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Intra-corporate Disputes partnership (general or limited), joint venture and business

Role of Corporation in Modern Business trust.


The corporate form of business organization permits the Individual proprietorship
combination of funds from various sources to raise the big Individual proprietorship is the ordinary form for the one-
capital needed for large business and industrial enterprises, man business, where the owner is at the same time the
which one or two persons may find difficult to finance. This worker. It does not preclude employment of others as his
has contributed greatly to the growth of industry carrying business may require, but decision-making is vested on him
with it the benefits of a wider employment of manpower and alone.
a fuller development of technical and managerial skill. The individual owner's earning are subjected to income tax
Definition and Attributes of a Corporation only once, unlike corporate and partnership profits which are
Section 2 of the Corporation Code defines a corporation as an subject to the corporate income tax as well as to the
artificial being created by operation of law, having the right of individual income tax of each partner or stockholder.
succession and the powers, attributes, and properties Its disadvantage is the owner's unlimited personal liability for
expressly authorized by law or incident to its existence. all the debts and obligations of the business. He cannot limit
Under this definition, a corporation has four attributes: his risk to his investment in the business. Capital will be
First, it is an artificial being, i.e. a juridical personal capable of limited by his resources. Expansion would present difficulties
having rights as well as obligations, with personality separate unless he can easily get credit or converts into at least a
and distinct from its members or stockholders. Hence, partnership.
stockholders are not personally liable for corporate The partnership
obligations and cannot be held liable to third persons who By the contract of partnership two or more persons bind
have claims against the corporation beyond their agreed themselves to contribute money, or industry to a common
contribution to the corporate capital. Neither may the fund, with the intention of dividing the profits among
corporation be liable for the personal obligations of its themselves.
stockholders. While partners are personally liable for the debts of the
Second, it is created by operation of law. Mere consent of the partnership which its assets cannot satisfy, stockholders of a
parties to form a corporation is not sufficient. Before it can corporation cannot be made to personally answer to
acquire a juridical personality, the State must give its consent corporate creditors beyond the amount which they have
either in the form of special law or a general enabling act. contributed or have promised to contribute to the corporate
The corporation's primary franchise refers to its right to be a capital.
corporation after compliance with the requirements of the The close corporation
Corporation Code, which will give it juridical personality. Where business associates belong to a small, closely-knit
A government corporation is normally created by special law, group, they usually prefer to keep the organization exclusive
referred to often as its charter. and would not welcome strangers. Wishing to avail
Third, a corporation has the right of succession whereby its themselves of the advantage of limiting their liability for
continued existence during the term stated in its articles of business reverses to the amount of their investment therein,
incorporation cannot be affected by any change in the they form a corporation, However, since the identity and
members or stockholders, whether this change be the personality of each stockholder are important to his
consequence of death, insolvency or any other incapacity. associates, although they may consider their organization as
Nor is it affected by the transfer of shares by a stockholder to a corporation in their dealings with third persons, among
a third person. themselves, they act and feel as partners.
Lastly, the corporation has the powers, attributes and
properties expressly authorized by law or incident to its Section 96 of the Corporation Code defines a close
existence. Under the traditional concept, a corporation, being corporation as one whose articles of incorporation provide
merely a creature of the law, can exercise only such powers that: (1) All the corporation's issued stock of all classes,
as the law may choose to grant it, either expressly or exclusive of treasury shares, shall be held of record by not
impliedly, as contrasted with the powers of a natural person, more than a specified number of persons, not exceeding
who can do anything as he wishes as long as he violates no twenty (20); (2) all the issued stock of all classes shall be
law nor rights of others. subject to one or more specified restrictions on transfer
Choice of Business Organization permitted by this Title; and (3) The corporation shall not
Besides the corporation, there are other forms of business list in any stock exchange or make any public offering of
possible under the law, i.e, individual proprietorship, any of its stock of any class. Notwithstanding the foregoing,
a corporation shall not be deemed a close corporation

LVJ I 1
personality which the partnership and the corporation
when at least two-thirds (2/3) of its voting stock or voting
possess.
rights is owned or controlled by another corporation which
If the trustees are given complete control of the business
is not a close corporation within the meaning of this Code.
without any right of the beneficiaries to interfere therein,
Any corporation may be incorporated as a close
such beneficiaries are exempt from personal liability for debts
corporation, except mining or oil companies, stock
incurred by the trustees on behalf of the business trust.
exchanges, banks, insurance companies, public utilities,
Under such a set-up, practically the only rights of the
educational institutions and corporations declared to be
beneficiaries would be to receive dividends and their
vested with public interest in accordance with the
distributive share of the assets upon the termination of the
provisions of this Code.
trust. Otherwise, they are liable.
Government Regulation of Corporations
The most characteristic feature of a close corporation is the By the legislature
identity of stock ownership and active management, i.e., all Government regulation of corporations can be justified not
or most of the stockholders are active in the corporate only by the police power of the state, but also by the fact that
business either as directors, officers or other key men in they owe their existence to it. The power to regulate
management. corporations in their activities and operations is exercised
A significant difference between the close corporation and through the legislative and executive branches of
other corporations under the Code is that the stockholders of government. The legislature has the power to amend or
a close corporation who are active in management are made repeal the Corporation Code or any part thereof, provided
personally liable for corporate torts, unless it has obtained that accrued rights are respected.
reasonably adequate insurance. However, they still enjoy By the SEC
limited liability in so far as other corporate obligations are Administrative supervision over corporations is vested by law
concerned. This will in effect compel close corporations to in the SEC, a quasi-judicial body charged with the
obtain insurance in order to indemnify those injured by the enforcement of all laws affecting corporations.
corporation's actions. Section 3 of PD 902-A, which granted more extensive powers
Where the proposed business is affected with a public to the SEC, reads:
interest, the formation of a close corporation composed only
of members of the same family or closely knit group may not
Sec. 3. The Commission shall have absolute jurisdiction,
be possible.
supervision and control over all corporations, partnerships
The limited partnership
or associations, who are the grantees of primary franchise
A limited partnership is in between a corporation and a
and/or a license or permit issued by the government to
partnership. It makes possible the sharing profits by an
operate in the Philippines; and in the exercise of its
investor, whose liability is limited to his investment. Like the
authority, it shall have the power to enlist the aid and
stockholder, the limited partner cannot take part in the
support of any and all enforcement agencies of the
management of the business and must leave its exclusively in
government, civil or military, as well as any private
the hands of general partner, under pain of losing the
institution, corporation, firm, association or person.
privilege of limited liability.
The joint venture
A joint venture is an organization formed for some temporary Among the more significant of its powers are the following:
purpose. It is hardly distinguishable from the partnership (1) To approve or reject articles of incorporation;
since their elements are similar - community of interest in the (2) To approve by-laws of corporations and amendments
business, sharing of profits and losses, and a mutual right of thereto;
control. Although a corporation cannot enter into a (3) To approve registration of securities, like shares and
partnership contract, it may however engage in a joint bonds, before they can be publicly sold;
venture with others. (4) To approve amendments to articles of incorporation;
The business trust (5) To approve increase or reduction of capital stock;
The vesting of title to the assets of a business enterprise in (6) To conduct investigations as it may consider necessary in
trustees, who act as representatives thereof, for the benefit the enforcement of the Corporation Code and other related
of others, called the beneficiaries or cestui que trust, gives laws, and in this connection, to inspect the books of any
rise to a business trust. corporation within its jurisdiction, to issue subpoenas and
Since there is no law in this jurisdiction which expressly subpoenas duces tecum as well as to order the search and
recognizes the existence of the business trust as an seizure of documents and records of any person or entity
association or organization, it cannot have the juridical under investigation;

LVJ I 2
(7) To punish for contempt, direct or indirect;
which may be detrimental to the interest of the public
(8) To require corporations to submit financial and other
and/or of the stockholder, partners, members of
reports as it may deem necessary in the public interest or for
associations or organizations registered with the
the proper discharge of its duties;
Commission.
(9) To issue rulings and opinions as to the proper
b) Controversies arising out of intra-corporate or
interpretation and application of laws entrusted to it for
partnership relations, between and among stockholders,
administration;
members, or associates; between any or all of them and
(10) To impose fines and/or penalties for violation of the laws
the corporation, partnership or association of which they
implemented by it, as well as its rules and regulations, its
are stockholders, members or associates, respectively; and
orders, decisions and/or rulings;
between such corporation, partnership or association and
(11) To act on complaints of any violation of law, rule or
the state insofar as it concerns their individual franchise or
regulation required to be enforced by it or for non-
right to exist as such entity;
compliance of any term or condition of any certificate, license
c) Controversies in the election or appointments of
or permit issued by it;
directors, trustees, officers or managers of such
(12) To suspend or revoke, after proper notice and hearing,
corporations, partnerships or associations; and
the certificate of registration of any corporation on certain
d) Petitions of corporations, partnerships or associations to
specified grounds;
be declared in the state of suspension of payments in cases
(13) To promulgate rules and regulations as may be necessary
where the corporation, partnership or association
for the proper execution of all the laws administered by it;
possesses sufficient property to cover all its debts but
(14) To grant licenses to foreign corporations to enable them
foresees the impossibility of meeting them when they
to transact business in the Philippines;
respectively fall due or in cases where the corporation,
(15) To issue preliminary or permanent injunctions, whether
partnership or association has no sufficient assets to cover
prohibitory or mandatory, in all cases in which it has
its liabilities, but is under the management of a
jurisdiction;
Rehabilitation Receiver or Management Committee
(16) To issue writs of attachment in cases in which it has
created pursuant to this Decree.
jurisdiction, in order to preserve the rights of parties;
(17) To appoint one or more receivers of the property, real Hearings are conducted by the SEC or by a Commissioner, or
and personal, which is the subject of the action pending by such other bodies designated by ir for the said purpose.
before it in accordance with the Rules of Court, and in such Any decision by said Commissioner may be appealed to the
other cases whenever necessary to preserve rights of parties SEC En Banc, where its decisions may also be appealed to the
litigants and/or protect the interest of the investing public CA by petition for review. The RTC has no jurisdiction to
and creditors; and review the decisions of the SEC.
(18) To create and appoint a management committee, board
or body upon petition or motu proprio to undertake the Articles of Incorporation
management of corporations not supervised or regulated by Steps in Formation of Corporation
other government agencies in appropriate cases when there (1) Promotional stage
is imminent danger of dissipation or loss of assets or other A promoter is one who "brings together persons who become
properties or paralyzation of business operations such interested in the enterprise, aids in procuring subscriptions
corporations which may be prejudicial to minority and sets in motion the machinery which leads to the
stockholders, parties-litigants or the general public. formation of the corporation itself." He formulates the
The SEC has original and exclusive jurisdiction to hear and necessary initial business and financial plans and, if
decide cases enumerated in Section 5 of PD 902-A: necessary, buys the rights and property which the business
may need, with the understanding that the corporation when
Section 5. In addition to the regulatory and adjudicative formed, shall take over the same.
functions of the Securities and Exchange Commission over (2) Drafting the articles of incorporation
corporations, partnerships and other forms of associations Once the financial plans are finalized, the incorporators
registered with it as expressly granted under existing laws should draft the articles of incorporation, which is the
and decrees, it shall have original and exclusive jurisdiction contract between it and its stockholders as well as the
to hear and decide cases involving: agreement among the stockholders.
a) Devices or schemes employed by or any acts, of the
board of directors, business associates, its officers or The state and the grantee of a charter are equally bound
partnership, amounting to fraud and misrepresentation

LVJ I 3
by its provisions. of incorporation pursuant to Section 181 of this Code.
It is a contract between three parties: The articles of incorporation and applications for
(a) Between the State and the corporation; amendments thereto may be filed with the Commission in
(b) Between the stockholders and the State; and the form of an electronic document, in accordance with
(c) Between the corporation and its stockholders. the Commission’s rules and regulations on electronic
(Government of the Philippine Islands v. Manila Railroad filing.
Co., 52 Phil. 699, 702 [1929])
Corporate name
The name of a corporation is essential to its existence since it
is through it that the corporation can sue and be sued and
SEC. 13. Contents of the Articles of Incorporation. – All
perform all legal acts. It is the only means of identifying it not
corporations shall file with the Commission articles of
only from its members or stockholders, but also from other
incorporation in any of the official languages, duly signed
entities and corporations.
and acknowledged or authenticated, in such form and
The law does not allow the corporation to adopt a name
manner as may be allowed by the Commission, containing
identical or deceptively or confusingly similar to that of any
substantially the following matters, except as otherwise
existing corporation or to any other name already protected
prescribed by this Code or by special law:
by law or which is patently deceptive, confusing or contrary
(a) The name of the corporation;
to existing laws.
(b) The specific purpose or purposes for which the
corporation is being formed. Where a corporation has
more than one stated purpose, the articles of Under the doctrine of secondary meaning, a word or
incorporation shall indicate the primary purpose and the phrase originally incapable of exclusive appropriation with
secondary purpose or purposes: Provided, That a reference to an article on the market, because
nonstock corporation may not include a purpose which geographically or otherwise descriptive might nevertheless
would change or contradict its nature as such; have been used so long and so exclusively by one producer
(c) The place where the principal office of the corporation with reference to his article that, in that trade and to that
is to be located, which must be within the Philippines; branch of the purchasing public, the word or phrase has
(d) The term for which the corporation is to exist, if the come to mean that the article was his product (Lyceum of
corporation has not elected perpetual existence; the Philippines v. Court of Appeals, G.R. No. 101897
(e) The names, nationalities, and residence addresses of [1993]).
the incorporators;
(f) The number of directors, which shall not be more than
fifteen (15) or the number of trustees which may be more
than fifteen (15);
(g) The names, nationalities, and residence addresses of A corporation has no right to intervene in a suit using a
persons who shall act as directors or trustees until the name other than its registered name, and if the
first regular directors or trustees are duly elected and corporation legally and truly wanted to intervene, should
qualified in accordance with this Code; have used its corporate name as the law requires and not
(h) If it be a stock corporation, the amount of its another name which it had not registered (Laureano
authorized capital stock, number of shares into which it is Investment and Development Corp. v. Court of Appeals, 272
divided, the par value of each, names, nationalities, and SCRA 253 [1997]).
residence addresses of the original subscribers, amount
subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par
value, if applicable; There would be no denial of due process when a
(i) If it be a nonstock corporation, the amount of its corporation is sued and judgment is rendered against it
capital, the names, nationalities, and residence addresses under its unregistered trade name, since a corporation may
of the contributors, and amount be sued under the name by which it makes itself known to
contributed by each; and its workers (Pison-Arceo Agricultural and Development
(j) Such other matters consistent with law and which the Corp. v. NLRC, 279 SCRA 312, 324 [1997]).
incorporators may deem necessary and convenient.
An arbitration agreement may be provided in the articles

LVJ I 4
The SEC has the authority to de-register at all times under
SEC. 17. Corporate Name. – No corporate name shall be all circumstances corporate names which in its estimation
allowed by the Commission if it is not distinguishable are likely to spawn confusion. The SEC has the duty to
from that already reserved or registered for the use of prevent confusion in the use of corporate names not only
another corporation, or if such name is already protected for the protection of the corporations involved but more so
by law, or when its use is contrary to existing law, rules for the protection of the public (Kaanib sa Iglesia ng Dios v.
and regulations. Iglesia ng Dios Kay Kristo Hesus, 372 SCRA 171 [2001]).
A name is not distinguishable even if it contains one or
more of the following:
The SEC requires incorporators to submit a written
(a) The word “corporation”, “company”, “incorporated”,
undertaking to change the corporate name in case there is
“limited”, “limited liability”, or an abbreviation of one of
another person, firm or entity with a prior right to the use of
such words; and
the said name or one similar to it. It also reserves the right to
(b) Punctuations, articles, conjunctions, contractions,
require a corporation to change its name in the case there
prepositions, abbreviations, different tenses, spacing, or
will later on appear a person or company with a prior right to
number of the same word or phrase.
the use of said name. If the name is legally permissible, the
The Commission, upon determination that the corporate
incorporators may be allowed by the SEC to reserve it for a
name is: (1) not distinguishable from a name already
reasonable period.
reserved or registered for the use of another corporation;
(2) already protected by law; or (3) contrary to law, rules
and regulations, may summarily order the corporation to
immediately cease and desist from using such name and A change in the corporate name does not make a new
require the corporation to register a new one. The corporation, whether effected by a special act or under a
Commission shall also cause the removal of all visible general law. It has no effect on the identity of the
signages, marks, advertisements, labels, prints and other corporation, or on its property, rights or liabilities (Philips
effects bearing such corporate name. Upon the approval Export B.V. v. Court of Appeals, G.R. No. 96161 [1992]).
of the new corporate name, the Commission shall issue a
certificate of incorporation under the amended name.
If the corporation fails to comply with the Commission’s
order, the Commission may hold the corporation and its
responsible directors or officers in contempt and/or hold The fact that the corporation by its old name makes a
them administratively, civilly and/or criminally liable format transfer of its property to the corporation by its
under this Code and other applicable laws and/or revoke new name does not of itself show that the change in name
the registration of the corporation. has affected a change in the identity of the corporation
(Philippine First Insurance Company, Inc. v. Hartigan, G.R.
No. L-26370 [1970]).

To distinguish it from partnerships and other business


To fall within the prohibition of the SEC Revised Guidelines
organizations, the law requires the corporation to append the
on deceptively or confusingly similar corporate names, two
word "Corporation" or "Inc." to its chosen name.
requisites must be proven, to wit:
Use of corporate names of dissolved corporations
(a) That the complainant corporation acquired a prior right
The name of a dissolved firm shall not be allowed to be used
over the use of such corporate name; and
by other firms within three years after the approval of the
(b) The proposed name is either (1) identical; or (2)
dissolution of the corporation by the SEC, unless allowed by
deceptively or confusingly similar to that of any existing
the last stockholders representing at least majority of the
corporation or to any other name already protected by
outstanding capital stock of the dissolved firm (SEC
law; or (3) patently deceptive, confusing or contrary to
Memorandum Circular No. 14-2000).
existing laws (Philips Export B.V. v. Court of Appeals, 206
SCRA 457 [1992]).
The SEC has quasi-judicial powers to hear and decide a
controversy between two corporations as to who has a
better right to the use of a particular name (Industrial
Refractories Corp. v. Court of Appeals, 390 SCRA 252, 259

LVJ I 5
if the powers are expressly enumerated in details "such
[2002]).
specification by implication excludes all other powers or
rights, except such incidental or subordinate rights and
powers as may be necessary to an exercise of the powers and
rights expressly given."
SEC. 159. Unauthorized Use of Corporate Name;
The indication of the primary purpose of the corporation is
Penalties. – The unauthorized use of a corporate name
necessary for the administrative supervision and monitoring
shall be punished with a fine ranging from Ten thousand
of the State, as it can determine which particular agency shall
pesos (P10,000.00) to Two hundred thousand pesos
have jurisdiction over the operations of the corporation
(P200,000.00).
(Villanueva).
Principal office of the corporation
A corporation should transact business only in its corporate The only requirement as to the principal office is that it must
name. It may amend such name provided it is done in be within the Philippines. However, the articles should specify
accordance with the procedure laid down by the law for not only the province but also the city or the town where
amendments of articles of incorporation and the SEC such principal office is located.
approves of such change. The statement of the principal office establishes the
Purpose clause residence of the corporation. This may prove important in
The significance of the purpose clause is that it confers as determining the venue of an action by or against the
well as limits the powers which a corporation may exercise. corporation.
Three reasons for requiring a purpose clause in the articles of All corporations and partnerships applying for registration
incorporation: "should state in their Articles of Incorporation or Articles of
(a) So that a prospective stockholder who is contemplating an Partnership the (i) specific address of their principal office,
investment in a business enterprise shall know within what which shall include, if feasible, the street number, street
lines of business his money is to be risked; name, barangay, city or municipality; and (ii) specific
(b) So that the management may know within what lines of residence address of each incorporator, stockholder, director,
business it is authorized to act; and trustee, or partner." "Metro Manila" shall no longer be
(c) So that anyone who deals with the corporation may allowed as address of the principal office (SEC Memorandum
ascertain, if he wishes, whether a contract or transaction into Circular No. 3, s. 2006).
which he contemplates entering is one within the general
The residence of a corporation is the place where its
authority of the management.
principal office is established; it can be sued in that place,
A corporation may have as many purposes as it may wish to
not in the place where its branch office is located
include in its articles, subject however to the following
(Clavecilla Radio System v. Antillon, 19 SCRA 379 [1967]).
conditions:
(a) The articles of incorporation must specify which is the
corporation's primary purpose and which are the secondary
purposes. The law does not require that the secondary Term of existence
purpose or purposes be related to the main purpose.
(b) Corporations for which special provisions are made in the
SEC. 11. Corporate Term. – A corporation shall have
Corporation Code or which are governed by special laws can
perpetual existence unless its articles of incorporation
have only the purpose peculiar to them and no other.
provides otherwise.
(c) The purpose or purposes must be lawful.
Corporations with certificates of incorporation issued
A corporation may not be formed for the purpose of
prior to the effectivity of this Code, and which continue to
practising a profession, like law, medicine or accountancy.
exist, shall have perpetual existence, unless the
Only persons who have passed the required government
corporation, upon a vote of its stockholders representing
examinations and who have fulfilled all the other legal
a majority of its outstanding capital stock, notifies the
requirements can practice such professions, and in the
Commission that it elects to retain its specific corporate
absence of any law granting authority to do so, such a
term pursuant to its articles of incorporation: Provided,
corporate purpose would not be lawful.
that any change in the corporate term under this section
It is a general rule that when the charter of corporation
is without prejudice to the appraisal right of dissenting
confers certain enumerated powers on the corporation, it is
stockholders in accordance with the provisions of this
to be construed as including incidental powers reasonably
Code.
necessary to the proper exercise of the enumerated powers
A corporate term for a specific period may be extended or
and as excluding all other non-enumerated powers; and that

LVJ I 6
shortened by amending the articles of incorporation:
Provided, That no extension may be made earlier than
The articles of incorporation must give the names,
three (3) years prior to the original or subsequent expiry
nationalities and residences of the incorporators as well as of
date(s) unless there are justifiable reasons for an earlier
the directors or trustees who will act as such until the first
extension as may be determined by the Commission:
regular directors or trustees are elected. The term directors is
Provided, further, That such extension of the corporate
used in reference to stock corporations, and trustees, to non-
term shall take effect only on the day following the
stock corporations.
original or subsequent expiry date(s).
Capital stock; subscription
A corporation whose term has expired may apply for a
Capital stock is the amount fixed in the articles of
revival of its corporate existence, together with all the
incorporation "to be subscribed and paid in or secured to be
rights and privileges under its certificate of incorporation
paid in by the shareholders of a corporation, at the
and subject to all of its duties, debts and liabilities
organization of the corporation or afterwards, and upon
existing prior to its revival. Upon approval by the
which it is to conduct its operations." It thus sets the limit to
Commission, the corporation shall be deemed revived
the total par or issued value of the shares which a
and a certificate of revival of corporate existence shall be
corporation may issue.
issued, giving it perpetual existence, unless its application
Subscription is the mutual agreement of the subscribers to
for revival provides otherwise.
take and pay for the stock of a corporation. Pre-incorporation
No application for revival of certificate of incorporation of
subscription is the amount which each incorporator or
banks, banking and quasi-banking institutions, preneed,
stockholder agrees to contribute to a proposed corporation.
insurance and trust companies, non-stock savings and
The articles of a stock corporation must state the amount of
loan associations, pawnshops, corporations engaged in
its authorized capital stock and the number of shares into
money service business, and other financial
which it is divided. Such shares may be par-value shares or no
intermediaries shall be approved by the Commission
par-value shares.
unless accompanied by a favorable recommendation of
A par value share is one in the certificate of stock which
the appropriate government agency.
appears an amount in pesos as the nominal value of the
shares. Such par value must be stated in the articles of
The first day of the corporate term is the date of incorporation, and par shares cannot be issued at less than
incorporation as stated in the Certificate of Incorporation and such par value, which can be changed only by an amendment
the last day of the corporate term is the day before of the articles of incorporation.
corresponding numbered day of the same month of The consideration for which no-par value shares may be
incorporation in the last year of existence of the corporation issued is referred to as its issued value, and this may be fixed
(SEC Memorandum Circular No. 21, s. 2014). in any of the the ways: (1) by the articles of incorporation, (2)
by the board of directors when so authorized by said articles
Incorporators and directors; number and qualifications or by the by-laws, or (3) by the stockholders representing at
least a majority of the outstanding capital stock.
If no-par value shares will be issued by the corporation, such
SEC. 10. Number and Qualifications of Incorporators. –
fact must be stated in the articles, and the consideration for
Any person, partnership, association or corporation,
their issuance cannot be less than the issued value. Some
singly or jointly with others but not more than fifteen (15)
corporations cannot issue no-par value shares, like banks,
in number, may organize a corporation for any lawful
trust companies, insurance companies, public utilities and
purpose or purposes: Provided, That natural persons who
building and loan associations.
are licensed to practice a profession, and partnerships or
associations organized for the purpose of practicing a
profession, shall not be allowed to organize as a SEC. 12. Minimum Capital Stock Not Required of Stock
corporation unless otherwise provided under special Corporations. – Stock corporations shall not be required
laws. Incorporators who are natural persons must be of to have a minimum capital stock, except as otherwise
legal age. specifically provided by special law.
Each incorporator of a stock corporation must own or be
a subscriber to at least one (1) share of the capital stock.
Other matters
A corporation with a single stockholder is considered a
The articles of incorporation may include such other matters
One Person Corporation as described in Title XIII, Chapter
as are not inconsistent with law and which the incorporators
III of this Code.
may deem necessary and convenient.

LVJ I 7
Other documentary requirements
(b) The purpose or purposes of the corporation are
(a) Certificate of Deposit
patently unconstitutional, illegal, immoral or contrary to
SEC Guidelines require that a bank certificate covering the
government rules and regulations;
deposit of the paid-up capital, in accordance with a
(c) The certification concerning the amount of capital
prescribed form subscribed under oath by a responsible bank
stock subscribed and/or paid is false; and
officer, must accompany the incorporation papers.
(d) The required percentage of Filipino ownership of the
(b) Letter of authority to examine bank deposit
capital stock under existing laws or the Constitution has
A letter of authority authorizing the SEC to examine not only
not been complied with.
the bank deposit account but also the corporation's books of
No articles of incorporation or amendment to articles of
accounts and supporting records to determine the existence
incorporation of banks, banking and quasi-banking
and utilization of the paid up capital stock must also be
institutions, preneed, insurance and trust companies,
submitted. The letter of authority shall be binding upon the
non-stock savings and loan associations (NSSLAs),
corporation even if there is a change of corporate officers.
pawnshops, and other financial intermediaries shall be
(c) Written undertaking to change corporate name
approved by the Commission unless accompanied by a
The SEC also requires that incorporators submit a written
favorable recommendation of the appropriate
undertaking to change their partnership or corporate name in
government agency to the effect that such articles or
case there is another person, firm or entity with a prior right
amendment is in accordance with law.
to the use of the said name or one similar to it.
(3) Filing of articles; payment of fees
After the articles of incorporation and the treasurer's affidavit
have been duly signed and acknowledged, these must be filed
Provisions in the articles of incorporation that allowed the
with the SEC and the corresponding fees must be paid.
directors and officers immunity from any claims against the
The articles of incorporation of corporations governed by
corporation even in cases of self-dealings is against
special laws, like banks, insurance companies, public utilities
Philippine corporate policies, since it would authorize the
and educational institutions will not be accepted for filing
directors and officers of the company to do anything, short
unless accompanied by a favorable recommendation of the
of actual fraud, with the affairs of the corporation even to
appropriate government agency to the effect that such
benefit themselves directly or other persons or entities in
articles are in accordance with law.
which they are interested, and with immunity because of
Failure to file the articles of incorporation will prevent due
the advance condonation or relief from responsibility by
incorporation of the proposed corporation and will not give
reason of such acts (Palting v. San Jose Petroleum, Inc., 18
rise to its juridical personality. It will not even be a de facto
SCRA 924, 942-943 [1996]).
corporation.
(4) Examination of articles; approval or rejection by SEC
After the articles of incorporation have been filed, the SEC Matters in Articles of Incorporation that are beyond
shall examine them in order to determine whether they are in amendment
conformity with law. If they are not, the SEC must give the The following provisions in the articles of incorporation refers
incorporators a reasonable time within which to correct or to facts existing as of the date of incorporation, and hence,
modify the objectionable portions. are beyond the power of the stockholders or members to
alter or change, because they are accomplished facts ("fait
accompli"):
SEC. 16. Grounds When Articles of Incorporation or
(a) Names of the incorporators;
Amendment may be Disapproved. – The Commission may
(b) Names of the incorporating directors/trustees;
disapprove the articles of incorporation or any
(c) Names of the original subscribers to the capital stock of
amendment thereto if the same is not compliant with the
the corporation and their subscribed and paid-up capital;
requirements of this Code: Provided, That the
(d) The Treasurer-in-trust elected by the original subscribers;
Commission shall give the incorporators, directors,
(e) Members who contributed to the initial capital of a non-
trustees, or officers a reasonable time from receipt of the
stock corporation;
disapproval within which to modify the objectionable
(f) Witnesses and the acknowledgment thereof.
portions of the articles or amendment. The following are
All the foregoing items refer to facts existing as of the date of
grounds for such disapproval:
incorporation and hence, are not subject to amendment.
(a) The articles of incorporation or any amendment
Grounds for rejection or disapproval of the articles of
thereto is not substantially in accordance with the form
incorporation:
prescribed herein;

LVJ I 8
(a) That the articles of incorporation or any amendment Internal Organization of Corporation
thereto is not substantially in accordance with the form After all the steps for incorporation have been accomplished
prescribed herein; and the certificate of incorporation has been issued, the
(b) That the purpose or purposes of the corporation are corporation has to be organized preparatory to the conduct
patently unconstitutional, illegal, immoral, or contrary to of its business. In order to be organized properly, the
government rules and regulations; following must be done:
(c) That the Treasurer's Affidavit concerning the amount of (1) approval of by-laws,
capital stock subscribed and/or paid is false; (2) election of directors, and
(d) That the required percentage of ownership of the capital (3) election of officers.
stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the
SEC. 45. Adoption of Bylaws. – For the adoption of bylaws
Constitution.
by the corporation, the affirmative vote of the
The SEC may, after consulting with the Board of Investments,
stockholders representing at least a majority of the
NEDA or any appropriate government agency, deny
outstanding capital stock, or of at least a majority of the
registration of any corporation, partnership or association if
members in case of nonstock corporations, shall be
its establishment, organization or operation will not be
necessary. The bylaws shall be signed by the stockholders
consistent with declared national economic policies.
or members voting for them and shall be kept in the
Any decision of the SEC disapproving or rejecting the articles
principal office of the corporation, subject to the
of incorporation may be appealed to the CA by petition for
inspection of the stockholders or members during office
review.
hours. A copy thereof, duly certified by a majority of the
(5) Issuance of certificate of incorporation
directors or trustees and countersigned by the secretary
If upon examination, the SEC is satisfied that all the legal
of the corporation, shall be filed with the Commission and
requirements have been complied with and that there are no
attached to the original articles of incorporation.
reasons for rejecting or disapproving the articles of
Notwithstanding the provisions of the preceding
incorporation, it will issue a certificate of incorporation. It is
paragraph, bylaws may be adopted and filed prior to
only upon such issuance that the corporation acquires a
incorporation; in such case, such bylaws shall be
juridical personality distinct and separate from its members
approved and signed by all the incorporators and
or stockholders with the power to sue and be sued and to
submitted to the Commission, together with the articles
perform all other legal acts.
of incorporation.
Articles of incorporation do not become binding as the
In all cases, bylaws shall be effective only upon the
charter of the corporation unless they have been filed and
issuance by the Commission of a certification that the
registered with, and certified by, the SEC.
bylaws are in accordance with this Code.
Should it subsequently be found that the incorporators were
The Commission shall not accept for filing the bylaws or
guilty of fraud in procuring the certificate of incorporation,
any amendment thereto of any bank, banking institution,
the same may be revoked by the SEC, after proper notice and
building and loan association, trust company, insurance
hearings.
company, public utility, educational institution, or other
special corporations governed by special laws, unless
SEC. 164. Obtaining Corporate Registration Through accompanied by a certificate of the appropriate
Fraud; Penalties. – Those responsible for the formation of government agency to the effect that such bylaws or
a corporation through fraud, or who assisted directly or amendments are in accordance with law.
indirectly therein, shall be punished with a fine ranging
from Two hundred thousand pesos (P200,000.00) to Two
million pesos (P2,000,000.00). When the violation of this
provision is injurious or detrimental to the public, the SEC. 46. Contents of Bylaws. – A private corporation may
penalty is a fine ranging from Four hundred thousand provide the following in its bylaws:
pesos (P400,000.00) to Five million pesos (P5,000,000.00). (a) The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
(b) The time and manner of calling and conducting regular
or special meetings and mode of notifying the
stockholders or members thereof;
By-Laws (c) The required quorum in meetings of stockholders or
members and the manner of voting therein;

LVJ I 9
SEC shall not register the by-laws of any bank, or any
(d) The modes by which a stockholder, member, director,
amendment thereto, unless accompanied by a certificate of
or trustee may attend meetings and cast their votes;
authority from the BSP.
(e) The form for proxies of stockholders and members and
the manner of voting them;
(f) The directors’ or trustees’ qualifications, duties and By-law provisions "must not disturb vested rights or impair
responsibilities, the guidelines for setting the substantial rights of stockholder or member, affect rights
compensation of directors or trustees and officers, and of property or create obligations unknown to the law"
the maximum number of other board representations (Fleischer v. Botica Nolasco, Co., 47 Phil. 583 [1925]).
that an independent director or trustee may have which
shall, in no case, be more than the number prescribed by
the Commission;
(g) The time for holding the annual election of directors or "Where the reasonableness of a by-law is a mere matter of
trustees and the mode or manner of giving notice thereof; judgment, and one upon which reasonable minds must
(h) The manner of election or appointment and the term necessarily differ, a court would not be warranted in
of office of all officers other than directors or trustees; substituting its judgment instead of the judgment of those
(i) The penalties for violation of the bylaws; who are authorized to make by-laws and who have
(j) In the case of stock corporations, the manner of issuing exercised their authority" (Gokongwei, Jr. v. Securities and
stock certificates; and Exchange Commission, 89 SCRA 336, 361-362 [1979]).
(k) Such other matters as may be necessary for the proper
or convenient transaction of its corporate affairs for the
promotion of good governance and anti-graft and
corruption measures. By-laws being merely private documents to regulate the
An arbitration agreement may be provided in the bylaws relationship among the members of the corporate family, it
pursuant to Section 181 of this Code. cannot create rights or be used to restrict rights. Moreover,
since be-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons
By-laws
who deal with the corporation, unless they have
By-laws are the product of the agreement of the stockholders
knowledge of the same (Fleischer v. Botica Nolasco, Co., 47
or members and establish the rules for the internal
Phil. 583 [1925]).
government of the corporation.
The by-laws are subordinate to the articles of incorporation
as well as to the Corporation Code and related statutes, and
should therefore not be inconsistent with any of these. Principle of waiver applicable to by-laws
Otherwise, they would have no binding effect.
"If a corporation acts or contracts in disregard of a by-laws
As in the case of the articles of incorporation, the SEC may
with the consent or acquiescence of the stockholders or
disapprove by-laws which it believes to be inconsistent with
members, there is waiver of the by-laws, at least pro hac
the law. Once approved by the SEC, the by-laws will bind the
vice, whether it is afterwards sought to set up the by-laws
corporation and all stockholders or members, including those
against strangers or as against its stockholders or
who voted against their adoption as well as those who
members" (SEC Opinion No. 22, s. of 2003).
become such after their adoption and approval.
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 failure to adopt and file the by-laws do not
the articles of incorporation.
automatically operate to dissolve a corporation, but are
The SEC shall not accept for filing the by-laws or any
considered grounds for which the SEC may seek the
amendment thereto of any bank, banking institution, building
corporation's dissolution (Chung Ka Bio v. Intermediate
and loan association, trust company, insurance company,
Appellate Court, 163 SCRA 534 [1998]).
public utility, educational institution, or other special
corporations governed by special laws, unless accompanied Under Section 6(I)(5) of PD 902-A, the SEC may suspend or
by a certificate of the appropriate government agency to the revoke, after proper notice and hearing, the franchise or
effect that such by-laws or amendments are in accordance certificate of registration of a corporation for its failure to file
with law. by-laws within the period required by law.
Under Section 14 of the General Banking Law of 2000, the When the articles of incorporation or constitution of the

LVJ I 10
association already includes provisions that embody internal juridical personality distinct and separate from its
rules to govern the workings of the group, a separate set of stockholders.
by-laws need not be filed (Villanueva). If a corporation is a de jure one, i.e., one which has complied
Election of directors and officers; commencement of substantially with the mandatory legal requirements, its due
business incorporation cannot be successfully attacked even in a quo
Once the directors are elected, they must complete the warranto proceeding by the State.
organization of the corporation by electing their officers. Rationale of the de facto doctrine
Annual Financial Statements The de facto doctrine grew out of necessity to promote the
Once a corporation is organized, SEC rules require it to keep security of business transaction and to eliminate quibbling
proper accounting records and to file a financial statement over irregularities. It would be unfair to allow a claimant
with the SEC annually. This requirement applies to both stock against the alleged corporation to insist on the individual
and non-stock corporations and is aimed to assist the SEC in liability of innocent investors merely because of some minor
the exercise of its supervisory powers over all corporations. flaws in its incorporation. If any wrong has been done, it is
only to the State, the only one which can give it legal
existence.
Without the de facto corporation, both private and public
Defective Incorporation dealings would grind to a halt because of the burden imposed
Defective attempts to incorporate; de facto corporation on the dealing public to first verify the power and authority of
SEC. 19. De facto Corporations. – The due incorporation of the person or entity they deal with. (Villanueva)
any corporation claiming in good faith to be a corporation It is only the State which can question its existence, and even
under this Code, and its right to exercise corporate then only by a direct and not a collateral attack.
powers, shall not be inquired into collaterally in any Where the requirements of either a de jure or de facto
private suit to which such corporation may be a party. corporation are not present, then the associates in the
Such inquiry may be made by the Solicitor General in a business may be held liable as partners for the obligations of
quo warranto proceeding. the alleged corporation, unless the principle of corporation
Not every defect in the incorporation precludes a de jure by estoppel can properly apply.
corporation. As long as the mandatory requirements for Should the assets of the business not be sufficient to satisfy
incorporation are substantially complied with, a its liabilities, then the "partners" will have to answer with
corporation de jure will be formed. their own property.
It is ordinarily held that persons who attempt, but fail, to
However, a corporation will be deemed to exist as a person form a corporation and who carry on business under the
distinct and separate from its members or stockholders corporate name occupy the position of partners. However,
despite the absence of substantial compliance if the following such a relation does not necessarily exist, for ordinarily
conditions are met: persons cannot be made to assume the relation of
(a) That there is an apparently valid statute under which the partners, as between themselves, when their purpose is
corporation with its purposes may be formed; that no partnership shall exist, and it should be implied
(b) That there has been colorable compliance with the legal only when necessary to do justice between the parties
requirements in good faith; (Pioneer Insurance & Surety Corporation v. Court of
(c) That there has been user of corporate powers; i.e., the Appeals, G.R. No. 84197 [1989]).
transaction of business in some way as if it were a
corporation. The de facto doctrine is meant to apply to the level of
If all the foregoing conditions are met by the defectively existence that pertains to the relationship of the corporation
formed corporation, it will be considered a de facto with the dealing public; and is not meant to govern nor be
corporation, the due incorporation of which cannot be applicable to other levels of existence, such as those
collaterally attacked either by the State or private individuals. pertaining to intra-corporate relationships. (Villanueva)
Such incorporation may, however, be directly attacked by the
State in a quo warranto proceeding. In the absence of the formal issuance by the SEC of the
A de facto corporation is in all aspects a de jure corporation certificate of incorporation, any other "colorable attempt
except that the State may question its due incorporation in a in good faith to incorporate" would not qualify the
direct proceeding. Hence, it has all the powers and liabilities application of the de facto corporation doctrine, and that
of a de jure corporation and, except as to the State, has a any party may raise the lack of juridical personality to avoid
the enforcement of a contract entered into in the name of

LVJ I 11
the corporation (Hall v. Piccio, 86 Phil. 603 [1950]). of a statute prior to such a determination of
Note: Said ruling only applies if the suit is in essence an unconstitutionality is an operative fact and may have
intra-corporate one, and not if the it is between the consequences which cannot always be erased by a new
corporation and "outsiders" or third parties. judicial declaration (De Agbayani v. Philippine National
The de facto doctrine and the corporation by estoppel Bank, 36 SCRA 429 [1971]).
doctrine have no application to issues and controversies
In the qualified view, a corporation defectively organized
that deal on the level of those that fall within the intra-
under the law before it was declared unconstitutional can
corporate level,for in both cases the essential element of
claim to be a de facto corporation (presuming that other
good faith does not exist.
requisites are present), since it was organized under color of
law, that the statute is presumptively constitutional until it
has been judicially declared to be invalid, and that until it is so
declared, men have a right to act and contract under such
Guidelines in determining if a corporation is de facto under
presumption.
an invalid statute:
After declaration of the invalidity or unconstitutionality of the
I. The color of authority requisite to the organization of a
enabling statute, any corporation organized under it can no
de facto municipal corporation may be:
longer claim the status of being a de facto corporation, since
1. A valid law enacted by the legislature.
at that point the element of good faith would no longer exist.
2. An unconstitutional law, valid on its face, which has
Orthodox view or qualified view?
either (a) been upheld for a time by the courts or (b) not
yet been declared void; provided that a warrant for its If the constitutionality of the statute is raised for the first
creation can be found in some other valid law or in the time in an action wherein it is sought to prevent the future
recognition of its potential existence by the general laws or incurring of rights and obligations, it will be proper to
constitution of the state. permit collateral attack (hence, the application of the
II. There can be no de facto municipal corporation unless orthodox view). [Villanueva]
either directly or potentially, such a de jure corporation is Where the constitutionality of the statute is raised for the
authorized by some legislative fiat. first time in litigation seeking enforcement of contracts or
III. There can be no color of authority in an transactions which have been fully or partially
unconstitutional statute alone, the invalidity of which is consummated, collateral attack on the juridical personality
apparent on its face. of the corporation should not be permitted, since the
IV. There can be no de facto corporation created to take corporation should be treated as a de facto corporation
the place of an existing de jure corporation, as such (hence, the application of the qualified view). [Villanueva]
organization would clearly be a usurper.
(Municipality of Malabang v. Benito, G.R. No. L-28113
"Substantial" or "colorable" compliance
[1969], citing Tooke, Municipal Corporations under
While the corporation is still in the process of formation,
Unconstitutional Statutes, 37 Yale L.J. 935, 951-53 [1928]).
there can be no "substantial" nor colorable compliance and
therefore, there cannot be at such stage a de facto
User of corporate powers corporation.
As regards the use of corporate powers, just a slight evidence In Philippine jurisdiction, the filing of articles of incorporation
of conducting business as a corporation will be deemed and the issuance of the certificate of incorporation may
sufficient. It is not necessary that the dealings between the therefore be considered as essential for the existence of a de
parties should have been on a corporate basis. facto corporation.
Taking subscriptions for and issuing shares of stocks, electing Some defects that do not preclude the creation of a de facto
directors and officers, adopting by-laws, buying a lot and corporation:
constructing a building upon it, are sufficient acts of user of (a) Defects in the incorporation papers - the articles of
corporate power to constitute a de facto corporation incorporation fail to state all the matters required by the
(Villanueva). Corporation Code to be stated, or state some of them
Law subsequently declared void; orthodox view incorrectly;
The prevailing view is that there can be no de facto (b) Corporate name - the name of the corporation closely
corporation under a statute subsequently declared resembles that of a pre-existing corporation that it will tend
unconstitutional. to deceive the public;
However, under the "qualified view," the actual existence

LVJ I 12
(c) Ineligibility of incorporators - the incorporators or a
indirectly therein, shall be punished with a fine ranging
certain number of them are not residents of the Philippines;
from Two hundred thousand pesos (P200,000.00) to Two
or
million pesos (P2,000,000.00). When the violation of this
(d) Defects in the execution of incorporation papers, the
provision is injurious or detrimental to the public, the
acknowledgment in the articles of incorporation, or
penalty is a fine ranging from Four hundred thousand
certificate of incorporation is insufficient or defective in form,
pesos (P400,000.00) to Five million pesos (P5,000,000.00).
or it was acknowledged before the wrong office. (Villanueva)
SEC. 138. Involuntary Dissolution. – A corporation may be
Corporation by estoppel
dissolved by the Commission motu proprio or upon filing
of a verified complaint by any interested party. The SEC. 20. Corporation by Estoppel. – All persons who
following may be grounds for dissolution of the assume to act as a corporation knowing it to be without
corporation: authority to do so shall be liable as general partners for
(a) Non-use of corporate charter as provided under all debts, liabilities and damages incurred or arising as a
Section 21 of this Code; result thereof: Provided, however, That when any such
(b) Continuous inoperation of a corporation as provided ostensible corporation is sued on any transaction entered
under Section 21 of this Code; by it as a corporation or on any tort committed by it as
(c) Upon receipt of a lawful court order dissolving the such, it shall not be allowed to use its lack of corporate
corporation; personality as a defense. Anyone who assumes an
(d) Upon finding by final judgment that the corporation obligation to an ostensible corporation as such cannot
procured its incorporation through fraud; resist performance thereof on the ground that there was
(e) Upon finding by final judgment that the corporation: in fact no corporation.
(1) Was created for the purpose of committing, concealing
or aiding the commission of securities violations,
The doctrine of corporation by estoppel may apply to a third
smuggling, tax evasion, money laundering, or graft and
party or the alleged corporation. It is based on equity
corrupt practices;
considerations, and is resorted to in fairness to all parties
(2) Committed or aided in the commission of securities
concerned.
violations, smuggling, tax evasion, money laundering, or
graft and corrupt practices, and its stockholders knew of The doctrine of corporation by estoppel may apply to the
the same; and alleged corporation and to a third party. In the first
(3) Repeatedly and knowingly tolerated the commission instance, an unincorporated association, which
of graft and corrupt practices or other fraudulent or illegal represented itself to be a corporation, will be estopped
acts by its directors, trustees, officers, or employees. from denying its corporate capacity in a suit against it by a
If the corporation is ordered dissolved by final judgment third person who relied in good faith on such
pursuant to the grounds set forth in subparagraph (e) representation. It cannot allege lack of personality to be
hereof, its assets, after payment of its liabilities, shall, sued to evade its responsibility for a contract it entered
upon petition of the Commission with the appropriate into and by virtue of which it received advantages and
court, be forfeited in favor of the national government. benefits.
Such forfeiture shall be without prejudice to the rights of On the other hand, a third party who, knowing an
innocent stockholders and employees for services association to be unincorporated, nonetheless treated it as
rendered, and to the application of other penalty or a corporation and received benefits from it, may be barred
sanction under this Code or other laws. from denying its corporate existence in a suit brought
The Commission shall give reasonable notice to, and against the alleged corporation. In such case, all those who
coordinate with, the appropriate regulatory agency prior benefited from the transaction made by the ostensible
to the involuntary dissolution of companies under their corporation, despite knowledge of its legal defects, may be
special regulatory jurisdiction. held liable for contracts they impliedly assented to or took
advantage of. (Lim v. Philippine Fishing Gear, G.R. No.
136448 [1999]).

SEC. 164. Obtaining Corporate Registration Through


Case 1: When a third person has entered into a contract with
Fraud;
an association which it represented itself to be a corporation,
Penalties. – Those responsible for the formation of a
the association will be estopped from denying its corporate
corporation through fraud, or who assisted directly or
capacity in a suit against by such third person. Thus:

LVJ I 13
The Corporate Entity: Piercing the Corporate Veil
Association/”corporatio Theory of Corporate Entity; its effects
Third person
n” SEC. 18. Registration, Incorporation and Commencement
(Plaintiff)
(Defendant) of Corporate Existence. – A person or group of persons
desiring to incorporate shall submit the intended
corporate name to the Commission for verification. If the
Any person acting or purporting to act on behalf of a
Commission finds that the name is distinguishable from a
corporation which has no valid existence assumes such
name already reserved or registered for the use of
privileges and becomes personally liable for contract
another corporation, not protected by law and is not
entered into or for other acts performed as such agent.
contrary to law, rules and regulations, the name shall be
(International Express Travel & Tour Services, Inc. v. Court
reserved in favor of the incorporators. The incorporators
of Appeals, G.R. No. 119002 [2000]).
shall then submit their articles of incorporation and
bylaws to the Commission.
Case 2: A third party who had dealt with an unincorporated If the Commission finds that the submitted documents
association as a corporation may be precluded from denying and information are fully compliant with the
its corporate existence on a suit brought by the alleged requirements of this Code, other relevant laws, rules and
corporation on the contract. This is true even if he was regulations, the Commission shall issue the certificate of
ignorant of the defective incorporation. A person should not incorporation.
be allowed to escape liability ona contract from which he has A private corporation organized under this Code
benefited on the irrelative ground of defective corporation. commences its corporate existence and juridical
The third person must be deemed to have admitted the personality from the date the Commission issues the
existence of the corporation by the fact that he dealt with it certificate of incorporation under its official seal and
as a corporation. thereupon the incorporators, stockholders/members and
Where the associates were ignorant of the defective their successors shall constitute a body corporate under
incorporation, and an innocent third person dealt with the the name stated in the articles of incorporation for the
corporation as such, the latter cannot hold the associates period of time mentioned therein, unless said period is
personally liable. extended or the corporation is sooner dissolved in
If the third person knew of the defects of incorporation and accordance with law.
still dealt with the corporation, he must be deemed to have
chosen to deal with the corporation as such and therefore
The issuance of the certificate of incorporation marks the
should not be allowed to recover from the individual
beginning of the corporation's existence as a legal entity. As
associates but should be limited in his recovery to the
such, it acquires the right to sue and be sued, to hold
corporate assets.
property in its own name, enter into contracts with third
Association/”corporation persons, and to perform all other legal acts.
Third person
” As a legal entity, a corporation has a personality distinct and
(Defendant)
(Plaintiff) separate from its individual stockholders or members, and is
Difference between de facto corporation and corporation by not affected by the personal rights, obligations and
estoppel transactions of the latter. As a consequence:
(a) The property of the corporation is not the property of its
De facto Corporation by estoppel stockholders; nor can the property of even the controlling
stockholders or the officers be treated as part of the
Where all the requisites of a If any of the requisites are corporate estate.
de facto corporation is absent, the estoppel (b) A parent or holding corporation has no proprietary
present, such corporation doctrine can apply only if interest in the property, rights and interests of its subsidiaries
will have the status of a de under the circumstances of or affiliates; consequently, any suit against the parent
jure corporation in all cases the particular case then company does not bind the subsidiaries and vice versa.
brought by or against it, before the court, the (c) A corporation may not be held liable for the obligations of
except only as to the State defendant corporation or the stockholders or members composing it, or those of its
in a direct proceeding. the third party is estopped. officers; and neither can its stockholders be held liable for the
obligations of such corporation.

LVJ I 14
(d) Corporate officers are not personally liable for their whenever a tortious act is committed by an officer or agent
official acts in pursuing the affairs and business of the under express direction or authority from the stockholders or
corporation; unless it is shown that they have exceeded their members acting as a body, or generally, from the directors as
authority. the governing body.
(e) Substantial ownership in the capital stock entitling the
Mere ownership by a single stockholder or by another
shareholder a significant vote in corporate affairs allows them
corporation is not of itself sufficient ground for
no standing or claims pertaining to corporate affairs. Thus, a
disregarding the separate corporate personality (Palay, Inc.
suit against a corporation cannot be considered as a suit
v. Clave, G.R. No. L-56076, September 21, 1983).
against its stockholders, and vice-versa.
(f) Since the separate juridical personality is a fiction created
by law for convenience and to prevent injustice, it may be
disregarded if it is used as a means to perpetuate fraud or an Disregarding corporate entity
illegal act or as a vehicle for the evasion of an existing The main doctrine of separate judicial personality is to be
obligation, the circumvention of statutes or to confuse tempered by the supporting doctrine of piercing the veil of
legitimate issues. corporate fiction. The privilege of being treated as an entity
(g) However, the following facts by themselves or in distinct and separate from the stockholders is confined to
combination, would not warrant a disregard of the veil of legitimate uses and is subject to equitable limitations to
corporate fiction, absent a showing of fraud or other public prevent its being exercised for fraudulent, unfair or illegal
policy consideration: purposes.
(I) Ownership by a single stockholder or by another
The legal corporate entity is disregarded only if it is sought
corporation of all or nearly all of the capital stock is
to hold the officers and stockholders directly liable for a
not in itself sufficient ground to disregard the
corporate debt or obligation (Indophil Textile Mill Workers
separate corporate personality;
Union-PTGWO v. Calica, G.R. No. 96490, February 3, 1992).
(II) Substantial identity of the incorporators of two
corporations does not imply fraud;
(III) Existence of interlocking directors or corporate If evidence of any such purpose is present, the courts will
officers; or "pierce the veil of corporate entity" and disregard the
(IV) Location of head officers or facilities in the same corporate fiction. Aside from this general guideline, no hard
compound or having the same addresses. and fast rule can be laid down to cover all cases where the
Since corporate property is owned by the corporation as a corporate entity theory cannot be availed of, and each case
juridical person, the stockholders have no claim on it as will have to be considered on its merits.
owners, but have merely an expectancy or inchoate right to
"If any general rule can be laid down in the present state of
the same should any of it remain upon the dissolution of the
authority, it is that a corporation will be looked upon as a
corporation after all corporate creditors have been paid. A
legal entity as a general rule, and until sufficient reason to
stockholder can therefore not bring an action for replevin to
the contrary appears, but when the notion of legal entity is
recover property of the corporation.
used to defeat public convenience, justify wrong, protect
A stockholder's property cannot be levied upon for an fraud, or defend crime, the law will regard the corporation
obligation of the corporation, even if such stockholder be as an association of persons" (Marvel Building Corp. et. al.
its president (Cruz v. Dalisay, A.M. R-181-P [1987]). v. David, 94 Phil. 376 [1954]).

The main effect of disregarding the corporate fiction is that


stockholders will be held personally liable for the acts and
A corporation has no interest in the individual property of
contracts of the corporation whose existence, at least for the
its stockholders, unless transferred to the corporation.
purpose of the particular situation involved, is ignored.
Thus, the corporation does not have the personality to
Nature and consequence of the piercing doctrine as being
bring an action for and in behalf of its stockholders or
essentially an equitable remedy
members for the purpose of recovering property which
A. Piercing doctrine applies only to prevent a wrong or
belongs to them in their personal capacities (Sulo ng
injustice, or to achieve equitable ends
Bayan, Inc. v. Araneta, G.R. No. L-31061 [1976]).
"As a general rule, a corporation is looked upon as a legal
entity, unless and until sufficient reason to the contrary
Since the corporation is a juridical person, it is civilly liable for
appears. Thus, the courts always presume good faith, and
torts in the same manner as a natural person. Thus, it is liable

LVJ I 15
for that reason accord prime importance to the separate (a) Control, not mere majority of complete stock control,
personality of the corporation, disregarding the corporate but complete domination, not only of finances but of policy
personality only after the wrongdoing is first clearly and and business practice in respect to the transaction attacked
convincingly established" (Halley v. Printwell, Inc., 649 so that the corporate entity as to this transaction had at
SCRA 116, 132-133 [2011]). the time to separate mind, will or existence of its own;
(b) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of
B. Piercing doctrine is a remedy of last resort
statutory or other positive legal duty, or dishonest or
Being merely an equitable remedy, the application of the
unjust act in contravention of plaintiff's legal rights; and
piercing doctrine is a remedy of last resort and will not be
(c) The aforesaid control and breach of duty must
applied, even in case of fraud, if other remedies are available
proximately cause the injury or unjust loss complained of
to the parties.
(PNB v. Hydro Resources Contractors Corp., 693 SCRA 294
C. The party invoking the piercing doctrine must have
[2013]).
standing
Being an equitable remedy, the piercing doctrine can be
invoked only on behalf of parties who are victims of fraud, E. Piercing application is essentially a judicial prerogative
deceit or injustice brought about by the use or as a result of
Piercing the veil of corporate fiction is a judicial remedy not
the attributes of the corporate juridical personality.
available to a sheriff (Cruz v. Dalisay, 152 SCRA 482 [1987]).
D. Piercing doctrine applies only when the corporate
personality was the efficient cause or means; it must be
shown to be necessary and with factual bases When a court disregards the corporate entity in a proper
The mere fact of there being a juridical personality embroiled case, it is not denying corporate existence for all purposes,
in the resolution of the issues covered in the complaint does but merely refuses to allow the corporation to use the
not necessarily warrant the application of the piercing corporate privilege for the particular purpose involved in the
doctrine. It is essential that the corporate fiction is the very case before it.
means by which to defeat public convenience, justify wrong, Consequences of the application of the piercing doctrine
protect fraud or defend crime. A. Treat the corporate, its controlling or accountable officers
as a mere association
"To warrant resort to this extraordinary remedy, there
must be proof that the corporation is being used as a cloak Two formulations on the application of the piercing
or cover for fraud or illegality, or to work injustice" (Jardine doctrine:
Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555, 565 [2005]). (a) First is that the courts "will often look at the
corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the
No hard and fast rule can be accurately laid down to apply corporation unifying the group;
the piercing doctrine, but the following are probative (b) Another is "when two business enterprises are owned,
factors of identity that will justify the application of the conducted and controlled by the same parties, both law
doctrine of piercing the corporate veil, thus: and equity will, when necessary to protect the rights of
(a) Stock ownership by one or common ownership of both third parties, disregard the legal fiction that two
corporations; corporations are distinct entities and treat them as
(b) Identity of directors and officers; identical or one and the same (General Credit Corporation
(c) The manner of keeping corporate books and records; v. Alsons Development and Investment Corporation, 513
and SCRA 225, 238 [2007]).
(d) Methods of conducting the business.
Absence of any of these elements prevents piercing the
corporate veil (Concept Builders, Inc. v. NLRC, 257 SCRA
149, 158 [1996]). Personal liability of a corporate director, trustee or officer
along (although not necessarily) with the corporation may
so validly attach, as a rule, only when: (1) he assents (a) to
a patently unlawful act of the corporation, or (b) for bad
Tests in determining the applicability of the doctrine of faith, or gross negligence in directing its affairs, or (c) for
piercing the veil of corporate fiction: conflict of interest, resulting in damages to the

LVJ I 16
absence of an evil motive, piercing would be allowed.
corporation, its stockholders or other persons; (2) he
(Villanueva)
consents to the issuance of watered stocks or who, having
Fraud piercing cases
knowledge thereof, does not forthwith file with the
Elements of the application of fraud piercing cases:
corporate secretary his written objection thereto; (3) he
(a) There must have been fraud or an evil motive in the
agrees to hold himself personally and solidarily liable with
affected transaction, and the mere proof of control of the
the corporation; or (4) he is made, by a specific provision of
corporation would not authorize piercing;
law, to personally answer for his corporate action (Tramat
(b) Corporate entity has been used in the perpetration of the
Mercantile, Inc. v. Court of Appeals G.R. No. 111008,
fraud or in the justification of wrong, or to escape personal
November 7, 1994).
liability;
(c) The main action should seek for the enforcement of
B. Piercing may apply to benefit those within and those pecuniary claims pertaining to the corporation against
outside the intra-corporate relations corporate officers or stockholders, or vice-versa. (Villanueva)
The fraud piercing doctrine provides an assurance to the
Unlike the de facto corporation and corporation by
dealing public that in cases of mischief by the actors behind
estoppel doctrines, which can be availed of only in
the corporation, the piercing doctrine allows them remedy
corporate dealings with third parties, the veil of corporate
against the very actors themselves.
fiction "may be disregarded in the interest of justice in such
Alter ego piercing cases
cases as fraud that may work inequities among members of
the corporation internally, involving no rights of the public The control necessary to invoke the instrumentality or alter
or third persons. In both instances, there must have been ego rule is not majority or even complete stock control but
fraud and proof of it" (Secosa v. Heirs of Francisco, 433 such domination of finances, policies and practices that the
SCRA 273, 281 [2004]). controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its
principal. The control must be shown to have been
exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must
SEC. 130. Liability of Single Shareholder. – A sole proximately cause the injury or unjust loss for which the
shareholder claiming limited liability has the burden of complaint is made (WPM International Trading, Inc. v.
affirmatively showing that the corporation was Labayen, G.R. No. 182770, September 17, 2014).
adequately financed. Where the single stockholder
cannot prove that the property of the One Person
Corporation is independent of the stockholder’s personal
property, the stockholder shall be jointly and severally In applying the "instrumentality" or "alter ego" doctrine,
liable for the debts and other liabilities of the One Person the courts are concerned with reality and not form, with
Corporation. how the corporation operated and the individual
The principles of piercing the corporate veil applies with defendant's relationship to that operation (Concept
equal force to One Person Corporations as with other Builders, Inc. v. National Labor Relations Commission, G.R.
corporations. No. 108734, May 29, 1996).

Classifications of the piercing application cases:


(a) When the corporate entity is used to commit fraud or to
The issuance of receipts and other commercial document
justify a wrong, or to defend a crime (fraud piercing cases);
covering corporate transactions but in the name of sole
(b) When the corporate entity is used as a mere alter ego,
proprietorship can be the basis for the application of the
business conduit or instrumentality of a person or another
piercing doctrine when the result is "inevitably misleading,
entity (alter ego piercing cases);
or at the very least, creating the wrong impression to
(c) When respect for the corporate entity would defeat public
respondents and the public as well, that the pawnshop was
convenience, or would result in injustice (defeat public
owned solely by the [former sole proprietor] and not by a
convenience or equity piercing cases).
corporation" (Sicam v. Jorge, 529 SCRA 443 [2007]).
The main distinction between the fraud piercing cases from
alter ego and defeat of public convenience piercing cases is
that in the former, there is always an element of malice, evil Parent-Subsidiary relationship
motive, or a wrong done, while in the latter cases, even in the

LVJ I 17
The mere fact that a corporation owns all or substantially all
responsible corporate directors and officers or even a
of the stocks of another corporation, taken alone, is not
separate but related corporation, may be impleaded and
sufficient to justify their being treated as one entity. If used
held answerable solidarily in a labor case, even after final
to perform legitimate functions, a subsidiary's separate
judgment and on execution, so long as it is established that
existence may be respected, and the liabilities of the parent
such persons have deliberately used the corporate vehicle
corporation as well as the subsidiary will be confined to those
to unjustly evade the judgment obligation, or have
arising in their respective business.
resorted to fraud, bad faith or malice in doing so (Guillermo
Although ownership of the controlling capital stock of the v. Uson, G.R. No. 198967, March 7, 2016).
corporation by itself would not authorize piercing,
however, when existing together with other factors that
Nationality of Corporations
will justify the application of the piercing of corporate veil,
A corporation can have no citizenship since this is a privilege
it will pierce the corporate fiction. Such factors are:
which can possibly belong only to natural persons. A
(a) Parent corporation owns all or almost all of the capital
corporation however, may either be domestic or foreign. A
stock of the subsidiary.
domestic corporation is one organized under Philippine laws
(b) Parent and subsidiary corporations have common
and is therefore governed by such laws. A foreign corporation
directors or officers.
is one organized under the laws other than those of the
(c) Parent corporation finances the subsidiary.
Philippines, and is governed by the law of its creation and can
(d) Parent corporation subscribes to all the capital stock of
operate only in the territory of the State under whose laws it
the subsidiary or otherwise causes its incorporation.
was formed.
(e) Subsidiary has grossly inadequate capital.
A foreign corporate corporation may, however, be licensed to
(f) Parent corporation pays the salaries and other expenses
do business in the Philippines, in which case it will be
or losses of the subsidiary.
governed by Philippine laws, except those which refer to the
(g) Subsidiary has substantially no business except with the
creation, formation, organization or dissolution thereof or
parent corporation or no assets except those conveyed to
those which fix the relations, liabilities and responsibilities of
or by the parent corporation.
the stockholders or officers to each other or to the
(h) In the papers of the parent corporation or in the
corporation.
statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its
business or financial responsibility is referred to as the Pre-Incorporation Contracts
parent corporation's own. Promoter, defined
(i) Parent corporation uses subsidiary's property as its own. Section 3.10 of the Securities Regulation Code defines
(j) Directors or executives of the subsidiary do not act promoter as "a person who, acting alone or with others, takes
independently but take their orders from parent initiative in founding and organizing the business or
corporation. enterprise of the issuer and receives consideration therefor."
(k) Formal legal requirements of the subsidiary are not Promoter's contracts, defined
observed. (Philippine National bank v. Ritratto Group, Inc., Promoter's contracts are those types of contracts entered
362 SCRA 216, 225 [2001]). into in behalf of a corporation which is in the process of
organization and incorporation, and such fact is
acknowledged as an essential ingredient in the process of
perfection, otherwise known as "pre-incorporation"
The Court has disregarded the separate existence of the contracts.
parent and the subsidiary where the latter was formed The principles embodied in promoter's contracts are different
merely for the purpose of evading the payment of higher from those applied in de facto corporation and the
taxes, or where it was so controlled by the parent that its corporation by estoppel doctrines in the sense that the other
identity was hardly discernible, thus becoming a mere party to the contracts is fully aware that the corporate party
instrumentality or alter ego of the former (Yutivo & Sons v. does not yet exist; therefore, there is no element of
Collector of Internal Revenue, G.R. No. L-13213 [1961]; misrepresentation, mistake or fraud.
Koppel (Phil.) Inc. v. Yatco, 77 Phil. 486 [1946]). Liability of corporation for promoter's contracts
A promoter may find it necessary, in the process of forming
the corporation, to enter into contracts on behalf of the
proposed corporation, as when it is necessary to contract for
The veil of corporate fiction can be pierced, and

LVJ I 18
options on rights or property which may be otherwise lost if Situations which may be intended by the promoter and the
postponed until after incorporation. other party to a pre-incorporation contract:
The corporation may make the contract its own and may (1) The promoter may take a continuing offer, on behalf of
become bound on such contracts if, after incorporation, it the corporation, which if accepted after incorporation, will
adopts or ratifies the same, or accepts its benefits with become a contract. In this case, the promoter does not
knowledge of the terms thereof. assume any personal liability, whether or not the offer is
accepted by the corporation.
"That a corporation should have a full and complete
(2) The promoter may make a contract at the time binding
organization and existence as an entity before it can enter
himself, with the understanding that if the corporation, once
into any kind of contract or transact any business, would
formed, accepts or adopts the contract, he will be relieved of
seem to be self-evident. A corporation, until organized, has
all responsibilities; or
no being, franchises, or faculties. Nor do those engaged in
(3) The promoter may bind himself personally and assume
bringing it into being have any power to bind it by contract,
the responsibility of looking to the proposed corporation,
unless so authorized by the charter. Until organized as
when formed, for reimbursement.
authorized by the charter there is not a corporation, nor
Unless either of the first two situations was agreed upon by
does it possess franchises or faculties for it or others to
the parties expressly or impliedly, the third situation will be
exercises until it acquires a complete existence" (Cagayan
presumed to exist.
Fishing Development Corporation, Inc. v. Sandiko, 65 Phil.
Thus, in the absence of any express or implied agreement to
223[1937]).
the contrary, a promoter is personally liable for contracts
made by him on behalf of the proposed corporation.
Such adoption or ratification need not be by express The fact that the corporation, when formed, has adopted or
resolution of the board and may be implied from the acts of ratified the contract does not release him from responsibility,
responsible officers of the corporation. But a corporation unless a novation was intended.
cannot adopt only the part of the contract which may be Compensation of promoters
beneficial or desirable and discard that which is burdensome. The corporation is not liable to pay compensation to
The contract must be one which is within the powers of the promoters because this would be an imposition on innocent
corporation to enter. investors. The promoter is deemed as having given his service
on the chance of his being able to get a reward from the
Although a franchise may be treated as a contract, the
corporation after it is formed.
subsequent incorporation of the applicant corporation
The corporation may, however, become liable to pay such
after the grant of the franchise, "and its acceptance of the
compensation if after it is formed, it expressly promises to do
franchise as shown by its action in prosecuting the
so, or where the promoter's services are performed partly
application filed with the Commission for the approval of
before and partly after incorporation, and the corporation
said franchise, not only perfected a contract between the
takes the benefits thereof. It will then be liable not only for
respondent municipality and Morong Electric but cured the
those rendered after, but also for those rendered before
deficiency," which was the awarding of the franchise to
incorporation.
Morong Electric which was under the process of
The compensation may be in cash or in shares of stock. In the
incorporation at that time (Rizal Light & Ice, Co. v.
latter case, the fair value of the services should at least be
Municipality of Morong, Rizal, 25 SCRA 285, 305 [1968]).
equal to the par or issued value of the shares, otherwise the
stocks would be watered.
Corporate rights under promoter's contracts Fiduciary relationship between corporation and promoter
Upon adoption or ratification of pre-incorporation contracts, The promoters of the corporation are mainly responsible for
the corporation becomes liable thereon. It thus acquires its financing and organization and as such, are under duty to
rights thereunder. Hence, if the other contracting party fails exercise good faith and fairness in all their acts and
to perform his part of the bargain, the corporation which has transactions. Secret profits made at the expense of the
adopted or ratified the contract may sue for specific corporation will have to be accounted by the promoter for all
performance or for damages resulting from breach of such profits to the corporation when formed.
contract.
The fact of bringing an action on the contract constitutes Corporate Powers in General
sufficient adoption or ratification to give the corporation a General powers of corporations
cause of action. A corporation has no power except those expressly conferred
Personal liability of promoter on pre-incorporation contracts on it by the Revised Corporation Code and its charter, and

LVJ I 19
those that are implied or incidental to its existence; in turn, a (e) To adopt bylaws, not contrary to law, morals or public
corporation exercises its powers through its Board of policy, and to amend or repeal the same in accordance with
Directors and/or its duly authorized officers and agents. this Code;
(f) In case of stock corporations, to issue or sell stocks to
SEC. 35. Corporate Powers and Capacity. – Every
subscribers and to sell treasury stocks in accordance with the
corporation incorporated under this Code has the power
provisions of this Code; and to admit members to the
and capacity:
corporation if it be a nonstock corporation;
(a) To sue and be sued in its corporate name;
(g) To purchase, receive, take or grant, hold, convey, sell,
(b) To have perpetual existence unless the certificate of
lease, pledge, mortgage, and otherwise deal with such real
incorporation provides otherwise;
and personal property, including securities and bonds of
(c) To adopt and use a corporate seal;
other corporations, as the transaction of the lawful business
(d) To amend its articles of incorporation in accordance
of the corporation may reasonably and necessarily require,
with the provisions of this Code;
subject to the limitations prescribed by law and the
(e) To adopt bylaws, not contrary to law, morals or public
Constitution;
policy, and to amend or repeal the same in accordance
(h) To enter into a partnership, joint venture, merger,
with this Code;
consolidation, or any other commercial agreement with
(f) In case of stock corporations, to issue or sell stocks to
natural and juridical persons;
subscribers and to sell treasury stocks in accordance with
(i) To make reasonable donations, including those for the
the provisions of this Code; and to admit members to the
public welfare or for hospital, charitable, cultural, scientific,
corporation if it be a nonstock corporation;
civic, or similar purposes: Provided, That no foreign
(g) To purchase, receive, take or grant, hold, convey, sell,
corporation shall give donations in aid of any political party or
lease, pledge, mortgage, and otherwise deal with such
candidate or for purposes of partisan political activity; and
real and personal property, including securities and bonds
(j) To establish pension, retirement, and other plans for the
of other corporations, as the transaction of the lawful
benefit of its directors, trustees, officers, and employees.
business of the corporation may reasonably and
Power to sue and sued
necessarily require, subject to the limitations prescribed
If the petitioner is a corporation, a board resolution
by law and the Constitution;
authorizing a corporate officer to execute the certification
(h) To enter into a partnership, joint venture, merger,
against forum shopping is necessary - a certification not
consolidation, or any other commercial agreement with
signed by a duly authorized person renders the petition
natural and juridical persons;
subject to dismissal, even when the petitioner is a GOCC.
(i) To make reasonable donations, including those for the
When a corporate officer has been granted an express power
public welfare or for hospital, charitable, cultural,
by the Board to sue, it is deemed to be broad enough to
scientific, civic, or similar purposes: Provided, That no
include the power to execute the certificate of non-forum
foreign corporation shall give donations in aid of any
shopping.
political party or candidate or for purposes of partisan
The failure to attach a certified copy of the board resolution
political activity;
authorizing the filing of a petition is deemed fata, because
(j) To establish pension, retirement, and other plans for
courts are not expected to take judicial notice of corporate
the benefit of its directors, trustees, officers, and
board resolutions or a corporate officer's authority to
employees; and
represent a corporation.
(k) To exercise such other powers as may be essential or
Section 11, Rule 14 of the Rules of Civil Procedure states to
necessary to carry out its purpose or purposes as stated in
whom shall service of summons be made if the summons is
the articles of incorporation.
for a domestic private juridical entity.
SEC. 11. Service upon domestic private juridical entity. -
Express powers
When the defendant is a corporation, partnership or
Section 35 of the Revised Corporation Code expressly
association organized under the laws of the Philippines
enumerates the powers which every corporation may
with a juridical personality, service may be made on the
exercise, to wit:
president, managing partner, general manager, corporate
(a) To sue and be sued in its corporate name;
secretary, treasurer, or in-house counsel. (13a)
(b) To have perpetual existence unless the certificate of
incorporation provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with
The enumeration under Section 11, Rule 14 of the Rules of
the provisions of this Code;

LVJ I
20
Although the primary fiduciary obligation of the Board of
Court is an exclusive list under the principle of expresso
Directors of stock corporations remains to be owed to their
unius est exclusio alterius (7107 Islands Publishing, Inc. v.
stockholders under the doctrine of maximization of
The House Printers Corporation, G.R.No. 193420, October
shareholder value, it is recognized that the Board amy, in the
14, 2015).
exercise of its business judgment, discharge of certain social
Powers to sell, lease, dispose, or encumber assets responsibilities towards society, to maintain the corporation
Investments of a corporation in another corporation in the as a "good corporate citizen" in a way that does not
form of shares of stock constitute part of the assets or undermine their main obligations to their stockholders.
property of the investor corporation, and cannot be legally "Reasonable donations" as stated in Section 35(i) of the
disposed of by mere endorsement of the President, since Revised Corporation Code embodies the limitation on the
such shares fall within disposition of properties being part of part of the Board of Directors in exercising such power: any
the management powers of the Board of Directors. donation made that is unreasonable would be an abuse of
the Board's business judgment, and a breach of their fiduciary
Since sale of corporate land can only be effected through
obligations to the corporation and its stockholders.
an agent, the provisions of the Law on Agency on sale of
What would constitute "reasonable" donation would remain
land take precedence over corporate doctrines of estoppel
a "business" test: corporate donations must be of such nature
and apparent authority. Hence, under Article 1874 of the
and of such amount that they promote the best interest of
Civil Code, when a sale of land is effected through an
the corporation and its stockholders, in the sense that the
agent, the lack of written authority of the agent would
main purpose is to build the name and goodwill of the
make the sale void and the principles of corporate
company as a good corporate citizen, thereby enhancing
ratification cannot be given effect to save the contract
patronage for its business on a long term basis. Hence, if
from its nullity (AF Realty & Development, Inc. v. Dieselman
donations constitute merely a wastage or have no reasonable
Freight Services, Co., 373 SCRA 385 [2002]).
means of enhancing the business enterprise, then they would
be "unreasonable" donations and amount to being ultra vires
Power to make donations acts.
The Board of Directors of every corporation holds a fiduciary Power to grant pension retirement, and other gratuities
obligation to the stockholders to operate the corporation and The underlying rationale for the express power of corporation
manage its business enterprise for the benefit of its beneficial to grant gratuities is that they engender loyalty among the
or equitable owners - the stockholders. It would be a breach corporation's human resources and grants them motivation
of trust on the part of the Board, and its duly designated to remain with the corporation, and thereby increase their
officers, to appropriate for themselves the benefits arising productivity and avoid wastage occurring through
from the corporate enterprise, or give them to third parties, unnecessary high turn-over of personnel.
such as is the essence of every donation made of corporate Section 35(j) granting corporations the express power to
assets. establish pension, retirement and other plans for the benefit
of directors or trustees are circumscribed and must operate
The main obligation of the Board of Directors of every
within the limited parameters of reasonableness, and must
corporation is "to seek the maximum amount of profits for
receive the ratificatory vote of stockholders or members
the corporation" This is otherwise known as the
representing at least a majority of the outstanding capital
"maximization of shareholder value" (Premium White
stock in a meeting duly called for the purpose. This is
Cement Corp. v. Intermediate Appellate Court, 220 SCRA
because:
103, 110 [1993]).
(a) Corporate decision is really being made by the Board of
Directors or Trustees, and the situation constitutes a case of
Essentially, every donation made by the corporation would conflict of interests; and
contravene the doctrine of maximization of shareholder (b) Said power is contrary to the principle that directorship or
value," and would constitute a breach by the Board of trusteeship is essentially an honorary and non-remunerative
Directors of its fiduciary duties to the stockholders. position, and except for a reasonable per diem, directors or
The doctrine of "corporate social responsibility," however, trustees are not entitled to any form of remuneration, except
posits that corporations, being creatures of the law and when that is provided for in the by-laws of the corporation.
receiving the protection of the State as well as profiting from (Villanueva)
society, must bear certain non-profit and social responsibility Incidental powers
towards society. Under such theory, donations and other Powers incident to corporate existence are those that attach
contributions made by the Board of Directors would not to a corporation at the moment of its creation without regard
constitute ultra vires acts. to its express powers or particular primary purpose, and may

LVJ I 21
be said to necessarily arise from its being a juridical person
procured its incorporation through fraud;
engaged in business.
(e) Upon finding by final judgment that the corporation:
Powers that go into the very nature and extent of a
(1) Was created for the purpose of committing, concealing
corporation’s juridical entity cannot be presumed to be
or aiding the commission of securities violations,
incidental or inherent powers. The juridical entity of a
smuggling, tax evasion, money laundering, or graft and
corporation is State-granted, and cannot be altered or
corrupt practices;
amended without State authority.
(2) Committed or aided in the commission of securities
Example: Power to adopt corporate name
violations, smuggling, tax evasion, money laundering, or
Implied powers
graft and corrupt practices, and its stockholders knew of
If incidental powers flow from the nature of the corporation
the same; and
as a juridical person, implied powers flow from the nature of
(3) Repeatedly and knowingly tolerated the commission
the underlying business enterprise.
of graft and corrupt practices or other fraudulent or illegal
Although under Section 44, all acts other than those specified
acts by its directors, trustees, officers, or employees.
in Section 35 and other special provisions would be ultra vires
If the corporation is ordered dissolved by final judgment
or beyond corporate powers, the broad qualification "as may
pursuant to the grounds set forth in subparagraph (e)
be essential or necessary to carry out its purpose", in effect
hereof, its assets, after payment of its liabilities, shall,
gives rise to such a wide range of implied powers that it
upon petition of the Commission with the appropriate
would normally not be too difficult to defend a corporate act
court, be forfeited in favor of the national government.
against the allegation that it is ultra vires.
Such forfeiture shall be without prejudice to the rights of
A corporation is presumed to have acted within its powers
innocent stockholders and employees for services
when a contract is not on its face necessarily beyond its
rendered, and to the application of other penalty or
authority.
sanction under this Code or other laws.
The rule is that the management of a corporation, in the
The Commission shall give reasonable notice to, and
absence of express restrictions, has discretionary authority to
coordinate with, the appropriate regulatory agency prior
enter into contracts or transactions which may be deemed
to the involuntary dissolution of companies under their
reasonably necessary or incidental to its business purposes.
special regulatory jurisdiction.
Ultra Vires Doctrine
SEC. 44. Ultra Vires Acts of Corporations. – No corporation
Under Section 6(i) of PD 902-A, the SEC may suspend or
shall possess or exercise corporate powers other than
revoke the certificate of registration of any corporation on
those conferred by this Code or by its articles of
any of the grounds provided by existing law, which would
incorporation and except as necessary or incidental to the
include the commission of ultra vires acts.
exercise of the powers conferred.
On the immediate parties to the ultra vires contract - Where
the contract has been fully executed on both sides, the
Where the acts are clearly beyond the powers of the parties will be left as they are and no resolution or rescission
corporation, its legal consequences are as follows: of the contract will be granted to deprive either party of what
On the corporation itself - A corporation may be dissolved he has acquired under it.
under a quo warranto proceeding instituted by the Solicitor- If the contract is executory on both sides, generally, neither
General. However, in most cases, the Supreme Court merely party can ask for specific performance. Where one party has
enjoined the further commission of the ultra vires acts. performed his part, and the other has not, the latter, having
benefited from the former's performance, is estopped from
SEC. 138. Involuntary Dissolution. – A corporation may be
claiming that the contract is ultra vires and the contract will
dissolved by the Commission motu proprio or upon filing
be enforced provided it is not illegal. The rule would be the
of a verified complaint by any interested party. The
same whether the contract has been partly performed or has
following may be grounds for dissolution of the
been completely executed by one party.
corporation:
On the rights of stockholders - A stockholder may bring either
(a) Non-use of corporate charter as provided under
an individual or derivative suit to enjoin a threatened ultra
Section 21 of this Code;
vires act or contract. If the act or contract has already been
(b) Continuous inoperation of a corporation as provided
performed, a derivative suit for damages against the directors
under Section 21 of this Code;
may be filed, but their liability will depend on whether they
(c) Upon receipt of a lawful court order dissolving the
acted in good faith and with reasonable diligence in entering
corporation;
into the contracts. If they did, then an honest mistake
(d) Upon finding by final judgment that the corporation

LVJ I 22
committed in the exercise of their business judgment will not
validly exercise powers outside those provided in law or
give rise to liability.
the articles of incorporation. In other words, without an
Where the suit against a corporation is based on tort, it
amendment, what is ultra vires before a corporation
cannot set up the defense of ultra vires against the injured
acquires shares in other corporations is still ultra vires after
party who had no knowledge that the corporation was
such acquisition (University of Mindanao v. Bangko Sentral
engaging in an act not included expressly or impliedly in its
ng Pilipinas, G.R. No. 194964-65 [2016]).
purpose clause.
Ultra vires acts may become binding by the ratification of all
the stockholders, unless third parties are prejudiced thereby, Doctrine of estoppel or ratification
or unless the act is illegal. Even in the case of ultra vires acts which are not per se illegal,
a corporation cannot be heard to complain that it is not liable
Acts of an officer that are not authorized by the board of
for the acts for its board, because of estoppel by
directors/trustees do not bind the corporation unless the
representation.
corporation ratifies the acts or holds the officer out as a
Illegal acts
person with authority to transact on its behalf (University
The corporation, being a mere creature of the State, does not
of Mindanao v. Bangko Sentral ng Pilipinas, G.R. No.
have any legal capability at all to violate the mandatory or
194964-65 [2016]).
prohibitory dictates of the State expressed through its
statutes, rules and regulations.
The ultra vires doctrine may be applied on the implied or The term ultra vires should be distinguished from an illegal
necessary powers of a corporation (Montelibano v. act for the former is merely voidable which may be
Bacolod-Murcia Milling Co., Inc., 5 SCRA 36 [1962]). enforced by performance, ratification or estoppel, while
the latter is void and cannot be validated. It being merely
voidable, an ultra vires act can be enforced or validated if
Test in determining the applicability of the ultra vires
there are equitable grounds for taking such action
doctrine
(Republic of the Philippines v. Acoje Mining Company, G.R.
It is a question, therefore, in each case of the logical No. L-18062 [1963]).
relation of the act to the corporate purpose expressed in
the charter. “If the act is one which is lawful in itself,” and
not otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary to the SEC. 165. Fraudulent Conduct of Business; Penalties. – A
promotion of those ends, in a substantial, and not in a corporation that conducts its business through fraud shall
remote and fanciful sense, it may fairly be considered be punished with a fine ranging from Two hundred
within charter powers. The test to be applied is whether thousand pesos (P200,000.00) to Two million pesos
the act in question is in direct and immediate furtherance (P2,000,000.00). When the violation of this provision is
of the corporation’s business, fairly incidental to the injurious or detrimental to the public, the penalty is a fine
express powers and reasonably necessary to their exercise. ranging from Four hundred thousand pesos (P400,000.00)
If so, the corporation has the power to do it; otherwise, not to Five million pesos (P5,000,000.00).
(Montelibano v. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36
[1962], quoting 6 Fletcher Cyc. Corp., Rev. Ed. 1950). SEC. 166. Acting as Intermediaries for Graft and Corrupt
Practices; Penalties. –A corporation used for fraud, or for
The trend has been to move away from holding corporate
committing or concealing graft and corrupt practices as
acts and contracts as ultra vires, because of the philosophy
defined under pertinent statutes, shall be liable for a fine
underlying the business judgment rule. Said rule states that
ranging from One hundred thousand pesos (P100,000.00)
courts will not sit in judgment to substitute their business
to Five million pesos (P5,000,000.00).
judgment for that of the directors; and that as much as
When there is a finding that any of its directors, officers,
possible, directors , in the exercise of their business
employees, agents, or representatives are engaged in
judgment, should be given leeway to adopt corporate policies
graft and corrupt practices, the corporation’s failure to
and to engage in transactions as they may deem best for the
install: (a) safeguards for the transparent and lawful
corporation, and the same cannot be claimed to be beyond
delivery of services; and (b) policies, code of ethics, and
their powers or ultra vires.
procedures against graft and corruption shall be prima
Appropriate amendments must be made either to the law facie evidence of corporate liability under this section.
or the articles of incorporation before a corporation can

LVJ I 23
SEC. 167. Engaging Intermediaries for Graft and Corrupt SEC. 15. Amendment of Articles of Incorporation. – Unless
Practices; Penalties. – A corporation that appoints an otherwise prescribed by this Code or by special law, and
intermediary who engages in graft and corrupt practices for legitimate purposes, any provision or matter stated in
for the corporation’s benefit or interest shall be punished the articles of incorporation may be amended by a
with a fine ranging from One hundred thousand pesos majority vote of the board of directors or trustees and the
(P100,000.00) to One million pesos (P1,000,000.00). vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting
Reportorial requirements when exercising specific corporate
stockholders in
powers
accordance with the provisions of this Code. The articles
In order to apprise the general public and the government of
of incorporation of a nonstock corporation may be
the operational status of corporations, as well as of the
amended by the vote or written assent of majority
trends and actual business climate of the county, the SEC
of the trustees and at least two-thirds (2/3) of the
issued the Rules Requiring Statement of Reasons for Change
members.
in the Corporate Charter or Cessation of Business, and Filing
The original and amended articles together shall contain
of Corresponding Resolution Authorizing Same. Under the
all provisions required by law to be set out in the articles
said rules, when a corporation -
of incorporation. Amendments to the
(a) Increases or decreases its capital stock;
articles shall be indicated by underscoring the change or
(b) Changes its line of business;
changes made, and a copy thereof duly certified under
(c) Creates bonded indebtedness;
oath by the corporate secretary and a majority of the
(d) Merges or consolidated with other corporations;
directors or trustees, with a statement that the
(e) Extends or shortens its term of existence;
amendments have been duly approved by the required
(f) Increases or decreases the number of its directors;
vote of the stockholders or members, shall be submitted
(g) Ceases business operations; or
to the Commission.
(h) Dissolves;
The amendments shall take effect upon their approval by
it must, in its application with the SEC, state the reasons or
the Commission or from the date of filing with the said
causes for said action in the resolution of the stockholders or
Commission if not acted upon within six (6) months from
Board of Directors approving the same, which resolution
the date of filing for a cause not attributable to the
must be signed and attested by the president and secretary
corporation.
of the corporation.
A juridical person is generally not entitled to moral
The phrase "vote or written assent" implies that a
damages because, unlike a natural person, it cannot
stockholders' meeting is not necessary to effect an
experience physical suffering or such sentiments as
amendment of the articles of incorporation, and a mere
wounded feelings, serious anxiety, mental anguish or
referendum would be sufficient.
moral shock (Filipinas Broadcasting Network, Inc. v. Ago
The 2/3 vote is based on the outstanding capital stock,
Medical and Educational Center, G.R. No. 141994 [2005]).
including non-voting stocks.
Limitations on power
The power of self-amendment given to a corporation is
Corporate Powers: Charter Amendments subject to the following limitations:
Amendment by Legislature (a) It must be for a legitimate purpose;
The charter of a private corporation consists of its articles of (b) It must be with the vote or written assent of two-thirds of
incorporation as well as the Corporation Code and such other the members of non-stock corporations, or two-thirds of the
law under which it is organized. A corporate charter is outstanding capital stock, in stock corporations. No meeting
considered a contract not only between the stockholders but is required;
also between the State and the corporation. (c) The appraisal right must be recognized in case the
Since a statute is always subject to amendment or repeal by amendment has the effect of changing or restricting the
the legislative body, and although the latter cannot directly rights of any stockholder or class of shares, or of authorizing
amend the articles of incorporation of a private corporation, preferences in any respect superior to those of outstanding
the State can amend or repeal the statute under which the shares of any class or extending or shortening the term of
latter was created. corporate existence;
Amendment by stockholders (d) A copy of the articles as amended, duly certified, should
be filed with the SEC; in case of banks, quasi-banks, building

LVJ I 24
and loan associations, trust companies and other financial The law expressly allows amendments which would change
intermediaries, public utilities, educational corporations and and even restrict the existing rights of stockholders or any
other corporations governed by special law, a certificate from class of shares.
the appropriate governmental agency that the amendment is The power of self-amendment must be exercised in good
in accordance with law is required before the same may be faith and not merely to defraud or prejudice the minority.
filed with the SEC; The Code further provides that the amendment be for a
(e) The original and amended articles together should contain legitimate purpose.
all the matters required by law to be set out in said articles; One who becomes a stockholder in a corporation is subject to
(f) An amendment to increase or decrease capital stock, as have accepted his contract with the corporation subject to
well as to extend or shorten the corporate term cannot be the existing power of self-amendment. Hence, there is no
made under Secs. 36 and 37, both of which require a vested right which is impaired by amendments. The only
meeting; and remedy of the dissenting stockholder when his rights are
(g) The amendment must be in the form prescribed by the restricted by the amendment, is to exercise his appraisal
Code. right.
Grounds for rejection of amendment If there was bad faith or fraud on the part of the majority,
The grounds for the SEC's rejection of any amendment to the however, the injured stockholder may file an opposition to
articles of incorporation are the same as those grounds for the registration of the amendment with the SEC, which may if
rejecting the original articles. it deem proper, disapprove the amendment.
Effectivity of amendment
SEC. 16. Grounds When Articles of Incorporation or
The amendment can take effect only from the approval
Amendment may be Disapproved. – The Commission may
thereof by the SEC. However, any approval or rejection by the
disapprove the articles of incorporation or any
SEC must be made within six months of the filing of the
amendment thereto if the same is not compliant with the
amendment, otherwise it shall take effect even without such
requirements of this Code: Provided, That the
approval, unless the delay is due to a cause attributable to
Commission shall give the incorporators, directors,
the corporation. In the absence of approval or rejection
trustees, or officers a reasonable time from receipt of the
within said period, the amendment takes effect as of the date
disapproval within which to modify the objectionable
of filing.
portions of the articles or amendment. The following are
Special amendments
grounds for such disapproval:
Four kinds of amendments which are covered by special
(a) The articles of incorporation or any amendment
provisions:
thereto is not substantially in accordance with the form
(a) Increase of capital stock;
prescribed herein;
(b) Reduction of capital stock;
(b) The purpose or purposes of the corporation are
(c) Extension of corporate term; and
patently unconstitutional, illegal, immoral or contrary to
(d) Shortening of corporate term.
government rules and regulations;
In all these cases, a meeting of the stockholders or members,
(c) The certification concerning the amount of capital
as the case may be, is required, unlike in Section 15 where
stock subscribed and/or paid is false; and
their written assent, even without a meeting, would be
(d) The required percentage of Filipino ownership of the
sufficient.
capital stock under existing laws or the Constitution has
The grounds for rejection or disapproval of amendments in
not been complied with.
general would also be applicable to these special
No articles of incorporation or amendment to articles of
amendments, since there is no other provision of law
incorporation of banks, banking and quasi-banking
covering the matter.
institutions, preneed, insurance and trust companies,
Increase in the capital stock
nonstock savings and loan associations (NSSLAs),
After the authorized capital stock has been fully subscribed
pawnshops, and other financial intermediaries shall be
and the corporation finds the need to increase its capital to
approved by the Commission unless accompanied by a
meet growing business demands, it will have to amend its
favorable recommendation of the appropriate
articles of incorporation to increase its capital stock. It cannot
government agency to the effect that such articles or
issue shares of stock beyond the authorized limit, since this
amendment is in accordance with law.
will constitute an overissuance rendering such shares void,
without prejudice to the right of bona fide purchasers to
Amendment changing stockholders’ rights recover damages.
Unless the law grants the power to increase capital stock, a
corporation does not have the implied power to do so.

LVJ I 25
Hence, where the law gives it such power, it must be
attached to the original articles of incorporation. After
exercised substantially in accordance with the provisions of
approval by the Commission and the issuance by the
the grant.
Commission of its certificate of filing, the capital stock
SEC. 37. Power to Increase or Decrease Capital Stock; shall be deemed increased or decreased and the
Incur, Create or Increase Bonded Indebtedness. – No incurring, creating or increasing of any bonded
corporation shall increase or decrease its capital stock or indebtedness authorized, as the certificate of filing may
incur, create or increase any bonded indebtedness unless declare: Provided, That the Commission shall not accept
approved by a majority vote of the board of directors and for filing any certificate of increase of capital stock unless
by two-thirds (2/3) of the outstanding capital stock at a accompanied by a sworn statement of the treasurer of
stockholders’ meeting duly called for the purpose. the corporation lawfully holding office at the time of the
Written notice of the time and place of the stockholders’ filing of the certificate, showing that at least twenty-five
meeting and the purpose for said meeting must be sent to percent (25%) of the increase in capital stock has been
the stockholders at their places of residence as shown in subscribed and that at least twenty-five percent (25%) of
the books of the corporation and served on the the amount subscribed has been paid in actual cash to the
stockholders personally, or through electronic means corporation or that property, the valuation of which is
recognized in the corporation’s bylaws and/or the equal to twenty-five percent (25%) of the subscription,
Commission’s rules as a valid mode for service of notices. has been transferred to the corporation: Provided,
A certificate must be signed by a majority of the directors further, That no decrease in capital stock shall be
of the corporation and countersigned by the chairperson approved by the Commission if its effect shall prejudice
and secretary of the stockholders’ meeting, setting forth: the rights of corporate creditors.
(a) That the requirements of this section have been Nonstock corporations may incur, create or increase
complied with; bonded indebtedness when approved by a majority of the
(b) The amount of the increase or decrease of the capital board of trustees and of at least two-thirds (2/3) of the
stock; members in a meeting duly called for the purpose.
(c) In case of an increase of the capital stock, the amount Bonds issued by a corporation shall be registered with the
of capital stock or number of shares of no-par stock Commission, which shall have the authority to determine
thereof actually subscribed, the names, nationalities and the sufficiency of the terms thereof.
addresses of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by
The increase or decrease in capital stock cannot take effect
each, and the amount paid by each on the subscription in
without prior approval of the SEC. Its approval is signified by
cash or property, or the amount of capital stock or
the issuance of a certificate that the certificate of increase or
number of shares of no-par stock allotted to each
reduction of capital stock has been duly filed with the SEC.
stockholder if such increase is
The increase or reduction cannot retroact to the date of the
for the purpose of making effective stock dividend
stockholders’ approval but will take effect only upon the
therefor authorized;
issuance of such certificate. Thus, until such time, the
(d) Any bonded indebtedness to be incurred, created or
subscription to the increase does not vest on the subscriber
increased;
the right to vote.
(e) The amount of stock represented at the meeting; and
The certificate of increase or reduction filed by the
(f) The vote authorizing the increase or decrease of the
corporation must be attached by the SEC to the original
capital stock, or the incurring, creating or increasing of
articles of incorporation. This implies that the corporation
any bonded indebtedness.
need not file a copy of the amended articles as required by
Any increase or decrease in the capital stock or the
Section 15.
incurring, creating or increasing of any bonded
A certificate of increase of capital stock will not be accepted
indebtedness shall require prior approval of the
for filing unless it is accompanied by the treasurer's affidavit
Commission, and where appropriate, of the Philippine
attesting to the matters required by law.
Competition Commission.
An increase of capital stock may be accomplished in any of
The application with the Commission shall be made
three ways: the par value of the each share may be increased
within six (6) months from the date of approval of the
without increasing the number of shares, or the number of
board of directors and stockholders, which period may be
the shares may be increased without an increase in their par
extended for justifiable reasons.
value, or the increase may be both in the number of shares
Copies of the certificate shall be kept on file in the office
and in the par value thereof.
of the corporation and filed with the Commission and

LVJ I 26
In any of the said cases, there is no appraisal right granted by
term shall take effect only on the day following the
law, but the existing stockholders would have a preemptive
original or subsequent expiry date(s).
to the new shares issued, if any, in order to protect them
A corporation whose term has expired may apply for a
against any dilution of their interest. However, where the
revival of its corporate existence, together with all the
increase in capital stock results in the creation of shares with
rights and privileges under its certificate of incorporation
preferences superior to those existing ones, a stockholder
and subject to all of its duties, debts and liabilities
who voted against such creation would have the appraisal
existing prior to its revival. Upon approval by the
right.
Commission, the corporation shall be deemed revived
The non-granting of appraisal right to dissenting stockholders
and a certificate of revival of corporate existence shall be
in case of increase of capital stock may be rationalized on two
issued, giving it perpetual existence, unless its application
grounds:
for revival provides otherwise.
(a) The increase in capital stock does not prevent any
No application for revival of certificate of incorporation of
stockholder, including a dissenting stockholder, from opting
banks, banking and quasi-banking institutions, preneed,
out of the contractual relationship by simply selling his shares
insurance and trust companies, nonstock savings and loan
in the corporation to any interested buyer.
associations, pawnshops, corporations engaged in money
(b) The grant of appraisal right in case of increase of capital
service business, and other financial intermediaries shall
stock would defeat the very purpose for which the power is
be approved by the Commission unless accompanied by a
exercised, i.e., to raise funds for the operation or survival of
favorable recommendation of the appropriate
the corporate business. (Villanueva)
government agency.
Reduction of capital stock
No reduction of capital stock will be approved by the SEC if it
will prejudice the rights of corporate creditors. However, if
they give their consent to such reduction, or if there are no
SEC. 36. Power to Extend or Shorten Corporate Term. – A
corporate creditors, then such a method of reduction would
private corporation may extend or shorten its term as
be legal.
stated in the articles of incorporation when approved by a
The decrease of the capital stock of a corporation should not
majority vote of the board of directors or trustees, and
trigger the exercise of the appraisal right since the decrease
ratified at a meeting by the stockholders or members
of capital stock would result in returning part of the
representing at least two-thirds (2/3) of the outstanding
investments of the stockholders, including those stockholders
capital stock or of its members.
who dissented.
Written notice of the proposed action and the time and
Change in corporate term
place of the meeting shall be sent to stockholders or
SEC. 11. Corporate Term. – A corporation shall have members at their respective place of residence as shown
perpetual existence unless its articles of incorporation in the books of the corporation, and must be deposited to
provides otherwise. the addressee in the post office with postage prepaid,
Corporations with certificates of incorporation issued served personally, or when allowed in the bylaws or done
prior to the effectivity of this Code, and which continue to with the consent of the stockholder, sent electronically in
exist, shall have perpetual existence, unless the accordance with the rules and regulations of the
corporation, upon a vote of its stockholders representing Commission on the use of electronic data messages. In
a majority of its outstanding capital stock, notifies the case of extension of corporate term, a dissenting
Commission that it elects to retain its specific corporate stockholder may exercise the right of appraisal under the
term pursuant to its articles of incorporation: Provided, conditions provided in this Code.
that any change in the corporate term under this section
is without prejudice to the appraisal right of dissenting
When a corporation wants to dissolve prior to the expiration
stockholders in accordance with the provisions of this
of the term fixed, it shortens its term by amendment of
Code.
articles. As soon as the shorter term expires, then the
A corporate term for a specific period may be extended or
corporation is automatically dissolved, resulting in the
shortened by amending the articles of incorporation:
liquidation of its corporate assets.
Provided, That no extension may be made earlier than
A duly certified copy of the articles as amended must be filed
three (3) years prior to the original or subsequent expiry
with the SEC, and the amendment shall take effect upon the
date(s) unless there are justifiable reasons for an earlier
SEC's approval. However, if the SEC does not act on the
extension as may be determined by the Commission:
amendment within six months from such filing, the
Provided, further, That such extension of the corporate
amendment will take effect even without the SEC's approval,

LVJ I 27
unless the cause for such lack of action is attributable to the
regular or special meeting.
corporation.
Whenever the bylaws are amended or new bylaws are
If the amendment is to extend the corporate term, it should
adopted, the corporation shall file with the Commission
be approved and filed prior to the expiration of the original
such amended or new bylaws and, if applicable, the
term since the corporation is ipso facto dissolved as soon as
stockholders’ or members’ resolution authorizing the
such term expires. However, such an amendment cannot be
delegation of the power to amend and/or adopt new
made earlier than three years prior to expiration, unless the
bylaws, duly certified under oath by the corporate
SEC finds justifiable reasons to allow it.
secretary and a majority of the directors or trustees.
The exercise of appraisal rights rightly belongs to a case of
extension of corporate term because an extension actually
novates the corporate contract with each shareholder, which The amended or new bylaws shall only be effective upon the
now seeks to extend the corporate relationship beyond the issuance by the Commission of a certification that the same is
original term provided for in the articles. in accordance with this Code and other relevant 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
SEC. 80. When the Right of Appraisal May Be Exercised. –
inconsistent with the Code.
Any stockholder of a corporation shall have the right to
Matters that cannot be provided for in the by-laws:
dissent and demand payment of the fair value of the
(a) Classification of shares of stock and preferences
shares in the following instances:
granted to preferred shares;
(a) In case an amendment to the articles of incorporation
(b) Provisions on founder’s shares;
has the effect of changing or restricting the rights of any
(c) Providing for redeemable shares;
stockholder or class of shares, or of authorizing
(d) Provisions on the purposes of the corporation;
preferences in any respect superior to those of
(e) Providing for the corporate term of existence;
outstanding shares of any class, or of extending or
(f) Capitalization of stock corporations;
shortening the term of corporate existence;
(g) Corporate name; and
(b) In case of sale, lease, exchange, transfer, mortgage,
(h) Denial of pre-emptive rights.
pledge or other disposition of all or substantially all of the
corporate property and assets as provided in this Code;
(c) In case of merger or consolidation; and Corporate Governance: Board of Directors and
(d) In case of investment of corporate funds for any Committees; Officers
purpose other than the primary purpose of the Allocation of power and control
corporation. In the corporate hierarchy, there are three levels of control:
(1) the board of directors or trustees, which is responsible for
The appraisal right should not be triggered when it comes to corporate policies and the general management of the
shortening of corporate life, because there is really no business affairs of the corporation; the officers, who in theory
violation of the original contractual intent. (Villanueva) execute the policies laid down by the board, but in practice
often have wide latitude in determining the course of
SEC. 47. Amendment to Bylaws. – A majority of the board business operations; and (3) the stockholders or members
of directors or trustees, and the owners of at least a who have the residual power over fundamental corporate
majority of the outstanding capital stock, or changes, like amendments of the articles of incorporation.
at least a majority of the members of a nonstock The board often delegates some of its functions not only to
corporation, at a regular or special meeting duly called for officers but also to committees appointed by it.
the purpose, may amend or repeal the bylaws or Primary objective of the board
adopt new bylaws. The owners of two-thirds (2/3) of the Stockholders theory: “Maximization of profits”
outstanding capital stock or two-thirds (2/3) of the
members in a nonstock corporation may delegate to the The primary obligation of the Board of Directors of a
board of directors or trustees the power to amend or corporation is “to seek the maximum amount of profits for
repeal the bylaws or adopt new bylaws: Provided, That the corporation,” and that a director’s position is a position
any power delegated to the board of directors or trustees of trust. In case a director’s interests conflict with those of
to amend or repeal the bylaws or adopt new bylaws shall the corporation, he cannot sacrifice the latter for that of
be considered as revoked whenever stockholders owning his own advantage and benefit (Prime White Cement Corp.
or representing a majority of the outstanding capital v. Intermediate Appellate Court, 220 SCRA 103, 110
stock or majority of the members shall so vote at a [1993]).

LVJ I 28
Although the stockholders or members elect the members of
the board, once they have so elected them, they have no
Stakeholders theory: “Enhancing the value of the corporation” right to interfere with the board's exercise of its powers and
functions, except in the instances where the law expressly
When it comes to listed and publicly-held companies, it is
gives them the final say, like in cases of removal of a director,
the obligation of the Board of Directors to promote good
amendment of the articles of incorporation, and other major
corporate governance, which is defined as “a system
changes.
whereby shareholders, creditors and other stakeholders of
a corporation ensure that management enhances the value Any action or resolution of the stockholders on corporate
of the corporation as it competes in an increasingly global matters should be ignored. The functions of the
marketplace (Sec. I(B), SEC Code of Corporate Governance). stockholders of a corporation, are of limited nature. The
theory of a corporation is that the stockholders may have
all the profits but shall turn over the complete
Business judgment rule
management of the enterprise to their representatives and
A resolution or transaction pursued within the corporate
agents, called directors (Ramirez v. The Orientalist Co., 38
powers and business operations of the corporation, and
Phil. 634, 654 [1918]).
passed in good faith by the Board of Directors, is valid and
binding; and generally the courts have no authority to review
the same or substitute their own judgment, even when it can
be proven that the exercise of such power may cause losses
SEC. 22. The Board of Directors or Trustees of a
to the corporation or decrease its profits.
Corporation; Qualification and Term. – Unless otherwise
Ratio behind the business judgment rule
provided in this Code, the board of directors or trustees
The raison d’etre behind the conferment of corporate shall exercise the corporate powers, conduct all business,
powers is on the Board of Directors is that the and control all properties of the corporation.
concentration in the board of the powers of control of Directors shall be elected for a term of one (1) year from
corporate business and appointment of corporate officers among the holders of stocks registered in the
and managers is necessary for efficiency in any large corporation’s books, while trustees shall be elected for a
organization.Stockholders are too numerous, scattered and term not exceeding three (3) years from among the
unfamiliar with the business of a corporation to conduct its members of the corporation. Each director and trustee
business directly. And so the plan of corporate organization shall hold office until the successor is elected and
is for the stockholders to choose the directors who shall qualified. A director who ceases to own at least one (1)
control and supervise the conduct of corporate business share of stock or a trustee who ceases to be a member of
(Filipinas Port Services v. Go, 518 SCRA 453, 463-464 the corporation shall cease to be such.
[2007]). The board of the following corporations vested with
public interest shall have independent directors
constituting at least twenty percent (20%) of such board:
Two branches of the business judgment rule
(a) Corporations covered by Section 17.2 of Republic Act
The business judgment rule has two applications, to wit:
No. 8799, otherwise known as “The Securities Regulation
(a) Resolutions approved, contracts and transactions entered
Code”, namely those whose securities are registered with
into, by the Board of Directors within the powers of the
the Commission, corporations listed with an exchange or
corporation cannot be reversed by the courts, not even on
with assets of at least Fifty million pesos (P50,000,000.00)
the behest of the stockholders of the corporation; and
and having two hundred (200) or more holders of shares,
(b) Directors and officers acting within such business
each holding at least one hundred (100) shares of a class
judgment cannot be held personally liable for the
of its equity shares;
consequences of such acts.
(b) Banks and quasi-banks, nonstock savings and loan
Who exercises corporate powers
associations, pawnshops, corporations engaged in money
Board of directors or trustees
service business, preneed, trust and insurance companies,
The governing body of a corporation is its board of directors
and other financial intermediaries; and
in case of stock corporations. In the case of non-stock
(c) Other corporations engaged in businesses vested with
corporations, it is the board of trustees. The board exercises
public interest similar to the above, as may be
almost all the corporate powers, lays down all corporate
determined by the Commission, after taking into account
business policies, and is responsible for the efficiency of
relevant factors which are germane to the objective and
management.
purpose of requiring the election of an independent

LVJ I 29
the circumstances, that the act involved was duly authorized
director, such as the extent of minority ownership, type
by the board.
of financial products or securities issued or offered to
Vote of acquiescence
investors, public interest involved in the nature of
business operations, and other analogous factors. An abstention is counted as an affirmative vote insofar as it
An independent director is a person who, apart from may be construed as an acquiescence in the action of those
shareholdings and fees received from the corporation, is who vote affirmatively. This manner of counting is
independent of management and free from any business obviously based on what is deemed to be a presumption as
or other relationship which could, or could reasonably be to the intent of the one abstaining, namely, to acquiesce in
perceived to materially interfere with the exercise of the action of those who vote affirmatively, but which
independent judgment in carrying out the responsibilities presumption, being merely prima facie, would not hold in
as a director. the face of clear evidence to the contrary. It is pertinent,
Independent directors must be elected by the therefore, to inquire into the facts and circumstances
shareholders present or entitled to vote in absentia which attended the voting by the members of the Board of
during the election of directors. Independent directors Regents (Lopez v. Hon. Ericta, G.R. No. L-32991 [1972]).
shall be subject to rules and regulations governing their
qualifications, disqualifications, voting requirements,
duration of term and term limit, maximum number of
board memberships and other requirements that the A provision in the by-laws of an association which runs
Commission will prescribe to strengthen their contrary to the law cannot attain validity through
independence and align with international best practices. acquiescence because, if it is contrary to law, it is beyond
the power of the members of the association to waive its
invalidity. For that matter the members of the association
Since the law has vested the responsibility of managing the
may have formally adopted the provision in question, but
corporate affairs on the board, the stockholders must abide
their action would be of no avail because no provision of
by its decisions. Although stockholders are to have all the
the by-laws can be adopted if it is contrary to law (Grace
profits, the complete management of the enterprise shall be
Christian High School v. Court of Appeals, G.R. No. 108905
with the board.
[1997]).
In case where the board of directors fails to observe the
reasonable degree of care and vigilance which the
surrounding circumstances reasonably impose, the Requirements of meeting
corporation may be held liable on a tort and may be liable to A board meeting must be properly called in accordance with
pay damages caused to third persons. It is also liable law, otherwise it will not be valid and any action taken
whenever a tortious act is committed by an officer or agent therein may be questioned by an objecting director or a
who acts under direction or authority from the board. stockholder, without prejudice however to any right which
The fact that a director is only holding the share as a nominee may have been acquired by an innocent third person.
of another person does not disqualify him as a director. What Requisites for a valid board meeting
the law only requires is that he has legal title to the share. (a) Meeting of the directors or trustees duly assembled as a
An independent director means a person who, apart from his Board, at the place, time and manner provided in the bylaws;
fees and shareholdings, is independent of management and (b) Presence of the required quorum; and
free from any business or other relationship which could (c) Decision of the majority of the quorum or, in other cases,
materially interfere with his exercise of independent a majority of the entire Board.
judgment in carrying out his responsibilities as director.
SEC. 52. Regular and Special Meetings of Directors or
Board must act as a body in a meeting
Trustees; Quorum. – Unless the articles of incorporation
The directors or trustees must act not individually or
or the bylaws provides for a greater majority, a majority
separately, but as a body in a lawful meeting.
of the directors or trustees as stated in the articles of
The grant of corporate power is to the Board as a body, and
incorporation shall constitute a quorum to transact
not to the individual members thereof, and that the
corporate business, and every decision reached by at least
corporation can be bound only by the collective act of the
a majority of the directors or trustees constituting a
Board.
quorum, except for the election of officers which shall
As a general rule, a third person who acts in good faith
require the vote of a majority of all the members of the
cannot be prejudiced by the fact that the directors did not act
board, shall be valid as a corporate act.
in accordance with the requirements of the law, if such third
Regular meetings of the board of directors or trustees of
person was led to believe or had the right to presume, under

LVJ I 30
was elected for his personal qualifications, his business
every corporation shall be held monthly, unless the
experience and sound judgment.
bylaws provide otherwise.
(d) Agenda - The notice of meeting should contain the
Special meetings of the board of directors or trustees may
purpose thereof and such other matters which are to be
be held at any time upon the call of the president or as
taken up therein. Extraordinary matters not mentioned in the
provided in the bylaws.
notice cannot be validly acted upon against the objection of a
Meetings of directors or trustees of corporations may be
director.
held anywhere in or outside of the Philippines, unless the
Even should the agenda list as its last item “other matters”,
bylaws provide otherwise. Notice of regular or special
only such matters which are routine and ordinary can be
meetings stating the date, time and place of the meeting
validly acted upon. However, if all directors are present and
must be sent to every director or trustee at least two (2)
agree to take up alien matters, then no one can later
days prior to the scheduled meeting, unless a longer time
question the validity of any action taken thereon.
is provided in the bylaws. A director or trustee may waive
(e) Presiding officer - Unless the by-laws otherwise provide,
this requirement, either expressly or impliedly.
the chairman, or in his presence, the president of the
Directors or trustees who cannot physically attend or vote
corporation shall preside at all meetings of the directors or
at board meetings can participate and vote through
trustees as well as of stockholders or members.
remote communication such as videoconferencing,
teleconferencing, or other alternative modes of SEC. 53. Who Shall Preside at Meetings. – The chairman
communication that allow them reasonable opportunities or, in his absence, the president shall preside at all
to participate. Directors or trustees cannot attend or vote meetings of the directors or trustees as well as of the
by proxy at board meetings. stockholders or members, unless the bylaws provide
A director or trustee who has a potential interest in any otherwise.
related party transaction must recuse from voting on the
approval of the related party transaction without
Disqualifications
prejudice to compliance with the requirements of Section
31 of this Code. SEC. 26. Disqualification of Directors, Trustees or Officers.
– A person shall be disqualified from being a director,
trustee or officer of any corporation if, within five (5)
(a) Notice - The law allows the bylaws to provide for different
years prior to the election or appointment as such, the
or additional requirements regarding notice, date and place
person was:
of board meetings. If the bylaws are silent on the matter,
(a) Convicted by final judgment:
however, then the board must at least once a month.
(1) Of an offense punishable by imprisonment for a period
Notice of any meeting, regular or special, is required, and
exceeding six (6) years;
although the by-laws may require that the notice be given
(2) For violating this Code; and
earlier, the bylaw cannot do away altogether with the
(3) For violating Republic Act No. 8799, otherwise known
requirement of notice.
as “The Securities Regulation Code”;
An individual director may expressly or impliedly waive such
(b) Found administratively liable for any offense involving
requirement as to him. Except in the case of such waiver, if
fraudulent acts; and
the required notice is not sent to a director, he may question
(c) By a foreign court or equivalent foreign regulatory
the validity of the meeting and of any matter taken up
authority for acts, violations or misconduct similar to
therein, without prejudice to the rights of a third person who
those enumerated in paragraphs (a) and (b) above.
had no notice of such irregularity.
The foregoing is without prejudice to qualifications or
(b) Place of meeting - If the bylaws are silent on the matter,
other disqualifications, which the Commission, the
the board may meet anywhere it pleases, possibly in a
primary regulatory agency, or the Philippine Competition
different place each meeting and even outside the
Commission may impose in its promotion of good
Philippines. The bylaws may however set limitations on this
corporate governance or as a sanction in its
freedom of the board to choose a place for its meetings.
administrative proceedings.
(c) Quorum and vote - Section 52 states the requirement for
quorum and vote, “[u]nless the articles of incorporation or
bylaws provide for a greater majority.” Hence, a lesser
majority in quorum and voting requirement cannot be had.
It is in the bylaws that the corporation may provide for
A director must be personally present in order to be counted
additional qualifications and disqualifications for directors
in the quorum. He cannot be represented by proxy since he
other than those found in the Code (Gokongwei v.

LVJ I 31
Such power does not include the power to enter into
Securities and Exchange Commission, 89 SCRA 336, 365-
contracts which is properly a function of the board. The
366 [1979]).
president, may, however, negotiate with third persons but
cannot perfect the contract, unless the board has authorized
Corporate officers and agents him to do so.
The board of directors of a corporation may validly delegate (b) Secretary - The secretary keeps the corporate records and
some of its functions and powers to individual officers, has custody thereof. His duties are ministerial and he cannot
committees or agents appointed by it. bind the corporation by contract, unless he is also named
manager thereof, or is otherwise authorized. The secretary
SEC. 24. Corporate Officers. – Immediately after their
must be both a resident and a citizen of the Philippines.
election, the directors of a corporation must formally
(c) Treasurer - A treasurer must be appointed at the time of
organize and elect: (a) a president, who must be a
the drafting of the articles of incorporation since the law
director; (b) a treasurer, who must be a resident; (c) a
requires his affidavit to attest to the fact of compliance with
secretary, who must be a citizen and resident of the
the required pre-incorporation subscription.
Philippines; and (d) such other officers as may be
His main function is to receive and keep the funds of the
provided in the bylaws. If the corporation is vested with
corporation, and to disburse them in accordance with the
public interest, the board shall also elect a compliance
authority given by the board. His powers are limited and he
officer. The same person may hold two (2) or more
cannot, as such, bind the corporation unless he is authorized
positions concurrently, except that no one shall act as
to do so.
president and secretary or as president and treasurer at
the same time, unless otherwise allowed in this Code. Where the authority of employing servants and agent is
The officers shall manage the corporation and perform expressly vested in the board of directors or trustees, an
such duties as may be provided in the bylaws and/or as officer or agent who has general control and management
resolved by the board of directors. of the corporation's business, or a specific part thereof,
may bind the corporation by the employment of such
agent and employees as are usual and necessary in the
Except for the president, an officer need not be a director.
conduct of such business. But the contracts of employment
The president’s term of office would therefore be
must be reasonable (Yu Chuck v. Kong Li Po, G.R. No. L-
coterminous with his term as director.
22450 [1924]).
The law contains no citizenship requirement for corporate
officers, except with respect to the secretary. However, in
business or industries which are partially or totally reserved
for Filipino citizens, no alien may be elected as an officer,
Where similar acts have been approved by the directors as
although the law permits in the board of directors in a
a matter of general practice, custom, and policy, the
number proportional to the alien equity allowed in the
general manager may bind the company without formal
particular business or industry concerned.
authorization of the board of directors (Board of
Where a close corporation has opted to provide in its articles
Liquidators v. Heirs of Kalaw, G.R. No. L-18805 [1967]).
that it will be managed by the stockholders directly, then
there will be no directors, in which case the officers shall also
be appointed or elected by said stockholders. Election of the directors or trustees
Since officers are in fact agents of the corporation, the
SEC. 23. Election of Directors or Trustees. – Except when
general rules of agency as to the binding effect of their acts
the exclusive right is reserved for holders of founders’
would apply. When authority has been conferred, the acts of
shares under Section 7 of this Code, each stockholder or
the officers within the scope of such authority would bind the
member shall have the right to nominate any director or
corporation as fully as if they were acts of the board of
trustee who possesses all of the qualifications and none
directors. Otherwise, it cannot bind the corporation.
of the disqualifications set forth in this Code.
(a) President - The president presides over all meetings of the
At all elections of directors or trustees, there must be
board of directors or trustees as well as all meetings of
present, either in person or through a representative
stockholders or members in the absence of the chairman.
authorized to act by written proxy, the owners of
The president has the power “to sign and execute” the
majority of the outstanding capital stock, or if there be no
contracts of the corporation, meaning that he is the person
capital stock, a majority of the members entitled to vote.
authorized to sign in the name of the corporation such
When so authorized in the bylaws or by a majority of the
contracts which have been previously approved by the board.
board of directors, the stockholders or members may also

LVJ I 32
vote through remote communication or in absentia: controversy or dispute involving title or claim to any
Provided, That the right to vote through such modes may elective office in a stock or non-stock corporation, the
be exercised in corporations vested with public interest, validation of proxies, the manner and validity of
notwithstanding the absence of a provision in the bylaws elections, and the qualifications of candidates, including
of such corporations. the proclamation of winners, to the office of director,
A stockholder or member who participates through trustee or other officer directly elected by the
remote communication or in absentia, shall be deemed stockholders in a close corporation or by members of a
present for purposes of quorum. non-stock corporation where the articles of incorporation
The election must be by ballot if requested by any voting or by-laws so provide.
stockholder or member.
In stock corporations, stockholders entitled to vote shall SEC. 3. Complaint. – In addition to the requirements in
have the right to vote the number of shares of stock section 4, Rule 2 of these Rules, the complaint in an
standing in their own names in the stock books of the election contest must state the following:
corporation at the time fixed in the bylaws or where the
bylaws are silent, at the time of the election. The said The case was filed within fifteen (15) days from the date
stockholder may: (a) vote such number of shares for as of the election if the by-laws of the corporation do not
many persons as there are directors to be elected; (b) provide for a procedure for resolution of the controversy,
cumulate said shares and give one (1) candidate as many or within fifteen (15) days from the resolution of the
votes as the number of directors to be elected multiplied controversy by the corporation as provided in its by-laws;
by the number of the shares owned; or (c) distribute them and
on the same principle among as many candidates as may The plaintiff has exhausted all intra-corporate remedies in
be seen fit: Provided, That the total number of votes cast election cases as provided for in the by-laws of the
shall not exceed the number of shares owned by the corporation.
stockholders as shown in the books of the corporation SEC. 4. Duty of the court upon the filing of the complaint.
multiplied by the whole number of directors to be – Within two (2) days from the filing of the complaint, the
elected: Provided, however, That no delinquent stock court, upon a consideration of the allegations thereof,
shall be voted. Unless otherwise provided in the articles may dismiss the complaint outright if it is not sufficient in
of incorporation or in the bylaws, members of nonstock form and substance, or, if it is sufficient, order the
corporations may cast as many votes as there are trustees issuance of summons which shall be served, together with
to be elected but may not cast more than one (1) vote for a copy of the complaint, on the defendant within two (2)
one (1) candidate. Nominees for directors or trustees days from its issuance.
receiving the highest number of votes shall be declared
elected. SEC. 5. Answer. – The defendant shall file his answer to
If no election is held, or the owners of majority of the the complaint, serving a copy thereof on the plaintiff,
outstanding capital stock or majority of the members within ten (10) days from service of summons and the
entitled to vote are not present in person, by proxy, or complaint. The answer shall contain the matters required
through remote communication or not voting in absentia in section 6, Rule 2 of these Rules.
at the meeting, such meeting may be adjourned and the
corporation shall proceed in accordance with Section 25 SEC. 6. Affidavits, documentary and other evidence. – The
of this Code. parties shall attach to the complaint and answer the
The directors or trustees elected shall perform their affidavits of witnesses, documentary and other evidence
duties as prescribed by law, rules of good corporate in support thereof, if any.
governance, and bylaws of the corporation.

Election contests covered under Rule 6 of the Interim Rules


A court of equity may, on showing of good reason, appoint
of Procedure Governing Intra-Corporate Controversies
a master to conduct and supervise an election of directors
SEC. 1. Cases covered. – The provisions of this rule shall when it appears that a fair election cannot make directions
apply to election contests in stock and non-stock contrary to statute and public policy with respect to the
corporations. conduct of such election (Board of Directors and Election
Committee of the SMB Workers Savings and Loan
SEC. 2. Definition. – An election contest refers to any Association, Inc. v. Hon. Tan, G.R. No. L-12282 [1959]).

LVJ I 33
SEC. 28. Vacancies in the Office of Director or Trustee;
Emergency Board. – Any vacancy occurring in the board of
Term of office; hold-over principle
directors or trustees other than by removal or by
The term of office of the members of the Board in a stock
expiration of term may be filled by the vote of at least a
corporation shall be one year and until their successors are
majority of the remaining directors or trustees, if still
elected and qualified.
constituting a quorum; otherwise, said vacancies must be
A hold-over situation is that which arises when no successor
filled by the stockholders or members in a regular or
is cleared due to valid and justifiable reasons, and the
special meeting called for that purpose.
incumbent holds over and continues to function until another
When the vacancy is due to term expiration, the election
officer is chosen and qualified.
shall be held no later than the day of such expiration at a
In the event that no new Board is elected and qualified after
meeting called for that purpose. When the vacancy arises
the original one-year term of the Board of Directors, under
as a result of removal by the stockholders or members,
the hold-over principle, the existing Board, if still constituting
the election may be held on the same day of the meeting
a quorum, is still a legitimate Board with full authority to bind
authorizing the removal and this fact must be so stated in
the corporation.
the agenda and notice of said meeting. In all other cases,
SEC. 25. Report of Election of Directors, Trustees and the election must be held no later than forty-five (45)
Officers, Nonholding of Election and Cessation from days from the time the vacancy arose. A director or
Office. – Within thirty (30) days after the election of the trustee elected to fill a vacancy shall be referred to as
directors, trustees and officers of the corporation, the replacement director or trustee and shall serve only for
secretary, or any other officer of the corporation, shall the unexpired term of the predecessor in office.
submit to the Commission, the names, nationalities, However, when the vacancy prevents the remaining
shareholdings, and residence addresses of the directors, directors from constituting a quorum and emergency
trustees and officers elected. action is required to prevent grave, substantial, and
The non-holding of elections and the reasons therefor irreparable loss or damage to the corporation, the
shall be reported to the Commission within thirty (30) vacancy may be temporarily filled from among the
days from the date of the scheduled election. The report officers of the corporation by unanimous vote of the
shall specify a new date for the election, which shall not remaining directors or trustees. The action by the
be later than sixty (60) days from the scheduled date. designated director or trustee shall be limited to the
If no new date has been designated, or if the rescheduled emergency action necessary, and the term shall cease
election is likewise not held, the Commission may, upon within a reasonable time from the termination of the
the application of a stockholder, member, director or emergency or upon election of the replacement director
trustee, and after verification of the unjustified non- or trustee, whichever comes earlier. The corporation
holding of the election, summarily order that an election must notify the Commission within three (3) days from
be held. The Commission shall have the power to issue the creation of the emergency board, stating therein the
such orders as may be appropriate, including orders reason for its creation.
directing the issuance of a notice stating the time and Any directorship or trusteeship to be filled by reason of
place of the election, designated presiding officer, and the an increase in the number of directors or trustees shall be
record date or dates for the determination of filled only by an election at a regular or at a special
stockholders or members entitled to vote. meeting of stockholders or members duly called for the
Notwithstanding any provision of the articles of purpose, or in the same meeting authorizing the increase
incorporation or bylaws to the contrary, the shares of of directors or trustees if so stated in the notice of the
stock or membership represented at such meeting and meeting.
entitled to vote shall constitute a quorum for purposes of In all elections to fill vacancies under this section, the
conducting an election under this section. procedure set forth in Sections 23 and 25 of this Code
Should a director, trustee or officer die, resign or in any shall apply.
manner cease to hold office, the secretary, or the
director, trustee or officer of the corporation, shall, within
seven (7) days from knowledge thereof, report in writing
such fact to the Commission. That the vacancy “may be filled” shows that the filling of
vacancies in the board by the remaining directors or
trustees constituting a quorum is merely permissive, not
Vacancy in the Board of Directors
mandatory, and the vacancies may still be filled-up by the

LVJ I 34
removal of members of the Board can only be done in a
stockholders or members in a regular or special meeting
meeting where previously notice has been given and such
called for the purpose. However, when the by-laws of the
notice must have specified that one of the things that will be
corporation contain a specific mode of filling-up existing
decided upon is the removal of directors.
vacancies in the board, the same is mandatory (Tan v.
Compensation of directors and officers
Sycip, 499 SCRA 216 [2006]).
SEC. 29. Compensation of Directors or Trustees. – In the
absence of any provision in the bylaws fixing their
Removal and discipline of directors and trustees
compensation, the directors or trustees shall not receive
SEC. 27. Removal of Directors or Trustees. – Any director any compensation in their capacity as such, except for
or trustee of a corporation may be removed from office reasonable per diems: Provided, however, That the
by a vote of the stockholders holding or representing at stockholders representing at least a majority of the
least two-thirds (2/3) of the outstanding capital stock, or outstanding capital stock or majority of the members may
in a nonstock corporation, by a vote of at least two-thirds grant directors or trustees with compensation and
(2/3) of the members entitled to vote: Provided, That approve the amount thereof at a regular or special
such removal shall take place either at a regular meeting meeting.
of the corporation or at a special meeting called for the In no case shall the total yearly compensation of directors
purpose, and in either case, after previous notice to exceed ten percent (10%) of the net income before
stockholders or members of the corporation of the income tax of the corporation during the preceding year.
intention to propose such removal at the meeting. A Directors or trustees shall not participate in the
special meeting of the stockholders or members for the determination of their own per diems or compensation.
purpose of removing any director or trustee must be Corporations vested with public interest shall submit to
called by the secretary on order of the president, or upon their shareholders and the Commission, an annual report
written demand of the stockholders representing or of the total compensation of each of their directors or
holding at least a majority of the outstanding capital trustees.
stock, or a majority of the members entitled to vote. If
there is no secretary, or if the secretary, despite demand,
Board committees
fails or refuses to call the special meeting or to give notice
For the purpose of convenience, the board of directors may
thereof, the stockholder or member of the corporation
create committees for the performance of certain functions.
signing the demand may call for the meeting by directly
As long as the board clearly specifies and limits the functions
addressing the stockholders or members. Notice of the
delegated, and the delegation does not in effect constitute an
time and place of such meeting, as well as of the intention
abdication by the board of the powers and responsibilities
to propose such removal, must be given by publication or
vested in it by law, such delegation will be valid.
by written notice prescribed in this Code. Removal may
be with or without cause: Provided, That removal without SEC. 34. Executive, Management, and Other Special
cause may not be used to deprive minority stockholders Committees. – If the bylaws so provide, the board may
or members of the right of representation to which they create an executive committee composed of at least three
may be entitled under Section 23 of this Code. (3) directors. Said committee may act, by majority vote of
The Commission shall, motu proprio or upon verified all its members, on such specific matters within the
complaint, and after due notice and hearing, order the competence of the board, as may be delegated to it in the
removal of a director or trustee elected despite the bylaws or by majority vote of the board, except with
disqualification, or whose disqualification arose or is respect to the: (a) approval of any action for which
discovered subsequent to an election. The removal of a shareholders’ approval is also required; (b) filling of
disqualified director shall be without prejudice to other vacancies in the board; (c) amendment or repeal of
sanctions that the Commission may impose on the board bylaws or the adoption of new bylaws; (d) amendment or
of directors or trustees who, with knowledge of the repeal of any resolution of the board which by its express
disqualification, failed to remove such director or trustee. terms is not amendable or repealable; and (e) distribution
of cash dividends to the shareholders.
The board of directors may create special committees of
“Cause” for removal constitutes violation of the duties of a
temporary or permanent nature and determine the
director and officer, which is loyalty, obedience and diligence.
members’ term, composition, compensation, powers, and
When the law provides that a certain action has to be done
responsibilities.
either by the Board and/or stockholders, and it says that
notice has to be given, it is a mandatory provision. Hence, the

LVJ I 35
The law allows a delegation to an executive committee of any The general rule is that contracts intra vires entered into by
act within the competence of the board, with some the board of directors are binding upon the corporation and
exceptions, provided such delegation is on specific matters. that the courts will not interfere unless such contracts are so
An executive committee can only be created by virtue of a unconscionable and oppressive as to amount to a wanton
provision in the by-laws and that in the absence of such destruction of the rights of minority.
bylaw provision, the Board of Directors cannot simply create The degree of care and diligence required is usually that
or appoint an executive committee to perform some of its which men prompted by self-interest, generally exercise in
functions. their own affairs. In determining whether reasonable
diligence has been exercised, the particular circumstances of
Corporate Governance: Duties of Directors and each case must be considered. The nature of the business is
also an important factor.
Controlling Stockholders Fiduciary duties; conflict of interests
Duties of Directors and Controlling Stockholders A director, holding as he does a position of trust, is a fiduciary
A director owes a three-fold duty to the corporation - to be of the corporation. As such, in case of conflict of his interests
diligent, to be loyal and to be obedient. with those of the corporation, he cannot sacrifice the latter
The duty of obedience imposes on the directors the without incurring liability for his disloyal act.
obligation to act only within the corporate powers, under the (a) The self-dealing director
penalty of liability for damages unless they acted in good A director may gain undue advantage over his corporation
faith and with due diligence. when he enters into a contract with the latter.
SEC. 30. Liability of Directors, Trustees or Officers. – Since the director participates in the decision as to whether
Directors or trustees who willfully and knowingly vote for or not a contract is to be accepted by the corporation, if he
or assent to patently unlawful acts of the corporation or has any financial interest in such contract, he will be subject
who are guilty of gross negligence or bad faith in directing to the temptation of putting his interests above those of the
the affairs of the corporation or acquire any personal or corporation, and exert his influence to obtain board approval
pecuniary interest in conflict with their duty as such of the contract, although it may not be for the best interests
directors or trustees shall be liable jointly and severally of the corporation.
for all damages resulting therefrom suffered by the SEC. 31. Dealings of Directors, Trustees or Officers with
corporation, its stockholders or members and other the Corporation. – A contract of the corporation with one
persons. (1) or more of its directors, trustees, officers or their
A Director, Trustee or Officer shall not attempt to acquire, spouses and relatives within the fourth civil degree of
or acquire any interest adverse to the corporation in consanguinity or affinity is voidable, at the option of such
respect of any matter which has been reposed in them in corporation, unless all the following conditions are
confidence, and upon which, equity imposes a disability present:
upon themselves to deal in their own behalf; otherwise, (a) The presence of such director or trustee in the board
the said director, trustee or officer shall be liable as a meeting in which the contract was approved was not
trustee for the corporation and must account for the necessary to constitute a quorum for such meeting;
profits which otherwise would have accrued to the (b) The vote of such director or trustee was not necessary
corporation. for the approval of the contract;
(c) The contract is fair and reasonable under the
Duty of diligence circumstances;
Those who voluntarily take the position of directors and (d) In case of corporations vested with public interest,
invite confidence in that relation, undertake that they possess material contracts are approved by at least two-thirds
at least ordinary knowledge and skill and that they will use (2/3) of the entire membership of the board, with at least
them in the discharge of their functions as such. The directors a majority of the independent directors voting to approve
are therefore expected to manage the corporation with the material contract; and
reasonable diligence, care and prudence. They can be held (e) In case of an officer, the contract has been previously
liable not only for willful dishonesty but also for negligence. authorized by the board of directors.
Business judgment rule Where any of the first three (3) conditions set forth in the
The directors cannot, however, be held liable for mistakes or preceding paragraph is absent, in the case of a contract
errors in the exercise of their business judgment, provided with a director or trustee, such contract may be ratified
that they have acted in good faith and with due care and by the vote of the stockholders representing at least two-
prudence. thirds (2/3) of the outstanding capital stock or of at least

LVJ I 36
two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse
Directors can receive compensation other than per diems,
interest of the directors or trustees involved is made at
only if the bylaws fix the same, or should there not be any
such meeting and the contract is fair and reasonable
such provision in the by-laws, if the stockholders representing
under the circumstances.
a majority of the outstanding capital stock agree to give it to
them.
The contract of the self-dealing director is voidable at the Not even the stockholders can grant compensation where the
option of the corporation, regardless of whether or not the total amount thereof exceeds ten percent of the
corporation has suffered any damages. If there are such corporation's net income before taxes.
damages, the director or trustee guilty of violating the The rules regarding compensation of directors are not
provision will be liable for all such damages suffered not only applicable to an officer who is not a director, for then he
by the corporation, but also by its stockholders, members and would in effect be an employee of the corporation and would
other persons. thus be entitled to compensation for his services, unless
Ratification by stockholders makes possible a contract otherwise agreed.
beneficial to the corporation in a situation where a majority Neither do the rules apply to a case where the director, upon
of the directors or trustees may have some interest in such request of the board of directors, renders services outside his
contract. usual duties, under such circumstances as may imply a
Although a director may not have voted, if the other promise to pay compensation.
members of the board are under his dominating influence, he (c) Using inside information
will still be considered as a participating or self-dealing As insiders, directors and officers have access to confidential
director covered by the provision. Neither can the director's information relating to the business of the corporation. Their
duty be avoided by resignation. fiduciary position prohibits them from using any such
(b) Fixing compensation of directors and officers information to benefit themselves or any competitor
Directors are not entitled to compensation for performing corporation in which they may have a more substantial
services ordinarily attached to their office, unless the articles interest.
of incorporation or the by-laws expressly so provide or a It is "inside information" if it is not generally available to
contract is expressly made in advance. others and is acquired because of the close relationship of
Assuming, however, that compensation is intended, only the the director or officer to the corporation. There is unfair use if
stockholders and not the directors themselves my fix the the information withheld is of such materiality that a
amount thereof. But any stockholders' resolution to grant reasonable person would consider it a factor in determining
such compensation can only refer to future and not to past whether he should sell his stocks or buy more stocks.
services. (d) Seizing corporate opportunity
A director should refrain from usurping a business
SEC. 29. Compensation of Directors or Trustees. – In the
opportunity rightly belonging to the corporation.
absence of any provision in the bylaws fixing their
compensation, the directors or trustees shall not receive SEC. 33. Disloyalty of a Director. – Where a director, by
any compensation in their capacity as such, except for virtue of such office, acquires a business opportunity
reasonable per diems: Provided, however, That the which should belong to the corporation, thereby
stockholders representing at least a majority of the obtaining profits to the prejudice of such corporation, the
outstanding capital stock or majority of the members may director must account for and refund to the latter all such
grant directors or trustees with compensation and profits, unless the act has been ratified by a vote of the
approve the amount thereof at a regular or special stockholders owning or representing at least two-thirds
meeting. (2/3) of the outstanding capital stock. This provision shall
In no case shall the total yearly compensation of directors be applicable, notwithstanding the fact that the director
exceed ten percent (10%) of the net income before risked one’s own funds in the venture.
income tax of the corporation during the preceding year.
Directors or trustees shall not participate in the
If the transaction is one which the corporation has the right
determination of their own per diems or compensation.
to appropriate, it is the duty of a director not to seize it for
Corporations vested with public interest shall submit to
himself. Should he do so, he must account for all the profits
their shareholders and the Commission, an annual report
he obtains, even if he used his personal funds. Conversely, if
of the total compensation of each of their directors or
the business opportunity is one which does not properly
trustees.
belong to the corporation, then the latter has suffered no

LVJ I 37
prejudice if the director takes advantage of the transaction.
fails to sanction, report, or file the appropriate action
He is therefore not accountable for his profits.
with proper agencies, allows or tolerates the graft and
Section 33 covers only directors and not officers. If an officer
corrupt practices or fraudulent acts committed by a
is not a director, he may be liable under Section 30(2).
corporation’s directors, trustees, officers, or employees
(e) Interlocking directors
shall be punished with a fine ranging from Five hundred
A director may occupy a position in two corporations dealing
thousand pesos (P500,000.00) to One million pesos
with each other.
(P1,000,000.00).
SEC. 32. Contracts Between Corporations with
Interlocking Directors. – Except in cases of fraud, and
provided the contract is fair and reasonable under the
circumstances, a contract between two (2) or more SEC. 170. Other Violations of the Code; Separate Liability.
corporations having interlocking directors shall not be – Violations of any of the other provisions of this Code or
invalidated on that ground alone: Provided, That if the its amendments not otherwise specifically penalized
interest of the interlocking director in one (1) corporation therein shall be punished by a fine of not less than Ten
is substantial and the interest in the other corporation or thousand pesos (P10,000.00) but not more than One
corporations is merely nominal, the contract shall be million pesos (P1,000,000.00). If the violation is
subject to the provisions of the preceding section insofar committed by a corporation, the same may, after notice
as the latter corporation or corporations are concerned. and hearing, be dissolved in appropriate proceedings
Stockholdings exceeding twenty percent (20%) of the before the Commission: Provided, That such dissolution
outstanding capital stock shall be considered substantial shall not preclude the institution of appropriate action
for purposes of interlocking directors. against the director, trustee, or officer of the corporation
responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the
The burden is on the corporation to prove the fairness or
other causes for dissolution of a corporation provided in
unfairness of the transaction.
this Code.
Duty to creditors
Liability for any of the foregoing offenses shall be
Ordinarily, directors cannot be personally liable to corporate
separate from any other administrative, civil, or criminal
creditors for general inefficient management of a solvent
liability under this Code and other laws.
corporation. But when the corporation has become insolvent,
the directors will be deemed trustees of the creditors and
should manage its assets with strict regard to the latter's
interest.
SEC. 171. Liability of Directors, Trustees, Officers, or Other
SEC. 160. Violation of Disqualification Provision; Employees. – If the offender is a corporation, the penalty
Penalties. – When, despite the knowledge of the may, at the discretion of the court, be imposed upon such
existence of a ground for disqualification as provided in corporation and/or upon its directors, trustees,
Section 26 of this Code, a director, trustee or officer stockholders, members, officers, or employees
willfully holds office, or willfully conceals such responsible for the violation or indispensable to its
disqualification, such director, trustee or officer shall be commission.
punished with a fine ranging from Ten thousand pesos
(P10,000.00) to Two hundred thousand pesos
(P200,000.00) at the discretion of the court, and shall be Corporate Governance: Stockholders
permanently disqualified from being a director, trustee or Instances when stockholders’ or members action is
officer of any corporation. When the violation of this necessary
provision is injurious or detrimental to the public, the The most significant rights of a stockholder are to vote, to
penalty shall be a fine ranging from Twenty thousand share in the profits of the business and, upon dissolution, to
pesos (P20,000.00) to Four hundred thousand pesos participate proportionally in the distribution of corporate
(P400,000.00). assets, after all corporate creditors have been paid.
The Code specifies the instances when board action will not
be sufficient but would need stockholders’ or members’ vote.
SEC. 6. Classification of Shares. – The classification of
SEC. 168. Tolerating Graft and Corrupt Practices;
shares, their corresponding rights, privileges, or
Penalties. – A director, trustee, or officer who knowingly

LVJ I 38
restrictions, and their stated par value, if any, must be such shares shall not be liable to the corporation or to its
indicated in the articles of incorporation. Each share shall creditors in respect thereto: Provided, That no-par value
be equal in all respects to every other share, except as shares must be issued for a consideration of at least Five
otherwise provided in the articles of incorporation and in pesos (P5.00) per share: Provided, further, That the entire
the certificate of stock. consideration received by the corporation for its no-par
The shares in stock corporations may be divided into value shares shall be treated as capital and shall not be
classes or series of shares, or both. No share may be available for distribution as dividends.
deprived of voting rights except those classified and A corporation may further classify its shares for the
issued as “preferred” or “redeemable” shares, unless purpose of ensuring compliance with constitutional or
otherwise provided in this Code: Provided, That there legal requirements.
shall always be a class or series of shares with complete
voting rights.
Election of directors or trustees
Holders of nonvoting shares shall nevertheless be entitled
The right to choose the persons who will direct the
to vote on the following matters:
management and operation of the corporation is significant
(a) Amendment of the articles of incorporation;
because it is the only way that a stockholder can have a voice
(b) Adoption and amendment of bylaws;
in the management of corporate affairs, and thus render
(c) Sale, lease, exchange, mortgage, pledge, or other
more secure his right to share in the profits and assets of the
disposition of all or substantially all of the corporate
corporation.
property;
(d) Incurring, creating, or increasing bonded SEC. 23. Election of Directors or Trustees. – Except when
indebtedness; the exclusive right is reserved for holders of founders’
(e) Increase or decrease of authorized capital stock; shares under Section 7 of this Code, each stockholder or
(f) Merger or consolidation of the corporation with member shall have the right to nominate any director or
another corporation or other corporations; trustee who possesses all of the qualifications and none
(g) Investment of corporate funds in another corporation of the disqualifications set forth in this Code.
or business in accordance with this Code; and At all elections of directors or trustees, there must be
(h) Dissolution of the corporation. present, either in person or through a representative
Except as provided in the immediately preceding authorized to act by written proxy, the owners of
paragraph, the vote required under this Code to approve majority of the outstanding capital stock, or if there be no
a particular corporate act shall be deemed to refer only to capital stock, a majority of the members entitled to vote.
stocks with voting rights. When so authorized in the bylaws or by a majority of the
The shares or series of shares may or may not have a par board of directors, the stockholders or members may also
value: Provided, That banks, trust, insurance, and vote through remote communication or in absentia:
preneed companies, public utilities, building and loan Provided, That the right to vote through such modes may
associations, and other corporations authorized to obtain be exercised in corporations vested with public interest,
or access funds from the public, whether publicly listed or notwithstanding the absence of a provision in the bylaws
not, shall not be permitted to issue no par value shares of of such corporations.
stock. A stockholder or member who participates through
Preferred shares of stock issued by a corporation may be remote communication or in absentia, shall be deemed
given preference in the distribution of dividends and in present for purposes of quorum.
the distribution of corporate assets in case of liquidation, The election must be by ballot if requested by any voting
or such other preferences: Provided, That preferred stockholder or member.
shares of stock may be issued only with a stated par In stock corporations, stockholders entitled to vote shall
value. The board of directors, where authorized in the have the right to vote the number of shares of stock
articles of incorporation, may fix the terms and conditions standing in their own names in the stock books of the
of preferred shares of stock or any series thereof: corporation at the time fixed in the bylaws or where the
Provided, further, That such terms and conditions shall be bylaws are silent, at the time of the election. The said
effective upon filing of a certificate thereof with the stockholder may: (a) vote such number of shares for as
Securities and Exchange Commission, hereinafter referred many persons as there are directors to be elected; (b)
to as the “Commission”. cumulate said shares and give one (1) candidate as many
Shares of capital stock issued without par value shall be votes as the number of directors to be elected multiplied
deemed fully paid and nonassessable and the holder of by the number of the shares owned; or (c) distribute them

LVJ I 39
on the same principle among as many candidates as may questions asked and answers given;
be seen fit: Provided, That the total number of votes cast (3) The matters discussed and resolutions reached;
shall not exceed the number of shares owned by the (4) A record of the voting results for each agenda item;
stockholders as shown in the books of the corporation (5) A list of the directors or trustees, officers and
multiplied by the whole number of directors to be stockholders or members who attended the meeting; and
elected: Provided, however, That no delinquent stock (6) Such other items that the Commission may require in
shall be voted. Unless otherwise provided in the articles the interest of good corporate governance and the
of incorporation or in the bylaws, members of nonstock protection of minority stockholders;
corporations may cast as many votes as there are trustees (b) A members’ list for nonstock corporations and, for
to be elected but may not cast more than one (1) vote for stock corporations, material information on the current
one (1) candidate. Nominees for directors or trustees stockholders, and their voting rights;
receiving the highest number of votes shall be declared (c) A detailed, descriptive, balanced and comprehensible
elected. assessment of the corporation’s performance, which shall
If no election is held, or the owners of majority of the include information on any material change in the
outstanding capital stock or majority of the members corporation’s business, strategy, and other affairs;
entitled to vote are not present in person, by proxy, or (d) A financial report for the preceding year, which shall
through remote communication or not voting in absentia include financial statements duly signed and certified in
at the meeting, such meeting may be adjourned and the accordance with this Code and the rules the Commission
corporation shall proceed in accordance with Section 25 may prescribe, a statement on the adequacy of the
of this Code. corporation’s internal controls or risk management
The directors or trustees elected shall perform their systems, and a statement of all external audit and non-
duties as prescribed by law, rules of good corporate audit fees;
governance, and bylaws of the corporation. (e) An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment
thereof;
Meeting and quorum required
(f) Director or trustee profiles which shall include, among
SEC. 48. Kinds of Meetings. – Meetings of directors, others, their qualifications and relevant experience,
trustees, stockholders, or members may be regular or length of service in the corporation, trainings and
special. continuing education attended, and their board
representations in other corporations;
SEC. 49. Regular and Special Meetings of Stockholders or (g) A director or trustee attendance report, indicating the
Members. – Regular meetings of stockholders or attendance of each director or trustee at each of the
members shall be held annually on a date fixed in the meetings of the board and its committees and in regular
bylaws, or if not so fixed, on any date after April 15 of or special stockholder meetings;
every year as determined by the board of directors or (h) Appraisals and performance reports for the board and
trustees: Provided, That written notice of regular the criteria and procedure for assessment;
meetings shall be sent to all stockholders or members of (i) A director or trustee compensation report prepared in
record at least twenty-one (21) days prior to the meeting, accordance with this Code and the rules the Commission
unless a different period is required in the bylaws, law, or may prescribe;
regulation: Provided, further, That written notice of (j) Director disclosures on self-dealings and related party
regular meetings may be sent to all stockholders or transactions; and/or
members of record through electronic mail or such other (k) The profiles of directors nominated or seeking election
manner as the Commission shall allow under its or reelection.
guidelines. At each regular meeting of stockholders or A director, trustee, stockholder, or member may propose
members, the board of directors or trustees shall any other matter for inclusion in the agenda at any
endeavor to present to stockholders or members the regular meeting of stockholders or members.
following: (a) The minutes of the most recent regular Special meetings of stockholders or members shall be
meeting which shall include, among others: held at any time deemed necessary or as provided in the
(1) A description of the voting and vote tabulation bylaws: Provided, however, That at least one (1) week
procedures used in the previous meeting; written notice shall be sent to all stockholders or
(2) A description of the opportunity given to stockholders members, unless a different period is provided in the
or members to ask questions and a record of the bylaws, law or regulation.

LVJ I
40
A stockholder or member may propose the holding of a Metropolitan areas shall, for purposes of this section, be
special meeting and items to be included in the agenda. considered a city or municipality.
Notice of any meeting may be waived, expressly or Notice of meetings shall be sent through the means of
impliedly, by any stockholder or member: Provided, That communication provided in the bylaws, which notice shall
general waivers of notice in the articles of incorporation state the time, place and purpose of the meetings.
or the bylaws shall not be allowed: Provided, further, Each notice of meeting shall further be accompanied by
That attendance at a meeting shall constitute a waiver of the following:
notice of such meeting, except when the person attends a (a) The agenda for the meeting;
meeting for the express purpose of objecting to the (b) A proxy form which shall be submitted to the
transaction of any business because the meeting is not corporate secretary within a reasonable time prior to the
lawfully called or convened. meeting;
Whenever for any cause, there is no person authorized or (c) When attendance, participation, and voting are
the person authorized unjustly refuses to call a meeting, allowed by remote communication or in absentia, the
the Commission, upon petition of a stockholder or requirements and procedures to be followed when a
member on a showing of good cause therefor, may issue stockholder or member elects either option; and
an order, directing the petitioning stockholder or member (d) When the meeting is for the election of directors or
to call a meeting of the corporation by giving proper trustees, the requirements and procedure for nomination
notice required by this Code or the bylaws. The and election.
petitioning stockholder or member shall preside thereat All proceedings and any business transacted at a meeting
until at least a majority of the stockholders or members of the stockholders or members, if within the powers or
present have chosen from among themselves, a presiding authority of the corporation, shall be valid even if the
officer. meeting is improperly held or called: Provided, That all
Unless the bylaws provide for a longer period, the stock the stockholders or members of the corporation are
and transfer book or membership book shall be closed at present or duly represented at the meeting and not one
least twenty (20) days for regular meetings and seven (7) of them expressly states at the beginning of the meeting
days for special meetings before the scheduled date of that the purpose of their attendance is to object to the
the meeting. transaction of any business because the meeting is not
In case of postponement of stockholders’ or members’ lawfully called or convened.
regular meetings, written notice thereof and the reason
therefor shall be sent to all stockholders or members of SEC. 51. Quorum in Meetings. – Unless otherwise
record at least two (2) weeks prior to the date of the provided in this Code or in the bylaws, a quorum shall
meeting, unless a different period is required under the consist of the stockholders representing a majority of the
bylaws, law or regulation. outstanding capital stock or a majority of the members in
The right to vote of stockholders or members may be the case of nonstock corporations.
exercised in person, through a proxy, or when so
authorized in the bylaws, through remote communication
or in absentia. The Commission shall issue the rules and SEC. 54. Right to Vote of Secured Creditors and
regulations governing participation and voting through Administrators. – In case a stockholder grants security
remote communication or in absentia, taking into account interest in his or her shares in stock corporations, the
the company’s scale, number of shareholders or stockholder-grantor shall have the right to attend and
members, structure, and other factors consistent with the vote at meetings of stockholders, unless the secured
protection and promotion of shareholders’ or members’ creditor is expressly given by the stockholder-grantor
meetings. such right in writing which is recorded in the appropriate
corporate books.
SEC. 50. Place and Time of Meetings of Stockholders or Executors, administrators, receivers, and other legal
Members. – Stockholders’ or members’ meetings, representatives duly appointed by the court may attend
whether regular or special, shall be held in the principal and vote in behalf of the stockholders or members
office of the corporation as set forth in the articles of without need of any written proxy.
incorporation, or, if not practicable, in the city or
municipality where the principal office of the corporation SEC. 55. Voting in Case of Joint Ownership of Stock. – The
is located: Provided, That any city or municipality in consent of all the co-owners shall be necessary in voting
Metro Manila, Metro Cebu, Metro Davao, and other shares of stock owned jointly by two (2) or more persons,

LVJ I 41
unless there is a written proxy, signed by all the co- purpose, or in the same meeting authorizing the increase
owners, authorizing one (1) or some of them or any other of directors or trustees if so stated in the notice of the
person to vote such share or shares: Provided, That when meeting.
the shares are owned in an “and/or” capacity by the In all elections to fill vacancies under this section, the
holders thereof, any one of the joint owners can vote said procedure set forth in Sections 23 and 25 of this Code
shares or appoint a proxy therefor. shall apply.

SEC. 56. Voting Right for Treasury Shares. – Treasury


Removal of directors
shares shall have no voting right as long as such shares
Only stockholders or members have the power to remove the
remain in the Treasury.
directors or trustees elected by them.
SEC. 27. Removal of Directors or Trustees. – Any director
Vacancies in the board
or trustee of a corporation may be removed from office
SEC. 28. Vacancies in the Office of Director or Trustee; by a vote of the stockholders holding or representing at
Emergency Board. – Any vacancy occurring in the board of least two-thirds (2/3) of the outstanding capital stock, or
directors or trustees other than by removal or by in a nonstock corporation, by a vote of at least two-thirds
expiration of term may be filled by the vote of at least a (2/3) of the members entitled to vote: Provided, That
majority of the remaining directors or trustees, if still such removal shall take place either at a regular meeting
constituting a quorum; otherwise, said vacancies must be of the corporation or at a special meeting called for the
filled by the stockholders or members in a regular or purpose, and in either case, after previous notice to
special meeting called for that purpose. stockholders or members of the corporation of the
When the vacancy is due to term expiration, the election intention to propose such removal at the meeting. A
shall be held no later than the day of such expiration at a special meeting of the stockholders or members for the
meeting called for that purpose. When the vacancy arises purpose of removing any director or trustee must be
as a result of removal by the stockholders or members, called by the secretary on order of the president, or upon
the election may be held on the same day of the meeting written demand of the stockholders representing or
authorizing the removal and this fact must be so stated in holding at least a majority of the outstanding capital
the agenda and notice of said meeting. In all other cases, stock, or a majority of the members entitled to vote. If
the election must be held no later than forty-five (45) there is no secretary, or if the secretary, despite demand,
days from the time the vacancy arose. A director or fails or refuses to call the special meeting or to give notice
trustee elected to fill a vacancy shall be referred to as thereof, the stockholder or member of the corporation
replacement director or trustee and shall serve only for signing the demand may call for the meeting by directly
the unexpired term of the predecessor in office. addressing the stockholders or members. Notice of the
However, when the vacancy prevents the remaining time and place of such meeting, as well as of the intention
directors from constituting a quorum and emergency to propose such removal, must be given by publication or
action is required to prevent grave, substantial, and by written notice prescribed in this Code. Removal may
irreparable loss or damage to the corporation, the be with or without cause: Provided, That removal without
vacancy may be temporarily filled from among the cause may not be used to deprive minority stockholders
officers of the corporation by unanimous vote of the or members of the right of representation to which they
remaining directors or trustees. The action by the may be entitled under Section 23 of this Code.
designated director or trustee shall be limited to the The Commission shall, motu proprio or upon verified
emergency action necessary, and the term shall cease complaint, and after due notice and hearing, order the
within a reasonable time from the termination of the removal of a director or trustee elected despite the
emergency or upon election of the replacement director disqualification, or whose disqualification arose or is
or trustee, whichever comes earlier. The corporation discovered subsequent to an election. The removal of a
must notify the Commission within three (3) days from disqualified director shall be without prejudice to other
the creation of the emergency board, stating therein the sanctions that the Commission may impose on the board
reason for its creation. of directors or trustees who, with knowledge of the
Any directorship or trusteeship to be filled by reason of disqualification, failed to remove such director or trustee.
an increase in the number of directors or trustees shall be
filled only by an election at a regular or at a special
Fundamental changes
meeting of stockholders or members duly called for the

LVJ I 42
Although action is usually initiated by the board of directors
SEC. 36. Power to Extend or Shorten Corporate Term. – A
or trustees, their decision is not final, and approval of the
private corporation may extend or shorten its term as
stockholders or members would be necessary:
stated in the articles of incorporation when approved by a
(a) Amendment of articles of incorporation;
majority vote of the board of directors or trustees, and
(b) Increase and decrease of capital stock;
ratified at a meeting by the stockholders or members
(c) Incurring, creating or increasing bonded indebtedness;
representing at least two-thirds (2/3) of the outstanding
(d) Sale, lease, mortgage or other disposition of substantially
capital stock or of its members.
all corporate assets;
Written notice of the proposed action and the time and
(e) Investment of funds in another business or corporate or
place of the meeting shall be sent to stockholders or
for a purpose other than the primary purpose for which the
members at their respective place of residence as shown
corporation was organized;
in the books of the corporation, and must be deposited to
(f) Adoption, amendment and repeal of by-laws;
the addressee in the post office with postage prepaid,
(g) Merger and consolidation; and
served personally, or when allowed in the bylaws or done
(h) Dissolution of corporation.
with the consent of the stockholder, sent electronically in
In all these cases, even non-voting stocks or non-voting
accordance with the rules and regulations of the
members, as the case may be, will be entitled to vote.
Commission on the use of electronic data messages. In
Amendment of articles of incorporation
case of extension of corporate term, a dissenting
The articles embody the basic agreement of the stockholders
stockholder may exercise the right of appraisal under the
or members. Thus, any change therein made in pursuance of
conditions provided in this Code.
the power to amend granted by the Code must always be
with the consent of the stockholders or members.
SEC. 37. Power to Increase or Decrease Capital Stock;
SEC. 15. Amendment of Articles of Incorporation. – Unless Incur, Create or Increase Bonded Indebtedness. – No
otherwise prescribed by this Code or by special law, and corporation shall increase or decrease its capital stock or
for legitimate purposes, any provision or matter stated in incur, create or increase any bonded indebtedness unless
the articles of incorporation may be amended by a approved by a majority vote of the board of directors and
majority vote of the board of directors or trustees and the by two-thirds (2/3) of the outstanding capital stock at a
vote or written assent of the stockholders representing at stockholders’ meeting duly called for the purpose.
least two-thirds (2/3) of the outstanding capital stock, Written notice of the time and place of the stockholders’
without prejudice to the appraisal right of dissenting meeting and the purpose for said meeting must be sent to
stockholders in accordance with the provisions of this the stockholders at their places of residence as shown in
Code. The articles of incorporation of a nonstock the books of the corporation and served on the
corporation may be amended by the vote or written stockholders personally, or through electronic means
assent of majority of the trustees and at least two-thirds recognized in the corporation’s bylaws and/or the
(2/3) of the members. Commission’s rules as a valid mode for service of notices.
The original and amended articles together shall contain A certificate must be signed by a majority of the directors
all provisions required by law to be set out in the articles of the corporation and countersigned by the chairperson
of incorporation. Amendments to the articles shall be and secretary of the stockholders’ meeting, setting forth:
indicated by underscoring the change or changes made, (a) That the requirements of this section have been
and a copy thereof duly certified under oath by the complied with;
corporate secretary and a majority of the directors or (b) The amount of the increase or decrease of the capital
trustees, with a statement that the amendments have stock;
been duly approved by the required vote of the (c) In case of an increase of the capital stock, the amount
stockholders or members, shall be submitted to the of capital stock or number of shares of no-par stock
Commission. thereof actually subscribed, the names, nationalities and
The amendments shall take effect upon their approval by addresses of the persons subscribing, the amount of
the Commission or from the date of filing with the said capital stock or number of no-par stock subscribed by
Commission if not acted upon within six (6) months from each, and the amount paid by each on the subscription in
the date of filing for a cause not attributable to the cash or property, or the amount of capital stock or
corporation. number of shares of no-par stock allotted to each
stockholder if such increase is
for the purpose of making effective stock dividend
therefor authorized;

LVJ I 43
stockholder in a corporation, since such proportionate
(d) Any bonded indebtedness to be incurred, created or
interest determines his proportionate power to vote in
increased;
corporate affairs when the law gives the stockholders a right
(e) The amount of stock represented at the meeting; and
to affirm or deny board actions.
(f) The vote authorizing the increase or decrease of the
capital stock, or the incurring, creating or increasing of SEC. 38. Power to Deny Preemptive Right. – All
any bonded indebtedness. stockholders of a stock corporation shall enjoy
Any increase or decrease in the capital stock or the preemptive right to subscribe to all issues or disposition
incurring, creating or increasing of any bonded of shares of any class, in proportion to their respective
indebtedness shall require prior approval of the shareholdings, unless such right is denied by the articles
Commission, and where appropriate, of the Philippine of incorporation or an amendment thereto: Provided,
Competition Commission. That such preemptive right shall not extend to shares
The application with the Commission shall be made issued in compliance with laws requiring stock offerings
within six (6) months from the date of approval of the or minimum stock ownership by the public; or to shares
board of directors and stockholders, which period may be issued in good faith with the approval of the stockholders
extended for justifiable reasons. representing two-thirds (2/3) of the outstanding capital
Copies of the certificate shall be kept on file in the office stock, in exchange for property needed for corporate
of the corporation and filed with the Commission and purposes or in payment of a previously contracted debt.
attached to the original articles of incorporation. After
approval by the Commission and the issuance by the
Sale or disposition of substantially all assets
Commission of its certificate of filing, the capital stock
The act of selling, leasing, mortgaging or otherwise disposing
shall be deemed increased or decreased and the
of substantially all of the corporate assets is not merely an act
incurring, creating or increasing of any bonded
of management but is clearly one of ownership. The board
indebtedness authorized, as the certificate of filing may
cannot therefore act alone in this matter but must seek
declare: Provided, That the Commission shall not accept
approval of the stockholders or members.
for filing any certificate of increase of capital stock unless
accompanied by a sworn statement of the treasurer of SEC. 39. Sale or Other Disposition of Assets. – Subject to
the corporation lawfully holding office at the time of the the provisions of Republic Act No. 10667, otherwise
filing of the certificate, showing that at least twenty-five known as the “Philippine Competition Act”, and other
percent (25%) of the increase in capital stock has been related laws, a corporation may, by a majority vote of its
subscribed and that at least twenty-five percent (25%) of board of directors or trustees, sell, lease, exchange,
the amount subscribed has been paid in actual cash to the mortgage, pledge, or otherwise dispose of its property
corporation or that property, the valuation of which is and assets, upon such terms and conditions and for such
equal to twenty-five percent (25%) of the subscription, consideration, which may be money, stocks, bonds, or
has been transferred to the corporation: Provided, other instruments for the payment of money or other
further, That no decrease in capital stock shall be property or consideration, as its board of directors or
approved by the Commission if its effect shall prejudice trustees may deem expedient.
the rights of corporate creditors. A sale of all or substantially all of the corporation’s
Nonstock corporations may incur, create or increase properties and assets, including its goodwill, must be
bonded indebtedness when approved by a majority of the authorized by the vote of the stockholders representing
board of trustees and of at least two-thirds (2/3) of the at least two-thirds (2/3) of the outstanding capital stock,
members in a meeting duly called for the purpose. or at least two-thirds (2/3) of the members, in a
Bonds issued by a corporation shall be registered with the stockholders’ or members’ meeting duly called for the
Commission, which shall have the authority to determine purpose.
the sufficiency of the terms thereof. In nonstock corporations where there are no members
with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the
Pre-emptive right
corporation to enter into any transaction authorized by
Pre-emptive right is the right of the stockholders to be
this section.
granted the first option to subscribe to any opening of the
The determination of whether or not the sale involves all
corporation's unissued capital stock, or to any increase of its
or substantially all of the corporation’s properties and
authorized capital stock.
assets must be computed based on its net asset value, as
The recognition of the pre-emptive right is intended to
shown in its latest financial statements. A sale or other
protect both the proprietary and voting rights of a

LVJ I 44
disposition shall be deemed to cover substantially all the bylaws or done with the consent of the stockholders:
corporate property and assets if thereby the corporation Provided, That any dissenting stockholder shall have
would be rendered incapable of continuing the business appraisal right as provided in this Code: Provided,
or accomplishing the purpose for which it was however, That where the investment by the corporation
incorporated. is reasonably necessary to accomplish its primary purpose
Written notice of the proposed action and of the time and as stated in the articles of incorporation, the approval of
place for the meeting shall be addressed to stockholders the stockholders or members shall not be necessary.
or members at their places of residence as shown in the
books of the corporation and deposited to the addressee
Power to declare dividends
in the post office with postage prepaid, served personally,
or when allowed by the bylaws or done with the consent SEC. 42. Power to Declare Dividends. – The board of
of the stockholder, sent electronically: Provided, That any directors of a stock corporation may declare dividends
dissenting stockholder may exercise the right of appraisal out of the unrestricted retained earnings which shall be
under the conditions provided in this Code. payable in cash, property, or in stock to all stockholders
After such authorization or approval by the stockholders on the basis of outstanding stock held by them: Provided,
or members, the board of directors or trustees may, That any cash dividends due on delinquent stock shall
nevertheless, in its discretion, abandon such sale, lease, first be applied to the unpaid balance on the subscription
exchange, mortgage, pledge, or other disposition of plus costs and expenses, while stock dividends shall be
property and assets, subject to the rights of third parties withheld from the delinquent stockholders until their
under any contract relating thereto, without further unpaid subscription is fully paid: Provided, further, That
action or approval by the stockholders or members. no stock dividend shall be issued without the approval of
Nothing in this section is intended to restrict the power of stockholders representing at least two-thirds (2/3) of the
any corporation, without the authorization by the outstanding capital stock at a regular or special meeting
stockholders or members, to sell, lease, exchange, duly called for the purpose.
mortgage, pledge, or otherwise dispose of any of its Stock corporations are prohibited from retaining surplus
property and assets if the same is necessary in the usual profits in excess of one hundred percent (100%) of their
and regular course of business of the corporation or if the paid-in capital stock, except: (a) when justified by definite
proceeds of the sale or other disposition of such property corporate expansion projects or programs approved by
and assets shall be appropriated for the conduct of its the board of directors; or (b) when the corporation is
remaining business. prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from
declaring dividends without their consent, and such
Investment in another business or corporation
consent has not yet been secured; or (c) when it can be
SEC. 41. Power to Invest Corporate Funds in Another clearly shown that such retention is necessary under
Corporation or Business or for Any Other Purpose. – special circumstances obtaining in the corporation, such
Subject to the provisions of this Code, a private as when there is need for special reserve for probable
corporation may invest its funds in any other corporation, contingencies.
business, or for any purpose other than the primary
purpose for which it was organized, when approved by a
Power to enter into management contracts
majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3) SEC. 43. Power to Enter into Management Contract. – No
of the outstanding capital stock, or by at least two-thirds corporation shall conclude a management contract with
(2/3) of the members in the case of nonstock another corporation unless such contract is approved by
corporations, at a meeting duly called for the purpose. the board of directors and by stockholders owning at
Notice of the proposed investment and the time and least the majority of the outstanding capital stock, or by
place of the meeting shall be addressed to each at least a majority of the members in the case of a
stockholder or member at the place of residence as nonstock corporation, of both the managing and the
shown in the books of the corporation and deposited to managed corporation, at a meeting duly called for the
the addressee in the post office with postage prepaid, purpose: Provided, That (a) where a stockholder or
served personally, or sent electronically in accordance stockholders representing the same interest of both the
with the rules and regulations of the Commission on the managing and the managed corporations own or control
use of electronic data message, when allowed by the more than one-third (1/3) of the total outstanding capital

LVJ I 45
stock entitled to vote of the managing corporation; or (b) the articles of incorporation or by the board of directors
where a majority of the members of the board of pursuant to authority conferred by the articles of
directors of the managing corporation also constitute a incorporation or the bylaws, or if not so fixed, by the
majority of the members of the board of directors of the stockholders representing at least a majority of the
managed corporation, then the management contract outstanding capital stock at a meeting duly called for the
must be approved by the stockholders of the managed purpose.
corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least
Merger and consolidation
two-thirds (2/3) of the members in the case of a nonstock
Merger is the union of two or more corporations by virtue of
corporation.
which one of them absorbs all the others. Consolidation, on
These shall apply to any contract whereby a corporation
the other hand, is a union of two or ,ore corporations with
undertakes to manage or operate all or substantially all of
the formation of a new single corporation, extinguishing all
the business of another corporation, whether such
the constituent corporations in the process. Since both these
contracts are called service contracts, operating
unions involve organic changes in the corporations affected,
agreements or otherwise: Provided, however, That such
the consent of the stockholders of all such corporations is
service contracts or operating agreements which relate to
indispensable.
the exploration, development, exploitation or utilization
of natural resources may be entered into for such periods SEC. 76. Stockholders’ or Members’ Approval. – Upon
as may be provided by pertinent laws or regulations. approval by a majority vote of each of the board of
No management contract shall be entered into for a directors or trustees of the constituent corporations of
period longer than five (5) years for any one (1) term. the plan of merger or consolidation, the same shall be
submitted for approval by the stockholders or members
of each of such corporations at separate corporate
Power to set the valuation of stocks
meetings duly called for the purpose. Notice of such
SEC. 61. Consideration for Stocks. – Stocks shall not be meetings shall be given to all stockholders or members of
issued for a consideration less than the par or issued price the respective corporations in the same manner as giving
thereof. Consideration for the issuance of stock may be: notice of regular or special meetings under Section 49 of
(a) Actual cash paid to the corporation; this Code. The notice shall state the purpose of the
(b) Property, tangible or intangible, actually received by meeting and include a copy or a summary of the plan of
the corporation and necessary or convenient for its use merger or consolidation.
and lawful purposes at a fair valuation equal to the par or The affirmative vote of stockholders representing at least
issued value of the stock issued; two-thirds (2/3) of the outstanding capital stock of each
(c) Labor performed for or services actually rendered to corporation in the case of stock corporations or at least
the corporation; two-thirds (2/3) of the members in the case of nonstock
(d) Previously incurred indebtedness of the corporation; corporations shall be necessary for the approval of such
(e) Amounts transferred from unrestricted retained plan. Any dissenting stockholder may exercise the right of
earnings to stated capital; appraisal in accordance with this Code: Provided, That if
(f) Outstanding shares exchanged for stocks in the event after the approval by the stockholders of such plan, the
of reclassification or conversion; board of directors decides to abandon the plan, the right
(g) Shares of stock in another corporation; and/or of appraisal shall be extinguished.
(h) Other generally accepted form of consideration. Any amendment to the plan of merger or consolidation
Where the consideration is other than actual cash, or may be made: Provided, That such amendment is
consists of intangible property such as patents or approved by a majority vote of the respective boards of
copyrights, the valuation thereof shall initially be directors or trustees of all the constituent corporations
determined by the stockholders or the board of directors, and ratified by the affirmative vote of stockholders
subject to the approval of the Commission. representing at least two-thirds (2/3) of the outstanding
Shares of stock shall not be issued in exchange for capital stock or of two-thirds (2/3) of the members of
promissory notes or future service. The same each of the constituent corporations. Such plan, together
considerations provided in this section, insofar as with any amendment, shall be considered as the
applicable, may be used for the issuance of bonds by the agreement of merger or consolidation.
corporation.
The issued price of no-par value shares may be fixed in
Appraisal right

LVJ I 46
In case any of the fundamental changes take place within the
corporation, the stockholder is granted by law an appraisal
right, which means that a stockholder who dissented and
voted against the proposed corporate action may choose to
get out of the corporation by demanding payment of the fair
value of his shares.

LVJ I 47