February 16, 2019
NON – STOCK CORPORATIONS
Sec. 87. Definition. — For the purposes of this Code, a
non-stock corporation is one where no part of its
income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this
Code on dissolution: Provided, that any profit which a
non-stock corporation may obtain as an incident to its
operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for
which the corporation was organized, subject to the
provisions of this Title.
The provisions governing stock corporations, when
pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific
provisions of this Title.
Sec. 88. Purposes. — Non-stock corporations may be
formed or organized for charitable, religious,
educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civic service, or
similar purposes, like trade, industry, agriculture and
like chambers, or any combination thereof, subject to
the special provisions of this Title governing particular
classes of non-stock corporations.
Discussion:
 Political purpose is not specifically included – the
SEC may reject the articles of incorporation if the
purpose of the corporation is to engage in
election campaign or partisan political activity
 GR: A non-stock corporation is not empowered
to engage in business with the object of making
profits
o EXCEPTION
a. Not prohibited to make income or
profits as INCIDENT to its operations
b. Incidental profits obtained from its
operations shall, whenever necessary or
proper, be used for the furtherance of
the purpose or purposes for which the
corporation was organized
c. Corporation may invest its accumulated
funds for profit purposes if allowed in its
articles of incorporation
 If a non-stock corporation wishes to engage in
activities not essential to its primary purpose, it
must amend its articles of incorporation
 Even if the capital stock of a corporation is
divided into shares, it does not detract from the
fact that it is not engaged in business for profit if
such is the case
 Even if there are other ways to share the
corporation’s profits to the members, it should
not be practiced by the corporation
 Purposes for organization of non-stock
corporations:
o Charitable
o Religious - may not necessarily be the
same as religious corporations since a
religious corporation may be established
by just on person
o Educational – may not necessarily be the
same as educational corporations
o Professional
o Cultural
o Recreational
o Fraternal
o Literary
o Scientific
o Social
o Civic service
o Similar purposes, like trade, industry,
agriculture and like chambers, or any
combination thereof
 If there is a combination of purposes, they
should be compatible with each other
CHAPTER I – MEMBERS
Sec. 89. Right to vote. — The right of the members of
any class or classes to vote may be limited, broadened
or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless of class,
shall be entitled to one vote.
Unless otherwise provided by the articles of
incorporation or the by-laws, a member may vote by
proxy in accordance with the provisions of this Code
Voting by mail or other similar means by members of
non-stock corporations may be authorized by the by-
laws of non-stock corporations with the approval of,
and under such conditions which may be prescribed by,
the Securities and Exchange Commission.
Discussion:
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  The right to vote of members may be limited,
broadened, or even denied in the articles of
incorporation or the by-laws
 A member may vote by proxy unless otherwise
prohibited in the articles
 Each member shall be entitled only to one vote
in the election of trustees unless cumulative
voting is authorized in the articles or the by laws
 Voting by mail or other similar means may be
authorized by the SEC and duly provided for in
the articles and in the by laws – members who
are scattered nationwide
 The articles of incorporation or by-laws may
provide that only members of good standing or
those who are up-to-date in the payment of their
dues or other obligations may vote
 A non-stock corporation is authorized by law to
accept members and may collect reasonable
membership dues and other assessments for
purposes of accomplishing the purposes or
objectives for which the corporation was
organized
 Q: Can a juridical entity be a member of a non-
stock corporation?
o A: It can have juridical entities at
benefactors but not as members
Sec. 90. Non-transferability of membership -
Membership in a non-stock corporation, and all rights
arising therefrom, are personal and non-transferable,
unless the articles of incorporation or the by-laws
otherwise provide
Discussion:
 Sec. 90 is the general rule, the bylaws may
provide for exceptions
 Membership and all rights arising therefrom are
personal and non-transferable unless otherwise
provided in the articles of incorporation or the
by-laws
 Transfer of membership rights by virtue of
inheritance is not provided for and is not,
therefore, considered as a valid mode of
acquiring membership in the corporation
Sec. 91. Termination of membership. — Membership
shall be terminated in the manner and for the causes
provided in the articles of incorporation or the by-laws.
Termination of membership shall have the effect of
extinguishing all rights of a member in the corporation
or in its property, unless otherwise provided in the
articles of incorporation or the by-laws
Discussion:
 Must be based on just and reasonable ground
 Courts are without power to strip a member of a
non-stock, non-profit corporation of his
membership therein without cause
 In the absence of a waiver, the member is
entitled to due process
 Q: Is expulsion and delisting the same?
o NO. When you are delisted, you are
merely put into an inactive status but if
you are expelled, that also carries with it
the disqualification from reapplying for
membership
Chapter II — TRUSTEES AND OFFICERS
Sec. 92. Election and term of trustees. — Unless
otherwise provided in the articles of incorporation or
the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in
number as may be fixed in their articles of incorporation
or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of
their number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the
board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold once only for
the unexpired period.
No person shall be elected as trustee unless he is a
member of the corporation.
Unless otherwise provided for in the articles of
incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members
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Discussion:
 In the absence of any express provision in the by-
laws as to what body the admission of corporate
members is lodged, it must logically be in the
board of trustees because it is the board which
exercises the corporate powers of
corporations formed under the Corporation
Code, and the approval of the members of the
corporation shall not be necessary
 Non-stock corporations may designate their
governing boards by any name other than as
board of trustees
- The number of trustees who must be
member of the corporation may be more
than 15 BUT the number of incorporating
trustees shall not be more than 15
- the board is supposed to be small in number
so that it may easily muster a quorum to act
on urgent matters
- Unless otherwise provided in the articles of
incorporation or the by-laws, the terms of
office of the trustees first elected are
staggered with a one-year interval
- Trustees subsequently elected shall have a
term of three consecutive years (staggered)
o Rationale: Ensure continuity of the
policies and programs of the board
because every year, there will
remain some or majority of the old
trustees
o In practice, the term is limited to 2
years subject to a “change all”
provision
- lifetime or unlimited term is not allowed as
it absolutely deprives other members to the
opportunity to participate in
management of the corporation or to
become officers of the corporation
- Only members of the corporation can be
elected to sit in the board.
- A corporation, being a juridical person, is not
qualified to occupy the position of a director
or trustee
 The board may authorize revenue generating
activities as long as it would inure for the benefit
of its intended beneficiaries and not for the
benefit of its members
all
Sec. 93. Place of meetings. — The by-laws may provide
that the members of a non-stock corporation may hold
their regular or special meetings at any place even
outside the place where the principal office of the
corporation is located: Provided, that proper notice is
sent to all members indicating the date, time and place
of the meeting: And provided, further, That the place of
meeting shall be within the Philippines
Discussion:
 Meetings of the board of trustees of a stock
corporation may be held anywhere in or outside
the Philippines, unless the by-laws provide
otherwise
 Meetings of the members must be within the
Philippines - the bylaws may provide for another
place even if outside the principal office of the
corporation as long as it is within the Philippines
 In case the by-laws do not indicate the place of
meeting, the members cannot hold their
meetings outside the place where the principal
office of the corporation is located
 When should notice be given? – provided in the
by laws
 Form of notice – provided in the by laws
 Electronic notice – can be allowed as long as
provided in the bylaws
Chapter III — DISTRIBUTION OF ASSETS IN NON-STOCK
CORPORATIONS
Sec. 94. Rules for distribution. — In case of dissolution
the of a non-stock corporation in accordance with the
provisions of this Code, its assets shall be applied and
distributed as follows:
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefor;
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 2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements;
3. Assets received and held by the corporation
subject to limitations permitting their use
only for charitable, religious, benevolent,
educational or similar purposes, but not
held upon a condition requiring return,
transfer or conveyance by reason of the
dissolution, shall be transferred or
conveyed to one or more corporations,
societies or organizations engaged in
activities in the Philippines substantially
similar to those of the dissolving
corporation pursuant to a plan of
distribution adopted as provided in this
Chapter;
4. Assets other than those mentioned in the
preceding paragraphs, if any, shall be
distributed in accordance with the
provisions of the articles of incorporation or
the by-laws, to the extent that the articles
of incorporation or the by-laws determine
the distributive rights of members, or any
class or classes of members, or provide for
distribution; and
5. In any other case, assets may be distributed
to such persons, societies, organizations or
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution as provided in this Chapter
Sec. 95. Plan of distribution of assets. — A plan
providing for the distribution of assets, not inconsistent
with the provisions of this Title, may be adopted by a
non-stock corporation in the process of dissolution in
the following manner:
The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and
directing the submission thereof to a vote at a regular
or special meeting of members having voting rights.
Written notice setting forth the proposed plan of
distribution or summary thereof; and the date, time
and place of such meeting shall be given to each
member entitled to vote, within the time and in the
manner provided in this Code for the giving of notice of
meetings to members. Such plan of distribution shall be
adopted upon approval of at least two-thirds (2/3) of
the members having voting rights present or
represented by proxy at such meeting
Discussion:
 In case of dissolution, its assets shall be applied
and distributed in accordance with certain
specific rules laid down by law
 Sufficient assets must be allocated/reserved for
payment of liabilities
 Subsection 2 contemplates of conditional
transfers (as long as it is used for the purposes
stated in the deed of donation or as long as the
corporation continues to exist)
 Subsection 3 contemplates a transfer by the
dissolved corporation to another corporation
with the same purpose
 Winding up period allowed by law – 3 years
o The corporation still enjoys its juridical
personality
 Subsection 4 does not violate the prohibition on
distribution of profits since these are only
remainder property without legal restrictions
 A non-stock corporation cannot be converted
into a stock corporation by mere amendment of
the articles of incorporation. It must be dissolved
first under the methods specified in Title XIV
Reason: This scheme might defraud the public
who might have contributed donations or grants to
the non-stock, non-profit corporation since after its
conversion the donated corporate assets would in
effect be treated as paid-in capital or subscription
payments of the stockholders
 Sec. 95 is called a liquidation plan
TITLE XII – CLOSE CORPORATIONS
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Sec. 96. Definition and applicability of Title. — A close
corporation, within the meaning of this Code, is one
whose articles of incorporation provide that: (1) All of
the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding
twenty (20); (2) All of the issued stock of all classes shall
be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any public
offering of any of its stock of any class. Notwithstanding
the foregoing, a corporation shall be deemed not a close
corporation when at least two- thirds (2/3) of its voting
stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close
corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to
be vested with public interest in accordance with the
provisions of this Code.
The provisions of this Title shall primarily govern close
corporations: Provided, That the provisions of other
Titles of this Code shall apply suppletorily except insofar
as this Title otherwise provides
Discussion:
 Closed corporation - corporation in which the
stock is held in a few hands, or in few families,
and which stock is not at all or only rarely dealt
in buying and selling
 In a close corporation, all the outstanding stock
(there being no publicly held securities of any
other class) is owned by the persons (or
members of their immediate families) who are
active in the management and conduct of the
business
 It is essentially an incorporated partnership in
which the stockholders consider each other as
partners but which the law treats as a
corporation
Requisites to qualify as a closed corporation:
1. All its issued stock, exclusive of treasury shares,
shall be held of record by not more than a
specified number of persons, not exceeding 20
o Must be specified in the articles
2. All its issued stock shall be subject to one or more
restrictions on transfer permitted by the Code
o Practice of restrictions does not
tantamount to being a closed
corporation as contemplated by law
(it must be clearly written in the
articles)
3. Any of its stock shall not be listed in any stock
exchange or offered to the public
 If all these three conditions are present and
provided for in the articles, by laws and
certificate of stock, there is already a closed
corporation
 To be able to determine if a corporation is really
a closed corporation, we shall look at the capital
contributions of the shareholders
Sec. 97. Articles of incorporation. — The articles of
incorporation of a close corporation may provide:
1. For a classification of shares or rights and
the qualifications for owning or holding the
same and restrictions on their transfers as
may be stated therein, subject to the
provisions of the following section
2. For a classification of directors into one or
more classes, each of which may be voted
for and elected solely by a particular class of
stock; and
3. For a greater quorum or voting
requirements in meetings of stockholders
or directors than those provided in this
Code.
The articles of incorporation of a close corporation may
provide that the business of the corporation shall be
managed by the stockholders of the corporation rather
than by a board of directors so long as this provision
continues in effect:
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 1. No meeting of stockholders need be called
to elect directors
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be directors
for purposes of applying provisions of this
Code; and
3. The stockholders and the corporation shall
be subject to all liabilities of directors.
The articles of incorporation may likewise provide that
all officers or employees or that specified officers or
employees shall be elected or appointed by the stock-
holders, instead of by the board of directors
Discussion:
 The classification of directors into one or more
classes or groups is not allowed in an ordinary or
widely-held corporation
 The articles of incorporation of a close
corporation may provide for quorum and voting
requirements in meetings of stockholders or
directors greater than those provided in the
Corporation Code
 The articles may provide that all or certain
specified officers or employees shall be elected
or appointed directly by the stockholders,
instead of the board of directors
Sec. 98. Validity of restrictions on transfer of shares. —
Restrictions on the right to transfer shares must appear
in the articles of incorporation and in the by-laws as
well as in the certificate of stock, otherwise, the same
shall not be binding on any purchaser thereof in good
faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation
the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or
period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails
to exercise the option to purchase, the transferring
stockholder may sell his shares to any third person,
Discussion:
 Two conditions for the validity of restrictions on
the right to transfer shares:
1. Such restrictions must appear in the articles of
incorporation and in the by-laws, as well as in the
certificate of stock; otherwise, they shall not be
binding on any purchaser thereof in good faith
2. They shall not be more onerous than granting
the existing stockholders or the corporation the
option to purchase the shares of the transferring
stockholders with such reasonable terms,
conditions or period stated therein (Right of First
Refusal)
Q: What if the restrictions were indicated in the
bylaws and in the articles but not in the certificate of
stock? Will he be bound?
A: NO. It must be indicated in all three if the
purchaser is in good faith
Q: What if the conveyance is not a sale?
A: NO. The law only mentions “purchaser in good
faith”
 The corporation or the stockholders have the
right of first refusal- the stockholder who wants
to sell his shares to any third person must first
offer it either to the corporation or to the other
existing stockholders
 Terms, conditions and period of the transfer shall
be contained in all the three documents for the
transferees to be guided
 What must be considered in the transfer of
shares?
o Restrictions
o Right of First Refusal
o Effect of admitting the new shareholder
to the number of allowable shareholders
in the articles of incorporation
 As a rule, the excessive number
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 of shareholders will not be
registered in the books
Reasons for stock transfer restrictions in closed
corporations:
1. Prevent changes in the control of the
corporation
2. Maintain delectus personae of partnership –
they want to continue as partners but with the
advantages of corporate personality
Limitations of restrictions:
 The restrictions cannot prevent a shareholder
from disposing of his shares by testamentary
provision
 It does not apply to a sheriff’s sale on execution
against a stockholder, nor to a sale of stock by a
receiver pursuant to an order of a court
Sec. 99. Issuance or transfer of stock of a close
corporation in breach of qualifying conditions. —
1. If stock of a close corporation is issued or transferred
to any person who is not entitled under any provision
of the articles of incorporation to be a holder of record
of stock, and if the certificate for such stock
conspicuously shows the qualifications of the persons
entitled to be holders of record thereof, such person is
conclusively presumed to have notice of the fact of his
ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation
states the number of persons, not in excess of twenty
(20), who are entitled to be holders of record of its
stock, and if the certificate for such stock conspicuously
states such number, and if the issuance or transfer of
stock to any person would cause the stock to be held by
more than such number of persons, the person to
whom such stock is issued or transferred is conclusively
presumed to have notice of this fact.
3. If a stock certificate of any close corporation
conspicuously shows a restriction on transfer of stock of
the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact that he
has acquired stock in violation of the restriction, if such
acquisition violates the restriction.
4. Whenever any person to whom stock of a close
corporation has been issued or transferred has, or is
conclusively presumed under this section to have,
notice either (i) that he is a person not eligible to be a
holder of stock of the corporation, or (ii) that transfer of
stock to him would cause the stock of persons
permitted by its articles of incorporation to hold stock
of the corporation, or (iii) that the transfer of stock is in
violation of a restriction on transfer of stock, the
corporation may, at its option, refuse to register the
transfer of the stock in the name of the transferee.
5. The provisions of subsection (4) shall not be
applicable if the transfer of stock, even though
otherwise contrary to subsections (1), (2) or (3), has
been consented to by all the stockholders of the close
corporation, or if the close corporation has amended its
articles of incorporation in accordance with this Title.
6. The term "transfer," as used in this section, is not
limited to a transfer for value.
7. The provisions of this section do not in any way
impair any right of a transferee regarding any right to
rescind the transaction or to recover under any
applicable warranty, express or implied
Discussion:
 Will the rules in Sec. 99 apply to an illiterate
person?
o No, conclusive presumptions may not
apply to illiterate persons
 In subsection 2, the transferee must inquire if
the transfer is without restriction before there
can be a conclusive presumption against him
 How can a corporation be precluded from
exercising the option to refuse registration?
(Curative actions)
1. Consent of ALL shareholders
2. Articles have been amended accordingly
curing the defect of the transaction
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  What is the remedy of the third person if the
corporation refuses to register?
o Go after the transferor of the shares
o May be rescission without right for
damages because he/she cannot claim
good faith since the restrictions appear
on the three documents
o No damages because both parties are
mutually guilty
Sec. 100. Agreements by stockholders. —
1. Agreements by and among stockholders executed
before the formation and organization of a close
corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to
be valid and binding between and among such
stockholders, if such be their intent, to the extent that
such agreements are not inconsistent with the articles
of incorporation, irrespective of whether the provisions
of such agreements are contained, except those
required by this Title to be embodied, in said articles of
incorporation.
2. An agreement between two or more stockholders, if
in writing and signed by the parties thereto, may pro-
vide that in exercising any voting rights, the shares held
by them shall be voted as therein provided, or as they
may agree, or as determined in accordance with a
procedure agreed upon by them.
3. No provision in any written agreement signed by the
stockholders, relating to any phase of the corporate
affairs, shall be invalidated as between the parties on
the ground that its effect is to make them, partners
among themselves.
4. A written agreement among some or all of the
stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation
as to restrict or interfere with the discretion or powers
of the board of directors: Provided, That such
agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts
imposed by this Code on directors.
5. To the extent that the stockholders are actively
engaged in the management or operation of the
business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability
insurance
Discussion:
 The relationship of shareholders shall not be
limited to the provisions of the articles and in the
bylaws only but also cover pre-incorporation
agreements, IF SO INTENDED
o There should be a clear provision in the
contracts
 If the shareholders want to be bound solidarily,
they may agree between themselves freely
 “Strict fiduciary duties” – they shall be faithful to
each other and there will shall be no withholding
of information between shareholders; they shall
be transparent in all matters
 Liability insurance – to protect against prejudicial
acts of the corporate officers (limited to civil
aspect only)
Sec. 101. When board meeting is unnecessary or
improperly held. — Unless the by-laws provide
otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written con- sent
thereto is signed by all the directors; or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt objection
thereto in writing; or
3. The directors are accustomed to take informal action
with the express or implied acquiescence of all the
stockholders; or
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4. All the directors have express or implied knowledge Sec. 103. Amendment of articles of incorporation. —
of the action in question and none of them makes Any amendment to the articles of incorporation which
prompt objection thereto in writing. seeks to delete or remove any provision required by this
Title to be contained in the articles of incorporation or
If a directors' meeting is held without proper call or to reduce a quorum or voting requirement stated in said
notice, an action taken therein within the corporate articles of incorporation shall not be valid or effective
power is deemed ratified by a director who failed to unless approved by the affirmative vote of at least two-
attend, unless he promptly files his written objection thirds (2/3) of the outstanding capital stock, whether
with the secretary of the corporation after having with or without voting rights, or of such greater
knowledge thereof proportion of shares as may be specifically provided in
the articles of incorporation for amending, deleting or
Discussion:
removing any of the aforesaid provisions, at a meeting
duly called for the purpose
 The conditions given in Sec. 101 are taken in the
alternative
 Why are these allowed in cases of a closed
corporation?
o Because a closed corporation is made up
of people who are acquaintances or
closely related to each other, the
operation is allowed to be less formal
o It would be remote that these
agreements will be challenged
 General Rule: What the bylaws provides
o Exception: What are provided in Sec. 101
 When the law says “prompt” objection, when
shall it be made?
o What is provided in the bylaws
o At the earliest opportunity before
approval
 If there is an objection in writing, to whom shall
it be given?
o Corporate secretary

Sec. 102. Pre-emptive right in close corporations. — The

pre-emptive right of stockholders in close corporations
shall extend to all stock to be issued, including
reissuance of treasury shares, whether for money or for
property or personal services, or in payment of
corporate debts, unless the articles of incorporation
provide otherwise