UNIVERSITY OF NUEVA CACERES

COLLEGE OF BUSINESS AND ACCOUNTANCY

BUSINESS LAWS AND REGULATIONS
SY 2020-2021

CORPORATION_Part 2
MADBOLIVAR

BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

DOCTRINE OF CENTRALIZED MANAGEMENT

BOARD IS SEAT OF CORPORATE POWERS General rule: Unless otherwise provided in this
Code, the board of directors or trustees shall exercise the corporate powers, conduct all business,
and control all properties of the corporation.

Exceptions:
(1) In case of an Executive Committee duly authorized in the by-laws;
(2) In case of close corporations, the stockholders may manage the business of the corporation
rather than by a board of directors, if the AOI so provide.

Note: The power to purchase real property is vested in the board of directors or trustees. While a
corporation may appoint agents to negotiate for the purchase of real property needed by the
corporation, the final say will have to be with the board, whose approval will finalize the
transaction.

The board of the following corporations vested with public interest shall have independent
directors constituting at least twenty percent (20%) of such board:

a. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The
Securities Regulation Code,” namely those whose securities are registered with the Commission,
corporations listed with an exchange or with assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred (200) or more holders of shares, with at least one
hundred (100) shares of a class of its equity shares;

b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service

business, pre-need, trust and insurance companies, and other financial intermediaries; and

c. Other corporations engaged in business vested with public interest similar to the above, as may
be determined by the Commission, after taking into account relevant factors which are germane
to the objective and purpose of requiring the election of an independent director, such as the
extent of minority ownership, type of financial products or securities issued or offered to
investors, public interest involved in the nature of business operations, and other analogous
factors.

An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship
which could, or could reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.
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Corporate Officers
Corporate Officer Corporate Employee
Position is provided for in the by-laws or Employed through the action of the managing
under the Revised Corporation Code officer of the corporation

Who are corporate officers (POST)

(1) President – must be a director and stockholder; need not be a resident and citizen of the Phil.
(2) Treasurer – may or may not be a director; must be a resident but need not be a citizen.
(3) Secretary – need not be a director unless required by the by-laws; must be a resident and
citizen of the Philippines; and
(4) Other officers as may be provided in the by-laws.

Note: Any two (2) or more positions may be held concurrently by the same person, EXCEPT
that no one shall act as president and secretary or as president and treasurer at the same time.

Additional qualifications of officers may be provided for in the by-laws.

Directors shall be elected for a term of one (1) year from among the holders of stocks registered
in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years
from among the members of the corporation. Each director and trustee shall hold office until the
successor is elected and qualified. A director who ceases to own at least one (1) share of stock or
a trustee who ceases to be a member of the corporation shall cease to be such.

“TENURE”- The period within which the director actually holds office, including the holdover
period after the end of his term.

"TERM" is defined as the time during which the officer may claim to hold the office as a matter
of right. The term of office is not affected by the holdover. The term is fixed by statute and it
does not change simply because the office may have become vacant, nor because the incumbent
holds over in office beyond the end of the term due to the fact that a successor has not been
elected and has failed to qualify.

The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent.

QUALIFICATIONS
(1) If STOCK, director must own at least 1 share of the capital stock, which stock shall stand in
his own name.
(2) If NON-STOCK, trustee must be a member.
(3) Majority of the directors/trustees must be residents of the Philippines.
(4) Natural person
(5) Of Legal Age
(6) Other qualifications as may be prescribed in the by-laws of the corporation.

DISQUALIFICATIONS

A person shall be disqualified from being a director, trustee, or officer of any corporation if,
within five (5) years prior to the election or appointment as such, the person was:

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(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;

(2) For violating this Code; and

(3) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation
Code”;

(b) Found administratively liable for any offense involving fraud acts; and

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the

Commission, the primary regulatory agency, or the Philippine Competition Commission may
impose in its promotion of good corporate governance or as a sanction in its administrative
proceedings.

Election and removal

CUMULATIVE VOTING

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.

Illustration: If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro
can give 500 (5 x 100 shares) votes to just one candidate.

Cumulative voting by distribution A stockholder may cumulate his shares by multiplying 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.

Illustration: In the illustration above, Pedro instead may choose to give 100 votes to candidate 1,
100 votes to candidate 2, 100 votes to candidate 3, 150 votes to candidate 4, and 50 votes to
candidate 5.

QUORUM A stockholder or member who participates through remote communication or in

absentia, shall be deemed present for purposes of quorum.

Election must be by ballot if requested. 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.

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No delinquent stock shall be voted. The candidates receiving the highest number of votes shall
be declared elected.

REMOVAL General rule: Any Director or Trustee of a corporation may be removed from office,
with or without cause.

Exception: Directors who have been elected by minority stockholders exercising cumulative
voting can only be removed for cause. Removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may be entitled.

Other requisites:
(1) by a vote of the stockholders holding or representing 2/3 of the outstanding capital stock, or if
the corporation be a non-stock corporation, by a vote of 2/3 of the members entitled to vote
(2) at a regular or special meeting after proper notice is given

FILLING OF VACANCIES

VACANCY - Vacancy/ies must be filled by the stockholders in a regular or special meeting

called for that purpose if reasons are the following:
(1) BY REMOVAL,
(2) BY EXPIRATION OF TERM, OR
(3) WHEN THE REMAINING DIRECTORS DO NOT CONSTITUTE A QUORUM

A director or trustee elected to fill a vacancy in shall be elected only for the unexpired term of
his predecessor in office.

VACANCY BY REASON OF INCREASE IN THE NUMBER OF THE

DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the stockholders:
(1) in a regular or special meeting called for that purpose; or
(2) in the same meeting authorizing the increase of directors or trustees if so stated in the notice
of the meeting.

VACANCY BY OTHER CAUSES Vacancy/ies may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a quorum.

COMPENSATION
General rule: They are not entitled to compensation as directors. Directors are only entitled to
reasonable per diems.

Exception:
(1) When AOI, by-laws, or an advance contract provides for compensation.
(2) Compensation other than per diems may also be granted to directors by the vote of the
stockholders representing at least a majority of the OCS at a regular or special stockholders’
meeting.

The total yearly compensation of directors shall not exceed 10% of the net income before income
tax of the corporation during the preceding year.

Powers and fiduciary duties

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Requisites of a valid corporate act by the Board of Directors
(1) The Board must act as a BODY in a meeting
(2) There must be a VALIDLY constituted meeting
(3) There act must be supported by a MAJORITY OF THE QUORUM duly assembled
(Exception: Election of officers requires a vote of majority of ALL the members of the board)
(4) The act must be within the powers conferred to the Board.

Limitations on powers of Board of Directors/Trustees

(1) Limitations imposed by the Constitution, statutes, articles of incorporation or by-laws

PRINCIPLE ON DELEGATION OF BOARD POWER

The power and the responsibility to decide whether the corporation should enter into a contract
that will bind the corporation is lodged in the board, subject to the articles of incorporation, by-
laws, or relevant provisions of law. However, just as a natural person may authorize another to
do certain acts for and on his behalf, the board of directors may validly delegate some of its
functions and powers to officers, committees or agents. The authority of such individuals to bind
the corporation is generally derived from law, corporate by-laws or authorization from the board,
either expressly or impliedly by habit, custom or acquiescence in the general course of business.

BUSINESS JUDGMENT RULE General rule: Directors cannot be held liable for mistakes or
errors in the exercise of their business judgment if they acted in good faith, with due care &
prudence. Contracts intra vires entered into by the board of directors are binding upon the
corporation & courts will not interfere.

Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton

destruction of the rights of the minority or if they violate their duties.

Authority of Corporate Officers

A person dealing with a corporate officer is put on inquiry as to the scope of the latter’s authority
but an innocent person cannot be prejudiced if he had the right to presume under the
circumstances the authority of the acting officers.

Q: What is the doctrine of apparent authority? A: If a corporation knowingly permits one of its
officers, or any other agent, to act within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts; the corporation will, as against anyone who
has in good faith dealt with it through such agent, be estopped from denying the agent’s
authority.

DUTIES
In this jurisdiction, the members of the board of directors have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty. Accordingly, the members of the board of
directors (1) Duty of Obedience - shall direct the affairs of the corporation only in accordance
with the purposes for which it was organized; (2)Duty of Diligence - shall not willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or
with gross negligence in directing the affairs of the corporation; and (3) Duty of Loyalty - shall
not acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees.

Doctrine of corporate opportunity

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Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a
business opportunity which:
(1) corporation is financially able to undertake
(2) from its nature, is in line with corporation’s business and is of practical advantage to it; and
(3) one in which the corporation has an interest or a reasonable expectancy.

The rule shall be applied notwithstanding the fact that the director risked his own funds in the
venture.

PERSONAL LIABILITIES
General rule: Members of the Board, who purport to act in good faith for and in behalf of the
corporation within the lawful scope of their authority, are not liable for the consequences of their
acts. When the acts are of such nature and done under those circumstances, they are attributed to
the corporation alone and no personal liability is incurred.

EXECUTIVE COMMITTEE

CREATION The by-laws of a corporation may create an executive committee, composed of not
less than three 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.

LIMITATION ON EC POWERS Cannot act on the following:

(1) Matters needing stockholder approval;
(2) Filling up of board vacancies;
(3) Amendment, repeal or adoption of by-laws;
(4) Amendment or repeal of any resolution of the Board which by its express terms is not
amendable or repealable;
(5) Cash dividend distribution; and
(6) Acts which would render the BOD powerless and free from all responsibilities imposed on it
by law

POWERS OF A CORPORATION

1. Expressed

2. Implied

3. Incidental

A corporation has no power except those expressly conferred on it by the Revised Corporation
Code and by its articles of incorporation, those which may be incidental to such conferred
powers, those that are implied from its existence, and those reasonably necessary to accomplish
its purposes. In turn, a corporation exercises said powers through its Board of Directors and/or its
duly authorized officers and agents.

GENERAL POWERS, THEORY OF GENERAL CAPACITY

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(1) Sue and be sued in its corporate name;
(2) To have perpetual existence unless the certificate of incorporation provides otherwise;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt by-laws;
(6) For stock corporations - issue or sell stocks to subscribers and sell treasury stocks; for non-
stock corporation - admit members to the corporation;
(7) Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, pursuant to its lawful business;
(8) To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons;
(9) Make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, no foreign corporation shall give
donations in aid of any political party or candidate or for purposes of partisan political activity;
(10) Establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
(11) Exercise such other powers as may be essential or necessary to carry out its purposes

Note: The Corporation has implied and incidental powers which are deemed to exist because of
the following provisions:

(1) “Powers such as are necessary or incidental to the exercise of the powers so conferred”
(2) “Such powers as are essential or necessary to carry out its purpose or purposes as stated in the
AOI” – catch-all phrase

SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY (Sec. 36-43)

(1) Power to Extend or Shorten Corporate Term

(2) Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness
(3) Power to Deny Pre-Emptive Rights
(4) Power to Sell or Dispose of Corporate Assets
(5) Power to Acquire Own Shares
(6) Power to Invest Corporate Funds in Another Corporation or Business
(7) Power to Declare Dividends
(8) Power to Enter into Management Contract

TRUST FUND DOCTRINE -The corporation can declare dividends only out of "unrestricted
retained earnings;" and that no corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and liabilities. These provisions in
essence provide for the "trust fund doctrine" where the "subscription to the capital of a
corporation constitute a fund to which creditors have a right to look for satisfaction of their
claims."

ULTRA VIRES ACTS

Definition: Ultra vires acts are those acts which a corporation is not empowered to do or
perform because they are not conferred by its AOI or by the Revised Corporation Code, or not
necessary or incidental to the exercise of the powers so conferred.

An ultra vires act is distinguished from illegal act, the former being voidable which may be

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enforced by performance, ratification, or estoppel, while the latter is void and cannot be
validated.

DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION Section 63 of the Revised Corporation

Code implicitly sets forth the doctrine that subscription is one entire and indivisible contract.
No certificate of stock shall be issued to a subscriber until the full amount of the subscription
together with interest and expenses (in case of delinquent shares), if any is due, has been paid.
Thus, if the stockholder has not paid the full amount of his subscription, he cannot transfer part
of it in view of the indivisible nature of subscription contract. It is only upon full payment of the
whole subscription that a stockholder can transfer a portion of his subscription.

HOW CORPORATE POWERS EXERCISED BY THE SHAREHOLDERS

Corporate acts requiring approval of stockholders or members (voting and non-voting shares)
General rule: Vote necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights (Sec. 6)

Exceptions (Sec. 6): Voting and non-voting shares shall be entitled to vote in the following
cases:
(1) Amendment of AOI
(2) Adoption, Amendment and Repeal of By-Laws
(3) Sale, Lease, Mortgage or Other Disposition of Substantially all corporate assets
(4) Incurring, Creating or Increasing Bonded Indebtedness
(5) Increase or Decrease of Capital Stock
(6) Merger and Consolidation
(7) Investment of funds in another corporation or business or for any purpose other than the
primary purpose for which it was organized
(8) Dissolution of the Corporation

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