BY-LAWS

 By-laws are rules adopted by the Corporation for its own government.
 It is also to regulate the conduct and define the duties of the stockholders or members
towards the corporation and among themselves.
 They are the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their
relation to it.
 The requirement is that the By-laws must be adopted by the Board.

When should the By-Laws be adopted?

Answer:
It can be adopted either prior or after the incorporation.
SEC. 45. Adoption of Bylaws. – For the adoption of bylaws by the corporation, the affirmative
vote of the stockholders representing at least a majority of the outstanding capital stock, or of at
least a majority of the members in case of nonstock corporations, shall be necessary. xxx

Is the requirements under Sec. 45 required if prior to incorporation?

Answer:
Prior to Incorporation After the Incorporation
All that is required is the signature of the The bylaws shall be signed by the
Incorporators. stockholders, representing at least a majority
of the OCS or at least a majority of the
members.
Sec. 45. xxx Sec. 45. xxx
Notwithstanding the provisions of the For the adoption of bylaws by the
preceding paragraph, by-laws may be corporation, the affirmative vote of the
adopted and filed prior to incorporation; in stockholders representing at least a majority
such case, such by-laws shall be approved of the outstanding capital stock, or of at least
and signed by all the incorporators and a majority of the members in case of
submitted to the Commission, together with nonstock corporations, shall be necessary.
the articles of incorporation. The bylaws shall be signed by the
xxx stockholders or members voting for them and
shall be kept in the principal office of the
corporation, subject to the inspection of the
stockholders or members during office hours.
A copy thereof, duly certified by a majority of
the directors or trustees and countersigned
by the secretary of the corporation, shall be
filed with the Commission and attached to the
original articles of incorporation.
xxx

Requirements: Requirements:
a) Bylaws shall be approved and signed by a) Affirmative vote of either of the
the incorporators; and following shall be necessary:
b) Submitted to the Commission, together i. The stockholders representing at
with the AOI. least a majority of the OCS;
ii. Of at least a majority in case of non-
stock corporation
b) Must be signed by the stockholders or
members voting for them;
c) Shall be kept in the principal office of the
corporation, subject to the inspection of
the stockholders or members during
office hours.
d) A copy thereof, duly certified by a
 majority of the directors or trustees and
countersigned by the secretary of the
corporation, shall be filed with the
Commission and attached to the original
AOI.

Which is the more convenient way in adopting the By-Laws, is it prior to incorporation or after
the incorporation?
Answer:
Prior to Incorporation

What happens if the By-Laws is not adopted and filed with the SEC?
Answer:
Adoption of By-laws is part and parcel of organization. Failure to organize and commence a
transaction upon its existence (because a corporation, once issued COI, has to do certain overt
acts including organization and commencement of transaction), will result to application of Sec.
21, and the COI of the Corporation is automatically revoked the day after the 5 years. Hence, it
must adopt by-laws within 5 years from the date of its incorporation.

SEC. 21. Effects of Non-Use of Corporate Charter and Continuous Inoperation. 

 If a corporation does not formally organize and commence its business ,within five (5)
years from the date of its incorporation its certificate of incorporation shall be deemed
revoked as of the day following the end of the five-year period. 
 However, if a corporation has commenced its business but subsequently becomes
inoperative for a period of at least five (5) consecutive years, the Commission may, after
due notice and hearing, place the corporation under delinquent status. A delinquent
corporation shall have a period of two (2) years to resume operations and comply with all
requirements that the Commission shall prescribe. 
o Upon compliance by the corporation, the Commission shall issue an order lifting
the delinquent status. 
o Failure to comply with the requirements and resume operations within the period
given by the Commission shall cause the revocation of the corporation’s
certificate of incorporation. 
o The Commission shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation of the
certificate of incorporation of companies under their special regulatory
jurisdiction.

When does the by-laws become effective?

Answer:
Sec. 45. xxx In all cases, bylaws shall be effective only upon the issuance by the Commission of
a certification that the bylaws are in accordance with this Code. xxx

Note: The Commission shall not accept, for filing the bylaws or any amendment thereto of any
special corporations governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such bylaws or amendments are in
accordance with law.

Note: As to stockholder/members and to directors or trustees, they are conclusively presumed

to know the contents or provisions of the by-laws. Hence, they cannot deny that they have no
knowledge of it.

Note: As to THIRD PERSONS are GENERALLY not bound, affected or prejudiced by the by-
laws, it being merely internal rules of the corporation, EXCEPT: if they have knowledge of its
existence and contents through actual or constructive notice.
What are the elements of a valid by-laws?
Answer:
1. It must not be contrary to law, morals or public policy;
2. It must not be inconsistent with the articles of incorporation;
3. It must be general and uniform in its effect or applicable to all alike or those similarly
situated;
4. It must not impair obligations and contracts or vested rights;
5. It must be reasonable.

Case: Fleischer vs. Botica Nolasco, Inc.

Facts:
 Manuel Gonzalez was the original owner of the five shares of stock in question of the
Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said five shares
to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided on
the back thereof, together with other credits, in consideration of a large sum of money
owed by Gonzalez to Fleischer.
 On March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said
corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said
shares of stock, at their par value of Php 100 a share, for P500; that by virtue of article
12 of the by-laws of Botica Nolasco, Inc, said corporation had the preferential right to
buy from Manuel Gonzalez said shares; that the plaintiff requested Doctro Miciano to
register said shares in his name.
 Dr. Miciano refused to do so, saying that it would be in contravention of the by-laws of
the corporation.

Issue:
 Whether or not Fleischer is bound by the provision of the corporation’s by-laws.

Held:
 Section 13, paragraph 7 (of Act 1459), empowers a corporation to make by-laws, not
inconsistent with any existing law, for the transferring of its stock. It follows from said
provision, that a by-law adopted by a corporation relating to transfer of stock should be
in harmony with the law on the subject of transfer of stock.
 The law on this subject is found in section 35 of Act No. 1459. Said section specifically
provides that the shares of stock “are personal property and may be transferred by
delivery of the certificate indorsed by the owner, etc.” Said section 35 defines the nature,
character and transferability of shares of stock.
 Under said section they are personal property and may be transferred as therein
provided. Said section contemplates no restriction as to whom they may be transferred
or sold. It does not suggest that any discrimination may be created by the corporation in
favor or against a certain purchaser.
 The holder of shares, as owner of personal property, is at liberty, under said section, to
dispose of them in favor of whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law.
 Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock
should take into consideration the specific provisions of section 35 of Act No. 1459, and
said by-law should be made to harmonize with said provisions. It should not be
inconsistent therewith.
 As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not
contradictory to the general policy of the laws of the land. (Supreme Commandery
of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)
 On the other hand, it is equally well settled that by-laws of a corporation must be
reasonable and for a corporate purpose, and always within the charter limits. They
must always be strictly subordinate to the constitution and the general laws of the
land. They must not infringe the policy of the state, nor be hostile to public
 welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair the
obligation of a contract, take away or abridge the substantial rights of stockholder
or member, affect rights of property or create obligations unknown to the law.
(People’s Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147;
Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
 The validity of the by-law of a corporation is purely a question of law. (South Florida
Railroad Co. vs. Rhodes, 25 Fla., 40.)
 “The power to enact by-laws restraining the sale and transfer of stock must be found in
the governing statute or the charter. Restrictions upon the traffic in stock must have their
source in legislative enactment, as the corporation itself cannot create such
impediments. By-laws are intended merely for the protection of the corporation, and
prescribe regulation and not restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such a power, cannot ordinarily inquire
into or pass upon the legality of the transaction by which its stock passes from one
person to another, nor can it question the consideration upon which a sale is based. A
by-law cannot take away or abridge the substantial rights of stockholder. Under a statute
authorizing by- laws for the transfer of stock, a corporation can do no more than
prescribe a general mode of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale.”
 The jus disponendi, being an incident of the ownership of property, the general rule
(subject to exceptions hereafter pointed out and discussed) is that every owner of
corporate shares has the same uncontrollable right to alien them which attaches to the
ownership of any other species of property. A shareholder is under no obligation to
refrain from selling his shares at the sacrifice of his personal interest, in order to secure
the welfare of the corporation, or to enable another shareholder to make gains and
profits. (10 Cyc., p. 577.)
 It follows from the foregoing that a corporation has no power to prevent or to restrain
transfers of its shares, unless such power is expressly conferred in its charter or
governing statute. This conclusion follows from the further consideration that by-
laws or other regulations restraining such transfers, unless derived from authority
expressly granted by the legislature, would be regarded as impositions in restraint
of trade. (10 Cyc., p. 578.)
 The foregoing authorities go farther than the stand we are taking on this question. They
hold that the power of a corporation to enact by-laws restraining the sale and transfer of
shares, should not only be in harmony with the law or charter of the corporation, but
such power should be expressly granted in said law or charter.
 The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: “No transfer, however,
shall be valid, except as between the parties, until the transfer is entered and noted
upon the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the number of
shares transferred.” This restriction is necessary in order that the officers of the
corporation may know who are the stockholders, which is essential in conducting
elections of officers, in calling meeting of stockholders, and for other purposes.
But any restriction of the nature of that imposed in the by-law now in question, is
ultra vires, violative of the property rights of shareholders, and in restraint of trade
 And moreover, the by-laws now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were assigned to
him. He obtained them in good faith and for a valuable consideration. He was not
a privy to the contract created by said by-law between the shareholder Manuel
Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his
rights as a purchaser.

Assuming that in the case of Fleischer the provision in the by law was declared valid,
will it bind Fleischer?
Answer:
NO, THIRD PERSONS are GENERALLY not bound, affected or prejudiced by the by-laws, it
being merely internal rules of the corporation, EXCEPT: if they have actual or constructive
knowledge of its existence and contents. In the case Fleischer being a third person, acting in
good faith and without any actual or constructive knowledge of the by law provision is therefore
not bound by it.

Case: Gokongwei, Jr. vs. SEC

Facts:
 On October 22, 1976, petitioner, a stockholder of respondent San Miguel Corporation
(SMC), filed with the SEC petition for declaration of nullity of amended by-laws,
cancellation of filing of amended by-laws, injunction and damages with prayer for a
preliminary injunction” against the majority of the members of the Board of Directors and
SMC as unwilling petitioner.
 As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended the bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961.
 As a third cause of action, petitioner averred that the membership of the BOD had
changed since the authority was given in 1961, there being six (6) new directors.
 As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the right to vote and be voted upon in the election
of directors; and that in amending the by-laws, respondents purposely provided for
petitioner’s disqualification and deprived him of his vested right as afore-mentioned
hence the amended by-laws are null and void.
 It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof by cancelled, and that the individual respondents be made to
pay damages, in specified amounts, to petitioner.
 On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of TRO. After receipt of the order of denial, respondents conducted the special
stockholders’ meeting wherein the amendments to the by-laws were ratified.
 In view of the fact that the annual stockholders’ meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation.
 Thereafter, respondents filed a Manifestation with respondent Commission, submitting a
Resolution of the Board of Directors of respondent corporation disqualifying and
precluding petitioner from being a candidate for director unless he could submit evidence
that he does not come within the disqualifications specified in the amendment to the by-
laws.
 By reason thereof, petitioner filed a manifestation and motion to resolve pending
incidents in the case and to issue a writ of injunction, alleging that private respondent
were seeking to nullify and render ineffectual the exercise of jurisdiction by the
respondent Commission, to petitioner’s irreparable damage and prejudice, allegedly
despite a subsequent Manifestation to prod respondent Commission to act, petitioner
was not hear prior to the date of the stockholders’ meeting.
 Petitioner alleged that there appears a deliberate and concerted inability on the part of
the SEC to act hence petitioner came to this court.

Issue:
 Whether or not the amended by-laws of SMC disqualifying a competitor from nomination
or election to the BOD of SMC are valid and reasonable.

Held:
 The validity or reasonableness of a by-law of a corporation in purely a question of law.
Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
 law. This rule is subject, however, to the limitation that where the reasonableness of a
by-law is a mere matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of
the judgment of those who are authorized to make by-laws and who have exercised their
authority.
 It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation’s Board of Directors. ... (A)n
amendment which renders ineligible, or if elected, subjects to removal, a director
if he be also a director in a corporation whose business is in competition with or
is antagonistic to the other corporation is valid.” This is based upon the principle
that where the director is so employed in the service of a rival company, he
cannot serve both, but must betray one or the other. Such an amendment
“advances the benefit of the corporation and is good.”
 An exception exists in New Jersey, where the Supreme Court held that the Corporation
Law in New Jersey prescribed the only qualification, and therefore the corporation was
not empowered to add additional qualifications. This is the exact opposite of the situation
in the Philippines because as stated heretofore, section 21 of the Corporation Law
expressly provides that a corporation may make by-laws for the qualifications of
directors.
 Thus, it has been held that an officer of a corporation cannot engage in a business in
direct competition with that of the corporation where he is a director by utilizing
information he has received as such officer, under “the established law that a director or
officer of a corporation may not enter into a competing enterprise which cripples or
injures the business of the corporation of which he is an officer or director.
 It is also well established that corporate officers “are not permitted to use their
position of trust and confidence to further their private interests.” In a case where
directors of a corporation cancelled a contract of the corporation for exclusive sale of a
foreign firm’s products, and after establishing a rival business, the directors entered into
a new contract themselves with the foreign firm for exclusive sale of its products, the
court held that equity would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a “faultless fiduciary may not reap
the fruits of his misconduct to the exclusion of his principal.
 The doctrine of “corporate opportunity” is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting
for two entities with competing interests. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage
of an opportunity for his own personal profit when the interest of the corporation
justly calls for protection.
 It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
 It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively
his duty, to satisfy his loyalty to both corporations and place the performance of
his corporation duties above his personal concerns.
 Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These dangers are enhanced
considerably where the common director such as the petitioner is a controlling
 stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his
own corporation the corporate plans and policies of the corporation where he sits as
director.
 Indeed, access by a competitor to confidential information regarding marketing
strategies and pricing policies of San Miguel Corporation would subject the latter to a
competitive disadvantage and unjustly enrich the competitor, for advance knowledge by
the competitor of the strategies for the development of existing or new markets of
existing or new products could enable said competitor to utilize such knowledge to his
advantage.
 Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the
case of one stockholder but waived in the case of another, then it could be reasonably
claimed that the by-law was being applied in a discriminatory manner. However, the by
law, by its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be
hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support
the view that a by-law which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.

Issue2:
 Whether or not the Corporation has the power to prescribe qualifications.

Held:
 Yes. Private respondents contend that the disputed amended by laws were adopted by
the Board of Directors of San Miguel Corporation as a measure of self-defense to protect
the corporation from the clear and present danger that the election of a business
competitor to the Board may cause upon the corporation and the other stockholders’
inseparable prejudice. Submitted for resolution, therefore, is the issue of whether or not
respondent San Miguel Corporation could, as a measure of self-protection, disqualify a
competitor from nomination and election to its Board of Directors.
 It is recognized by an authorities that ‘every corporation has the inherent power to
adopt by-laws ‘for its internal government, and to regulate the conduct and
prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. At common law, the rule
was “that the power to make and adopt by-laws was inherent in every corporation as one
of its necessary and inseparable legal incidents. And it is settled throughout the United
States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal
incidents, independent of any specific enabling provision in its charter or in general law,
such power of self-government being essential to enable the corporation to accomplish
the purposes of its creation.
 In this jurisdiction, under section 21 of the Corporation Law, a corporation may
prescribe in its by- laws “the qualifications, duties and compensation of directors,
officers and employees ... “This must necessarily refer to a qualification in
addition to that specified by section 30 of the Corporation Law, which provides
that “every director must own in his right at least one share of the capital stock of
the stock corporation of which he is a director ... “ In Government v. El Hogar, the
Court sustained the validity of a provision in the corporate by-law requiring that persons
elected to the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground that section 21
of the Corporation Law expressly gives the power to the corporation to provide in its by-
laws for the qualifications of directors and is “highly prudent and in conformity with good
practice.
Prof’s comment: Sec. 47 allows a corporation to amend by-laws. Sec. 46 authorizes the
corporation to provide for additional qualifications of the Directors or Officers. It cannot thus be
said that the petitioner has a vested right to be elected as such.

May the by-laws be amended, altered or repealed?

Answer:
Yes.

How may the by-laws be amended, altered or repealed?

Answer:
Two ways:
1. By a majority vote of:
a. the board of directors or trustees, AND (not OR)
b. the owners of at least a majority of the outstanding capital stock, or at least a
majority of the members of a nonstock corporation;
c. at a regular or special meeting duly called for the purpose.
2. By the board of directors or trustees, when the power to amend or repeal the bylaws or
adopt new bylaws are delegated to them by a vote of the owners of two-thirds (2/3) of
the outstanding capital stock or two-thirds (2/3) of the members in a nonstock
corporation.

May the power delegated to the Board of Directors be repealed?

Answer:
YES, Any power delegated to the board of directors or trustees to amend or repeal the bylaws
or adopt new bylaws MAY BE revoked whenever stockholders owning or representing a
majority of the outstanding capital stock or majority of the members shall so vote at a
regular or special meeting.

When does the amendment become effective?

Answer:
The amended or new bylaws shall only be effective upon the issuance by the Commission of
a certification that “the same is in accordance with this Code and other relevant laws.”

What if the SEC did not act within 6mons after the filing of the amendment, without fault
on the part of the corporation?
Answer:
It can never be effective until the SEC issues a certification, the amended or new bylaws shall
only be effective upon the issuance by the Commission of a certification. Note: section 15 which
provides for the effect of the SEC does not act within 6 months, applies only to amendment of
articles of incorporation.