Corporation Final Reviewer

CORPORATION REVIEWER 1
ATTRIBUTES OF A CORPORATION
CORPORATION
- Artificial being created by operation of law, having the rights of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence
ATTRIBUTES:
1. ARTIFICIAL BEING - legal or juridical person with a personality separate and apart from individual stockholders/members
and from any other legal entity into which it may be connected or related
 Effects of separate personality: rights and liabilities
1. Acquire properties in their name
2. Incur its own separate obligations
3. Constitutional rights i.e. due process, equal protection, non-impairment of contracts, right to just
compensation
EXN: right to self-incrimination
4. Liable for torts, if committed by an officer or agent under the express direction or authority by
stockholders/members acting as a body, or generally from the directors as the governing body (ART 2180, CC;
Bonum pater familias and not just respondent superior)
5. Criminally liable
GR: not criminally liable since there is no penal provision with respect to corporations, they are
incapable of intent and crimes are personal in nature
EXN:
1. Fine or forfeiture
2. Criminal liabilities under RCCP
a. Sec 161: violation of duty to maintain records, allows inspection, reproduction
b. Sec 165: conducts business thru fraud
c. Sec 166: used for fraud/committing or concealing graft and corruption
d. Sec 167: appoints an intermediary who engages in graft and corruption
6. Moral damages
GR: Not entitled since it has no feelings and mental state
EXN:
1. Corporation has good reputation that is debased, resulting in social humiliation
2. libel, slander or any form of defamation
2. BY OPERATION OF LAW (Concession theory) - consent of the sovereign is needed; mere agreement of parties will not
suffice
GR: Private corporation is created by the RCCP or special law (GOCC)
EXN: Corporations by prescription – exercised powers for an indefinite period without interference on the part of the
sovereign power and which by fiction of law, is given the status of a corporation
 GOCCs shall be governed by the provisions of special laws or charters creating them or applicable to them,
supplemented by the provisions of the RCCP, insofar as they are applicable
 Requisites for GOCC:
1. stock/ non-stock
2. vested with functions relating to public needs whether governmental or proprietary nature
3. owned by the government directly or through its instrumentalities either wholly or to the extent of at
least 51% of its capital stock
 Not all corporations created by special charter can be considered a GOCC; some corporations are deemed SUI
GENERIS PRIVATE ENTITIES
 FRANCHISE
- certain rights and privileges conferred upon existing corporations
- granted to such corporations to the business for which it was created, including those conferred for
purposes of public benefit such as the power of eminent domain and other powers and privileges
enjoyed by public utilities
- engaged in specialized business e.g. insurance companies, right to use streets of municipality to lay
pipes of tracks
- granted by government agency or municipal corporation
- can be conveyed or mortgaged under special power granted to a corporation to dispose of its
properties i.e. board resolution or approval of stockholders
- subject to levy and sale on execution together with corporate property
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3. RIGHT OF SUCCESSION
- continuous existence irrespective of the death, withdrawal, insolvency or incapacity of the stockholders/ members and
regardless of the transfer of their interest/ shares of stock
4. POWERS, ATTRIBUTES AND PROPERTIES OF A CORPORATON

- those only within its express, implied and incidental powers
TEST: Whether the act of the corporation is direct and immediate furtherance of its business, fairly incidental to the
express powers and reasonably necessary in their exercise
CLASSES OF CORPORATIONS:
1. Stock
2. Non-stock
3. Public Corporation
4. Private Corporation
5. Close corporation
6. Education Corporation
7. Religious Corporation
8. Eleemosynary Corporation
9. Domestic Corporation
10. Foreign Corporation
11. Corporation created by special laws
12. Subsidiary
13. Parent
14. Corporation de Jure
15. Corporation De facto
16. Corporation by estoppel
CORPORATION v. PARTNERSHIP
PARTNERSHIP CORPORATION
Mere agreement of parties Operation of law
Commences from meeting of minds Commences from issuance date of COI by SEC
Any period Perpetual existence, unless AOI provides otherwise
Any powers authorized by partners Powers granted by law and AOI
When management is not agreed upon, every partner is an GR: BOD/T as business partners
agent of the partnership EXN:
1. EXECOM
2. management contract
3. AOI of a close corp
Partners can sues a co-partner for mismanagement Suit against member of BOD/T must be in the name of corp
(Derivative suit)
Partners are liable personally and subsidiarity for partnership Stockholders are liable only to the extent of their subscribed
debts to third persons, unless for limited partners shares, paid or not
No right of succession; dissolves upon death of a partner Right of succession exists
No transfer of his interest in the partnership w/out consent of Has right to transfer without prior consent unless right of first
all partners refusal is indicated in AOI
May be dissolved any time by the will of any or all partners Can only be dissolved upon consent of State
DE FACTO vs DE JURE v. BY ESTOPPEL
DE JURE DE FACTO BY ESTOPPEL

Cannot be directly/collaterally attacked Cannot be collaterally attacked; must be Can be collaterally and directly attacked
thru quo warranto
Substantial compliance Colorable compliance; issuance if COI No existence
is minimum requirement
Liable to the extent of their subscription Liable to the extent of their subscription Those who have knowledge of its lack
of authority to act as such are liable as
general partners
 CORPORATION BY ESTOPPEL
- Group of persons who assumes to act as a corporation knowing it to be without authority to do so and enters into a
transaction with a third person on the strength of such appearance
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- Cannot invoke lack of personality to evade liability

- Applied to third persons who, knowing an association to be unincorporated treated it as otherwise and received benefits
therefrom
- EXN:
1. No third person is involved and the conflict arises only among those assuming the form of a corporation
who know that the corporation has not been registered
2. Ostensible corporators are not trying to escape liability from the contract from which he has benefited but
rather are the ones claiming from it
DOCTRINE OF PIERCING THE CORPORATE VEIL
- Though the corporation has separate and distinct personality from its stockholders, such personality may be
disregarded or veil of corporate fiction may be pierced, attaching personal liability to the responsible person, if the
personal liability is used to defeat public convenience, justify wrong, protect fraud or defend crime or used to defeat
labor laws
- Not presumed but must be clearly and convincingly proved
- Affects only specific transactions, no effect of res judicata
- Corporation continues for other legitimate objectives; corporate character not necessarily abrogated
Grounds:
1. Fraud-piercing - corporation is used to justify wrong, protect fraud or defend a crime
- mere proof of control does not suffice; there must be fraud in the affected transaction
- main action is seek enforcement of pecuniary claims
2. Alter-ego piercing - organized and its affairs are so conducted as to make it merely an agency or instrumentality of
another
 Elements:
1. Control test – complete control or dominion of the corporate entity as to render it without a
separate mind
2. Fraud test – such control must have been used by the defendant to commit fraud or wrong in
contravention of plaintiff’s legal rights
3. Harm test – control or breach of duty mist be the proximate cause of injury or loss
 Indications that a subsidiary company is merely an alter-ego of its parent corporation:

1. The parent corporation owns all or most of the capital stock of the subsidiary.
2. The parent and subsidiary corporations have common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary.
7. The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation.
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation’s own.
9. The parent corporation uses the property of the subsidiary as its own.
10. The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.
11. The formal legal requirements of the subsidiary are not observed
 Subsidiary Corporation – more than 50% of the voting stock of which is owner or controlled directly or
indirectly through one or more intermediaries of another
 Piercing may be done even at the execution stage; no violation of due process even if the agent was not
impleaded in main case
 If used for legitimate functions, subsidiary’s separate existence shall be respected and the liability of parent and
subsidiary corporations will be confined to those arriving in their respective business
3. Public Convenience Piercing -used to defeat public convenience or evade existing obligation
INCORPORATION
- Performance of conditions, acts and writings by incorporators and the official acts, certifications and records which give
the corporation its existence
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 Components:
1. Incorporators - stockholders mentioned in the AOI as originally forming and composing the corporation,
having signed the articles and acknowledged the same before a notary public
Requirements:
a. not more than 15
b. natural/juridical person
EXN: natural persons who are licensed to practice a profession and partnerships or
associations organized for the purpose of practicing a profession
c. must own or subscribe to at least one share
d. majority must be residents
The statement of nationalities of the incorporators will enable the SEC to determine prima facie compliance with
constitutional or legal requirements regarding ownership by Filipino citizens of certain' percentages of capital stock of
certain corporations
2. Corporators - compose a corporation whether as stockholders/shareholders in a stock corporation or as

members in a non-stock corporation
INCORPORATOR CORPORATOR
Signatory to articles Stockholder/member
Do not cease to be such if no longer Cease to be such
a stockholder
Max: 15 No restriction
EXN: close corporation
Must have contractual capacity May be such through his guardian
3. Directors/ Trustees – governing body in a stock/ non-stock corporation

4. Stockholders/Members – owners of share of stock in a stock corporation/ corporators in a non-stock corp
5. Subscriber – persons who have agreed to take and pay for original, unissued shares of a corporation formed
or to be formed
6. Corporate officers – identified as such in the CC, AOI or by-laws
7. Promoter – self-constituted organizer who finds an enterprise or venture and helps to attract investors, forms
of a corporation and launches it in business all with a view to promoting profits
Liabilities of a Promoter:
1. corporation not bound by contract entered into by the promoter before incorporation, unless the
contract is ratified
2. promoter is personally liable for contracts or agreements with third persons contracted in behalf of the
future corporation
3. promoter should remit to the corporation profits that he derived that property pertain to the corp
CORPORATE NAME
- Disallowed if not distinguishable from that already received or registered or already protected by law, its use is contrary
to existing law, rules and regulations
 Rules:
1. Priority of adoption use
2. Doctrine of secondary meaning – words or phrases used in the corporate name has been for such length of
time with such exclusivity as to have associated or identified the corp in the mind of the general public or at
least a portion thereof
3. person’s full name or surname may be used
4. name of dissolved firm shall not be allowed to be used by other firms within 3 years after the approval of the
dissolution of the corporation by SEC, unless allowed by the stockholders representing at least majority of
outstanding capital stack
PRINCIPAL OFFICE
Purpose:
1. Venue of court cases
2. Service of summons and notices
Rules:
1. Indicate city/municipality and province
2. No need to amend AOI if transfer is within same city/municipality
3. Use INC, CORP or OPC
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CORPORATE TERM
 Perpetual existence
EXN: AOI provides otherwise
 Retroactive Effect
GR: perpetual existence
EXN: elects to retain its specific term by stockholders representing majority of outstanding capital stock
 Revival: proper action is revival as there is no extension after expiration of term; ipso facto dissolved
 Limitations:
1. shortening or extension shall be by amendment of AOI
2. amendment to extend the corporate term cannot be made earlier than 3 years prior to the expiration of present
term, unless for justifiable reasons
ARTICLES OF INCORPORATION
- defines the contractual relationships bet the state and the corporation, the stockholders and the state and between the
corporations and its stockholders
 Certificate of Incorporation – from its issuance, life a corporation commences
 Contents of AOI
1. Name and “INC”, “Corporation” or “OPC”
2. Purpose/s, primary or secondary
3. Place of principal office
4. Term
5. names, nationalities, residential addresses of incorporators
6. no of directors/ trustees
7. names, nationalities and residences of directors/trustees
8. stock corporation:
a. amount of authorized capital stock and no. of shares into which it is divided
b. statement that all/ some of the shares are with par value indicating the par value per share and the no
of shares with such par value and those without
c. name of shares subscribed, amounts subscribed and amounts paid by subscribers
9. non stock corporation: amount of capital, person who contributed their nationalities and residence
addresses
10. arbitration agreement (option) – excludes criminal offenses or interest of third parties
 Documents to be filed w/ SEC:
1. reservation of corporate name
2. AOI/ by-laws (by laws may be subsequently filed)
3. certificate of authority /favorable recommendation
EXN: banks, banking, quasi-banking institutions, preneed insurance and trust companies,
nonstock savings and loan associations, pawnshops and other financial intermediaries
 Amendment:
1. majority vote of directors/trustees and vote/ written assent of stockholders representing 2/3 or OCS/ members
2. effective upon approval or if not acted within 6 months from date of filing
3. does not apply to ACCOMPLISHED FACTS, except to correct mistakes i.e name of incorporators and name or
original directors because the incorporators and original directors are always the same even if there is a
change in the stockholders or directors
4. stock corporation may be converted into a stock-corporation by mere amendment,
 Grounds for cancellation/suspension of COI:
1. fraud in procuring registration
2. serious misrepresentation as to objectives of corporation
3. refusal to comply with lawful orders of SEC to: cease and desist from using corporate name and cause the
removal of all visible signages bearing such corporate name
4. failure to commence business within 5 years
5. failure to resume operations within 2 years if placed under delinquent status
6. failure to file by-laws within required period
7. failure to file reports
8. refusal of obstruction without justifiable cause for the exercise of the SEC’s visitorial powers
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PURPOSE CLAUSE
- determines whether acts performed are beyond the corporate powers or ultra vires
- a non-stock corporation may not include a purpose which would change of contradict its nature
NON-USE OF CORPORATE CHARTER & CONTINUOUS INOPERATION
1. failure to organize and commence businesses within 5 years from date of incorporation – REVOKED
2. continuous inoperation for 5 years, SEC may upon notice and hearing, place it under DELINQUENT STATUS within 2
years
3. failure to submit reports may put corporation in DELINQUENT STATUS if fails to comply with the reportorial
requirements 3 times, consecutively or intermittently within 5 years
BY-LAWS
- relatively permanent and constituting rules of action adopted by the corporation for its own government and that of
individuals composing it and those having the direction, management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities
 Requisites:
1. consistent with RCCP
2. consistent with AOI; in case of conflict, AOI prevails
3. reasonable and not impair vested rights
 Adoption:
1. Pre-Incorporation – together with AOI, must be approved and signed by all incorporators
2. Post-incorporation – must be approved by stockholders constituting at least a majority of OCS/members;
copy signed by the approving stockholders, certified by majority of directors/trustees and countersigned by
the corporate secretary is filed with and approved by SEC and attached to the original AOI
 Effectivity and Binding Effect:

1. effective upon issuance of SEC that it is in accordance with RCCP
2. binding as to the corporation and its components
3. not binding as to third persons unless there is actual knowledge i..e provisions of the by -laws on
delinquency sale shall not be binding on a pledgee
AMENDMENT
STOCKHOLDERS/ MEMBERS & BOARD BOARD ONLY
Majority of board plus majority of OCS/members Delegated by 2/3 of OCS/members
Delegated authority can be revoked by a majority of the
OCS/members
CORPORATE POWERS
 Kinds:
1. Express – granted by RCCP, AOI and administrative regulations
2. Inherent/ Incidental – not expressly stated but are deemed to be within the capacity of corporate entities
3. Implied/Necessary – exists as a necessary consequence of the exercise of the express powers
 Who exercises:
GR: Board Of Directors/ Trustees
EXN:
1. management contract
2. powers of the Board are delegated by majority vote of an executive committee
Non- delegable:
a. approval of action requiring concurrence of stockholders
b. filing of vacancies with the Board
c. adoption, amendment or repeal of by-laws
d. amendment of repeal of board resolution which by its express terms cannot be
amended or repealed
e. distribution of cash dividends to stockholders
3. corporate offers i.e. President
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4. corporate agent may represent and bind the corporation in transactions with third persons to the extent
that the authority to do so has been conferred upon him
5. officer who has apparent authority
6. ratification of stockholders/members necessary for the exercise of powers by majority of the
Board and concurrence of stockholders representing at least 2/3 of OCS
a. extend or shorten corporate term
b. increase or decrease corporate stock
c. incur, create or increase bonded indebtedness
d. deny pre-emptive right after incorporation
e. sell, dispose, lease and encumber all or substantially ass of the corporate assets
f. invest in another corporation, business other than primary purpose
g. declare stock dividends
h. enter into management contract
i. amend AOI
j. voluntary dissolution where creditors are affected
7. approval at a meeting dully called for that purpose by stockholders representing majority of
OCS
a. adopt, amend or repeal by-laws
b. voluntary dissolution where no creditor is affected
c. enter into management contract (both managed and managing corporation)
8. no board resolution
a. 2/3 of OCS/members – delegate to board the power to amend by-laws
b. majority of OCS/members – revoke power of board to amend by-laws
HOW EXERCISED
Shareholders Participate in the controlling the affairs of the corporation by exercising their right to vote
They can elect the directors who, will actually govern the corporation
Vote on matters that are still reserved to them by the Corporation
BOD/T Primarily responsible for the governance of the corporation; primary duty is to set policies for
the accomplishment of the corporate objectives and elect officers who execute them
Corporate Officers Tasked to carry out the policies laid down by the Board, AOI and by-laws as well as those
conferred by virtue of express or implied delegation
EXN:
1. Discretionary powers
2. Entire supervision and control
3. Special powers especially conferred by resolution
ULTRA VIRES ACTS
- an act outside or beyond express, implied and incidental corporate powers

 Effects:
1. Executed -courts will not set aside
2. Executory – no enforcement even at the suit of the other party; void and unenforceable
3. executory (apparently authorized) – principle of estoppel
4. partly executed and partly executory – principle of unjust enrichment
 Remedies of aggrieved party:
1. State- forfeiture, suspension/revocation
2. stockholders – injunction, derivative suit
3. creditors – nullification of contract in fraud of creditors
ULTRA VIRES ILLEGAL ACTS UNAUTHROIZED ACTS

Not necessarily unlawful Unlawful Law on agency applies
Merely voidable; may be enforced by Void and cannot be ratified Not w/in powers of particular officer, but
performance, ratification or estoppel may be within the powers of the
corporation
Binding if wholly or partly executed
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GENERAL POWERS SPECIFIC POWERS

Sue and be sued Extend or shorten corporate term
Right of succession Increase or decrease corporate stock
Adopt and use a corporate seal Incur, create or increase bonded indebtedness
Amend AOI Deny pre-emptive right
Adopt, amend or repeal by-laws Sell, dispose, lease, encumber all or substantially all
corporate assets
Stock corporation: issue and sell stocks to subscribers Purchase or acquire
Non-stock corporation: admit members
Purchase, receive, tale or grant, hold, convey, sell, lease, Invest corporate funds in another corporation or business
pledge, mortgage and deal with real and personal property other than primary purpose
Enter into partnership, joint venture, merger, consolidation or Declare dividends out of unrestricted retained earnings
any commercial agreement with natural or juridical person
Make reasonable donations for public welfare, hospital, Enter into management contract with another corporation
charitable institutions, scientific, civic or similar purposes whereby one corporation undertakes to manage all or
EXN: political party, candidate, partisan political activity substantially all of the business of the other corporation for a
period not longer than 5 years for any term
Establish pension, retirement and other plans for the benefit Amend AOI
of its directors, trustees, officers and employees
Exercise other powers essential / necessary to carry out is
purpose
I. POWER TO SUE AND BE SUED – exercised by BOD/T thru a resolution

GR: verification and certification against forum shopping must be signed on behalf of the corporation pursuant to a valid
resolution
EXN: no need for board resolution
1. chairperson of BOD
2. President
3. General Manager
4. Personnel officer
5. employment specialist in a labor case
II. POWER TO DEAL PROPERTIES

- Must be in furtherance of its purpose
- Constitutional limitations; cannot acquire public lands except by lease
- Subject to special laws i.e. Bulk Sales Law, law against monopoly, illegal combination or restraint of trade
III. POWER TO ACQUIRE OWN SHARES – where ac corporation reacquires is own shares, it does not thereby become a
subscriber thereof
 Grounds:
1. To eliminate fractional shares 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
3. To pay dissenting or withdrawing stockholders (in the exercise of the stockholder’s appraisal right)
4. To acquire treasury shares
5. To acquire Redeemable shares regardless of existence of retained earnings
6. To effect a decrease of capital stock
7. In close corporations, when there is a deadlock in the management of the business, the SEC may order
the purchase at their fair value of the shares of any stockholder by a corporation regardless of the
availability of unrestricted retained earnings (URE’s) in its books
 Rules:
GR: The corporation may only acquire its own stocks in the absence of unrestricted retained earnings
EXN:
1. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the
insolvency of the Corporation
2. In cases that the corporation conveys its stocks in payment of a Debt
3. In a Close corporation, a stockholder may demand the payment of the fair value of shares regardless of
existence of retained earnings for
4. As long as it will not result to the insolvency of the corporation.
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 UNRESTRICTED RETAINED EARNINGS (URE)

- It represents the surplus profits of the corporation and is determined by subtracting the liabilities (L), the Capital
Stock (CS) and the Restricted Retained Earnings (RRE) from the assets (A) of the corporation (URE = A – (L +
CS+ RRE))
- accumulated profits and gains out of the normal and continuous operations of the company after deducting
therefrom distribution of stockholders and transfers to capital stock or other accounts and includes those arising
from transactions not associated with but incidental to or necessary in keeping business i.e. earning from rent,
interest for the use by others of the corporate assets and resources, as long as there is surplus profits
EXN:
1. Funds appropriated by its BOD for corporate expansion projects or programs
2. Funds covered by a restriction for dividend declaration under a loan agreement
3. Funds required to be retained under special circumstances obtaining in the corporation such as when there
is a need for a special reserve for probable circumstances.
 Guidelines for the acquisition of its own shares

1. The capital of the corporation must not be impaired; there shall be URE’s to purchase the shares
2. Legitimate or proper corporate objective is advanced
3. Condition of the corporate affairs warrants it
4. Transaction is designed and carried out in good faith
5. Interest of creditors is not impaired, that is, the same is not violative of the trust fund doctrine
- the requirement of unrestricted retained earnings to cover the share is based on the trust fund doctrine
which means that the capital stock, property and other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The reason is that the creditors of a corporation are
preferred over the stockholders in the distribution of corporate assets
IV, POWER TO DECLARE DIVIDENDS

 Who may declare dividends:
1. BOD alone – cash and property dividends
2. BOD, with approval of stockholders representing not less than 2/3 of OCS in a meeting called for that purpose
– stock dividends
 Business Judgment: Declaration of dividends is discretionary; even there are existing profits, it depends upon the
BOD whether to declare or not
GR: Stock corporations are prohibited from retaining surplus profits more than 100% of their paid-in capital
stock
EXN: Can still refuse to declare:
1. justified by corporate expansion projects/programs approved by the Board
2. 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
3. it can be clearly shown hat such retention is necessary under special circumstances obtaining in the
corporation
 Conditions:
1. Unrestricted retaining earnings
2. Resolution of the Board or board approval with concurrence of 2/3 of OCS (stock dividends)
 Forms:
1. Stock – withheld from the delinquent stockholder until his unpaid subscription is paid
2. Cash – first applied to the unpaid balance on the subscription plus cost and expenses
3. Property – entitled to pro rata based on the total number of shares and not on the amount paid on shares
 Rules:
1. can only be declared in favor of stockholders
2. cannot be declared out of capital as it would be violative of the trust fund doctrine
EXN:
a. liquidating dividends
b. dividends from investments in wasting asset corporation
- corporation solely or principally engaged in the exploitation of wasting assets to distribute the net
proceeds derived from exploitation of their holdings such as mines, oil, wells, patents and leaseholds,
without allowance or deduction for depletion
3. stockholders are entitled to dividends at the time of declaration
- those declared before the transfer of shares belong to the transferor and those declared after belong to the
transferee
- can be declared at a premium or value higher than par value
- even unpaid subscribers are entitled to dividend subject to effect of delinquency sale
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 Items that cannot be used for dividend distribution

1. share/ equity in net income of the associate or joint venture accounted for equity method as the same is not yet
actually earned or realized; investee company must first declare that such income as dividends
- due to the effect on investment account, the investor-company shall consider only cash or property
dividends declared by the investee company as earnings declarable as dividends
2. unrealized foreign exchange gains except those attributable to cash and cash equivalents, for the time being
that they are not yet actual income prior to realization of such foreign exchange gain
3. unrealized actuarial gains which is the result when the company chooses the option of recognizing actuarial
gains or losses directly to profit or loss statements
4. fair value adjustment or the gains arising only from market-to market valuation which are not realized
5. amount of recognized deferred tax asset that reduced the amount of income tax expense and increased the net
income and retained earnings, until realized
6. paid- in surplus cannot be declared as dividend
- difference between the par value and issued value of the shares and are not therefor considered as
profits earned in the conduct of the business corporation but rather as capital
7. revaluation surplus or the increase in the value of assets cannot be considered earnings of the corporation; not
income form operation but are by nature subject to fluctuations
8. reduction surplus arising from the reduction of the par value of the issued shares of stocks
 Considered part of retained earnings

1. Gains on sale of the corporation’s real properties
2. Treasury shares can be distributed by way of dividends, but only as property
- cannot be declared as stock or cash dividends because they are not considered as part of earned or surplus
profits because doing so would make the corporation both a debtor and creditor
- only property dividends as long as issued out of restrained earnings previously used to support their
acquisition provided that the amount of the said retained earnings has not been subsequently impaired by
losses
 Remedies:
1. wrongful or illegal declaration of dividends – solution indebiti
2. when transfer is not recorded in the books of the corporation – such transfer is valid only between parties, hence
the transfer has the right to dividends as against the corporation without notice of the transfer, but he is the trustee
of the real owner of the dividends subject to the contract between the transferor and transferee as to who is entitled
to receive to dividends
3. mortgagor and pledgor has the right to dividends, unless mortgage and pledgee acquires said shares and transfer
is recorded
V. POWER TO SELL ALL OR SUBSTANTIALLY ALL PROPERTIES

 Rules
1. Must comply with formalities of Bulk Sales Law and requirements of Philippine Competition Act
2. Not have been disapproved or abandoned by the Board after approval by the stockholders
3. After authorization or approval by the stockholders or members, the board of directors or trustees may
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties under any contract relating thereto, without further
action or approval by the stockholders or members
4. Grounds: incapable of continuing business or incapable of accomplishing the purpose
 Instances when corporation may forego the ratification by stockholder/members

1. if sale is necessary in the usual and regular course of business
2. if the proceeds of the sale or other disposition of such property and assets are to be appropriated for the
conduct of the remaining business
3. if the transaction does not cover all or substantially all of the assets
 Effect on creditors
GR: The corporation who acquired all or substantially all of the assets of the selling corporation shall not be
liable for the debts of the latter.
XPNs:
1. Express or implied assumption of liabilities;
2. Merger or consolidation;
3. If the purchase was in fraud of creditors;
4. If the purchaser becomes a continuation of the seller;
5. If there is violation of the Bulk Sales Law
6. Business-Enterprise Transfer – the transferor transfers both its assets and business and the
transferor is left with juridical existence devoid of its authority
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VI. INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE, INCREASE BONDED INDEBTEDNESS
 Bond – is an indebtedness that is covered by security which is under the Securities Regulation Code and must be
registered with SEC
 Ways of increasing/ decreasing capital stock
1. by increasing/decreasing the number of shares and retaining par value
2. by increasing/decreasing the par value of existing shares without changing the number of shares
3. by increasing/decreasing the number of shares and increasing par value
 Reduction of shares may be thru:
1. Redeeming redeemable shares (CC, Sec. 8);
2. Purchasing of own shares (CC, Sec. 41);
3. Cancelling or retiring the shares, including the treasury shares (CC, Sec. 9);
4. The corporation may accept a surrender of shares and give the holders in exchange therefor a proportionate
amount of its assets, provided no rights of creditors are involved;
5. Issue bonds for that purpose;
6. Exchange another class of stock for that retired;
7. Exchange the corporation’s outstanding shares for a smaller number of shares; or
8. Cancelling shares which have not yet been issued (De Leon, 2010).
 Requisites:
1. application for approval with the SEC should be filed within 6 months, unless extend, from the date of approval
by the Board and the stockholders
2. in case of increase of capital stock, 25% of the increase in capital stock must be subscribed and at least 25% of
the subscription must be paid either in actual cash or property
 Rules:
1. Over-issue of shares is ultra vires; such is deemed a spurious stock and void
EXN: no over-issue in the case of shares which were surrendered and new shares were issued in their
stead
2. The power to issue stocks is lodged within BOD and no stockholder’s meeting is required to consider it; what is
required is the board resolution, however in case of increase in capital stock such approval and meeting is
required
3. Not all borrowings of the corporation need stockholder’s approval, only bonded indebtedness requires such
approval
 Effect of attempted unauthorized increase of capital stock:
1. Subscriptions for such stock are likewise void both on the ground of illegality and for want of consideration;
2. Subscribers for or purchasers of such stock acquire none of the rights of stockholders;
3. Subscribers for or purchasers of such shares do not become liable to creditors of the corporation or on a
winding up as stockholders for unpaid subscriptions, and are not subject to a statutory liability to creditors
imposed upon stockholders;
4. Subscribers for or purchasers of such shares from the corporation may recover from it, money paid to it under
their subscription or purchase as upon a failure of consideration, or breach of warranty for the existence of the
thing sold, unless they are precluded from such relief as parties in pari delicto.
VII. POWER TO DENY PRE-EMPTIVE RIGHT

 Pre-emptive right – preferential right of a subscriber to subscribe to all issues or disposition of shares of any class,
including sale or reissuance of treasury shares in proportion to their stockholdings.
 Purpose: Enable shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus
 Unavailable:
1. Shares issued to comply with laws requiring stock offering or minimum stock ownership by the public
2. shares issued in good faith with the approval of the stockholders representing 2/3 of the OCS, in payment of
previously contracted debt
3. denied in AOI
4. shares issued in good faith, with the approval of the stockholders representing 2/3 of the OCS, in exchange for
property needed for corporate purposes
5. waiver
- personal right hence need for SPA
- cannot be compelled even if majority opts to waive
 Rules:
1. Must be exercised within period stated in AOI or by-laws
2. transferrable unless expressly restricted
3. shareholder may exercise his appraisal right when his pre-emptive right is violated
4. validity of issuance of additional shares may be questioned if done in breach of trust by the controlling
stockholders notwithstanding the non-existence of pre-emptive right
5. Shareholder cannot purchase the corresponding shares of a shareholder who declined his pre-emtive right,
unless no one purchased the same and late the Board re-issues the shares,
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PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL

Right to subscribe to all issuance or dispositions of Right to purchase shares of a stockholder
shares of the corporation even to the subsequent sale of
treasury stocks
Pertains to unsubscribed portion of authorized capital Pertains to the sale of the stocks by another stockholder
stock
Right exercised against the corporation Right exercised against a co-stockholder
May be exercised even when there is no express Can only be exercised when so provided in the AOI, by-
provision in the AOI or amendment thereto laws and printed in the stock certificate
Includes treasury shares Does not include treasury shares
VIII: POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS

 Rules:
1. Investment in a business
GR: The corporation is not allowed to engage in a business different from those enumerated in its AOI.
EXN: The purpose will be amended to include the desired business activity among its secondary purpose.
2. Investment in an undertaking
GR: Investment of a corporation in a business which is in line with its primary purpose requires only the
approval of the board. Any dissenting stockholder shall have appraisal right.
EXN: Where the corporation undertakes to invest in another corporation or business or for any purpose other
than a primary purpose, it has to comply with the statutory requirements before it can do so
 Statutory requirements that the corporation needs to comply with to invest in another corporation or business
or for any purpose other than a primary purpose:
1. Approval by the majority vote of the BOD or BOT
2. 2. Ratification by stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of
the members in case of non-stock corporations
3. Ratification must be made at a meeting duly called for the purposes
4. Prior written notice of the proposed investment and the time and place of the meeting shall be made
addressed to each stockholder or member by mail or by personal service
IX: POWER TO ENTER INTO MANAGEMENT CONTRACT

 Management contract – any contract whereby a corporation undertakes to manage or operate all or substantially all of
the business of another corporation, whether such contracts are called service contracts, operating agreements or
otherwise
 Rules:
1. Does not apply to management contracts entered into by a corporation with natural persons
2. Requirements for a management contract to be valid
a. Contract must be approved by the majority of the BOD or BOT of both managing and managed
corporation.
b. Ratified by the stockholders owning at least the majority of the outstanding capital stock, or
members in case of a non-stock corporation, of both the managing and the managed corporation,
at a meeting duly called for the purpose.
c. Contract must be approved by the stockholders of the managed corporation owning at least 2/3 of
the outstanding capital stock entitled to vote or 2/3 of the members when
d. Stockholders representing the same interest in both of the managing and the managed
corporation own or control more than 1/3 of the total outstanding capital stock entitled to vote of
the managing corporation (Interlocking stockholders)
e. Majority of the members of the BOD of the managing corporation also constitute a majority of the
BOD of the managed corporation. (Interlocking Directors)
3. Period for every management contract entered into by the corporation
GR: Management contract shall be entered into for a period not longer than 5 years for any one term.
EXN: In cases of service contracts or operating agreements which relate to the exploitation,
development, exploration or utilization of natural resources, it may be entered for such periods as may
be provided by the pertinent laws or regulations.
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X. POWER TO ENTER INTO MERGER OR CONSOLIDATION
1. Merger – one corporation absorbs another one/ more corporations into a single corporation and one of the constituent
corporations survives and remains in existence while the other corporations are dissolved
2. Consolidation – new corporation is created and the existence of all the constituent corporations shall cease
 Procedure:
a. The Board of each corporation shall draw up a plan of merge or consolidation setting forth (1) names of
the corporation involved, (2) terms and mode of carrying the same into effect, (3) statement of changes if
any in the present AOI of the surviving corporation and for consolidation, all statements to be included in
the Articles of the new corporation to be formed and other provisions deemed necessary
b. Plan for merger or consolidation shall be approved by majority vote of each of the Board of the constituent
corporations of separate meetings and approved by 2/3 of the OCS or members
c. Any amendment to the plan must be approved by the majority vote of the Board of the constituent
corporations and affirmative vote of 2/3 of the OCS or members
d. Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations,
signed by the President or Vice President and certified by the Secretary or Asst Secretary setting forth
i. Plan of merger or consolidation
ii. Stock: number of shares outstanding:: Non-stock: number of members
iii. As to each corporation, number of shares or members voting for and against such plan
respectively
iv. Carrying amounts and fair values of the assets and liabilities of the respective companies as of
the agreed cut-off date
v. The method to be used in the merger or consolidation of accounts of the companies
vi. The provisional or pro-forma values as merged or consolidated, using the accounting method
vii. Such other information as may be prescribed by SEC
e. copies of the articles of merger or consolidation and plan of merger shall be submitted to the SEC for
approval. The merger or consolidation is effective upon approval by the SEC. Merger or consolidation of
banks, insurance companies, building and loan associations, trust companies, public utilities, educational
institutions and other special corporations requires favorable recommendation of the government agency
occurred
f. Philippine Competition Act ( RA No. 10667) imposes compulsory notification and review of covered
Mergers and Acquisition
NATIONALITY OF A CORPORATION
- Kinds:
1. PLACE OF INCORPORATION – corporation, as a general rule, is considered a national of the country where it
was incorporated
2. WAR-TIME CONTROL TEST – nationality of controlling stockholders
3. Investment Purposes:
a. CONTROL TEST - nationality of controlling stockholders/ members
i. corporation organized under Philippine laws of which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino citizens
ii. corporation organized abroad and registered as doing business in the Philippines under the
general law on corporations of which 100% of the capital stocks entitled to vote belong in Filipinos
iii. Foreign Investments Act of 1991 (RA 7042) - where a corporation and its non-Filpino
stockholders own stocks in a SEC registered enterprise, at least 60% of the capital stock
outstanding and entitled to vote of both corporations and at least 60% of the members of the
board of directors of both corporations must be Filipino citizens (DOUBLE 60% RULE)
Example:
X corporation owns 65% of the outstanding shares, entitled to vote in “A”
corporation. The 70% shares outstanding entitled to vote in X corporation are owned
by Pedro, a Filipino and four of its five directors are also Filipinos. “A” corporation is a
Philippine national in this example.
However, “A” corporation is not a Philippine national if 70% of the shares of
outstanding capital stock entitled to vote in X corporation (which owns 65% of “A”
corporation belongs to aliens. The same conclusion will be reached even if only 55%
of the shares outstanding entitled to vote in X belongs to aliens but more than 60% of
its directors are aliens e.g. 4 of 5 directors
iv. Nature of Filipino Ownership for purposes of determining nationality and compliance with
foreign equity restrictions (TWO-TIERED TEST) - Beneficial Ownership Test and Voting
Control Test
i. Total number of outstanding shares of stock entitled to vote in the election of
directors
ii. Total number of shares of stock, whether or not entitled to vote
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b. GRANDFATHER RULE
- method of determining the nationality of a corporation, which is owned in part by another corporation,
by breaking down the equity structure of the shareholder corporation.
- applied when the 60-40 Filipino-foreign equity ownership is in doubt as a result of various indicia that
beneficial ownership and voting control of a subject corporation does not in fact reside in Filipino
shareholders but in foreign stakeholders through the medium practice of corporate layering
- both the direct and indirect shareholdings are determined to arrive at actual Filipino ownership and
control in a corporation
- not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource
corporation is not in doubt
Rules:
1. CORPORATE LAYERING – means of structuring companies where by a parent corporation
holds shares in other corporations. Unless used to circumvent the law, corporate layering is a
valid and legal practice and is the use of corporations as stockholders of other corporations in
different stages of organization
2. A corporation that complies with the 60-40 Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no doubt as to who has the beneficial ownership
and control of the corporation
3. DOUBT refers to various indicia that the beneficial ownership and control of the corporation
do not in fact reside in Filipino shareholders but in foreign stockholders
4. Indicators of doubt:
a. the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner
b. the foreign investors undertake to provide practically all the technological support for
the joint venture
c. foreign investors, while being minority stockholders, manage the company and
prepare all economic viability studies
5. Shares belonging to parent corporations or partnerships at least 60% of the capital of which
are owned by Filipino citizens shall be considered as having 100% Philippine nationality, but if
the percentage of Filipino ownership in the parent corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of Philippine
nationality
ILLUSTRATIONS:
I. Two-tiered Control Test
- Suppose XYZ Corp has 300 outstanding shares distributed in the following classes: 100 common
shares with voting rights 100 preferred shares with voting rights (Cass A) 100 preferred shares without voting
rights (Class K). XYZ Corp. is Filipino only if Filipino citizens have full legal and beneficial ownership of 180 of
the total outstanding shares of which 120 shares must be some combination of common and Class A shares.
a. Failure to Comply with Beneficial Ownership

- If Filipino citizens own less than 180 of the outstanding shares, then immediately, Filipinos
legally and beneficially own less than 60% of 300 outstanding shares. Example is when
Filipinos own 50 shares of each class and thus own only 150 of the outstanding shares. In
such case, Filipinos legally and beneficially own only 50% of the capital stock. Voting control
is immaterial as beneficial ownership is not with Filipinos. The corporation is foreign.
b. Failure to Comply with Voting Control Tier

- Even if Filipino citizens own 180 outstanding shares or more, but of those shares so owned,
less than 120 are able to vote, then Filipinos do not have voting control in the corporation
(60% of 200 voting shares = 120). For example, Filipinos own 60 common shares, 50 Class A
shares, and 80 Class K shares. Filipinos therefore own 190 of the outstanding shares but
only 110 of the voting shares. In this case, since Filipinos only own 110 shares with voting
rights, even if Filipinos have full and beneficial ownership of more than 180 outstanding
shares, they do not have control of the company. XYZ Corp. will be deemed foreign.
2. Double 60% Rule

- 30% of ABC Corp. is held by Mr. Green, a US citizen. Both ABC Corp. and Mr. Green hold shares in XYZ. Corp.
XYZ is to be considered a "Philippine National" if 60% of ABC Corp. and XYZ Corp. are held by Philippine
citizens and 60% of their respective boards are held by Philippine citizens. Thus, in any of the following
scenarios, XYZ is not a "Philippine national":
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a. ABC Corp. owns 50% of XYZ shares, Mr. Green and Mr. Brown, an Australian, own the remaining
50%. In this case, although ABC is a Philippine national, only 50% of XYZ shares is owned by a
Philippine national.
b. ABC Corp., together with 5 other Filipinos, own and control 70% of XYZ's voting shares. 3 members of
the 5-member Board were US citizens, including Mr. Green (Mr. Green is also a stockholder of XYZ
so he can be elected) In this case, although more than 60% of both ABC and XYZ are held by
Philippine nationals, XYZ's board is only 40% Filipino.
3. Grandfather Rule
- Suppose ABC Corp. was organized as holding company, particularly for XYZ Corp. 55% of ABC's outstanding
shares is owned by foreigners. ABC owns 70% of the outstanding shares of XYZ while the remaining 30% is
held by 10 Filipinos citizens. Assume that all shares involved are voting shares. What are the nationalities of
ABC and XYZ?
a. Nationality of ABC Corp
Applying the Control Test, since 55% of the outstanding capital stock of ABC is owned by
foreigners, ABC is a foreign corporation.
b. Nationality of XYZ Corp.
Applying the Grandfather Rule, we must determine first how, much of ABC's shares in XYZ
are considered Filipino. If Filipinos own at least 60% of ABC's shares, then all of the shares owned by
ABC in XYZ shall be deemed Filipino. However, since Filipinos only own 45%, then only 45% of the
shares owned by ABC in XYZ shall be deemed Filipino. 55% of ABC's shares in XYZ are foreign.
Therefore, shareholding in XYZ Corp. according to nationality is broken down as follows:
Shares in XYZ owned by Filipinos 61.50%

10 Filipino shareholders 30%
ABC's shares in XYZ 31.50%
(45% of 70%)
Shares in XYZ owned by Foreigners 38.50%

ABC's shares in XYZ 38.50%
(55% of 70%)
Total 100%
Applying the Control Test, since 61.50% of the outstanding capital stock of XYZ is owned by Filipinos, XYZ is a
Filipino corporation.
FOREIGN CORPORATIONS
- Corporation formed, organized, or existing under any law other than those of the Philippines, and
whose laws allow Filipino citizens and corporations to do business in its own country
- Resident Agent – corporation required to appoint a resident agent who may be an individual or a domestic corporation;
failure to appoint one if the original resident resigns is a ground for revocation
Purpose: service of any summons and other legal processes in all actions or other legal proceedings against such
corporation; but cannot sign the certificate of non-forum shopping
 Bond for commencement of business – must be within 60 days after issuance of license, except banking or
insurance companies
 Ways a foreign corporation may transact business

i. Incorporation and Organization of a Domestic Subsidiary
- a foreign corporation may cause the incorporation and organization of a subsidiary corporation in the
Philippines under the Corporation Code and then retain a controlling interest on such subsidiary
- depending on the percentage of shares owned by foreigners in the subsidiary, the subsidiary may be a
Filipino or foreign corporation and subject to the foreign equity restrictions set by law. In all cases
however, the subsidiary has a separate juridical personality from the foreign parent corporation. The
foreign parent corporation cannot be held liable for the debts of the subsidiary unless the corporate
may be pierced as to reach the foreign parent corporation as the person truly liable.
ii. Establishment of a branch or office
- A branch office has no separate juridical personality from the foreign corporation and is merely a
resident arm of the foreign corporation and carries out the activities of the foreign corporation and
derives income from the host country
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iii. Establishment of a representative/ liaison office

- Similar to a branch office except that its operations are limited to dealing directly with clients of the
parent company but does not derive income from the host country and is fully subsidized by its head
office.
 License to do business In the Philippines

- A foreign corporation 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
Purpose: To subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts; not to
prevent the foreign corporation from performing single or isolated acts
Doing Business - any act or acts that imply a continuity of commercial dealings or arrangements and contemplate to
that extent or arrangements, or the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or of the purpose and object of the business organization
i. Soliciting orders, service contracts, opening offices, whether called liaison offices or branches
ii. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in
the country for a period or periods totaling 180 days or more
iii. Participating in the management, supervision or control of any domestic business, firm or entity or
corporation in the Philippines
Twin Test of Doing Business (substance and continuity)
- Foreign corporation is continuing the body or substance of the business of enterprise for which it was
organized
- Whether there is continuity of commercial dealings and arrangements, contemplating 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
- Must actually transact business in the Philippines, that is, perform specific business transactions within
Philippine territory on a continuing basis in Its own name and for its own account.
- Number of frequency of transaction is immaterial; A single act or transaction made in the Philippines
could qualify a foreign corporation to be doing business in the Philippines, if such singular act is not
merely incidental or casual, but indicates the foreign corporation's intention to do business in the
Philippines
Distributorship Agreement
GR: Appointment of a distributor in the Philippines is not sufficient to constitute "doing business" unless it is
under the
full control of the foreign corporation.
EXN: If the distributor is an independent entity which buys and distributes products, other than those of the
foreign corporation, for its own name and its own account, the latter cannot be considered to be doing
business in the Philippines
 Legal Capacity to sue not same as legal capacity to act

 Effect of No License
Without a license to do Not permitted to maintain or intervene in a suit, but

Suit by business validity of contracts not affected
Subsequent acquisition of Lack of legal capacity to sue is cured; no res judicata
license
Suit against With/ without a license Can be sued or proceeded against on any valid
causes of action
Defense of estoppel does not apply
Suit by and Without license Doctrine of Isolated Transaction
against - foreign corporations even unlicensed ones, can sue
or be sued on a transaction or series of transactions
set apart from their common business in the sense
that there is no intention to engage in a progressive
pursuit of the purpose and object of business
transaction
 SUMMARY RULES
i. If a foreign corporation does business in the Philippines without a license, it cannot maintain a suit before
the Philippine courts
ii. If a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action entirely independent of any business transaction
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iii. If a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity
which has contracted with said corporation may be estopped from challenging the foreign corporation's
corporate personality in a suit brought before Philippine courts
iv. If a foreign corporation does business in the Philippines with the required license, it can sue before
Philippine courts on any transaction
TRUST FUND DOCTRINE
- The subscribed capital stock of the 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, and which the
corporation may not dissipate.
- The creditors may sue the stockholders directly for the latter’s unpaid subscription
 Effects of Trust Fund Doctrine
i. Dividends must never impair the subscribed capital stock and must only be declared out of unrestricted
retained earnings (URE)
ii. Subscription commitments cannot be condoned or remitted
iii. The corporation cannot buy its own shares using the subscribed capital as the consideration therefore
a. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the
insolvency of the Corporation
b. In cases that the corporation conveys its stocks in payment of a Debt; or
c. In a Close corporation, a stockholder may demand the payment of the fair value of shares regardless
of existence of retained earnings for as long as it will not result to the insolvency of the corporation
iv. Rescission of a subscription agreement is not allowed since it will effectively result in the unauthorized
distribution of the capital assets and property of the corporation
 Exceptions to the trust fund doctrine: Distribution for Assets

a. Amendment of the AOI to reduce authorized capital stock
b. Purchase of redeemable shares by the corporation regardless of existence of URE
c. Dissolution and eventual liquidation of the corporation
d. Money received for subscription of increase of authorized capital are not covered prior to the approval of such
increase by the board
 Scope of the Trust Fund Doctrine

a. Solvent Corporation – encompasses only the capital stock of the corporation and does not cover URE
b. Insolvent Corporation – capital stock plus other property and assets such as the unpaid subscriptions
BOARD OF DIRECTORS AND TRUSTEES
 Doctrine of Centralized Management – all corporate powers are exercised by the BOD/BOT and conducts all
business of the corporation and controls and holds all the properties of the corporation
 Independent Director
- person who apart from shareholdings and fees received from the corporation, is independent of the
management and free from any business or other relationship which could, or could reasonably be perceived to
materially interfere with the exercise of independent judgement in carrying out the responsibilities as a director
Scope:
1. Corporations vested with public interest:
i. Corporations covered by Section 17.2 of RA No. 8799 (The Securities Regulation Code)
namely those whose securities are registered with SEC (Publicly listed), corporations
listed with an exchange or with assets of at least 50 million pesos and having 200 or more
holders of shares, each holding at least 100 shares of a class of its equity shares.
ii. Banks and quasi-banks, non-stock savings and loan associations, pawnshops,
corporations engaged in money service business, preneed, trust and insurance
companies, and other financial intermediaries
iii. Other public corporations engaged in business vested with public interest similar to the
above, as may be determined by the SEC, 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
 Regular director
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1. Term: 1 yr for directors; 3 yrs for trustees

2. Qualifications:
i. Own at least 1 share of the capital stock of the corporation is his own name/member
- With legal and beneficial title
- Stockholder-trustor in a voting trust agreement cannot be a director because he only
has beneficial title; the trustee can be elected as director because has legal title
- Stockholder who was elected as a director is automatically disqualified the moment he
sell his shares; the purchaser cannot claim that he or she assumed the rights of the
stockholder as director after the purchase
- Person is disqualified as director if he is a mere pledgee
ii. not have been convicted by final judgement of an offense punishable by imprisonment for
period exceeding 6 years or a violation of the Corporation Code, committed within 5 years
prior to the date of his election, violations of RCCP, RA 8799 (The Securities Regulation
Code), found administratively liable for any offense involving fraudulent acts and by a
foreign court or equivalent regulatory authority for acts, violations or misconduct similar to
those enumerated the latter paragraphs
iii. legal age
iv. other qualifications as may be prescribed in special laws or regulations or in the by-laws of
the corporation
- percentage of equity participation of foreigners with respect to nationalized activities
- as provided in the by-laws
v. compensation cannot exceed 10% of the net income before income tax
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ELECTION OF DIRECTORS & TRUSTEES
 Rules:
1. Each stockholder or member shall have the right to nominate any qualified director or trustee, except when the
exclusive right to vote and be voted for in the election is reserved for holders of founder’s shares for a limited
period of 5 years
2. Each stockholder entitled to vote has the total number of shares owned by the same stockholder as shown in
the books of corporation at the time fixed in the By-Laws or if the By-laws is silent, at the time of the election
and provided not delinquent, multiplied by the whole number of directors to be elected.
3. Methods: Stock Corporation
a. Straight voting – every stockholder may vote such number of shares for as many persons as there
are directors to be elected
b. 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
c. Cumulative vote by distribution – a stockholder may distribute his votes among as many candidates
as he shall see fit
Straight Cumulative Voting (one Cumulative voting (distribution)

candidate)
No. of Directors to be voted: 5 No. of Directors to be voted: 5 No. of Directors to be voted: 5
No. of shares owned;150 No. of shares owned;150 No. of shares owned;150
Total no of outstanding Total no of outstanding Total no of outstanding shares:1000
shares:1000 shares:1000
May distribute equally, or allocate
Every candidate voted is May cast all his 750 votes to 300 votes to one candidate, 250 to
deemed to have 150 votes one candidate another and 150 to a third candidate
each
4. Method: Non-stock
- may cast as many votes as there are trustees to be elected but may cast not more than one vote for
one candidate
- cumulative voting not allowed unless provided in AOI or by-laws
 Requirements:
1. Presence of stockholders representing a majority of the outstanding capital stock of the corporation or
majority of the members, either in person or by proxy
EXN: In absentia, if allowed by the By-laws, or authorized by a majority of the directors or even without a
provision if corporation is vested with public interest
2. QUORUM – at all elections of directors or trustees, there must be present, either in person or thru
representative authorized to act by written proof, the owners of majority of the outstanding capital stock, or
if there be no capital stock, a majority of the members entitled to vote.
3. PLURALITY OF VOTES – candidates receiving the highest number of votes shall be declared elected
4. REPORTORIAL REQUIREMENT – within 30 days after the election of directors, trustees and officers of
the corporation, the secretary or any other officer of the corporation, shall submit to the Commission, the
names, shareholdings and residence addresses of the directors, trustees and officers elected
5. REPORT - within 30 days from the date of the scheduled of election which shall specify the new date for
the election in which case shall not be later than 60 days from the scheduled date; SEC can summarily
order if no new date has been scheduled or if rescheduled election is not likewise held
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REMOVAL OF DIRECTORS OR TRUSTEES
– belong exclusively to stockholders or members

 Rules
GR: With or without cause
EXN: If the director is elected by minority, there must be cause for removal because the minority may not be
deprived of his right to representation i.e. right to cumulative voting for one candidate
 Requisites:
1. It must take place either at a regular meeting or special meeting of the stockholders or members called for
the purpose;
2. A special meeting for the purpose of removing directors or trustees may be called by:
a. The secretary, on order of the president; or
b. The secretary, upon written demand of the stockholders representing or holding at least a MAJORITY
of the capital stock or MAJORITY of the members entitled to vote;
3. Previous notice to the stockholders or members of the intention to remove a director

4. A vote of the stockholders representing 2/3 of outstanding capital stock or 2/3 of members.
5. Remedy for refusal to call a meeting
If there is:
a. No secretary; or
b. If the secretary, despite demand, fails or refuses to call the special meeting or to give notice thereof
The stockholder or member signing the demand may call for the meeting by directly addressing the
stockholders or members
 The Commission shall, motu propio or upon verified complaint, and after due notice and hearing, order the removal of a
director or trustee elected despite the disqualification or whose disqualification arose or is discovered subsequent to an
election, without prejudice to other sanctions that the Commission may impose on the board of directors or trustees
who, with knowledge of the disqualification, failed to remove such director or trustee.
VACANCIES IN THE BOARD
 Rules:
I. How:
1. By the stockholders/members
a. removal
b. expiration of term
c. death, resignation or abandonment where the remaining directors do not constitute a quorum
d. increase in the number of directors or trustees
2. By the Board – if the remaining directors/trustees constitute quorum and in cases not reserved to
stockholders or members i.e. vacancies arising from resignation or death
II. When:
1. Due to term expiration - on that of such expiration at a meeting called for that purpose
2. Removal by stockholders/members – same day of meeting authorizing the removal and this fact may be so
stated in the agenda and notice of said meeting
3. Other cases – not later than 45 days from the time vacancy arose
III. Replacement of Hold-over Directors
- If one of the holdover directors resigns, the remaining holdover directors cannot replace him even if
they constitute quorum
- Power of the remaining members of the board to fill in the vacancy applied only if a director resigns
before his term
- Even if a director was invalidly removed, he cannot be ordered reinstated to his position if his term
already expired and a valid election of new directors in the annual meeting was held
IV. Emergency Board – even if there is no quorum, may elect a temporary Replacement Director/Trustee
Requirements:
a. remaining directors or trustees do not constitute a quorum
b. need for emergency action
c. action is necessary to prevent grave, substantial and irreparable loss or damage
d. come from the officers of the corporation
e. elected by unanimous vote of the remaining directors or trustees
f. notice must be given to the SEC within 3 days from the creation of such board
g. action of the designated director or trustee shall be limited to the emergency action necessary
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h. term shall cease within a reasonable time from the termination of the emergency or upon election or
upon the election of the replacement director or trustee, whichever comes earlier
COMPENSATION
 Rules:
GR: Directors, in their capacity as such, are not entitled to receive any compensation except for reasonable
per diems.
XPNs: (Directors or trustees shall not participate in the determination of their own per diems or compensation)
a. When their compensation is fixed in the by-laws;
b. When granted by the vote of stockholders representing at least a majority of the outstanding
capital stock at a regular or special meeting; or
c. If they perform services other than as directors of the corporation (i.e. where directors are also
corporate officers or employees of the corporation; since they have no control over the funds and
property of the corporation, even though they may be stockholders, they then do not occupy the
relation of trustees to the corporation)
 Per diems - are paid attendance in board meetings; other benefits and emoluments of directors fall within the term
“compensation”
 BOD is not prohibited from securing an insurance policy for the life of its members and making the directors
the beneficiaries instead of the corporation
- The Insurance Code does not contain any prohibition as to such. However, the premium paid
thereon is analogous to a continuing bonus and gift and thus falls within the context of
additional compensation.
 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
 Remedy: Compensation to the directors of a corporation without proper authorization in the by-laws or by the vote of
the stockholders may be recovered in a stockholders’ suit
 Reportorial requirement for corporations vested with public interest : Corporations vested with public interest shall
submit to their shareholders and the Commission, an annual report of the total compensation of each of their directors
or trustees
CORPORATE OFFICERS
 Composition:
a. President (director)
b. Treasurer (may or may not be a director; resident)
c. Corporate Secretary (citizen and resident)
d. Compliance officer for corporations vested with public interest
e. Other officers as may be provided in the By-laws
 Rules:
1. Same person may hold two or more positions concurrently
EXN:
a. Treasurer and the Corporate Secretary cannot be the President at the same time
b. One Person Corporation – the single stockholder may not be appointed as the Corporate
Secretary but he/she can be the Treasurer subject to the giving of a bond to the SEC
2. Officers are elected by the Board; removal is also by the Board and no stockholders’ concurrence is
required
3. The creation of the position must be expressly mentioned in the By-laws in order to be considered a
corporate office
4. Unless the By-laws specifies other officers who have appointment authority i.e. President, the Board
of Directors/Trustees shall appoint the officers and as an incident of the power of appointment, the
Board may remove or discharge those that they appointed
 Duties and liabilities

1. DUTY - TRUST: The directors’ character is that of a fiduciary insofar as the corporation and stockholders are
concerned; the relation is a trust
GR: The majority rule states that a director has a fiduciary duty with respect to the corporation as an entity,
and not to the stockholders as individuals. Consequently, he is subject to the duty to disclose all material facts
only to the corporation and not to the stockholders
EXN: Where special circumstances or facts are present which make it inequitable for the director to withhold
information from the stockholder, the duty to disclose arises, and concealment is fraud
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2. LIABILITY:
GR: The officers of a corporation are not personally liable for their official acts
EXN:
a. Vote or assent to patently unlawful acts
b. Act in bad faith or with gross negligence in directing the affairs of the corporation
c. Guilty of conflicts of interest to the prejudice of corporation, its stockholders or members and other
persons, even if private or secret profits were made prior to the time they became directors or trustees
or if obtained thru ultra vires transactions
d. When the director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solitarily liable with the corporation
e. When a director, trustee, or officer is made by specific provisions of law, personally liable for his
corporate actions
f. Director has consented to issuance of watered stocks, or who having knowledge thereof, did not
forthwith file with the corporate secretary his written objection thereto
EXN: Subsequent transfer of stocks as it is no longer deemed an issue, but sale thereof
 DOCTRINE OF CORPORATE OPPORTUNITY – a director takes a business opportunity that belongs to the
corporation when
a. corporation is financially able to undertake
b. from its nature, it is in line with the corporation’s business
c. one in which the corporation has an interest or a reasonable expectancy (prohibited even if he will use his
own funds in the venture)
GR: If a director, by virtue of such office, seizes a business opportunity which should belong to the corporation
thereby obtaining profits to the prejudice of the corporation, he must account and refund to the corporation all
the profits
EXN: The contract or act may be ratified by a vote of the stockholders owning or representing at least 2/3 of the
outstanding capital stock
Effect on Breach of Duty: Liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation if the following requirements are present: (a) a director,
trustee or officer attempts to acquire/s any interest adverse to the corporation in respect of any matter, (b) the
matter must have been reposed in him in confidence, (c) equity imposes a disability upon him to deal in his own
behalf
Non-Applicability:
1. When a director engages in a distinct enterprise of the same general class of business as that which
his corporation is engaged in, so long as he acts in good faith
2. The opportunity is one which is not essential to the corporation’s business, or employment of
company’s resources, or where the director or officer embracing opportunity personally is not brought
into direct competition with the corporation;
3. When the property or business opportunity has ceased to be a “corporate opportunity” and has
transformed into a “personal opportunity”. In such a case the corporation is definitely no longer able to
avail itself of the opportunity, which may “arise from financial insolvency”, or from legal restrictions, or
from any other factor which prevents it from acting upon the opportunity for its own advantage
SELF-DEALING DIRECTORS
- Covers contracts between the corporation and a director/trustee or officer or their spouses or
relatives within the fourth civil degree of consanguinity or affinity
GR: Voidable at the option of the corporation

EXN: Valid
a. The presence of the director or trustee in the board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting
b. The vote of such director or trustee was not necessary for the approval of the contract
c. The contract is fair and reasonable under the circumstances
d. In case of corporations vested with public interest, material contracts are approved by at least 2/3 of
the entire membership of the board, with at least a majority of the independent directors voting to
approve the material contract
e. In case of an officer, the contract has been previously authorized by the board of directors.
EXN to EXN: Presence and vote are not necessary
a. ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or members
b. full disclosure of the adverse interest of the director or trustee involve in such meeting
c. contract is fair and reasonable under the circumstances
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INTERLOCKING DIRECTORS
- When one, some or all of the directors in one corporation is or are directors in another
corporation
 SUBSTANTIAL INTEREST IN BOTH: Stockholdings exceed 20% of the Outstanding Capital Stock
GR: Valid
EXN: Voidable at the option of the corporation if fraudulent or not fair and reasonable; prejudiced corporation has the
right to annul
 SUBSTANTIAL IN ONE, NOMINAL IN THE OTHER:
GR: Voidable at the option of the corporation where the interlocking director has nominal interest
EXN: Valid
a. Presence of such director/trustee in the board meeting in which the contract was approved not
necessary to constitute a quorum for such meeting
b. Vote of such director/trustee was not necessary for the approval of the contract
c. Contract is fair and reasonable under the circumstances
d. If any of (a) or (b) is absent, the contract can be ratified by the vote of the stockholders representing at
least 2/3 of the OCS or by the vote of at least 2/3 of the members in a meeting called for the purpose,
provided full disclosure of the adverse interest of the directors/trustees involved is made on such
meeting and the contract is fair and reasonable under the circumstances
EXECUTIVE COMMITTEE
- a body created by the by-laws and composed of not less than three (3) members of the board which, subject to the
statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws
 RULES:
1. The committee may act by a majority vote of all of its members
2. Non-members of the board may be appointed as members of the executive committee provided that there are
at least three (3) members of the board who are members of the committee; a person not a director can be a
member of the executive committee but only in a recommendatory or advisory capacity.
3. Executive committees provided in the Revised Code of Corporate Governance
a. Audit Committee
b. Nomination Committee
c. Compensation and Remuneration Committee
4. Limitations on the powers of the executive committee

a. Matters needing stockholder approval
b. Filling up of board vacancies;
c. Amendment, repeal or adoption of by-laws;
d. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or
repeatable
e. Cash dividend declaration
5. The Board of directors may create special committees of temporary or permanent nature and determine the
members’ term, composition, powers, and responsibilities
6. Decisions of the executive committee are not subject to appeal to the board. However, if the resolution of the
Executive Committee is invalid, i.e. not one of the powers conferred to it, it may be ratified by the board
MEETINGS OF BOARD OF DIRECTORS OR TRUSTEES
 Kinds:
1. Regular Meeting – monthly unless otherwise specified in the By-laws
2. Special Meeting – any time, upon call of the President or as provided in the By-laws.
 Rules:
a. Notice – at least 2 days prior to the scheduled regular or special meeting, unless longer period is
provided in the By-laws
b. Quorum - majority, unless greater number is provided in the AOI or the By-laws
- same even if there is vacancy due to leave or abstain
- proxy not allowed
c. Chairman as presiding officer or if there is non or is absent, President to take over
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d. Shareholder-mortgagor/pledgor retains the right to attend and vote at the stockholder’s meeting,
unless the right is expressly given in writing to the pledgee or mortgagee or other secured creditor and
such fact is recorded in the books of corporation
e. Teleconference or other alternative modes of communication is allowed
f. Approval of Resolution:
GR: Majority of the directors or trustees present constituting a quorum

EXN:
1. Cases where the law expressly requires a majority vote of all members of the Board
i.e. election of officers
2. By custom, usage and practice in the corporation not requiring prior board approval
or where subsequent approval is sufficient
STOCKHOLDERS AND SHARES
 SUBSCRIPTON CONTRACT – any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed; considered as such notwithstanding the fact that the parties refer to it as purchase or
some other contract
 Kinds:
a. Pre-incorporation
- entered into before the incorporation and irrevocable for a period of at least 6 months from the
date of subscription unless (a) all other subscribers’ consent to the revocation or (b) if the
corporation fails to incorporate within the same 6-month period or within a longer period
stipulated in the contract of subscription
- cannot be revoked after the filing of AOI with SEC even if the filing is prior to the expiration of
the 6-month period
b. Post-incorporation – entered into after incorporation
 Valid considerations:
a. actual cash paid to the corporation
b. 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 stock issued
c. labor performed for or services actually rendered to the corporation
d. previously incurred indebtedness if the corporation
e. amounts transferred from URE to stated capital (in case of stock dividends)
f. outstanding shares exchanged for stocks in the event of reclassification or conversion
g. shares of stock in another corporation
h. other generally accepted form of consideration
EXN:
a. promissory notes or future services or receivables
b. corporation cannot set-off the unpaid subscription with the unpaid salaries of the shareholder-
employee
 When does one become a shareholder?

a. Enters into a subscription contract with an existing corporation; upon acceptance of his offer to
subscribe whether the consideration is fully paid or not
b. Purchases treasury shares from the corporation
c. Acquires shares from existing shareholders by sale or any other contract, or through other modes of
acquiring ownership like succession
 Underwriting Agreement - agreement between a corporation and a third person, termed the underwriter, by which the
latter agrees for a certain compensation, to take a stipulated amount of stocks or bonds, specified in the underwriting
agreement, if such securities are not taken by those to whom they are first offered
 Doctrine of Equality of Shares – where the articles 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 same liabilities
 Doctrine of Indivisibility – subscription contract is one entire and indivisible contract and cannot be divided into
portions; consequently, where stocks were subscribed and part of the subscription contract price was not paid, the
whole subscription shall be considered delinquent and not only the shares which correspond to the amount paid
 Condonation is prohibited: Corporation has no power to release an original subscriber to its capital stock from the
obligation of paying his shares, without a valuable consideration for such release, otherwise it would be violative of the
trust fund doctrine
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 As long as shares are not considered delinquent, stockholders are entitled to all rights granted to it whether fully paid or
not
RIGHTS OF A STOCOKHOLDER
Management Proprietary Remedial
a. To attend and vote in person a. Transfer stock in the a. Inspect corporate books
or by proxy at a stockholders’ corporate book b. Recover stock unlawfully sold
meetings b. Receive dividends when for delinquent payment of
b. To elect and remove directors declared subscription
c. To approve certain corporate c. Issuance of certificate of c. Be furnished with most recent
acts stock or other evidence of financial statements or
d. To adopt and amend or repeal stock ownership reports of the corporation’s
the by-laws or adopt new by- d. Participate in the distribution operation
laws of corporate assets upon d. Bring suits: derivative,
e. To compel the calling of the dissolution individual and representative
meetings e. Pre-emption in the issue of e. Demand payment in the
f. To enter into a voting trust shares exercise of appraisal right
agreement
g. To have the corporation
voluntarily dissolved
A. RIGHT TO ATTEND AND VOTE IN PERSON OR BY PROXY AT A STOCKHOLDERS’ MEETINGS

 Stockholder’s meeting
- given the right to participate in the corporate affairs by giving him the right to attend meetings
upon due notice and the right thereat in person, or through proxy or trustee, or when so
authorized in the By-laws or by a majority of the Board, through remote communication or in
absentia
- no distinction between disputed or undisputed shares
 Quorum
GR: Majority of outstanding capital stock or a majority of the members,
EXN:
1. Unless otherwise provided in the RCCP or in the By-laws
2. Stockholder’s/ member’s meeting for the election of directors/ trustees upon order of the SEC
after verification of the unjustified non-holding of such election may be less than the majority
3. AOI of a close corporation may provide for a greater quorum and voting requirement
 Excluded from computation of quorum

a. Delinquent shares or members
b. Non-voting shares or members, except in case meeting where approval of matters allow non-voting
shares
c. Treasury shares
d. Fractional shares, unless they constitute at least one full share
e. Escrow shares
 Rules applicable on certain shares

1. Sequestered shares
GR: Registered owner of the shares of a corporation even if they are sequestered by the
government through the PCGG, exercises the right and privilege of voting on them; PCGG as
mere conservator cannot exercise acts of dominion
EXN: The registered owner of sequestered shares may only be deprived of voting rights and
the PCGG authorized to exercise the same, only if it is able to establish that
a. prima facie evidence showing that the said shares are ill-gotten and thus
belong to the State
b. imminent danger of dissipation thus necessitating the continued
sequestration of the shares and authority to vote thereupon by the PCGG
while the main issue is pending before the Sandiganbayan
Two-tiered Test : contemplates a situation where the registered stockholders were in control
and had been dissipating company assets and the PCGG wanted to vote the sequestered
shares to save the company
EXN to EXN: Cases involving funds of public character

a. where the government shares are taken over by private persons or entities who or
which registered them in their own names
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b. where the capitalization of shares that were acquired with public funds somehow
landed in private hands
2. Pledgor, mortgagor or administrator shares have the right to attend and vote unless such right has
been expressly given to pledgee or mortgagee and recorded on the books
3. Executors, administrators, receivers and other legal representatives may attend or vote in behalf
of the stockholder or members without any written proxy
4. For shares jointly owned, consent of all co-owners is necessary, unless there is a written proxy
signed by all the co-owners; if shares are owned in an “and/or” capacity by the holders thereof,
any one of the joint owners can vote or appoint a proxy thereof
5. Transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of
the corporation
Kinds of Meetings
Kinds of Meeting Date of Meeting Required Notice Record Date
Regular Meeting Held annually on a date fixed Within the period provided in The stock and transfer book
in the By-laws the By-laws, or required in a or membership shall be
law or regulation closed at least 20 days
before the meeting date
If no date, on any date after If none, at least 21 days prior If the by-laws provide for a
April 15 of each year as to the meeting longer period, that shall
determined by the Board prevail
Note: The written notice may

be sent through electronic
mail or other manner,
pursuant to guidelines issued
by the SEC
Special Meeting Any time deemed necessary Within the period provided in The stock and transfer book
the By-laws or or membership book shall be
closed 7 days prior to the
scheduled meeting date
As provided in the by-laws If there is no provision in the The By-laws may provide for
By-laws, at least 1 week prior a longer period, which period
to the meeting shall prevail
 Who will call a special meeting?

GR:
1. Officer designated in the AOI or By-laws
2. BOD or Trustees if nobody is designated
3. SEC, upon petition of a stockholder/member, if there is no person authorized to call or the person
authorized unjustly refuses to call a meeting
EXN:
1. In removal of directors, the Corporate Secretary must make the call for a special meeting
upon order of the President or written demand of a majority of the outstanding capital stock or
members entitled to vote, otherwise the removal is void
 Place of Meeting – principal office but if not practicable, in the city or municipality where the principal office is
located
 Rules on waiver of notice to stockholders
1. General waiver in AOI or By-laws is not allowed
2. Waiver may be express or implied
3. A stockholder is deemed to have waived the notice of meeting if he attends such meeting
except when stockholder/member attends the meeting for express purpose of objecting to the
transaction of any business because the meeting was not lawfully called or convened
4. All proceedings and any business transacted at a stockholders’/ members’ meeting if not ultra
vires acts shall be valid even if the meeting is improperly held or called, subject to the
following:
a. All stockholders/members are present or duly represented at the meeting
b. Not one of the stockholders/members expressly states at the start of the
meeting that his/her purpose for attending the meeting is to object to the
transaction of any business on the ground that the meeting is not lawfully
called or convened
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 Proxy and remote communication

1. Proxy Form: in writing, in any form authorized by the By-laws, signed by the stockholder or member, and received
by the corporate secretary within a reasonable time before the scheduled meeting; each notice of meetings shall
include a proxy form
2. Period of Validity: Unless otherwise provided in the proxy form, it shall be valid only for the meeting for which it is
intended; no proxy shall be valid and effective for longer period than 5 years at any one time
3. A stockholder or member may participate at meetings through remote communication or in absentia and such
participation shall be deemed present for purposes of quorum when so provided in the By-laws
4. The vote through remote communication or in absentia must be received before the corporation finishes the tally of
votes
 Voting Trust Agreement

1. One or more stockholder of a stock corporation may create a voting trust for the purpose of conferring upon a
trustee/s the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any
one time
2. The trustee can also be voted as director because the trustee will acquire legal title that must also be recorded
in the stock and transfer book; the trustee does not become the trustee of the corporate assets
3. If the voting trust is a requirement for a loan agreement, period may exceed 5 years but shall automatically
expire upon full payment of the loan
4. Voting trust certificates shall be executed and delivered by the trustee/s to the transferors and such certificates
shall be transferrable in the same manner as stock certificates
B. PRE-EMPTIVE RIGHT
- right to subscribe to all issues or dispositions of shares of any class, including sale or re-issuance of treasury shares
in proportion to their stockholdings
- the purpose of the pre-emptive right is to enable the shareholder to retain his proportionate control in the corporation
and to retain his equity in the surplus
- transferrable unless expressly restricted in AOI
EXN:
1. Shares issued to comply with laws requiring stock offering or minimum stock ownership by the public
2. Shares issued in good faith, with the approval of the stockholders representing 2/3 of the outstanding capital
stock, in payment of previously contracted debt
3. Expressly denied in the AOI
4. Impliedly denied as when stockholder fails to exercise such right after being notified and given an opportunity to
avail of such right
5. Shares 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
6. If one stockholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to
purchase the corresponding shares of the shareholder who declined, unless nobody purchased the same and
later the Board re-issue the shares,
C. APPRAISAL RIGHT
- right of dissenting stockholder to withdraw from the corporation and demand payment of the fair value of his/her shares,
which right is exercised after dissenting from or voting against proposed corporate acts involving fundamental changes
in the corporate structure
- upon demand for payment of the fair value of shares, all rights accruing to the shares shall be suspended, provided that
if the dissenting stockholder is not paid the value of his/her shares within 30 days after the award, the voting and
dividend rights shall be immediately restored
 Instances when appraisal right may be exercised

1. In case of change in corporate term, including extension or shortening of corporate term or changing from
perpetual existence to one with a fixed term
2. In case of amendment to the articles of incorporation has the effect of
a. changing or restricting the rights of any stockholder or class of shares
b. authorizing preferences in any respect superior to those of outstanding shares of any class
3. In case of sale, lease, exchange, transfer, mortgage or pledge, or other disposition of all or substantially all of
the corporate property
4. Merger or consolidation
5. Investment of corporate funds for any purpose other than the primary purpose of the corporation
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 Rules for Exercise of Appraisal Right

1. Stockholder must be a dissenting stockholder
2. Stockholder must make a written demand on the corporation within 30 days after the vote was taken
3. Proposed action is any one of the instances enumerated above
4. Price to be paid is the fair value of the shares on the date before the vote was taken
5. Fair value shall be agreed upon but in no case there is no agreement within 60 days from the date the
vote was taken, the fair value shall be determined by a majority of 3 disinterested person one of whom
shall be by the stockholder, another by the corporation, and the third by the two who were chosen
6. The dissenting shareholder shall submit his certificates to stock within 10 days from demanding
payment for notation that the shares are dissenting shares
7. Right of appeal is extinguished or lost when
a. Shareholder withdraws the demand with the corporation’s consent, when necessary
b. Proposed action is abandoned or rescinded by the corporation
c. SEC disapproves the corporation
d. Dissenting stockholder fails to make a demand with the 30-day period
e. There is transfer of the shares by the dissenting shareholder
f. The dissenting stockholder fails to submit his/her stock certificate/s within 10 days from
demand if payment; termination of the appraisal right shall be at the option of the corporation
 Effect of exercise of such right

1. Once the dissenting stockholder demands payment of the fair value of his shares:
a. All rights accruing to such shares including voting and dividend rights shall be suspended;
b. He 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 him;
c. GR: He is not allowed to withdraw his demand for payment of his shares
XPN: Unless the corporation consents thereto.
2. If the dissenting stockholder was not paid the value of his shares within 30 days after the award, his voting and
dividend rights shall be immediately restored until payment of his shares
3. Even if his rights as stockholder are suspended after his demand in writing is made, he cannot be considered
as an ordinary creditor of the corporation
4. Upon payment of the stockholder’s shares, all his rights as stockholders are terminated, not merely suspended
5. If before the stockholder is paid, the proposed corporate action is abandoned, his rights and status as a
stockholder shall thereupon be permanently restored
D. RIGHT TO DIVIDENDS
- It is the right of the stockholder to demand payment of dividends after the board’s declaration
- Stockholders are entitled to dividends pro rata based on the total number of shares that they own and not on the
amount paid for the shares
 RULES:
1. Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock
XPN:
a. When justified by definite corporate expansion projects or programs approved by the board of directors
b. 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
c. 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
2. Entitlement to receive dividends at the time of declaration

XPN: In case a record date is provided for
Dividends declared before the transfer of shares belong to the transferor and those declared after the transfer,
belong to the transferee
3. A record date is the date fixed in the resolution declaring dividends, when the dividend shall be payable to those who
are stockholders of record on a specified future date or as of the date of the meeting declaring said dividend. Holders of
shares not fully paid which are not delinquent shall have all the rights of a stock holder.
GR: Prior to the declaration of a dividend, a stockholder cannot maintain an action at law to recover his share
of the accumulated profits because such stockholder has no individual interest in the profits of a corporation
until a dividend has been declared.
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XPN: An action at law may be maintained where it is alleged that sufficient net profits have been earned to
obligate the corporation to pay, however, there must be a prior application with the directors for the relief
sought. If it appears that the directors have wantonly violated their duty, and such application would be
inefficacious, such application need not be made.
4. No dividends can be declared out of capital, except when liquidating dividends distributed at dissolution
a. Cash – cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription
plus cost and expenses
b. Stock – stock dividends are withheld from the delinquent stockholder until his unpaid subscription is fully paid
E. RIGHT TO INSPECT
- The stockholder’s right of inspection of the corporation’s book and records is based upon his ownership of shares in the
corporation and the necessity for self-protection
- The mere fact that the shareholdings of a stockholder is merely .001 per cent of the issued shares of stock does not
justify the denial of the request of inspection of the corporate records
 Valid purposes for inspection:
1. Ascertainment of financial condition of corporation or propriety of dividends

2. Value of the shares of stock for sale or investment.
3. Existence of mismanagement.
4. Obtainment of list of stockholders to solicit proxies or influence voting.
5. Obtainment of information in aid of litigation with the corporation or its officers regarding corporate
transactions.
 Books and records required to be kept by the corporation - The duty to keep these books is imperative and
mandatory. The stockholder can likewise inspect the financial statements of the corporation
1. A record of all business transactions, which shall include contract, memoranda, journals, ledgers, etc;
2. Minutes of all meetings of stockholders or members;
3. Minutes of all meetings of directors or trustees;
4. Stock and transfer book, in case of stock corporations
 Place where the books and records shall be kept

GR: All the above books and records must be kept at the principal office of the corporation.
XPN: The stock and transfer book may be kept in the principal office of the corporation or in the office of its stock
transfer agent, if one has been appointed by the corporation
 Requirement in order for the minutes of the board meetings be given probative value
The minutes of board meetings should be signed by the corporate secretary. Without such signature, neither probative
value nor credibility could be accorded such minutes
 Requirements for the Exercise of the Right of Inspection

1. The right must be exercised during reasonable hours on business days
2. The person demanding the right has not improperly used any information obtained through any previous
examination of the books and records of the corporation;
3. The demand is made in good faith or for legitimate purpose germane to his interest as a stockholder
Good purposes may be:
a. To investigate acts of management
b. To investigate financial conditions; fix value of shares
c. Mailing list for proxies
d. Information for litigation
4. It should follow the formalities that may be required in the by-laws;
5. The right does not extend to trade secrets;
6. It is subject to limitations under special laws, e.g. Secrecy of Bank Deposits and FCDA or the Foreign Currency
Deposits Act.
 The right to inspect extends to the books and records of the wholly-owned subsidiary of the corporation.
It would be more in accord with equity, good faith and fair dealing to construe the statutory right of the stockholder to
inspect the books and records of the corporation as extending to books and records of its wholly-owned subsidiary
which are in the corporation’s possession and control. The right extends, in compliance with equity, good faith, and fair
dealing, to a foreign subsidiary wholly-owned by the corporation.
 Rationale behind the right of inspection of a corporation: Based upon their ownership of the assets and property of
the corporation. It is, therefore, an incident of ownership of the corporate property
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 Persons entitled to inspect corporate book

1. Any director, trustee, or stockholder or member of the corporation at reasonable hours on business day
2. Voting trust certificate holder : The term “stockholder” means not only a stockholder of record; it includes a
voting trust certificate holder who has become merely an equitable owner of the shares transferred
3. Stockholder of a sequestered company
4. Beneficial owner of shares- pledgee, judgment debtor, buyer from record owner. This is provided that his
interest is clearly established by evidence.
 Remedies for enforcement of right to inspect

1. Action for mandamus or damages
2. Civil and criminal liability
 Liability of a corporate officer or agent in case he violates the stockholder’s right to inspection
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be liable for by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30)
days but not more than five (5) years, or both, in the discretion of the court
 Requisites for existence of probable cause to file a criminal case of violation of a stockholder’s right to inspect
corporate books
1. A director, etc. has made a prior demand in writing for a copy or excerpts from the corporation’s records or
minutes;
2. Any officer or agent of the concerned corporation shall refuse to allow the said director, etc., to examine and
copy said excerpts; 3. If such refusal is made pursuant to a resolution or order of the BOD’s the liability for
such action shall be imposed upon the directors or trustees who voted such refusal;
3. Where the officer or agent of the corporation sets up the defense that the person demanding to examine and
copy excerpts from the records and minutes has improperly used any information secured through any prior
examination of the same or was not acting in good faith or for a legitimate purpose in making his demand, the
contrary must be shown or proved
4. The Corporation Code has granted to all stockholders the right to inspect the corporate books and records,
and in so doing has not required any specific amount of interest for the exercise of the to inspect
 Refusal to allow inspection is a criminal offense

Defenses that can be set up:
1. Improper use of the information obtained in the past;
2. There was bad faith;
3. Use the information for an illegitimate purpose
F. RIGHT OF FIRST REFUSAL

- the right to buy the shares of stock of another stockholder at a fixed price and only valid if made on reasonable terms
and consideration
- Provisions in articles of incorporation requiring stockholders desiring to sell their stocks to offer them first to the
corporation or to the existing stockholders at a given reasonable date before disposing of them to third persons may be
considered valid and enforceable
 Right of first refusal is not a substantive right under the Corporation Code
GR: The right of first refusal can only arise by means of a contractual stipulation, or when it is provided for in the AOI
XPN: In the case of a close corporation, the right of first refusal is required to be found in the AOI.
 When only the by-laws provide a right of first refusal without the corresponding provision in the AOI and not printed in
the stock certificate, it is null and void. There is no authority to create property restrictions in by-laws provisions
PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL

May be exercised even when there is no Arises only by virtue of contractual stipulations but
express provision of law is also granted under the provisions of a close
corporation
Pertains to unsubscribed portion of the Exercisable against another stockholder of the
authorized capital stock. A right that may corporation of his shares of stock
claimed against the corporation.
It includes treasury shares
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REMEDIAL RIGHTS
a. Derivative suit – one brought by one or more stockholders or members in the name and on behalf of the corporation to
redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue or are the ones to be sued or hold control of the corporation.
Neither the Corporation Code nor the Securities Regulation Code expressly grant the stockholder the right to institute a
derivative suit. It is impliedly recognized when the said laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties
 Requisites
a. Corporate cause of action: the cause of action must devolve upon the corporation itself; the wrongdoing or
harm having been caused to the corporation and not to the particular stockholder brining the suit
b. Stockholder/member at the time the acts or transactions subject of the action occurred and at the time the
action was filed
c. Exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies
available under the AOI, By-laws, laws or rules governing the corporation or partnership to obtain the relief he
desires
d. no appraisal rights are available for the acts complained of
e. suit is not a nuisance or harassment suit
f. corporation is impleaded as plaintiff
g. exhaustion of all intra-corporate remedies available under the AOI, By-Laws, laws or rules governing the
corporation or partnership to obtain the relief he desires
h. Not a Nuisance or Harassment suit
i. Appraisal right is not
j. if the cause of action is continuing in nature, the only requisite is that the party is a stockholder at the time the
action was filed
 Rationale
Where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. However, an
individual stockholder may be permitted to institute a derivative suit on behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold
control of the corporation
 The corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a
nominal party
 Time when a person must be a stockholder for him to be justified in filing a derivative suit
He must be a stockholder at the time the cause of action accrued. If the cause of action is general and continuing, said
person must be a stockholder at the time of filing of the suit and at the time the cause of action accrued.
The implicit argument — that a stockholder, to be considered as qualified to bring a derivative suit, must hold a
substantial or significant block of stock — finds no support whatever in the law. The bona fide ownership by a
stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the
corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or
vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for
the benefit of the corporation
 Allegation of tort can co-exist with a derivative suit in the same petition
Personal injury suffered by a stockholder cannot disqualify him from filing a derivative suit on behalf of the corporation.
It merely gives rise to an additional cause of action for damages against the erring directors
 Jurisdiction over a derivative suit: RTC acting as a special commercial court over intra-corporate controversies
b. Individual Suit
- an action brought by a stockholder against the corporation for direct violation of his contractual rights as such
individual stockholder, such as the right to vote and be voted for, the right to share in the declared dividends,
the right to inspect corporate books and records, and others.
- When the injury is suffered directly by an individual shareholder as to affect his proprietary rights, as when his
right to vote is unlawfully withheld or his right to inspect corporate books arbitrarily denied, an action may be
brought by the injured stockholder in his own name and for his own benefit against the corporation
- Authorization from the board of directors is not necessary. Since the wrong is done to him personally and not to
the other stockholder or the corporation, the cause of action belongs to him alone.
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c. Representative Suit
- one brought by a person in his own behalf and on behalf of all similarly situated
- filed by the shareholder individually, or on behalf of a class of shareholders to which he or she belongs, for
injury to his or her interest as a shareholder
- proper where the wrong is done to a group of stockholders, as where preferred stockholders’ rights are
violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same
group
- Right of pre-emption is personal to each stockholder. While a stockholder may maintain a suit to compel the
issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a
representative action on behalf of other stockholders who are similarly situated.
 Remedies of representative suit and derivative suit are mutually exclusive : The two actions are mutually
exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) or the corporation
(derivative action)
REPRESENTTAIVE SUIT DERIVATIVE SUIT

Initiated by the stockholder under his own Initiated by the stockholder on behalf of the corporation
name or on behalf of other stockholders
Seeks vindication for injury to his or her Seeks to recover for the benefit of the corporation and
interest as a shareholder its whole body of shareholders when injury is caused to
the corporation that may not otherwise be redressed
because of the failure of the corporation to act
Deals with individual stockholders or a class Deals with corporate rights
of stockholder’s rights
VOTING TRUST AGREEMENT
- One or more stockholder/s 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 certain period of time and in return, trust certificates
are given to the stockholders which are transferrable like stock certificates, subject to the trust agreement
 Rules
a. It is the trustee of the shares who acquires legal title to the shares under the voting trust agreement and entitled
to vote
b. Trustor-stockholder has the beneficial title which includes right to receive dividends
c. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder in the
same manner as any other corporate book or record. Both the transferor and the trustee may exercise the right
of inspection of all corporate books and records
d. Trustor has the right to terminate voting trust agreement when the trustee has committed a breach of trust.
e. The agreement cannot be entered into for a period exceeding 5 years at any one time except when it is a
condition in a loan agreement, in which case, said contract shall automatically expire upon full payment of the
loan
f. The agreement must not be used for purposes of fraud.
g. It must be in writing and notarized and specify the terms and conditions thereof.
h. A certified copy of the agreement must be filed with the corporation and with the SEC or it will be ineffective
and unenforceable.
i. The agreement shall be subject to examination by any stockholder of the corporation.
j. Unless expressly renewed, all rights granted in the agreement shall automatically expire at the end of the
agreed period
 Powers or Rights of Voting Trustees:
a. They shall possess the right to vote and other rights pertaining to the shares so transferred and registered in
his or their names subject to the terms and conditions of and for the period specified in the agreement;
b. May vote in person or by proxy unless the agreement provides otherwise;
c. The trustee may exercise the rights of inspection of all corporate books and records
d. The trustee is the legal title holder or owner of the shares so transferred under the agreement. He is therefore
qualified to be a director.
 Effect, of VTA on Qualification for Directorship or Trusteeship: Because a VTA results in the parting of legal title
from the trustor to the trustee, a shareholder or member who assigns his membership or all of his shares in a VTA
ceases to become a shareholder or member of the corporation. Thus, he/she is disqualified from being elected as
director or trustee. If he is an incumbent, he is immediately disqualified and the position is vacated
 Pooling agreement
- agreements by which two or more stockholders agree that their shares shall be voted as a unit. They are
usually concerned with the election of directors to gain control of the management. The parties remain the legal
owners of their stocks with the right to vote them
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- does not involve a transfer of stocks but is merely a private agreement
ILLUSTRATION: Shareholders A,B,C,D,E, hold 50% of the outstanding capital stock, entered into a pooling
agreement to vote for F as a member of the board of director.
- Pooling agreements are valid as long as they do not limit the discretion of the BOD in the management of
corporate affairs or work any fraud against stockholders not party to the contract.
- The validity and legality of such pooling agreements depend upon the objects sought to be attained and the
acts which are done under them, and the other circumstances.
 Pooling agreement vs. Voting Trust Agreement: In Pooling Agreement, the stockholders themselves exercise their
right to vote. On the other hand, the trustees are the ones who exercise the right to vote under the Voting Trust
Agreement.
VTA PROXY
If validly executed, VTA is intended to be irrevocable for A proxy, unless coupled with interest, is revocable any
a definite and limited period of time time
Trustee acquires legal title to the shares of the Proxy has no legal title to the shares of the principal
transferring stockholder
Right to vote as well as other rights may be given except Only right to vote is given. The proxy must vote in person
the right to receive dividends. The trustee may vote in
person or by proxy unless the agreement provides
otherwise
Agreement must be notarized Proxy need not be notarized
Trustee is not limited to act as any particular meeting Proxy can only act a specified stockholder’s meeting (if
not continuing)
The stock certificate shall be cancelled and a new one in No cancellation of the certificate shall be made
the name of the trustee shall be issued stating that they
are issued pursuant to a VTA
Trustee can vote and exercise all the rights of the A proxy can only vote in the absence of the owner of the
stockholder even when the latter is present stocks
Governed by law on trust Governed by law on agency
Trustee has the right to inspect corporate books Proxy does not have a right of inspection of corporate
books
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SUMMARY OF VOTE REQUIREMENT

CORPORATE ACT BOD STOCKHOLDERS
Amendments, repeal or adoption of new Majority vote of the BOD GR: Majority vote of the outstanding
by-laws capital sock
EXN: If delegated by the
stockholders to the board
Entering into management contract Majority of the quorum of the BOD GR: Vote of the majority of the
outstanding shares of stock or
members of both the managing and
the managed corporation
EXN: The vote required for the

managed corporation is not merely
majority but 2/3 of the outstanding
capital stock in cases where:
a. a stockholder/s
representing the same
interest of both the
managing and the managed
corporations own or control
more than 1/3 of the total
OCS entitled to vote of the
managing corporation
b. majority of the members of
the board of directors of the
managing corporation also
constitute majority of the
members of the board of
directors of the managed
corporation
Issuance of dividends Majority of the quorum of the BOD 2/3 of OCS
Amendments to AOI Majority vote of BOD 2/3 of OCS
Grant of compensation to directors Approval of the Board Majority of OCS
Extending or shortening of corporate Majority of the BOD 2/3 of OCS
term
Increase or decrease capital stock Majority of the BOD 2/3 of OCS
Incur, create or increase bonded Majority of the BOD 2/3 of OCS
indebtedness
Deny pre-emptive right Majority of the BOD 2/3 of OCS
Investment in corporate funds in another Majority of the BOD 2/3 of OCS
corporation or business or for any other
purpose other than the primary purpose
Sale or other disposition of all or Majority of the BOD 2/3 of OCS
substantially all of the corporate assets
Merger or consolidation Majority of the BOD 2/3 of OCS
Voluntary dissolution Majority of the BOD 2/3 of OCS
Adopt a plan of distribution of assets of a Majority vote of the Trustees 2/3 of members having voting rights
non-stock corporation
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CORPORATE POWERS EXERCISED SOLELY BY THE STOCKHOLDERS

Corporate act Approval of stockholders
Election of directors or trustees; filing up of vacancies by the candidates receiving the highest number of votes from
stockholders due to the expiration of term, removal from office or the OCS or members entitled to vote (plurality, not
increase in the number of board seats majority)
Elect officers of the corporation Plurality vote of the BOD listed in the AOI, not merely
those present constituting quorum
Fixing the issued price of no-par values Majority of the quorum of the BOD if authorized by the
AOI or in the absence of such authority, by a majority of
the OCS
Declarations of cash and other dividends other than stock dividends Majority of the quorum of the board
Adopt by-laws Majority of the OCS or members
Revoke the power delegated to the BOD to amend or repeal the by- Majority of the OCS or members
laws of adopt new by-laws
Call a special meeting to remove directors/ trustees Majority of the OCS or members
Removal of directors 2/3 of the OCS or members entitled to vote
Delegation of the power to amend by-laws to the board of directors 2/3 of OCS
Ratification of corporate contract with a director 2/3 of OCS
Delegate to the BOD the power to amend or repeal the by-laws of 2/3 of OCS or members
adopt new by-laws
SHARES OF STOCK
- one of the units in which the capital stock is divided and represents the interest or right which the owner has In the
management of the corporation in which he takes part through his right to vote (if voting rights are permitted for that class of
stock by the AOI), In a portion of the corporate earnings, if and when segregated in the form of dividends, and upon its
dissolution land winding up, in the property and assets of the corporation remaining after the payment of corporate debts and
liabilities to creditors
 Nature:
a. The ownership of a share of stock confers no immediate legal right or title to any of the property of the
corporation
b. Each share merely represents a distinct undivided share or interest in the common property of the
corporation
c. Interest over the share is merely inchoate or a mere expectancy of a right in the management of the
corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after
payment of the corporate debts and obligations
d. Personal property except treasury stocks which belong to the corporation
 Situs:
GR: The situs of shares of stock is the country where the corporation is domiciled; the residence of the
corporation is the principal office of the corporation
EXN: In property taxation, the situs of intangible property is at the domicile of the residence of the owner
EXN to EXN:
a. When a nonresident alien has shares of stock in a domestic corporation, then the situs will be in the
Philippines
b. For purposes of the estate tax, the gross estate of a resident decedent, whether citizen or alien, or a
citizen decedent, whether resident or nonresident, includes his intangible personal property wherever
situated
 Who may classify shares:
a. Incorporators – the classes and number of shares which a corporation shall issue are first determined by the
incorporators as stated in the articles of incorporation filed with the SEC
b. Board of directors and stockholders – after the corporation comes into existence, classification of shares may
be altered by the board of directors and the stockholders by amending the articles of incorporation
 Classes:
1. Par Value Shares- shares with a value fixed in the articles of incorporation and the certificates of stock; the par
value fixes the minimum issue price of the shares
GR: A corporation cannot issue shares at less than its par value.
EXN: The prohibition applies only to original issuance of shares and not to the subsequent sale of treasury
shares and sale of shares made by stockholders.
2. No par value shares - shares having no stated value in AOI.

Limitations:
a. Shares which have no par value, cannot have an issued price of less than P5.00
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b. The entire consideration for its issuance constitutes capital so that no part of it should be Distributed
as dividends
c. They cannot be issued as Preferred stocks.
d. They cannot be issued by Banks, Building and loan association, Trust companies, Insurance
companies, and Public utilities.
e. The Articles of incorporation must state the fact that it issued no par value shares as well as the
number of said shares
f. Once issued, they are deemed fully Paid and non-assessable
3. Preferred Shares - entitle the shareholder to some priority on distribution of dividends and assets over those
holders of common shares; may be issued only with a stated par value
Rules:
a. Holders of preferred shares are not creditors
b. Holders of preferred shares cannot compel the corporation to give them dividends; the preference only
applies once dividends are declared.
4. Redeemable shares - shares of stocks issued by a corporation which said corporation can purchase or take
up from their holders upon expiry of the period stated in certificates of stock representing said shares
Limitations:
a. Issuance of redeemable shares must be expressly provided in the Articles of incorporation
b. The terms and conditions affecting said shares must be stated both in the articles of incorporation and
in the certificates of stock
c. Redeemable shares may be deprived of Voting rights in the articles of incorporation, unless otherwise
provided in the Code
d. Redemption cannot be made if it will cause Insolvency of the corporation.
e. Once redeemed are retired unless reissuance is expressly allowed in the AOI.
5. Treasury shares - Shares that have been earlier issued as fully paid and have thereafter been acquired by the
corporation by purchase, donation, and redemption or through some lawful means
Rule:
a. Treasury shares are not retired shares. They do not revert to the unissued shares of the corporation
but are regarded as property acquired by the corporation which may be reissued or resold at a price to
be fixed by the Board of Directors
b. Other means in which a corporation may acquire its own shares
i. To collect or compromise unpaid indebtedness to the
corporation
ii. To eliminate fractional shares
iii. To pay dissenting or withdrawing stockholders entitled
to payment for their shares;
iv. Redemption
v. Close corporation.
c. Limitations on treasury shares
i. They may be re-issued or sold again as long as it is for a reasonable price fixed by the BOD
ii. Cannot participate in dividends
iii. It has no voting right
iv. It cannot be represented during stockholder’s meetings
v. The amount of URE equivalent to the cost of treasury shares being held shall be restricted
from being declared and issued as dividends.
d. When treasury shares are sold below its par or issued value, there can be no watering of stock
because such watering of stock contemplates an original issuance of shares
e. They can be distributed only as property dividends. They cannot be declared as stock or cash
dividends because they are not considered part of earned or surplus profits. The distribution of cash
or stock dividends out of treasury shares would be converting the corporation into both a debtor and
creditor for the same amount at the same time, or requiring it to take money or stock from one of its
pockets and putting it in another, which is absurd. Treasury shares may be declared as property
divided to be issued out of the retained earnings previously used to support their acquisition provided
that the amount of the said retained earnings has not been subsequently impaired by losses
f. Since a treasury share is a fully paid share re-acquired by the corporation, it is not outstanding and
may be re-issued and resold. It cannot receive dividends before the resale, because the corporation
cannot grant dividends to itself
6. Founders shares - shares classified as such in the articles of incorporation and which may be given special
preference in voting rights and dividend payments.
Rule:
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a. Where the exclusive right to vote and be voted for in the election of directors is granted, such right
must be for a limited period not exceeding 5 years subject to approval of the SEC, the period to
commence from the date of said approval
b. Under the Revised Corporation Code, Founder’s shares given the exclusive right to vote and be voted
for are not allowed to exercise that right in violation of the Anti-Dummy Law and the Foreign
Investment Act.
7. Voting shares - shares with a right to vote. If the stock is originally issued as voting stock, it may not thereafter
be deprived of the right to vote without the consent of the holder
8. Non-voting shares - shares without right to vote i.e. denial of voting rights in the case of redeemable shares
and preferred shares, provided that there shall always be a class or series of shares which have complete
voting rights
Instances when holders of non-voting shares are allowed to vote:
a. Amendment of articles of incorporation
b. Adoption and amendment of by-laws
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property
d. Incurring, creating or increasing bonded indebtedness
e. Increase or decrease of capital stock
f. Merger or consolidation of the corporation with another corporation or other corporations
g. Investment of corporate funds in another corporation or business in accordance with this Code
h. Dissolution of the corporation
9. Convertible shares - shares which are changeable by the stockholder from one class to another (such as from
preferred to common) at a certain price and within a certain period.
GR: Stockholder may demand conversion at his pleasure.
EXN: Otherwise when restricted by the articles of incorporation
Rules:
a. In the absence of express provision in the AOI as to their convertibility feature, preferred shares
cannot be converted into common. The terms of the preferred share contract cannot be changed
without the consent of the stockholders
b. The conversion of no par value shares to par value is allowed by SEC provided there would be no
change in the stockholder’s percentage interest in the total assets of the corporation
10. Fractional Share - is a share of equity that is less than one full share
11. Shares in escrow - subject to an agreement by virtue of which the share is deposited by the grantor or his
agent with a third person to be kept by the depositary until the performance of certain condition or the
happening of a certain event contained in the agreement
12. Over-issued stock - is a stock issued in excess of the authorized capital stock. Stocks which are issued in
this manner are null and void
13. Street certificate - is a stock issued in excess of the authorized capital stock. Stocks which are issued in this
manner are null and void
14. Promotional share - is a share issued to promoters or those in some way interested in the company, for
incorporating the company, or for services rendered in launching or promoting the welfare of the company
15. Watered stock - is a stock issued in exchange for cash, property, share, stock dividends, or services lesser
than its par value or issued value
Include stocks:
a. Issued without consideration (bonus share)
b. Issued for a consideration other than cash, the fair valuation of which is less than its par or issued
value
c. Issued as stock dividend when there are no sufficient retained earnings to justify it
d. Issued as fully paid when the corporation has received a lesser sum of money than its par or
issued value (discount share).
Rules;
a. Watered stocks can either be par or no par value shares.
b. The issuance of watered stocks is prohibited to protect persons who may acquire stock and the
creditors of the corporation particularly those who may become such on the faith of its outstanding
capital stock being fully paid. The prohibition secures equality among subscribers and prevents
discriminations against those who have paid in full the par or issued value of their share
c. Not all exchanges of stocks worth less than their value are considered watered stock
d. The watered stocks refer only to original issue of stocks but not to a subsequent transfer of such
stocks by the corporation, for then it would no longer be an “issue” but a sale thereof
e. Treasury shares are not subject to the prohibition on the issuance of watered stocks Treasury shares
are not original issuances. They are shares of stocks which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption, donation, or through
some other lawful means. Since they do not lose their status as issued shares, they cannot be treated
as new issues when disposed of or reissued.
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f. Treasury shares may again be disposed of for a reasonable price fixed by the BOD. Since they are not
subject to the prohibition on the issuance of watered stock, they may be sold for less than their par or
issued value as long as the price for re-disposal is reasonable.
g. The issuance of watered stock cannot be ratified by the stockholders. It is not merely ultra vires, but is
illegal per se.
h. Any director or officer of a corporation shall be solidarily liable with stockholder concerned to the
corporation and its creditors for difference between the fair value received at the time of the issuance
of the stock and the par or issued value of the same, if:
i. He consents to the issuance of stocks for consideration less than its par or issued
value
ii. He consents to the issuance of stocks for a consideration in any form other than
cash, valued in excess of its fair value
iii. Who, having knowledge thereof, does not forthwith express his objection in writing
and file the same with the corporate secretary
i. The solidary liability of the directors emanates from the fiduciary character of the position of director or
corporate officer
j. Defenses that can be invoked in order that a director or an officer can escape liability for the issuance
of watered stocks
i. The director or officer did not consent and did not have knowledge in the issuance of the
watered stock
ii. The director or officer objected to its issuance, provided:
- Objection must be directed to the issuance of the watered stocks
- In writing
- File the same with the corporate secretary
- Such objection must be done before the sale of stocks
k. The subscribed capital stock of the 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, and which the
corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s
unpaid subscription.
GR: The trust fund doctrine is violated where stocks are issued by the corporation for a
consideration which is less than its par value
EXN: Trust fund doctrine is not violated in case treasury shares are reacquired and subsequently
re-issued for a lesser consideration by the corporation. The only limitation for the reissuance of
treasury shares is that their price must be reasonable
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PROCEDURE FOR COLLECTION OF UNPAID SUBSCRIPTION
1. Call – declaration by the BOD that the unpaid subscriptions are due and demandable to the corporation
GR: Necessary if no time to make payment is stated in the subscription agreement
EXN: Time fixed in the agreement or if corporation becomes insolvent
2. Notice of Call – the stockholders are given notice of the board resolution by the corporate secretary, either personally
of by registered mail and such is necessary to bind the stockholders
3. When Delinquent: If the stockholders concerned do not pay within 30 days from the date specified in the contract of
subscription or in the call, all the stocks covered by the subscription shall be declared delinquent and shall be subject to
sale
a. Unpaid claim – any unpaid subscription and not to any indebtedness which a subscriber or stockholder may
owe the corporation arising from any other transaction
b. Remedies: (i) extrajudicial delinquency sale at public auction, (ii) judicial action, (iii) collection from cash
dividends and withholding of stock dividends
4. Notice of Sale - served on the subscribers either personally or registered mail and publication in a newspaper of
general circulation in the province or the city where principal office is located once a week for 2 consecutive weeks and
it shall state the amount due one each subscription plus accrued interest,, and the date, time, place of the sale which
sall not be less than 30 days nor more than 60 days from the date the stocks become delinquent
5. Sale - such number of shares as may be necessary to pay the amount due on subscription, plus interests, and other
amounts due, will be sold at public auction
6. Highest Bidder - person offering to pay the full amount of the balance on the subscription with accrued interest, cost
of advertisements, and expenses of sale for the smallest number of shares of fraction of a share
EXN: If there is no bidder, the corporation may bid for the same and the total amount due shall be credited in
full in the books of the corporation and the purchase thereof must be made of net earnings in view of the trust
fund doctrine and the reacquired shares shall be considered as treasury shares
7. Remaining Shares – shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares
8. Transfer – the stock so purchased shall be transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor
9. Discontinuance or cancellation – delinquency sale may be discontinued or cancelled if the delinquent stockholder
pays the unpaid balance plus interest, costs and expenses or before the date specified for the sale or when the BOD
orders otherwise
10. Action against delinquency sale
GR: Sale at public auction of delinquent share is absolute and not subject to redemption
EXN:
a. allegation and proof of irregularity or defect in the notice of sale
b. party filling the action must first pay the party holding the stock the sum for which the stock was sold with
legal interest from the date of sale
c. action is filed with 6 months from date of sale; in non stock corporations, applicable period if 4 years
11. Effects of Delinquency

GR: All rights of the stockholder are suspended
EXN: Right to dividends
a. cash dividends should be applied against unpaid subscription
b. stock dividends should be withheld until full payment of subscription
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CERTIFICATE OF STOCK
 Nature
1. written instrument signed by the proper officer of a corporation stating or acknowledging that the person named
therein is the owner of a designated number of shares of its stock
2. indicates the name of the holder, the number, kind and class of shares represented and the date of issuances
3. merely evidence of the holder’s interest and status in the corporation; not essential to the existence of a share of
stock or the creation of the relation of the shareholder with the corporation
4. has value separate and distinct from the value of shares represented
5. delivery is essential for its issuance
6. must be signed by the President or Vice President and countersigned by the Corporate Secretary or the Assistant
Secretary and sealed with the corporate seal, otherwise it is not deemed issued
7. certificate of stock will be issued only when the full amount of the subscription, together with interest and
expenses in case of delinquent shares if due, has been paid
8. stockholder may alienate his shares even if there is no certificate of stock issued by the corporation
 Transfer
a. In case of a fully paid subscription, without the corporation having issued a certificate of stock, the transfer
may be effected by the subscriber or stockholder executing a contract of sale or deed of assignment covering
the number of shares sold and submitting said contract or deed to the corporate secretary for recording
b. In case of subscription not fully paid, the corporation may record such transfer, provided that the transfer is
approved by the board of directors and the transferee executes a verified assumption of obligation to pay the
unpaid balance of the subscription.
c. Requirements for valid transfer of stocks
i. If represented by a certificate, the following must be strictly complied with
- Indorsement by the owner and his agent
- Delivery of the certificate
- To be valid to third parties and to the corporation, the transfer must be recorded in
the books of the corporation
ii. If not represented by a certificate (such as when the certificate has not yet been issued or where
for some reason is not in the possession of the stockholder)
- By means of deed of assignment and such is duly recorded in the books of the
corporation
 Registration
iii. Not necessary if the conveyance is by way of chattel mortgage, but here must be due
registration with ROD
iv. Necessary if the heirs acquire the shares of deceased shareholder
 The corporation whose shares of stock are the subject of a transfer through any mode of conveyance is not a party to
the transaction
 Negotiability: Certificates of stock may be issued only to registered owners of stock. The issuance of “bearer” stock
certificates is not allowed under the law
 Remedies:
a. Petition for mandamus, provided there are no unpaid claims against the stock by the corporation
EXN: ordinary cases to compel a corporation or its officers to transfer stock on its books and issue new
certificates to the transferee
b. Suit for specific performance of an express or implied contract
c. May sue for damages where specific performance cannot be granted
 Validity of stock transfer

1. As between the parties, the requisite for a valid transfer is merely the delivery of the certificate indorsed by
the owner or his attorney-in-fact or other person legally authorized to make the transfer
2. As against third persons and the corporation, the transfer of shares must be entered and noted upon the
books of the corporation so as to show the names of the parties to the transaction, the date of the transfer,
the number of the certificate, and the number of shares transferred.
 Effects of an unregistered transfer of shares

1. It is valid and binding as between the transferor and the transferee.
2. It is invalid or ineffective, as to the corporation, as against corporate creditors, as to the attaching or executing
creditors of the transferor, subsequent purchasers in good faith without notice of the transfer, and as to all
persons interested except the parties to such transfers
 Issuance of certificate of stock: It may only be issued until the full amount of the stockholder’s subscription together
with the interest and expenses (in case of delinquent shares) if due has been paid
 Requisites for the issuance of the certificate of stock
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a. The certificate must be signed by the president or vice-president, countersigned by the corporate secretary or
assistant secretary
b. The certificate must be sealed with the seal of the corporation
c. The certificate shall be issued in accordance with the by-laws
d. The certificate must be delivered
e. The par value as to par value shares, or full subscription as to no par value shares must be fully paid, the basis
of which is the doctrine of indivisibility of subscription
f. The original certificate must be surrendered where the person requesting the issuance of a certificate is a
transferee from the stockholder, a subscription is one, entire and indivisible contract, and therefore, it cannot be
divided into portions so that the stockholder shall not be entitled to the certificate of stock until he has paid the
full amount of his subscription together with interest and expenses, if any is due.
 Payment: Corporation may apply payments made by subscribers on account of their subscriptions, either as: (a) full
payment for the corresponding number of shares, the par value of which is covered by such payment, or (b) as payment
pro rata to each and all the entire number of shares subscribed for. This rule applies to all kinds and classes of stock
corporations. The two alternatives cannot be availed of at the same time
STOCK AND TRANSFER BOOK
 Contents
1. All stocks in the name of the stockholders alphabetically arranged
2. Amount paid and unpaid on all stocks and the date of payment of any installment
3. Alienation, sale or transfer of stocks
4. Other entries as the by-laws may prescribe
 Who may make valid entries
The obligation and duty to make proper entries in stock and transfer books falls on the corporate secretary. If the
corporate secretary refuses to comply, the stockholder may rightfully bring suit to compel performance. The stockholder
cannot take the law on to his hands; otherwise such entry shall be void
 Registration
As between the parties to the contract of sale, registration of the transfer of shares is not required. However, until the
shares are fully paid, such transfer cannot be recorded in the books of the corporation. Consequently, the transferee will
not be considered as a stockholder.
 Restrictions
1. Restrictions are provided in the articles of incorporation;
2. It must be printed at the back of the certificate of stock; and
3. Must not be more onerous than the right of first refusal
 Stockholder can transfer his shares without being fully paid, but such shall be valid only between parties and
corporation has the right to refuse recording the sale in its books
 Transferee of the partially paid shares cannot compel the corporation to record the transfer of shares in its books, even
though he has no knowledge that they are not fully paid
 In case the stockholder on record fails to pay the pay the balance of the purchase price, he is still liable for the balance
of the purchase price. Unless the transfer of the shares is recorded, the stockholder is still the owners of the shares as
far as the corporation is concerned.
 Sale of fully paid shares is allowed even without the consent of the corporation as long as the requisites for the valid
transfer of shares are complied.
 Recording of a deed of assignment with the SEC without the transfer of shares does not bind the corporation and third
persons
INVOLUNTARY DEALINGS WITH SHARES
- It refers to such writ, order or process issued by a court of record affecting shares of stocks which by law
should be registered to be effective, and also to such instruments which are not the willful acts of the
registered owner and which may have been executed even without his knowledge or against his consent.
Examples of involuntary dealings of a share
1. Attachment
2. Sale on execution of judgment or sales for taxes
3. Adverse claims
4. Foreclosure of mortgage of stocks
Involuntary dealings must be registered

It is the act of registration which creates a constructive notice to the whole world of such instrument or court writ or
process and is the operative act that conveys ownership
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DISSOLUTION & LIQUIDATION
 Dissolution – extinguishment of the franchise of a corporation and the termination of its corporate existence
 Modes:
1. Voluntary dissolution where no creditor is affected
2. Voluntary dissolution where creditors are affected
3. Involuntary dissolution
4. Shortening of term
5. Expiration of term
6. Revocation of certificate of incorporation by the SEC
 Sale of all the assets does not dissolve the corporation
I. Voluntary Dissolution where no creditors are affected

a) meeting must be held on the call of directors or trustees
b) notice of the meeting should be given to the stockholders by personal delivery or registered mail at
least 20 days prior to the meeting
c) the notice of meeting should also be published once in a newspaper in the principal office, or if there’s
is no such newspaper, in a newspaper of general circulation
d) resolution to dissolve must be approved by the majority of the directors/trustees and approved by the
stockholders representing at least a majority of the OCS or members
e) a verified request for dissolution shall be filed with the SEC and the latter will issue the certificate of
dissolution within 15 days from receipt of the verified request
II. Voluntary Dissolution where creditors are affected
a) Approval of the stockholders representing at least 2/3 of the OCS or members in a meeting called for
that purpose
b) Necessary to file a verified petition with the SEC signed by majority of directors or trustees or other
officers having the management of its affairs, verified by the President or Secretary or Director, Claims
and demands must be stated in the petition
c) SEC shall issue an order fixing the deadline for filing objections, which shall be no less than 30 days
nor more than 60 days after the entry of the Order
d) Copy of the order shall be published at least once a week for three consecutive weeks and shall be
posted for three consecutive weeks in three public places in the city
e) After the expiration of the time to file objections, a hearing shall be conducted upon prior five day
notice to hear the objections
f) Judgement shall be entered dissolving the corporation and directing the disposition of assets; the
judgement may include appointment of a receiver
g) Dissolution is effective upon issuance by the SEC of the certificate of dissolution
III. Shortening of Corporate Term - thru amendment of AOI which shall be filed with the SEC and the
corporation is deemed dissolved upon approval of the amended Articles or upon expiration of the new term; the
dissolution takes effect on the day following the expiration of the term without need of issuance by the SEC of a
certificate of dissolution
IV. Involuntary Dissolution – by filing a verified complaint with the SEC based on any ground provided by law or
rules
a.) non-use of corporate charter
b.) continuous inoperation of a corporation
c.) upon receipt of a lawful court order dissolving the corporation
d.) upon finding by final judgement that the corporation procured its incorporation through fraud
e.) upon finding by final judgement that the corporation
i. was created for the purpose of committing, concealing or aiding the commission of securities violation,
smuggling, tax evasion, money laundering, or graft and corrupt practices
ii. committed or aided in the commission of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices and its stockholders knew of the same
iii. repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or
illegal acts by its directors, trustees, officers or employees
Effect of dissolution on such grounds:
i. assets after payment of its liabilities upon petition of the SEC with the appropriate court be forfeited in
the favor of the national government
ii. forfeiture shall be without prejudice to the rights of innocent stockholders and employees for services
rendered and to the application of other penalty or sanction
V. Revocation of certificate of incorporation
a) refusal or obstruction, without justifiable cause, of the SEC’s exercise of its visitorial powers
b) failure to comply with the SEC’s order to immediately cease and desist from using corporate name and
require the corporation to register a new one or to remove all visitorial signages, marks, advertisements,
labels, prints and other effects bearing such corporation name
c) non-filing of by-laws
 Effects of Dissolution
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1. Corporate Properties – properties be distributed after payment of liabilities and debs and results in the transfer
of legal title to properties to the stockholders who become co-owners thereof after payment of the liabilities
2. Continuation of Corporate Business – corporation ceases as a body corporate
3. Creation of a new Corporation -the stockholders are not prevented from conveying their respective
shareholdings toward creation of a new corporation to continue the business of the old
4. Reincorporation of Dissolved Corporation – though a dissolved corporation cannot be revives, those interested
may reincorporate by re-filing new Articles of Incorporation and By-laws
5. Continuation of a Body Corporation – corporation continues as a body corporate for three years for purposes of
winding up or liquidation
6. Cessation of Corporate existence for all purposes – upon expiration of the 3 year winding up period, the
corporation ceases to exist for all purposes
7. Application for Revival – a corporation whose term has expired may apply for a revival of its corporate
existence, together with all the rights and privileges under its certificate of incorporation and subject to all of its
duties, debts, liabilities existing prior to its revival
 Liquidation – process by which all the assets of a corporation are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders
 Rules:
1. The corporation under liquidation can no longer enter into 20-year lease because this goes against the
nature of liquidation
2. Modes: (a) BOD, (b) Through a trustee to whom the properties are conveyed by the corporation, (c) by
management committee or rehabilitation receiver-appointed by court
3. If full liquidation can only be effected after the 3-year period and there is no trustee, the directors may
be permitted to complete the liquidation by continuing as trustees by legal implication
4. Cases that were filed while the corporation was still in existence and remain pending beyond 3-year
liquidation period may be continued by the trustees or directors until rendition of the final judgment,
even if such judgement is rendered beyond the 3-year period
5. Order of Distribution:
a) payment of creditors who are not stockholders based on preference or concurrence of
credits
b) payment of claims of stockholders who are creditors of the corporation as to the amount
of their claim as creditors
c) residual balance shall be distributed proportionately
i. holders of preferred stock
ii. holders of common stock
d) if the creditor or stockholder cannot be found, their claims or shares shall be escheated in
favor of the city or municipality where the asset is located
6. Period of existence of the trusteeship: Where no time limit has been fixed with respect to the
existence of the trusteeship, the trustee has authority to close the affairs of the corporation even
after the expiration of the statutory 3-year period and claims not barred by the statute of
limitations can be presented and allowed until the liquidation is terminated
CLOSE CORPORATION
 Requirements:
1. all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more
than 20 persons
2. all the issued stock of all classes shall be subject to one or more specified restrictions on transfer i.e. transfer of
shares must be specified In the AOI, By-laws, and the certificate of stock to be binding on 3 rd persons
3. the corporation shall not list in any stock exchange or make any public offering of its stocks of any class
 Rules:
1. corporation shall not be deemed a close corporation when at least 2/3 of the its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation
2. restrictions on the transfer of shares must not be more onerous than granting the existing shareholders or the
corporation the option to purchase the shares of the transferring shareholder under reasonable terms, conditions
and period stated
3. Corporation is not a close corporation even if the shares belong to less than 20 if not all requisites are present;
three requisites must concur
4. Cannot be close corporations: mining, oil, stock exchange, banks, insurance, public utility, educational institutions
5. Other corporations declared to be vested with public interest
6. Stockholder may act as directors without need of Election and therefore are liable as directors
7. Quorum may be greater than mere majority when provided in the A01
8. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are
invalid
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9. Corporate Acts may be binding even without a formal board meeting, if the stockholder had knowledge or ratified
the informal action of the others
10. Preemptive right extends to all stock issues
11. Deadlocks in board may be settled by the SEC, on the written petition by any stockholder
12. Stockholder may withdraw and avail of his right of Appraisal
13. Agreements by stockholders as managers
a. No Longer necessary to elect directors
b. Stockholders concerned shall be deemed the Directors
c. The stockholders shall have the same Liabilities as directors
d. To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict Fiduciary duties
to each other and among themselves
e. The stockholders shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance
14. The restriction on transfer is in the nature of a right of first refusal in favor of the stockholders that can be waived
by the stockholder, if the latter fails to exercise the option to purchase within the period stated in the articles and
by-laws. Any transfer made should not result in exceeding the number of stockholders as allowed by the Code
15. Effect of Issuance or Transfer of Stock in Breach of Qualifying Conditions: The transferee is conclusively
presumed to have notice if:
a. Stock is issued or transferred to any person who is not entitled under any provision of the AOl to
be a holder of record of its stock and the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof.
b. The issuance or transfer of stock to any person would cause the stock to be held by more than
such number of persons and the A01 of a close corporation states the number of persons, not
exceeding 20, who are entitled to be holders of record of its stock, and the certificate for such
stock conspicuously states such number.
c. The acquisition violates the restriction and the stock certificate conspicuously shows a restriction
on transfer of stock
16. Remedy of the Corporation for Breach of Restrictions
a. It may refuse to register the transfer of stock in the name of the transferee. However, the
corporation may not refuse to register if the transfer has been consented to by all the stockholders
or if the A01 is amended
b. To rescind the transfer or to recover under any applicable warranty, express or implied
17. Amendment of A01 of a Close Corporation
GR: 2/3 of the outstanding' capital Stock is necessary to approve amendments to A01 deleting or
removing any required provision (on close corporations) in the A01 or reducing the quorum
EXN: Greater proportions are specifically provided in A01 for the purpose
18. Deadlock in a Close Corporation - occurs when the directors or stockholders are so divided respecting the
management of the business and affairs of the corporation that the votes required for any corporate action
cannot be obtained and as a result, business and affairs can no longer be conducted to the advantage of the
stockholders generally
19. Remedy In Case of Deadlock: The SEC, upon written petition by any stockholder, shall have the power to
arbitrate the dispute
Authority of the SEC to Arbitrate

a. Direct or prohibit any act of the corporation or its Board, stockholders, officers, or other
persons party to the action;
b. Cancel, alter or enjoin any resolution or act of the corporation or its Board, stockholders, or
officers
c. Cancel or alter any provision in the Articles, bylaws or any stockholders' agreement;
d. Require the Purchase at their fair value of shares of any stockholder, either (a) by the
corporation regardless of the availability of unrestricted retained earnings, or (b) by the other
stockholders;
e. Appoint a Provisional director, who shall be an impartial person who is neither a stockholder
nor a creditor of the corporation or its subsidiary/affiliate
f. Grant such Other relief as the circumstances may warrant; or
g. Dissolve the corporation
20. Remedies of Stockholders In case of Deadlock

a. Compel the corporation to purchase his shares — any stockholder of a close corporation
may, for any reason, compel the said corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value, when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of capital stock.
b. Compel the dissolution of the corporation - any stockholder of a close corporation may, by
written petition to the SEC, compel the dissolution of such corporation whenever: a. Any of
acts of the directors, officers or those in control of the corporation is illegal, fraudulent,
44
dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder, or b.

Corporate assets are being misapplied or wasted
21. Permissive Provisions in the Articles of Incorporation of a Close Corporation:

a. Classifications of Shares or rights and the qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein;
b. Classification of Directors into one or more classes, each of whom may be voted for and
elected solely by a particular class of stock;
c. A greater quorum or voting requirements in meetings of stockholders or directors than those
provided in the Code; and
d. The business of the corporation to be managed by the stockholders of the corporation rather
than by a board of directors
CLOSE CORPORATIONS ORDINARY CORPORATIONS

Limitation on the number of stockholders to a max of 20 No limit
There must be restriction on the transfer of shares Restriction need not be provided for
Specific qualifications to be eligible as stockholder are Qualifications of stockholders are not normally prescribed
usually provided in the AOI
Public offering of shares is prohibited Public offering of shares is not prohibited
May be managed directly by stockholders; in which case they Managed by the board of directors and not the stockholders
assume the liabilities of directors
Shareholder can withdraw by compelling the close Generally, a shareholder cannot withdraw and compel the
corporation to purchase his/her shares corporation to purchase his/her share except under Sec 40 of
RCCP
Rules on deadlock are provided No rules on deadlock and the powers granted to SEC under
Sec 130 of RCCP are not available even if there is deadlock
45
NONSTOCK CORPORATION
- One where no part of its income is distributable as dividends to tits members, trustees, or officers and any profit which
it may obtain as an incident to its operations shall whenever necessary or proper, be used in furtherance of the
purpose/s for which it was organized
 Purpose: charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civil service and
other similar purposes, such as chambers or combinations in trade, industry or agriculture
 Non-stock corporation may not generally engage in profit making business and it may however invest in corporate funds
in order to earn additional income for paying its operating expenses and meeting benefits claims
 Rights of members
a. Right to vote – a member is entitled to one vote, but may be broadened, denied in the AOI or By-laws
b. Right to transfer membership
GR: Member cannot transfer his membership and the rights therefrom
EXN: AOI or By-laws may provide for their transferability
 Admission and termination of membership pertains to the Board of Trustees
a. Based on the standards fixed in the AOI or By-laws
b. Membership may involve property rights
c. when loss of property rights is involved, the manner of deprivation of such property right should also be in
accordance with Arts. 19, 20, and 21 of the CC on Human Relations
d. Non-payment of dues may be a ground for termination or suspension of membership and the AOI and By-laws
may provide that unpaid dues shall constitute a lien on the member’s share
e. The shares may be sold by virtue of a lien and in such sale, the member had already full paid for the share and
no longer had any outstanding obligation to deprive him of full title to his share
 Effect of death of member: membership and all rights derived therefrom are personal and non-transferrable, unless AOI
or the By-laws provide otherwise and hence not counted in determining quorum
 Conversion:
a. Non-stock corporation cannot be converted into a stock corporation through mere amendment of its AOI as it
would violate the prohibition on distribution of income as dividends
b. Non-stock corporation can be converted into stock corporation only if members dissolve it first an then organize
a stock corporation
c. Stock corporation may be converted into a non-stock corporation by mere amendment provided all the
requirements are complied but its rights and liabilities will remain
 Order of Distribution of Assets
a. All its creditors shall be paid
b. Assets held subject to return on dissolution shall be delivered back to their givers
c. Assets held for charitable, religious, benevolent, educational or similar purposes, without a combination for their
return on dissolution shall be conveyed to one or more organizations engaged in similar activities as the
dissolved corporation
d. All other assets shall be distributed to members, as provided for in the AOI or by-laws
NON-STOCK STOCK
Components Members Shareholders
Board Members and term Trustees for 3 years Directors for 1 year
Existence of shares No capital stock divided into shares Capital stock divided into shares
Dividends No dividends are declared Dividends may be declared
Purpose Primary purpose is non-profit; Can conduct business Primary purpose is business
but only incidental to the primary purpose
Voting rights Right to vote may be denied in the AOI or by -laws; One class of shares must always have
vote by proxy can be denied complete voting rights; may always vote
by proxy
Transferability of interest Membership is generally non-transferrable Shares are transferable; subject to
provisions on close corporations
Termination Membership may be terminated Ownership of shareholder cannot be
terminated until the transfer of the
shares or liquidation
Effect of death Death of a member terminates the membership and Shares can be acquired through
generally membership is not transferred succession
Number of board members Can be more than 15 trustees Not more than 15 directors
Term of boards Term may be not more than 3 years one year
Voting Cumulative voting not allowed unless provided for in Cumulative voting is expressly allowed
the Articles or By-laws
Liquidation Generally, the members will not get a share in the Shareholders will get their share in the
assets unless provided for in the AOI or by-laws net assets known as liquidating
dividends after payment of creditors
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OTHER CORPORATIONS
 Religious Corporations:
1. Corporation Sole – special form of corporation, usually associated with the clergy and consists of one person
only and his successors, who are incorporated by law to give some legal capacities and advantages
i. Does not have nationality but for purposes of nationalization laws, its nationality is determined by the
nationality of the members constituting it, hence the Roman Catholic Church can acquire land in the
Philippines
ii. Members of the sect who left and who formed a separate religious group are not entitled to any right
over the properties of their former sect
iii. a corporation sole may be converted to a corporation aggregate through the amendment of its AOI by
concurrence of 2/3 of the members
iv. dissolution may be made by filing a verified declaration of dissolution stating (1) name of the
corporation; (2) reason for dissolution; (3) authorization for the dissolution by the particular religious
denomination, sect or church; (4) names and addresses of the persons who will supervise the
dissolution and winding up
v. sale or mortgage of properties administered by the corporation sole shall be made in accordance with
its rules and regulations and such rules may provide that court intervention is not necessary
2. Religious societies – non-stock corporation formed by a religious society, group, diocese, synod or district of
any religious denomination, sect or church after getting the approval of 2/3 of its members
i. Its By-laws may provided that a member may be expelled or removed without previous notice
and such is conclusive before the courts
ONE PERSON CORPORATION

- Corporation with a single stockholder
 Only natural person, trust, or an estate may form an OPC

 The following cannot be an OPC:
1. banks, quasi-banks, preneed, trust, insurance, public and publicly-listed companies and non-chartered
GOCCs
2. natural person who is licensed to exercise a profession may not organize as OPC for the purpose of
exercising such profession except as otherwise provided under special laws
 Separate Personality
1. Limited liability: While the single stockholder’s liability is also limited to his investment, a sole shareholder
claiming limited liability has the burden of affirmatively showing that the corporation was adequately
financed
2. Jointly and severally liable: where the stockholder cannot prove that the property of the OPC is
independent of the stockholder’s personal property, the stockholder shall be jointly and severally liable for
the debts and other liabilities
 AOI is required but no need for By-laws; AOI must contain:
1. If the single stockholder is a trust or an estate, the name, nationality and residence of the trustee,
administrator executor, guardian, conservator, custodian or other person exercising fiduciary duties
together with the proof of such authority to act on behalf of the trust or estate
2. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and
limitation of the authority (consent of nominee shall be attached)
 Nominee or alternate nominee
1. the person designated by the single stockholder who shall, in the event of the single stockholder who shall, in
the event of the single stockholder’s death or incapacity, take the place of the single stockholder as director
and shall manage the corporation’s affairs
2. the nominee must consent and such consent may be withdrawn in writing any time before the death or
incapacity of the single stockholder
3. In case of temporary incapacity, he shall sit as director/manage the OPC’s affairs until the stockholder, the
self-determination, regains the capacity to assume such duties
4. In case of death or permanent capacity, the nominee shall manage the OPC’s affairs until the legal heirs of the
single stockholder have been lawfully determined, and the heirs have designated one of them or have agreed
that the estate shall be the single stockholder of the OPC
5. The single stockholder, at any time without need to amend the AOI, change its nominee and alternate nominee
by submitting to the SEC the names of the new nominees and their corresponding written consent
 Directors and officers
1. The single stockholder shall be the sole director and president of the OPC
2. Within 15 days from the issuance of it certificate of incorporation, the OPC shall appoint a treasure,
corporate secretary, and other officers as it may deem necessary and notify the SEC thereof within 5 days
from appointment
3. The single stockholder may not be appointed as the corporate secretary
47
4. A single stockholder who is likewise the self-appointed treasurer shall give a bond ( 2 -year term) to the
Sec with undertaking in writing to faithfully administer the OPC’s funds to be received as treasurer, and to
disburse and invest the same according to the AOI as approved by the SEC
5. In addition to the functions designated by the OPC, the corporate secretary shall
ii. Be responsible for maintain the minutes book and/or records of the corporation
iii. Notify the nominee or alternate nominee of the death or incapacity of the single stockholder,
which notice shall be given no later than 5 days from such occurrence
iv. Notify the SEC of the death of the single stockholder within 5 days from such occurrence and
stating in such notice the names, residence, addresses and contact details of all known legal
heirs
v. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the
legal heirs with regard to, among others, the election of a new director, amendment of the
AOI, and other ancillary and/ or consequential matters
 Minutes
a. contains all actions, decisions and resolutions
b. when action is needed on any matter, it shall be sufficient to prepare a written resolution, signed and dated by
the single stockholder, and recorded in the Minutes Book
c. date of recording in the minutes book shall be deemed to be the date of the meeting for all purposes
 Reportorial requirements
1. Annual financial statements audited by an independent certified public accountant, except if the total assets or
liabilities of the corporation are less than 60, 000, the financial statement shall be certified under oath by the
corporations’ treasurer and president
2. Report containing explanations or comments by the president on every qualification, reservation, or adverse
remark or disclaimer made by the auditor in the latter’s report
3. Disclosure of all self-dealings and related party transactions entered into between the OPC and the single
stockholder
4. Other reports as the SEC may require
5. The SEC may place the corporation under delinquent status should the corporation fail to submit the reportorial
requirements 3 times consecutively or intermittently within a period of 5 years
 Conversion
1. When a single stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply for
conversion into an OPC and in effect it shall be legal responsible for all the latter’s outstanding liabilities as the
date of conversion
2. An OPC may be converted into an ordinary stock corporation after due notice to the SEC of such fact and of
the circumstances leading to the conversion, and after compliance with all other requirements for stock
corporations under the RCCP and which such notice shall be filed with the SEC
48

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CORPORATION REVIEWER 1

4. POWERS, ATTRIBUTES AND PROPERTIES OF A CORPORATON

DE FACTO vs DE JURE v. BY ESTOPPEL

DE JURE DE FACTO BY ESTOPPEL

- Cannot invoke lack of personality to evade liability

DOCTRINE OF PIERCING THE CORPORATE VEIL

 Indications that a subsidiary company is merely an alter-ego of its parent corporation:

2. Corporators - compose a corporation whether as stockholders/shareholders in a stock corporation or as

3. Directors/ Trustees – governing body in a stock/ non-stock corporation

NON-USE OF CORPORATE CHARTER & CONTINUOUS INOPERATION

 Effectivity and Binding Effect:

ULTRA VIRES ACTS

- an act outside or beyond express, implied and incidental corporate powers

ULTRA VIRES ILLEGAL ACTS UNAUTHROIZED ACTS

GENERAL POWERS SPECIFIC POWERS

I. POWER TO SUE AND BE SUED – exercised by BOD/T thru a resolution

II. POWER TO DEAL PROPERTIES

 UNRESTRICTED RETAINED EARNINGS (URE)

 Guidelines for the acquisition of its own shares

IV, POWER TO DECLARE DIVIDENDS

 Items that cannot be used for dividend distribution

 Considered part of retained earnings

V. POWER TO SELL ALL OR SUBSTANTIALLY ALL PROPERTIES

 Instances when corporation may forego the ratification by stockholder/members

VII. POWER TO DENY PRE-EMPTIVE RIGHT

PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL

VIII: POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS

IX: POWER TO ENTER INTO MANAGEMENT CONTRACT

X. POWER TO ENTER INTO MERGER OR CONSOLIDATION

a. Failure to Comply with Beneficial Ownership

b. Failure to Comply with Voting Control Tier

2. Double 60% Rule

Shares in XYZ owned by Filipinos 61.50%

Shares in XYZ owned by Foreigners 38.50%

 Ways a foreign corporation may transact business

iii. Establishment of a representative/ liaison office

 License to do business In the Philippines

 Legal Capacity to sue not same as legal capacity to act

Without a license to do Not permitted to maintain or intervene in a suit, but

TRUST FUND DOCTRINE

 Exceptions to the trust fund doctrine: Distribution for Assets

 Scope of the Trust Fund Doctrine

BOARD OF DIRECTORS AND TRUSTEES

1. Term: 1 yr for directors; 3 yrs for trustees

ELECTION OF DIRECTORS & TRUSTEES

Straight Cumulative Voting (one Cumulative voting (distribution)

REMOVAL OF DIRECTORS OR TRUSTEES

– belong exclusively to stockholders or members

3. Previous notice to the stockholders or members of the intention to remove a director

VACANCIES IN THE BOARD

 Duties and liabilities

GR: Voidable at the option of the corporation

4. Limitations on the powers of the executive committee

MEETINGS OF BOARD OF DIRECTORS OR TRUSTEES

GR: Majority of the directors or trustees present constituting a quorum

STOCKHOLDERS AND SHARES

 When does one become a shareholder?

A. RIGHT TO ATTEND AND VOTE IN PERSON OR BY PROXY AT A STOCKHOLDERS’ MEETINGS

 Excluded from computation of quorum

 Rules applicable on certain shares

EXN to EXN: Cases involving funds of public character

Note: The written notice may