Commercial Law Review
Corporation Code
CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on Private
Corporation regarding to its creation, formation and
powers.
INTRODUCTION:
A. Historical Background
Effectivity: May 1, 1980
Article XII Section 16 of the 1987
Constitution: “The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-owned or
controlled corporations may be created or
established by special charters in the
interest of the common good and subject to
the test of economic viability.”
*Congress has limited powers in the
formation, creation and regulation of a
private corporation.
Purposes:
1. Uniformity
2. To avoid corruption
General Rule: Congress is prohibited to
enact a law directly forming a private
corporation.
Exception: GOCC may be created by
special charter.
*GOCC is a private corporation with regard
to function and in the meantime a public
corporation with regard to ownership.
Twin Conditions must be present in
forming a GOCC:
1. Interest in the common good
2. Subject to the test of economic viability
-
Means can survive alone in the
market; can generate income which
they can use for their operating
expenses
CONCEPT AND ATTRIBUTES OF A directors and officers.
CORPORATION:
A. Statutory definition of a Corporation
Section 2 of the Corporation Code: “A
corporation is an artificial being created by
operation of law, having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence.”
B. Attributes of a Corporation
 Artificial Being
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- It exist by fiction of law only, hence it
is subject to limitations that are
inherent because of its nature
- A corporation is a juridical person
which exists by process of legal
fiction
Doctrine of Corporate
Entity/Doctrine of Separate
Personality - A corporation is a
legal or juridical person with a
personality separate and apart from
its individual stockholders or
members and from any other legal
entities to which it may be connected
Consequences/Implications of
Separate Personality:
1. It is entitled to own properties in
its own name and its properties
are not the properties of its
stockholders, directors and
officers.
Cases: Magsaysay-Labrador v
CA; Sulo ng Bayan v Araneta
*The interest of the stockholders
over the properties of the
corporation is merely inchoate.
*Merely inchoate because there
are still condition precedents
before the shareholders get their
share, viz, in Asset, there are
dissolution and satisfaction of
claims; in profit-sharing, there
are unrestricted retained
earnings and declaration by the
Board of Directors.
2. It can incur obligations and its
obligations are not the
obligations of its stockholders,
Case: Francisco v CA
3. The rights belonging to the
corporation cannot be invoked
by the stockholders, directors
and officers and vice versa.
4. Corporations are entitled to
certain constitutional rights, i.e.,
right against unreasonable
searches and seizure, due
process clause.
*It is not entitled to certain
constitutional right, i.e., right
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against self-incrimination
particularly production
corporate documents.
*Right against self-incrimination
is applicable only to natural
persons.
General Rule: Constitutional
guarantees are applicable to
corporations.
Exceptions:
1. Right against self-
incrimination
2. Freedom to travel
Case: Bataan Shipyard v
PCGG
5. It is liable for tort. It is liable
when the act was committed by
the officer or agent under
express direction or authority
from the stockholders
members acting as a body or
generally from the directors as
the governing body.
6. Generally, the corporation is
considered a national of the
country where it was
incorporated (Place
incorporation test)
*Exceptions: 1. In times of war,
the nationality of a corporation is
determined by the nationality of
the controlling stockholders; 2.
Under the Foreign Investment
Act of 1991
7. Corporations are incapable of
intent, hence, they cannot
commit felonies that are
punishable under the RPC. They
cannot commit crimes that are
punishable under special laws
because crimes are personal in
nature requiring personal
performance of overt acts. In
addition, the penalty
imprisonment cannot
imposed.
*Criminal liability falls upon to
responsible officers.
*Responsible officers cannot
invoke the doctrine of separate
personality.
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*Corporations cannot be
of incarcerated.
8. Moral damages cannot be
awarded in favor of corporations
because they do not have
feelings and mental state.
*Corporations can claim
damages such as actual,
compensatory, exemplary, loss
of earning capacity.
General Rule: Corporation
cannot claim moral damages.
Exception: If the corporation
has a good reputation and such
reputation was destroyed.
Case: Coastal Pacific Trading
v Southern Rolling Mills, Co.
*In Filipinas Broadcasting
Network Inc. v. Ago Medical and
or Educational Center, the SC ruled
that a corporation can recover
moral damages under Article
2219(7) if it was the victim of
defamation.
Doctrine of Piercing the Veil of Corporate Entity
– The doctrine that a corporation is a legal entity
distinct from the persons composing it. It is a theory
of
introduced for the purposes of convenience and to
serve the ends of justice. But when the veil of
corporate fiction is used as a shield to perpetuate
fraud, to defeat public convenience, justify wrong,
or defend crime, this fiction shall be disregarded
and the individuals composing it will be treated
identically.
Cases: Times Transportation Co. v Santos
Sotelo; Concept Builders v NLRC
*The doctrine of piercing the veil of corporate entity
is the exception to the doctrine of corporate entity.
*The users of this doctrine are: 1. Stockholder; 2.
Group of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation
are in effect jointly liable; 2. In case of two
corporations, they will be treated as one wherein
they will be both solidarily liable. (Instrumentality
of
rule)
be
*There is no effect on the existence of each
corporation as long as their separate entity is used
for legitimate purposes.
Instrumentality Rule – When one corporation is so
organized and controlled and its affairs are
conducted so that it is in fact a mere instrumentality
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or adjunct of the other, the fiction of the corporate
entity to the instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
Requisites: 1. Control, not mere majority or
complete stock control, but complete dominion,
not only of finances but of policy and business
in respect to the transaction attacked so that
the corporate entity as to this transaction had at
the time no separate mind, will or existence of
its own; 2. Such control must have been used
by the defendant to commit fraud or wrong in
contravention of plaintiff’s legal rights; 3. The
aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
Three cases of piercing the veil:
1. Fraud Cases – when a corporation is used
as a cloak to cover fraud, or to do wrong;
2. Alter Ego Cases – when the corporate entity
is merely a farce since the corporation is an
alter ego, business conduit or instrumentality of
a person or another corporation;
3. Equity cases – when piercing the corporate
fiction is necessary to achieve justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and
equipments;
4. Engage practically in the same business; 5.
The same manner of keeping books and
records.
*The probative factors of identity are not
conclusive but may be considered as strong
evidence.
 Creature of Law
Article XII Section 16 of the 1987
Constitution: “The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-
owned or controlled corporations may
be created or established by special
charters in the interest of the common
good and subject to the test of economic
viability.”
C. Classification of Private Corporations:
Concession Theory – It is a principle in
the creation of corporations, under
which a corporation is an artificial
creature without any existence until it
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has received the imprimatur of the State
acting according to law, through the
SEC. The life of the corporation is a
concession made by the State.
 Right of Succession
- Capacity to have continuity of
existence despite the changes on
the persons who compose it. Thus,
the personality continues despite the
change of stockholders, members,
board members or officers; death or
disability.
- Also known as Principle of Perpetual
Succession
Reason: To make the corporation more
stable
 Creature of enumerated powers,
attributes and properties
Doctrine of Limited Capacity – No
corporation under the Corporation Code,
shall possess or exercise any corporate
powers, except those conferred by law,
its Articles of Incorporation, those
implied from express powers and those
as are necessary or incidental to the
exercise of the powers so conferred.
The corporation’s capacity is limited to
such express, implied and incidental
powers.
*Corporation may be restrained from
engaging a particular transaction
because it is beyond their powers.
*General Capacity – a corporation can
perform any act for as long as it is
lawful, moral and not contrary to public
policy or order.
Ultra Vires Doctrine – Even if the act is
lawful, moral and not contrary to public
order or policy but such act is not within
the express, implied and incidental
powers of the corporation such act shall
be void for being ultra vires.
*These doctrines are based on Section
2 and Section 45 of the Corporation
Code.
1. As to existence of Stocks:
Stock Corporation – Corporations which
have capital stock divided into shares and
are authorized to distribute to the holders of
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such shares dividends or allotments of the
surplus profits on the basis of the shares
held. (Sec. 3)
Non-stock Corporation – A corporation
where no part of its income is distributable
as dividends to its members, trustees, or
officers, subject to the provisions of this
Code on dissolution. (Sec. 87)
Q: Is it correct to say that a Non-stock
corporation cannot generate income on their
own?
A: NO
2. As to function/organizers:
Public Corporation – for public purpose
and organized by the State.
Private Corporation – for profit making
functions and organized by private persons
alone or with the State
3. As to laws of Incorporation (Place of
Incorporation) :
Domestic Corporation – corporation
formed, organized or existing under the
Philippine Laws.
Foreign Corporation – corporation formed,
organized or existing under any laws other
than those of the Philippines and whose
laws allow Filipino citizens and corporations
to do business in its own country or state.
(Sec. 123)
*License is necessary for; 1. Regulation
purposes and 2. Access to local courts.
4. As to legal status:
De Jure Corporation – corporation created
in strict or substantial compliance with the
mandatory requirements for incorporation
and the right of which to exist as a
corporation cannot be successfully attacked
or questioned by any party even in a direct
proceeding for that purpose by the state.
De Facto Corporation – the due
incorporation of any corporation claiming in
good faith to be a corporation under the
Corporation Code, and its right to exercise
corporate powers, shall not be inquired into
collaterally in any private suit to which such
corporation may be a party. Such inquiry
may be made by Solicitor General in a quo
warranto proceeding. (Sec. 20)
- organized with a colourable
compliance with the requirements of
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a valid law and its existence cannot
be inquired collaterally.
- There is an irregularity or defect in
the constitution or organization.
Can be compared to a voidable
contract, i.e., valid until annulled.
*Can be challenged by the State later
on.
Cases: Hall v Piccio; Seventh
Adventist v Northeastern Mindanao
Mission
*The filing of the Articles of
Incorporation and the issuance of the
certificate of registration are the
essential requisites for the existence of
a de facto corporation.
Requisites:
1. The existence of a valid law under
which it may be incorporated;
2. An attempt in good faith to
incorporate; 3. Use of corporate powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the
requirement of law.
*In both corporations, there must be a
certificate of registration issued.
Doctrine of Corporation by Estoppel – All
persons who assume to act as a corporation
knowing it to be without authority to do so shall
be liable as general partners for all debts,
liabilities and damages incurred or arising as an
result thereof: Provided, however, that when
any such ostensible corporation is sued on any
transaction entered into by it as a corporation or
on any tort committed by it as such, it shall not
be allowed to use as a defense its lack or
corporate personality. (Sec. 21)
- Group of persons which holds itself
out as a corporation and enters into
a contract with a third person on the
strength of such appearance cannot
be permitted to deny its existence in
an action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited
from the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from
denying their existence by their previous
act or conduct
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Holding Corporation – it is one which controls
another as a subsidiary by the power to elect
management. It is one that holds stocks in other
companies for purposes of control rather than for
mere investment.
Affiliate – one related to another by owning or
being owned by common management or by a
long-term lease of its properties or other control
device. It may be the controlled or controlling
corporation, or under common control.
Subsidiary Corporation – one which is so related
to another corporation that the majority of its
directors can be elected either directly or indirectly
by such other corporation. It is always controlled.
Open Corporation – one which is open to any
person who may wish to become a stockholder or
member thereto.
Close Corporation – those whose shares of stock
are held by limited number of persons like the
family or other closely knit group. (Sec. 96)
FORMATION AND ORGANIZATION OF A
PRIVATE CORPORATION:
A. Submission of Articles of Incorporation;
contractual significance
*The life of a corporation commences from
the issuance of the Certificate of
Registration by the SEC upon filing of the
Articles of Incorporation and other
documents.
Article of Incorporation – is the charter of
the corporation, and the contractual
relationships between the State and the
corporation, the stockholder and the State,
and between the corporation and its
stockholders.
Contractual Significance:
1. The issuance of a certificate of
incorporation signals the birth of the
corporation’s juridical personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto
one.
B. Contents and Form of the Articles of
Incorporation (Secs. 14 and 15)
Contents of Articles of Incorporation:
1. Corporate Name;
2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
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6. Directors or trustees;
7. Capitalization;
8. Shares of stock;
9. Treasurer’s Affidavit.
 Corporate Name
Purpose: Identification
*Corporation can not adopt any name or
group of words at its pleasure because
of statutory limitation, viz., Sec. 18 of
the Corporation Code which provides
that: “No corporate name may be
allowed by the SEC if the proposed
name is identical or deceptively or
confusingly similar to that of any
existing corporation or to any other
name already protected by law or is
patently deceptive, confusing or
contrary to existing laws. When a
change in the corporate name is
approved, the Commission shall issue
an amended certificate of incorporation
under the amended name.
SEC Guideline ”x x x b. In order to
prevent confusion and difficulties of
administration, supervision and control,
if the proposed name contains a word
already use as a part of the firm name
or style of a registered entity, the
proposed name must contain two other
words different and distinct from the
name of the company already registered
or protected by law. x x x”
Case: Ang Mga Kaanib Ni Jesus
Cristo
*The phrase “Ang Mga Kaanib” are
words merely descriptive of membership
while the phrase “Sa Bansang Pilipinas”
are merely descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or descriptive
word may be used as a corporate name.
Reason: public domain; can be used by
anyone; public use.
Exception: Doctrine of Secondary
Meaning – a word or phrase originally
incapable of exclusive appropriation with
reference to an article on the market,
because geographically or otherwise
descriptive, might nevertheless have
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been used so long and so exclusively by
one producer with reference to his
article that in that trade and to that
branch of the purchasing public, the
word or phrase has come to mean that
the article was his product.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was not
satisfied by Lyceum of the Philippines.
*In case of change of name, the
corporation is not dissolve nor create a
new corporation; it also does not
extinguish the corporate liability.
*Change of name can be done by
amending the Articles of Incorporation.
Procedure:
1. Obtain approval of majority of the
Board and 2/3 stockholders;
2. Submission to the SEC for approval.
 Purpose Clause
*Only one primary purpose. Primary
purpose defines the business activities
of the corporation. It is the ordinary
course of business of the corporation.
*Secondary Purpose is for future
expansion. There is no limit on the
secondary purpose.
*In case the primary purpose is not
viable then secondary purpose may be
used.
 Principal Office
*The principal place of business may
determine the venue of court cases
involving corporations. It may also
determine if service of summons and
notices was properly made. It is also
important for tax purposes (local
taxation).
*The SEC requires the exact address to
be indicated in the Articles of
Incorporation.
*It is the residence of the corporation. It
is where the corporation maintains its
books and records and where normally
the bulk of its business is being
conducted or undertaken.
*For personal action, venue is the
residence.
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 Term of Existence
*A corporation has a maximum term of
50 years. It may be extended for a
period not exceeding 50 years in any
single instance.
As a rule, no extension can be made
earlier than 5 years prior to the
expiration of the term.
*No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
meet the corporation’s term.
Exception: If for compelling reasons,
earlier extension will be allowed.
*During the three year winding up
period, the corporation still has
personality but activities are limited to
the liquidation of the corporation affairs
and not to transact further business.
As a rule, after the term has expired, no
more extensions be allowed or
entertained by the SEC.
Reason: No more period to extend.
Exception: Doctrine of Relation – The
filing and recording of a certificate of
extension after the term cannot relate
back to the date of the passage of the
resolution of the stockholders to extend
the life of the corporation. However, the
doctrine of relations applies if the failure
to file the application for existence within
the term of the corporation is due to
neglect of the officer with whom the
certificate is required to be filed or to
wrongful refusal on is part to receive it.
*The delay in submitting the application
for extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the corporation
(insuperable intervening causes)
 Incorporators
*Once an incorporator always an
incorporator. (Fait accompli – an
accomplished fact which cannot be
altered)
*They are the signatories to the Articles
of Incorporation.
*They are originally forming the
corporation
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Q: What is the reason behind the
phrase that an incorporator is not
always a corporator?
A: To be an incorporator it is not
necessary to own a share unlike as a
corporator.
*Number is limited to 5 to 15.
*They must have a contractual capacity.
*Juridical person cannot create another
juridical person.
*There is no citizen requirement but
special laws may require otherwise.
*Majority must be a resident of the
Philippines.
 Directors and trustees
*The Board of Directors is the governing
body in a stock corporation while Board
of Trustees is the governing body in a
non-stock corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least one
(1) share of the capital stock;
2. Majority of the directors or trustees
must be residents of the Philippines.
*Any director who ceases to be the
owner of at least one share of the
capital stock of the corporation of which
he is a director shall thereby cease to be
a director.
*Trustees of non-stock corporations
must be members thereof.
*Initial directors/trustees shall hold office
for one year until their successors are
elected and qualified.
 Capitalization
Section 14(8) states that: “If it be a
stock corporation, the amount of its
authorized capital stock in lawful money
of the Philippines, the number of shares
into which it is divided, and in case the
share are par value shares, the par
value of each, the names, nationalities
and residences of the original
subscribers, and the amount subscribed
and paid by each on his subscription,
and if some or all of the shares are
without par value, such fact must be
stated.”
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*It is required that at least 25% of the
subscribed capital must be paid and in
no case may be paid-up capital be less
than P5,000.
Authorized Capital Stock – the amount
fixed in the articles of incorporation to be
subscribed and paid by the stockholders
of the corporation.
*Shows the total number of shares
Subscribed Capital – that portion of the
authorized capital stock that is covered
by subscription agreements whether
fully paid or not.
Paid-Up Capital – the portion of the
authorized capital stock which has been
subscribed and actually paid.
Outstanding Capital Stock – the total
shares of stock issued to subscribers or
stockholders, whether or not fully or
partially paid except treasury shares so
long as there is a binding subscription
agreement.
 Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the profits
2. expectancy on the share of assets in
case of dissolution/liquidation.
Political Value:
1. vote
2. control in the management of the
corporation.
Doctrine of Equality of Shares –
“Except as otherwise provided in the
articles of incorporation and stated in
the certificate of stock, each share shall
be equal in all respects to every other
share.”
- Provides that where the Article of
Incorporation do not provide for any
distinction of the shares of stock, all
shares issued by the corporation are
presumed to be equal and enjoy the
same rights and privileges and are also
subject to the same liabilities.
Classes of Shares:
1. Par Value Share – shares that have
a nominal value in the certificate of
stock.
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Contractual Significance: The
minimum price at which the shares
are to be issued.
*The price is fixed. It is stated in the
Articles of Incorporation.
2. No Par Value Share – those shares
which do not have nominal value.
However, they have issued value
stated in the certificate or articles of
incorporation.
*There is flexibility in the price.
*The price is determined by the
Board.
Limitations:
1. No par value shares cannot have
an issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so that
no part of it should be distributed as
dividends;
3. They cannot be used as preferred
stocks;
4. They cannot be issued by banks,
trust companies, insurance
companies, public utilities and
building and loan association
(Reason: imbued with public
interest);
5. The articles of incorporation must
state the fact that it issued no par
value shares as well as the number
of said shares;
6. Once issued, they are deemed
fully paid and non-assessable.
3. Voting Shares – shares with the
right to vote. They have the right to
participate in the management of the
corporation through the exercise of
such right.
4. Non-voting Shares – shares
without the right to vote.
*Has only a limited right to vote.
General Rule: Shareholder owning
non-voting shares has no right to
vote.
Exceptions:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-
laws;
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3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital
stock; 6. Merger or consolidation of
the corporation with another
corporation or other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with the Corporation
Code; 8. Dissolution of the
corporation.
*The exceptions are exclusive; the
list is a closed list
Statutory Constraint: Sec. 6 of the
Corporation Code
*The corporation cannot provide for
shares with no voting right
General Rule: Only redeemable and
preferred shares are deprived of
voting right.
Exception: Common shares may be
denied of its voting right in the
following instances: 1. Delinquent in
paying the subscription; 2. If there
was a founder’s share where it was
given the right to vote exclusively for
5 years (Sec. 7).
5. Common Shares – the most
common type of shares which enjoy
no preference.
*The basic class of stock ordinarily
and usually issued without
extraordinary rights and privileges,
and the owners thereof are entitled
to a pro rata share in the profits of
the corporation and in its assets
upon dissolution and, likewise, in the
management of its affairs without
preference or advantage
whatsoever.
6. Preferred Shares- shares which
enjoy preference as to dividends or
assets upon dissolution as stated in
the Articles of Incorporation.
Reason: To attract investors.
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*Preference does not give them a
lien upon the property nor make
them creditors of the corporation.
*Characterized as redeemable
shares.
Kinds:
1. Preferred shares as to assets –
share which gives the holder thereof
preference in the distribution of the
assets of the corporation in case of
liquidation;
2. Preferred shares as to
dividends – share which gives the
holder thereof preference in the
distribution of the dividends to the
extent agreed upon before any
dividends at all are paid to the
holders of common shares;
3. Participating preferred shares –
the holders thereof are still given the
right to participate with the common
stockholders in dividends beyond
their stated preference;
4. Non-participating preferred
shares – where there is no such
participation;
5. Cumulative preferred shares –
the shareholder is entitled to recover
dividends in arrears. While dividend
declaration may not be compelled,
once it is declared, the shareholder
is entitled to the said arrears;
6. Non-cumulative preferred
shares – not entitled to arrears only
to present dividends.
7. Redeemable Shares – are those
which permit the issuing corporation
to redeem or purchase its own
shares.
Limitations:
1. Redeemable shares may be
issued only when expressly provided
for in the Articles of Incorporation;
2. The terms and conditions
affecting said shares must be stated
both in the certificate of stock
representing such share;
3. Redeemable shares may be
deprived of voting rights in the
Articles of Incorporation, unless
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otherwise provided in the
Corporation Code;
4. The corporation is required to
maintain a sinking fund to answer for
redemption price if the corporation is
required to redeem;
5. The redeemable shares are
deemed retired upon redemption
unless otherwise provided in the
Articles of Incorporation;
6. Unrestricted retained earnings is
not necessary before shares can be
redeemed but there must be
sufficient assets to pay the creditors
and to answer for operations.
8. Treasury Shares – shares which
have been earlier issued as fully
paid and have thereafter been
acquired by the corporation by
purchase, donation, redemption or
through some lawful means.
- Shares which are previously issued
by the corporation but subsequently
reacquired by the corporation.
*Retired thus can no longer be re-
issued.
*They are not entitled to dividends.
*They are not entitled to voting
rights. Rationale: to prevent abuse
by the management.
*These shares may again be
disposed of for a reasonable price
fixed by the Board of Directors.
9. Founders’ Shares – classified as
such in the articles of incorporation
may be given certain rights and
privileges not enjoyed by the owners
of other stocks, provided that where
the exclusive right to vote and be
voted for in the election of directors
is granted, it must be for the limited
period not to exceed 5 years subject
to the approval of the SEC. The 5
year period shall commence from
the date of the approval by the SEC.
 Treasurer’s affidavit
*The SEC shall not accept the Articles
of Incorporation of any stock corporation
unless accompanied by a sworn
statement of the Treasurer elected by
the subscribers showing that at least
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25% of the authorized capital stock of
the corporation has been subscribed,
and at least 25% of the total
subscription has been fully paid to him
in actual cash and/or in property the fair
valuation of which is equal to at least
25% of the said subscription, such paid
up capital being not less than P5,000.
*If the Treasurer’s affidavit is false such
act is tantamount to fraud. (PD 902-A)
*Fraud on the part of the corporation is a
ground for revocation or suspension of
license depending upon the extent of
the violation committed.
*If there’s no Treasurer’s Affidavit, the
first ground shall apply, i. e.,
noncompliance with the minimum
requirement.
General Rule: 25% must be subscribed
and 25% must be paid.
Exception: If the law provides
otherwise, i.e., special laws.
C. Grounds for rejection of the Articles of
Incorporation
1. The articles of incorporation or any
amendment thereto is not substantially
in accordance with the form prescribed
herein;
2. The purpose or purposes of the
corporation are patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulations;
3. The Treasurer’s Affidavit concerning the
amount of capital stock subscribed
and/or paid is false;
4. The percentage of ownership of the
capital stock to be owned by citizens of
the Philippines has not been complied
with as required by existing laws or the
Constitution.
Dual Franchise Requirement: No articles
of incorporation or amendment to articles of
incorporation of banks, banking and quasi-
banking institutions, building and loan
associations, trust companies and other
financial intermediaries, insurance
companies, public utilities, educational
institutions, and other corporations
governed by special laws shall be accepted
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or approved by the Commission unless
accompanied by a favourable
recommendation of the appropriate
government agency to the effect that such
articles or amendment is in accordance with
law.
D. Commencement of Corporate Existence
Sec. 19 of the Corporation Code states
that “ A private corporation formed or
organized under this Code commences to
have corporate existence and juridical
personality and is deemed incorporated
from the date the SEC issues a certificate of
incorporation under its official seal; and
thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law.”
*For purposes of determining whether a
corporation enjoys the status of a de facto
corporation, it must have been at least
issued a certificate of registration.
E. Amendment of the Articles of Incorporation
Sec. 16 of the Corporation Code states
that: “Unless otherwise prescribed by this
Code or by special law, and for legitimate
purposes, any provision or matter stated in
the articles of incorporation may be
amended by a majority vote of the board of
directors or trustees and the vote or written
assent of the stockholders representing at
least 2/3 of the outstanding capital stock,
without prejudice to the appraisal right of
dissenting stockholders in accordance with
the provisions of this Code, or the vote or
written assent of at least 2/3 of the
members if it be a non-stock corporation.”
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction.
Amendment by Inaction – Upon filing with
the SEC of the amendment and the
Commission failed to act on it within 6
months from the date of filing for a cause
not attributable to the corporation.
F. Effects of Non-Use of Corporate Charter
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Sec. 22 of the Corporation Code states
that: “If a corporation does not formally
organize and commence the transaction of
its business or the construction of its work
within 2 years from the date of its
incorporation, its corporate powers cease
and the corporation shall be deemed
dissolved. However, if the corporation has
commenced the transaction of its business
but subsequently becomes continuously
inoperative for a period of at least 5 years,
the same shall be a ground for the
suspension or revocation of its corporate
franchise or certificate of incorporation. This
provision shall not apply if the failure to
organize, commence the transaction of its
businesses or the construction of its works,
or to continuously operate is due to causes
beyond the control of the corporation as
may be determined by the SEC.”
*The period must be counted from the
issuance of the Certificate of Incorporation.
*Automatic dissolution is not contemplated
under Section 22. (SEC Opinion).
*Section 22 must be read in conjunction
with Sec 6(1) of PD 902-A which requires
that the corporation must be given the
opportunity to be heard in compliance with
the requirement of due process before the
revocation of its license.
CONTROL AND MANAGEMENT OF A of directors; the board is the business
CORPORATION:
A. Levels of Corporate Control
1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees
 General Powers of the Board
Sec. 23 of the Corporation Code
states that: “Unless otherwise provided
in this Code, the corporate powers of all
corporations formed under this Code
shall be exercised, all business
conducted and all property of such
corporations controlled and held by the
board of directors or trustees to be
elected from among the holders of
stocks, or where there is no stock, from
among the members of the corporation,
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who shall hold office for one year until
their successors are elected and
qualified.”
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties
of the Corporation.
*Board of Directors/Trustees is the
statutory representative of the
corporation.
General Rule: All corporate powers
emanate from the Board of
Directors/Trustees.
Exception: Unless otherwise provided
in this Code. (Limiting Clause)
The limiting clause means that there
are certain corporate matters that
cannot be done by the Board by reason
that such matters fall upon the
shareholders; or corporate matters that
cannot be resolved by the Board alone,
i.e., it must be done with the approval of
the shareholders.
 Business Judgment Rule
Business Judgment Rule – questions
of policy or management are left solely
to the honest decision of officers and
directors of a corporation and the courts
are without authority to substitute their
judgment for the judgment of the board
manager of the corporation and so long
as it acts in good faith its orders are not
reviewable by the courts or the SEC.
- A resolution or transaction pursued
within the corporate powers and
business operations of the corporation,
and passed in good faith by the board of
directors/trustee, is valid and binding,
and generally the courts have no
authority to review the same and
substitute their own judgment, even
when the exercise of such power may
cause losses to the corporation or
decrease the profits of a department.
*Great respect is accorded to the
decisions of the Board of
Directors/Trustees.
*The directors are not liable to the
stockholders in performing such acts.
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 Qualifications of the Board Members
Sec. 23 of the Corporation Code
states that: “Every director must have at
least one share of the capital stock of
the corporation of which he is a director,
which share shall stand in his name on
the books of the corporation. Any
director who ceases to be the owner of
at least one share of the capital stock of
the corporation of which he is a director
shall thereby cease to be a director.
Trustees of non-stock corporations must
be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.”
*In order to be eligible as director, what
is material is the legal title to and not
beneficial title or ownership of the stocks
appearing on the books of the
corporation.
*The directors/trustees must be natural
persons.
*They must also be of legal age.
*He must possess other qualifications
as may be prescribed in the by-laws of
the corporation.
*Under Sec. 27 of the Corporation
Code: “No person convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6
years, or a violation of this Code
committed within 5 years prior to the
date of his election or appointment, shall
qualify as a director, trustee or officer of
any corporation.”
Reason: The position is based on trust
and confidence.
*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications.
 Election of the Board Members
Sec. 24 of the Corporation Code
provides that: “At all elections of
directors or trustees, there must be
present, either in person or by
representative authorized to act by
written proxy, the owners of a majority of
the outstanding capital stock, or if there
be no capital stock, a majority of the
members entitled to vote. The election
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must be by ballot if requested by any
voting stockholder or member. In stock
corporations, every stockholder entitled
to vote shall have the right to vote in
person or by proxy the number of
shares of stock standing, at the time
fixed in the by-laws, in his own name on
the stock books of the corporation, or
where the by-laws are silent at the time
of the election; and said stockholder
may vote such number of shares for as
many persons as there are directors to
be elected or he may cumulate said
shares and give one candidate as many
votes as the number of directors to be
elected multiplied by the number of his
shares shall equal, or he may distribute
them on the same principle among as
many candidates as he shall see fit:
Provided, that the total number of votes
cast by him shall not exceed the number
of shares owned by him as shown in the
books of the corporation multiplied by
the whole number of directors to be
elected: Provided, however, that no
delinquent stock shall be voted. Unless
otherwise provided in the articles of
incorporation or in the by-laws,
members of the corporations which
have no capital stock may cast as many
votes as there are trustees to be elected
but may not cast more than one vote for
one candidate. Candidates receiving the
highest number of votes shall be
declared elected. Any meeting of the
stockholders or members called for an
election may adjourn from day to day or
from time to time but not sine die or
indefinitely if, for any reason, no election
is held, or if there not present or
represented by proxy, at the meeting,
the owners of a majority of the
outstanding capital stock, or if there be
no capital stock, a majority of the
member entitled to vote.”
*It is the stockholders or corporators
who elect members of the Board of
Directors.
*The only procedure required by the
Code is through Election. There can be
no other modes.
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*The election must be by ballot if
requested by any voting member or
stockholder.
*A stockholder cannot be deprived in the
articles of incorporation or in the by-laws
of his statutory right to use any of the
methods of voting in the election of
directors.
*No delinquent stock shall be voted.
*It is not required that the candidate
received the majority vote, what the law
provides is only plurality of votes.
*Majority number is required only for the
existence of a quorum.
Not included in outstanding capital
stocks: 1. Unissued stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1. Straight Voting – every stockholder
may vote such number of shares for as
many persons as there are directors to
be elected.
2. Cumulative Voting for One
Candidate – a stockholder is allowed to
concentrate his votes and give one
candidate as many votes as the number
of directors to be elected multiplied by
the number of his shares shall equal.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes (10x5) available
to him. X may opt to concentrate all his
50 votes to a particular candidate.
3. Cumulative Voting by Distribution
– a stockholder may cumulate his
shares by multiplying also the number of
his shares by the number of directors to
be elected and distribute the same
among as many candidates as he shall
see fit.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes available to him.
X may opt to distribute the votes to as
many candidates as there are provided
that the total number of votes does not
exceed 50.
Purpose of cumulative voting: To
protect the minority stockholders.
*The elected officer must act as a body.
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*In a stock corporation, cumulative
voting is a statutory right whereas in a
non-stock corporation, cumulative voting
is applicable if it is provided in the Article
of Incorporation.
Sec. 26 of the Corporation Code
provides that: Within 30 days after the
election of the directors, trustees and
officers of the corporation, the secretary,
or any other officer of the corporation,
shall submit to the SEC, the names,
nationalities and residences of the
directors, trustees and officers elected.
Should a director, trustee or officer die,
resign or in any manner cease to hold
office, his heirs in case of his death, the
secretary, or any other officer of the
corporation, or the director, trustee or
officer himself, shall immediately report
such fact to the SEC.”
 Term of Office
*The directors or trustees shall hold
office for one (1) year subject to the
“hold over” principle, i.e., they
continue in office until their successors
are elected and qualified.
*The one year period does not apply to
directors initially elected for purposes of
incorporation.
 Quorum Requirement in Board
Meetings
Sec. 25 of the Corporation Code
states that: “Unless the articles of
incorporation or the by-laws provide for
a greater majority, a majority of the
number of directors or trustees as fixed
in the articles of incorporation shall
constitute a quorum for the transaction
of corporate business, and every
decision of at least a majority of the
directors or trustees present at a
meeting at which there is a quorum shall
be valid as a corporate act, except for
the election of officers which shall
require the vote of a majority of all the
members of the board.”
Q: Is the director allowed to let a proxy
attend a board meeting in behalf for
himself?
A: NO. Proxy prohibition.
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Reason: Because of their personal
qualifications.
*Quorum requirement should always be
computed based on the number
specified in the Articles of Incorporation
regardless of ensuing vacancies.
*The basis is always the number
specified in the Articles of Incorporation.
*The corporation can modify the number
by providing a different provision in the
articles of incorporation, however, the
law provides that the modification must
be for a number greater than that
provided in the law. It cannot provide for
a number less than the general
requirement of the code.
*For voting purposes, majority of the
member present constituting a quorum.
Except: election of directors.
 Removal of Board Members
Sec. 28 of the Corporation Code
states that: “Any director or trustee of a
corporation may be removed from office
by a vote of the stockholders holding or
representing at least 2/3 of the
outstanding capital stock, or if the
corporation be a non-stock corporation,
by a vote of at least 2/3 of the members
entitled to vote: Provided, that such
removal shall take place either at a
regular meeting of the corporation or at
a special meeting called for the purpose,
and in either case, after previous notice
to stockholders or members of the
corporation of the intention to propose
such removal at the meeting. A special
meeting of the stockholders or members
of a corporation for the purpose of
removal of directors or trustees, or any
of them, must be called by the secretary
on order of the president or on the
written demand of the stockholders
representing or holding at least a
majority of the outstanding capital stock,
or, if it be a non-stock corporation, on
the written demand of a majority of the
members entitled to vote. Should the
secretary fail or refuse to call the special
meeting upon such demand or fail or
refuse to give the notice, or if there is no
secretary, the call for the meeting may
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be addressed directly to the
stockholders or members by any
stockholder or member of the
corporation signing the demand. Notice
of the time and place of such meeting,
as well as of the intention to propose
such removal, must be given by
publication or by written notice
prescribed in this Code. Removal may
be with or without cause: Provided, that
removal without cause may not be used
to deprive minority stockholders or
members of the right of representation
to which they may be entitled under
Sec. 24 of this Code.”
Requisites:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. There must be previous notice to the
stockholders or member of the intention
to remove;
3. The removal must be by a vote of the
stockholders representing 2/3
outstanding capital stock or 2/3 of
members;
4. The director may be removed with or
without cause unless he was elected by
the minority, in which case, it is required
that there is cause for removal.
Reason: The functions of directors are
fiduciary in nature.
Requisites for the removal of
minority directors are:
1. Justifiable cause;
2. Satisfaction of the voting
requirements, i.e., 2/3 of OCS or
members.
*It is the secretary of the corporation
upon order of the president or in case
there is no secretary, stockholder
representing majority of the outstanding
capital stocks or member signing the
demand who may call a meeting for the
purpose of removal.
 Vacancies in the Board
Sec. 29 of the Corporation Code
provides that: “Any vacancy occurring in
the board of directors or trustees other
than by removal by the stockholders or
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members or by expiration of term, may
be filled by the vote of at least a majority
of the remaining directors or trustees, if
still constituting a quorum; otherwise,
said vacancies must be filled by the
stockholders in a regular or special
meeting called for that purpose. A
director or trustee so elected to fill a
vacancy shall be elected only or the
unexpired term of his predecessor in
office. A directorship or trusteeship to be
filled by reason of an increase in the
number of directors or trustees shall be
filled only by an election at a regular or
at a special meeting of stockholders or
members duly called for the purpose, or
in the same meeting authorizing the
increase of directors or trustees if so
stated in the notice of the meeting.”
General Rule: Power to elect directors
is vested in the stockholders
Exception: Vacancy occurring in the
board of directors or trustees other than
by removal by the stockholders or
members or by expiration of term may
be filled by the vote of at least a majority
of the remaining directors or trustees if
still constituting a quorum.
 Compensation of Board Members
Sec. 30 of the Corporation Code
provides that: “In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, that any
such compensation other than per
diems may be granted to directors by
the vote of the stockholders
representing at least a majority of the
outstanding capital stock at a regular or
special stockholders’ meeting. In no
case shall the total yearly compensation
of directors, as such directors, exceed
10% of the net income before income
tax of the corporation during the
preceding year.”
General Rule: Directors are not entitled
to receive compensation
Exceptions:
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1. When their compensation is fixed in
the by-laws;
2. If compensation is granted to
directors by the vote of the stockholders
representing at least a majority of the
outstanding capital stock at a regular or
special stockholders’ meeting.
Limitation: In no case shall the total
yearly compensation of directors exceed
10% of the net income before income
tax of the corporation during the
preceding year.
Reason: In order to avoid temptation on
the part of directors to abuse powers by
appropriating compensation packages
since they are in control of corporate
assets.
C. Corporate Officers
 Concept of Corporate Officers
*Corporate powers reside on the Board
of Directors; decision/policymaking
resides on them. Implementation of
rules/policy lies on the corporate officers
Categories:
1. Statutory Corporate Officers –
President (must be a stockholder);
Secretary (must be a resident and
citizen of the Philippines); Treasurer
(must be a resident and citizen of the
Philippines).
2. As provided by the By-Laws –
must be clearly stated in the By-Laws
that such office is a corporate office.
3. Those designated by the Board
of Directors provided the Board of
Directors is authorized to do so by
the By-Laws.
 Validity and Binding Effect of Acts of
Corporate Officers
General Rule: No one, even corporate
officers can bind the corporation. It is
only the Board of Directors who has the
authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act
is part of the function of such office;
2. If authorized by the Board of Directors
 Doctrine of Apparent Authority
Doctrine of Apparent
Authority/Doctrine of Estoppel –If a
15

corporation, knowingly permits one of its
officers, or any other agent, to act within
the scope of an apparent authority, it
holds him out to the public as
possessing the power to do those acts;
and thus, the corporation will, as against
anyone who has in good faith dealt with
it through such agent, be stopped from
denying the agent’s authority.
Cases: People’s Aircargo; Inter-Asia;
Lapu-Lapu
*Requires good faith on the part of third
person.
D. Liability of Directors, Trustees and Officers
 Instances when Corporate
Officers/Directors are held Solidarily
Liable
Sec. 31 of the Corporation Code
provides that: “Directors or trustees who
wilfully and knowingly vote for or assent
to patently unlawful acts of the
corporation or who are guilty of gross
negligence or bad faith in directing the
affairs of the corporation or acquire any
personal or pecuniary interest in conflict
with their duty as such directors or
trustees shall be liable jointly and
severally for all damages resulting
therefrom suffered by the corporation,
its stockholders or members and other
persons. When a director, trustee or
officer attempts to acquire or acquires,
in violation of his duty, any interest
adverse to the corporation in respect of
any matter which has been reposed in
him in confidence, as to which equity
imposes a disability upon him to deal in
his own behalf, he shall be liable as a
trustee for the corporation and must
account for the profits which otherwise
would have accrued to the corporation.”
General Rule:
Directors/Trustees/Officers are not
solidarily liable with the corporation.
Exceptions:
1. Wilfully and knowingly vote for
and assent to patently unlawful
acts of the corporation (Sec. 31).
Case: Carag v NLRC
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2. Guilty of gross negligence or bad
faith in directing the affairs of the
corporation (Sec. 31).
Case: David v Construction
Industry
3. Acquire any personal or
pecuniary interest in conflict of
their duty (Sec.31).
4. Consent to the issuance of
watered stocks or having
knowledge thereof, fails to file
objections with the secretary
(Sec. 65).
5. Agree or stipulate in a contract to
hold himself personally liable
with the corporation.
6. By virtue of a specific provision
of law such as BP 22; Trust
receipts Law; RA 7832 (Anti-
Electricity Pilferage Act of 1997);
Securities Regulation Code
*In Carag v NLRC, the Supreme Court
held that not any violative of law, the Code
means that violation must have a
corresponding penalty. Patently unlawful act
means that a law declares an act unlawful
and that such law provides penalty for that
unlawful act.
 Self-Dealing Directors/Officers
Sec. 32 of the Corporation Code
states that: “A contract of the
corporation with one or more of its
directors or trustees or officers is
voidable, at the option of such
corporation, unless all of the following
conditions are present: 1. That the
presence of such director or trustee in
the board meeting in which the contract
was approved was not necessary to
constitute a quorum for such meeting; 2.
That the vote of such director or trustee
was not necessary for the approval of
the contract; 3. That the contract is fair
and reasonable under the
circumstances; and 4. That in case of an
officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set
forth in the preceding paragraph is
absent, in the case of a contract with a
director or trustee, such contract may be
16

ratified by the vote of the stockholders
representing at least 2/3 of the
outstanding capital stock or of at least
2/3 of the members in a meeting called
for the purpose: Provided, That full
disclosure of the adverse interest of the
directors or trustees involved is made at
such meeting: Provided, however, that
the contract is fair and reasonable under
the circumstances.”
Example:
In XYZ Corporation, A is a director. The
corporation acts through the Board of
Directors. XYZ Corporation and A
entered into a lease contract. A as the
lessor and XYZ Corporation as lessee.
The contract was approved by the
Board of Directors.
Q: What is the status of the contract?
General Rule: The contract is voidable.
Exception: If the requisites provided in
Sec. 32 are present.
Exception to the Exception: If
requirement number 1 or 2 is absent, in
the case of a contract with a director or
trustee, such contract may be
considered valid by the ratification of at
least 2/3 of the outstanding capital stock
or 2/3 of the members.
Requisites:
1. The presence of such director or
trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for
such meeting;
2. The vote of such director or trustee
was not necessary for the approval of
the contract;
3. The contract is fair and reasonable
under the circumstances;
4. In case of an officer, the contract has
been previously authorized by the board
of directors.
Reason: A’s presence in the board
meeting might affect the status of the
contract.
Self-Dealing Directors/Officers –
directors/officers who transact business
with their own corporation.
- This is not prohibited by law.
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Interlocking Directors – those who
have been elected as directors in 2 or
more different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however there
are consequences.
 Contracts involving Inter-locking
Directors
Sec. 33 of the Corporation Code
provides that: “Except in cases of fraud,
and provided the contract is fair and
reasonable under the circumstances, a
contract between two or more
corporations having interlocking
directors shall not be invalidated on that
ground alone: Provided, That if the
interest of the interlocking director in
one corporation is substantial and his
interest in the other corporation or
corporations is merely nominal, he shall
be subject to the provisions of the
preceding section insofar as the latter
corporation or corporations are
concerned. Stockholdings exceeding
20% of the outstanding capital stock
shall be considered substantial for
purposes of interlocking directors.”
Example:
A is a director of two corporation, ABC
Corporation and XYZ Corporation. XYZ
Corporation and ABC Corporation
entered into a lease contract where ABC
Corporation is the lessor and XYZ
Corporation is the lessee.
Q: Can this contract be invalidated on
the ground that there is an interlocking
director?
A: NO.
Q: What is the status of the contract?
A: General Rule: Contracts between
two or more corporations having
interlocking directors are valid.
Exceptions:
1. Contracts are void if contracts are
fraudulent or if contracts are
unfair and unreasonable.
2. If the By-Laws prohibits interlocking
director.
Case: Gokongwei, Jr. v SEC
17

*The interest is nominal if his interest is
20% or less of the outstanding capital
stock. The interest is substantial if his
interest is more than 20% of the
outstanding capital stock.
*If the interlocking director has a
substantial interest in one corporation
and has a nominal interest in the other
corporation, the director must comply
with the requisites provided in Sec. 32
on self-dealing directors.
Reason: The case is analogous to that
of transactions involving self-dealing
directors because such director holds
substantial interest with the other
company.
 Doctrine of Corporate Opportunity
Sec. 34 of the Corporation Code
states that: “Where a director, by virtue
of his office, acquires for himself a
business opportunity which should
belong to the corporation, thereby
obtaining profits to the prejudice of such
corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified
by a vote of the stockholders owning or
representing at least 2/3 of the
outstanding capital stock. This provision
shall be applicable notwithstanding the
fact that the director risked his own
funds in the venture.”
General Rule: A director shall refund to
the corporation all the profits he realizes
on a business opportunity which: 1. the
corporation is financially able to
undertake; 2. from its nature, is in line
with corporations business and is of
practical advantage to it; and 3. the
corporation has an interest or a
reasonable expectancy.
Exception: His act has been ratified by
a vote of the stockholders owning or
representing at least 2/3 of the
outstanding capital stock.
*A business opportunity ceases to be
corporate opportunity and transforms to
personal opportunity where the
corporation refuses or is definitely no
longer able to avail itself of the
opportunity.
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E. Executive Committee
Sec. 35 of the Corporation Code states
that: “The by-laws of a corporation may
create an executive committee composed of
not less than 3 members of the board to be
appointed by the board. Said committee
may act, by majority vote of all its members,
on such specific matters within the
competence of the board, as may be
delegated to it in the by-laws or on a
majority vote of the board, except with
respect to: (1) approval of any action for
which shareholders’ approval is also
required; (2) the filing of vacancies in the
board; (3) the amendment or repeal of by-
laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of
the board which by its express terms is not
so amendable or repealable; and (5) a
distribution of cash dividends to the
shareholders.”
Keyword: BY-LAWS
*It must be stated in the By-Laws.
*Board Resolution is not sufficient if there is
no provision in the By-Laws.
*The decision of the executive committee is
considered a Board Resolution.
*The decision of the executive committee is
not subject to appeal to the board. However,
if the resolution of the Executive Committee
is invalid it may be ratified by the Board.
*The decision of the executive committee
needs no confirmation from the Board.
Case: Filipinas Port, Inc.
*The corporation may create other
committees.
Distinction: In executive committee, there
is a statutory restriction on members
whereas in other committee there is no such
restriction.
General Rule: The executive committee
may act on specific matters within the
competence of the board as may be
delegated to it in the by-laws or on a
majority vote of the board.
Exceptions:
1. Approval of any action for which
shareholders’ approval is also required;
2. The filing of vacancies in the board;
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3. The amendment or repeal of by-laws or
the adoption of new by-laws;
4. The amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable;
5. A distribution of cash dividends to the
shareholders.
CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept of
Ultra Vires Act
Sec. 45 of the Corporation Code states
that: “No corporation under this Code shall
possess or exercise any corporate powers
except those conferred by this Code or by
its articles of incorporation and except such
as are necessary or incidental to the
exercise of powers so conferred.”
Ultra Vires Acts – an act committed
outside the object for which a corporation is
created as defined by the law of its
organization and therefore beyond the
power conferred upon it by law.
Effects of Ultra Vires Acts:
1. Executed Contract – courts will not set
aside or interfere with such contracts.
2. Executory Contract – no enforcement
even at the suit of either party.
3. Partly executed and Partly executory
contract – principle against unjust
enrichment shall apply.
B. Classes of Corporate Powers
1. Express
2. Implied
3. Incidental
 Express – those expressly authorized
by the Corporation Code and other laws,
and its Articles of Incorporation or
Charter.
 Implied – those that can be inferred
from or necessary for the exercise of the
express powers.
 Incidental – those that are incidental to
the existence of the corporation.
Doctrine of Necessary Implication – those which
can be reasonably inferred from the express
powers given since they are necessary for the
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corporation to perform a particular act are deemed
part of such powers.
C. Statutory Powers of a Corporation and the
Limitations on their Exercise
Sec. 36 of the Corporation Code states
that: “Every corporation incorporated under
this Code has the power and capacity: 1. To
sue and be sued in its corporate name; 2.
Of succession by its corporate name for the
period of time stated in the articles of
incorporation and the certificate of
incorporation; 3. To adopt and use a
corporate seal; 4. To amend its articles of
incorporation in accordance with the
provisions of this Code; 5. To adopt by-
laws, not contrary to law, morals, or public
policy, and to amend or repeal the same in
accordance with this Code; 6. In case of
stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in
accordance with the provisions of this Code;
and to admit members to the corporation if it
be a non-stock corporation; 7. To purchase,
receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal
with such real and personal property,
including securities and bonds of other
corporations, as the transaction of the lawful
business of the corporation may reasonably
and necessarily require, subject to the
limitations prescribed by law and the
Constitution; 8. To enter into merger or
consolidation with other corporations as
provided in this Code; 9. To make
reasonable donations, including those for
the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or
foreign, shall give donations in aid of any
political party or candidate or for purposes
of partisan political activity; 10. To establish
pension, retirement, and other plans for the
benefit of its directors, trustees, officers and
employees; and 11. To exercise such other
powers as may be essential or necessary to
carry out its purpose or purposes as stated
in the articles of incorporation.”
 Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code
states that: “Unless otherwise
prescribed by this Code or by special
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law, and for legitimate purposes, any
provision or matter stated in the articles
of incorporation may be amended by a
majority vote of the board of directors or
trustees and the vote or written assent
of the stockholders representing at least
2/3 of the outstanding capital stock,
without prejudice to the appraisal right of
dissenting stockholders in accordance
with the provisions of this Code, or the
vote or written assent of at least 2/3 of
the members if it be a non-stock
corporation.”
*The following are excluded in counting
the outstanding capital stock: 1.
Treasury stock; 2. Unissued shares.
*Aside from the votes of majority of the
board and assent of the 2/3 of the OCS,
the approval of the SEC is necessary for
the amendment of the AOI.
*There is an implied approval of the
SEC, i.e., failure to act on the
application filed by the corporation
within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain the
written assent of the stockholders.
*In Tan v Sycip, the Supreme Court held
that in case of a non-stock corporation,
membership is personal and non-
transferrable unless the by-laws
provides otherwise. The deceased
member is not entitled to vote.
Four changes in Articles of Incorporation that
require the approval of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.
*Approval of Stockholders is necessary in these
changes because they are necessary for the
corporation’s existence.
 Extension/Shortening of Corporate Term
Sec. 37 of the Corporation Code
states that: “A private corporation may
extend or shorten its term as stated in
the articles of incorporation when
approved by a majority vote of the board
of directors or trustees and ratified at a
meeting by the stockholders
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representing at least 2/3 of the
outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation. Written notice of the
proposed action and of the time and
place of the meeting shall be addressed
to each stockholder or member at his
place of residence as shown on the
books of the corporation and deposited
to the addressee in the post office with
postage prepaid, or served personally:
Provided, That in case of extension of
corporate term, any dissenting
stockholder may exercise his appraisal
right under the conditions provided in
this code.”
 Increase or Decrease of Capital Stock/
Incurrence, Creation or Increase of
Bonded Indebtedness
Sec. 38 of the Corporation Code
states that: “No corporation shall
increase or decrease its capital stock or
incur, create or increase any bonded
indebtedness unless approved by a
majority vote of the board of directors
and, at a stockholders’ meeting duly
called for the purpose, 2/3 of the
outstanding capital stock shall favor the
increase or diminution of the capital
stock, or the incurring, creating or
increasing of any bonded indebtedness.
Written notice of the proposed increase
or diminution of the capital stock or of
the incurring, creating, or increasing of
any bonded indebtedness and of the
time and place of the stockholders’
meeting at which the proposed increase
or diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered , must
be addressed to each stockholder at his
place of residence as shown on the
books of the corporation and deposited
to the addressee in the post office with
postage prepaid, or served personally.
xxx.”
Q: When the corporation increases its
capital stock, is the 25% requirement
necessary? How can it be computed?
A: YES. The SEC ruled that the 25%
applies to the increase amount.
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*The corporation is required to maintain
a sinking fund.
Q: What does bonded indebtedness
mean?
A: Requires longer time of payment;
special burden on the corporation;
involves the important assets of the
corporation.
 Denial of Pre-emptive Right
Sec. 39 of the Corporation Code
states that: “All stockholders of a stock
corporation shall enjoy pre-emptive right
to subscribe to all issues or disposition
of shares of any class, in proportion to
their respective shareholdings, unless
such right is denied by the articles of
incorporation or an amendment thereto:
Provided, That such pre-emptive right
shall not extend to shares to be issued
in compliance with laws requiring stock
offerings or minimum stock ownership
by the public; or to shares to be issued
in good faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock, in exchange
for property needed for corporate
purposes or in payment of a previously
contracted debt.”
*Coming from the increased authorized
capital stock.
* Similar to Right of First Refusal
*It is not a matter of right. It can be
denied by the corporation through denial
of such right in the articles of
incorporation.
Purposes:
1. In order that the stockholder may be
able to maintain their relative
proportional voting trend and control in
the corporation; 2. To avoid dilution of
their proportionate voting and control in
the corporation.
General Rule: Pre-emptive right is
available to stockholders.
Exception: if it is denied in the Articles
of Incorporation or through amendment.
Exception to the Exception: Pre-
emptive right shall not extend to:
1. Shares to be issued in compliance
with laws requiring stock offerings or
minimum stock ownership by the public;
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Maria Zarah Villanueva - Castro
2. Shares to be issued in good faith with
the approval of the stockholders
representing 2/3 of the outstanding
capital stock, in exchange for property
needed for corporate purposes; and
3. In payment of a previously contracted
debt.
*Pre-emptive right is satisfied as long as
the corporation gives the stockholder
the opportunity to buy the shares.
*The offer must first be made to the
stockholders.
 Sale or Disposition of Assets
Sec. 40 of the Corporation Code
states that: “ Subject to the provisions of
existing laws on illegal combinations
and monopolies, a corporation may, by
a majority vote of its board of directors
or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose
of all or substantially all of its property
and assets, including its goodwill, upon
such terms and conditions and for such
consideration, which may be money,
stocks, bonds or other instruments for
the payment of money or other property
or consideration, as its board of
directors or trustees may deem
expedient, when authorized by the vote
of the stockholders representing at least
2/3 of the outstanding capital stock, or in
case of non-stock corporation by the
vote of at least 2/3 of the members, in a
stockholders’ or members’ meeting duly
called for the purpose. Written notice of
the proposed action and of the time and
place of the meeting shall be addressed
to each stockholder or member at his
place of residence as shown on the
books of the corporation and deposited
to the addressee in the post office with
postage prepaid, or served personally:
Provided, That any dissenting
stockholder may exercise his appraisal
right under the conditions provided in
this Code. A sale or other disposition
shall be deemed to cover substantially
all the corporate property and assets if
thereby the corporation would be
rendered incapable of continuing the
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business or accomplishing the purpose
for which it was incorporated. xxx.”
Q: What makes the disposition peculiar?
A: The disposition is of all or
substantially all of the corporation’s
properties and assets.
Q: What kind of disposition involve?
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
Requirements:
1. Majority vote of the Board.
2. Vote of the Stockholders
representing 2/3 of the OCS.
3. The sale does not bring about the
illegal combinations and monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test – no statutory
test; pertains to the disposition of all
assets
2. Qualitative Test – there is a
statutory test; pertains to the
disposition of substantially all of its
assets.
*The provision is so strict because the
law wants the corporation will reach its
expiration term.
Q: With the sale of all the assets of the
corporation, will the same result to its
dissolution?
A: NO. Possession or continued
possession of corporate properties is
not a condition for the existence of a
corporation. Corporation still exists
despite the disposition of all its
properties and assets.
Q: Will the buying corporation be made
answerable for the liabilities of the
selling corporation?
A: NO. The two corporations are two
separate personalities thus they are
separate and distinct from each other
hence the buying corporation cannot be
held liable to the obligations of the
selling corporation.
General Rule: The sale of all or
substantially all of the assets of the
corporation does not make the buyer
answerable for the obligations of the
seller.
Exceptions:
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1. If the buyer expressly agrees to
assume the obligations of the seller.
2. If sale amounts to merger or
consolidation.
3. If and when application of piercing
the veil of corporate entity doctrine is
warranted.
4. If the purchaser becomes a
continuation of the seller.
5. Sale was done in violation of the
Bulk Sales Law.
Case: PNB v Andrada
 Acquisition of Corporate Shares
Sec. 41 of the Corporation Code
states that: “A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate corporate
purpose or purposes, including but not
limited to the following cases: Provided,
That the corporation has unrestricted
retained earnings in its books to cover
the shares to be purchased or acquired:
1. To eliminate fractional shares arising
out of stock dividends; 2. To collect or
compromise an indebtedness to the
corporation, arising out of unpaid
subscription, in a delinquency sale, and
to purchase delinquent shares sold
during said sale; and 3. To pay
dissenting or withdrawing stockholders
entitled to payment for their shares
under the provisions of this Code.”
Requisites:
1. Unrestricted Retained Earnings
2. The acquisition must be for
legitimate purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any other
purpose.
Q: What happens to reacquired shares?
A: General Rule: They are
automatically deemed retired.
Exception: The AOI provides
otherwise.
Trust Fund Doctrine – The capital stock, property
and other assets of the corporation are regarded as
equity in trust for the payment of the corporate
creditors. The subscribed capital stock of the
22

corporation is a trust fund for the payment of debts
of the corporation which the creditors have the right
to look up to satisfy their credits. Corporation may
not dissipate this and the creditors may sue
stockholders directly for the unpaid subscription.
 Investment of Corporate Funds
Sec. 42 of the Corporation Code
states that: “Subject to the provisions of
this Code, a private corporation may
invest its funds in any other corporation
or business or for any purpose other
than the primary purpose for which it
was organized when approved by a
majority of the board of directors or
trustees and ratified by the stockholders
representing at least 2/3 of the
outstanding capital stock, or by at least
2/3 of the members in the case of non-
stock corporations, at a stockholders’ or
members’ meeting duly called for the
purpose. Written notice of the proposed
investment and the time and place of
the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the
addressee in the post office with
postage prepaid, or served personally:
Provided, That any dissenting
stockholder shall have appraisal right as
provided in this Code: Provided,
however, That where the investment by
the corporation is reasonably necessary
to accomplish its primary purpose as
stated in the articles of incorporation,
the approval of the stockholders or
members shall not be necessary.”
Requisites:
1. Majority vote of the Board
2. Vote of the stockholders
representing 2/3 OCS.
 Declaration of Dividends
Sec. 43 of the Corporation Code
states that: “The board of directors of a
stock corporation may declare dividends
out of the unrestricted retained earnings
which shall be payable in cash, in
property, or in stock to all stockholders
on the basis of outstanding stock held
by them: Provided, That any cash
dividends due on delinquent stock shall
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Maria Zarah Villanueva - Castro
first be applied to the unpaid balance on
the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than
2/3 of the outstanding capital stock at a
regular or special meeting duly called for
the purpose. Stock corporations are
prohibited from retaining surplus profits
in excess of 100% of their paid-in capital
stock, except: 1. When justified by
definite corporate expansion projects or
programs approved by the board of
directors; or 2. When the corporation is
prohibited under any loan agreement
with any financial institution or creditor,
whether local or foreign, from declaring
dividends without its/his consent, and
such consent has not yet been secured;
or 3. When it can be clearly shown that
such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is need
for special reserve for probable
contingencies.”
*This section is exclusive to stock
corporations.
Dividends – represents part of the
earnings of the corporation which the
board has decided to distribute among
the stockholders.
*The fact that the corporation has
surplus earning does not mean that it is
mandated to declare dividends; it is still
upon the sound discretion of the board
of directors.
Reason: Trust Fund Doctrine
*There must be a unrestricted retained
earnings before dividends may be
declared.
*The board may opt to restrict its
earnings, as the earnings may be
allocated to legitimate business
purpose.
CASH STOCK
DIVIDENDS DIVIDENDS
does not require Requires
stockholders’ stockholders’
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approval approval *In Nielson case, the SC held that

The stockholders The stockholders dividends cannot be given to non-
receive cash receive stocks stockholders.
Creditor-debtor No creditor-debtor *If there is date of record – Dividends
relationship relationship
may be received by those persons who
are holders of stocks as of date of
Requisites for declaration of
record.
cash/property dividends:
*If there is no date of record – dividends
1. Board approval may be received by those persons who
2. Unrestricted Retained Earnings are holders of stocks as of the
Requisites for declaration of stock declaration.
dividends: Q: When the corporation declares stock
1. Unrestricted Retained Earnings; dividends, would it likewise create a
2. Board approval; creditor-debtor relationship between the
3. Ratification by the stockholders. corporation and the stockholder?
Q: Why stockholders’ ratification is A: NO. Stock dividends will not bring
necessary in the declaration of stock about a creditor-debtor relationship.
dividends? When it comes to shareholdings, the
A: Because the earnings are one holding the shares are considered
capitalized. It is considered to be a investors; risk-takers.
corporate assets. Q: Will legal compensation possible to
Q: May the board be compelled to occur?
declare dividends? A: NO. The parties are not mutually
A: General Rule: NO. creditor-debtor of each other. The
Exception: Stock corporations are requisites under the Civil Code on legal
prohibited from retaining surplus profits compensation are not present.
in excess of 100% of their paid-in capital
 Management Contract
stock.
Sec. 44 of the Corporation Code
Exceptions to the Exception:
states that: “No corporation shall
1. Corporate expansion conclude a management contract with
2. Pursuant to loan agreement another corporation unless such
3. Special circumstances/contingent contract shall have been approved by
liabilities the board of directors and by
Q: Are the stock dividends considered stockholders owning at least the
as watered stocks because the majority of the outstanding capital stock,
stockholder concerned does not pay or by at least a majority of the members
anything therefor? in the case of a non-stock corporation,
A: NO. The unrestricted retained of both the managing and the managed
earnings are considered to be a corporation, at a meeting duly called for
consideration thus dividends received the purpose: Provided, That 1. Where a
through stocks are not watered stocks. stockholder or stockholders
*The source of payment is the representing the same interest of both
unrestricted retained earnings. the managing and the managed
Q: Are delinquent stockholders entitled corporations own or control more than
to receive dividends? 1/3 of the total outstanding capital stock
A: YES. But only in terms of cash entitled to vote of the managing
dividends. corporation; or 2. Where a majority of
Q: Who are entitled to receive the members of the board of directors of
dividends? the managing corporation also
A: Stockholders constitute a majority of the members of
the board of directors of the managed

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corporation, then the management the management and control of its affairs
contract must be approved by the and activities.
stockholders of the managed Nature: Regulates internal affairs of the
corporation owning at least 2/3 of the corporation.
total outstanding capital stock entitled to
vote, or by at least 2/3 of the members B. By-Laws in relation to Articles of
in the case of a non-stock corporation. Incorporation
No management contract shall be Distinction between By-Laws and
entered into for a period longer than 5 Articles of Incorporation:
years for any one term. The provisions By-Laws –is a condition subsequent.
of the next preceding paragraph shall Articles of Incorporation – is a condition
apply to any contract whereby a precedent. Essential for corporate
corporation undertakes to manage or existence.
operate all or substantially all of the
business of another corporation, ARTICLES OF BY-LAWS
whether such contracts are called INCORPORATION
service contracts, operating agreements External affairs Internal Affairs
or otherwise: Provided, however, That Affects the status of Does not affect the
such service contracts or operating existence of the status of the
agreements which relate to the corporation existence but has
exploration, development, exploitation or impact on the
utilization of natural resources may be existence; failure to
submit is a ground
entered into for such periods as may be for
provided by the pertinent laws or disenfranchisement
regulations.” Joint decision of the General Rule: joint
Requisite: board and decision
General Rule: Majority vote of the OCS stockholders Exception:
Exception: 2/3 of the OCS Delegates the power
*SEC’s approval is not necessary to amend the By-
Laws to the Board
*When the corporation enters into a
management contract, appraisal right is
C. Adoption of By-Laws; Effect of Non-Filing
NOT AVAILABLE to any dissenting
within the prescribed period
stockholder.
Sec. 46 of the Corporation Code states
Reason: Sound business policy dictates
that: “Every corporation formed under this
that it would be better for the
Code must, within 1 month after receipt of
corporation, at the inception of its
official notice of the issuance of its
operation, to be managed by a company
certificate of incorporation by the SEC,
who has been experienced in a
adopt a code of By-Laws for its government
particular kind of business if the
not inconsistent with this Code. For the
managed corporation needs the
adoption of By-Laws by the corporation the
technical expertise, skills, experiences,
affirmative vote of the stockholders
background of another entity.
representing at least a majority of the
CORPORATE BY-LAWS:
outstanding capital stock, or of at least a
A. Concept, Use and Nature of By-Laws
majority of the members in case of non-
By-Laws – relatively permanent and
stock corporations, shall be necessary. The
continuing rules of action adopted by the
By-Laws shall be signed by the
corporation for its own government and that
stockholders or members voting for them
of the individuals composing it and those
and shall be kept in the principal office of
having the direction, management and
the corporation, subject to the inspection of
control of its affairs, in whole or in part, in
the stockholders or members during office
hours. A copy thereof, duly certified to by a
25

majority of the directors or trustees
countersigned by the secretary of the
corporation, shall be filed with the SEC
which shall be attached to the original
articles of incorporation. Notwithstanding
the provisions of the preceding paragraph,
By-Laws may be adopted and filed prior to
incorporation; in such case, such By-Laws
shall be approved and signed by all the
incorporators and submitted to the SEC,
together with the articles of incorporation. In
all cases, By-Laws shall be effective only
upon the issuance by the SEC of a
certification that the By-Laws are not
inconsistent with this Code. The SEC shall
not accept for filing the By-Laws or any
amendment thereto of any bank, banking
institution, building and loan association,
trust company, insurance companies, public
utility, educational institution or other special
corporations governed by special laws,
unless accompanied by a certificate of the
appropriate government agency to the effect
that such By-Laws or amendments are in
accordance with law.”
*Submission of By-Law is not a requirement
for acquisition of corporate existence,
however, for the corporation to be able to
continue its corporate existence, the
corporation is required to submit the
corporate By-Law.
*Non-submission of the By-Laws within the
prescribed period allowed by law is a
ground for the dissolution of the corporation.
*In Loyola Grandvillas Homeowners
Association v CA, the SC held that failure
to adopt a set of By-Laws within the
prescribed period, notwithstanding the word
used in the Code, the same would not result
to automatic dissolution of the corporation.
The failure to file by-laws would not, by
itself, amount to dissolution or
extinguishment of the corporate existence.
*Section 46 of the Corporation Code must
be read in conjunction with PD 902-A which
outlines the procedure to be followed before
the franchise/license of a private corporation
may be suspended or revoked.
*Observance of Due Process is necessary.
*In Sawadjaan v CA, the SC held that
meanwhile when the By-Laws is not yet
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submitted, the corporation, at that time, and
the very least, may be considered as a De
Facto Corporation and therefore, its right to
exist as such cannot be inquired into or
cannot be collaterally attacked in a private
suit. It is for the State to initiate a
proceeding questioning the existence, on
the ground of its non-submission of By-
Laws, within the prescribed period.
D. Contents of By-Laws; Requisites of a Valid
By-Law Provision
Sec. 47 of the Corporation Code states
that: “Subject to the provisions of the
Constitution, this Code, other special laws,
and the articles of incorporation, a private
corporation may provide in its By-Laws for:
1. The time, place and manner of calling
and conducting regular or special meetings
of the directors or trustees; 2. The time and
manner of calling and conducting regular or
special meetings of the stockholders or
members; 3. The required quorum in
meetings of stockholders or members and
the manner of voting therein; 4. The form for
proxies of stockholders and members and
the manner of voting them; 5. The
qualifications, duties and compensation of
directors or trustees, officers and
employees; 6. The time for holding the
annual election of directors or trustees and
the mode or manner of giving notice thereof;
7. The manner of election or appointment
and the term of office of all officers other
than directors or trustees; 8. The penalties
for violation of the By-Laws; 9. In the case
of stock corporations, the manner of issuing
stock certificates; and 10. Such other
matters as may be necessary for the proper
or convenient transaction of its corporate
business and affairs.”
Requisites:
1. It must be consistent with Corporation
Code, other pertinent laws and
regulations.
2. It must be consistent with the Articles of
Incorporation.
3. It must be reasonable and not arbitrary
or oppressive.
4. It must not disturb vested rights, impair
contract or property rights of
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stockholders or members or create
obligations unknown to law.
CORPORATE MEETINGS:
E. Amendment to By-Laws
Sec. 48 of the Corporation Code provides
that: “The board of directors or trustees, by
a majority vote thereof, and the owners of at
least a majority of the outstanding capital
stock, or at least a majority of the members
of a non-stock corporation, at a regular or
special meeting duly called for the purpose,
may amend or repeal any By-Laws or adopt
new By-Laws. The owners of 2/3 of the
outstanding capital stock or 2/3 of the
members in a non-stock corporation may
delegate to the board of directors or
trustees the power to amend or repeal any
By-Laws or adopt new By-Laws: Provided,
That any power delegated to the board of
directors or trustees to amend or repeal any
By-Laws or adopt new By-Laws shall be
considered as revoked whenever
stockholders owning or representing a
majority of the outstanding capital stock or a
majority of the members in non-stock
corporations, shall so vote at a regular or
special meeting. Whenever any amendment
or new By-Laws are adopted, such
amendment or new By-Laws shall be
attached to the original By-Laws in the office
of the corporation, and a copy thereof, duly
certified under oath by the corporate
secretary and a majority of the directors or
trustees, shall be filed with the SEC the
same to be attached to the original articles
of incorporation and original By-Laws. The
amended or new By-Laws shall only be
effective upon the issuance by the SEC of a
certification that the same are not
inconsistent with this Code.”
F. By-Laws in relation to Third Parties
*In China Banking Corporation v CA, the
SC held that in the absence of evidence that
China Bank is aware of the provisions of the
By-Laws, China Bank is not bound to
observe the provisions of the By-Laws.
Hence, China Bank must be allowed to
register the shares in its name.
General Rule: Third parties are not affected
by the By-Laws.
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Exception: If the third party has actual
knowledge of the provisions of the By-Laws.
A. Kinds of Corporate Meetings
Sec. 49 of the Corporation Code provides
that: “Meetings of directors, trustees,
stockholders, or members may be regular or
special.”
Kinds:
a. Stockholders/Members:
1. Regular meeting
2. Special meeting
b. Directors/Trustees:
1. Regular meeting
2. Special meeting
Sec. 50 of the Corporation Code provides
that: “Regular meetings of stockholders or
members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on
any date in April of every year as
determined by the board of directors or
trustees: Provided, That written notice of
regular meetings shall be sent to all
stockholders or members of record at least
2 weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or
members shall be held at any time deemed
necessary or as provided in the by-laws:
Provided, however, That at least 1 week
written notice shall be sent to all
stockholders or members, unless otherwise
provided in the by-laws. Notice of any
meeting may be waived, expressly or
impliedly, by any stockholder or member.
Whenever, for any cause, there is no
person authorized to call a meeting, the
SEC, upon petition of a stockholder or
member on a showing of good cause
therefor, may issue an order to the
petitioning stockholder or member directing
him to call a meeting of the corporation by
giving proper notice required by this Code
or by the by-laws. The petitioning
stockholder or member shall preside thereat
until at least a majority of the stockholders
or members present have been chosen one
of their number as presiding officer.”
*Regular meeting of stockholders/members
shall be held annually on a date fixed in the
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by-laws or if not so fixed, on any date in 3. It must be called by the proper person.
April of every year. Written notice of regular 4. There must be a previous notice.
meetings shall be sent 2 weeks prior to the
5. There must be a quorum.
meeting unless a different period is required
Sec. 51 of the Corporation Code provides
by the by-laws.
that: “Stockholders’ or members’ meetings,
** Special meeting of stockholders/members
whether regular or special, shall be held in
shall be held at any time deemed necessary
the city or municipality where the principal
or as provided in the by-laws. Written notice
office of the corporation is located, and if
shall be sent to all stockholders or members
practicable in the principal office of the
at least one week or unless otherwise
corporation: Provided, That Metro Manila
provided in the by-laws.
shall, for purposes of this section, be
Sec. 53 of the Corporation Code provides
considered a city or municipality. Notice of
that: “Regular meetings of the board of
meetings shall be in writing, and the time
directors or trustees of every corporation
and place thereof stated therein. All
shall be held monthly, unless the by-laws
proceedings had and any business
provide otherwise. Special meetings of the
transacted at any meeting of the
board of directors or trustees may be held at
stockholders or members, if within the
any time upon the call of the president or as
powers or authority of the corporation, shall
provided in the by-laws. Meetings of
be valid even if the meeting be improperly
directors or trustees of corporations may be
held or called, provided all the stockholders
held anywhere in or outside of the
or members of the corporation are present
Philippines, unless the by-laws provide
or duly represented at the meeting.”
otherwise. Notice of regular or special
*Applies to both stock and non-stock
meetings stating the date, time and place of
corporations.
the meeting must be sent to every director
General Rule: The meeting must be held in
or trustee at least 1 day prior to the
the city or municipality where the principal
scheduled meeting, unless otherwise
office is located.
provided by the by-laws. A director or
Exception: Sec. 93 on non-stock
trustee may waive this requirement, either
corporations, the By-Laws may provide
expressly or impliedly.”
different venue for their meeting.
*Regular meetings of directors/trustees shall
*A casual reading of section 51 would say
be held monthly unless the by-laws provide
that a corporation cannot provide any other
otherwise.
place for the meeting of stockholders. But in
*Special meetings of directors/trustees may
case of a non-stock corporation, Section 93
be held at any time upon the call of the
of the Corporation provides that the by-laws
president or as provided in the by-laws.
could provide any place for the meeting of
*Meetings of directors or trustees may be
its members provided that it is within the
held anywhere in or outside of the
Philippines and proper notice has been
Philippines unless the by-laws provide
given.
otherwise.
Q: Is there a conflict between Section 51
*Notice of regular or special meetings
and Section 93?
stating the date, time and place of the
A: YES. There is conflict but this conflict
meeting must be sent to every director or
may be reconciled. As a rule, the by-laws
trustee at least 1 day prior to the scheduled
may provide a different place of meeting
meeting unless otherwise provided by the
provided that it is within the Philippines and
by-laws.
notice has been given. As an exception, if
B. Requirements of a Meeting the by-laws is silent of the place of the
1. It must be held at the proper place. meeting, section 51 applies.
2. It must be held at the stated date and at Sec. 52 of the Corporation Code provides
the appointed time or at a reasonable that: “Unless otherwise provided for in this
time thereafter. Code or in the by-laws, a quorum shall
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consist of the stockholders representing a
majority of the outstanding capital stock or a
majority of the members in the case of non-
stock corporations.”
General Rule: Majority of the OCS or
Majority of the members
Exception: Unless otherwise provided by
the Code or by the By-Laws.
*In Tan v Sycip, deceased member is not
entitled to vote
Sec. 54 of the Corporation Code provides
that: “The president shall preside at all
meetings of the directors or trustees as well
as of the stockholders or members, unless
the by-laws provide otherwise.”
C. Right to Vote of Stockholders
 Instances when voting right not
available
Sec. 6 of the Corporation Code
provides that: “Except as provided in the
immediately preceding paragraph, the
vote necessary to approve a particular
corporate act as provided in this Code
shall be deemed to refer only to stocks
with voting rights.”
Instances when voting right is not
available:
1. Delinquent shares
2. Treasury shares
3. Fractional shares
4. Escrow shares
 Rules on:
1. Delinquent Shares
Sec. 71 of the Corporation Code
provides that: “No delinquent stock
shall be voted for or be entitled to
vote or to representation at any
stockholders’ meeting, nor shall the
holder thereof be entitled to any of
the rights of a stockholder except the
right to dividends in accordance with
the provisions of this Code, until and
unless he pays the amount due on
his subscription with accrued
interest, and the costs and expenses
of advertisement, if any.”
*Delinquency arises upon default in
payment of subscription.
Q: Are they included for quorum and
voting purposes?
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Maria Zarah Villanueva - Castro
A: NO.
Q: Even if there are proxies?
A: YES.
Q: Shares not yet fully paid but not
yet delinquent, are they entitled to
vote?
A: YES.
*Delinquent stock is not entitled to
vote and his presence would not be
taken for purposes of quorum.
*The only right remain is the right to
receive dividends subject to the
provision of Section 43.
2. Escrow Shares
*Escrow shares are not entitled to
vote before the fulfillment of the
condition imposed thereon.
3. Unpaid Shares
Sec. 72 of the Corporation Code
provides that: “Holders of subscribed
shares not fully paid which are not
delinquent shall have all the rights of
a stockholder.”
General Rule: The holder of unpaid
shares can exercise the right to vote.
Exception: If it is provided in the
subscription contract that such right
cannot be exercised until the
subscription is fully paid.
4. Sequestered Shares
Q: What is the reason for
sequestration process?
A: For investigative purposes; To
avoid wastage dissipation of assets.
Q: Is PCGG authorized to vote for
the sequestered shares?
A: General Rule: No. PCGG cannot
vote for the sequestered shares
because being a
conservator/administrator, it should
only perform acts of administration
and not acts of ownership.
Exception: If there is a strong
evidence that indeed the shares
have been purchased through public
funds.
Requisites:
1. Strong evidence or prima facie
evidence that the shares are ill-
gotten.
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2. There is an imminent danger that
the shares will be dissipated.
Case: Transmiddle East v CA
Q: During the pendency of
sequestration process, are the
sequestered shares included for
quorum purposes?
A: General Rule: YES.
Q: Who can vote them?
A: General Rule: Stockholder of
record.
*In Republic of the Philippines v
COCOFED, the SC held that there is
a prima facie evidence that the
shares are purchased with the use
of public funds.
5. Pledgor, Mortgagor or Administrator
of Shares
Sec. 55 of the Corporation Code
provides that: “In case of pledged or
mortgaged shares in stock
corporations, the pledgor or
mortgagor shall have the right to
attend and vote at meetings of
stockholders, unless the pledgee or
mortgagee is expressly given by the
pledgor or mortgagor such right in
writing which is recorded on the
appropriate corporate books.
Executors, administrators, receivers,
and other legal representatives duly
appointed by the court may attend
and vote in behalf of the
stockholders or members without
need of any written proxy.”
Q: Can the pledgee/mortgagee
exercise the right to vote?
A: General Rule: No. The right to
vote remains to the owner thus, it is
the pledgor/mortgagor that can
exercise it.
Exception: If there is an agreement
that the pledgee/mortgagee can
exercise the right to vote.
Case: Calapatia
*Administrator/executor/heirs have
the right to vote even without prior
proxy. But the SEC requires them to
submit letters of appointment or
documents showing that he has
been duly instituted as
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executor/administrator of the
deceased.
6. Shares Jointly Owned
Sec. 56 of the Corporation Code
provides that: “In case of shares of
stock owned jointly by two or more
persons, in order to vote the same,
the consent of all the co-owners
shall be necessary, unless there is a
written proxy, signed by all the co-
owners, authorizing one or some of
them or any other person to vote
such share or shares: Provided,
That when the shares are owned in
an “and/or” capacity by the holders
thereof, any one of the joint owners
can vote said shares or appoint a
proxy therefor.”
D. Concept of Proxy and Voting Trust
Agreement
Proxy is a written authorization given by
one person to another so that the second
person can act for the first.
*Proxy is a representative.
*Relationship: Principal-Agent.
*Proxy is authorized to vote and also
authorized to be present in a meeting.
Functions: For quorum purposes; for
voting purposes.
*In Board meeting, proxy is not allowed
(Sec. 25 of the Corporation Code).
Sec. 58 of the Corporation Code provides
that: “Stockholders and members may vote
in person or by proxy in all meetings of
stockholders or members. Proxies shall be
in writing, signed by the stockholder or
member and filed before the scheduled
meeting with the corporate secretary.
Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which
it is intended. No proxy shall be valid and
effective for a period longer than 5 years at
any one time.”
Requisites:
1. Must be in writing
2. Filed before the scheduled meeting;
under the SEC rule, 10 days before the
scheduled meeting
*Proxy ensures presence of a quorum and
also approval of corporate acts.
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General Rule: Proxy is revocable.
Exception: If proxy is coupled with interest.
Ways to revoke proxy:
1. By execution of subsequent proxy.
2. If the stockholder concerned would
appear in the scheduled meeting.
Voting Trust Agreement is an agreement
whereby one or more stockholders transfer
their shares of stocks to a trustee, who
thereby acquires for a period of time the
voting rights (and/or any other rights) over
such shares; and in return, trust certificates
are given to the stockholders, which are
transferable like stock certificates, subject
however, to the trust agreement.
PROXY VOTING TRUST
AGREEMENT
The stockholder The stockholder
remains the ceases to be a
stockholder of stockholder of record
record
Revocable Irrevocable
General Rule: 5
years
Exception: If
coupled with interest
*The transfer includes the transfer of legal
title.
Sec. 59 of the Corporation Code provides
that: “One or more stockholders of a stock
corporation may create a voting trust for the
purpose of conferring upon a trustee or
trustees the right to vote and other rights
pertaining to the shares for a period not
exceeding 5 years at any time: Provided,
That in the case of a voting trust specifically
required as a condition in a loan agreement,
said voting trust may be for a period
exceeding 5 years but shall automatically
expire upon full payment of the loan. A
voting trust agreement must be in writing
and notarized, and shall specify the terms
and conditions thereof. A certified copy of
such agreement shall be filed with the
corporation and with the SEC; otherwise,
said agreement is ineffective and
unenforceable. The certificate or certificates
of stock covered by the voting trust
agreement shall be cancelled and new ones
shall be issued in the name of the trustee or
trustees stating that they are issued
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pursuant to said agreement. In the books of
the corporation, it shall be noted that the
transfer in the name of the trustee or
trustees is made pursuant to said voting
trust agreement. The trustee or trustees
shall execute and deliver to the transferors
voting trust certificates, which shall be
transferable in the same manner and with
the same effect as certificates of stock. The
voting trust agreement filed with the
corporation shall be subject to examination
by any stockholder of the corporation in the
same manner as any other corporate book
or record: Provided, That both the transferor
and the trustee or trustees may exercise the
right of inspection of all corporate books and
records in accordance with the provisions of
this Code. Any other stockholder may
transfer his shares to the same trustee or
trustees upon the terms and conditions
stated in the voting trust agreement, and
thereupon shall be bound by all the
provisions of said agreement. No voting
trust agreement shall be entered into for the
purpose of circumventing the law against
monopolies and illegal combinations in
restraint of trade or used for purposes of
fraud. Unless expressly renewed, all rights
granted in a voting trust agreement shall
automatically expire at the end of the
agreed period, and the voting trust
certificates as well as the certificates of
stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the
name of the transferors. The voting trustee
or trustees may vote by proxy unless the
agreement provides otherwise.”
Consequence: The stockholder entering
into a voting trust agreement ceases to be a
stockholder of record.
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title to
the shares so that if the stockholder is, at
the same time, a director of the corporation,
automatically he is disqualified to continue
performing the duties of a director because
the law requires each and every director to
have legal, not beneficial title to at least one
share.
E. Derivative Suit; Concept and Requisites
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Derivative Suit is a suit brought by any
stockholder, usually a minority shareholder,
to redress a wrong committed against the
corporation whenever the responsible
officers refuse to take any action thereon or
are the very person to be sued.
*This prerogative is developed through
jurisprudence.
*This is expressly mandated by Sec. 31 of
the Corporation Code.
Q: Why derivative?
A: From the word derive. The one bringing
the suit derives the cause of action from the
corporation.
Q: Who brings the suit?
A: Any stockholder/member usually
minority stockholder.
Q: Whose cause of action?
A: It is the corporation’s cause of action.
Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
board thus when the board refuses to take
action in order to protect the corporation
derivative suit may be allowed.
Compelling Reason: Inaction of the
officers. Failure to discharge their
responsibilities. Requisites:
1. The stockholder bringing the suit must
be one of record as of the time the
cause of action accrues as well as of the
time the action is brought unless the
cause of action is a continuing offer.
*The stockholder must implead the real
party in interest, i.e. the corporation.
*In Chua v CA, the SC held that the
corporation must be impleaded since it
is the real party in interest.
2. The action must be named under the
corporation’s name
3. General Rule: The stockholder bringing
the suit must have exhausted intra-
corporate remedies within
corporation.
Exception: If the very person to be
sued is the responsible officers
themselves.
**This is a condition precedent.
4. The suit is not intended to harass the
defendant, not a nuisance
harassment suit.
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5. Appraisal right must not be an available
remedy.
Individual suit is a suit filed by the
stockholder because his personal right has
been violated. The cause of action is
personal to the stockholder. The party
injured is the stockholder himself.
Representative suit is a suit filed by a
group of stockholders that suffered common
injury.
SUBSCRIPTION CONTRACT:
A. Ways to become a Stockholder of a
Corporation
1. Subscription contract with the
corporation.
2. Purchase or acquisition of shares from
existing stockholders.
3. Purchase of treasury shares from the
corporation.
*All of them involve shareholdings.
*Subscription is unique because it involves
unissued shares.
B. Concept of Subscription Contract
Subscription Contract is, under Sec. 60 of
the Corporation Code, “any contract for
the acquisition of unissued stock in an
existing corporation or a corporation still to
be formed shall be deemed a subscription
within the meaning of this Title,
notwithstanding the fact that the parties
refer to it as a purchase or some other
contract.”
*This is strictly regulated by the Corporation
Code.
C. Kinds of Subscription
1. Pre-incorporation subscription – one
entered into before incorporation.
Sec. 61 of the Corporation Code
provides that: “A subscription for shares
the of stock of a corporation still to be
formed shall be irrevocable for a period
of at least 6 months from the date of
subscription, unless all of the other
subscribers consent to the revocation,
or unless the incorporation of said
corporation fails to materialize within
said period or within a longer period as
or
may be stipulated in the contract of
subscription: Provided, That no pre-
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incorporation subscription may be
revoked after the submission of the
articles of incorporation to the SEC.”
*Contracts between the subscribers.
2 Fold Characteristics:
a. It is a contract between subscribers.
b. May be regarded as continuing offer
on the part of the subscriber
concerned which the corporation
may accept upon acquisition of
juridical personality.
Reason: The corporation is not yet
in existence.
2. Post incorporation subscription – one
entered into after the incorporation for
the acquisition of unissued stock.
*Contracts between the subscribers and
the corporation.
*Creates a creditor-debtor relationship.
D. Consideration for the Issuance of Shares
Sec. 62 of the Corporation Code provides
that: “Stocks shall not be issued for a
E. Payment of Subscription
consideration less than the par or issued
price thereof. Consideration for the issuance
of stock may be any or a combination of any
two or more of the following: 1. Actual cash
paid to the corporation; 2. Property, tangible
or intangible, actually received by the
corporation and necessary or convenient for
its use and lawful purposes at a fair
valuation equal to the par or issued value of
the stock issued; 3. Labor performed for or
services actually rendered to the
corporation; 4. Previously incurred
indebtedness of the corporation; 5. Amounts
transferred from unrestricted retained
earnings to stated capital; and 6.
Outstanding shares exchanged for stocks in
the event of reclassification of conversion.
Where the consideration is other than actual
cash, or consists of intangible property such
as patents of copyrights, the valuation
thereof shall initially be determined by the
incorporators or the board of directors,
subject to the approval by the SEC. Shares
of stock shall not be issued in exchange for
promissory notes or future service. The
same considerations provided for in this
section, insofar as they may be applicable,
may be used for the issuance of bonds by
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the corporation. The issued price of no-par
value shares may be fixed in the articles of
incorporation or by the board of directors
pursuant to authority conferred upon it by
the articles of incorporation or the by-laws,
or in the absence thereof, by the
stockholders representing at least a majority
of the outstanding capital stock at a meeting
duly called for the purpose.”
Valid considerations for the subscription
agreements:
1. Cash
2. Property
3. Labor or services actually rendered to
the corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares in exchange for
stocks in the event of reclassification or
conversion.
Q：When payment of the subscription is
made?
A: Look into the subscription agreement. If
subscription agreement is silent as to when
the amount of subscription to be paid, the
board of directors may call on all the unpaid
subscribers to pay the remaining balance of
their subscription.
 Remedies to enforce payment of
subscription
1. By Extra-judicial sale at public
auction.
2. By judicial action.
3. Collection from cash dividends and
withholding of stock dividends.
 When shares are considered delinquent
Sec. 67 of the Corporation Code
provides that: “Subject to the provisions
of the contract of subscription, the board
of directors of any stock corporation
may at any time declare due and
payable to the corporation unpaid
subscriptions to the capital stock and
may collect the same or such
percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary. Payment of any unpaid
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subscription or any percentage thereof,
together with the interest accrued, if
any, shall be made on the date specified
in the contract of subscription or on the
date stated in the call made by the
board. Failure to pay on such date shall
render the entire balance due and
payable and shall make the stockholder
liable for interest at the legal rate on
such balance, unless a different rate of
interest is provided in the by-laws,
computed from such date until full
payment. If within 30 days from the said
date no payment is made, all stocks
covered by said subscription shall
thereupon become delinquent and shall
be subject to sale as hereinafter
provided, unless the board of directors
orders otherwise.”
*If there was no date as to payment of
subscription stated in the subscription
agreement, the board may call on all the
unpaid subscribers to pay the remaining
balance of their subscription. Failure to
pay within 30 days from the said date,
all stocks covered by said subscription
shall thereupon become delinquent and
shall be subject to sale unless the board
of directors orders otherwise.
F. Certificate of Stock
Certificate of Stock is a written evidence of
the shares of stock but it is not the share
itself.
*Does not represent credit.
Q: How important is a stock certificate?
A: It is an evidence of ownership of stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed by the
president or vice-president, countersigned
by the secretary or assistant secretary.
Q: When certificate of stock may be issued?
A: Sec. 64 of the Corporation Code states
that: “No certificate of stock shall be issued
to a subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if
any is due, has been paid.”
 Doctrine of Indivisibility of Subscription
Contract
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Doctrine of Indivisibility of
Subscription Contract: Failure to pay
any of the installments due would
necessarily affect all the other
installments because the subscription is
to be treated as one, whole, entire,
indivisible contract. Upon default of
payment on any of the installment
results to entire subscription due and
demandable.
*The Certificate of Stock cannot be
divided into portions.
*No certificate of stock shall be issued
until the full payment of the subscription.
*The corporation has an automatic lien
over the shares.
Q: What will happen to the payment
already made by the subscriber?
A: The payment partially made shall be
applied proportionately to all the shares
covered by the subscription.
Example:
P10 per share; payment made is P6000
covering 1000 shares. The P6000 shall
be allocated equally to all shares. P6
per share has been paid. P4 per share
is the liability.
 Certificate of Stock, quasi-negotiable
Q: can the stock certificate be treated as
negotiable instrument under NIL?
A: No. The requisites are not complied
with. There is no engagement to pay in
sum certain in money.
*Negotiable instrument represents
credit. Creditor-debtor relationship
arises.
Q: Are certificates of stock negotiable?
A: They are negotiable in certain extent.
That is why they are quasi-negotiable.
*The title over the share can be
assigned, transferred by indorsement
and delivery.
*Due course holding is not applicable.
G. Transfer of Shares
If represented by a certificate, the
following must be strictly complied with:
1. Delivery of the certificate;
2. Indorsement by the owner or his agent;
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3. To be valid to third parties, the transfer
must be recorded in the books of the
corporation.
*If not represented by the certificate, the
shares may be transferred by means of a
deed of assignment and such is duly
recorded in the books of the corporation.
*To make the transfer binding to the
corporation and third person, the transfer
must be recorded in the stock and transfer
book of the corporation.
Q: Who is the owner of the share?
A: The stockholder of record.
H. Lost and Destroyed Certificate of Stock
Sec. 73 of the Corporation Code provides
that: “The following procedure shall be
followed for the issuance by a corporation
of new certificates of stock in lieu of those
which have been lost, stolen or destroyed:
1. The registered owner of a certificate of
stock in a corporation or his legal
representative shall file with the corporation
an affidavit in triplicate setting forth, if
possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the
certificate and the name of the corporation
which issued the same. He shall also submit
such other information and evidence which
he may deem necessary; 2. After verifying
the affidavit and other information and
evidence with the books of the corporation,
said corporation shall publish a notice in a
newspaper of general circulation published
in the place where the corporation has its
principal office, once a week for 3
consecutive weeks at the expense of the
registered owner of the certificate of stock
which has been lost, stolen or destroyed.
The notice shall state the name of said
corporation, the name of the registered
owner and the serial number of said
certificate, and the number of shares
represented by such certificate, and that
after the expiration of 1 year from the date
of the last publication, if no contest has
been presented to said corporation
regarding said certificate of stock, the right
to make such contest shall be barred and
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said corporation shall cancel in its books the
certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof
new certificate of stock, unless the
registered owner files a bond or other
security in lieu thereof as may be required,
effective for a period of 1 year, for such
amount and in such form and with such
sureties as may be satisfactory to the board
of directors, in which case a new certificate
may be issued even before the expiration of
the 1 year period provided herein: Provided,
That if a contest has been presented to said
corporation or if an action is pending in
court regarding the ownership of said
certificate of stock which has been lost,
stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be
suspended until the final decision by the
court regarding the ownership of said
certificate of stock which has been lost,
stolen or destroyed. Except in case of fraud,
bad faith, or negligence on the part of the
corporation and its officers, no action may
be brought against any corporation which
shall have issued certificate of stock in lieu
of those lost, stolen or destroyed pursuant
to the procedure above-described.”
CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a Corporation
Sec. 74 of the Corporation Code provides
that: “Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in detail
the time and place of holding the meeting,
how authorized, the notice given, whether
the meeting was regular or special, if
special its object, those present and absent,
and every act done or ordered done at the
meeting. Upon the demand of any director,
trustee, stockholder or member, the time
when any director, trustee, stockholder or
member entered or left the meeting must be
noted in the minutes; and on a similar
demand, the yeas and nays must be taken
on any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on
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any action or proposed action must be
recorded in full on his demand. The records
of all business transactions of the
corporation and the minutes of any
meetings shall be open to inspection by any
director, trustee, stockholder or member of
the corporation at reasonable hours on
business days and he may demand, writing,
for a copy of excerpts from said records or
minutes, at his expense. Any officer or
agent of the corporation who shall refuse to
allow any director, trustee, stockholder or
member of the corporation to examine and
copy excerpts from its records or minutes, in
accordance with the provisions of this Code,
shall be liable to such director, trustee,
stockholder or member for damages, and in
addition, shall be guilty of an offense which
shall be punishable under Section 144 of
this Code: Provided, That if such refusal is
made pursuant to a resolution or order of
the board of directors or trustees, the
liability under this section for such action
shall be imposed upon the directors or
trustees who voted for such refusal: and
Provided, further, That it shall be a defense
to any action under this section that the
person demanding to examine and copy
excerpts from the corporation’s records and
minutes has improperly used any
information secured through any prior
examination of the records or minutes of
such corporation or of any other
corporation, or was not acting in good faith
or for a legitimate purpose in making his
demand. Stock corporations must also keep
a book to be known as the “stock and
transfer book,” in which must be kept a
record of all stocks in the names of the
stockholders alphabetically arranged; the
installments paid and unpaid on all stock for
which subscription has been made, and the
date of payment of any installment; a
statement of every alienation, sale or
transfer of stock made, the date thereof,
and by and to whom made; and such other
entries as the by-laws may prescribe. The
stock and transfer book shall be kept in the
principal office of the corporation or in the
office of its stock transfer agent and shall be
open for inspection by any director or
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Maria Zarah Villanueva - Castro
stockholder of the corporation at reasonable
hours on business days. No stock transfer
agent or one engaged principally in the
business of registering transfers of stocks in
behalf of a stock corporation shall be
allowed to operate in the Philippines unless
he secures a license from the SEC and
pays a fee as may be fixed by the
Commission, which shall be renewable
annually: Provided, That a stock corporation
is not precluded from performing or making
transfer of its own stocks, in which case all
the rules and regulations imposed on stock
transfer agents, except the payment of a
license fee herein provided, shall be
applicable.”
*Keeping of books and records are
mandatory.
Books required to be kept:
1. Book of minutes – reflects the decisions
and actions of the Board of
Directors/Stockholders.
2. Record of all business transactions
3. Stock and Transfer Book/Membership
Book
4. Books of Proceedings
B. Right to Inspect Corporate Books
 Basis and Extent of the Right of
Inspection
Q: Is the keeping of these books
mandatory?
A: YES. Section 144 of the Corporation
Code provides penalty for any violation
of the provision of the Code.
Rationale: Right of inspection would be
futile. Right of inspection would not be
exercised.
 Limitations on the Right of Inspection
1. The books and records shall be
open to inspection at reasonable
hours on business days.
2. The books and records shall not be
improperly used any information
secured through any prior
examination of the books or records.
3. The stockholder’s demand must be
in good faith or for a legitimate
purpose.
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*Inspection can be done personally or
through agent.
 Remedies to Enforce Right of Inspection
*In case of refusal to exercise the right
of inspection, the stockholder concerned
may file an action for mandamus before
the RTC.
*Can also claim damages.
MERGER AND CONSOLIDATION:
A. Concept of Merger and Consolidation
Merger is one where a corporation absorbs
the other and remains in existence while the
others are dissolved.
*There is a continuous flow of juridical
personality.
Examples:
A+B=B
A+B+C=C
A+B+C=A
A+B+C=B
Consolidation is one where a new
corporation is created, and consolidating
corporations are extinguished.
Examples:
A+B=C
A+B+C=D
A + B + C = ABC
A + B + C = XYZ
B. Requisites of and Procedure for Merger and
Consolidation
1. Approval by majority vote of the Board
of Directors of each corporation.
2. Approval of the stockholders of each
corporation representing 2/3 of the
outstanding capital stock.
3. Approval of SEC
Cases: Associated Bank v CA; Polyan v
CA
Procedure:
1. The Board of each corporation shall
draw up a plan of merger/consolidation.
2. The plan of merger or consolidation
shall be approved by majority vote of
each board of the concerned
corporations at separate meetings.
3. The plan of merger/consolidation shall
be approved by the majority vote of the
2/3 of the shareholders of the
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Maria Zarah Villanueva - Castro
outstanding capital stock or members in
case of a non-stock corporation.
4. Articles of Merger/Consolidation shall be
executed by each of the constituent
corporators, signed by the President or
Vice-President and certified by the
secretary or assistant secretary.
5. Four copies of the Articles of Merger or
Consolidation together with favorable
recommendation of a pertinent
government agency in certain cases
shall be submitted to the SEC for
approval.
6. The SEC shall issue a certificate or
merger if it is satisfied that the merger or
consolidation of the corporations
concerned is not inconsistent with the
provisions of this Code and existing
laws.
C. Effects of Merger or Consolidation
1. All property, real or personal, and all
receivables due to, and all other interest
of each constituent corporation, shall be
deemed transferred to and vested in
such surviving or consolidated
corporation without further act or deed.
2. The surviving or consolidated
corporation shall be responsible for all
the liabilities and obligations of each of
the constituent corporations.
3. Any claim, action or proceeding pending
by or against any of the constituent
corporations may be prosecuted by or
against the surviving or consolidated
corporations.
4. The rights of the creditors or lien upon
the property of any of each constituent
corporation shall not be impaired by
such merger or consolidation.
5. Dissolution of other corporation leaving
the surviving or consolidated corporation
exists.
Remedy of the dissenting stockholder:
The dissenting stockholder may exercise his
appraisal right.
RIGHT OF APPRAISAL:
A. Concept of Appraisal Right
Appraisal Right is the right to withdraw
from the corporation and demand payment
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of the fair value of his shares after
dissenting from certain corporate acts
involving fundamental changes in corporate
structure.
*Demanding for the reasonable return of
investment.
*Stockholders cannot exercise this right at
his pleasure.
Requisites:
1. The Stockholder has dissented
2. Corporate change must have been
approved by the SEC.
*Any changes that affect
stockholders’ right.
*Any changes that concern the
corporation’s existence.
*Corporate changes that appraisal right
can be availed of.
3. There must have an unrestricted
retained earnings,
*It is not a matter of right.
Reason: If it is a matter of right it shall lead
to the diminution or depletion of corporate
assets which is violative of the Trust Fund
Doctrine.
B. Instances of Appraisal Right
Sec. 81 of the Corporation Code provides
that: “Any stockholder of a corporation shall
have the right to dissent and demand
payment of the fair value of his shares in the
following instances: 1. In case any
amendment to the articles of incorporation
has the effect of changing or restricting the
rights of any stockholder or class of shares,
or of authorizing preferences in any respect
superior to those of outstanding shares of
any class, or of extending or shortening the
term of corporate existence; 2. In case of
sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or
substantially all of the corporate property
and assets as provided in the Code; and 3.
In case of merger or consolidation.”
C. Requirements for a Valid Exercise of
Appraisal Right
Sec. 82 of the Corporation Code provides
that: “The appraisal right may be exercised
by any stockholder who shall have voted
against the proposed corporate action, by
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Maria Zarah Villanueva - Castro
making a written demand on the corporation
within 30 days after the date on which the
vote was taken for payment of the fair value
of his shares: Provided, That failure to make
the demand within such period shall be
deemed a waiver of the appraisal right. If
the proposed corporate action is
implemented or affected, the corporation
shall pay to such stockholder, upon
surrender of the certificate or certificates of
stock representing his shares, the fair value
thereof as of the day prior to the date on
the which the vote was taken, excluding any
appreciation or depreciation in anticipation
of such corporate action. If within a period of
60 days from the date the corporate action
was approved by the stockholders, the
withdrawing stockholder and the corporation
cannot agree on the fair value of the shares,
it shall be determined and appraised by 3
disinterested persons, one of whom shall be
named by the stockholder, another by the
corporation, and the third by the two thus
chosen. The findings of the majority of the
appraisers shall be final, and their award
shall be paid by the corporation within 30
days after such award is made: Provided,
That no payment shall be made to any
dissenting stockholder unless the
corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That upon
payment by the corporation of the agreed or
awarded price, the stockholder shall
forthwith transfer his shares to the
corporation.”
Requisites:
1. Any of the instances set forth by law
must be present.
2. Dissenting stockholder must have voted
against the proposed action.
*Abstaining stockholder cannot claim or
exercise his appraisal right.
3. Demand for payment must be made
within 30 days from the date vote is
taken thereon. Failure to make demand
shall be deemed a waiver.
4. Price must be based on fair value as of
day prior to date on which vote was
taken
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5. Submission by withdrawing stockholder
of his shares to the corporation for
notation of being a dissenting
stockholder within 10 days from written
demand.
6. Payment must be made only when the
corporation has unrestricted retained
earnings in its books.
7. Stockholder must transfer his shares to
the corporation upon payment by the
corporation.
D. Effects of Exercising Appraisal Right
Sec. 83 of the Corporation Code provides
that: “From the time of demand for payment
of the fair value of a stockholder’s shares
until either the abandonment of the
corporate action involved or the purchase of
the said shares by the corporation, all rights
accruing to such shares, including voting
and dividend rights, shall be suspended in
accordance with the provisions of this Code,
except the right of such stockholder to
receive payment of the fair value thereof:
Provided, That if the dissenting stockholder
is not paid the value of his shares within 30
days after the award, his voting and
dividend rights shall immediately be
restored.”
Effects:
1. All rights accruing to such shares shall
be suspended from the time of demand
B. Distinguished from Stock Corporation
for payment of the fair value of the
shares until either the abandonment of
the corporate action.
2. The dissenting stockholder shall be
entitled to receive payment of the fair
value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen by
them.
*Sec. 86. The dissenting stock can be sold
during the pendency of its payment.
Remedy in case appraisal right cannot
be exercised: Dispose the shareholdings.
NON-STOCK CORPORATIONS:
A. Definition and Purposes of a Non-Stock
Corporation
Sec. 87 of the Corporation Code states
that: “For the purposes of this Code, a non-
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Maria Zarah Villanueva - Castro
stock is one where no part of its income is
distributable as dividends to its members,
trustees, or officers, subject to the
provisions of this Code on dissolution:
Provided, That any profit which a non-stock
corporation may obtain as an incident to its
operations shall, whenever necessary or
proper, be used for the furtherance of the
purpose or purposes for which the
corporation was organized, subject to the
provisions of this Title. The provisions
governing stock corporations, when
pertinent, shall be applicable to non-stock
corporations, except as may be covered by
specific provisions of this Title.”
*Sec. 87 should be read in harmony with
Sec. 94.
*A Non-stock corporation is not precluded
from engaging in profit-business related.
Sec. 88 of the Corporation Code provides
that: “Non-stock corporations may be
formed or organized for charitable, religious,
educational, professional, cultural, fraternal,
literary, scientific, social, civic service, or
similar purposes, like trade, industry,
agricultural and like chambers, or any
combination thereof, subject to the special
provisions of this Title governing particular
classes of non-stock corporations.”
*The purpose of a non-stock corporation
is related to public welfare.
Non- stock Stock Corporation
Corporation
Public welfare For profit
Board of Trustees Board of directors
Generally, the term 1 year subject to
of office of trustees hold-over principle
is 3 years
By-laws can provide City or municipality
for a different venue where the principal
as long as it is within office is located
the Philippines
Member may be Proxy is allowed
deprived of their right
to designate proxies
by provisions in the
articles of
incorporation or by-
laws
Reason: To promote
camaraderie,
togetherness, unity
39

and familiarity.
Generally, members Election is vested
could directly elect upon Board of
officers. Except Directors
unless AOI provides
otherwise.
C. Membership in a Non-Stock Corporation
Sec. 89 of the Corporation Code provides
that: “The right of the membership of any
class or classes to vote may be limited,
broadened or denied to the extent specified
in the articles of incorporation or the by-
laws. Unless so limited, broadened or
denied, each member, regardless of class,
shall be entitled to one vote. Unless
otherwise provided in the articles of
incorporation of the by-laws, a member may
vote by proxy in accordance with the
provisions of this Code. Voting by mail or
other similar means by members of non-
stock corporations may be authorized by the
by-laws of non-stock corporations with the
approval of, and under such conditions
which may be prescribed by, the SEC.”
General Rule: Sec. 58
Exception: Sec. 89. This provision allows
denial of proxy.
Reason: To promote camaraderie,
togetherness, unity and familiarity.
*A member is entitled to 1 vote. However,
such right may be limited, broadened or
denied in the Articles of Incorporation or By-
Laws. Thus, the By-laws of a non-stock
corporation may provide for the desired
voting rights of members including the
number of votes.
Sec. 90 of the Corporation Code provides
that: “Membership in a non-stock
corporation and all rights arising therefrom
are personal and non-transferable, unless
the articles of incorporation or the by-laws
otherwise provide.”
General Rule: Membership is non-
transferable.
Exception: If the Articles of Incorporation or
the By-laws provide otherwise.
Sec. 91 of the Corporation Code provides
that: “Membership shall be terminated in the
manner and for the causes provided in the
articles of incorporation or the by-laws.
Termination of membership shall have the
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effect of extinguishing all rights of a member
in the corporation or in its property, unless
otherwise provided in the articles of
incorporation or the by-laws.”
Rules on Place of Meeting:
General Rule: Sec. 51
Exception: Sec. 93
D. Rule on Distribution of Assets
Sec. 94 of the Corporation Code provides
that: “In case dissolution of a non-stock
corporation in accordance with the
provisions of this Code, its assets shall be
applied and distributed as follows: 1. All
liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or
adequate provision shall be made therefor;
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements; 3. Assets received and
held by the corporation subject to limitations
permitting their use only for charitable,
religious, benevolent, educational or similar
purposes, but not held upon a condition
requiring return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or more
corporations, societies or organizations
engaged in activities in the Philippines
substantially similar to those of the
dissolving corporation according to a plan of
distribution adopted pursuant to this
Chapter; 4. Assets other than those
mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with
the provisions of the articles of incorporation
or the by-laws, to the extent that the articles
of incorporation or the by-laws, determine
the distributive rights of members, or any
class or classes of members, or provide for
distribution; and 5. In any other case, assets
may be distributed to such persons,
societies, organizations or corporations,
whether or not organized for profit, as may
be specified in a plan of distribution adopted
pursuant to this Chapter.”
Order of distribution:
1. All its creditors shall be paid;
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2. Assets held subject to return on
dissolution, shall be delivered back to
their givers;
3. Assets held for charitable, religious
purposes, etc., without a condition for
their return on dissolution, shall be
conveyed to one or more organizations
engaged in similar activities as
dissolved corporation; and
4. All other assets shall be distributed to
members, as provided for in the Articles
or By-Laws.
Sec. 95 of the Corporation Code provides
that: “A plan providing for the distribution of
assets, not inconsistent with the provisions
of this Title, may be adopted by a non-stock
corporation in the process of dissolution in
the following manner: The board of trustees
shall, by majority vote, adopt a resolution
recommending a plan of distribution and
directing the submission thereof to a vote at
a regular or special meeting of members
having voting rights. Written notice setting
forth the proposed plan of distribution or a
summary thereof and the date, time and
place of such meeting shall be given to
each member entitled to vote, within the
time and in the manner provided in this
Code for the giving of notice of meetings to
members. Such plan of distribution shall be
adopted upon approval of at least 2/3 of the
members having voting rights present or
represented by proxy at such meeting.”
Q: Would it be possible for a non-stock
corporation to be converted into a stock
corporation by mere amendment of the
Articles of Incorporation?
A: NO. Because it would violate Section 87
of the Corporation Code which prohibits
distribution of income as dividends to
members.
Reason: Fraudulent to donors
Q: Can a stock corporation be converted to
a non-stock corporation by mere
amendment of the Articles of Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
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Maria Zarah Villanueva - Castro
*Appraisal right is available.
CLOSE CORPORATIONS:
A. Concept; Distinguished from Open
Corporations
Sec. 96 of the Corporation Code states
that: “A corporation, within the meaning of
this Code, is one whose articles of
incorporation provide that: (1) All the
corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held
of record by not more than a specified
number of persons, not exceeding 20; (2) all
the issued stock of all classes shall be
subject to one or more specified restrictions
on transfer permitted by this Title; and (3)
The corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be
deemed a close corporation when at least
2/3 of its voting stock or voting rights is
owned or controlled by another corporation
which is not a close corporation within the
meaning of this Code. Any corporation may
be incorporated as a close corporation,
except mining or oil companies, stock
exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with
public interest in accordance with the
provisions of this Code. The provisions of
this Title shall primarily govern close
corporations: Provided, That the provisions
of other Titles of this Code shall apply
suppletorily except insofar as this Title
otherwise provides.”
*Whether open or close corporation
depends on its charter.
Case: San Juan Structural
The following must be stated in the
Articles of Incorporation:
1. Membership is limited to 20
2. Transfer or disposition of shares is
subject to specified restrictions
3. Prohibition against offering to the public
of the shares or listing in the stock
exchange.
General Rule: Any corporation may be
incorporated as close corporation.
Exceptions:
1. Mining or oil companies
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2. Stock exchanges corporation of its deadlock by the

3. Banks own stock must SEC, the corporation
always be made may be ordered to
4. Insurance companies from the unrestricted purchase its own
5. Public utilities retained earnings shares from the
6. Educational institutions stockholders
regardless of the
7. Corporations declared to be vested with availability of
public interest unrestricted retained
Distinctions from Open Corporations: earnings
Open Corporation Close Corporation Arbitration of Arbitration of
Its articles of Its articles must intracorporate intracorporate
incorporation need contain the special deadlock by the deadlock by the SEC
only contain the matters prescribed SEC is not a remedy is an available
general matters by Section 97 aside in case the directors remedy in case the
enumerated in from the general or stockholders are directors or
Section 14 of the matters in Section so divided stockholders are so
Corporation Code 14. Failure to do so respecting the divided respecting
precludes a de jure management of the the management of
close corporation corporation. the corporation.
status
Its status as an 2/3 of its voting stock *In San Juan Structural Steel Fabricators
ordinary stock or voting rights must v CA, the SC held that the circumstance
corporation is not not be owned or that around 99.86% of the total share
affected by the controlled by another
holding of petitioner belongs to respondent
ownership of its corporation which is
voting stock or not a close would not justify classification of the
voting rights corporation corporation as close.
Its articles cannot Its articles may B. Permissive Provisions in the Articles of
classify its directors classify its directors Incorporation
Business of the Business of the Sec. 97 of the Corporation Code provides
corporation is corporation may be that: “The articles of incorporation of a close
managed by the managed by the
board of directors stockholders if the corporation may provide: 1. For a
articles so provide, classification of shares or rights and the
but they are liable as qualifications for owning or holding the
directors same and restrictions on their transfers as
The corporate Its articles may may be stated therein, subject to the
officers and provide that any or provisions of the following section; 2. For a
employees are all of the corporate
classification of directors into one or more
elected by a majority officers or
vote of all the employees may be classes, each of whom may be voted for
members of the elected or appointed and elected solely by a particular class of
board of directors by the stockholders stock; and 3. For a greater quorum or voting
The pre-emptive The pre-emptive requirements in meetings of stockholders or
right is subject to the right is subject to no directors than those provided in this Code.
exceptions found in exceptions unless The articles of incorporation of a close
Section 39 of the denied in the articles
corporation may provide that the business
Corporation Code
of the corporation may provide that the
The appraisal right The appraisal right
may be exercised by may be exercised business of the corporation shall be
a stockholder only in and compelled managed by the stockholders of the
the cases provided against the corporation rather than by a board of
in Sections 81 and corporation by a directors. So long as this provision
42 of the stockholder for any continues in effect: 1. No meeting of
Corporation Code reason
stockholders need be called to elect
Except as regards In case of an
redeemable shares, arbitration of an directors; 2. Unless the context clearly
the purchase by the intracorporate requires otherwise, the stockholders of the
42

corporation shall be deemed to be directors
for the purpose of applying the provisions of
this Code; and 3. The stockholders of the
corporation shall be subject to all liabilities
of directors. The articles of incorporation
may likewise provide that all officers or
employees or that specified officers or
employees shall be elected or appointed by
the stockholders, instead of by the board of
directors.”
C. Restrictions on Transfer of Shares
Sec. 98 of the Corporation Code provides
that: “Restrictions on the right to transfer
shares must appear in the articles of
incorporation and in the by-laws as well as
in the certificate of stock; otherwise, the
same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall
not be more onerous than granting the
existing stockholders or the corporation the
option to purchase the shares of the
transferring stockholder with such
reasonable terms, conditions or period
stated therein. If upon the expiration of said
period, the existing stockholders or the
corporation fails to exercise the option to
purchase, the transferring stockholder may
sell his shares to any third person.”
Option Restriction – this restriction
provides that no disposition of shares will be
made unless the shares are offered first to
the corporation or the stockholders.
*Pre-emptive right is exercisable or
available.
*This restriction is valid and allowed.
Reason: it is the one contemplated by law.
*Restriction derogates private rights.
Consent Restriction – this restriction
provides that no disposition of shares will be
made without the consent of directors.
*This restriction is not valid.
Reason: It is more onerous and
burdensome.
CORPORATE DISSOLUTION/LIQUIDATION:
A. Methods of Voluntary Corporate Dissolution
and the Requirements therefor
Dissolution refers to the extinguishment of
franchise or termination of corporate
existence.
Modes of Dissolution:
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1. Voluntary dissolution
2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary dissolution where no creditors
are affected
2. Voluntary dissolution where creditors
are affected
3. Shortening of the corporate term by
amending the articles of incorporation
*Dissolution takes effect upon the
coming of the shortened term.
4. Expiration of corporate term
 Voluntary dissolution where no creditors
are affected
Sec. 118 of the Corporation Code
provides that: “If dissolution of a
corporation does not prejudice the rights
of any creditor having a claim against it,
the dissolution may be effected by
majority vote of the board of directors or
trustees, and by a resolution duly
adopted by the affirmative vote of the
stockholders owning at least 2/3 of the
outstanding capital stock or of at least
2/3 of the members of a meeting to be
held upon call of the directors or
trustees after publication of the notice of
time, place and object of the meeting for
3 consecutive weeks in a newspaper
published in the place where the
principal office of said corporation is
located; and if no newspaper is
published in such place, then in a
newspaper of general circulation in the
Philippines, after sending such notice to
each stockholder or member either by
registered mail or by personal delivery
at least 30 days prior to said meeting. A
copy of the resolution authorizing the
dissolution shall be certified by a
majority of the board of directors or
trustees and countersigned by the
secretary of the corporation. The SEC
shall thereupon issue the certificate of
dissolution.”
Requisites:
1. A meeting must be held on the call
of the directors or trustees;
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2. Notice of the meeting should be
given to the stockholders by
personal delivery or registered mail
at least 30 days prior to the meeting;
3. The notice of meeting should also be
published for 3 consecutive weeks in
a newspaper published in the place;
4. The resolution to dissolve must be
approved by the majority of the
directors/trustees and approved by
the stockholders representing at
least 2/3 of the outstanding capital
stock or 2/3 of members;
5. A copy of the resolution shall be
certified by the majority of the
directors or trustees and
countersigned by the secretary;
6. The signed and countersigned copy
will be filed with the SEC and the
latter will issue the certificate of
dissolution
 Voluntary dissolution where creditors
are affected
Sec. 119 of the Corporation Code
provides that: “Where the dissolution of
a corporation may prejudice the rights of
any creditor, the petition for dissolution
shall be filed with the Securities and
Exchange Commission. The petition
shall be signed by a majority of its board
of directors or trustees or other officers
having the management of its affairs,
verified by its president or secretary or
one of its directors or trustees, and shall
set forth all claims and demands against
it, and that its dissolution was resolved
upon by the affirmative vote of the
stockholders representing at least two-
thirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of
the members at a meeting of its
stockholders or members called for that
purpose. If the petition is sufficient in
form and substance, the Commission
shall, by an order reciting the purpose of
the petition, fix a date on or before
which objections thereto may be filed by
any person, which date shall not be less
than thirty (30) days nor more than sixty
(60) days after the entry of the order.
Before such date, a copy of the order
shall be published at least once a week
for three (3) consecutive weeks in a
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newspaper of general circulation
published in the municipality or city
where the principal office of the
corporation is situated, or if there be no
such newspaper, then in a newspaper of
general circulation in the Philippines,
and a similar copy shall be posted for
three (3) consecutive weeks in three (3)
public places in such municipality or city.
Upon five (5) day's notice, given after
the date on which the right to file
objections as fixed in the order has
expired, the Commission shall proceed
to hear the petition and try any issue
made by the objections filed; and if no
such objection is sufficient, and the
material allegations of the petition are
true, it shall render judgment dissolving
the corporation and directing such
disposition of its assets as justice
requires, and may appoint a receiver to
collect such assets and pay the debts of
the corporation.”
Requisites:
1. Approval of the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
members in a meeting called for that
purpose;
2. Filing of a Petition with the SEC
signed by majority of directors or
trustees or other officers having the
management of its affairs verified by
President or Secretary or Director.
Claims and demands must be stated
in the petition;
3. If petition is sufficient in form and
substance, the SEC shall issue an
Order fixing a hearing date for
objections;
4. A copy of the Order shall be
published at least once a week for 3
consecutive weeks in a newspaper
of general circulation or if there is no
newspaper in the municipality or city
of the principal office, posting for 3
consecutive weeks in 3 public places
is sufficient;
5. Objections must be filed no less than
30 days nor more than 60 days after
the entry of the order;
6. After the expiration of the time to file
objections, a hearing shall be
conducted upon prior 5 day notice to
hear the objections;
7. Judgment shall be rendered
dissolving the corporation and
directing the disposition of assets;
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the judgment may include
appointment of a receiver.
 Shortening of term of existence
Sec. 120 of the Corporation Code
provides that: “A voluntary dissolution
C. Corporate Liquidation
may be effected by amending the
articles of incorporation to shorten the
corporate term pursuant to the
provisions of this Code. A copy of the
amended articles of incorporation shall
be submitted to the Securities and
Exchange Commission in accordance
with this Code. Upon approval of the
amended articles of incorporation of the
expiration of the shortened term, as the
case may be, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of
this Code on liquidation.”
B. Concept of Involuntary Dissolution and the
Grounds therefor
Sec. 121 of the Corporation Code
provides that: “A corporation may be
dissolved by the Securities and Exchange
Commission upon filing of a verified
complaint and after proper notice and
hearing on the grounds provided by existing
laws, rules and regulations.”
*This must be done with substantive and
procedural due process.
Grounds:
1. Failure to submit by-laws within the
prescribed period
2. Fraud in the procurement of Certificate
of Registration
3. Misrepresentation as to the activities
that the corporation will undertake
4. Treasurer’s affidavit is false
5. Continued inoperation for 5 years
6. Failure to commence business
transactions within 2 years from
issuance of certificate of registration
7. To some cases, performance of ultra
vires act since it is a violation to the
franchise but depending on the
seriousness or gravity of the offense
8. Issuance of watered stocks
9. De facto status
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10. Failure to keep corporate books and
records depending on the gravity or
seriousness of the offense
11. Violation of its charter
Liquidation is a process by which all the
assets of the corporation are converted into
liquid assets in order to facilitate the
payment of obligations to creditors, and the
remaining balance if any is to be distributed
to the stockholders.
*Liquidation takes place after dissolution.
Sec. 122 of the Corporation Code
provides that: “Every corporation whose
charter expires by its own limitation or is
annulled by forfeiture or otherwise, or
whose corporate existence for other
purposes is terminated in any other manner,
shall nevertheless be continued as a body
corporate for three (3) years after the time
when it would have been so dissolved, for
the purpose of prosecuting and defending
suits by or against it and enabling it to settle
and close its affairs, to dispose of and
convey its property and to distribute its
assets, but not for the purpose of continuing
the business for which it was established. At
any time during said three (3) years, the
corporation is authorized and empowered to
convey all of its property to trustees for the
benefit of stockholders, members, creditors,
and other persons in interest. From and
after any such conveyance by the
corporation of its property in trust for the
benefit of its stockholders, members,
creditors and others in interest, all interest
which the corporation had in the property
terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other
persons in interest. Upon the winding up of
the corporate affairs, any asset distributable
to any creditor or stockholder or member
who is unknown or cannot be found shall be
escheated to the city or municipality where
such assets are located. Except by
decrease of capital stock and as otherwise
allowed by this Code, no corporation shall
distribute any of its assets or property
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except upon lawful dissolution and after
payment of all its debts and liabilities.”
D. Methods of Liquidation or Winding Up
1. By Board of Directors
2. Through a trustee to whom the
properties are conveyed
3. By management committee or
rehabilitation receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period, there is
no corporate existence for all purposes
subject to doctrine of relation.
Remedy: Before the expiration of the 3 year
period, appoint a trustee/receiver.
Q: During the 3 year period, does the
corporation enjoy corporate existence?
A: YES. But for limited purpose only, i.e., for
liquidation purposes only. (Limited
existence)
Q: May such corporation sue during the 3
year period?
A: YES. But only when the subject matter is
related to liquidation and winding up of its
remaining affairs.
*In case trustee/receiver is appointed, he is
not bound by the 3 year period.
*In Gelano v CA, the SC held that the
lawyer of the corporation can be considered
as trustee. The term trustee must be
considered in its generic sense. Anyone
who has been designated by the
corporation to act on its behalf could be
considered as trustee for purposes of
pursuing a claim for and on behalf of the
corporation. A lawyer falls within the ambit
of the word “trustee.”
*Appointment of trustee can be inferred
from the conduct of the corporation. This is
by Implication.
*If the corporation is the creditor appoint a
trustee. If the corporation is the debtor
appoint a receiver.
Q: What if the corporate properties have
already been distributed among the
shareholders without trustee/receiver?
A: Remedy: Run after the erring directors
and officers.
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E. Concept of Rehabilitation; Effects of
Appointment of Management Committee or
Receiver
Rehabilitation connotes a reopening or
reorganization. Contemplates a continuance
of corporate existence in an effort to restore
the corporation to its former successful
operation.
*This is a remedy expressly allowed under
Section 6 of PD 902-A.
Purpose: To make the corporation
financially viable again.
Substantive Grounds:
1. When there is imminent danger of
dissipation or wastage of corporate
assets
2. Serious paralyzation of business which
would work to the prejudice of the
stockholders and creditors of the
corporation
*Mere misconduct of an officer is not a
ground for corporate rehabilitation.
*A corporation cannot ask for corporate
rehabilitation and at the same time
dissolution.
*With the passage of RA8799, the remedy
could now be instituted with the proper
RTC.
Effect: Stay Order - stops or suspends the
enforcement of all claims for money or
otherwise whether enforcement is by court
or not, until rehabilitation proceedings are
terminated.
Cases: PAL v Garcia; Sobrejuanite;
Lingkod Manggagawa ng Rubberworld v
Rubberworld Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay
order suspends all enforcement in all stages
of the proceedings.
*In Lingkod Manggagawa sa
Rubberworld v Rubberworld Philippines,
the SC held that labor claims are likewise
affected by the Stop order.
*In RCBC v IAC, the SC held that whether
creditors are secured or not, stay order will
still affect them. The preference still remains
it is just the enforcement that is suspended.
FOREIGN CORPORATIONS:
A. Concept of Foreign Corporation
Foreign Corporation is a corporation
formed, organized or existing under any law
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other than those of the Philippines, and
whose laws allow Filipino citizens and
corporations to do business in its own
country or state.
Sec. 123 of the Corporation Code
provides that: “For the purposes of this
Code, a foreign corporation is one formed,
organized or existing under any laws other
than those of the Philippines and whose
laws allow Filipino citizens and corporations
to do business in its own country or state. It
shall have the right to transact business in
the Philippines after it shall have obtained a
license to transact business in this country
in accordance with this Code and a
certificate of authority from the appropriate
government agency.”
Reciprocity Clause provides that the
foreign laws allow Filipino citizens and
corporations to do business in its own
country or state.
B. Tests to Determine Nationality of a
Corporation
1. Incorporation Test – when the
corporation is incorporated, organized
under the law of other country.
2. Control Test – for purposes of
investment; the citizenship of a
particular corporation is to be
determined by the citizenship of the
controlling stockholders.
C. Concept of “Doing Business” and the
License Requirement therefor
Substance Test provides that: a foreign
corporation is doing business in the country
if it is continuing the body or substance of
the enterprise of business for which it was
organized.
Continuity Test provides that: doing
business implies a continuity of commercial
dealings and arrangements, and
contemplates to some extent the
performance of acts or works or the
exercise of some functions normally incident
to and in progressive prosecution of, the
purpose and object of its organization.
*Foreign Corporation is required to obtain
license from the SEC to enable them to do
business in the Philippines.
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*The foreign corporation must appoint a
resident agent so that court may acquire
jurisdiction over the foreign corporation
*License is essential if there is an intention
to maintain main or substance of the
business in the Philippines or to continue
the same.
*Lack of license does not affect the validity
of the transaction.
*License is for regulatory purposes.
*License requirement does not prevent
performance of acts that are isolated from
the main business of the corporation and
there is no intent to continue the same in
the Philippines.
*If the foreign corporation is not licensed to
do business in the Philippines, General
Rule: they have no access in Philippine
Courts
Exceptions:
1. Isolated transactions
2. Infringement of trademark
*International offense can be sued
anywhere.
Cases: Expert Travel Tours v CA; Home
Insurance v Eastern Shipping Lines
*In Expert Travel Tours v CA, the SC held
that resident agent is not with authority to
execute a certification of Forum shopping
following Sec. 23 of the Corporation Code.
*In Home Insurance v Eastern Shipping
Lines, the SC held that if at the time the suit
was brought, the suing foreign entity already
have license to do business in the
Philippines, the suit will be allowed although
at the time the transaction was made it does
not have the requisite of a license to do so,
the remedial defect is cured.
Cases: Japan Airlines v CA
*In Japan Airlines v CA, the SC held that
the selling of tickets though there is no
aircraft landing in the Philippines constitute
doing business in the Philippines.
*In Ericks v CA, the SC held that license is
necessary in order the foreign corporation
may sue. In this case, the court considered
the continuity test, they found out that the
foreign corporation has the intent to
continue business in the Philippines.
*Credit is obtained to maintain longer
transactions.
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D. Effects of Being Issued a License

1. They are placed under the jurisdiction of
the Philippine courts
2. They are placed under the same footing
as domestic corporations
3. The public is protected in dealing with
foreign corporations.

E. Revocation and Withdrawal of License

Grounds for Revocation:
1. Failure to file its annual report or pay
any fees as required by the Corporation
Code
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by the Corporation Code
3. Failure, after change of its resident
agent or his address, to submit to the
SEC a statement of such change as
required by the Corporation Code
4. Failure to submit to the SEC an
authenticated copy of any amendment
to its articles of incorporation or by-laws
or of any articles of merger or
consolidation within the time prescribed
by the Corporation Code
5. A misrepresentation of any material
matter in any application, report affidavit
or other document submitted by such
corporation pursuant to the provisions of
the Corporation Code
6. Failure to pay any and all taxes,
imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivision
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized
under its license
8. Transacting business in the Philippines
as agent of or acting for and in behalf of
any foreign corporation or entity not duly
licensed to do business in the
Philippines
9. Any other ground as would render it
unfit to transact business in the
Philippines.

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