay the creditors and to answer for operations.

8. Treasury Shares – shares which have been earlier issued as

fully paid and have thereafter been acquired by the
corporation by purchase, donation, redemption or through
some lawful means.

- Shares which are previously issued by the corporation but

subsequently reacquired by the corporation.

*Retired thus can no longer be re-issued.

*They are not entitled to dividends.

*They are not entitled to voting rights. Rationale: to

prevent abuse by the management.

*These shares may again be disposed of for a reasonable

price fixed by the Board of Directors.

9. 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 the limited
period not to exceed 5 years subject to the approval of the
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 SEC. The 5 year period shall commence from the date of
the approval by the SEC.
• Treasurer’s affidavit

*The SEC 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 25% of the authorized capital stock of the corporation
has been subscribed, and at least 25% of the total subscription
has been fully paid to him in actual cash and/or in property
the fair valuation of which is equal to at least 25% of the said
subscription, such paid up capital being not less than P5,000.

*If the Treasurer’s affidavit is false such act is tantamount to

fraud. (PD 902-A)

*Fraud on the part of the corporation is a ground for

revocation or suspension of license depending upon the
extent of the violation committed.

*If there’s no Treasurer’s Affidavit, the first ground shall

apply, i. e., noncompliance with the minimum requirement.

General Rule: 25% must be subscribed and 25% must be paid.

Exception: If the law provides otherwise, i.e., special laws.

C. Grounds for rejection of the Articles of Incorporation

1. The articles of incorporation or any amendment thereto is not

substantially in accordance with the form prescribed herein;

2. The purpose or purposes of the corporation are patently

unconstitutional, illegal, immoral, or contrary to government
rules and regulations;

3. The Treasurer’s Affidavit concerning the amount of capital

stock subscribed and/or paid is false;

4. 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.
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 Dual Franchise Requirement: 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
favourable recommendation of the appropriate government
agency to the effect that such articles or amendment is in
accordance with law.

D. Commencement of Corporate Existence

Sec. 19 of the Corporation Code states that “ 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 SEC 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.”

*For purposes of determining whether a corporation enjoys the

status of a de facto corporation, it must have been at least issued
a certificate of registration.

E. Amendment of the Articles of Incorporation

Sec. 16 of the Corporation Code states that: “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 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

22
 the vote or written assent of at least 2/3 of the members if it be a
non-stock corporation.”

*It is effective upon the approval of the SEC.

*There may be an amendment by inaction. Amendment by

Inaction – Upon filing with the SEC of the amendment and the
Commission failed to act on it within 6 months from the date of
filing for a cause not attributable to the corporation.

F. Effects of Non-Use of Corporate Charter

Sec. 22 of the Corporation Code states that: “If a corporation

does not formally organize and commence the transaction of its
business or the construction of its work within 2 years from the
date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if the
corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of
at least 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 SEC.”

*The period must be counted from the issuance of the Certificate

of Incorporation.

*Automatic dissolution is not contemplated under Section 22.

(SEC Opinion).

*Section 22 must be read in conjunction with Sec 6(1) of PD 902-

A which requires that the corporation must be given the
opportunity to be heard in compliance with the requirement of
due process before the revocation of its license.

CONTROL AND MANAGEMENT OF A CORPORATION:

23
A. Levels of Corporate Control

1. By Stockholders/Shareholders;

2. By Corporate Officers;

3. By Directors/Trustees

B. Board of Directors/Trustees
• General Powers of the Board

Sec. 23 of the Corporation Code states that: “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 year until their successors are elected and
qualified.”

Powers of the Board of Directors:

1. Corporate Powers;

2. Manage the Corporation; and

3. Control over and hold the properties of the Corporation.

*Board of Directors/Trustees is the statutory representative of

the corporation.

General Rule: All corporate powers emanate from the Board

of Directors/Trustees.

Exception: Unless otherwise provided in this Code. (Limiting

Clause)

The limiting clause means that there are certain corporate

matters that cannot be done by the Board by reason that such
matters fall upon the shareholders; or corporate matters that
cannot be resolved by the Board alone, i.e., it must be done
with the approval of the shareholders.
24
• Business Judgment Rule

Business Judgment Rule – questions of policy or

management are left solely to the honest decision of officers
and directors of a corporation and the courts are without
authority to substitute their judgment for the judgment of the
board of directors; the board is the business manager of the
corporation and so long as it acts in good faith its orders are
not reviewable by the courts or the SEC.

- A resolution or transaction pursued within the corporate

powers and business operations of the corporation, and
passed in good faith by the board of directors/trustee, is valid
and binding, and generally the courts have no authority to
review the same and substitute their own judgment, even
when the exercise of such power may cause losses to the
corporation or decrease the profits of a department.

*Great respect is accorded to the decisions of the Board of

Directors/Trustees.

*The directors are not liable to the stockholders in performing

such acts.
• Qualifications of the Board Members

Sec. 23 of the Corporation Code states that: “Every director

must have at least one 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 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.”

*In order to be eligible as director, what is material is the legal

title to and not beneficial title or ownership of the stocks
appearing on the books of the corporation.

*The directors/trustees must be natural persons.

25
 *They must also be of legal age.

*He must possess other qualifications as may be prescribed in

the by-laws of the corporation.

*Under Sec. 27 of the Corporation Code: “No person

convicted by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years, or a violation of
this Code committed within 5 years prior to the date of his
election or appointment, shall qualify as a director, trustee or
officer of any corporation.”

Reason: The position is based on trust and confidence.

*No citizenship requirement.

*The By-Laws may provide additional qualifications/

disqualifications.
• Election of the Board Members

Sec. 24 of the Corporation Code provides that: “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
26
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 the 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.”

*It is the stockholders or corporators who elect members of

the Board of Directors.

*The only procedure required by the Code is through

Election. There can be no other modes.

*The election must be by ballot if requested by any voting

member or stockholder.

*A stockholder cannot be deprived in the articles of

incorporation or in the by-laws of his statutory right to use
any of the methods of voting in the election of directors.

*No delinquent stock shall be voted.

*It is not required that the candidate received the majority

vote, what the law provides is only plurality of votes.

*Majority number is required only for the existence of a

quorum.

Not included in outstanding capital stocks: 1. Unissued

stocks;

2. Non-voting stocks;

3. Treasury Shares.

Methods of Voting:
27
1. Straight Voting – every stockholder may vote such number
of shares for as many persons as there are directors to be
elected.

2. Cumulative Voting for One Candidate – a stockholder is

allowed to concentrate his votes and give one candidate as
many votes as the number of directors to be elected
multiplied by the number of his shares shall equal.

*Example: X has 10 shares in his name; there are 5 numbers of

directors to be elected. X has 50 votes (10x5) available to him.
X may opt to concentrate all his 50 votes to a particular
candidate.

3. Cumulative Voting by Distribution – a stockholder may

cumulate his shares by multiplying also the number of his
shares by the number of directors to be elected and distribute
the same among as many candidates as he shall see fit.

*Example: X has 10 shares in his name; there are 5 numbers of

directors to be elected. X has 50 votes available to him. X may
opt to distribute the votes to as many candidates as there are
provided that the total number of votes does not exceed 50.

Purpose of cumulative voting: To protect the minority

stockholders.

*The elected officer must act as a body.

*In a stock corporation, cumulative voting is a statutory right

whereas in a non-stock corporation, cumulative voting is
applicable if it is provided in the Article of Incorporation.

Sec. 26 of the Corporation Code provides that: Within 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 SEC, 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

28
 director, trustee or officer himself, shall immediately report
such fact to the SEC.”
• Term of Office

*The directors or trustees shall hold office for one (1) year
subject to the “hold over” principle, i.e., they continue in
office until their successors are elected and qualified.

*The one year period does not apply to directors initially

elected for purposes of incorporation.
• Quorum Requirement in Board Meetings

Sec. 25 of the Corporation Code states that: “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.”

Q: Is the director allowed to let a proxy attend a board

meeting in behalf for himself?

A: NO. Proxy prohibition.

Reason: Because of their personal qualifications.

*Quorum requirement should always be computed based on

the number specified in the Articles of Incorporation
regardless of ensuing vacancies.

*The basis is always the number specified in the Articles of

Incorporation.

*The corporation can modify the number by providing a

different provision in the articles of incorporation, however,
the law provides that the modification must be for a number
greater than that provided in the law. It cannot provide for a
number less than the general requirement of the code.
29
 *For voting purposes, majority of the member present
constituting a quorum. Except: election of directors.
• Removal of Board Members

Sec. 28 of the Corporation Code states that: “Any director or

trustee of a corporation may be removed from office by a vote
of the stockholders holding or representing at least 2/3 of the
outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least 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 Sec. 24 of
this Code.”

Requisites:

1. It must take place either at a regular meeting or special

meeting of the stockholders or members called for the
purpose;

30
 2. There must be previous notice to the stockholders or
member of the intention to remove;

3. The removal must be by a vote of the stockholders

representing 2/3 outstanding capital stock or 2/3 of members;

4. The director may be removed with or without cause unless

he was elected by the minority, in which case, it is required
that there is cause for removal.

Reason: The functions of directors are fiduciary in nature.

Requisites for the removal of minority directors are:

1. Justifiable cause;

2. Satisfaction of the voting requirements, i.e., 2/3 of OCS or

members.

*It is the secretary of the corporation upon order of the

president or in case there is no secretary, stockholder
representing majority of the outstanding capital stocks or
member signing the demand who may call a meeting for the
purpose of removal.
• Vacancies in the Board

Sec. 29 of the Corporation Code provides that: “Any vacancy

occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in
a regular or special meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall be elected only or
the unexpired term of his predecessor in office. A directorship
or trusteeship to be filled by reason of an increase in the
number of directors or trustees shall be filled only by an
election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in
the notice of the meeting.”

31
 General Rule: Power to elect directors is vested in the
stockholders

Exception: Vacancy occurring in the board of directors or

trustees other than by removal by the stockholders or
members or by expiration of term may be filled by the vote of
at least a majority of the remaining directors or trustees if still
constituting a quorum.
• Compensation of Board Members

Sec. 30 of the Corporation Code provides that: “In the

absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per
diems: Provided, however, that any such compensation other
than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders’
meeting. In no case shall the total yearly compensation of
directors, as such directors, exceed 10% of the net income
before income tax of the corporation during the preceding
year.”

General Rule: Directors are not entitled to receive

compensation

Exceptions:

1. When their compensation is fixed in the by-laws;

2. If compensation is granted to directors by the vote of the

stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders’
meeting.

Limitation: In no case shall the total yearly compensation of

directors exceed 10% of the net income before income tax of
the corporation during the preceding year.

Reason: In order to avoid temptation on the part of directors

to abuse powers by appropriating compensation packages
since they are in control of corporate assets.
32
C. Corporate Officers
• Concept of Corporate Officers

*Corporate powers reside on the Board of Directors; decision/

policymaking resides on them. Implementation of rules/
policy lies on the corporate officers

Categories:

1. Statutory Corporate Officers – President (must be a

stockholder); Secretary (must be a resident and citizen of the
Philippines); Treasurer (must be a resident and citizen of the
Philippines).

2. As provided by the By-Laws – must be clearly stated in

the By-Laws that such office is a corporate office.

3. Those designated by the Board of Directors provided

the Board of Directors is authorized to do so by the By-
Laws.
• Validity and Binding Effect of Acts of Corporate Officers

General Rule: No one, even corporate officers can bind the

corporation. It is only the Board of Directors who has the
authority to bind the corporation.

Exceptions:

1. If the By-Laws provides that such act is part of the function

of such office;

2. If authorized by the Board of Directors

• Doctrine of Apparent Authority

Doctrine of Apparent Authority/Doctrine of Estoppel –If a

corporation, knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do
those acts; and thus, the corporation will, as against anyone

33
 who has in good faith dealt with it through such agent, be
stopped from denying the agent’s authority.

Cases: People’s Aircargo; Inter-Asia; Lapu-Lapu

*Requires good faith on the part of third person.

D. Liability of Directors, Trustees and Officers

• Instances when Corporate Officers/Directors are held
Solidarily Liable

Sec. 31 of the Corporation Code provides that: “Directors or

trustees who wilfully 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.”

General Rule: Directors/Trustees/Officers are not solidarily

liable with the corporation.

Exceptions:

1. Wilfully and knowingly vote for and assent to patently

unlawful acts of the corporation (Sec. 31).

Case: Carag v NLRC

2. Guilty of gross negligence or bad faith in directing the

affairs of the corporation (Sec. 31).

34
 Case: David v Construction Industry

3. Acquire any personal or pecuniary interest in conflict of

their duty (Sec.31).

4. Consent to the issuance of watered stocks or having

knowledge thereof, fails to file objections with the
secretary (Sec. 65).

5. Agree or stipulate in a contract to hold himself

personally liable with the corporation.

6. By virtue of a specific provision of law such as BP 22;

Trust receipts Law; RA 7832 (Anti-Electricity Pilferage
Act of 1997); Securities Regulation Code

*In Carag v NLRC, the Supreme Court held that not any
violative of law, the Code means that violation must have a
corresponding penalty. Patently unlawful act means that a law
declares an act unlawful and that such law provides penalty for
that unlawful act.
• Self-Dealing Directors/Officers

Sec. 32 of the Corporation Code states that: “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 of 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 not 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 2/3 of the outstanding
capital stock or of at least 2/3 of the members in a meeting
called for the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved is made
35
at such meeting: Provided, however, that the contract is fair
and reasonable under the circumstances.”

Example:

In XYZ Corporation, A is a director. The corporation acts

through the Board of Directors. XYZ Corporation and A
entered into a lease contract. A as the lessor and XYZ
Corporation as lessee. The contract was approved by the
Board of Directors.

Q: What is the status of the contract?

General Rule: The contract is voidable.

Exception: If the requisites provided in Sec. 32 are present.

Exception to the Exception: If requirement number 1 or 2 is

absent, in the case of a contract with a director or trustee, such
contract may be considered valid by the ratification of at least
2/3 of the outstanding capital stock or 2/3 of the members.

Requisites:

1. The presence of such director or trustee in the board

meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;

2. The vote of such director or trustee was not necessary for

the approval of the contract;

3. The contract is fair and reasonable under the circumstances;

4. In case of an officer, the contract has been previously

authorized by the board of directors.

Reason: A’s presence in the board meeting might affect the

status of the contract.

Self-Dealing Directors/Officers – directors/officers who

transact business with their own corporation.

- This is not prohibited by law.

36
 Interlocking Directors – those who have been elected as
directors in 2 or more different corporations.

- May be prohibited by the By-Laws (Gokongwei case).

-Not prohibited by law however there are consequences.

• Contracts involving Inter-locking Directors

Sec. 33 of the Corporation Code provides that: “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 20% of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.”

Example:

A is a director of two corporation, ABC Corporation and XYZ

Corporation. XYZ Corporation and ABC Corporation entered
into a lease contract where ABC Corporation is the lessor and
XYZ Corporation is the lessee.

Q: Can this contract be invalidated on the ground that there is

an interlocking director?

A: NO.

Q: What is the status of the contract?

A: General Rule: Contracts between two or more

corporations having interlocking directors are valid.

Exceptions:

1. Contracts are void if contracts are fraudulent or if contracts

are unfair and unreasonable.

2. If the By-Laws prohibits interlocking director.

37
 Case: Gokongwei, Jr. v SEC

*The interest is nominal if his interest is 20% or less of the

outstanding capital stock. The interest is substantial if his
interest is more than 20% of the outstanding capital stock.

*If the interlocking director has a substantial interest in one

corporation and has a nominal interest in the other
corporation, the director must comply with the requisites
provided in Sec. 32 on self-dealing directors.

Reason: The case is analogous to that of transactions

involving self-dealing directors because such director holds
substantial interest with the other company.
• Doctrine of Corporate Opportunity

Sec. 34 of the Corporation Code states that: “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 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.”

General Rule: A director shall refund to the corporation all

the profits he realizes on a business opportunity which: 1. the
corporation is financially able to undertake; 2. from its nature,
is in line with corporations business and is of practical
advantage to it; and 3. the corporation has an interest or a
reasonable expectancy.

Exception: His act has been ratified by a vote of the

stockholders owning or representing at least 2/3 of the
outstanding capital stock.

*A business opportunity ceases to be corporate opportunity

and transforms to personal opportunity where the
corporation refuses or is definitely no longer able to avail
itself of the opportunity.

38
E. Executive Committee

Sec. 35 of the Corporation Code states that: “The by-laws of a

corporation may create an executive committee composed of not
less than 3 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.”

Keyword: BY-LAWS

*It must be stated in the By-Laws.

*Board Resolution is not sufficient if there is no provision in the

By-Laws.

*The decision of the executive committee is considered a Board

Resolution.

*The decision of the executive committee is not subject to appeal

to the board. However, if the resolution of the Executive
Committee is invalid it may be ratified by the Board.

*The decision of the executive committee needs no confirmation

from the Board.

Case: Filipinas Port, Inc.

*The corporation may create other committees.

Distinction: In executive committee, there is a statutory

restriction on members whereas in other committee there is no
such restriction.

39
 General Rule: The executive committee may act on 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.

Exceptions:

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;

5. A distribution of cash dividends to the shareholders.

CORPORATE POWERS:

A. Doctrine of Limited Capacity; Concept of Ultra Vires Act

Sec. 45 of the Corporation Code states that: “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 powers so conferred.”

Ultra Vires Acts – an act committed outside the object for which
a corporation is created as defined by the law of its organization
and therefore beyond the power conferred upon it by law.

Effects of Ultra Vires Acts:

1. Executed Contract – courts will not set aside or interfere with

such contracts.

2. Executory Contract – no enforcement even at the suit of either

party.

3. Partly executed and Partly executory contract – principle

against unjust enrichment shall apply.

40
 B. Classes of Corporate Powers

1. Express

2. Implied

3. Incidental
• Express – those expressly authorized by the Corporation
Code and other laws, and its Articles of Incorporation or
Charter.
• Implied – those that can be inferred from or necessary for the
exercise of the express powers.
• Incidental – those that are incidental to the existence of the
corporation.

Doctrine of Necessary Implication – those which can be reasonably

inferred from the express powers given since they are necessary for
the corporation to perform a particular act are deemed part of such
powers.

C. Statutory Powers of a Corporation and the Limitations on their

Exercise

Sec. 36 of the Corporation Code states that: “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 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
41
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.”
• Amendment of Articles of Incorporation

Sec. 16 of the Corporation Code states that: “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 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 2/3 of the members if it be a non-stock corporation.”

*The following are excluded in counting the outstanding

capital stock: 1. Treasury stock; 2. Unissued shares.

*Aside from the votes of majority of the board and assent of

the 2/3 of the OCS, the approval of the SEC is necessary for
the amendment of the AOI.

*There is an implied approval of the SEC, i.e., failure to act on

the application filed by the corporation within 6 mos.

Q: How to get the approval of the stockholders?

A: 1. Call for a meeting; 2. Obtain the written assent of the

stockholders.

42
 *In Tan v Sycip, the Supreme Court held that in case of a non-
stock corporation, membership is personal and non-
transferrable unless the by-laws provides otherwise. The
deceased member is not entitled to vote.

Four changes in Articles of Incorporation that require the approval

of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.
*Approval of Stockholders is necessary in these changes because they
are necessary for the corporation’s existence.
• Extension/Shortening of Corporate Term

Sec. 37 of the Corporation Code states that: “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 2/3 of the outstanding
capital stock or by at least 2/3 of the members in case of non-
stock corporation. 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.”
• Increase or Decrease of Capital Stock/ Incurrence, Creation or
Increase of Bonded Indebtedness

Sec. 38 of the Corporation Code states that: “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 stockholders’
meeting duly called for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or diminution of the

43
 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 stockholders’ 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. xxx.”

Q: When the corporation increases its capital stock, is the 25%

requirement necessary? How can it be computed?

A: YES. The SEC ruled that the 25% applies to the increase
amount.

*The corporation is required to maintain a sinking fund.

Q: What does bonded indebtedness mean?

A: Requires longer time of payment; special burden on the

corporation; involves the important assets of the corporation.
• Denial of Pre-emptive Right

Sec. 39 of the Corporation Code states that: “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 2/3 of the
outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted
debt.”

*Coming from the increased authorized capital stock.

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 * Similar to Right of First Refusal

*It is not a matter of right. It can be denied by the corporation

through denial of such right in the articles of incorporation.

Purposes:

1. In order that the stockholder may be able to maintain their

relative proportional voting trend and control in the
corporation; 2. To avoid dilution of their proportionate voting
and control in the corporation.

General Rule: Pre-emptive right is available to stockholders.

Exception: if it is denied in the Articles of Incorporation or

through amendment.

Exception to the Exception: Pre-emptive right shall not

extend to:

1. Shares to be issued in compliance with laws requiring stock

offerings or minimum stock ownership by the public;

2. Shares to be issued in good faith with the approval of the

stockholders representing 2/3 of the outstanding capital
stock, in exchange for property needed for corporate
purposes; and

3. In payment of a previously contracted debt.

*Pre-emptive right is satisfied as long as the corporation gives

the stockholder the opportunity to buy the shares.

*The offer must first be made to the stockholders.

• Sale or Disposition of Assets

Sec. 40 of the Corporation Code states that: “ 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
45
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 2/3 of the outstanding
capital stock, or in case of non-stock corporation by the vote of
at least 2/3 of the members, in a stockholders’ or members’
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.
xxx.”

Q: What makes the disposition peculiar?

A: The disposition is of all or substantially all of the

corporation’s properties and assets.

Q: What kind of disposition involve?

A: 1. Sell; 2. Lease; 3. Exchange; 4. Mortgage; 5. Pledge.

Requirements:

1. Majority vote of the Board.

2. Vote of the Stockholders representing 2/3 of the OCS.

3. The sale does not bring about the illegal combinations and
monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test – no statutory test; pertains to the
disposition of all assets
2. Qualitative Test – there is a statutory test; pertains to the
disposition of substantially all of its assets.

46
 *The provision is so strict because the law wants the
corporation will reach its expiration term.
Q: With the sale of all the assets of the corporation, will the
same result to its dissolution?
A: NO. Possession or continued possession of corporate
properties is not a condition for the existence of a corporation.
Corporation still exists despite the disposition of all its
properties and assets.

Q: Will the buying corporation be made answerable for the

liabilities of the selling corporation?

A: NO. The two corporations are two separate personalities

thus they are separate and distinct from each other hence the
buying corporation cannot be held liable to the obligations of
the selling corporation.

General Rule: The sale of all or substantially all of the assets

of the corporation does not make the buyer answerable for the
obligations of the seller.

Exceptions:

1. If the buyer expressly agrees to assume the obligations of

the seller.

2. If sale amounts to merger or consolidation.

3. If and when application of piercing the veil of corporate

entity doctrine is warranted.

4. If the purchaser becomes a continuation of the seller.

5. Sale was done in violation of the Bulk Sales Law.

Case: PNB v Andrada
• Acquisition of Corporate Shares

Sec. 41 of the Corporation Code states that: “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

47
 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.”

Requisites:

1. Unrestricted Retained Earnings

2. The acquisition must be for legitimate purpose

Q: What is an unrestricted retained earnings?
A: Earnings not allocated for any other purpose.
Q: What happens to reacquired shares?
A: General Rule: They are automatically deemed retired.
Exception: The AOI provides otherwise.

Trust Fund Doctrine – The capital stock, property and other assets of
the corporation are regarded as equity in trust for the payment of the
corporate creditors. The subscribed capital stock of the corporation is
a trust fund for the payment of debts of the corporation which the
creditors have the right to look up to satisfy their credits. Corporation
may not dissipate this and the creditors may sue stockholders directly
for the unpaid subscription.
• Investment of Corporate Funds

Sec. 42 of the Corporation Code states that: “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
2/3 of the outstanding capital stock, or by at least 2/3 of the
members in the case of non-stock corporations, at a
stockholders’ or members’ 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

48
 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.”

Requisites:

1. Majority vote of the Board

2. Vote of the stockholders representing 2/3 OCS.

• Declaration of Dividends

Sec. 43 of the Corporation Code states that: “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 2/3 of the outstanding capital stock at a regular or
special meeting duly called for the purpose. Stock
corporations are prohibited from retaining surplus profits in
excess of 100% 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.”

49
*This section is exclusive to stock corporations.

Dividends – represents part of the earnings of the corporation

which the board has decided to distribute among the
stockholders.

*The fact that the corporation has surplus earning does not
mean that it is mandated to declare dividends; it is still upon
the sound discretion of the board of directors.

Reason: Trust Fund Doctrine

*There must be a unrestricted retained earnings before

dividends may be declared.

*The board may opt to restrict its earnings, as the earnings

may be allocated to legitimate business purpose.

C A S H S T O C K
DIVIDENDS DIVIDENDS
does not require Requires
stockholders’ stockholders’
approval approval
The stockholders The stockholders
receive cash receive stocks
Creditor-debtor No creditor-
relationship debtor
relationship

Requisites for declaration of cash/property dividends:

1. Board approval

2. Unrestricted Retained Earnings

Requisites for declaration of stock dividends:

1. Unrestricted Retained Earnings;
2. Board approval;
3. Ratification by the stockholders.

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Q: Why stockholders’ ratification is necessary in the
declaration of stock dividends?
A: Because the earnings are capitalized. It is considered to be a
corporate assets.
Q: May the board be compelled to declare dividends?
A: General Rule: NO.
Exception: Stock corporations are prohibited from retaining
surplus profits in excess of 100% of their paid-in capital stock.
Exceptions to the Exception:
1. Corporate expansion
2. Pursuant to loan agreement
3. Special circumstances/contingent liabilities
Q: Are the stock dividends considered as watered stocks
because the stockholder concerned does not pay anything
therefor?
A: NO. The unrestricted retained earnings are considered to
be a consideration thus dividends received through stocks are
not watered stocks.
*The source of payment is the unrestricted retained earnings.
Q: Are delinquent stockholders entitled to receive dividends?
A: YES. But only in terms of cash dividends.
Q: Who are entitled to receive dividends?
A: Stockholders
*In Nielson case, the SC held that dividends cannot be given
to non-stockholders.
*If there is date of record – Dividends may be received by
those persons who are holders of stocks as of date of record.
*If there is no date of record – dividends may be received by
those persons who are holders of stocks as of the declaration.
Q: When the corporation declares stock dividends, would it
likewise create a creditor-debtor relationship between the
corporation and the stockholder?
A: NO. Stock dividends will not bring about a creditor-debtor
relationship. When it comes to shareholdings, the one holding
the shares are considered investors; risk-takers.
Q: Will legal compensation possible to occur?

51
 A: NO. The parties are not mutually creditor-debtor of each
other. The requisites under the Civil Code on legal
compensation are not present.
• Management Contract
Sec. 44 of the Corporation Code states that: “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 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 2/3 of the total outstanding
capital stock entitled to vote, or by at least 2/3 of the members
in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than 5 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.”

Requisite:

General Rule: Majority vote of the OCS

52
 Exception: 2/3 of the OCS

*SEC’s approval is not necessary

*When the corporation enters into a management contract,

appraisal right is NOT AVAILABLE to any dissenting
stockholder.

Reason: Sound business policy dictates that it would be better

for the corporation, at the inception of its operation, to be
managed by a company who has been experienced in a
particular kind of business if the managed corporation needs
the technical expertise, skills, experiences, background of
another entity.

CORPORATE BY-LAWS:

A. Concept, Use and Nature of By-Laws

By-Laws – relatively permanent and continuing rules of action
adopted by the corporation for its own government and that of
the individuals composing it and those having the direction,
management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities.
Nature: Regulates internal affairs of the corporation.

B. By-Laws in relation to Articles of Incorporation

Distinction between By-Laws and Articles of Incorporation:

By-Laws –is a condition subsequent.

Articles of Incorporation – is a condition precedent. Essential for

corporate existence.

ARTICLES OF BY-LAWS
INCORPORATION
External affairs Internal Affairs

53
 Affects the status of Does not affect the
existence of the s t a t u s o f t h e
corporation existence but has
impact on the
existence; failure to
submit is a ground
f o r
disenfranchisement
Joint decision of the General Rule: joint
board a n d decision
stockholders E x c e p t i o n :
Delegates the
power to amend
the By-Laws to the
Board

C. Adoption of By-Laws; Effect of Non-Filing within the prescribed

period

Sec. 46 of the Corporation Code states that: “Every corporation

formed under this Code must, within 1 month after receipt of
official notice of the issuance of its certificate of incorporation by
the SEC, adopt a code of By-Laws for its government not
inconsistent with this Code. For the adoption of By-Laws by the
corporation the affirmative vote of the stockholders representing
at least a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations, shall
be necessary. The By-Laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office
of the corporation, subject to the inspection of the stockholders
or members during office hours. A copy thereof, duly certified to
by a majority of the directors or trustees countersigned by the
secretary of the corporation, shall be filed with the SEC which
shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, By-
Laws may be adopted and filed prior to incorporation; in such
case, such By-Laws shall be approved and signed by all the
incorporators and submitted to the SEC, together with the
articles of incorporation. In all cases, By-Laws shall be effective
54
only upon the issuance by the SEC of a certification that the By-
Laws are not inconsistent with this Code. The SEC shall not
accept for filing the By-Laws or any amendment thereto of any
bank, banking institution, building and loan association, trust
company, insurance companies, public utility, educational
institution or other special corporations governed by special
laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such By-Laws or
amendments are in accordance with law.”

*Submission of By-Law is not a requirement for acquisition of

corporate existence, however, for the corporation to be able to
continue its corporate existence, the corporation is required to
submit the corporate By-Law.

*Non-submission of the By-Laws within the prescribed period

allowed by law is a ground for the dissolution of the
corporation.

*In Loyola Grandvillas Homeowners Association v CA, the SC

held that failure to adopt a set of By-Laws within the prescribed
period, notwithstanding the word used in the Code, the same
would not result to automatic dissolution of the corporation. The
failure to file by-laws would not, by itself, amount to dissolution
or extinguishment of the corporate existence.

*Section 46 of the Corporation Code must be read in conjunction

with PD 902-A which outlines the procedure to be followed
before the franchise/license of a private corporation may be
suspended or revoked.

*Observance of Due Process is necessary.

*In Sawadjaan v CA, the SC held that meanwhile when the By-
Laws is not yet submitted, the corporation, at that time, and the
very least, may be considered as a De Facto Corporation and
therefore, its right to exist as such cannot be inquired into or
cannot be collaterally attacked in a private suit. It is for the State
to initiate a proceeding questioning the existence, on the ground
of its non-submission of By-Laws, within the prescribed period.

55
D. Contents of By-Laws; Requisites of a Valid By-Law Provision

Sec. 47 of the Corporation Code states that: “Subject to the

provisions of the Constitution, this Code, other special laws, and
the articles of incorporation, a private corporation may provide
in its By-Laws for: 1. The time, place and manner of calling and
conducting regular or special meetings of the directors or
trustees; 2. The time and manner of calling and conducting
regular or special meetings of the stockholders or members; 3.
The required quorum in meetings of stockholders or members
and the manner of voting therein; 4. The form for proxies of
stockholders and members and the manner of voting them; 5.
The qualifications, duties and compensation of directors or
trustees, officers and employees; 6. The time for holding the
annual election of directors or trustees and the mode or manner
of giving notice thereof; 7. The manner of election or
appointment and the term of office of all officers other than
directors or trustees; 8. The penalties for violation of the By-
Laws; 9. In the case of stock corporations, the manner of issuing
stock certificates; and 10. Such other matters as may be necessary
for the proper or convenient transaction of its corporate business
and affairs.”

Requisites:

1. It must be consistent with Corporation Code, other pertinent

laws and regulations.

2. It must be consistent with the Articles of Incorporation.

3. It must be reasonable and not arbitrary or oppressive.

4. It must not disturb vested rights, impair contract or property

rights of stockholders or members or create obligations
unknown to law.

E. Amendment to By-Laws

Sec. 48 of the Corporation Code provides that: “The board of

directors or trustees, by a majority vote thereof, and the owners
of at least a majority of the outstanding capital stock, or at least a
56
 majority of the members of a non-stock corporation, at a regular
or special meeting duly called for the purpose, may amend or
repeal any By-Laws or adopt new By-Laws. The owners of 2/3
of the outstanding capital stock or 2/3 of the members in a non-
stock corporation may delegate to the board of directors or
trustees the power to amend or repeal any By-Laws or adopt
new By-Laws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal any By-Laws or adopt
new By-Laws shall be considered as revoked whenever
stockholders owning or representing a majority of the
outstanding capital stock or a majority of the members in non-
stock corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new By-Laws are adopted, such
amendment or new By-Laws shall be attached to the original By-
Laws in the office of the corporation, and a copy thereof, duly
certified under oath by the corporate secretary and a majority of
the directors or trustees, shall be filed with the SEC the same to
be attached to the original articles of incorporation and original
By-Laws. The amended or new By-Laws shall only be effective
upon the issuance by the SEC of a certification that the same are
not inconsistent with this Code.”

F. By-Laws in relation to Third Parties

*In China Banking Corporation v CA, the SC held that in the

absence of evidence that China Bank is aware of the provisions
of the By-Laws, China Bank is not bound to observe the
provisions of the By-Laws. Hence, China Bank must be allowed
to register the shares in its name.

General Rule: Third parties are not affected by the By-Laws.

Exception: If the third party has actual knowledge of the

provisions of the By-Laws.

CORPORATE MEETINGS:

A. Kinds of Corporate Meetings

57
Sec. 49 of the Corporation Code provides that: “Meetings of
directors, trustees, stockholders, or members may be regular or
special.”

Kinds:

a. Stockholders/Members:

1. Regular meeting

2. Special meeting

b. Directors/Trustees:

1. Regular meeting

2. Special meeting
Sec. 50 of the Corporation Code provides that: “Regular
meetings of stockholders or members shall be held annually on a
date fixed in the by-laws, or if not so fixed, on any date in April
of every year as determined by the board of directors or trustees:
Provided, That written notice of regular meetings shall be sent to
all stockholders or members of record at least 2 weeks prior to
the meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any
time deemed necessary or as provided in the by-laws: Provided,
however, That at least 1 week written notice shall be sent to all
stockholders or members, unless otherwise provided in the by-
laws. Notice of any meeting may be waived, expressly or
impliedly, by any stockholder or member. Whenever, for any
cause, there is no person authorized to call a meeting, the SEC,
upon petition of a stockholder or member on a showing of good
cause therefor, may issue an order to the petitioning stockholder
or member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws.
The petitioning stockholder or member shall preside thereat
until at least a majority of the stockholders or members present
have been chosen one of their number as presiding officer.”
*Regular meeting of stockholders/members shall be held
annually on a date fixed in the by-laws or if not so fixed, on any
date in April of every year. Written notice of regular meetings

58
 shall be sent 2 weeks prior to the meeting unless a different
period is required by the by-laws.
** Special meeting of stockholders/members shall be held at any
time deemed necessary or as provided in the by-laws. Written
notice shall be sent to all stockholders or members at least one
week or unless otherwise provided in the by-laws.
Sec. 53 of the Corporation Code provides that: “Regular
meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide
otherwise. Special meetings of the board of directors or trustees
may be held at any time upon the call of the president or as
provided in the by-laws. Meetings of directors or trustees of
corporations may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise. Notice of
regular or special meetings stating the date, time and place of the
meeting must be sent to every director or trustee at least 1 day
prior to the scheduled meeting, unless otherwise provided by
the by-laws. A director or trustee may waive this requirement,
either expressly or impliedly.”
*Regular meetings of directors/trustees shall be held monthly
unless the by-laws provide otherwise.
*Special meetings of directors/trustees may be held at any time
upon the call of the president or as provided in the by-laws.
*Meetings of directors or trustees may be held anywhere in or
outside of the Philippines unless the by-laws provide otherwise.
*Notice of regular or special meetings stating the date, time and
place of the meeting must be sent to every director or trustee at
least 1 day prior to the scheduled meeting unless otherwise
provided by the by-laws.

B. Requirements of a Meeting

1. It must be held at the proper place.

2. It must be held at the stated date and at the appointed time or

at a reasonable time thereafter.

3. It must be called by the proper person.

4. There must be a previous notice.

59
5. There must be a quorum.
Sec. 51 of the Corporation Code provides that: “Stockholders’ or
members’ meetings, whether regular or special, shall be held in
the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of
the corporation: Provided, That Metro Manila shall, for purposes
of this section, be considered a city or municipality. Notice of
meetings shall be in writing, and the time and place thereof
stated therein. All proceedings had and any business transacted
at any meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid even if the
meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or duly
represented at the meeting.”
*Applies to both stock and non-stock corporations.
General Rule: The meeting must be held in the city or
municipality where the principal office is located.
Exception: Sec. 93 on non-stock corporations, the By-Laws may
provide different venue for their meeting.
*A casual reading of section 51 would say that a corporation
cannot provide any other place for the meeting of stockholders.
But in case of a non-stock corporation, Section 93 of the
Corporation provides that the by-laws could provide any place
for the meeting of its members provided that it is within the
Philippines and proper notice has been given.
Q: Is there a conflict between Section 51 and Section 93?
A: YES. There is conflict but this conflict may be reconciled. As a
rule, the by-laws may provide a different place of meeting
provided that it is within the Philippines and notice has been
given. As an exception, if the by-laws is silent of the place of the
meeting, section 51 applies.
Sec. 52 of the Corporation Code provides that: “Unless
otherwise provided for in this Code or in the by-laws, a quorum
shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the
case of non-stock corporations.”
General Rule: Majority of the OCS or Majority of the members

60
 Exception: Unless otherwise provided by the Code or by the By-
Laws.
*In Tan v Sycip, deceased member is not entitled to vote
Sec. 54 of the Corporation Code provides that: “The president
shall preside at all meetings of the directors or trustees as well as
of the stockholders or members, unless the by-laws provide
otherwise.”

C. Right to Vote of Stockholders

• Instances when voting right not available

Sec. 6 of the Corporation Code provides that: “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.”

Instances when voting right is not available:

1. Delinquent shares

2. Treasury shares

3. Fractional shares

4. Escrow shares
• Rules on:

1. Delinquent Shares

Sec. 71 of the Corporation Code provides that: “No

delinquent stock shall be voted for or be entitled to vote or
to representation at any stockholders’ meeting, nor shall
the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance
with the provisions of this Code, until and unless he pays
the amount due on his subscription with accrued interest,
and the costs and expenses of advertisement, if any.”

*Delinquency arises upon default in payment of

subscription.

Q: Are they included for quorum and voting purposes?

61
 A: NO.

Q: Even if there are proxies?

A: YES.

Q: Shares not yet fully paid but not yet delinquent, are they
entitled to vote?

A: YES.

*Delinquent stock is not entitled to vote and his presence

would not be taken for purposes of quorum.

*The only right remain is the right to receive dividends

subject to the provision of Section 43.

2. Escrow Shares

*Escrow shares are not entitled to vote before the

fulfillment of the condition imposed thereon.

3. Unpaid Shares

Sec. 72 of the Corporation Code provides that: “Holders of

subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder.”

General Rule: The holder of unpaid shares can exercise the

right to vote.

Exception: If it is provided in the subscription contract that

such right cannot be exercised until the subscription is fully
paid.

4. Sequestered Shares

Q: What is the reason for sequestration process?

A: For investigative purposes; To avoid wastage dissipation

of assets.

Q: Is PCGG authorized to vote for the sequestered shares?

A: General Rule: No. PCGG cannot vote for the

sequestered shares because being a conservator/

62
 administrator, it should only perform acts of administration
and not acts of ownership.

Exception: If there is a strong evidence that indeed the

shares have been purchased through public funds.

Requisites:

1. Strong evidence or prima facie evidence that the shares

are ill-gotten.

2. There is an imminent danger that the shares will be

dissipated.

Case: Transmiddle East v CA

Q: During the pendency of sequestration process, are the

sequestered shares included for quorum purposes?

A: General Rule: YES.

Q: Who can vote them?

A: General Rule: Stockholder of record.

*In Republic of the Philippines v COCOFED, the SC held

that there is a prima facie evidence that the shares are
purchased with the use of public funds.

5. Pledgor, Mortgagor or Administrator of Shares

Sec. 55 of the Corporation Code provides that: “In case of

pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and
vote at meetings of stockholders, unless the pledgee or
mortgagee is expressly given by the pledgor or mortgagor
such right in writing which is recorded on the appropriate
corporate books. Executors, administrators, receivers, and
other legal representatives duly appointed by the court
may attend and vote in behalf of the stockholders or
members without need of any written proxy.”

Q: Can the pledgee/mortgagee exercise the right to vote?

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 A: General Rule: No. The right to vote remains to the
owner thus, it is the pledgor/mortgagor that can exercise it.

Exception: If there is an agreement that the pledgee/

mortgagee can exercise the right to vote.

Case: Calapatia

*Administrator/executor/heirs have the right to vote even

without prior proxy. But the SEC requires them to submit
letters of appointment or documents showing that he has
been duly instituted as executor/administrator of the
deceased.

6. Shares Jointly Owned

Sec. 56 of the Corporation Code provides that: “In case of

shares of stock owned jointly by two or more persons, in
order to vote the same, the consent of all the co-owners
shall be necessary, unless there is a written proxy, signed by
all the co-owners, authorizing one or some of them or any
other person to vote such share or shares: Provided, That
when the shares are owned in an “and/or” capacity by the
holders thereof, any one of the joint owners can vote said
shares or appoint a proxy therefor.”

D. Concept of Proxy and Voting Trust Agreement

Proxy is a written authorization given by one person to another

so that the second person can act for the first.

*Proxy is a representative.

*Relationship: Principal-Agent.

*Proxy is authorized to vote and also authorized to be present in

a meeting.

Functions: For quorum purposes; for voting purposes.

*In Board meeting, proxy is not allowed (Sec. 25 of the

Corporation Code).

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Sec. 58 of the Corporation Code provides that: “Stockholders
and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall be in writing, signed by
the stockholder or member and filed before the scheduled
meeting with the corporate secretary. Unless otherwise provided
in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period
longer than 5 years at any one time.”

Requisites:

1. Must be in writing

2. Filed before the scheduled meeting; under the SEC rule, 10

days before the scheduled meeting

*Proxy ensures presence of a quorum and also approval of

corporate acts.

General Rule: Proxy is revocable.

Exception: If proxy is coupled with interest.

Ways to revoke proxy:

1. By execution of subsequent proxy.

2. If the stockholder concerned would appear in the scheduled

meeting.

Voting Trust Agreement is an agreement whereby one or more

stockholders transfer their shares of stocks to a trustee, who
thereby acquires for a period of time the voting rights (and/or
any other rights) over such shares; and in return, trust
certificates are given to the stockholders, which are transferable
like stock certificates, subject however, to the trust agreement.

PROXY VOTING TRUST

AGREEMENT
The stockholder The stockholder
remains the ceases to be a
stockholder of stockholder of
record record

65
Revocable Irrevocable
General Rule: 5
years
Exception: If
coupled with
interest

*The transfer includes the transfer of legal title.

Sec. 59 of the Corporation Code provides that: “One or more
stockholders of a stock corporation may create a voting trust for
the purpose of conferring upon a trustee or trustees the right to
vote and other rights pertaining to the shares for a period not
exceeding 5 years at any time: Provided, That in the case of a
voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding 5
years but shall automatically expire upon full payment of the
loan. A voting trust agreement must be in writing and notarized,
and shall specify the terms and conditions thereof. A certified
copy of such agreement shall be filed with the corporation and
with the SEC; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by
the voting trust agreement shall be cancelled and new ones shall
be issued in the name of the trustee or trustees stating that they
are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the
trustee or trustees is made pursuant to said voting trust
agreement. The trustee or trustees shall execute and deliver to
the transferors voting trust certificates, which shall be
transferable in the same manner and with the same effect as
certificates of stock. The voting trust agreement filed with the
corporation shall be subject to examination by any stockholder of
the corporation in the same manner as any other corporate book
or record: Provided, That both the transferor and the trustee or
trustees may exercise the right of inspection of all corporate
books and records in accordance with the provisions of this
Code. Any other stockholder may transfer his shares to the same
trustee or trustees upon the terms and conditions stated in the
voting trust agreement, and thereupon shall be bound by all the

66
 provisions of said agreement. No voting trust agreement shall be
entered into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used
for purposes of fraud. Unless expressly renewed, all rights
granted in a voting trust agreement shall automatically expire at
the end of the agreed period, and the voting trust certificates as
well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new certificates
of stock shall be reissued in the name of the transferors. The
voting trustee or trustees may vote by proxy unless the
agreement provides otherwise.”
Consequence: The stockholder entering into a voting trust
agreement ceases to be a stockholder of record.
*In case of Lee v CA, the SC held that the stockholder concerned
loses his legal title to the shares so that if the stockholder is, at
the same time, a director of the corporation, automatically he is
disqualified to continue performing the duties of a director
because the law requires each and every director to have legal,
not beneficial title to at least one share.

E. Derivative Suit; Concept and Requisites

Derivative Suit is a suit brought by any stockholder, usually a

minority shareholder, to redress a wrong committed against the
corporation whenever the responsible officers refuse to take any
action thereon or are the very person to be sued.

*This prerogative is developed through jurisprudence.

*This is expressly mandated by Sec. 31 of the Corporation Code.

Q: Why derivative?

A: From the word derive. The one bringing the suit derives the
cause of action from the corporation.

Q: Who brings the suit?

A: Any stockholder/member usually minority stockholder.

Q: Whose cause of action?

A: It is the corporation’s cause of action.

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 Q: Are we in violation of the Code?

A: No. Because the power to sue lies on the board thus when the
board refuses to take action in order to protect the corporation
derivative suit may be allowed.

Compelling Reason: Inaction of the officers. Failure to discharge

their responsibilities. Requisites:

1. The stockholder bringing the suit must be one of record as of

the time the cause of action accrues as well as of the time the
action is brought unless the cause of action is a continuing
offer.

*The stockholder must implead the real party in interest, i.e.

the corporation.

*In Chua v CA, the SC held that the corporation must be

impleaded since it is the real party in interest.

2. The action must be named under the corporation’s name

3. General Rule: The stockholder bringing the suit must have

exhausted intra-corporate remedies within the corporation.

Exception: If the very person to be sued is the responsible

officers themselves.

**This is a condition precedent.

4. The suit is not intended to harass the defendant, not a

nuisance or harassment suit.

5. Appraisal right must not be an available remedy.

Individual suit is a suit filed by the stockholder because his

personal right has been violated. The cause of action is personal
to the stockholder. The party injured is the stockholder himself.

Representative suit is a suit filed by a group of stockholders that

suffered common injury.

SUBSCRIPTION CONTRACT:

A. Ways to become a Stockholder of a Corporation

68
 1. Subscription contract with the corporation.

2. Purchase or acquisition of shares from existing stockholders.

3. Purchase of treasury shares from the corporation.

*All of them involve shareholdings.
*Subscription is unique because it involves unissued shares.

B. Concept of Subscription Contract

Subscription Contract is, under Sec. 60 of the Corporation

Code, “any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase
or some other contract.”

*This is strictly regulated by the Corporation Code.

C. Kinds of Subscription

1. Pre-incorporation subscription – one entered into before

incorporation.

Sec. 61 of the Corporation Code provides that: “A

subscription for shares of stock of a corporation still to be
formed shall be irrevocable for a period of at least 6 months
from the date of subscription, unless all of the other
subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize within
said period or within a longer period as may be stipulated in
the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the
submission of the articles of incorporation to the SEC.”

*Contracts between the subscribers.

2 Fold Characteristics:

a. It is a contract between subscribers.

69
 b. May be regarded as continuing offer on the part of the
subscriber concerned which the corporation may accept
upon acquisition of juridical personality.

Reason: The corporation is not yet in existence.

2. Post incorporation subscription – one entered into after the

incorporation for the acquisition of unissued stock.

*Contracts between the subscribers and the corporation.

*Creates a creditor-debtor relationship.

D. Consideration for the Issuance of Shares

Sec. 62 of the Corporation Code provides that: “Stocks shall not

be issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any or a
combination of any two or more of the following: 1. Actual cash
paid to the corporation; 2. Property, tangible or intangible,
actually received by the corporation and necessary or convenient
for its use and lawful purposes at a fair valuation equal to the
par or issued value of the stock issued; 3. Labor performed for or
services actually rendered to the corporation; 4. Previously
incurred indebtedness of the corporation; 5. Amounts
transferred from unrestricted retained earnings to stated capital;
and 6. Outstanding shares exchanged for stocks in the event of
reclassification of conversion. Where the consideration is other
than actual cash, or consists of intangible property such as
patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors,
subject to the approval by the SEC. Shares of stock shall not be
issued in exchange for promissory notes or future service. The
same considerations provided for in this section, insofar as they
may be applicable, may be used for the issuance of bonds by the
corporation. The issued price of no-par value shares may be
fixed in the articles of incorporation or by the board of directors
pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the

70
 stockholders representing at least a majority of the outstanding
capital stock at a meeting duly called for the purpose.”

Valid considerations for the subscription agreements:

1. Cash

2. Property

3. Labor or services actually rendered to the corporation

4. Prior corporate obligations

5. Amounts transferred from unrestricted retained earnings to

stated capital

6. Outstanding shares in exchange for stocks in the event of

reclassification or conversion.

E. Payment of Subscription

Q：When payment of the subscription is made?

A: Look into the subscription agreement. If subscription

agreement is silent as to when the amount of subscription to be
paid, the board of directors may call on all the unpaid
subscribers to pay the remaining balance of their subscription.
• Remedies to enforce payment of subscription

1. By Extra-judicial sale at public auction.

2. By judicial action.

3. Collection from cash dividends and withholding of stock

dividends.
• When shares are considered delinquent

Sec. 67 of the Corporation Code provides that: “Subject to the

provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare
due and payable to the corporation unpaid subscriptions to
the capital stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as it may
71
 deem necessary. Payment of any unpaid subscription or any
percentage thereof, together with the interest accrued, if any,
shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the
board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless a
different rate of interest is provided in the by-laws, computed
from such date until full payment. If within 30 days from the
said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be
subject to sale as hereinafter provided, unless the board of
directors orders otherwise.”

*If there was no date as to payment of subscription stated in

the subscription agreement, the board may call on all the
unpaid subscribers to pay the remaining balance of their
subscription. Failure to pay within 30 days from the said date,
all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale unless the
board of directors orders otherwise.

F. Certificate of Stock

Certificate of Stock is a written evidence of the shares of stock

but it is not the share itself.

*Does not represent credit.

Q: How important is a stock certificate?

A: It is an evidence of ownership of stocks.

Q: Who issue stock certificate?

A: Stock certificates must be signed by the president or vice-

president, countersigned by the secretary or assistant secretary.

Q: When certificate of stock may be issued?

A: Sec. 64 of the Corporation Code states that: “No certificate of

stock shall be issued to a subscriber until the full amount of his
72
subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.”
• Doctrine of Indivisibility of Subscription Contract

Doctrine of Indivisibility of Subscription Contract: Failure

to pay any of the installments due would necessarily affect all
the other installments because the subscription is to be treated
as one, whole, entire, indivisible contract. Upon default of
payment on any of the installment results to entire
subscription due and demandable.

*The Certificate of Stock cannot be divided into portions.

*No certificate of stock shall be issued until the full payment

of the subscription.

*The corporation has an automatic lien over the shares.

Q: What will happen to the payment already made by the

subscriber?

A: The payment partially made shall be applied

proportionately to all the shares covered by the subscription.

Example:

P10 per share; payment made is P6000 covering 1000 shares.

The P6000 shall be allocated equally to all shares. P6 per share
has been paid. P4 per share is the liability.
• Certificate of Stock, quasi-negotiable

Q: can the stock certificate be treated as negotiable instrument

under NIL?

A: No. The requisites are not complied with. There is no

engagement to pay in sum certain in money.

*Negotiable instrument represents credit. Creditor-debtor

relationship arises.

Q: Are certificates of stock negotiable?

A: They are negotiable in certain extent. That is why they are

quasi-negotiable.
73
 *The title over the share can be assigned, transferred by
indorsement and delivery.

*Due course holding is not applicable.

G. Transfer of Shares

If represented by a certificate, the following must be strictly

complied with:

1. Delivery of the certificate;

2. Indorsement by the owner or his agent;

3. To be valid to third parties, the transfer must be recorded in

the books of the corporation.

*If not represented by the certificate, the shares may be

transferred by means of a deed of assignment and such is duly
recorded in the books of the corporation.

*To make the transfer binding to the corporation and third

person, the transfer must be recorded in the stock and transfer
book of the corporation.

Q: Who is the owner of the share?

A: The stockholder of record.

H. Lost and Destroyed Certificate of Stock

Sec. 73 of the Corporation Code provides that: “The following

procedure shall be followed for the issuance by a corporation of
new certificates of stock in lieu of those which have been lost,
stolen or destroyed: 1. The registered owner of a certificate of
stock in a corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth, if possible,
the circumstances as to how the certificate was lost, stolen or
destroyed, the number of shares represented by such certificate,
the serial number of the certificate and the name of the
corporation which issued the same. He shall also submit such

74
 other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and
evidence with the books of the corporation, said corporation
shall publish a notice in a newspaper of general circulation
published in the place where the corporation has its principal
office, once a week for 3 consecutive weeks at the expense of the
registered owner of the certificate of stock which has been lost,
stolen or destroyed. The notice shall state the name of said
corporation, the name of the registered owner and the serial
number of said certificate, and the number of shares represented
by such certificate, and that after the expiration of 1 year from
the date of the last publication, if no contest has been presented
to said corporation regarding said certificate of stock, the right to
make such contest shall be barred and said corporation shall
cancel in its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new certificate of
stock, unless the registered owner files a bond or other security
in lieu thereof as may be required, effective for a period of 1 year,
for such amount and in such form and with such sureties as may
be satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the 1 year
period provided herein: Provided, That if a contest has been
presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock which has
been lost, stolen or destroyed, the issuance of the new certificate
of stock in lieu thereof shall be suspended until the final decision
by the court regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed. Except in case of fraud,
bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against any corporation which
shall have issued certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-described.”

CORPORATE BOOKS AND RECORDS:

A. Books required to be kept by a Corporation

Sec. 74 of the Corporation Code provides that: “Every

corporation shall keep and carefully preserve at its principal

75
office a record of all business transactions and minutes of all
meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the time
and place of holding the meeting, how authorized, the notice
given, whether the meeting was regular or special, if special its
object, those present and absent, and every act done or ordered
done at the meeting. Upon the demand of any director, trustee,
stockholder or member, the time when any director, trustee,
stockholder or member entered or left the meeting must be
noted in the minutes; and on a similar demand, the yeas and
nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must
be recorded in full on his demand. The records of all business
transactions of the corporation and the minutes of any meetings
shall be open to inspection by any director, trustee, stockholder
or member of the corporation at reasonable hours on business
days and he may demand, writing, for a copy of excerpts from
said records or minutes, at his expense. Any officer or agent of
the corporation who shall refuse to allow any director, trustee,
stockholder or member of the corporation to examine and copy
excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be
guilty of an offense which shall be punishable under Section 144
of this Code: Provided, That if such refusal is made pursuant to a
resolution or order of the board of directors or trustees, the
liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal: and
Provided, further, That it shall be a defense to any action under
this section that the person demanding to examine and copy
excerpts from the corporation’s records and minutes has
improperly used any information secured through any prior
examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand. Stock corporations
must also keep a book to be known as the “stock and transfer
book,” in which must be kept a record of all stocks in the names

76
 of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been
made, and the date of payment of any installment; a statement of
every alienation, sale or transfer of stock made, the date thereof,
and by and to whom made; and such other entries as the by-laws
may prescribe. The stock and transfer book shall be kept in the
principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any director or
stockholder of the corporation at reasonable hours on business
days. No stock transfer agent or one engaged principally in the
business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines unless
he secures a license from the SEC and pays a fee as may be fixed
by the Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case
all the rules and regulations imposed on stock transfer agents,
except the payment of a license fee herein provided, shall be
applicable.”

*Keeping of books and records are mandatory.

Books required to be kept:

1. Book of minutes – reflects the decisions and actions of the

Board of Directors/Stockholders.

2. Record of all business transactions

3. Stock and Transfer Book/Membership Book

4. Books of Proceedings

B. Right to Inspect Corporate Books

• Basis and Extent of the Right of Inspection

Q: Is the keeping of these books mandatory?

A: YES. Section 144 of the Corporation Code provides penalty

for any violation of the provision of the Code.

77
 Rationale: Right of inspection would be futile. Right of
inspection would not be exercised.
• Limitations on the Right of Inspection

1. The books and records shall be open to inspection at

reasonable hours on business days.

2. The books and records shall not be improperly used any

information secured through any prior examination of the
books or records.

3. The stockholder’s demand must be in good faith or for a

legitimate purpose.
*Inspection can be done personally or through agent.
• Remedies to Enforce Right of Inspection

*In case of refusal to exercise the right of inspection, the

stockholder concerned may file an action for mandamus
before the RTC.

*Can also claim damages.

MERGER AND CONSOLIDATION:

A. Concept of Merger and Consolidation

Merger is one where a corporation absorbs the other and

remains in existence while the others are dissolved.

*There is a continuous flow of juridical personality.

Examples:

A+B=B

A+B+C=C

A+B+C=A

A+B+C=B

Consolidation is one where a new corporation is created, and

consolidating corporations are extinguished.

Examples:

78
 A+B=C

A+B+C=D

A + B + C = ABC

A + B + C = XYZ

B. Requisites of and Procedure for Merger and Consolidation

1. Approval by majority vote of the Board of Directors of each

corporation.

2. Approval of the stockholders of each corporation representing

2/3 of the outstanding capital stock.

3. Approval of SEC
Cases: Associated Bank v CA; Polyan v CA
Procedure:
1. The Board of each corporation shall draw up a plan of
merger/consolidation.

2. The plan of merger or consolidation shall be approved by

majority vote of each board of the concerned corporations at
separate meetings.

3. The plan of merger/consolidation shall be approved by the

majority vote of the 2/3 of the shareholders of the outstanding
capital stock or members in case of a non-stock corporation.

4. Articles of Merger/Consolidation shall be executed by each of

the constituent corporators, signed by the President or Vice-
President and certified by the secretary or assistant secretary.

5. Four copies of the Articles of Merger or Consolidation

together with favorable recommendation of a pertinent
government agency in certain cases shall be submitted to the
SEC for approval.

6. The SEC shall issue a certificate or merger if it is satisfied that

the merger or consolidation of the corporations concerned is
not inconsistent with the provisions of this Code and existing
laws.
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 C. Effects of Merger or Consolidation

1. All property, real or personal, and all receivables due to, and
all other interest of each constituent corporation, shall be
deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed.

2. The surviving or consolidated corporation shall be

responsible for all the liabilities and obligations of each of the
constituent corporations.

3. Any claim, action or proceeding pending by or against any of

the constituent corporations may be prosecuted by or against
the surviving or consolidated corporations.

4. The rights of the creditors or lien upon the property of any of

each constituent corporation shall not be impaired by such
merger or consolidation.

5. Dissolution of other corporation leaving the surviving or

consolidated corporation exists.
Remedy of the dissenting stockholder: The dissenting
stockholder may exercise his appraisal right.

RIGHT OF APPRAISAL:

A. Concept of Appraisal Right

Appraisal Right is the right to withdraw from the corporation

and demand payment of the fair value of his shares after
dissenting from certain corporate acts involving fundamental
changes in corporate structure.

*Demanding for the reasonable return of investment.

*Stockholders cannot exercise this right at his pleasure.

Requisites:

1. The Stockholder has dissented

2. Corporate change must have been approved by the SEC.

*Any changes that affect the stockholders’ right.

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 *Any changes that concern the corporation’s existence.

*Corporate changes that appraisal right can be availed of.

3. There must have an unrestricted retained earnings,

*It is not a matter of right.

Reason: If it is a matter of right it shall lead to the diminution or

depletion of corporate assets which is violative of the Trust Fund
Doctrine.

B. Instances of Appraisal Right

Sec. 81 of the Corporation Code provides that: “Any

stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following
instances: 1. In case any amendment to the articles of
incorporation has the effect of changing or restricting the rights
of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of
corporate existence; 2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.”

C. Requirements for a Valid Exercise of Appraisal Right

Sec. 82 of the Corporation Code provides that: “The appraisal

right may be exercised by any stockholder who shall have voted
against the proposed corporate action, by making a written
demand on the corporation within 30 days after the date on
which the vote was taken for payment of the fair value of his
shares: Provided, That failure to make the demand within such
period shall be deemed a waiver of the appraisal right. If the
proposed corporate action is implemented or affected, the
corporation shall pay to such stockholder, upon surrender of the
certificate or certificates of stock representing his shares, the fair

81
value thereof as of the day prior to the date on which the vote
was taken, excluding any appreciation or depreciation in
anticipation of such corporate action. If within a period of 60
days from the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be
determined and appraised by 3 disinterested persons, one of
whom shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen. The findings
of the majority of the appraisers shall be final, and their award
shall be paid by the corporation within 30 days after such award
is made: Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment: and
Provided, further, That upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer
his shares to the corporation.”

Requisites:

1. Any of the instances set forth by law must be present.

2. Dissenting stockholder must have voted against the proposed

action.

*Abstaining stockholder cannot claim or exercise his appraisal

right.

3. Demand for payment must be made within 30 days from the

date vote is taken thereon. Failure to make demand shall be
deemed a waiver.

4. Price must be based on fair value as of day prior to date on

which vote was taken

5. Submission by withdrawing stockholder of his shares to the

corporation for notation of being a dissenting stockholder
within 10 days from written demand.

6. Payment must be made only when the corporation has

unrestricted retained earnings in its books.

82
 7. Stockholder must transfer his shares to the corporation upon
payment by the corporation.

D. Effects of Exercising Appraisal Right

Sec. 83 of the Corporation Code provides that: “From the time

of demand for payment of the fair value of a stockholder’s
shares until either the abandonment of the corporate action
involved or the purchase of the said shares by the corporation,
all rights accruing to such shares, including voting and dividend
rights, shall be suspended in accordance with the provisions of
this Code, except the right of such stockholder to receive
payment of the fair value thereof: Provided, That if the
dissenting stockholder is not paid the value of his shares within
30 days after the award, his voting and dividend rights shall
immediately be restored.”

Effects:

1. All rights accruing to such shares shall be suspended from the

time of demand for payment of the fair value of the shares
until either the abandonment of the corporate action.

2. The dissenting stockholder shall be entitled to receive

payment of the fair value of his shares as agreed upon
between him and the corporation or as determined by the
appraisers chosen by them.
*Sec. 86. The dissenting stock can be sold during the pendency of
its payment.
Remedy in case appraisal right cannot be exercised: Dispose
the shareholdings.

NON-STOCK CORPORATIONS:

A. Definition and Purposes of a Non-Stock Corporation

Sec. 87 of the Corporation Code states that: “For the purposes of

this Code, a non-stock is one where no part of its income is
distributable as dividends to its members, trustees, or officers,
subject to the provisions of this Code on dissolution: Provided,
That any profit which a non-stock corporation may obtain as an
83
 incident to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which
the corporation was organized, subject to the provisions of this
Title. The provisions governing stock corporations, when
pertinent, shall be applicable to non-stock corporations, except
as may be covered by specific provisions of this Title.”

*Sec. 87 should be read in harmony with Sec. 94.

*A Non-stock corporation is not precluded from engaging in

profit-business related.

Sec. 88 of the Corporation Code provides that: “Non-stock

corporations may be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade,
industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions of this Title governing
particular classes of non-stock corporations.”

*The purpose of a non-stock corporation is related to public

welfare.

B. Distinguished from Stock Corporation

Non- stock Stock

Corporation Corporation
Public welfare For profit
Board of Trustees Board of directors
G e n e r a l l y, t h e 1 year subject to
term of office of h o l d - o v e r
trustees is 3 years principle
By-laws can City or
provide for a municipality
different venue as where the
long as it is within principal office is
the Philippines located

84
 Member may be Proxy is allowed
deprived of their
right to designate
proxies by
provisions in the
articles of
incorporation or
by-laws
Reason: To
p r o m o t e
camaraderie,
togetherness,
unity and
familiarity.
G e n e r a l l y , Election is vested
members could upon Board of
d i r e c t l y e l e c t Directors
officers. Except
unless AOI
p r o v i d e s
otherwise.

C. Membership in a Non-Stock Corporation

Sec. 89 of the Corporation Code provides that: “The right of the

membership of any class or classes to vote may be limited,
broadened or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited, broadened or
denied, each member, regardless of class, shall be entitled to one
vote. Unless otherwise provided in the articles of incorporation
of the by-laws, a member may vote by proxy in accordance with
the provisions of this Code. Voting by mail or other similar
means by members of non-stock corporations may be authorized
by the by-laws of non-stock corporations with the approval of,
and under such conditions which may be prescribed by, the
SEC.”
General Rule: Sec. 58
Exception: Sec. 89. This provision allows denial of proxy.

85
 Reason: To promote camaraderie, togetherness, unity and
familiarity.
*A member is entitled to 1 vote. However, such right may be
limited, broadened or denied in the Articles of Incorporation or
By-Laws. Thus, the By-laws of a non-stock corporation may
provide for the desired voting rights of members including the
number of votes.
Sec. 90 of the Corporation Code provides that: “Membership in
a non-stock corporation and all rights arising therefrom are
personal and non-transferable, unless the articles of
incorporation or the by-laws otherwise provide.”
General Rule: Membership is non-transferable.
Exception: If the Articles of Incorporation or the By-laws provide
otherwise.
Sec. 91 of the Corporation Code provides that: “Membership
shall be terminated in the manner and for the causes provided in
the articles of incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing all rights of a
member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws.”
Rules on Place of Meeting:
General Rule: Sec. 51
Exception: Sec. 93

D. Rule on Distribution of Assets

Sec. 94 of the Corporation Code provides that: “In case

dissolution of a non-stock corporation in accordance with the
provisions of this Code, its assets shall be applied and
distributed as follows: 1. All liabilities and obligations of the
corporation shall be paid, satisfied and discharged, or adequate
provision shall be made therefor; 2. Assets held by the
corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in
accordance with such requirements; 3. Assets received and held
by the corporation subject to limitations permitting their use
only for charitable, religious, benevolent, educational or similar
purposes, but not held upon a condition requiring return,

86
transfer or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations, societies or
organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant to this
Chapter; 4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-laws, determine
the distributive rights of members, or any class or classes of
members, or provide for distribution; and 5. In any other case,
assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for
profit, as may be specified in a plan of distribution adopted
pursuant to this Chapter.”

Order of distribution:

1. All its creditors shall be paid;

2. Assets held subject to return on dissolution, shall be delivered

back to their givers;

3. Assets held for charitable, religious purposes, etc., without a

condition for their return on dissolution, shall be conveyed to
one or more organizations engaged in similar activities as
dissolved corporation; and

4. All other assets shall be distributed to members, as provided

for in the Articles or By-Laws.

Sec. 95 of the Corporation Code provides that: “A plan

providing for the distribution of assets, not inconsistent with the
provisions of this Title, may be adopted by a non-stock
corporation in the process of dissolution in the following
manner: The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and directing
the submission thereof to a vote at a regular or special meeting of
members having voting rights. Written notice setting forth the
proposed plan of distribution or a summary thereof and the
date, time and place of such meeting shall be given to each

87
 member entitled to vote, within the time and in the manner
provided in this Code for the giving of notice of meetings to
members. Such plan of distribution shall be adopted upon
approval of at least 2/3 of the members having voting rights
present or represented by proxy at such meeting.”
Q: Would it be possible for a non-stock corporation to be
converted into a stock corporation by mere amendment of the
Articles of Incorporation?
A: NO. Because it would violate Section 87 of the Corporation
Code which prohibits distribution of income as dividends to
members.

Reason: Fraudulent to donors

Q: Can a stock corporation be converted to a non-stock

corporation by mere amendment of the Articles of
Incorporation?

A: YES.

Requirements:

1. Approval of 2/3 of the members

2. Approval of the SEC

Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.

CLOSE CORPORATIONS:

A. Concept; Distinguished from Open Corporations

Sec. 96 of the Corporation Code states that: “A corporation,

within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All the corporation’s issued stock
of all classes, exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not exceeding
20; (2) all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title;
and (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be
88
deemed a close corporation when at least 2/3 of its voting stock
or voting rights is owned or controlled by another corporation
which is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation,
except mining or oil companies, stock exchanges, banks,
insurance companies, public utilities, educational institutions
and corporations declared to be vested with public interest in
accordance with the provisions of this Code. The provisions of
this Title shall primarily govern close corporations: Provided,
That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.”

*Whether open or close corporation depends on its charter.

Case: San Juan Structural

The following must be stated in the Articles of Incorporation:

1. Membership is limited to 20

2. Transfer or disposition of shares is subject to specified

restrictions

3. Prohibition against offering to the public of the shares or

listing in the stock exchange.

General Rule: Any corporation may be incorporated as close

corporation.

Exceptions:

1. Mining or oil companies

2. Stock exchanges

3. Banks

4. Insurance companies

5. Public utilities

6. Educational institutions

7. Corporations declared to be vested with public interest

Distinctions from Open Corporations:

89
 Open Close
Corporation Corporation
Its articles of Its articles must
incorporation contain the special
need only contain m a t t e r s
the general prescribed by
m a t t e r s Section 97 aside
enumerated in from the general
Section 14 of the matters in Section
Corporation Code 14. Failure to do
so precludes a de
jure close
corporation status
Its status as an 2/3 of its voting
o rd i n a r y s t o c k stock or voting
corporation is not rights must not be
affected by the owned or
ownership of its controlled by
voting stock or a n o t h e r
voting rights corporation which
is not a close
corporation
Its articles cannot Its articles may
classify its classify its
directors directors
Business of the Business of the
corporation is corporation may
managed by the be managed by
board of directors the stockholders if
the articles so
provide, but they
are liable as
directors
The corporate Its articles may
officers and provide that any
employees are or all of the
elected by a corporate officers
majority vote of or employees may
all the members be elected or
of the board of appointed by the
directors stockholders

90
The pre-emptive The pre-emptive
right is subject to right is subject to
the exceptions no exceptions
found in Section unless denied in
39 of the the articles
Corporation Code
The appraisal The appraisal
right may be right may be
exercised by a exercised and
stockholder only compelled against
in the cases the corporation by
provided in a stockholder for
Sections 81 and 42 any reason
of the
Corporation Code
Except as regards In case of an
redeemable arbitration of an
shares, the intracorporate
purchase by the deadlock by the
corporation of its SEC, the
own stock must corporation may
always be made be ordered to
from the purchase its own
unrestricted shares from the
retained earnings stockholders
regardless of the
availability of
unrestricted
retained earnings
Arbitration of Arbitration of
intracorporate intracorporate
deadlock by the deadlock by the
SEC is not a SEC is an
remedy in case available remedy
the directors or in case the
stockholders are directors or
so divided stockholders are
respecting the so divided
management of respecting the
the corporation. management of
the corporation.

91
 *In San Juan Structural Steel Fabricators v CA, the SC held that
the circumstance that around 99.86% of the total share holding of
petitioner belongs to respondent would not justify classification
of the corporation as close.

B. Permissive Provisions in the Articles of Incorporation

Sec. 97 of the Corporation Code provides that: “The articles of

incorporation of a close corporation may provide: 1. For a
classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section; 2. For a classification of directors into one or more
classes, each of whom may be voted for and elected solely by a
particular class of stock; and 3. For a greater quorum or voting
requirements in meetings of stockholders or directors than those
provided in this Code. The articles of incorporation of a close
corporation may provide that the business of the corporation
may provide that the business of the corporation shall be
managed by the stockholders of the corporation rather than by a
board of directors. So long as this provision continues in effect: 1.
No meeting of stockholders need be called to elect directors; 2.
Unless the context clearly requires otherwise, the stockholders of
the corporation shall be deemed to be directors for the purpose
of applying the provisions of this Code; and 3. The stockholders
of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all
officers or employees or that specified officers or employees shall
be elected or appointed by the stockholders, instead of by the
board of directors.”

C. Restrictions on Transfer of Shares

Sec. 98 of the Corporation Code provides that: “Restrictions on

the right to transfer shares must appear in the articles of
incorporation and in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding on any purchaser

92
 thereof in good faith. Said restrictions shall not be more onerous
than granting the existing stockholders or the corporation the
option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period stated therein.
If upon the expiration of said period, the existing stockholders or
the corporation fails to exercise the option to purchase, the
transferring stockholder may sell his shares to any third person.”

Option Restriction – this restriction provides that no disposition

of shares will be made unless the shares are offered first to the
corporation or the stockholders.

*Pre-emptive right is exercisable or available.

*This restriction is valid and allowed.

Reason: it is the one contemplated by law.

*Restriction derogates private rights.

Consent Restriction – this restriction provides that no

disposition of shares will be made without the consent of
directors.

*This restriction is not valid.

Reason: It is more onerous and burdensome.

CORPORATE DISSOLUTION/LIQUIDATION:

A. Methods of Voluntary Corporate Dissolution and the

Requirements therefor

Dissolution refers to the extinguishment of franchise or

termination of corporate existence.

Modes of Dissolution:

1. Voluntary dissolution

2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary dissolution where no creditors are affected

2. Voluntary dissolution where creditors are affected

93
3. Shortening of the corporate term by amending the articles of
incorporation

*Dissolution takes effect upon the coming of the shortened

term.

4. Expiration of corporate term

• Voluntary dissolution where no creditors are affected

Sec. 118 of the Corporation Code provides that: “If

dissolution of a corporation does not prejudice the rights of
any creditor having a claim against it, the dissolution may be
effected by majority vote of the board of directors or trustees,
and by a resolution duly adopted by the affirmative vote of
the stockholders owning at least 2/3 of the outstanding
capital stock or of at least 2/3 of the members of a meeting to
be held upon call of the directors or trustees after publication
of the notice of time, place and object of the meeting for 3
consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located; and if
no newspaper is published in such place, then in a newspaper
of general circulation in the Philippines, after sending such
notice to each stockholder or member either by registered
mail or by personal delivery at least 30 days prior to said
meeting. A copy of the resolution authorizing the dissolution
shall be certified by a majority of the board of directors or
trustees and countersigned by the secretary of the
corporation. The SEC shall thereupon issue the certificate of
dissolution.”

Requisites:

1. A meeting must be held on the call of the directors or

trustees;

2. Notice of the meeting should be given to the stockholders

by personal delivery or registered mail at least 30 days
prior to the meeting;

94
 3. The notice of meeting should also be published for 3
consecutive weeks in a newspaper published in the place;

4. The resolution to dissolve must be approved by the

majority of the directors/trustees and approved by the
stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of members;

5. A copy of the resolution shall be certified by the majority of

the directors or trustees and countersigned by the
secretary;

6. The signed and countersigned copy will be filed with the

SEC and the latter will issue the certificate of dissolution

• Voluntary dissolution where creditors are affected

Sec. 119 of the Corporation Code provides that: “Where the

dissolution of a corporation may prejudice the rights of any
creditor, the petition for dissolution shall be filed with the
Securities and Exchange Commission. The petition shall be
signed by a majority of its board of directors or trustees or
other officers having the management of its affairs, verified by
its president or secretary or one of its directors or trustees, and
shall set forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of 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 at a meeting of its stockholders or members called
for that purpose. If the petition is sufficient in form and
substance, the Commission shall, by an order reciting the
purpose of the petition, fix a date on or before which
objections thereto may be filed by any person, which date
shall not be less than thirty (30) days nor more than sixty (60)
days after the entry of the order. Before such date, a copy of
the order shall be published at least once a week for three (3)
consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal
office of the corporation is situated, or if there be no such
newspaper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three (3)
consecutive weeks in three (3) public places in such

95
 municipality or city. Upon five (5) day's notice, given after the
date on which the right to file objections as fixed in the order
has expired, the Commission shall proceed to hear the
petition and try any issue made by the objections filed; and if
no such objection is sufficient, and the material allegations of
the petition are true, it shall render judgment dissolving the
corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation.”
Requisites:
1. Approval of the stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of members in a
meeting called for that purpose;
2. Filing of a Petition with the SEC signed by majority of
directors or trustees or other officers having the
management of its affairs verified by President or Secretary
or Director. Claims and demands must be stated in the
petition;
3. If petition is sufficient in form and substance, the SEC shall
issue an Order fixing a hearing date for objections;
4. A copy of the Order shall be published at least once a week
for 3 consecutive weeks in a newspaper of general
circulation or if there is no newspaper in the municipality
or city of the principal office, posting for 3 consecutive
weeks in 3 public places is sufficient;
5. Objections must be filed no less than 30 days nor more than
60 days after the entry of the order;
6. After the expiration of the time to file objections, a hearing
shall be conducted upon prior 5 day notice to hear the
objections;
7. Judgment shall be rendered dissolving the corporation and
directing the disposition of assets; the judgment may
include appointment of a receiver.

• Shortening of term of existence

Sec. 120 of the Corporation Code provides that: “A voluntary

dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Securities and
Exchange Commission in accordance with this Code. Upon
approval of the amended articles of incorporation of the

96
 expiration of the shortened term, as the case may be, the
corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on
liquidation.”

B. Concept of Involuntary Dissolution and the Grounds therefor

Sec. 121 of the Corporation Code provides that: “A corporation

may be dissolved by the Securities and Exchange Commission
upon filing of a verified complaint and after proper notice and
hearing on the grounds provided by existing laws, rules and
regulations.”

*This must be done with substantive and procedural due

process.

Grounds:

1. Failure to submit by-laws within the prescribed period

2. Fraud in the procurement of Certificate of Registration

3. Misrepresentation as to the activities that the corporation will

undertake

4. Treasurer’s affidavit is false

5. Continued inoperation for 5 years

6. Failure to commence business transactions within 2 years

from issuance of certificate of registration

7. To some cases, performance of ultra vires act since it is a

violation to the franchise but depending on the seriousness or
gravity of the offense

8. Issuance of watered stocks

9. De facto status

10.Failure to keep corporate books and records depending on the

gravity or seriousness of the offense

11.Violation of its charter

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C. Corporate Liquidation

Liquidation is a process by which all the assets of the

corporation are converted into liquid assets in order to facilitate
the payment of obligations to creditors, and the remaining
balance if any is to be distributed to the stockholders.

*Liquidation takes place after dissolution.

Sec. 122 of the Corporation Code provides that: “Every

corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner,
shall nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for
the purpose of prosecuting and defending suits by or against it
and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by
the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial interest
in the stockholders, members, creditors or other persons in
interest. Upon the winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city or
municipality where such assets are located. Except by decrease
of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and
liabilities.”

98
D. Methods of Liquidation or Winding Up

1. By Board of Directors

2. Through a trustee to whom the properties are conveyed

3. By management committee or rehabilitation receiver

Q: Can the 3 year period be extended?
A: NO.

Reason: Beyond the 3 year period, there is no corporate existence

for all purposes subject to doctrine of relation.
Remedy: Before the expiration of the 3 year period, appoint a
trustee/receiver.
Q: During the 3 year period, does the corporation enjoy
corporate existence?
A: YES. But for limited purpose only, i.e., for liquidation
purposes only. (Limited existence)
Q: May such corporation sue during the 3 year period?
A: YES. But only when the subject matter is related to
liquidation and winding up of its remaining affairs.
*In case trustee/receiver is appointed, he is not bound by the 3
year period.
*In Gelano v CA, the SC held that the lawyer of the corporation
can be considered as trustee. The term trustee must be
considered in its generic sense. Anyone who has been designated
by the corporation to act on its behalf could be considered as
trustee for purposes of pursuing a claim for and on behalf of the
corporation. A lawyer falls within the ambit of the word
“trustee.”
*Appointment of trustee can be inferred from the conduct of the
corporation. This is by Implication.
*If the corporation is the creditor appoint a trustee. If the
corporation is the debtor appoint a receiver.
Q: What if the corporate properties have already been
distributed among the shareholders without trustee/receiver?
A: Remedy: Run after the erring directors and officers.

E. Concept of Rehabilitation; Effects of Appointment of

Management Committee or Receiver

99
 Rehabilitation connotes a reopening or reorganization.
Contemplates a continuance of corporate existence in an effort to
restore the corporation to its former successful operation.

*This is a remedy expressly allowed under Section 6 of PD 902-

A.

Purpose: To make the corporation financially viable again.

Substantive Grounds:

1. When there is imminent danger of dissipation or wastage of

corporate assets

2. Serious paralyzation of business which would work to the

prejudice of the stockholders and creditors of the corporation
*Mere misconduct of an officer is not a ground for corporate
rehabilitation.
*A corporation cannot ask for corporate rehabilitation and at the
same time dissolution.
*With the passage of RA8799, the remedy could now be
instituted with the proper RTC.
Effect: Stay Order - stops or suspends the enforcement of all
claims for money or otherwise whether enforcement is by court
or not, until rehabilitation proceedings are terminated.
Cases: PAL v Garcia; Sobrejuanite; Lingkod Manggagawa ng
Rubberworld v Rubberworld Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay order suspends all
enforcement in all stages of the proceedings.
*In Lingkod Manggagawa sa Rubberworld v Rubberworld
Philippines, the SC held that labor claims are likewise affected
by the Stop order.
*In RCBC v IAC, the SC held that whether creditors are secured
or not, stay order will still affect them. The preference still
remains it is just the enforcement that is suspended.

FOREIGN CORPORATIONS:

A. Concept of Foreign Corporation

Foreign Corporation is a corporation formed, organized or

existing under any law other than those of the Philippines, and

100
 whose laws allow Filipino citizens and corporations to do
business in its own country or state.

Sec. 123 of the Corporation Code provides that: “For the

purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state. It shall
have the right to transact business in the Philippines after it shall
have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the
appropriate government agency.”

Reciprocity Clause provides that the foreign laws allow Filipino

citizens and corporations to do business in its own country or
state.

B. Tests to Determine Nationality of a Corporation

1. Incorporation Test – when the corporation is incorporated,

organized under the law of other country.

2. Control Test – for purposes of investment; the citizenship of a

particular corporation is to be determined by the citizenship
of the controlling stockholders.

C. Concept of “Doing Business” and the License Requirement

therefor

Substance Test provides that: a foreign corporation is doing

business in the country if it is continuing the body or substance
of the enterprise of business for which it was organized.

Continuity Test provides that: doing business implies a

continuity of commercial dealings and arrangements, and
contemplates to some extent the performance of acts or works or
the exercise of some functions normally incident to and in
progressive prosecution of, the purpose and object of its
organization.

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*Foreign Corporation is required to obtain license from the SEC
to enable them to do business in the Philippines.

*The foreign corporation must appoint a resident agent so that

court may acquire jurisdiction over the foreign corporation

*License is essential if there is an intention to maintain main or

substance of the business in the Philippines or to continue the
same.

*Lack of license does not affect the validity of the transaction.

*License is for regulatory purposes.

*License requirement does not prevent performance of acts that

are isolated from the main business of the corporation and there
is no intent to continue the same in the Philippines.

*If the foreign corporation is not licensed to do business in the

Philippines, General Rule: they have no access in Philippine
Courts

Exceptions:

1. Isolated transactions

2. Infringement of trademark

*International offense can be sued anywhere.

Cases: Expert Travel Tours v CA; Home Insurance v Eastern
Shipping Lines
*In Expert Travel Tours v CA, the SC held that resident agent is
not with authority to execute a certification of Forum shopping
following Sec. 23 of the Corporation Code.
*In Home Insurance v Eastern Shipping Lines, the SC held that
if at the time the suit was brought, the suing foreign entity
already have license to do business in the Philippines, the suit
will be allowed although at the time the transaction was made it
does not have the requisite of a license to do so, the remedial
defect is cured.
Cases: Japan Airlines v CA

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 *In Japan Airlines v CA, the SC held that the selling of tickets
though there is no aircraft landing in the Philippines constitute
doing business in the Philippines.
*In Ericks v CA, the SC held that license is necessary in order the
foreign corporation may sue. In this case, the court considered
the continuity test, they found out that the foreign corporation
has the intent to continue business in the Philippines.
*Credit is obtained to maintain longer transactions.

D. Effects of Being Issued a License

1. They are placed under the jurisdiction of the Philippine courts

2. They are placed under the same footing as domestic

corporations

3. The public is protected in dealing with foreign corporations.

E. Revocation and Withdrawal of License

Grounds for Revocation:

1. Failure to file its annual report or pay any fees as required by

the Corporation Code

2. Failure to appoint and maintain a resident agent in the

Philippines as required by the Corporation Code

3. Failure, after change of its resident agent or his address, to

submit to the SEC a statement of such change as required by
the Corporation Code

4. Failure to submit to the SEC an authenticated copy of any

amendment to its articles of incorporation or by-laws or of
any articles of merger or consolidation within the time
prescribed by the Corporation Code

5. A misrepresentation of any material matter in any application,

report affidavit or other document submitted by such
corporation pursuant to the provisions of the Corporation
Code

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6. Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine Government
or any of its agencies or political subdivision

7. Transacting business in the Philippines outside of the purpose

or purposes for which such corporation is authorized under
its license

8. Transacting business in the Philippines as agent of or acting

for and in behalf of any foreign corporation or entity not duly
licensed to do business in the Philippines

9. Any other ground as would render it unfit to transact

business in the Philippines.

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