CORPORATION LAW

I. CORPORATION DEFINED

1. What is a corporation? (Sec. 2, Revised Corporation Code [RA 11232])

A corporation is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.

1.01 Explain the concession theory

A corporation is a creature of the State and all its powers and capacities are only to the extent that the laws
and its charter has granted it.

This theory looks at a corporation simply as a creature of the State, completely within its control (Sec. 2).
Accordingly, a corporation has without any existence until it has received the imprimatur of the State acting
according to law, through the SEC. The life of the corporation is a concession made by the State.

Although fiction cannot be created unless there is an enterprise or group upon whom it may be conferred,
and in spite of the underlying contract among the persons wanting to form the corporation, the grant is only
by virtue of a primary franchise given by the State.

It applies within the juridical entity level, and the issues to be resolved arise between the State and its
instrumentalities and the corporation.

1.02 What are the attributes of a corporation?

1. It is an artificial being – by operation of law, it becomes a being with the attributes of an individual with
full capacity to enter into contractual relations. It is a legal or juridical person with a personality
separate and distinct from its individual members.
2. It is created by operation of law – a corporation cannot come into being by mere consent of the parties,
there must be a law granting it, and once granted, forms the primary franchise of the corporation.
3. It enjoys the right of succession – the capacity for continuous existence despite the death or replacement
of its shareholders/members for it has a personality distinct from those who compose it.
4. It has the powers, attributes and properties expressly authorized by law or incident to its existence –
allowed only and can legally exercise only such powers granted by law for its creation.

1.03 Consequences of Separate Personality

 It is the basis of the primary doctrine that a corporation being a juridical person has a personality
separate and distinct from the stockholders or members who compose it. [Art. 44(3), Civil Code]

 The granting to the corporate entity of a strong separate juridical personality has been considered as the
attribute or privilege most characteristic of corporations. Unlike the cumbersome juridical personality of
its nearest rival today, the partnership, the separate juridical personality of the corporation has features
that have made it most attractive to businessmen: right of succession, limited liability, centralized
management, and generally free-transferability of shares of stock. In addition, the strong separate
juridical personality of the corporation facilitates and preserves the “going concern value” of the
underlying business enterprise, saves on transaction costs, and prevents disruption of that value because
of investors who withdraw or who are deceased. Therefore, an undermining of the separate juridical
personality of the corporation, such as the abusive application of the piercing doctrine, necessarily
dilutes any or all of these attributes.

 The stability of the main doctrine of separate juridical personality is inextricably linked with the
attractiveness of the corporation as an efficient medium by which businessmen can pursue and operate
business enterprises. It would also compel businessmen to enter into efficient and costly contractual
relations to fill the gaps created by a flawed main doctrine.

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▪ Consequences:
1. Liability for acts or contracts – obligations incurred by a corporation, acting through its authorized
agents are its sole liabilities. (Creese vs. CA, 93 SCRA 483)
2. Right to bring actions – may bring civil and criminal actions in its own name in the same manner as
natural persons. (Art. 46, Civil Code)
3. Right to acquire and possess property – property conveyed to or acquired by the corporation is in
law the property of the corporation itself as a distinct legal entity and not that of the stockholders or
members. (Art. 44(3), Civil Code)
Note: The interest of the shareholder in the properties of the corporation is inchoate only. The interest
of the shareholder on a particular property becomes actual, direct and existing only upon the
liquidation of the assets of the corporation and the same property is assigned to the shareholder
concerned.
4. Acquisition of court of jurisdiction – service of summons may be made on the president, general
manager, corporate secretary, treasurer or in-house counsel. (Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership – remains unchanged and unaffected in its identity by changes
in its individual membership. (The Corporation Code of the Philippines Annotated, Hector de Leon,
2002 ed.)
6. Entitlement to constitutional guaranties:
a. Due process (Albert vs. University Publishing, 13 SCRA 84)
b. Equal protection of the law (Smith, Bell & Co. vs. Natividad, 40 Phil. 136)
c. Protection against unreasonable searches and seizures. (Stonehill vs. Diokno, 20 SCRA 383) A
corporation is not entitled to invoke the right against self-incrimination. (Bataan Shipyard vs.
PCGG)
7. Liability for torts – a corporation is liable whenever a tortuous act is committed by an officer or
agent under the express direction or authority of the stockholders or members acting as a body, or,
generally, from the directors as the governing body. (PNB vs. CA, 83 SCRA 237)
8. Non-entitlement to moral damages - a corporation is not entitled to moral damages because it has
no feelings, no emotions, no senses. (ABS-CBN vs. Court of Appeals)
o Bedrock Rule: Under Article 2219 of the Civil Code, for cases of libel, slander and other forms
of defamation, a corporation is entitled to moral damages.
9. Liability for Crimes – since a corporation is a mere legal fiction, it cannot be held liable for a crime
committed by its officers, since it does not have the essential element of malice; in such case the
responsible officers would be criminally liable. (People vs. Tan Boon Kong, 54 Phil.607)

▪ Q: Is a corporation liable for torts?

A: Yes, whenever a tortuous act is committed by an officer or agent under the express direction
or authority of the stockholders or members acting as a body, or, generally, from the directors as
the governing body. (PNB v. CA, G.R. No. L‐27155, May 18, 1978)

a) As to nationality

▪ Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality.

▪ Sec. 176, Revised Corporation Code. Stock Ownership in Corporations. – Pursuant to the duties
specified by Article XIV of the Constitution, the National Economic and Development Authority
(NEDA) shall, from time to time, determine if the corporate vehicle has been used by any
corporation, business, or industry to frustrate the provisions of this Code or applicable laws, and
shall submit to Congress, whenever deemed necessary, a report of its findings, including
recommendations for their prevention or correction.

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 The Congress of the Philippines may set maximum limits for stock ownership of individuals or
groups of individuals related to each other by consanguinity, affinity, or by close business
interests, in corporations declared to be vested with public interest pursuant to the provisions of
this section, or whenever necessary to prevent anti-competitive practices as provided in Republic
Act No. 10667, otherwise known as the “Philippine Competition Act”, or to implement national
economic policies designed to promote general welfare and economic development, as declared
in laws, rules, and regulations.

In recommending to the Congress which corporations, businesses and industries will be declared
as vested with public interest, and in formulating proposals for limitations on stock ownership,
the NEDA shall consider the type and nature of the industry, size of the enterprise, economies of
scale, geographic location, extent of Filipino ownership, labor intensity of the activity, export
potential, as well as other factors which are germane to the realization and promotion of business
and industry.

▪ Tests in determining the nationality of corporations:

1) Place of incorporation test - determined by the state of incorporation, thus, a corporation is a
national of the country under whose laws it has been organized and registered.
2) Domiciliary test or Principal place of business - determined by the state where it is domiciled,
thus, a corporation is a national or subject to the jurisdiction of the place where its principal
office or center of management is located.
3) Investment test or Control test - determined by the nationality of the majority of the
controlling stockholders or members. This test is applied in times of war which is also known
as the wartime test.

▪ As general rule, the control test or investment test cannot overcome the place of incorporation
test i.e., a foreign corporation even when 100% of its equity is owned by Filipino citizens
continues to be considered as a foreign corporation. The only exception to this rule recognized
by the SEC in an opinion, is that found in the provision of the Foreign Investment Act of 1991
that “a corporation organized abroad and registered as doing business in the Philippines under
the Corporation Code, 100% of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos.

▪ Under the Foreign Investment Act of 1991 (R.A. No. 7042), the following are considered
“Philippine Nationals,” to wit:
1) Corporations organized under Philippine laws of which 60% of the capital stock outstanding
and entitled to vote is owned and held by Filipino citizens;
2) A foreign corporation licensed as doing business in the Philippines of which 100% of the
outstanding capital stock entitled to vote is wholly owned by Filipinos.
It provides, however, that where a corporation and its non-Filipino 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, in order that the corporation shall be considered a Philippine national
(double 60% rule).
NOTE: The law applies the control test both with respect to the ownership of shares entitled to
vote and the membership in the board of directors.

▪ Grandfather rule - A sub-application under control test, where the various nationality tests shall
first be applied on the shareholders of the holding companies, to determine the nationality of the
equity in the target corporation, and thereby arrive at the nationality of such target corporation.

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 - It is a three-level relationship test that gave it the name: the target company may be termed to
be the “grandson”; the holding company would be considered the “father”; and the person or
entity holding shares in the holding company would be considered the “grandfather”.

- Used to determine the nationality of a corporation by which the percentage of Filipino equity
in corporations engaged in nationalized and/or partly nationalized areas of activities,
provided for under the constitution and other nationalization laws, is computed, in cases
where corporate shareholders are present in the situation, by attributing the nationality of the
second or even subsequent tier of ownership to determine the nationality of the corporate
stockholder. (Villanueva, 2003)

- Example: In case of public utilities, the Constitution requires 60% capital Filipino
ownership, said corporation shall be considered as of Philippine nationality. If it has less than
60%, only the number of shares corresponding to such percentage shall be counted as
Philippine nationality.

- The grandfather rule determines the actual Filipino ownership and control in a corporation by
tracing both the direct and indirect shareholdings in the corporation. It is originally intended
to look into the citizenship of the individuals who ultimately own and control the shares of
stock of a corporation for purposes of determining compliance with the constitutional
requirement of Filipino ownership. The shareholdings should ideally be traced (i.e.
grandfathered) to the point where natural persons hold the shares. It applies only when the
60-40 Filipino-foreign ownership is in doubt or where there is reason to believe that there is
non-compliance with the provisions of the Constitution on the nationality restriction.

- The Grandfather Rule is a method to determine the nationality of the corporation by making
reference to the nationality of the stockholders of the investor corporation. Where the 60-40
Filipino-foreign equity ownership is not in doubt, the Grandfather Rule will not apply.

 Exceptions to the Doctrine of Separate Personality:

1) Application of piercing the veil of corporate fiction.
- It is the doctrine that allows the State to disregard the notion of separate personality of a corporation
for justifiable reason/s thereby holding the actor liable.
- Grounds upon which piercing may be applied:
• When it is used as a shield to confuse legitimate issues; or
• Whether lifting the veil is necessary to achieve equity; or
• For the protection of the creditors;
• When the corporation is used to evade a just and due obligation, or to justify a wrong, to shield
or perpetuate fraud, to carry out other similar unjustifiable aims or intentions, or as a
subterfuge to commit injustice and so circumvent the law;
• Where a corporation is the mere alter ego or business conduit of a person; or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely
as an instrumentality, agency, conduit or adjunct of another corporation.
- Classification of the Piercing Cases:
• when the corporate entity is used to commit fraud, or to justify a wrong, or to defend a crime
(fraud cases)
• when the corporate entity is used as a mere alter ego, business conduit or instrumentality of a
person or another entity (alter ego cases)
• when the corporate entity is used to defeat public convenience (defeat public convenience
cases)
• when piercing of the corporate fiction is necessary to achieve justice or equity (equity cases)

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 Note: Reverse piecing of veil of corporate fiction

2) Alter ego doctrine or theory (there are 2 corporations – conduit, instrumentality), when a corporate
officer/trustee/director held solidarily liable with the corporation.

 What is business judgment rule?

- General Rule: Courts will not interfere in the decisions made by the BOD as regards the internal
affairs of the corporation.
Exception: Unless such contracts are so unconscionable and oppressive as to amount to a wanton
destruction of rights of the minority. (Ingersoll v. Malabon Sugar Co., G.R. No. L-‐ 16977, Apr.
21, 1922)

1.04 Artificial Being

a) As to actions

- In spite of its artificial being, every corporation incorporated under the RCC has the power and
capacity to sue and be sued in its corporate name. [Sec. 35(a), RCC; Art. 46, Civil Code)

b) As to criminal liability

- Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its
officers, since it does not have the essential element of malice. In such case the responsible officers
would be criminally liable. (People v. Tan Boon Kong, G.R. No. L‐32066. Mar. 15, 1930)

 Sec. 184, RCC. Effect of Amendment or Repeal of This Code, or the Dissolution of a Corporation. - No
right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees,
or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this Code or of any part thereof.

c) As to moral damages

- A corporation is not entitled to moral damages because it has no feelings, no emotions, and no
senses. (ABS-CBN vs. Court of Appeals)

 What is the doctrine of piercing the veil of corporation entity?

- It is the doctrine that allows the State to disregard the notion of separate personality of a corporation
for justifiable reason/s in order to hold the actor liable.
- It requires the court to see through the protective shroud which exempts its stockholders from
liabilities that they ordinarily would be subject to, or distinguishes a corporation from a seemingly
separate one, were it not for the existing corporate fiction (Lim vs. CA, 323 SCRA 102).
- It aims to protect the interest of innocent third person dealing with the corporation.
- Note that yellow highlighted Sections of the RCC are those provisions which justifies the piercing of
corporate fiction.

 When should party raise the doctrine?

- The issue of piercing the veil of corporate fiction should be raised before the trial court. The
plaintiff/petitioner shall not be allowed to raise it for the first time on appeal for it will undermine the
basic considerations of due process.

 Requirement in suit involving piercing veil of corporate fiction:

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 (1) Complainant must allege in the complaint that the director or officer assented to patently unlawful
acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and
(2) Complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.
To hold a director or officer personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director or officer must be established clearly and
convincingly.

 What is the consequence of piercing the corporate veil?

It will temporarily disregard the basic principle that a corporation has a separate personality distinct
from its stockholders and officers thereby causing the courts to treat the corporation as a mere
aggrupation of persons and the liability will directly attach to them.

 What are the elements for piercing the corporate veil based on the alter ego theory?
1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and
3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.

 Components of alter ego doctrine:

(Three-pronged test to determine the application of the alter ego theory)
(i) Instrumentality or control test - The instrumentality or control test of the alter ego doctrine requires
not mere majority or complete stock control, but complete domination of finances, policy and
business practice with respect to the transaction in question. The corporate entity must be shown to
have no separate mind, will, or existence of its own at the time of the transaction.
(ii) Fraud test - The fraud test, which is the second of the three-prong test to determine the application
of the alter ego doctrine, requires that the parent corporation's conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful.
(iii) Harm test - Under the third prong, or the harm test, a causal connection between the fraudulent
conduct committed through the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff has to be established.

 When application not justified and the general rule on corporate entity applies
In the absence of any of the following circumstances, the courts will not be justified in disregarding the
corporate entity:
1. The corporation is used or being used to defeat public convenience;
2. Justify wrong;
3. Protect fraud;
4. Defend crime;
5. Confuse legitimate issues;
6. Circumvent the law;
7. Perpetuate deception; or
8. An alter-ego, adjunct or business conduit for the sole benefit of a stockholder or a group of
stockholders or another corporation.
9. The wrongdoing must be clearly and convincingly established. It cannot be justified by
speculation and can never be presumed.

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 10. The petitioner must seek to impose a claim against the stockholders or officers directly liable,
otherwise piercing the veil of corporate fiction would not be available nor justified.

 What is reverse piercing of the corporate veil

Instead of holding certain individuals or persons responsible for an alleged corporate act, the situation
has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal
liability of certain individual directors, officers and incorporators concerned. Hence, it appears that the
doctrine has been turned upside down because of its erroneous invocation.
Simply stated, under the doctrine of reverse corporate piercing, a corporation can be made liable for the
personal debts or obligations of a stockholder, member, officer or director (IAME vs. Litton, 2017).

1.05 Created by Operation of Law

Franchises of a Corporation

 Franchise: appropriately applies to the right or privilege itself to be and act as a corporation or to do a
certain act while charter applies to the instrument by which the state vests such right or privilege.
Franchise may either be:
4) Primary – nothing more than the right or privilege of being a corporation; or
5) Secondary – the powers and privileges vested in, and to be exercised by the corporate body as such.
Example: Employment Agencies, primary franchise is the certificate of incorporation from the SEC,
the secondary franchise is the license issued by the POEA.

(i)primary, corporate or general franchise

(ii) special or secondary franchise

 How are they created

(i) By general law
(ii) By special law

1.06 Right of Succession

1.07 Powers, Attributes and Properties

Theory of Special Capacities/Limited Capacity Doctrine

II. CLASSIFICATIONS, DISTINCTIONS OF CORPORATIONS

2. Classifications and Distinctions

2.01 Classes of Corporations

(i) As to organizers:
1) Public - by the State only; and
2) Private - by the private persons alone or with the State.

(ii) As to functions;
1) Public - government of a portion of the territory; and (governmental purposes)
2) Private - usually for profit-making.

 Test to determine the nature of a corporation as public or private:

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 - The TRUE TEST to determine the nature of a corporation is found in the relation of the body to the
State. Strictly speaking, a public corporation is one that is created, formed or organized for political
or governmental purposes with political powers to be exercised for purposes connected with the
public good in the administration of the civil government.

The government-owned and controlled corporations (GOCCs) are regarded as private corporations
despite common misconceptions.

Note: Officers and employees of GOCCs created by special laws are governed by the law of their
creation, usually the Civil Service Law. Their subsidiaries, organized under the provisions of the
Corporation Code are governed by the Labor Code. The test in determining whether they are
governed by the Civil Service Law is the manner of their creation.

(iii) As to governing law:

1) Public - Special laws; and
2) Private - Revised Corporation Code and other related special laws.

(iv) As to legal status:

1) De jure corporation - a corporation organized in accordance with the requirements of the law.
(substantial compliance)
2) De facto corporation - a corporation where there exists a flaw in its incorporation as it is organized
with a colorable compliance with the requirements of a valid law. Its existence cannot be inquired
collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
(Sec. 19, RCC) (colorable compliance- defective)
Requisites:
1. The existence of a valid law under which it may be incorporated;
2. A bona fide attempt in good faith to incorporate under such law;
3. Actual use or exercise in good faith of corporate powers; and
4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of
continued good faith.
The only difference between a de facto corporation and a de jure corporation is that a de jure
corporation can successfully resist a suit by a state brought to challenge its existence; a de facto
corporation cannot sustain its right to exist.

 What is the status of a corporation which failed to submit its by-laws within the period prescribed
under the CC?

- The failure to submit its by-laws on time, a corporation may be considered a de facto corporation,
and its right to exercise corporate powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. This is true because a corporation does not ipso facto lose its
powers as such.

(v) Corporation by estoppel

- A group of persons which holds itself out as a corporation or that 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. It cannot be permitted to deny its existence in an action under said
transaction. It is neither de jure nor de facto.

Sec. 20, Revised Corporation Code (RCC)

- All persons who assume to act as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof:

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 Provided, however, That when any such ostensible corporation is sued on any transaction entered by
it as a corporation or on any tort committed by it as such, it shall not be allowed to use its lack of
corporate personality as a defense. Anyone who assumes an obligation to an ostensible corporation
as such cannot resist performance thereof on the ground that there was in fact no corporation.

(vi) Corporation by prescription

- A corporation that was not formally organized as such but has been duly recognized by immemorial
usage as a corporation, with rights and duties maintainable at law. It has exercised corporate powers
for an indefinite period without interference on the part of the sovereign power, e.g. Roman Catholic
Church.

(vii) As to existence of stocks

1) Stock corporation

- A corporation in which capital stock is divided into share and is authorized to distribute to
holders thereof of such shares dividends or allotments of the surplus profits on the basis of the
shares held.
Sec. 3, RCC
- Corporations formed or organized under this Code may be stock or nonstock corporations. Stock
corporations are those which have capital stock divided into shares and are authorized to
distribute to the holders of such shares, dividends, or allotments of the surplus profits on the
basis of the shares held. All other corporations are nonstock corporations.

2) Non- Stock corporation

- A corporation which does not issue stocks and does not distribute dividends to their members.
However, it may also issue stocks, but the same should be distributing dividends.

Sec. 86, RCC

- For purposes of this Code and subject to its provisions on dissolution, a nonstock corporation is
one where no part of its income is distributable as dividends to its members, trustees, or officers:
Provided, That any profit which a non-stock corporation may obtain incidental to its operations
shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for
which the corporation was organized, subject to the provisions of this Title.
The provisions governing stock corporations, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title.

(viii) As to laws of incorporation

1) Domestic corporation - a corporation formed, organized, or existing under Philippine laws.
2) Foreign corporation - a corporation formed, organized, or existing under any laws other than those
of the Philippines. (Sec. 140, RCC)
Sec. 140, RCC
- For purposes of this Code, a foreign corporation is one formed, organized or existing under laws
other than those of the Philippines’ and whose laws allow Filipino citizens and corporations to
do business in its own country or State. It shall have the right to transact business in the
Philippines after obtaining a license for that purpose in accordance with this Code and a
certificate of authority from the appropriate government agency.

(ix) Other corporations

1) Close corporation - one which is limited to selected persons or members of the family. (Secs.
95‐ 104, RCC)

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 - A close corporation, within the meaning of this Code (RCC), is one whose articles of
incorporation provides that:
a. all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20);
b. all the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and
c. the corporation shall not list in any stock exchange or make any public offering of its stocks
of any class.
- Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code.
2) Open corporation - one which is open to any person who may wish to become a stockholder or
member thereto.
3) Special corporations - those which are governed by Sections 105 to 132 of the Revised
Corporation Code (RCC), and which include the following:
a. Educational corporation
- One which provides facilities for teaching or instruction. It includes both public and private
schools or colleges or universities and are subject to the provisions of special laws and by the
general provisions of the RCC.
- Sec. 105, RCC. Incorporation. - Educational corporations shall be governed by special laws
and by the general provisions of this Code.
- Sec. 106, RCC. Board of Trustees. - Trustees of educational institutions organized as
nonstock corporations shall not be less than five (5) nor more than fifteen (15): Provided,
That the number of trustees shall be in multiples of five (5). Unless otherwise provided in
the articles of incorporation or by-laws, the board of trustees of incorporated schools,
colleges, or other institutions of learning shall, as soon as organized, so classify themselves
that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall
hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused
by expiration of term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and authority of trustees
shall be defined in the bylaws.
For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations.
b. Religious corporation
One which is composed entirely of spiritual persons which is created for the furtherance
of religion or perpetuating the rights of the church or for the administration thereof or
religious work or property.
Sec. 107, RCC provides that religious corporations may be incorporated by one or more
persons. Such corporations may be classified into the following:

i. Corporation sole
One which consists of one person only and his successor in some particular
station, who are incorporated by law in order to give them some legal capacities and
advantages, which, as natural persons, they cannot have.
Under Sec. 108, RCC, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder of religious
denominations, sects or churches.

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 ii. Religious societies
A religious society is a body of persons associated together for the purpose of
maintaining religious worship.
Any religious society, order, diocese, synod, or district organization of any
religious denomination, sect or church may incorporate for the administration of its
temporalities or for the management of its affairs, properties, and estate in accordance
with Sec. 114, RCC.
c. One person corporation
- A corporation with a single stockholder formed by either a natural person, trust, or an estate.
(Section 116, RCC)
Sec. 116, RCC. One Person Corporation. - A One Person Corporation is a corporation
with a single stockholder: Provided, That only a natural person, trust, or an estate may form a
One Person Corporation.
Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and
non-chartered government-owned and controlled corporations may not incorporate as One
Person Corporations: Provided further, That a natural person who is licensed to exercise a
profession may not organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.
Sec. 117, RCC. Minimum Capital Stock Required for One Person Corporation. – A
One Person Corporation shall not be required to have a minimum authorized capital stock
except as otherwise provided by special law.

(x) Corporations going public v. Corporations going private

1) Public corporation - those formed or organized for the government of a portion of the State or any
of its political subdivisions and which have for their purpose the general good and welfare. It is to
be observed, however, that the mere fact that the undertaking in which a corporation is engaged in
is one which the State itself might enter into as part of its public work does not make it a public
one. Nor is the fact that the State has granted property or special privileges to a corporation render
it public. Likewise, the fact that some or all of the stocks in the corporation are held by the
government does not make it a public corporation. (Public listed)
2) Private corporation - those formed for some private purpose, benefit, aim or end. They are created
for the immediate benefit and advantage of the individuals or members composing it and their
franchise may be considered as privileges conferred by the State to be exercised and enjoyed by
them in the form of the corporation.

(xi) Real estate investment trust (REIT)

Sec. 3, RA 9856 (The Real Estate Investment Trust [REIT] Act of 2009)
(cc) “Real Estate Investment Trust” or RElT is a stock corporation established in accordance with
the Corporation Code of the Philippines and the rules and regulations promulgated by the
Commission principally for the purpose of owning income - generating real estate assets. For
purposes of clarity, a REIT, although designated as a "trust", does not have the same technical
meaning as "trust" under existing laws and regulations but is used herein for the sole purpose of
adopting the internationally accepted description of the company in accordance with global best
practices.

(xii) Ecclesiastical v. Lay

1) Ecclesiastical or religious corporations

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 Those which are composed exclusively of ecclesiastics organized for spiritual purposes or for
administering properties held for religious ones. They are organized to secure public worship
or perpetuating the right of a particular religion.
2) Lay Corporations
Those which are composed of laymen organized and existing for secular or business purposes.
They may further be classified as:
a. Eleemosynary corporations - those which are created for charitable and benevolent purposes
such as those organized for the purpose of maintaining hospitals and houses for the sick, aged
or poor.
b. Civil corporations - those organized not for the purpose of public charity but for the benefit,
pecuniary or otherwise, of its members.

(xiii) Aggregate v. Corporation sole

1) Aggregate corporation - one which is composed of a number of individuals vested with corporate
powers.
2) Corporation sole - one which is composed of a series of successive persons vested with corporate
powers. (see also above)

(xiv) Close v. Open

1) Close corporation - is one whose shares of stock are held by a limited number of persons or a
selected few individuals like the family or other closely-knit group. There are no public investors
and the shareholders are active in the conduct of the corporate affairs. Recognized under Sec. 95 of
the Revised Corporation Code.
Sec. 95, RCC. - A close corporation, within the meaning of this Code, is one whose articles of
incorporation provides that:
a. all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20);
b. all the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and
c. the corporation shall not list in any stock exchange or make any public offering of its stocks
of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of this
Code.
The provisions of this Title shall primarily govern close corporations: Provided, That other Titles
in this Code shall apply suppletorily, except as otherwise provided under this Title.

2) Open corporation - one which is formed to openly accept outsiders as stockholders or investors,
and whose shares are available for exchange on a public market. Such corporation is authorized
and empowered to list in the stock exchange and to offer their shares to the public such that stock
ownership can widely be dispersed.

(xv) Parent or Holding Companies, Subsidiaries, Affiliates

1) Parent or Holding Company - a corporation which controls another corporation, or several other
corporations known as its subsidiaries. Holding companies have been defined as corporations that

12
 confine their activities to owning stock in, and supervising management of other companies. A
holding company usually owns a controlling interest (more than 50% of the voting stock) in the
companies whose stocks it holds. As may be differentiated from investment companies which are
active in the sale or purchase of shares of stock or securities, parent or holding companies have a
passive portfolio and hold the securities merely for purposes of control and management.
2) Subsidiaries - those which another corporation owns at least a majority of the shares, and thus
have control. A subsidiary has an independent and separate juridical personality, distinct from that
of its parent company, hence any claim or suit against the latter does not bind the former or vice
versa.
3) Affiliates - are those corporations which are subject to common control and operated as part of a
system. They are sometimes called “sister companies” since the stockholdings of a corporation
is not substantial enough to control the former. Example: 15% of ABCD Company is held by A
Corporation, 18% by B Corp, and another 15% by C Corp. - A, B and C are affiliates.

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: (a)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; (b) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or (c) alter ego cases, where a corporation is merely
a farce since it is a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. This principle is basically
applied only to determine established liability. However, piercing of the veil of corporate
fiction is frowned upon and must be done with caution. This is because a corporation is
invested by law with a personality separate and distinct from those of the persons composing it
as well as from that of any other legal entity to which it may be related. 
A parent or holding company is a corporation which owns or is organized to own a substantial
portion of another company's voting shares of stock enough to control or influence the latter's
management, policies or affairs thru election of the latter's board of directors or otherwise.
However, the term "holding company" is customarily used interchangeably with the term
"investment company" which, in turn, is defined by Section 4 (a) of Republic Act (R.A.) No.
2629 as "any issuer (corporation) which is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing, reinvesting, or trading in
securities."
While the veil of corporate fiction may be pierced under certain instances, mere ownership of
a subsidiary does not justify the imposition of liability on the parent company. It must further
appear that to recognize a parent and a subsidiary as separate entities would aid in the
consummation of a wrong. Thus, a holding corporation has a separate corporate existence
and is to be treated as a separate entity; unless the facts show that such separate corporate
existence is a mere sham, or has been used as an instrument for concealing the truth.

However, mere presence of control and full ownership of a parent over a subsidiary is not
enough to pierce the veil of corporate fiction. It has been reiterated by this Court time and
again that mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality.

(xvi) Quasi corporations and Quasi-public corporations

1) Quasi corporations - those which possess some corporate functions and attributes but they are
primarily political subdivisions - agencies in the administration of civil government - and their
corporate functions are granted to enable them more readily to perform their public duties.

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 2) Quasi-public corporations - These are private corporations which have accepted from the state the
grant of a franchise or contract involving the performance of public duties. The term is sometimes
applied to corporations which are not strictly public in the sense of being organized for
governmental purposes, but whose operations contribute to the convenience or welfare of the
general public, such as telegraph and telephone companies, water and electric companies. More
appropriately, they are known as public service corporations.

(xvii) Domestic and Foreign corporations

1) Domestic corporations - those which are organized or created under or by virtue of the Philippine
laws, either by legislative act or under the provisions of the Revised Corporation Law.
2) Foreign corporations - those which are formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations to do business
in its own country or state (Sec. 140, RCC).

(xviii) Corporations Vested with Public Interest

1) Those whose securities are registered with the SEC;
2) Those listed with an exchange;
3) Those with assets of at least P50,000,000.00 and having 200 or more holders of shares, each
holding at least 100 shares of a class of its equity shares;
4) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business,
preneed, trust and insurance companies and other financial intermediaries; and
5) Other corporations engaged in businesses 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. (Section 22,
RCC)

(xix) Municipal corporations - those formed and organized by the State (mini-state); possesses power of
eminent domain, police power, & power of taxation.
▪ Two-fold character of a MUNICIPAL CORPORATION:

a) Public or governmental character, in which it acts as agent of the state and exercises, by
delegation a part of the sovereignty of the state.
b) A private, corporate or proprietary character, in which it acts as a private or business
corporation, and stands for the community in the administration of its local affairs wholly
beyond the sphere of public purposes for which its governmental powers are conferred.

o MUNICIPAL CORPORATIONS (governmental character) - Are possessed of and can

exercise the so-called police power of the state, by delegation of the legislature. They may
levy taxes for certain purposes under limitations imposed by the lawmaking body. They are
organized for the purpose of serving the communal welfare of the inhabitants of a town or a
city.
o MUNICIPAL CORPORATIONS (proprietary character) - Are empowered to mortgage their
property under certain limitations. They can sue and be sued, enter into contracts and may be
held liable for damages for torts committed by them in the exercise of their corporate
functions as distinguished from public and governmental functions.

2.02 Distinguished from Partnerships

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 CORPORATION
As to manner of creation
Created by operation of law (Secs. 2 & 4, RCC)
As to number of organizers
There must be at least one (1) incorporator but
not more than fifteen (15) in number (Sec. 10, RCC)
As to powers
Can exercise only such powers and functions
expressly granted to it by law and those that are
necessary or incidental to its existence (Sec. 2, 44)
Authority of those who compose
Unless validly delegated expressly or impliedly, a
corporation must transact its business through the
board of directors (Sec. 22)
Transfer of interest
A shareholder may transfer his shares without the
consent of the other shareholders (Sec. 62)
Succession
Having the right of succession, it continues to
exist despite the death, withdrawal, incapacity or
civil interdiction of the stockholders or members.
(Sec. 3)
Liability of stockholders/partners
The liability of the stockholders or members are
limited only to the extent of their subscription or
their promised contribution.
As to management
Managed by a board of directors and officers
Term of existence
A corporation shall have perpetual existence
unless its articles of incorporation (AOI) provides
otherwise. A corporate term for a specific period
may be extended or shortened by amending the
AOI (Sec. 11)
Dissolution
Cannot be dissolved by mere agreement of the
stockholders. The consent of the State is
necessary for it to cease as a body corporate.
Governing law
Governed by the Revised Corporation Code
2.03 Advantages, Disadvantages of a Corporation
A. Advantages
1. Capacity to Act as a Single Unit - any number of persons may unite in a single enterprise without
using their names, without difficulty or inconvenience, and with the valuable right to contract, to sue
and be sued, and to hold or convey property, in the corporate name;
PARTNERSHIP
Created by agreement of the parties (Art. 1767, CC)
Maybe formed by two or more natural persons
(Art. 1767, CC) – (Juridical persons - Sec. 35[h], RCC)
Can do anything by agreement of the parties
provided only that it is not contrary to law,
morals, good customs or public order (Art. 1306)
In the absence of an agreement to the contrary,
any one of the parties may validly bind the
partnership (Art.1308, par. 1)
A partner cannot transfer his rights or interests in
the partnership so as to make the transferee a
partner without the consent of the other partners
(Art. 1830, par. 6 & 7)
Since it is based on mutual trust and confidence,
the death, incapacity, insolvency, civil
interdiction or mere withdrawal of one of the
parties would result in its dissolution (Art. 1830, par.
6 & 7)
All partners, including industrial ones (except a
limited partner) are liable pro rata with all their
property and after all the partnership property has
been exhausted, for all partnership liability (Art.
1813)
Managed by all partners except if they appoint a
managing partner
May exist for an indefinite period subject only to
the causes of dissolution provided for by the law
of its creation (Art. 1824)
Partners may dissolve their partnership at will or
at any time they deem it fit (Art. 1830, par. 1(b) and
par. 2)
Governed by the Civil Code
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 2. Limited Shareholder’s Liability - the limit of his liability since stockholders are not personally liable
for the debts of the corporation;
3. Continuity of Existence - rights and obligations of a corporation are not affected by the death,
incapacity or replacement of the individual members;
4. Feasibility of Greater Understanding - it enables the individuals to cooperate in order to furnish the
large amounts of capital necessary to finance large scale enterprises;
5. Transferability of Shares - unless reasonably restricted, shares of stocks, being personal properties,
can be transferred by the owner without the consent of the other stockholders;
6. Centralized Management - the vesting of powers of management and appointing officers and agents
in board of directors gives to a corporation the benefit of a centralized administration which is a
practical business necessity in any large organization; and
7. Standardized Method of Organization, Management and Finance - which are provided under a well-
drawn revised corporation law.

A. Disadvantages
1. To have a valid and binding corporate act, formal proceedings, such as board meetings are required;
2. The business transactions of a corporation is limited to the State of its incorporation and may not act
as such corporation in other jurisdiction unless it has obtained a license or authority from the foreign
state;
3. The shareholders’ limited liability tends to limit the credit available to the corporation as a separate
legal entity;
4. Transferability of shares may result to uniting incompatible and conflicting interests;
5. The minority shareholders have practically no say in the conduct of corporate affairs;
6. In large scale enterprises, stockholders’ voting rights may become merely fictitious and theoretical
because of disinterest in management, wide-scale ownership and inaccessible place of meeting;
7. “Double taxation” may be imposed on corporate income; and
8. Corporations are subject to governmental regulations, supervision and control including submission
of reportorial requirements not otherwise imposed in other business form.

III. COMPONENTS OF A CORPORATION

3. Components of a Corporation

(i) Incorporators - They are those stockholders or members mentioned in the Articles of Incorporation as
originally forming and composing the corporation, and who are signatories thereof. They have no powers
beyond those vested in them by the statute. (Sec. 5, 94, 104, RCC)
 Requirements (Sec. 10)
1. Any natural person, partnership, association or corporation;
2. At least one (corporation sole and one person corporation) but not more than fifteen (15);
3. Natural persons must be of legal age;
4. Each must own or subscribe to at least one share of the capital stock.

 SEC MC No. 16 (s. 2019) Guidelines on the Number and Qualifications of Incorporators under the
Revised Corporation Code
Sec. 1. Number of Incorporators - For the purpose of forming a new domestic corporation under the Revised Corporation
Code, two (2) or more persons, but not more than fifteen (15), may organize themselves and form a corporation. Only a
One Person Corporation (OPC) may have a single stockholder, as well as a sole director. Accordingly, its registration
must comply with the corresponding separate guidelines on the establishment of an OPC.

Sec. 3. Qualifications of Incorporators - Each incorporator of a stock corporation must own, or be a subscriber to, at least
one (1) share of the capital stock. Each incorporator of a nonstock corporation must be a member of the corporation. The
incorporators may be composed of any combination of natural person/s, SEC-registered partnership/s, SEC-registered

16
 domestic corporation/s or association/s, as well as foreign corporation/s. Incorporators who are natural persons must be
of legal age, and must sign the Articles of Incorporation/Bylaws.

(ii) Corporators - Those who compose a corporation, whether as stockholders or members, and need not be
among those who execute the articles of incorporation.

(iii) Stockholders and members

a) Stockholders - Owners of shares of stock in a stock corporation.
b) Members - Corporators of a corporation which has no capital stock. They are not owners of shares of
stocks, and their membership depends on terms provided in the articles of incorporation or by ‐laws
(Sec. 90, RCC).

(iv) Directors and trustees - The Board of Directors is the governing body in a stock corporation while the
Board of Trustees is the governing body in a non‐ stock corporation. ( BOD - at least two directors but not
more than 15, except in the close corporation, and in case of merged corporations) – (BOT – at least one
and no maximum number of trustees, except in educational corporation)

(v) Corporate officers - They are the officers who are identified as such in the Corporation Code, the Articles
of Incorporation, or the By‐laws of the corporation. (President, Corporate Secretary, and Treasurer) –
(including those mentioned in the AOI)

(vi) Promoter - A person who, acting alone or with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives consideration therefor. He is an agent of the incorporators
but not of the corporation.
Contracts by the promoter for and in behalf of a proposed corporation generally bind only him, subject to
and to the extent of his representations, and not the corporation, unless and until after these contracts are
ratified, expressly or impliedly, by its Board of Directors/Trustees.

3.01 Corporators vs. Incorporators

INCORPORATOR CORPORATOR
Signatory of the Articles of Incorporation May or not be signatory of the Articles of
Incorporation.
Stockholder (stock corporation) or member (non-
stock corporation)
Does not cease to be an incorporator upon sale of Cease to be a corporator by sale of his shares in
his shares case of stock corporation. In case of non‐stock
corporation, when the corporator ceases to be a
member.
Must have contractual capacity May be such through a guardian
At least one in number but not more than 15 No restriction as to number
Originally forms part of the corporation Not necessarily

3.02 Foreign Stockholders

 Can all the stockholders in a corporation be foreigners?

YES, it is allowed here in the Philippines as long as the applicable minimum capital requirement is
fulfilled.
Note: Under the new law, however, the Revised Corporation Code states that “stock corporations
shall not be required to have a minimum capital stock, except as otherwise specifically provided by
special law.”

IV. FORMATION OF A CORPORATION

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4. Formation of a Corporation

 When does life of a corporation commence?

Sec.18, RCC. - “x x x A private corporation organized under this Code commences its corporate existence
and juridical personality from the date the Commission issues the certificate of incorporation under its
official seal and thereupon the incorporators, stockholders/members and their successors shall constitute a
body corporate under the name stated in the articles of incorporation for the period of time mentioned
therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.”

4.01 Articles of Incorporation

Sec. 13, RCC. Contents of the Articles of Incorporation. - All corporations shall file with the Commission
articles of incorporation in any of the official languages, duly signed and acknowledged or authenticated, in such
form and manner as may be allowed by the Commission, containing substantially the following matters, except
as otherwise prescribed by this Code or by special law:
(a) The name of the corporation;
(b) The specific purpose or purposes for which the corporation is being formed. Where a corporation has more
than one stated purpose, the articles of incorporation shall indicate the primary purpose and the secondary
purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change
or contradict its nature as such;
(c) The place where the principal office of the corporation is to be located, which must be within the Philippines;
(d) The term for which the corporation is to exist, if the corporation has not elected perpetual existence;
(e) The names, nationalities, and residence addresses of the incorporators;
(f) The number of directors, which shall not be more than fifteen (15) or the number of trustees which may be
more than fifteen (15);
(g) The names, nationalities, and residence addresses of persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and qualified in accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized capital stock, number of shares into which it is
divided, the par value of each, names, nationalities, and residence addresses of the original subscribers,
amount subscribed and paid by each on the subscription, and a statement that some or all of the shares are
without par value, if applicable;
(i) If it be a nonstock corporation, the amount of its capital, the names, nationalities, and residence addresses of
the contributors, and amount contributed by each; and
(j) Such other matters consistent with law and which the incorporators may deem necessary and convenient.
An arbitration agreement may be provided in the articles of incorporation pursuant to Section 181 of this Code.
The articles of incorporation and applications for amendments thereto may be filed with the Commission in the
form of an electronic document, in accordance with the Commission’s rules and regulations on electronic filing.

4.02 Documents to be filed with SEC to secure certificate of registration of a stock corporation:
1) Name Reservation and Payment Form
2) Notarized Articles of Incorporation and By-laws
3) Treasurer’s Affidavit – (as to capital)
4) Bank Certificate of Deposit or Proof of Inward Remittance
5) Duly accomplished SEC Form F-100 (for corporations with more than 40% foreign equity)

4.03 What corporate name cannot be used?

Under Sec. 17 of the Revised Corporation Code (RCC), the following corporate name shall not be allowed:
1) A name which is not distinguishable from that already reserved or registered for the use of another
corporation;
2) Such name which is already protected by law; or
3) When its use is contrary to existing law, rules and regulations.

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 Sec. 18 of the (old) Corporation Code provides:
Corporate Name. - No corporate name may be allowed by the Securities and Exchange Commission if
the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or
to any other name already protected by law or is patently deceptive, confusing or is contrary to existing
laws. When a change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:
(d) If the proposed name contains a word similar to a word already used as part of the firm name or style
of a registered company, the proposed name must contain two other words different from the name of the
company already registered;
Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one
adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to
injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation
having a prior right, by a suit for injunction against the new corporation to prevent the use of the name. 

 SEC MC No. 13 (2019), amended guidelines and procedures on use of corporate name
The following salient features are provided for under SEC MC No. 13, s. of 2019:
▪ In the case of a One Person Corporation, the corporate name shall contain the word “OPC” either below
or at the end of its corporate name (Sec. 1).
▪ The name shall be distinguishable from other or corporate or partnership name registered with the
commission, or with the Department of Trade and Industry, in the case of sole proprietorships [Sec. 3
(a)].
▪ The name of a corporation or partnership that has been dissolved or whose registration has been revoked
shall not be used by another corporation or partnership within five years from the approval of
dissolution or 5 years from the date of revocation, unless its use has been allowed at the time of
dissolution or revocation by the stockholders, members or partners who represent a majority of the
outstanding capital stock or membership of the dissolved corporation or partnership, as the case may be
(Sec. 14).
▪ A corporate or partnership name, which was previously used but becomes the subject of the
amendment, shall not be re-registered or used by another corporation or partnership for a period of three
years from the date of the approval of the adoption of the new corporate or partnership name. Further,
an earlier period may be allowed for the registration or use of the former corporate or partnership name
provided that the corporation or partnership, which previously owned the used corporate or partnership
name, gives its consent.

4.04 Importance of the Principal Place of Business

The principal place of business plays a role not only for taxes but also in litigation. Where a company is
based can affect legal jurisdiction and determine the proper venue of the action, or ascertain which court
will hear legal matters involving the company.

4.05 Maximum Term of a Corporation

 Under the (old) Code, a corporation shall exist for a period not exceeding fifty (50) years from the date
of incorporation unless sooner dissolved or unless said period is extended. Such term as originally stated
in the AOI may be extended for periods not exceeding fifty (50) years.
The Revised Corporation Code, however, amended the above-mentioned term as follows:
Sec. 11, RCC. Corporate Term. - A corporation shall have perpetual existence unless its articles of
incorporation provides otherwise. Corporations with certificates of incorporation issued prior to the
effectivity of this Code, and which continue to exist, shall have perpetual existence, unless the
corporation, upon a vote of its stockholders representing a majority of its outstanding capital stock,

19
 notifies the Commission that it elects to retain its specific corporate term pursuant to its articles of
incorporation: Provided, That any change in the corporate term under this section is without prejudice to
the appraisal right of dissenting stockholders in accordance with the provisions of this Code. A corporate
term for a specific period may be extended or shortened by amending the articles of incorporation:
Provided, That no extension may be made earlier than three (3) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the
Commission: Provided, further, That such extension of the corporate term567890-;lk shall take effect
only on the day following the original or subsequent expiry date(s). 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 and liabilities existing prior to its revival.
Upon approval by the Commission, the corporation shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual existence, unless its application for revival
provides otherwise. No application for revival of certificate of incorporation of banks, banking and quasi-
banking institutions, preneed, insurance and trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service business, and other financial
intermediaries shall be approved by the Commission unless accompanied by a favorable recommendation
of the appropriate government agency.

 What is the doctrine of relations/relating back doctrine?

Generally, the filing and recording of a certificate of extension after the term cannot relate back to
the date of the passage of the resolution of the stockholders to extend the life of the corporation.
However, the doctrine of relation applies if the failure to file the application for extension within the term
of the corporation is due to the neglect of the officer with whom the certificate is required to be filed or to
a wrongful refusal on his part to receive it.

4.06 Definition of Terms

1) Authorized capital stock - The capital stock divided into shares with par values. Par value stocks are
required in the case of corporations issuing preferred shares, as well as in the case of banks, trust
companies, insurance companies, building and loan associations, and public utilities. It is the total
amount in the charter, which may be raised by the corporation for its operations (Sec. 12). Authorized
amount of capital stock to be sold.
2) Subscribed capital - The total amount of the capital stock subscribed whether fully paid or not.
(Including treasury shares)
3) Paid-up capital - The amount paid by the stockholders on subscriptions from unissued shares of the
corporation.
4) Outstanding capital stock - The total shares of stock issued under binding subscription contracts to
subscribers or stockholders, whether fully or partially paid, except treasury shares (Sec. 173).
5) Capital - The value of the actual property or estate of the corporation whether in money or property. Its
net worth (or stockholder’s equity) is its assets less liabilities.

Note: Subscribed means covered by subscription contract/agreement

 Art. 12, Sec. 11, 1987 Constitution

No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when the common good so requires.
The State shall encourage equity participation in public utilities by the general public. The

20
 participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.

4.07 Amendment of Articles of Incorporation (AOI)

 Sec. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code has the
power and capacity:
x x x (d) To amend its articles of incorporation in accordance with the provisions of this Code; x x x.

 Ordinary Amendments of AOI

Sec. 15 of the Revised Corporation Code provides for the general requirements and
procedure for ordinary amendment or amendments of the AOI such as change of name, purpose or
purposes and/or principal office.

1) Procedure (Sec. 15)

1. Any provision or matter stated in the articles of incorporation (AOI) of a stock corporation
may be amended upon the majority vote of the directors and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock.
2. In the case of a non-stock corporation, the vote or written assent of majority of the trustees
and at least two-thirds (2/3) of the members.
3. A copy of the amended AOI shall be duly certified under oath by the corporate secretary and
a majority of the directors or trustees, with a statement that the amendments have been duly
approved by the required vote of the stockholders or members.
4. Such copy of the amended AOI, together with the copy of the original AOI shall be submitted
to the Commission (SEC).

2) When effective (Sec. 15)

The amendments shall take effect upon their approval by the Commission or from the
date of filing with the said Commission if not acted upon within six (6) months from the date
of filing for a cause not attributable to the corporation.

3) Congress
▪ Only Congress can make amendments to the charter or special law creating any public or
private corporation.

 Sec. 184. Effect of Amendment or Repeal of This Code, or the Dissolution of a Corporation. – No right
or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees,
or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this Code or of any part thereof.

 Special Amendments of AOI – (it must be in a regular or special board meeting)

 Sec. 36. Power to Extend or Shorten Corporate Term. – A private corporation may extend or shorten its
term as stated in the articles of incorporation when approved by a majority vote of the board of directors
or trustees, and ratified at a meeting by the stockholders or members representing at least two-thirds
(2/3) of the outstanding capital stock or of its members. Written notice of the proposed action and the
time and place of the meeting shall be sent to stockholders or members at their respective place of
residence as shown in the books of the corporation, and must either be deposited to the addressee in the
post office with postage prepaid, served personally, or when allowed in the by-laws or done with the
consent of the stockholder, sent electronically in accordance with the rules and regulations of the

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 Commission on the use of electronic data messages. In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal under the conditions provided in this Code.

 Sec. 37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness.
- No corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and by two-thirds (2/3) of the
outstanding capital stock at a stockholders’ meeting duly called for the purpose. Written notice of the
time and place of the stockholders’ meeting and the purpose for said meeting must be sent to the
stockholders at their places of residence as shown in the books of the corporation and served on the
stockholders personally, or through electronic means recognized in the corporation’s bylaws and/or the
Commission’s rules as a valid mode for service of notices.
A certificate must be signed by a majority of the directors of the corporation and countersigned by the
chairperson and secretary of the stockholders’ meeting… x x x.

 Items Not Subject to Amendment

1. Names of incorporators
2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up
capital
3. Names of the original directors
4. Treasurer elected by the original subscribers
5. Members who contributed to the initial capital of the non‐stock corporation
6. Witnesses to and acknowledgement with AOI

 Grounds when AOI or amendment may be disapproved

(a) The articles of incorporation or any amendment thereto is not substantially in accordance with the
prescribed form;
(b) The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or contrary
to government rules and regulations;
(c) The certification concerning the amount of capital stock subscribed and/or paid is false; and
(d) The required percentage of Filipino ownership of the capital stock under existing laws or the
Constitution has not been complied with.

4.08 When can SEC suspend or revoke certificate of registration (Sec. 6, PD 902-A)
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
i) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the
following:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of
or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission restraining commission
of acts which would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5) years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as determined by the Commission within
the prescribed period;

 Sec. 21, RCC. Effects of Non-Use of Corporate Charter and Continuous Inoperation. – If a corporation
does not formally organize and commence its business within five (5) years from the date of its

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 incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of
the five-year period.
However, if a corporation has commenced its business but subsequently becomes inoperative for a period
of at least five (5) consecutive years, the Commission may, after due notice and hearing, place the
corporation under delinquent status.
A delinquent corporation shall have a period of two (2) years to resume operations and comply with all
requirements that the Commission shall prescribe. Upon compliance by the corporation, the Commission
shall issue an order lifting the delinquent status. Failure to comply with the requirements and resume
operations within the period given by the Commission shall cause the revocation of the corporation’s
certificate of incorporation.
The Commission shall give reasonable notice to, and coordinate with the appropriate regulatory agency
prior to the suspension or revocation of the certificate of incorporation of companies under their special
regulatory jurisdiction.

 What does formal organization include

Formal organization refers to the process of structuring the corporation to enable it to effectively pursue
the purpose for which it was organized. It includes the following:
1. Organizational meeting of the stockholders to elect its board of directors;
2. Adoption of by-laws, if not simultaneously filed with the AOI, and its subsequent filing with the
Commission and attached to the original articles of incorporation;
3. Organizational meeting of the board of directors elected to elect the corporate officers, adoption of
corporate seal, accepting pre-incorporation subscriptions, establishing the principal office and such
other steps necessary to transact legitimate business for which the corporation was formed.

V. BY-LAWS

5. Definition
Rules and regulations or private laws enacted by the corporation to regulate, govern and control its own
actions, affairs and concerns, and define the duties of the stockholders or members towards the corporation
and among themselves.
 Adoption of by-laws 
• Sec. 45, RCC - For the adoption of bylaws by the corporation, the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock, or of at least a
majority of the members in case of nonstock corporations, shall be necessary. The bylaws shall be
signed by the stockholders or members voting for them and shall be kept in the principal office of
the corporation, subject to the inspection of the stockholders or members during office hours. A
copy thereof, duly certified by a majority of the directors or trustees and countersigned by the
secretary of the corporation, shall be filed with the Commission and attached to the original
articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, bylaws may be adopted and filed
prior to incorporation; in such case, such bylaws shall be approved and signed by all the
incorporators and submitted to the Commission, together with the articles of incorporation.

5.01 Requisites in adopting by-laws:

1. Affirmative vote of the stockholders representing at least a majority of the outstanding capital stock.
2. Affirmative vote of at least majority of the members in case of nonstock corporations.
3. It shall be signed by the stockholders or members voting for them.
4. It shall be kept in the principal office of the corporation.

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 5. A copy thereof shall be duly certified by a majority of the directors or trustees and countersigned by the
secretary of the corporation.
6. It shall be filed with the Commission and attached to the original articles of incorporation.
7. If filed prior to incorporation, it shall be approved and signed by all the incorporators and submitted to
the Commission, together with the articles of incorporation.
Note: By-laws may be filed or submitted to the SEC later after that of the AOI within 5 years or not beyond such
period.

5.02 Adoption and Amendment

Sec. 47. Amendment to Bylaws. – A majority of the board of directors or trustees, and the
owners of at least a majority of the outstanding capital stock, or at least a majority of the
members of a nonstock corporation, at a regular or special meeting duly called for the purpose,
may amend or repeal the bylaws or adopt new bylaws. The owners of two thirds (2/3) of the
outstanding capital stock or two thirds (2/3) of the members in a non-stock corporation may
delegate to the board of directors or trustees the power to amend or repeal the bylaws or adopt
new bylaws: Provided, That any power delegated to the board of directors or trustees to amend
or repeal the bylaws or adopt new bylaws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or majority of the members
shall so vote at a regular or special meeting.
Whenever the bylaws are amended or new bylaws are adopted, the corporation shall file with
the Commission such amended or new bylaws and, if applicable, the stockholders’ or members’
resolution authorizing the delegation of the power to amend and/or adopt new bylaws, duly
certified under oath by the corporate secretary and a majority of the directors or trustees.
The amended or new bylaws shall only be effective upon the issuance by the Commission of a
certification that the same is in accordance with this Code and other relevant laws.
 Two modes of amending or repealing by-laws or adopting a new one:
1. By a majority vote of the board of directors or trustees and the majority vote of the outstanding capital
stock or members in a nonstock corporation, at a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by 2/3 of the outstanding capital stock or 2/3 of the
members in a non-stock corporation.

 Original By-Laws
 Sec. 48 of the (old) Corporation Code provides that whenever any amendment or new by-laws
are adopted, such amendment or new by-laws shall be attached to the original by-laws in the
office of the corporation, and a copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall be filed with the Securities and
Exchange Commission the same to be attached to the original articles of incorporation and
original by-laws.
 Sec. 47 of the Revised Corporation Code, however, is silent on the attachment of the amended
or new bylaws to the original AOI and original by-laws in submitting the same to the
Commission.

 Amendment to by-laws
(Pls. see Sec. 47, RCC above-stated)

5.03 Binding Effect of By-Laws

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 1) As to corporation and its components
By-laws are binding upon the corporation and its components when the same become effective upon
the approval of the Commission (SEC).
2) As to third persons
Binding upon third persons only when they have knowledge of the existence and contents of the by-
laws. (Fleisher vs. Botica Nolasco, and China Banking Corp. vs. CA)

 Q: In case of conflict between the by‐laws and the articles of incorporation which prevails?
A: The AOI prevails because the by‐laws are intended merely to supplement the former.

VI. POWERS OF A CORPORATION

6. Powers of a Corporation
- A corporation merely exists by virtue of a grant by the State and may, therefore, only exercise such powers,
authority or functions that a State allows it to do. The grant of corporate franchise by the State gives the
corporation such powers and functions as may be contained in its AOI. Along with the powers indicated in its
AOI, a corporation can also exercise powers that may be granted by law, particularly those provided for under
Sec. 35 to 43 of the Revised Corporation Code and those which may be necessary or incidental to its existence,
and which may be classified into three (3) classes or kinds.

VI.01 Kinds of Corporate Powers:

i. Express – those expressly granted or authorized by law (RCC) inclusive of the corporate charter or AOI;
ii. Implied – those impliedly granted as are essential or reasonably necessary to the carrying out of the
express powers; and
iii. Incidental – those that are incidental to its existence.

Note: There are two (2) doctrines insofar as corporate power is concerned:
1) Doctrine of general capacity – maintains that a corporation is said to hold such powers as are not
prohibited or withheld from it by general law.
2) Doctrine of specific capacity – maintains that a corporation cannot exercise powers except those
expressly or impliedly given as well as incidental powers.

In the Philippines, we adopt the doctrine of specific capacity. Acts done outside of such powers are
ultra vires, but can be ratified later by the corporation except those illegal or unlawful acts.

VI.02 Express Powers

a) General Powers (Sec. 35, RCC)
1. To sue and be sued in its corporate name;
2. To have perpetual existence unless the certificate of incorporation provides otherwise;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a
nonstock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;

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 8. To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement
with natural and juridical persons; (new)
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation shall give
donations in aid of any political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers,
and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation.
b) Specific Powers (Sec. 36-43, RCC)
1. To extend or shorten corporate term (Sec. 36)
2. To increase/decrease corporate stock (Sec. 37)
3. To incur or create bonded indebtedness (Sec. 37) – [corporate bond – debt – (Bond Certificate)]
4. To deny preemptive right (Sec. 38, 101) – (if it is denied in the AOI) – except shares are offered
publicly (Stock Exchange) – Note: Does not apply to close corporation.
5. To sell, dispose, lease, encumber all or substantially all of corporate assets (Sec. 39)

- This can be exercised by a majority vote of the board of directors or trustees. As provided by Sec.
39 of RCC, however, a sale of all or substantially all of the corporation’s properties and assets,
including its goodwill must be authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or at least two-thirds (2/3) of the members, in a
stockholders’ or members’ meeting duly called for the purpose.
In nonstock corporations where there are no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient authorization for the corporation to enter into
any transaction authorized by this section.
- For Sec. 39 to apply, therefore, the sale or disposition must involve “all or substantially all” of
the properties and assets of the corporation as to render it incapable of continuing its business or
accomplishing the purpose for which it was incorporated, or that the proceeds thereof will not be
used for the conduct of the remaining business.
Note: This may also mean sale of at least 51% of corporate assets and properties.

Note: Subject to Phil. Competition Act

Right of appraisal – dissenting stockholders

6. To purchase or acquire own shares (Sec. 40, 8, 9, 55)

- Under Sec. 40 of RCC, a stock corporation has the power to acquire its own shares for a
legitimate corporate purpose or purposes provided that the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired.

- From the foregoing provision, the existence of unrestricted retained earnings is a condition for the
exercise of this particular corporate power. As such, the corporation cannot use its capital stock to
purchase its own shares but only from surplus profits. Nevertheless, there are some exceptions
such as in the case of the following, viz:
1) Redemption by the corporation of redeemable shares regardless of the existence of unrestricted
retained earnings in its books under Sec. 8, provided that it has sufficient assets to pay its
creditors and to answer for its operations. Sec. 104,
2) Reacquisition by issuing corporation of treasury shares through purchase, redemption,
donation, or some other lawful means under Sec. 9.
3) In the case of a close corporation wherein:

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 i. the SEC, in case od deadlocks, may exercise its authority to make appropriate order
requiring the purchase by a corporation of shares of any stockholder regardless of the
availability of unrestricted retained earnings in its books under Sec. 103.
ii. any stockholder may, for any reason, exercise his right to compel the corporation to
purchase his shares under Sec. 104, provided that the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock.

7. To invest in another corporation, business other than the primary purpose (Sec. 41)

▪ As held by the Commission in one case, the investment shall be in the form of money, stock,
bonds and other liquid assets and does not include real properties or other fixed assets.
▪ For a valid investment of corporate funds, the following requirements as enunciated under Sec.
41 of RCC shall be complied with:
1) Resolution by the majority of the board of directors or trusties;
2) Ratification by the stockholders representing at least two-third (2/3) of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations;
3) The ratification must be made in a meeting duly called for that purpose;
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 personal service, or electronic
data messaging; and
5) Any dissenting stockholder shall have the option to exercise his appraisal right.

▪ It can be viewed from the provision of Sec. 41 that the ratification or approval of the
stockholders or members is not required where the investment is reasonably necessary to
accomplish the primary purpose of the corporation. However, this is not so in the case of
business or undertaking allowed or authorized in the secondary purpose or purposes of the
corporation inclusive of investments that are beyond the corporation’s primary purpose, or
outside the express or implied powers of the investing corporation.

8. To declare dividends (Sec. 42, RCC)

(Other discussions are set forth in No. 6.06 on pages 6 to 8 hereof)
 Sec. 42. Power to Declare Dividends. – The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash,
property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on
the subscription plus costs and expenses, while stock dividends shall be withheld from the
delinquent stockholders until their unpaid subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval of stockholders representing at least two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
percent (100%) of their paid-in capital stock, except: (a) when justified by definite corporate
expansion projects or programs approved by the board of directors; or (b) when the corporation
is prohibited under any loan agreement with financial institutions or creditors, whether local or
foreign, from declaring dividends without their 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.
 The power or authority of the board to declare dividends is usually said to be absolute as long as
they act in the exercise of an honest and impartial judgment which has been said to be conclusive

27
 except when they act in bad faith or in abuse of discretion thereby impairing the rights of the
complaining stockholders.

 The right of the stockholders to be paid dividends vest as soon as the dividends have been
lawfully and finally declared by the board of directors.?

 Any dividend already declared when shares are transferred belongs to the owner of the shares at
the time of the declaration.
Note: Generally, corporation cannot be compelled to declare dividends, except in the case of Real Estate
Investment Trust (REIT) as it must declare dividends every year.

9. To enter into management contract (Sec. 43)

▪ Sec. 43 of RCC provides the requirements for a valid management contract as follows:
1) Resolution of the board of directors;
2) Approval by the stockholders holding or representing a majority of the outstanding capital
stock, or majority of the members in case of non-stock corporation of both the managing and
the managed corporation;
3) The approval of the stockholders or members must be made at the meeting called for that
purpose; and
4) The contract shall not be for a period longer than five (5) years for any one term, except
those which relate to the exploration, development, exploitation or utilization of natural
resources which may be entered into for such periods as may be provided by the pertinent
laws or regulations.

Note: This applies to Stock corporation only.

10. To amend the AOI (Sec. 15; 36; 37)

▪ As set forth in Sec. 15 of RCC, any provision or matter stated in the articles of incorporation
may be amended by a majority vote of the board of directors or trustees and the vote or written
assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code. The articles of incorporation of a nonstock corporation may be amended
by the vote or written assent of majority of the trustees and at least two-thirds (2/3) of the
members.
▪ The amendments shall take effect upon their approval by the Commission or from the date of
filing with the said Commission if not acted upon within six (6) months from the date of filing
for a cause not attributable to the corporation.

▪ As far as corporations created by special law are concerned, amendment may NOT be
considered as a matter of right. The law creating it may or may not authorize or empower the
corporation to make any changes in its AOI or charter. However, whether empowered or not,
Congress may amend or repeal a corporate charter by virtue of its inherent authority to amend
or repeal laws under the Constitution.
▪ Ordinary and special amendments.
a) Ordinary amendments - Those involving change of name, purpose, principal office which
only need written assent of stockholders or members, and even if no meeting is conducted for
the purpose.
b) Special amendments – Those which involve corporate powers such as:
i. Power to extend or shorten corporate term.

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 ii. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. (Note: This must be made during the meeting)

VI.03 Ultra Vires Acts (Sec. 44)

- Ultra-vires acts are those that cannot be executed or performed by a corporation because they are not
within (or outside) its express, inherent, or implied powers as defined by its charter or AOI.
Sec. 44. Ultra Vires Acts of Corporations. – No corporation shall possess or exercise corporate powers
other than those conferred by this Code or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.

 While ultra vires acts are voidable which may be enforced by performance, ratification, or estoppel,
illegal acts are void and cannot be validated.

1. Effects of Ultra Vires Acts

a. As to executed contracts
- The contract is effective and the courts will not set aside it nor interfere therewith in order to
deprive either party of what has been acquired under it.
b. As to executory contracts
- As a rule, neither party can maintain an action for its non-performance, but stockholders can file
an action to prevent the enforcement of the contract. (void and unenforceable)
c. As to part executed and part executory
- The courts differ as to whether an action will lie on the contract against the party who has received
benefits of performance under it. Majority of the courts, however, hold that the party who has
received benefits from the performance is estopped to set up that the contract is ultra vires to
defeat an action on the contract. This is more in conformity with the doctrine that no person shall
be allowed to enrich himself at the expense of another (principle against unjust enrichment).

Note: Although they are not illegal, nevertheless, if such ultra vires act prejudices the public, then that
is a ground for suspension or revocation of the certificate of incorporation.
2. Distinguished from acts that do not comply with formalities
 Ultra-vires acts cannot become duly authorized or delegated acts as the same are outside the scope
of the actor’s conferred powers while acts that do not comply with formalities may be duly
authorized and within the scope of the actor’s conferred powers.
3. Distinguished from unauthorized acts
 Ultra-vires act of corporate officer does not bind the corporation but when it is ratified, the same
shall bind the corporation. Unauthorized act, on the other hand, cannot bind the corporation as it has
no legal force and effect and as such, it cannot be subject to ratification.

 Consequences of ultra vires acts

1) It will allow a collateral attack upon the authority of the corporation to engage in such particular
endeavor.
2) It may become binding and enforceable either by ratification, estoppel or on equitable grounds
unless public or third parties are thereby prejudiced or if the acts are illegal per se.

VI.04 Exercise of Powers

- Who may exercise the powers of a corporation (Sec. 22)

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 The board of directors or trustees shall exercise the powers of a corporation. They shall also conduct
all the business, and control all properties of the corporation.
Corporate officers and agents may do so provided they are authorized by the board of directors or
trustees in the form of board resolution.

- When not exercised by the board directly

 When corporate powers are delegated by the board to the executive committee, or to the officers or
agents of the corporation.

- Powers that cannot be exercised by or cannot be delegated to the executive committee

b) Approval of any action for which shareholders’ approval is also required;
c) Filling up of vacancies in the board;
d) Amendment or repeal of bylaws or the adoption of new bylaws;
e) Amendment or repeal of any resolution of the board which by its express terms is not amendable
or repealable; and
f) Distribution of cash dividends to the shareholders.

- What is the executive committee (Sec. 34)

▪ An executive committee is created by the board which shall be composed of at least three (3)
directors. Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the bylaws or by majority vote of
the board.

- Can corporate officers like the President bind the corporation?

▪ As a general rule, no person, not even its officers, can validly bind a corporation in the absence of
authority from the board of directors.
▪ Under Sec. 23 (Sec. 22, RCC), the power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board, subject to the
articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural person
may authorize another to do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees or agents. The authority of such
individuals to bind the corporation is generally derived from law, corporate bylaws or authorization
from the board, either expressly or impliedly by habit, custom or acquiescence in the general course
of business, viz:
A corporate officer or 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, and this includes
powers as, in the usual course of the particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has caused person dealing
with the officer or agent to believe that it has conferred.
Apparent authority is derived not merely from practice. Its existence may be ascertained through
(1) the general manner in which the corporation holds out an officer or agent as having the power to
act or, in other words the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within
or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer with power to bind the
corporation.

- Five classification of power of agents

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 1. Incidental powers
2. Intentionally conferred powers.
3. Implied powers
4. Apparent powers
5. Powers added by custom and usage

- Apparent authority of officer

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

(Read: Inter Asia Case mentioned above)

- Explain the Doctrine of Apparent Authority

▪ The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope
of an apparent authority, and it holds him out to the public as possessing the power to do those
acts. The doctrine of apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agent’s acts or conduct must have produced a change of
position to the third party’s detriment.

- Under what circumstances could apparent authority be inferred?

 Apparent authority is derived not merely from practice. Its existence may be ascertained through:
1) The general manner in which the corporation holds out an officer or agent as having the power to
act or, in other words the apparent authority to act in general, with which it clothes him; or
2) The acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers. It requires presentation of evidence
of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of
similar acts which establishes apparent authority, but the vesting of a corporate officer with the
power to bind the corporation. 

VI.05 Instances where concurrence of stockholders necessary for exercise of powers of corporations

1) Approval of majority of the board and concurrence of stockholders representing 2/3 of outstanding
capital (or 2/3 of members) is necessary in the exercise of the following powers:
1) Power to extend or shorten corporate term (Sec. 36)
2) Increase/decrease corporate stock (Sec. 37)
3) Incur or create bonded indebtedness (Sec. 37)
4) Deny preemptive right (Sec. 38)
5) Sell, dispose, lease, encumber all or substantially all of corporate assets (Sec. 39)
6) Invest in another corporation, business other than the primary purpose (Sec. 41)
7) Declare stock dividends (Sec. 42)? (Note: Not in the declaration but in the issuance of dividends)
8) To enter into management contract (Sec. 43)
9) Amend the AOI (Sec. 15)
2) Approval of the stockholders representing majority of the outstanding capital is necessary together with
board approval in the following:
i. To enter into management contract if any of the two instances stated above are absent (Sec. 43)

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 ii. To adopt, amend, or repeal the by-laws (Sec. 45 and 47)
3) Without board resolution, stockholders may delegate to the board of directors or trustees the power to
amend or repeal the by-laws, or adopt new by-laws by:
i. 2/3 of outstanding capital (Sec. 48)
ii. Majority of outstanding capital

VI.06 Dividends

As defined in SEC Memorandum Circular No. 11 s. 2008, dividend refers to corporate profits allocated,
lawfully declared and ordered by the directors to be paid to the stockholders on demand or at a fixed
time.

 Who may declare dividends? (Sec. 42)

a) BOD alone - The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, property, or in stock to all
stockholders on the basis of outstanding stock held by them.
b) Issuance of dividends, however, needs the approval of the stockholders representing not less than
2/3 of outstanding capital.

 Retained earnings - these are accumulated profits realized out of normal and continuous
operations of the business after deducting therefrom distributions to stockholders and transfers to
capital stock or other accounts (Assets - Liabilities and Legal Capital = Retained Earnings)
 Unrestricted retained earnings - these are retained earnings which have not been reserved or
set aside by the board of directors for some corporate purpose.
The SEC, on the other hand, defined this as the undistributed earnings of the corporation which
have not been allocated for any managerial, contractual or legal purposes and which are free for
distribution to the stockholders as dividends.

 Conditions that must be present in the declaration and distribution of dividends (1st par, Sec. 42)
1) Existence and/or availability of the corporation’s unrestricted retained earnings, out of which the
dividends are to be declared for distribution to stockholders.
2) That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent
stockholders until their unpaid subscription is fully paid.
3) That no stock dividend shall be issued without the approval of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose.

 Can board be compelled to declare dividends every year?

 The board cannot be compelled to declare dividends, except*:
3) When the unrestricted retained earnings is in excess of 100% of the paid-up capital; and
4) When there are no circumstances prohibiting stock corporations from retaining surplus profits
in excess of 100% of their paid-in capital stock as provided under 2nd par., Sec. 42 of the RCC.
- A preferred share of stock is one which entitles the holder thereof to certain preferences over the holders
of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation.
It is a share which gives the holder thereof preference in the distribution of the assets of the corporation in
case of liquidation, in case of preferred shares as to assets. In the case of preferred shares as to dividends,

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 it is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon
before any dividends at all are paid to the holders of common stock.
- Both Sec. 16 (now 15) of the Corporation Law and Sec. 43 (now 42) of the present Corporation Code
prohibit the issuance of any stock dividend without the approval of stockholders, representing not less
than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter
of right but a matter of consensus.
(I believe, not payment of dividends, but rather, payment of stock dividends. Said prohibition applies to
the issuance of stock dividends alone, and not to payment or distribution of cash and property dividends.
Further, it is of my opinion that the 1 st sentence of par. one, Sec. 42 of RCC refers only to the
requirements in the declaration of dividends in general by the board of directors. The 1 st proviso refers to
the requirements for cash and stock dividends before they are distributed to stockholders while the 2 nd
proviso refers only to the voting requirement for the issuance of stock dividends.)
- Exception* - (See above)

 Can board refuse to declare dividends even if retained surplus profits in excess of 100% of paid-in
capital?
 Yes. As provided in 2nd par., Sec. 42 of RCC, the board of stock corporation may retain surplus
profits in excess of 100% of their paid-in capital stock under the following circumstances:
a) When justified by definite corporate expansion projects or programs approved by the board of
directors; or
b) When the corporation is prohibited under any loan agreement with financial institutions or
creditors, whether local or foreign, from declaring dividends without their 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.
With the presence of any of the foregoing circumstances, therefore, the board can justifiably
refuse to declare dividends, and much more if there is nothing left to be declared for
distribution to the stockholders. In one way or another, this may consequently cause the
corporation to have zero or negative retained earnings otherwise known as retained earnings
deficit.

 Can dividends be declared out of capital?

NO. The capital cannot be distributed in the form of redemption of stock dividends without violating the
trust fund doctrine - wherein the capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always
capital. That doctrine was intended for the protection of corporate creditors.
Furthermore, Sec. 42 of the RCC clearly and explicitly states that the board may declare dividends out
of the “unrestricted retained earnings” of stock corporation. Likewise, Sec. 5 of SEC MC No. 11 s. 2020
provides that dividends (cash, stock or property) shall be declared out of unrestricted retained earnings
of the corporation. For such purpose, the surplus profits or income must be a bona fide income founded
upon actual earnings or profits. The existence, therefore, of surplus profits arising from the operation of
corporate business is a condition precedent to the declaration of dividend.
- Exception:
- Wasting assets corporation
 What can be included in unrestricted retained earning?

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  The accumulated profits and gains realized out of the normal and continuous operations of the
company after deducting therefrom distributions to stockholders and transfers to capital stock or
other accounts, and which is: (1) not appropriated by its Board of Directors for corporate expansion
projects or programs; (2) not covered by a restriction for dividend declaration under a loan
agreement; and (3) not required to be retained under special circumstances obtaining in the
corporation such as when there is a need for a special reserve for probable contingencies.

(SEC Memorandum Circular No. 11, 2008)

 What items cannot be used for dividend distribution (unrealized items)

1) Share/equity in net income
2) Unrealized foreign exchange gains
3) Unrealized actuarial gains
4) Fair value adjustment
5) Amount of recognized deferred tax asset
6) Adjustment due to deviation from PFRS/GAAP
7) Other unrealized gains or adjustments
8) Other adjustment that SEC may prescribe

 Can gain on sale of corporation’s real property be considered part of retained earnings?
No, unless the corporation is engaged in a real estate business and such gain is realized out of the
normal and continuous operations of its business.

 Can treasury shares be declared as dividends?

As a general rule, NO because treasury shares may be declared property dividends

 How are dividends allocated

Dividends are declared and allocated out of the corporation’s unrestricted retained earnings, and in
accordance with the pertinent provisions of RCC as well as by taking into consideration the respective
interest of the stockholders and the proposed corporate plans and programs including other proposed
allocations for managerial, contractual and legal purposes.

 Who are entitled to dividends

The stockholders of record date in so far as the corporation is concerned; if there is no record date, the
stockholders at the time of declaration of dividends (not at the time of payment).
Note: In case of transfer, dividends declared before the transfer of shares belong to the transferor and
those declared after the transfer belongs to the transferee.

Cojuangco v. Sandiganbayan, (586 SCRA 790), April 24, 2009

- Dividends are payable to the stockholders of record as of the date of the declaration of dividends  or
holders of record on a certain future date, as the case may be, unless the parties have agreed
otherwise. And a transfer of shares which is not recorded in the books of the corporation is valid only as
between the parties, hence, the transferor has the right to dividends as against the corporation without
notice of transfer but it serves as trustee of the real owner of the dividends, subject to the contract between
the transferor and transferee as to who is entitled to receive the dividends.

 Can dividends be declared for preferred shares which were guaranteed a quarterly dividend?
YES.

 What are interest bearing stocks and what is the condition for the same to be legal

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VI.07 Sale of all or substantially all properties

- Sec. 39 of the RCC provides that a sale of “all or substantially all” of the corporation’s properties and assets,
including its goodwill must be authorized by the vote of the stockholders representing at least two thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the members, in a stockholders’ or members’ meeting duly
called for the purpose.
In nonstock corporations where there are no members with voting rights, the vote of at least a majority of the trustees
in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.
Written notice of the proposed action and of the time and place for the meeting shall be addressed to stockholders or
members at their places of residence as shown in the books of the corporation and deposited to the addressee in the
post office with postage prepaid, served personally, or when allowed by the by-laws or done with the consent of the
stockholder, sent electronically: Provided, That any dissenting stockholder may exercise the right of appraisal under
the conditions provided in this Code.

- Requisites:
1. Resolution by a majority of the BOD/T;

2. Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members;

3. The ratification of the stockholders or member must be made at a meeting duly called for that purpose;

4. Prior written notice of the proposed action and of the time and place of meeting must be made
addressed to all stockholders of record, either by mail or personal service;

5. The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and
monopolies; and

6. Any dissenting stockholder shall have the option to exercise his appraisal right.

- The above requirements will not apply:

1. In case the sale is NOT covering all or substantially all of the assets of a corporation as to render it
incapable of continuing the business or accomplishing the purpose for which it was incorporated;

2. If the proceeds are to be used to continue the conduct of the remaining business of the company; and

3. If the sale is necessary in the usual and regular course of business of the company.

 When is it considered substantial

 When it renders a corporation incapable of continuing the business or accomplishing the purpose for
which it was incorporated, or if the proceeds of such sale will not be used to continue the conduct of
the remaining business.
 Determination of whether sale involves all or substantially all of corporate properties and assets
must be computed based on its net asset value, as shown in latest financial statements. A sale or
other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing
the purpose for which it was incorporated.

 What is the voting requirement for a corporation to be able to sell its sole property

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  By a majority vote of the board of directors or trustees of the corporation, and as authorized by the
vote of the stockholders representing at least two thirds (2/3) of the outstanding capital stock, or at
least two-thirds (2/3) of the members.

Islamic Directorate v. CA, G.R. 117897, May 14, 1997

- The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's
failure to comply with Section 40 (now Sec. 39, RCC) of the Corporation Code pertaining to the
disposition of all or substantially all assets of the corporation.
For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of
at least 2/3 of the bona fide members of the corporation should have been obtained. These twin
requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property was a
fake Board of Trustees.

 Effect of aforesaid sale on creditors

 It is a general rule, that where one corporation sells or otherwise transfers all its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:
1) Where the purchaser expressly or impliedly agrees to assume such debts;
2) Where the transaction amounts to a consolidation or merger of the corporations;
3) Where the purchasing corporation is merely a continuation of the selling corporation; and
4) Where the transaction is entered into fraudulently in order to escape liability for such debts.
Thus, the creditor may go against either the selling corporation or the buying corporation depending
on the circumstances surrounding the case.

Jiao v. NLRC, April 18, 2012 (670 SCRA 184)

- As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where the purchaser expressly or
impliedly agrees to assume the debts; (2) where the transaction amounts to a consolidation or merger of
the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation;
and (4) where the selling corporation fraudulently enters into the transaction to escape liability for those
debts.
 Art. 1311 of the Civil Code
Contracts take effect only between the parties, their assigns and heirs, except in case where the rights
and obligations arising from the contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit
or interest of a person is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person. (stipulation pour autrui)

VII. DIRECTORS AND OFFICERS

7. Directors and Officers

Directors are those composing the governing body of stock corporation that is the Board of Directors which
shall exercise the corporate powers, conduct all business, and control all properties of the corporation. Under
Sec. 13[f] of RCC, the number of directors shall not be more than fifteen (15). Sec. 22 of RCC provides that
they shall be elected for a term of one (1) year from among the holders of stocks registered in the
corporation’s books. Each director shall hold office until the successor is elected and qualified. A director
who ceases to own at least one (1) share of stock shall cease to be such.

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 Except One Person Corporation
As regards corporate officers on the other hand, Sec. 24 of RCC states that immediately after their election,
the directors of a corporation must formally organize and elect: (a) a president, who must be a director; (b) a
treasurer, who must be a resident; (c) a secretary, who must be a citizen and resident of the Philippines; and
(d) such other officers as may be provided in the bylaws. If the corporation is vested with public interest, the
board shall also elect a compliance officer. The same person may hold two (2) or more positions
concurrently, except that no one shall act as president and secretary or as president and treasurer at the same
time, unless otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or
as resolved by the board of directors.

7.01 Qualifications of directors

 As provided under Sec. 22, RCC, the directors must be among the holders of stocks registered in the
corporation’s books, and must own at least one (1) share of stock. The trustees, on the other hand, must
be among the members of the corporation.

Another one is of legal age

No. of directors = 2 - 15
Exception: Close corporation = 20
Trustee = more than 15
Except Educational = not more than 15 but multiples of 5
 Sec. 26, RCC. Disqualification of Directors, Trustees or Officers. – A person shall be disqualified
from being a director, trustee, or officer of any corporation if, within five (5) years prior to the election
or appointment as such, the person was:
g) Convicted by final judgment:
1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
2) For violating this Code; and
3) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code.”
h) Found administratively liable for any offense involving fraudulent acts; and
i) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similar to those enumerated in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other disqualifications, which the Commission,
the primary regulatory agency, or the Philippine Competition Commission may impose in its promotion
of good corporate governance or as a sanction in its administrative proceedings.

 Term of Directors (Sec. 22)

 Under Sec. 22 of RCC, the directors shall have a term of one (1) year while the trustees shall have a
term not exceeding three (3) years.
Each director and trustee shall hold office until the successor is elected and qualified. A director who
ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the
corporation shall cease to be such.

7.02 Independent Directors (Sec. 22)

 According to Sec. 22 of RCC, an independent director is a person who, apart from shareholdings and
fees received from the corporation, is independent of management and free from any business or other
relationship which could, or could reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.

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 Independent directors must be elected by the shareholders present or entitled to vote in absentia during
the election of directors. Independent directors shall be subject to rules and regulations governing their
qualifications, disqualifications, voting requirements, duration of term and term limit, maximum
number of board memberships and other requirements that the Commission will prescribe to strengthen
their independence and align with international best practices.
Note: No. of Independent Directors = 20% of the members of BOD
7.03 Business Judgment Rule
 Although directors are commonly said to be responsible both for reasonable care and also prudence, the
formula is continually repeated that they are not liable for losses due to imprudence or honest error of
judgment. 
 The business judgment rule in effect states that questions of policy and management are left solely to
the honest decision of the board of directors and the courts are without authority to substitute its
judgment as against the former. The directors are business managers and as long as they act in good
faith, its actuations are not subject to judicial review.
 The business judgment rule provides that a resolution or transaction pursued within the corporate
powers and business operations of the corporation, and passed in good faith by the board of directors, is
valid and binding, and generally the courts have no authority to review the same and substitute their
own judgment, even when the exercise of such power may cause losses to the corporation or decrease
the profits of a department.
In other words, courts will not interfere in the decisions made by the BOD as regards the internal affairs
of the corporation, unless the contracts entered into by BOD are so unconscionable and oppressive as to
amount to a wanton destruction of rights of the minority.
Exception: In case of deadlock in close corporation

7.04 Criminal Liability

 The general rule is that unless the law specifically provides, a corporate officer or agent is not civilly or
criminally liable for acts done by him as such officer or agent, or in the absence of bad faith or malice.
 Where a law requires a corporation to do a particular act, failure of which on the part of the responsible
officer to do so constitutes an offense, the responsible officer is criminally liable therefore. The reason
is that a corporation can act through its officers and agents and where the business itself involves a
violation of law all who participate in it are liable. While the corporation may be fined for such criminal
offense if the law so provides, only the responsible corporate officer can be imprisoned. (People vs. Tan
Boon Kon, 1930) However, a director or officer can be held liable for a criminal offense only when
there is a specific provision of law making a particular officer liable because being a corporate officer
by itself is not enough to hold him criminally liable.

 Anti-Dummy Law, CA 108, Sec. 2A

As provided under the above provision, the following acts of any person, corporation, or association
which, having in its name or under its control, a right, franchise, privilege, property or business, the
exercise or enjoyment of which is expressly reserved by the Constitution or the laws to citizens of the
Philippines or of any other specific country, or to corporations or associations at least 60% of the capital
of which is owned by such citizens, are violative of the Anti-Dummy Law and punishable by law:
1) Permits or allows the use, exploitation or enjoyment thereof by a person, corporation or association
not possessing the requisites prescribed by a the Constitution or the laws;
2) Leases, or in any other way, transfers or conveys said right, franchise, privilege, property or business
to a person, corporation or association not otherwise qualified under the Constitution, or the
provisions of the existing laws;

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 3) Permits or allows any person, not possessing the qualifications required by the Constitution, or
existing laws to acquire, use, exploit or enjoy a right, franchise, privilege, property or business, the
exercise and enjoyment of which are expressly reserved by the Constitution or existing laws to
citizens of the Philippines;
4) To intervene in the management, operation, administration or control thereof, whether as an officer,
employee or laborer therein with or without remuneration except technical personnel whose
employment may be specifically authorized by the Secretary of Justice;
5) Any person who knowingly aids, assists or abets in the planning consummation or perpetration of
any of the acts herein above enumerated.

7.05 Methods of Voting – Election of Directors (Sec. 23, 7)

1) Straight voting - every stockholder may vote such number of shares for as many persons as there are
directors to be elected.
2) Cumulative voting for one candidate - a stockholder is allowed to concentrate his votes and give one
candidate, as many votes as the number of directors to be elected multiplied by the number of his shares
shall equal.
3) Cumulative voting by distribution - a stockholder may cumulate his shares by multiplying the number
of his shares by the number of directors to be elected and distribute the same among as many candidates
as he shall see fit.

In stock corporation, cumulative voting is a matter of right but not in nonstock corporation.

 Sec. 88, RCC. Right to Vote. – The right of the members of any class or classes to vote may be limited,
broadened, or denied to the extent specified in the articles of incorporation or the bylaws.
Unless so limited, broadened, or denied, each member, regardless of class, shall be entitled to one (1)
vote. Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by
proxy, in accordance with the provisions of this Code. The bylaws may likewise authorize voting
through remote communication and/or in absentia.

 Election at Large
 The above provision states that unless otherwise provided in the articles of incorporation or the
bylaws, a member may vote by proxy, in accordance with the provisions of this Code. The bylaws
may likewise authorize voting through remote communication and/or in absentia.

 Quorum Required for Election

 Sec. 23 of RCC provides that if no election is held, or the owners of majority of the outstanding
capital stock or majority of the members entitled to vote are not present in person, by proxy, or
through remote communication or not voting in absentia at the meeting, such meeting may be
adjourned and the corporation shall proceed in accordance with Section 25 of this Code.
Anent the foregoing, said Sec. 25 states that notwithstanding any provision of the articles of
incorporation or bylaws to the contrary, the shares of stock or membership represented at such
meeting and entitled to vote shall constitute a quorum for purposes of conducting an election under
this section.
Quorum – majority of the outstanding capital stock
 Mode of Voting
 As required under Sec. 23 of RCC, the election must be by ballot if requested by any voting
stockholder or member.

 Election by Ballot

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  Under the old law, the election, upon the request of any voting stockholder or member, may be held
by ballot otherwise viva-voce would suffice.

 Effect if No Election or Lack of Quorum (Sec. 23; 25)

 Sec. 23 of RCC provides that if no election is held, or the owners of majority of the outstanding
capital stock or majority of the members entitled to vote are not present in person, by proxy, or
through remote communication or not voting in absentia at the meeting, such meeting may be
adjourned and the corporation shall proceed in accordance with Section 25 of this Code.
Thus, pursuant to Sec. 25 of RCC, the non-holding of elections and the reasons therefor shall be
reported to the Commission within thirty (30) days from the date of the scheduled election. The
report shall specify a new date for the election, which shall not be later than sixty (60) days from the
scheduled date.
If no new date has been designated, or if the rescheduled election is likewise not held, the
Commission may, upon the application of a stockholder, member, director or trustee, and after
verification of the unjustified non-holding of the election, summarily order that an election be held.
The Commission shall have the power to issue such orders as may be appropriate, including orders
directing the issuance of a notice stating the time and place of the election, designated presiding
officer, and the record date or dates for the determination of stockholders or members entitled to
vote.
Notwithstanding any provision of the articles of incorporation or bylaws to the contrary, the shares
of stock or membership represented at such meeting and entitled to vote shall constitute a quorum
for purposes of conducting an election under this section.

7.06 Removal and Vacancies in the Board (Sec.27; 28, RCC)

a) Requisites for Removal:

1. The removal should take place at a general or special meeting duly called for that purpose;

2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding
capital stock or the members entitled to vote in cases of non-stock corporations; and

3. There must be a previous notice to the stockholders or members of the intention to propose such
removal at the meeting either by publication or on written notice to the stockholders or members.

 Note:
 Removal may be with or without cause.
 A minority director elected through cumulative voting cannot be removed without cause.

 Sec. 27 of RCC finally provides that the Commission (SEC) shall, motu proprio 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. The
removal of a disqualified director shall be 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.

b) Filling of vacancies in the Board (Sec. 28)

 Filling of vacancies in the Office of Director or Trustee under Sec. 28 of RCC is set forth therein as
follows:
i. When vacancy occurs in the board of directors or trustees due to some causes other than by
removal or by expiration of term, such vacancy may be filled by the vote of at least a majority of

40
 the remaining directors or trustees, if still constituting a quorum; otherwise, the same must be
filled by the stockholders or members in a regular or special meeting called for that purpose.
ii. When the vacancy is due to term expiration, the election shall be held not later than the day of
such expiration at a meeting called for that purpose.
iii. When the vacancy arises as a result of removal by the stockholders or members, the election may
be held on the same day of the meeting authorizing the removal and this fact must be so stated in
the agenda and notice of said meeting.
iv. In all other cases, the election must be held not later than forty-five (45) days from the time the
vacancy arose.
v. When the vacancy prevents the remaining directors from constituting a quorum an emergency
action is required to prevent grave, substantial, and irreparable loss or damage to the corporation,
the vacancy may be temporarily filled from among the officers of the corporation by unanimous
vote of the remaining directors or trustees.

c) Replacement of Hold-Over Directors

 The replacement of hold-over directors/trustees shall be done by the stockholders or members in a
regular or special meeting called for that purpose.
The elected director or trustee shall be referred to as replacement director or trustee and shall serve
only for the unexpired term of the predecessor in office.

 Election Contest
 Under Sec. 5(c) of PD 902-A, the SEC shall have the original and exclusive jurisdiction to hear and
decide cases involving controversies in the election or appointments of directors, trustees, officers or
managers of corporations, partnerships and other forms of associations registered with the
Commission.
 Any award, judgment, final order or resolution of SEC shall be appealable to the Court of Appeals
under Rule 43 of the Rules of Court.
 The law also grants the proper court, the power and authority to hear and decide cases “involving
controversies in the election or appointment of directors, trustees, officers, or managers of such
corporation, partnership or association.” = RTC – Special Commercial Court. PD 902-A has already
been repealed.

 Deadlock in Close Corporation

 Under Sec. 95 of RCC, a close corporation is one whose articles of incorporation provides that: (a)
all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not exceeding twenty (20); (b) all the issued stock
of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title;
and (c) the corporation shall not list in any stock exchange or make any public offering of its stocks
of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code.
  In the case of deadlock in a close corporation, the Commission (SEC) is also authorized to issue an
Order as it deems appropriate “canceling, altering or enjoining any resolution or other act of the
corporation or its board of directors or “directing or prohibiting” any act the corporation or the other
board of directors thereby effectively taking away the rights of the directors to act as manager of the
corporation (Sec. 103 [b] and [c] of RCC)

 Compensation of Directors (Sec. 29)

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  Sec. 29, RCC. Compensation of Directors or Trustees. – In the absence of any provision in the by-
laws fixing their compensation, the directors or trustees shall not receive any compensation in their
capacity as such, except for reasonable per diems: Provided however, That the stockholders
representing at least a majority of the outstanding capital stock or majority of the members may
grant directors or trustees with compensation and approve the amount thereof at a regular or special
meeting.
In no case shall the total yearly compensation of directors exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding year.

7.07 Liability of Directors, Trustees, Officers (Sec. 30)

 Sec. 30, RCC. Liability of Directors, Trustees or Officers. – Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or members and other
persons.
A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the
corporation in respect of any matter which has been reposed in them in confidence, and upon which,
equity imposes a disability upon themselves to deal in their own behalf; otherwise the said director,
trustee, or officer shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.

 Three Fold Duty of Directors

1. Duty of Obedience - To direct the affairs of the corporation only in accordance with the purposes for
which it was organized.
Legal Basis: The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws (Sec. 24)
2. Duty of Diligence -
Legal Basis: Directors or trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons (Sec. 30)
3. Duty of Loyalty -
Legal Basis: Directors or trustees who acquire any pecuniary or personal interest in conflict with
their duty as such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom. (Sec. 30)
When a director or trustee attempts to acquire or acquires in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed in him in confidence as
to which equity imposes a liability upon him to deal in his own behalf, he shall be liable as trustee
for the corporation and must account for all the profits which otherwise would have accrued to the
corporation (Sec. 30, 2nd par.)
Where a director, by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits which should belong to the corporation, he must
account to the latter for all such profits by refunding the same (Sec. 33)

The responsible directors are solidarily liable with the corporation. Difference between Sec. 30 and
33 – forbidden profits

 Degree of Diligence Required

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  As contemplated under Sec. 30 of RCC, the directors are required to manage the corporate affairs
with reasonable care and prudence. This is because the liability of a corporation is not limited to
willful breach of trust or excess of power, but extends also to negligence. Their liability rests upon
the common law rule which renders liable every agent who violates his authority or neglects his duty
to the damage of his principal.
The degree of diligence, however, is relative. The more fair and satisfactory rule is that degree of
care and diligence which an ordinary prudent director could reasonably be expected to exercise in a
like position under similar circumstances.

7.08. Self-Dealing Directors, Trustees, officers (Sec. 31)

 Sec. 31, RCC. Dealings of Directors, Trustees or Officers with the Corporation. – A contract of the
corporation with (1) one or more of its directors, trustees, officers or their spouses and relatives within
the fourth civil degree of consanguinity or affinity is voidable, at the option of such corporation, unless
all the following conditions are present:
a) The presence of such director or trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum for such meeting;
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 two-
thirds (2/3) of the entire membership of the board, with at least a majority of the independent
directors voting to approve the material contract; and
e) In case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and the contract is fair and reasonable under the
circumstances.

 Levels of Degree of Consanguinity/Affinity

 Within the fourth civil degree of consanguinity or affinity.

7.09 Interlocking Directors (Sec. 32)

 An interlocking director is a director in one corporation who deals or transacts with another
corporation of which he is also a director. In such case, there may effectively be a dual agency, a
divided allegiance where allegiance in one corporation may subordinated to the other.
The prevailing view is that these contracts entered into where there is an interlocking director is not
voidable merely by reason of conflicting duties or interest as to corporations represented, even when a
majority or all of the directors are common to both corporations. It is recognized that such will be
upheld if there is no bad faith or unfairness or collusion.
 Sec. 32, RCC. Contracts Between Corporations with Interlocking Directors. – Except in cases of
fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two
(2) or more corporations having interlocking directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one (1) corporation is substantial and the
interest in the other corporation or corporations is merely nominal, the contract shall be subject to the
provisions of the preceding section insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.

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7.10 Doctrine of Corporate Opportunity (Sec. 33)
 Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a
business opportunity which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporations business and is of practical advantage to it; and
3. The corporation has an interest or a reasonable expectancy.
The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture.

 Disloyalty of a Director
 Sec. 33, RCC. Disloyalty of a Director. – Where a director, by virtue of such office, acquires a
business opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must account for and refund to the latter all such profits,
unless the act has been ratified by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the
fact that the director risked one’s own funds in the venture.

7.11 Are corporate agents solidarily liable with corporation

 Yes. Based on the provision of Sec. 30 of RCC, a director, trustee, or officer of a corporation may be
made solidarily liable with it for all damages suffered by the corporation, its stockholders or members,
and other persons in any of the following cases:
j) The director or trustee willfully and knowingly voted for or assented to a patently unlawful
corporate act;
k) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and
l) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as
director or trustee.
Solidary liability with the corporation will also attach in the following instances:
a) When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;
b) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation; and
c) When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.
d) Also in labor cases
e) In BP 22

 Requisites to Hold Director/Officer Personally Liable

1) It must be alleged in the complaint that the director or officer assented to patently unlawful acts of
the corporation or that the officer was guilty of gross negligence or bad faith; and
2) There must be proof that the officer acted in bad faith.

 Doctrine of Apparent Authority

Under this doctrine, acts and contracts of the agent, as are within the apparent scope of the authority
conferred on him, although no actual authority to do such acts or to make such contracts has been
conferred, bind the principal. Furthermore, the principal's liability is limited only to third persons who
have been led reasonably to believe by the conduct of the principal that such actual authority exists,
although none was actually given.
The rule on apparent authority is based on the principle of estoppel. Through estoppel an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as

44
 against the person relying thereon. Thus, if a corporation knowingly permits one of its officers or any
other agent to act within the scope of an apparent authority, it holds him out to the public as possessing
the power to do those acts; and the corporation will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the agent's authority.

 Patently Unlawful Acts

The rule is that a director is not personally liable for the debts of the corporation, which has a separate
legal personality of its own. As one of the exceptions, however, Sec. 30 of RCC provides that directors
or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation
shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
Thus, for a wrongdoing to make a director personally liable for debts of the corporation, the wrongdoing
approved or assented to by the director must be a patently unlawful act. Mere failure to comply with the
notice requirement of labor laws on company closure or dismissal of employees does not amount to a
patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes
penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and
penalizing the act.
An example of a patently unlawful act is violation of Article 287 of the Labor Code, which states that
"Violation of this provision is hereby declared unlawful and subject to the penal provisions provided
under Article 288 of this Code."

7.12 Who are Corporate Officers (Sec. 24)

As provided under Sec. 24 of RCC, the corporate officers to be elected by the board of directors are as
follows:
a) A president, who must be a director;
b) A treasurer, who must be a resident;
c) A secretary, who must be a citizen and resident of the Philippines; and
d) Such other officers as may be provided in the by-laws.
Further, the same person may hold two (2) or more positions concurrently, except that no one shall act as
president and secretary or as president and treasurer at the same time, unless otherwise allowed in the Code
(RCC). Exception is in OPC wherein the President may also be the Treasurer.

Sec. 122, RCC. Treasurer, Corporate Secretary, and Other Officers. – Within fifteen (15) days from
the issuance of its certificate of incorporation, the One Person Corporation shall appoint a treasurer,
corporate secretary, and other officers as it may deem necessary, and notify the Commission thereof
within five (5) days from appointment. The single stockholder may not be appointed as the corporate
secretary.

 Rule in the case of corporations vested with public interest

Under Sec. 24 of RCC, if the corporation is vested with public interest, the board shall also elect a
compliance officer.

 Is service of summons on the secretary of the president of a domestic private corporation binding on
the corporation?
It depends. Under Sec. 12, Rule 14 of the 2019 Rules of Civil Procedure, service of summons may be
made on the president, etc. of the corporation wherever they may be found, or in their absence or
unavailability, on their secretaries. In other words, service of summons on the secretary of the president
is binding on the corporation only when the president is absent or unavailable at the time of such
service, otherwise, it will not bind the corporation.

Rule 14 (Summons), 2019 Rules of Civil Procedure:

45
 Section 6. Substituted service. - If, for justifiable causes, the defendant cannot be
served personally after at least three (3) attempts on two (2) different dates, service
may be effected:
(a)x x x x x . . . . .

(b)By leaving copies of the summons at the defendant's office or regular place of
business with some competent person in charge thereof. A competent person
includes, but is not limited to, one who customarily receives correspondences for
the defendant;

(c)x x x x x . . . . .

(d)By sending an electronic mail to the defendant’s electronic mail address, if allowed
by the court.

Section 12. Service upon domestic private juridical entity. - When the defendant is a
corporation, partnership or association organized under the laws of the Philippines
with a juridical personality, service may be made on the president, managing partner,
general manager, corporate secretary, treasurer, or in-house counsel of the corporation
wherever they may be found, or in their absence or unavailability, on their secretaries.
If such service cannot be made upon any of the foregoing persons, it shall be made
upon the person who customarily receives the correspondence for the defendant at its
principal office.
In case the domestic juridical entity is under receivership or liquidation, service of
summons shall be made on the receiver or liquidator, as the case may be.
Should there be a refusal on the part of the persons above-mentioned to receive
summons despite at least three (3) attempts on two (2) different dates, service may be
made electronically, if allowed by the court, as provided under Section 6 of this Rule.
Nation Petroleum Gas v. RCBC, G.R. No. 183370, August 17, 2015 (constructive service of
summons)
- Service of summons to acquire jurisdiction is deemed proper in the case where the one who received it
was the agent of the corporate secretary who is one of the officers competent under the Rules of Court to
receive summons on behalf of a private juridical person. Thus, while it may be true that there was no
direct, physical handing of the summons to the said corporate officer, the latter could at least be charged
with having constructively received the same, which according to the Court’s view, amounts to a valid
service of summons.

2019 Rules of Civil Procedure:

Section 14. Service upon foreign private juridical entities. - When the defendant is a
foreign private juridical entity which has transacted or is doing business in the
Philippines, as defined by law, service may be made on its resident agent designated
in accordance with law for that purpose, or, if there be no such agent, on the

46
 government official designated by law to that effect, or on any of its officers, agents,
directors or trustees within the Philippines.
If the foreign private juridical entity is not registered in the Philippines, or has no
resident agent but has transacted or is doing business in it , as defined by law, such
service may, with leave of court, be effected outside of the Philippines through any of
the following means:
(a)By personal service coursed through the appropriate court in the foreign country
with the assistance of the department of foreign affairs;

(b)By publication once in a newspaper of general circulation in the country where the
defendant may be found and by serving a copy of the summons and the court order
by registered mail at the last known address of the defendant;

(c)By facsimile;

(d)By electronic means with the prescribed proof of service; or

(e)By such other means as the court, in its discretion, may direct.

Service in Intra Corporate Controversy

 Who can appoint/remove officers of the corporation

Sec. 24 of RCC provides that immediately after their election, the directors of a corporation must
formally organize and elect corporate officers. Relatedly in Sec. 22 of the Code, a corporation’s board
of directors is understood to be that body which (1) exercises all powers provided for under the
Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all property
of the corporation. As such, the directors may appoint corporate officers and agents, and as incident to
this power of appointment, they may discharge those whom they appointed. Hence, the power to
appoint and remove corporate officers and agents is lodged in the board of directors.

 Exception: Close corporations

As provided under Sec. 103 of RCC, in case of deadlock in a close corporation, a provisional director
appointed as such upon order of the Commission (SEC) may be removed by order of the latter or by all
the stockholders.

 Can trustee in voting trust agreement run for a seat in the BOD
Although there is no specific provision expressly allowing the trustee in voting trust agreement to run
for a seat in the BOD, it can be presumed that said trustee may do so because being such, the trustee is
conferred with the right to vote and other rights pertaining to the shares similar to that of a stockholder.
Provided that such trustee has all the qualifications without any disqualification to be a member of the
BOD for a period of one year and during the existence of the VTA.
(Read: Sec. 58 (par 1), RCC)

7.13 Meetings
In corporate parlance, the term “meeting” applies to every duly convened assembly either of stockholders,
members, directors or trustees, or corporate officers for any legal purpose, or for the transaction of business
of a common interest. It is classified as stockholder’s meeting and board meeting.

47
 Comparative Matrix between Stockholder’s Meeting and Board Meeting
Stockholder’s Meeting
(Stockholders/Members)
a) Kinds 1. Regular - those which are held annually
on a date fixed in the by-laws, or if not so
fixed, on any date after April 15 of every
year as determined by the board of
directors or trustees.
2. Special - those which are held at any time
deemed necessary or as provided in the
by-laws. (Sec. 48, RCC)
b) Notice  Written notice of regular meetings shall
be sent to all stockholders or members of
record at least twenty-one (21) days prior
to the meeting, unless a different period
is required in the by-laws, law, or
regulation.
 Further, written notice of regular
meetings may likewise be sent to all
stockholders or members of record
through electronic mail or such other
manner as the Commission shall allow
under its guidelines.
 As regards special meetings, written
notice thereof shall be sent to
stockholders or members at least one (1)
week prior to the meeting, unless a
different period is provided in the by-
laws, law or regulation.
(Sec. 49, RCC)
c) Place and  Whether regular or special, the meeting
Time shall be held in the principal office of the
corporation as set forth in the articles of
incorporation, or, if not practicable, in the laws provide otherwise. (Sec. 52, RCC)
city or municipality where the principal
office of the corporation is located. For
this purpose, any city or municipality in
Metro Manila, Metro Cebu, Metro Davao,
and other Metropolitan areas shall be
considered a city or municipality. (Sec. 50,
RCC) – Except Non-stock corp. S.92
d) Quorum  Unless otherwise provided in RCC or in
the by-laws, a quorum shall consist of the
stockholders representing a majority of
the outstanding capital stock or a majority
of the members in the case of non-stock
corporations. (Sec. 51, RCC)
Board Meeting
(Directors/Trustees)
1. Regular meetings of the board of
directors or trustees of every corporation
shall be held monthly, unless the by-laws
provide otherwise.
2. Special meetings of the board of directors
or trustees may be held at any time upon
the call of the president or as provided in
the bylaws. (Sec. 52, RCC)
 Notice of regular or special meetings
stating the date, time and place of the
meeting must be sent to every director or
trustee at least two (2) days prior to the
scheduled meeting, unless a longer time
is provided in the by-laws. A director or
trustee may waive this requirement,
either expressly or impliedly. (Sec. 52,
RCC)
 [See also SEC Memorandum Circular No. 6
(2020) as stated below]
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-
 Unless the articles of incorporation or the
by-laws provides for a greater majority, a
majority of the directors or trustees as
stated in the articles of incorporation
shall constitute a quorum to transact
corporate business, and every decision
reached by at least a majority of the
directors or trustees constituting a
quorum, except for the election of
officers which shall require the vote of a
48
 majority of all the members of the board,
shall be valid as a corporate act. (Sec. 52,
RCC)
e) Manner of  The right to vote of stockholders or  Directors or trustees who cannot
attending members may be exercised in person, physically attend or vote at board
or voting through a proxy, or when so authorized in meetings can participate and vote
(by proxy the by-laws, through remote through remote communication such as
or not) communication or in absentia. (Sec. 49, videoconferencing, teleconferencing, or
RCC) other alternative modes of
communication that allow them
reasonable opportunities to participate.
Directors or trustees cannot attend or
vote by proxy at board meetings. (Sec. 52,
RCC)

Note: For purposes of quorum, non-voting chares and delinquent shares are not counted

SEC Memorandum Circular No. 6 (2020):

Section 6. Notice of the Meeting. The Corporate Secretary shall send the notice of the meeting to all
directors or trustees in accordance with the manner of giving notice as provided in the by-laws or
by board resolution.
Notice of meetings may be sent to all directors or trustees through electronic mail, messaging service
or such other manner as may be provided in the bylaws or by board resolution.
Notice of regular or special meetings stating the date, time and place of the meeting must be
sent to every director or trustee at least two (2) days prior to the scheduled meeting, unless a
longer time is provided in the bylaws. A director or trustee may waive this requirement, either
expressly or impliedly. [Rcc-52, par. 4]
The notice of meetings shall include the following information:
a. The date, time and place of the meeting;
b. The agenda of the meeting;
c. All pertinent materials for discussion which shall be numbered and marked in such manner that the
director or trustee can easily follow and participate in the meeting;
d. That a Director or trustee may participate via remote communication;
e. Contact information of the Corporate Secretary or office staff whom the director or trustee may
communicate;
f. When the meeting is for the election of directors or trustees or officers, the requirements and
procedure for nomination and election;
g. The fact that there will be a visual and/or audio recording of the meeting; and
h. Other instructions to facilitate participation in the meeting through remote communications.

f) President, Sec. 53
Sec. 53, RCC. Who Shall Preside at Meetings. – The chairman or, in his absence, the president shall
preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the
bylaws provide otherwise.

g) Pledged or Mortgaged Shares

Sec. 54, RCC. Right to Vote of Secured Creditors and Administrators. – In case a stockholder grants
security interest in his or her shares in stock corporations, the stockholder-grantor shall have the right to
attend and vote at meetings of stockholders, unless the secured creditor is expressly given by the
stockholder-grantor such right in writing which is recorded in the appropriate corporate books.

49
 Executors, administrators, receivers, and other legal representatives duly appointed by the court may
attend and vote in behalf of the stockholders or members without need of any written proxy.

h) Board meeting thru teleconference or video conference allowed

Sec. 52 of RCC provides that the directors or trustees who cannot physically attend or vote at board
meetings can participate and vote through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication.

 SEC MC No. 6 (2020)

Section 4. Participation in Board Meetings Through Remote Communication; Internal Procedures.
Directors or trustees who cannot physically attend or vote at board meetings can participate and vote
through remote communication such as videoconferencing, teleconferencing, or other alternative
modes of communication that allow them reasonable opportunities to participate. However, directors or
trustees cannot attend or vote by proxy at board meetings.
If a director or trustee intends to participate in a meeting through remote communication, he/she shall
notify in advance the Presiding Officer and the Corporate Secretary of his/her intention. The Corporate
Secretary shall note such fact in the Minutes of the meeting.
Corporations may issue their own internal procedures for the conduct of board meetings through remote
communication or other alternative modes of communication to address administrative, technical and
logistical issues.

Note: BOD can only validly act during the board meeting, except in close corporation.
=============================================================================

Assigned Case

45. Engineering Geoscience, Inc. vs. Philippine Savings Bank

GR No.187262, January 10, 2019

In this case, Petitioner EGI obtained ……………

Facts: Petitioner EGI obtained a loan from respondent PSBank secured by a Real Estate Mortgage executed by
EGI’s President, Jose Rolando Santos. The petitioner was able to make some partial payments only as it fell due
but later on, made no further payments thereto. The PSBank then demanded full payment of EGI’s loan
obligation but the latter ignored it prompting the former to file a petition for extra-judicial foreclosure of
mortgage. The foreclosure sale, however, did not push through on account of the complaint filed by EGI before
the RTC which subsequently granted EGI's prayer for the issuance of writ of preliminary injunction, enjoining
PSBank from proceeding with the foreclosure sale.

Meanwhile, a Compromise Agreement between PSBank and EGI was approved by the trial court but EGI still
failed to comply with the terms and conditions thereof. Consequently, PSBank moved for the execution of the
RTC's decision on the compromise agreement entered into by Mr. Santos on behalf of EGI. In its several
motions for reconsideration and petitions, EGI raised for the first time the alleged lack of authority of its former
president, Mr. Santos, to enter into the compromise agreement. PSBank on the other hand, pointed out that more
than twelve (12) years have already lapsed from the rendition of the decision approving such agreement and as a
consequence, EGI is now barred by laches.

Notwithstanding the foregoing, the trial court declared the said Compromise Agreement as null and void. In
support thereof, it cited a previous jurisprudence, stating that a compromise agreement executed by one in behalf
of another, who is not duly authorized to do so by the principal, is void and has no legal effect, and the judgment
based on such compromise agreement is null and void and vests no right and holds no obligation to any party.
On appeal, however, the CA appreciated the facts differently from the trial court as it annulled the latter’s Order,
declaring the Compromise Agreement as null and void.

50
Issue: Was the act of Mr. Santos in entering into the compromise agreement legally binding and thereby making
such agreement enforceable against plaintiff EGI?

Held: Yes. It bears to stress that EGI has been insisting that the board of directors has the sole power and
responsibility to bind the corporation in transacting business or in the performance of any act binding on the
corporation. Verily, a corporation acts through its Board of Directors or Trustees as provided under Section 23 of
the Corporation Code.

In the case at bar, EGI's grant of authority to Santos falls under the doctrine of apparent authority. Under this
doctrine, the acts and contracts of the agent, as are within the apparent scope of the authority conferred on him,
although no actual authority to do such acts or to make such contracts has been conferred, bind the principal.
Furthermore, the principal's liability is limited only to third persons who have been led reasonably to believe by
the conduct of the principal that such actual authority exists, although none was actually given. As a matter of
course, apparent authority is determined only by the acts of the principal and not by the acts of the agent.

Furthermore, it is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent
to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those
acts. Thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority.

In fine, Mr. Santos’ act of entering into such compromise agreement binds EGI, and considering that its Board of
Directors questioned Mr. Santos' authority only after 12 years, laches had already set in.

51