COBLAW2 NOTES Definition of ‘Right of Succession’
by: migs o Q: If a director/stockholder dies, would it
(Note: Bullets with * that sign is emphasized by Sir
to be part of the exam)
Title I
GENERAL PROVISIONS
Definitions and Classifications
Section 1. Title of the Code. - This Code shall be
known as the “The Corporation Code of the
Philippines.” (a)
Section 2. Corporation Defined. 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 incidental to its existence.
Notes:
Definition of ‘Artificial Being’
o First off, we need to understand that as
natural beings (humans), our rights, some
are established by law and some are simply
recognized by law.
o And, there’s a difference. The moment you’re
born, you’re indulged (?) with human rights.
The laws that we have do not establish
human rights rather they simply
acknowledge these rights.
o Whereas, a corporation, being an artificial
being would not have existed without the
law. Now, without the law giving it’s
imprimatur to its existence, it would not have
even existed.
o That being said, all of its rights depends on
the law. If the law does not grant a
corporation such power, then it is withheld
from it.
For example: Can a corporation say that I have a
right to remain silent?
A: No, it doesn’t have the right which is self-
incrimination.
Q: Does it have a right on undue seizure of
effects, violations of its office and papers?
A: Yes, you can have it subpoena for you cannot
enter the property without any notice (basta
basta lang papasukin ) means literally piercing the veil (tho it cannot
result to dissolution?
A: No.
For example: (In a movie setting) When a
stockholder dies, the heirs commonly fight to
whoever will get the stocks and who will own the
company.
- The company remains alive, it does not
die along with its owners.
For ‘powers, attributes, and properties’
‘Powers’
o There are three types of powers: the express,
implied and inherent powers
o The main difference is that in
- Express powers - these are found either
in the law or in the Articles of
Incorporation
- Implied powers - these are implied from
the express powers
- Inherent (/incidental) powers - these are
necessary for a corporation to exist. For
example: The power to acquire properties
to dispose of them. (If you don’t have that
kind of power then what was the purpose
of you making a corporation)
Piercing the veil of corporate entity
o The premise is this that in partnerships, it has
a separate juridical personality. However, in
the event that the partnership does not have
sufficient properties, it will have to pay off its
creditors using the partners, general
properties. They will be responsible for the
payment of the debt for they are subsidiary
liable.
o When it comes to corporations, not quite. If
say a corporation, creates liabilities or
becomes debtor to third persons. Whatever
happens, maybe because of bad business
decision or bankruptcy, the creditors cannot
run after the stockholders. Why? Because the
veil of corporate entity is much stronger in a
corporation.
o So, the corporation having the juridical
personality, is much stronger in a
corporation setting.
o The piercing the veil of corporate entity
happen in reality) but it’s like creditors can
ran after the stockholders. However, on what
incidents or grounds that this can occur?
- Note: This is just an exception and not a
general rule.
1
Exceptions of the Concept: wife. He was pointing out that they had
1. Alter Ego Piercing separate personality. (But, this is not
- For Example: Let’s say that the allowed)
corporation is being used by one person - The court said then that this was true,
simply as his alter ego. This corporation that the person in contact with Mr. A was
is not being used for legitimate purposes Villarey Transit. However, the
and is purely to take advantage of establishment of the new company was
corporate setting so that he can shield his way to evade his obligations from that
himself from creditors, government and contract. And, because of that, the court
others. said that it will piece the veil of corporate
entity and you can hold Villarey for
- If the corporation is being used like that, damages.
like for example you’re running several
corporations and then the only thing Summary of Definitions:
you’re doing is to ensure that the  Corporation for the benefit of a single
government is unable to exact taxes from person (Alter ego).
you, that can be the ground for alter ego  Domestic corporation is dummy for aliens
piercing.  Insolvent debtor organizes to defraud
debtors. (BUT see the tax provision allowing
2. Fraud Piercing corporations composed by five five) GOOD
- For example: Let’s say you have a FAITH
corporation, and then you have  Subsidiary is created by parent corporation
employees that you don’t want to pay to evade liability
anymore. So, you simply made a new
 Formed by the person for the purpose of
corporation and transferred the assets
evading his individual contract (Villarey,
and hired new employees. you cannot compete with me clause)
- This cannot be done for you’re basically  Dissolved and assets are transferred to
defrauding the employees in order to evade liability. Corporations may merge,
evade the payment of liabilities. consolidate, or reorganize so long as done
Note: In these instances, the courts can in good faith.
pierce the veil of corporate entity and
therefore ran after the stockholders, Let’s Compare…
directors or the officers who openly and Partnership Corporation
practically accented to this act. Consensual Yes No
• For things like that will not happen, if not Number of Two or Min. of 1
for their decisions. persons more person
composing persons
3. Equity Piercing Juridical Yes Yes
- In this part, this can be perfectly
Personality
illustrated by the case of Villarey.
Powers
Backstory: Villarey owns a bus company and Management Managing Board of
he sold it to Mr. A for P20M. However, Mr. A partner Directors or
made an agreement with Villarey that he Board of
should not compete with him for the next Trustees
five years and he agreed. (Why is this Term Limit Not Continued
important for Mr. A? The situation will be is continued Perpetually
that Mr. A will buy the company then Villarey perpetually
will buy new ones and then compete with Mr. Name In the case should be
A so the effort will be wasted.) of Limited, distinguishable
- Then, what Villarey do is that it was his Ltd. should
wife who made the new company and be present
used the same office and facility like he Transferability Only Can easily
did and they have new set of buses. of Ownership transfer of transfer status
interests as a
- Mr. A then filed a complaint for this. stockholder
However, Villarey said that Mr. A was in
Manner of
contact with Villarey Transit and not his
Dissolution
2
 Governing Civil Code Revised
Law Corporation
Code
Advantages
Disadvantages
Notes:
• Consensual - A partnership is consensual
because it is perfected by mere consent.
There is no corporation that will be
established without the Certificate of
Incorporation so it should be registered
in the SEC.
• Number of persons composing - For a
partnership, it should be two or more.
While in a corporation, it can be just one.
In the past, there should be a minimum
of 5.
• Both has juridical personality.
• In the partnership, it’s that managing
partner. In a corporation, it’s the board of
directors or board of trustees.
• In a partnership, it has a limited life for it
can be dissolve upon the death of a
partner and other circumstances. It is In a
corporation, it is continued perpetually.
(In the past, it was 50 years.) It is also
allowed that a corporation will have a
specific term limit as long as it is in the
stipulation/articles.
• For the name, in the case of a Limited
partnership, the abbreviation of Ltd.
should be present. In corporation, it
should be distinguishable. Like if it is OPC
(One person corporation), Inc. or
Corporation.
Terms:
• For the transferability of ownership, if a
partner transfers his ownership what will
happen? The partner can only transfer
interest and not make someone a new
partner. In corporation, you can easily
transfer your status as a stockholder
simply by selling/assigning your shares to
another person.
• In manner of dissolution, it’s almost the
same, the difference is that in part in
partnership, the one that is being
returned is the capital and profits. In
corporation, it’s the same but there is no
something similar to limited partners,
lahat third persons muna.
- There’s also some sort of variation when
it comes to non-stock corporation.
• For governing law, in partnership, it is the
Civil Code. In corporation, it’s the Revised
Corporation Code. (*Always look at the
revised corporation code)
• Advantages and Disadvantages
- Partnership: If the partnership becomes
insolvent then the general partners will
be subsidiary liable.
Another, when you put up a partnership,
there are reportorial requirements which
means you need to report a lot in the SEC.
o That’s why in huge corporations,
there are compliance officers,
which are required to perform all
the reportorial requirements of
the corporation. In corporations,
there are a lot of reporting’s
because that is how the SEC
monitor how they are doing. It is
to ensure that the public is
protected.
o So every time, that directors,
stockholders or officers are
changed, they need to file a
general information sheet in SEC.
Every year/quarter, the
corporation need to hold a
stockholder’s meeting.
o Every year, they’re required to
submit BIR Returns and
consolidate it with BIR.
- Corporation: Even if the corporation
become insolvent, the stockholders will
not be held liable for the liabilities of the
corporation.
 Stock vs. Non-Stock
 Stock Corporation - the main goal is
to earn profit
o Q: What do you call the
persons who composes a stock
corporation?
A: Corporators but aside from
it you also call the people who
own the corporation as
stockholders. They own equity
in the corporation.
 Non-Stock Corporation - it is created
for non-profit but for the public good
and welfare
o They are for the non-profit
organizations.
o The people that composes them
as members.
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 Corporation aggregate vs. Corporation
Sole vs. OPC
 Corporate Aggregate - this means two or
more
 Corporation Sole - it is usually used like
for example: a religious corporation
o This religious corporation is
headed by one head of the church.
He is also the only person that
composes the religious society,
that’s why it’s only one (sole).
 Ecclesiastical - 2 Kinds
 Lay
o It has two types: Eleemosynary
and Civil Corporations.
o Eleemosynary - these are for
charitable purposes
o Civil Corporations - for business or
profit
 Religious
o These are corporations that is
geared towards faith and
proliferation of a certain faith
 Domestic vs. Foreign
 In the country, we don’t simply
recognized foreign corporations simply
by the fact that they were incorporated
outside the Philippines. The main reason
why they are considered foreign
corporations is that they are incorporated
in a country which allows Filipinos and
Filipino corporations to do business
there. That’s how it works.
o In short, if you have a foreign
corporation and you want to do
business here, you have to show
first that you’re country of origin
also gives Filipinos and Filipino
Corporations has the ability to do
business there. (This is what you
call the law on reciprocity.)
 De Jure vs. De Facto
 De Jure - it exists in fact and in law
because you have complied with all the
requirements in establishing a -
corporation
 De facto - It exists in reality but on paper
you’re not. So, you’re someone who did
not comply with all the requirements and
yet you’re there.
 Closed corporations vs. Non-closed
 Closed Corporation - there are three
elements:
1. The stockholders numbering in the
corporation should not exceed 20.
2. They are not allowed to participate in
any public offering like IPO and Stock
Exchange
3. There are restrictions as to the
transfer of shares.
o So, it is a common misconception
that a closed corporations are
those that are composed by family
members. Because, before you
become a stock corporation, the
three elements should be present.
o The next misconception is that if
you’re all family members, it is
supposed to be a closed
corporation.
o What is the implication of these?
- It doesn’t necessarily means that if you’re
a family then it is a closed corporation. It
should be registered in a certain way and
that all 3 elements are present. Also,
shares in this type cannot be sold easily.
If you are going to sell a share, you need
to give the other stockholders,
preemptive right before you sell it. So,
you’ll still give them a chance or like right
of refusal.
 Parent vs. Subsidiary
 Parent Corporation - Usually, this is the
holding company
 Subsidiary - they are the ones being held
by the holding company
 Corporation by prescription
 It is exercises corporate powers for an
indefinite period without the interference
of sovereign power
 Example: Roman Catholic Church
o Barnes vs Ramirez
Around 1915, Barnes arrived in the
church and was wondering where are the
images. It was removed because the
parishioners doesn’t want to support
Barnes as the new parish priest. That’s
why they made their own (Inglesia
Aglipay/ Philippine Independent Church)
They were claiming that all the images
were theirs. They reached the Supreme
Court and was saying that it could not
possibly be owned by the Roman
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 Catholic Church because they are not a
corporation, it does not exist and it
doesn’t have papers in SEC. If it could not
exist then how could it own properties?
- A: The SC said that the Roman Catholic
Church has arrived before the
establishment of the laws and how could
they expect to have papers about laws
and corporations.
 That’s why the Roman Catholic Church is
the only private owned corporation in the
Philippines that is not registered in the
SEC.
 Corp by estoppel - a corporation which
was never registered in the first place so
the people composing it are considered
as general partners.
 It will not be a partnership but they will
be treated as general partners.
 The reason for this is that for the third
persons that were defrauded, they could
claim that these group of people were
acting as if they’re in a corporation
whereas in fact they’re not. The moment
they could prove that, they could treat
these as general partners.
 The implications is that the law will
consider them as a corporation by
estoppel and that they will be treated as
general partners.
 And, in the point of view of creditors,
general partners can be held liable up to
the extent of their personal assets.
Section 3. Classes of Corporations. -
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.
o These two attributes should be
present in a stock corporation.
All other corporations are nonstock
corporations.
Notes:
• If there is only 1 stock in a corporation,
it’s shares of stock and if you have a
share then, it would be like you have a
share of stock.
Section 4. Corporations Created by Special
Laws or Charters. - Corporations created by
special laws or charters shall be governed
primarily by the provisions of the special law or
charter creating them or applicable to them,
supplemented by the provisions of this Code,
insofar as they are applicable.
Note: What we will study are private
corporations.
---
Corporators vs. Incorporators
Definition (*what was recited*)
 Corporators - are those who composes a
corporation
 Incorporators - are the stockholders or
members mentioned in the Articles of
Incorporation
 Q: Are all corporators, incorporators?
A: A corporator is somebody who holds
shares of stock and they change every now
and then. Stockholders sells, assigns his
shares of stock to another person he
becomes a corporator.
An incorporator is his fait accompli meaning
it’s an accomplished fact which will never
change. Why? Because they were the
persons whose names are submitted in the
SEC.
Remember: If a friend offers you to be an
incorporator, don’t believe if he will say that
you’ll be removed after a period of time because
you’re part of the corporation forever. Although,
you’ll not be part anymore of the corporation it
will be sold. However, your name will always be
there.
Section 5. Corporators and Incorporators.
Stockholders and Members.
- Corporators are those who compose a
corporation, whether as stockholders or
shareholders in a stock corporation or as
members in a nonstock corporation.
- Incorporators are those stockholders or
members mentioned in the articles of
incorporation as originally forming and
composing the corporation and who are
signatories thereof.
*Recitation Answers with Sir*
 Stockholder vs. Member
 Stockholder - the corporators in a stock
corporation
 Members - for the nonstock corporation
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  Promoters
 They are the one who invite people to
join the venture.
 Subscribers
o They are the persons who are willing
to pay. Why is this important? There is
a difference with the persons who has
already paid. Although, as a
subscriber you can already subscribe
and already pay. However, it doesn’t
mean that you already paid and
you’re a subscriber.
 Basically, what you did was to promise
that you will be purchasing these specific
number of shares.
*Definition in the PPT*
 Stockholder vs. Member
 Stockholder - Stock Corporation
 Member - Non-Stock
 Promoters
 Persons who bring about or cause to
bring about the formation and
organization of a corporation
 Subscribers
 persons who agreed to take and pay for
original, unissued shares of a corporation
formed or to be formed.
Q: If you bought from a stockholder, shares of
stock, would you consider him/her (the buyer) a
subscriber?
A: No, because it’s original and unissued.
Although, it can happen that you can assign the
subscription. You’ll transfer the right and the
duty to buy, that can happen.
But, if you bought shares from an existing
stockholder, technically speaking, those are
transfer of shares and you’re not subscribing any
more.
 Capital vs. Capital Stock (*p.226)
 Capital - the money of the corporation. It
also changes over time while;
 Capital Stock - it doesn’t change over
time.
 Authorized Capital Stock vs. Capital
Stock
 Both of these stocks are considered for a
stock corporation.
 Authorized Capital Stock - means there’s
a ceiling or an amount of shares which
you can sell.
o For kind of this stock, there is a
(par value) per share
o For example: P10 par value, the
minimum shares that you can sell
is worth P10. It cannot be lower
but can definitely be higher but
there are implications.
If value at P10, then you’ll buy
100 shares. You need to pay
P1000. (The 1K should be kept
by the corporation. That should
be part of the trust fund
doctrine.)
Q: Can you sell higher than the
par value?
A: Yes. For example: They can
sell it at P20 so they can gain
profit. If they buy 100 shares,
then you’ll pay 2K. (The
amount that you will be
keeping in the Trust Fund
Doctrine will be only 1K
because you have a par
value.) The other 1K will be
recognized as Cash Premium.
Anything above the par value
is cash premium.
 Capital Stock - these are for corporations
issuing shares of stocks but without par
value
o For it doesn’t have par value, you
can sell it at any amount. But not
lower than P5 for it is the issued
value.
o What is the catch if it’s capital
stock? Since there is no par value,
you can’t hide a minimum, instead
you need to keep everything in the
trust fund.
 Outstanding Capital Stock
 There is someone who already purchased
or subscribed
 It’s competitor is the treasury shares
 Paid-up capital vs. Subscribed vs.
Unissued Capital Stock
 Paid-up capital - it was paid already
 Subscribed - you simply promised to
pay
 Unissued Capital Stock - it still not
outstanding
6
 Shares of Stock vs. Certificate of Stock
 Shares of Stock - it is what you actually
own
 Certificate of Stock - a manifestation or a
piece of evidence of that particular
ownership
o However, it doesn’t mean that you
lost the certificate of stock, you’re
no longer the owner.
o Remember: If you subscribe for a
specific number of shares, you’re
not entitled to receive a certificate
of stock until you have fully paid
your subscription.
It may be that you’ve already
subscribed yet you haven’t
paid so you won’t get the
certificate of stock yet.
Trust Fund Doctrine
Definition
 Subscriptions to the capital stock of a
corporation constitute a fund to
which the creditors have a right to
look for the satisfaction of their claims
Explanation of Sir
 This means that all your subscription
to the capital stock constitutes a fund
in which creditors have a right to look
for, for the satisfaction of their claims.
 For example: The corporation
becomes bankrupt, and they don’t
have money to pay for the liabilities.
The presumption of the law is that
you have money that you haven’t
spent and what is that? (*Lahat ng
benta or proceeds ng shares ay dapat
ay tinatago ng corporation and hindi
ginagamit.) That capital should always
be intact because the creditors of the
corporation can look for those funds
in order to satisfy their claims.
 It means even though the corporation
may be in the state of bankruptcy, the
presumption is that they have money.
Watered down stocks or “Watered
Stocks”
Definition
 Stock that is issued for less than its
par or issued value
Notes:
o Selling a stock at a lower par value
without informing the
stakeholders that you sold it at a
lower amount is a form of
dishonesty.
o For example: P9/par value and you
sold 500 shares so it’s 4,500 but
what you recorded was for 10/par
value and sold 500 shares means
5000. It means that you have
recorded 5K but in reality, you
only have 4,500.
o So the people or the third persons
that will be relying on your Articles
of Incorporation will be misled.
That’s why watered stocks are not
allowed.
Unrestricted retained earnings
 Any portion of company earning that
are not assigned to a specific purpose
 These are profits which you have kept
and which are not yet earmarked for
a particular purpose. It hasn’t been
designated yet (*and with that you
could do anything with the
unrestricted retained earnings).
Why is it important?
- It is where the corporation declares its
dividends from. Hindi ka pwede mag
declare ng dividends na akala mo kita
lang. Kailangan sobra sobrang kita yon.
Notes:
o The declaration of dividends, especially
cash and stock dividends. It cannot be
done simply by the corporation
whenever it pleases.
o Cash Dividends
- It could be declared by the directors. But,
ofc they have to meet and agree that
these are unrestricted retained earnings.
o Stock Dividends
- It has to be approved by the stockholders
and the board of directors.
 The importance of this concept is that,
this is where you get the dividends from
and this is where you get the money, in
case you need to repurchase some of the
shares of the corporations. For at some
instances, you can repurchase the shares
of the corporation.
 For example: There has been delinquency
so the corporation will get it back and if
they have sold it in a public auction then
they could buy. (*In accounting, the entry
would be [debit - unrestricted retained
earnings & credit - accounts receivable)
7
 2nd Synch Class
Notes:
 Common vs. Preferred
 Common
- What explicitly stated in the constitution
is that there should always be in a
corporation, a class of shares which has
complete voting rights.
Why is that so important?
- Because, a corporation, moves on its own
as an entity but it have to be decided
upon not just by the directors but as well
as the stockholders who will eventually
elect the directors.
- So, there must always be a share with
complete voting rights which is called the
common shares/stock.
 Preferred
- They are given preference when it comes
to certain things.
- For example: The most usual preference
is in the declaration of dividends or the
preference in receiving surplus, later on.
 However, despite this, there is a draw
back. If you have preferred shares, this is
usually deprived of voting rights. The
company has an option to give it voting
rights however by default, it does not
have voting rights. (*which means they
don’t have the right to elect members of
the board of directors.)
Note: However, there are certain matters
wherein shares without voting rights can vote.
There are only 2 kinds where there is no voting
right: preferred and redeemable.
 Voting Shares
 Basically shares which has voting rights.
Q: Can common shares be deprived of voting
rights?
A: Yes.
- For example: they have delinquent
shares. Once they become delinquent,
they are not anymore allowed to vote.
- Q: Is delinquency similar to failure to pay
a subscription?
A: No. It should be delayed payment in
subscription meaning there is a call from
the board of directors and you did not
heed the call or natapos na yung term
and when you already need to pay and
you haven’t done it that’s when you’ll be
place in default and because of that
you’re shares will be declared delinquent.
- Once it is delinquent, they cannot vote
and they also do not have the right to
earn dividends at that points, except cash
dividends.
 Principle of Equality of Shares
 All shares of the company (*by default)
shall be treated equally, if not otherwise
stipulated in law or provided under the
articles of incorporation.
 For example: What you did was, you went
to the SEC, filed the default Articles of
Incorporation because it’s not stated
there if you want preferred or something
else unless you include it. Unless, the
Articles of Incorporation that you’re
going to submit will state the concept of
preferred shares. Because, if it is not
stated then by default, all shares are
considered common. Everyone has
voting rights.
 Because of this principle, unless you limit
otherwise, the default is that it would
have equal rank in terms of privilege or
rights.
Notes from Questions:
- If you’re buying a share, you can choose
whether it would be common or
preferred. Unless, if the company only
offers common or preferred then you
don’t have other choice but to buy that.
- It is also allowed to buy both stocks.
Remember: This is not a matter of right. It will
only be a matter of right, if it will be about pre-
emptive right.
- For example: You increase your
authorized capital stock. That increase
means first dibs of all existing
stockholders. With that, that is your right
and it is demandable. However,
otherwise, this is an open contract of sale
which means it is really up to the buyer
and seller to agree on whether or not
they want to proceed with the sale. So, if
a corporation don’t want to sell to you a
share, then you don’t have a choice but
to just accept it. The only time where the
corporation don’t have a choice is
technically, where the corporation cannot
do something about it if they are publicly
offered shares. (*those in the Stock
Exchange.) Again, they are considered
securities.
8
 - Security/Securities - is anything that you
buy wherein you expect profits through
the efforts of others.
- For example: You buy investments, that’s
considered as securities and that should
be registered in the SEC.
Section 6. ….. Holders of non-voting shares
shall nevertheless be entitled to vote on the
following matters;
*Non-Voting Shares - Preferred and Redeemable
Note: However, in these following instances, they
are allowed to vote.
- As you can notice, these matter are of
extreme importance, not just for the
stockholders but also for the corporation
as a whole.
a.) Amendment of the articles of
incorporation;
b.) Adoption and amendment of bylaws;
- Bylaws - are internal rules. These are rules
which are attended to the corporation and
its directors, officers, and stockholders.
- For example: what is the manner of voting,
eligibility concerns (*especially in non-
stock corporation where there is no shares
of stock, that’s why your membership is
dependent on whether you maintain good
standing)
c.) Sale, lease, exchange, mortgage, pledge,
or other disposition of all or
substantially all of the corporate
property;
- This is important, why? For example: you
have a corporation then you sold
everything, Q: Can you still operate the
next day? A: No, because you don’t have
any property anymore for it will affect
your operations.
d.) Incurring, creating, or increasing
bonded indebtedness;
- “bonded” - for example: Company A says
that I will build you a bridge, Company B.
However, B isn’t keen to the track record
of A. Instead, if you want, you can get a
bond. So, there is a bonding company (*or
what you call performance surety bond), A
will talk to the bonding company and tell
them what he promised A. If he fails to
deliver his promise, the bonding co. will
pay B. So, if A really fails to fulfil the
promise, the bonding co. will pay B. Then,
B will not ran after A anymore bcos he’s
paid.
Q: Is A free of his liabilities?
A: No, the bonding company has indemnity
agreement against A. Whatever happens, A will
still pay the bonding company. So, in the POV of A,
it’s more of an onerous obligation.
e.) Increase or decrease of authorized
capital stock;
f.) Merger or consolidation of the
corporation with another corporation
or business in accordance with this
Code; and
- In merger, you have two constituent
corporations, one is absorbed by the other,
so much so that only one will survive.
A+B = A
- In consolidation, you have two
constituent corporations and neither of
them survives and they create a new one.
A+B = C
g.) Investment of corporate funds in
another corporation or business in
accordance with this Code; and
- Q: Is that so bad if you invest some funds
to another corporation? A: Well, it’s not
that bad.
- The source of concern is an instance
wherein you have a corporation is that if
you’ll invest it to a field far different from
your corporation, if it’s like a near industry
with yours then maybe it’s acceptable.
- A corporation should invest only with
allied industries.
h.) Dissolution of the Corporation
Section 7. Founders’ Shares. - Founders’ share
may be given certain rights and privileges not
enjoyed by the owners of other stock. Where
the exclusive right to vote and be voted for in
the election of directors is granted, it must be
for a limited period not to exceed five (5)
years from the date of incorporation:
Provided, That such exclusive right shall not
be allowed if its exercise will violate
Commonwealth Act. No. 108, otherwise
known as the “Anti-Dummy Law”; Republic
Act No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and otherwise
known as “Foreign Investments Act of 1991”;
and other pertinent laws
- Has special rights and privileges
- May be given exclusive right to vote or me
voted for 5 years from the date of
incorporation.
Note:
- Remember the promoter, to persuade
potential investors they promise to give
them founder shares.
- “the date of incorporation” is a new part of
the article. In the past, this isn’t included in
article. It becomes a leeway especially
during the start of the corporation for
you’ll never know when will you have a
tug-of-war between you and the other
9
 stockholders over the control of the
corporation.
o In the past, it is in the bylaws
stating that from the time that they
demand.
Section 8. Redeemable Shares. - Redeemable
shares may be issued by the corporation when
expressly provided in the Articles of
Incorporation. They are shares which may be
purchased by the corporation from the
holders of such shares upon the expiration of
a fixed period, regardless of the existence of
unrestricted retained earnings in the books of
the corporation, and upon such other terms
and conditions stated in the articles of
incorporation and the certificate of stock
representing the shares, subject to rules and
regulations issued by the Commission.
Limitations:
1. Redeemable shares may be issued only
when expressly provided for in the
Articles of Incorporation;
2. The terms and conditions affecting said
shares must be stated in the certificate of
stock representing such share;
3. Redeemable shares may be deprived of
voting rights in the Articles of
incorporation
4. The corporation is required to maintain a
sinking fund to answer for redemption
price if the corporation is required to
redeem;
5. The redeemable shares are deemed
retired upon redemption unless otherwise
provided in the articles of Incorporation.
Notes:
- The rationale here is that for example: A is
a promoter and is persuading you to invest
in the corporation that A will be making
which he tells is the ‘next big thing’.
However, you don’t trust A because of his
bad skills in business, that’s why A wants
to issue you redeemable shares.
- Redeemable Shares is within a fix period
of time, the company will have to buy back
those shares. As long as the company will
continue to operate for example, in the
next three (3) years.
o Q: How will they do this? Where are
they going to get the money?
Should it be in unrestricted
retained earnings?
A: No, because in the law, it says
‘regardless’ of the unrestricted
retain earnings. So, this is an
exception to the rule. In which,
when you need to buy back shares,
you need to have unrestricted
retained earnings. (*Here, it is not
needed) Why?
o Because, this is an obligation under
a contract. You are contractually
obligated to buy back those shares.
So, whether or not you have extra
money, you have to buy back those
shares.
- Q: For example, the shares was redeemed
already, what will happen to the shares?
A: It will now be considered as Treasury
Shares.
Section 9. Treasury Shares. Treasury shares
are shares of stock which have been issued
and fully paid for, but subsequently
reacquired by the issuing corporation through
purchase, redemption, donation, or some
other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the
board of directors.
- Shares which are previously issued by the
corporation but subsequently reacquired
by the corporation.
- *Can be re-issued, unless retired.
- *They are not entitled to dividends.
- *They are not entitled to voting rights.
- *These shares may again be disposed of for
a reasonable price fixed by the Board of
Directors.
Notes:
Q: Do you think treasury shares can vote?
A: No, because the shares are inside the
company, and remember that the one who
makes the decision for the corporation is the
board of directors and if it will have voting rights
then it’ll look like a joke. They will circumvent the
law, for example if they have the shares, then
they can block the decisions which can be the
director and they can override the decision by
the stockholders because they’ll also be the one
to vote.
Q: Will they earn dividends?
A: No. Because they own it already and the
profits it will make will just go back to the
company.
• For example: Let’s assume that the
corporation has 1000 shares in the
treasury with P1 par value.
Q: Can the corporation resell these treasury
shares?
A: Yes, it can be.
Q: Can the corporation sell the share for P5
each?
A: Yes because pumasok na yung par value nung
trust fund. Remember, when you say treasury
shares, these were fully paid for and issued, but
10
subsequently reacquired. In short, it has been
issued before which means it’s been paid
already. So, you have already complied with the
trust fund doctrine in the first sale of the share.
So, when the shares returns to you, it has been
already fully paid which means you can sell it at
any price even below the par value. Because, the
trust fund doctrine has not been violated.
 Who can incorporate? [Sir then changed
the question to who can’t incorporate]
 Deaf and mute people can incorporate as
long as they are literate, if they’re not
then they can’t incorporate. Insane
people can’t also incorporate unless
they’re in the lucid interval. Also, minors
can’t incorporate.
 How many does it take to incorporate?
 It only takes one to incorporate provided
that it’s an OPC. In corporate aggregate,
at least two. It is stated in the law that
singly or jointly with others.
 Can corporations incorporate?
 Yes, it is now allowed.
 What are the qualifications of an
incorporator?
 They should be a stockholder in the
company. They should at least own one
share or if there’s no shares of stock then
he should at least be a member.
 Can lawyers or accountants incorporate?
 Yes, they can as long as they don’t form
a corporation in order to perform their
functions as professionals.
 So, for example: if you’re a lawyer, you
can put up a hardware. The only time that
you won’t be allowed is when you’ll start
a corporation where you’ll practice your
profession. (*You can only do that
through a partnership.)
Section 10. Number and Qualifications of
Incorporators. – Any person, partnership,
association or corporation, singly or jointly with
others but not more than fifteen (15) in
number, may organize a corporation for any
lawful purpose or purposes: Provided, That
natural persons who are licensed to practice a
profession, and partnerships or associations
organized for the purpose of practicing a
profession, shall not be allowed to organize as a
corporation unless otherwise provided under
special laws. Incorporators who are natural
persons must be of legal age.
Each incorporator of a stock corporation must
own or be a subscriber to at least one (1) share of
the capital stock.
A corporation with a single stockholder is
considered a One Person Corporation as
described in Title XIII, Chapter III of this Code.
 Who is a professional?
 Someone who must have gone up to
study. Not only that, he went not only to
a rigorous training that has sequence of
qualifications but also has a government
license.
 Has completed a prescribed field of study
or special training, education or skill
 Passed a licensure examination or
complied with regulatory requirements
 Member of a good standing of that
profession
 Follows a set of standards or code or
practice
 Example: (Medical Technicians, Brokers,
Lawyers, Accountants)
 Is there a term limit for corporate
existence?
 Nowadays, there is no term limit.
However, corporations can have term
limits, they can impose upon themselves
term limits in their Articles of
Incorporation.
 What is the rule on corporations already
in existence prior to the effectivity of the
Revised Corporation Code?
 In the past, the term limit was only 50
years, so does that mean when the
Revised Corporation Code was
implemented their life added up another
50 years? Can they exist even if they don’t
do anything? A: Yes, they don’t need to
do anything. It’s automatic if you had
many years already in the past, you now
become perpetual.
 What about corporations whose terms
have already expired prior to the
effectivity of the Revised Corporation
Code?
 Those companies can file a petition for
revival. (*Lazarus Doctrine)
 What about corporations whose licenses
have been revoked prior to the effectivity
of the Revised Corporation Code, can
they petition for revival?
11
  No, they did something bad which was
the cause of their license to be revoked
so why would they be bring back to life
which will not make sense.
SEC. 11. 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, 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 term 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.
• If for example: The corporation included in
the stipulation that the life of the corp. will
up until 2021-2121 only. However, they
changed their mind on 2022 that they’ll
change the articles. That is not allowed,
you can only do that 3 years (2068) prior
to the subsequent expiry date.
• If for example: They suddenly want to cut
the life of the corporation to 2032, will
they still need to wait for 3 years prior to
the subsequent expiry date? A: No they
don’t need to wait, they can cut it already.
SEC. 12. Minimum Capital Stock Not Required
of Stock Corporations. – Stock corporations
shall not be required to have a minimum capital
stock, except as otherwise specifically provided
by special law.
SEC. 13. 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 nonstock 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;
12
(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.
 How does one incorporate?
- Go to the SEC
 What are the government agencies
involved?
- Primarily, the SEC. However, if you need
secondary licenses, SEC will refer you to
that agencies.
- Secondary Licenses - are like clearances
from other agencies then that’s the time
they will or they can approve the
application.
 Is there a form?
- The default form is the Articles of
Incorporation.
 Can incorporators draft their own articles
of Incorporation instead of using the form?
- Yes they can.
3rd Synch Class
(*From the Discussion of Sir)
 How does one amend the articles of
Incorporation?
- You amend the articles by way of two
ways of approval: majority of the board
of directors and then when you get
approved there, it would be subjected for
ratification or approval of stockholders..
*Remember: When the law says 2/3 of the
outstanding capital stock, we’re talking about
the equity and not the number of people per
head.
- For example: Let’s say in a corporation, you
have a situation wherein only 1 person out of
100 owns 99% of the outstanding capital stock,
if you tell me that what is required would 2/3 or
majority of the stockholders, that would be
definitely wrong because you’ll be counting by
the number of shareholders which is not true.
One person holding 99% could very well
determine by himself alone 2/3 or the majority.
• Do not ever say that 2/3 or majority of the
stockholders. Because, whenever you say
stockholders, you count per head which
is wrong. The thing that you’re going to
count is the equity. So, it means that even
if there is only one person, if he holds
99% or 2/3 which is about 67%, then he
could decide on his own and it does not
require the so called, majority or 2/3 by
sheer number.
 What are the steps? How can the
corporation indicate to the SEC what they
want to amend?
 Is a meeting of stockholders/board of
directors always necessary to amend the
articles?
- There should always be meeting for the
board of directors.
Note:
- Not all events or matters can be taken
into the manner of written assent. It is
only a general rule.
- For example: You are going to enter into
a merger or consolidation with another
corporation, or you’re going to sell all or
substantially all of the assets of the
corporation or if you’re going to dissolve
the corporation or many others. It is not
enough that you’ll only have written
assent. There should be an actual
meeting.
Q: What’s the difference of the written
assent?
- In written assent, the scenario is that you
can simply send the letter and all you
have to do is to take the check box, if they
approve or not approve.
- For example: you’re going to amend the
articles of incorporation, and all you’re
going to do is to ask the stockholders,
would you like us to adapt this seal or this
seal, take the check box. Imagine if you’ll
still ask for a meeting for decisions like
that?
- So, as a general rule if you’re going to
change anything in the articles of
incorporation, written assent would
suffice. (*which means you don’t need to
have a meeting, you just need to send
them or just have a proof that you have
written assent to whatever the thing or
phrase that you are going to amend in
the articles. However, if it fits into the
instances where there should be a
meeting, then there should be a meeting.
13
  What is the concept of amendment by
inaction?
- This is about the inaction of the SEC. For
an instance, the articles of incorporation
has been sent and was received by the
SEC and SEC did not do anything.
- The SEC is given 6 months to make an act
on the application and beyond that the
amendment will be deemed approved.
- It gives a mandate to the SEC to approve
or disapprove the application. It doesn’t
say that you need to approve it, but, If
you’re going to disapprove them, tell
them immediately within 6 months
otherwise if you don’t approve or
disapprove, it is deemed approved
already.
Q: How are you supposed to advise the SEC that
these are the portions that you are going to
amend?
A: You need to underscore them.
SEC. 15. Amendment of Articles of
Incorporation. – Unless otherwise prescribed
by this Code or by special law, and for
legitimate purposes, any provision or matter
stated in the articles of incorporation may be
amended by a majority vote of the board of
directors or trustees and the vote or written
assent of the stockholders representing at
least 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 original and amended articles together
shall contain all provisions required by law to
be set out in the articles of incorporation.
Amendments to the articles shall be indicated
by underscoring the change or changes made,
and a copy thereof 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, shall be submitted to the
Commission.
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.
Q: Does the SEC automatically approve
amendments?
A: No, they have to look into it.
Q: What are the possible grounds for denial of
the amendment?
A: ex. unlawful (Sec. 16)
Q: What should the SEC do if it disapproves an
amendment?
A: SEC needs to inform the corporation and give
them time to change it.
SEC. 16. Grounds When Articles of
Incorporation or Amendment May be
Disapproved. – The Commission may
disapprove the articles of incorporation or
any amendment thereto if the same is not
compliant with the requirements of this Code:
Provided, That the Commission shall give the
incorporators, directors, trustees, or officers a
reasonable time from receipt of the
disapproval within which to modify the
objectionable portions of the articles or
amendment. The following are grounds for
such disapproval:
(a) The articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed herein;
(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.
No articles of incorporation or amendment to
articles of incorporation of banks, banking
and quasi-banking institutions, preneed,
insurance and trust companies, NSSLAS,
pawnshops, and other financial
intermediaries shall be approved by the
Commission unless accompanied by a
favorable recommendation of the appropriate
government agency to the effect that such
articles or amendment is in accordance with
law.
14
Notes:
• “Preneed”
- one thing why the congress inserted
this in the articles is that, they are now
included so that they will be governed
properly (*it was due to the incident of
CAP investment fail)
- it is stated that incase that the
amendment would be involving banks,
they need to go to BSP first and they
need to seek its endorsement.
- same thing with insurance commissions
or pawnshops
Q: What are the rules on corporate name?
A: (Sec. 17) The rule right now is that it should
be distinguishable. It’s not anymore deceptively
similar or identical.
SEC. 17. Corporate Name. – No corporate name
shall be allowed by the Commission if it is not
distinguishable from that already reserved or
registered for the use of another corporation,
or if such name is already protected by law, or
when its use is contrary to existing law, rules
and regulations.
A name is not distinguishable even if it
contains one or more of the following:
(a) The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”,
or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations,
different tenses, spacing, or number of the
same word or phrase.
The Commission, upon determination that the
corporate name is:
(1) not distinguishable from a name already
reserved or registered for the use of another
corporation;
(2) already protected by law; or
(3) contrary to law, rules and regulations, may
summarily order the corporation to
immediately cease and desist from using such
name and require the corporation to register
a new one.
The Commission shall also cause the removal
of all visible signages, marks, advertisements,
labels, prints and other effects bearing such
corporate name. Upon the approval of the new
corporate name, the Commission shall issue a
certificate of incorporation under the
amended name.
If the corporation fails to comply with the
Commission’s order, the Commission may
hold the corporation and its responsible
directors or officers in contempt and/or hold
them administratively, civilly and/or
criminally liable under this Code and other
applicable laws and/or revoke the
registration of the corporation.
Note:
- Remember that there are two barometers
on the law on corporate name:
o First, it should be distinguishable.
o Second, if such name is not yet
protected by law, or when its use
is contrary to existing law, rules
and regulations.
- Example: The name of your business is
Mcdoo Ice Cream.
Q: Do you think that’s possible?
A: No. for there are already certain names
which have already acquired a secondary
meaning, one of which in this example is
McDonalds.
o The name is protected by the law
especially if it was registered
under Intellectual Property Rights.
- Now for example: even though SEC, has
already approved of your name, there
can still be an instance where SEC can
remove the name and the order is
summary (which means mabilisan like
aalisin agad) If the SEC believes that the
name you’re using has been protected by
the law already then the SEC can
immediately order the removal of your
corporate name.
- If you would not comply then you can be
held in contempt and/or hold them
administratively, civilly or criminally
liable.
------
Q: What is a certificate of Incorporation? What
is the significance of its issuance?
- The certificate of incorporation certifies
the existence of the corporation legally.
- It is the document that signifies the birth
of the corporation.
- Take note that upon the issuance of
certificate of Incorporation, that is the
only time that the corporation actually
comes alive. It’s not the filing of the
articles of Incorporation for that is the
15
 operative fact rather it’s the issuance of Incorporation but there are requirements
the certificate of Incorporation. that you haven’t complied yet.
- Q: Should it be received or just the mere
- In short, they are still a corporation it’s
issuance of the certificate is enough?
just that they failed to comply with all of
A: Just the issuance is enough. As long as
the requirements.
it was issued, that is the time wherein the
birth of the corporation is recognized.
 What is de jure corporation?
SEC. 18. Registration, Incorporation and
Commencement of Corporate Existence. – A  What is a corporation by Estoppel?
person or group of persons desiring to - They are not a corporation, they formed
incorporate shall submit the intended a corporation that doesn’t exist in the first
corporate name to the Commission for place. They misrepresented to third
verification. If the Commission finds that the persons saying that they are a
name is distinguishable from a name already corporation but they are really not.
reserved or registered for the use of another
- These persons (*those who
corporation, not protected by law and is not
contrary to law, rules and regulations, the misrepresented) will be considered as
name shall be reserved in favor of the General Partners who is liable up to the
incorporators. The incorporators shall then extent of their personal assets.
submit their articles of incorporation and
bylaws to the Commission.  Which type of corporation is susceptible
to an attack over the issue of corporate
If the Commission finds that the submitted
existence?
documents and information are fully
compliant with the requirements of this Code,
other relevant laws, rules and regulations, the  How is the attack commence, and who
Commission shall issue the certificate of initiates the attack?
incorporation.
De Jure De Facto Corporation
A private corporation organized under this by Estoppel
Code commences its corporate existence and Exists both in Exists in fact, Assume to act
juridical personality from the date the fact and in but not in law. as a
Commission issues the certificate of law. corporation
incorporation under its official seal and knowing it to
thereupon the incorporators, be without
stockholders/members and their successors authority
shall constitute a body corporate under the Complied Filed the No Articles of
name stated in the articles of incorporation with all articles of Incorporation
for the period of time mentioned therein, requirements Incorporation filed
unless said period is extended or the for but failed to
corporation is sooner dissolved in accordance incorporation comply with
with law. all
requirements
---- for
Incorporation.
 What is a de facto corporation? Cannot be Can be Can be
- These are corporations which haven’t directly or directly collaterally
fully complied with all of the collaterally attacked attacked.
requirements, meaning they lack certain attacked.
Attack Attack may be
requirements.
initiated by initiated by
- Q: Would you consider a corporation or
the OSG anyone.
group of persons who never filed articles
of Incorporation before the SEC as
someone whose forming a de facto
corporation? SEC. 19. De facto Corporations. – The due
incorporation of any corporation claiming in
A: If you never filed anything in the SEC, good faith to be a corporation under this Code,
you’re a corporation by Estoppel, a de and its right to exercise corporate powers,
facto corporation is you filed articles of shall not be inquired into collaterally in any
Incorporation with the SEC and you have private suit to which such corporation may be
also been issued with certificate of a party. Such inquiry may be made by the

16
Solicitor General in a quo warranto
proceeding.
Notes:
• Solicitor General - is the lawyer of the
government. The word ‘solicitor’ is just
another fancy word for lawyer.
o What is the work of the Solicitor
General?
- He is the lawyer of the government
incases for and against the state. So, if the
state will be filing a case, it would be then
represented by the Solicitor General. If a
case will be filed against the state, it
would be the Solicitor General that will
fight for the state.
• Quo Warranto - this has medieval origins.
- The word ‘quo warranto’ literally means
by whose authority.
- So being applied in the lesson, if you
have a de facto corporation, the solicitor
general is saying “by whose authority are
you acting as a corporation” whereas in
fact you have failed to comply with all of
the requirements. That is what a quo
warranto proceeding is.
- A quo warranto proceeding is available
against a de facto corporation and it can
only be done by way of direct attack.
‘Direct Attack’ means that it is the main
issue in the case, meaning a case was
filed specifically to satisfy that purpose.
That is what the court is going to resolve.
As opposed to collateral attack, it is just a
side issue.
• Collateral Attack - In this attack, the
purpose is to obtain some relief, which is
only incidental and not the main object
of the suit or proceeding.
- The subject in this attack are for example:
the corporations by estoppel.
For example: A, B and C never formed a
corporation and never filed for articles of
Incorporation, buy they pretended as if they
were. They have X&Co. which is not
registered. They had a contract with Y and
under the contract Y is liable to X & Co. for
1M. The case that was filed by X & Co. to Y is
a collection of sum of money. So, the issue is
that you have a debt and if it’s due already.
These are the questions that should be
resolved by the court and no other issue.
However, for they are a Corporation by
Estoppel, Y can say that why would they
collect money from him if they are not a
corporation.
- So, in a way, he can use it to attack the
corporation, saying that he don’t have
anything against Y because they don’t
even have juridical personality which
means they can’t file a case against Y.
That is the issue which the court can to
resolve even though it’s a collateral issue.
Because, the corporation is one by
estoppel.
o Now, for example it’s a de facto
corporation. Can Y still do the
same? No. They need to go to the
Solicitor General and let the office
file a case against the de facto
corporation.
SEC. 20. Corporation by Estoppel. – All persons
who assume to act as a corporation knowing it
to be without authority to do so shall be liable
as general partners for all debts, liabilities
and damages incurred or arising as a result
thereof:
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.
Scenario #2:
- For example: you filed Articles of
Incorporation before the SEC then they
issued you a Certificate of Incorporation,
dated April 21, 2021. So, you were happy
and promised to you will start operating
immediately. However, when you woke
up the next morning there was text from
GF telling that ‘break na kayo’ so you
were so disheartened that you went to
Sagada for 6 years. Then, you returned in
year 2027. By that time, you were already
okay and told yourself that you will begin
operating.
Q: Can you still do that?
A: No, because if you don’t operate within 5
years from the date of its incorporation then
your Certificate of Incorporation will be
deemed revoked.
*Change of Date*
- Example: On April 22-27, you began
operating. Then on the 28th, your GF
sent you a breakup text and then you
went away for 6 years.
17
Q: Upon your return, can you still operate?
A:
Notes:
- Your job is to operate immediately. If
you don’t do it for the next five years,
then it is deemed revoked.
- However, if a corporation has
commenced its business but
subsequently becomes inoperative for a
period of at least five (5) consecutive
years, you will be placed in a delinquent
status.
SEC. 21. Effects of Non-Use of Corporate
Charter and Continuous Inoperation. – If a
corporation does not formally organize and
commence its business within five (5) years
from the date of its incorporation, its
certificate of incorporation shall be deemed
revoked as of the day following the end of the
five (5)-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.
---
 Board of Directors, who are they?
- They are the brains of the operation. They
will be the one deciding. On the other
hand, the officers are their arms and
hands in the daily operations of the
business.
Note: There are also some officers who
are directors.
- They could be held liable for their
decisions in the corporations (for
example: they patently assented to an
unlawful act). But, as to the person who
could lawfully represent a person on a
suit, the board of directors will have to
determine who will it be.
- In short, they still have to name a person
who will represent them. Because, that
person will be the one who will sign
papers that will be sent to the court.
- BOD applies to a stock corporation.
 Board of Trustees, who are they?
- BOT applies to a non-stock corporation.
 What are their powers?
- There are 3 powers of the BOD
They are in charge of the business,
They are the ones who are in charge of
exercising the corporate powers, and
They are the one who controls the
properties.
 When shall they be elected?
- In annual stockholders meeting and
that’s the time where they will elect who
will the directors will be.
 How long are their terms of office?
- For a director, it’s only one (1) year.
- For a trustee, not exceeding three (3)
years.
Note: The difference of the revised corporation
code from the past code is that the staggard
form was removed.
 What is the minimum qualification for
each director/trustee?
- For a director, owns at least one (1) share
of stock.
- For a trustee, you must at least be a
member of the corporation.
TITLE III
BOARD OF DIRECTORS/TRUSTEES AND
OFFICERS
SEC. 22. The Board of Directors or Trustees of
a Corporation; Qualification and Term. –
Unless otherwise provided in this Code, the
board of directors or trustees shall exercise
the corporate powers, conduct all business,
and control all properties of the corporation.
Directors shall be elected for a term of one (1)
year from among the holders of stocks
registered in the corporation’s books, while
trustees shall be elected for a term not
exceeding three (3) years from among the
members of the corporation. Each director
and trustee shall hold office until the
18
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.
Note:
- For example: They are removed by the
stockholders or they die (*referring to the
directors or trustee), the replacement will
only hold over the position for the
remainder of the term that is not yet
expired from the director/trustee.
The board of the following corporations
vested with public interest shall have
independent directors constituting at least
twenty percent (20%) of such board:
a) Corporations covered by Section 17.2 of
Republic Act No. 8799, otherwise known as
“The Securities Regulation Code”, namely
those whose securities are registered with the
Commission, corporations listed with an
exchange or with assets of at least Fifty million
pesos (P50,000,000.00) and having two
hundred (200) or more holders of shares,
each holding at least one hundred (100)
shares of a class of its equity shares;
b) Banks and quasi-banks, NSSLAs,
pawnshops, corporations engaged in money
service business, pre-need, trust and
insurance companies, and other financial
intermediaries; and
c) Other corporations engaged in business
vested with public interest similar to the
above, as may be determined by the
Commission, after taking into account
relevant factors which are germane to the
objective and purpose of requiring the
election of an independent director, such as
the extent of minority ownership, type of
financial products or securities issued or
offered to investors, public interest involved
in the nature of business operations, and
other analogous factors.
An independent director is a person who,
apart from shareholdings and fees received
from the corporation, is independent of
management and free from any business or
other relationship which could, or could
reasonably be perceived to materially
interfere with the exercise of independent
judgment in carrying out the responsibilities
as a director.
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.
---
Quorum
- The minimum number of members of a
group or committee required to be in
attendance in order for that group to be
able to take action.
- So for example: If there are 9 BOD, what
is the most minimum number of assent
to a particular vote for us to amend the
articles?
A: It would be 5 for this example. But if
these 5 are what consists of the quorum
then only the majority of it is needed
which is 3.
- In any meeting of the BOD, the first thing
you need to do is to identify if there was
a quorum.
• Why is this important?
- Remember: When the BOD transacts
business, they don’t transact individually.
They transact as a board.
- And, for them to compose a board that is
authorized to do business, the first thing
they need to have is quorum.
In the example: The quorum in a 9 BOD is
5. If the 5 of them attend, then there is
quorum. If 3 out of 5 voted for Yes then
the decision is carried. Why?
- If there is no quorum, ‘umuwi na kayo’.
Because, the board is not speaking.
Now for example: there 15 BOD, 7
attended and all of them said Yes.
Q: Carried or Not Carried?
A: Not Carried, Because only 7 people
attended and it did not reach the
quorum.
- In this instance, if 8 Directors attended,
can they transact business? A: Yes. If 5 out
of 3, said yes then it is carried.
- Next instance, if 8 attended and 4 said
yes and also 4 said no. Is it carried? A: No.
19
Remember:
- Of everything that was mentioned in the
revised corporation code, if it said that
Majority of the BOD, the general rule is
Majority of the Quorum. Not the majority
of the absolute.
- When is the absolute majority needed? If
the decision that will be made is about
who will be the officers.
Notes:
- If they are to determine the officer, for a
15 member BOD, 8 of them attended, it
is needed that all of them said yes. Why?
Because 8 is the absolute majority of the
15.
Who are independent directors?
- Is a person who has no shareholding in
another company which may create bias
on the way of how he will be going to
decide for and behalf of the corporation.
- So, there should be no interest which
could form a conflict of interest in making
a decision as a director and his status as
a person.
- They should also have one (1) share of
stock.
- Stockholders elects them.
- This is a concept that is in the article to
ensure corporations vested with public
interest will have a separate set of eyes
looking after the corporation that would
be unbiased and whose judgement will
not be clouded.
4th Synch Class
 Election of Board of Directors, when is it
held?
- The first election will probably be held on
the first stockholder’s meeting which is
one year.
 Who can elect the BOD/BOT?
- With respect to the BOD and Bot,
obviously, the persons who are going to
elect them are the stockholders.
 What is the procedure?
 Who are not allowed to vote?
Note: It is safe to say that there are certain
shareholders like while they are shareholders
but they are still not allowed to vote.
- One reason is that shares which are
delinquent, they cannot vote.
- *Another is that if they are in ownership
of non-voting shares such as Preferred
and Redeemable. They are shares which
could be deprive of voting rights.
- Another, is what we call the Founder
Shares which is within a period of 5 years,
he/she is reserved with the power to vote
and to be voted in the BOD, this is also
considered a limitation.
- Remember for the BOD, when you file
your articles of Incorporation, the BOD is
already stated there.
o The presumption is that they
already have a term of one (1) year
unless the bylaws says otherwise.
- BOT will have a maximum term of office
of three (3) years.
o However, as denoted this is only
the maximum, it doesn’t
necessarily means that it’s always
like this. They might have some
other arrangement in the bylaws
wherein it can say that the term of
office will only be a year.
o Example: In real life, there are a lot
of non-stock corporation who
only elect for one year but the
maximum is really 3 years.
- With respect to the BOD and Bot,
obviously, the persons who are going to
elect them are the stockholders.
- Also, remember that when you draft the
bylaws, it important that you state the
manner of voting, who are eligible to
vote, and what date is it supposed to be
or the mechanism that you want to
happen. If these are not stated in the
bylaws, then it is presumed that
everybody who have shares on a
particular date during the stockholder’s
meeting is eligible to cast a vote.
 In what manner could stockholders vote?
 There are three methods on exercising
your right to vote.
a) Straight Voting
- How does this work?
o For example: If you have 100
shares and there are 5 positions
that you can vote for (*which
means there are 5 directors), you
have 500 votes.
20
 o So with this votes, how are you
going to exercise your right to
vote or how are you going to cast
your ballot?
- Also remember that even though there
are only 5 directors, it doesn’t mean that
there’s only 5 people running for that
position.
o Example: There are 10 people
running for that position (Letters
A-J), so if you are going to exercise
your straight voting you will
exercise it by distributing the
votes equally.
o So you’ll give equal 100 votes to A,
B, C, D and E. Like you can choose
5 then you’ll give them 100 each.
b) Cumulative Voting
c) Cumulative Voting by distribution
- How does this work?
o For one candidate, whoever he
votes for receives the votes.
o For example: You can give 500
votes to one candidate of your
choice.
- What is this kind of voting good for?
o If you are the voter/stockholder,
this will benefit you if you are part
of the minority. Why? Because by
concentrating your votes to a
single person, all persons or
stockholders who are part of the
minority can elect a representative
at the board.
- This way of voting is the most capricious
of all. It’s up to the voter how he will
distribute the vote.
o For example: He can give 5 votes
to A, no vote for B, 100 to C and
even 300 for D. It really depends
on him.
Notes:
- These three manners of voting are
available to all stockholders. They can’t
be deprive of these voting rights. Why?
Because it is part of their right as
stockholders.
 The said stockholder may:
(a) vote such number of shares for as
many persons as there are directors
to be elected;
(b) cumulate said shares and give one (1)
candidate as many votes as the
number of directors to be elected
multiplied by the number of the
shares owned; or
(c) distribute them on the same principle
among as many candidates as may be
seen fit:
Provided, That the total number of votes cast
shall not exceed the number of shares owned by
the stockholders as shown in the books of the
corporation multiplied by the whole number of
directors to be elected: Provided, however, That
no delinquent stock shall be voted. Unless
otherwise provided in the articles of
incorporation or in the bylaws, members of
nonstock corporations may cast as many votes
as there are trustees to be elected but may not
cast more than one (1) vote for one (1)
candidate. Nominees for directors or trustees
receiving the highest number of votes shall be
declared elected.
 Who are corporate officers?
- There are a lot of officers in a corporation
however these corporate officers whose
offices are existent because of the bylaws.
 Who are statutory corporate officers?
- This is the bare minimum because it is
required by the law.
 Who elect the officers?
- The board.
Q: Here, is the quorum determined and only the
majority of the quorum will elect?
A: No. Remember that here the absolute
majority is what always needed.
- For example: If there are 5 directors, there
should be 3 who will elect a corporate
officer.
- It is not allowed that you got 3 directors
then you have quorum then the majority
of the quorum is 2, then you’ll have
corporate officers. NO, that is not
allowed.
- Here it should always be absolute
majority.
21
  Minimum qualifications?
Notes:
- The president must be a director (and
when you’re a director it means you’re a
stockholder.)
- The treasure must be a resident then a
secretary must be both a citizen and
resident of the PH. Why is it different?
o Remember, that the corporate
secretary’s job/main functions is
to certify certain actions by the
Board of Directors, so usually
he/she releases a corporate
secretary certificate and what is
the content?
o He is usually telling other people
or whoever who will see that
certificate that he is the corporate
secretary and that there was a
meeting held on this date and on
that date, this was the resolution
released by the board. Also, this
corporate secretary certificate is
under oath before a notary public.
So, it means that he should be a
resident citizen so that he can be
held liable. So he cannot simply
certify and ran off.
- In which corporations are compliance
officers required?
o Corporations vested with public
interest.
o Also, it is not necessary for every
corporation to have a compliance
officer. However, if it’s necessary
the corporation must appoint one.
- What is the downside if a corporation
don’t appoint a corporate officer?
o The SEC said that if there is no
compliance officer, the
corporations is not only in
violation of the corporation code
but the president will be burdened
by the responsibility and duties of
being the compliance officer.
Q: Can you be the president and secretary at the
same time?
A: No
Q: Can you be the president and treasurer at the
same time?
A: No
Q: Can you be the secretary and corporate
secretary at the same time?
A: Yes
Q: Can you be the treasurer and the corporate
secretary at the same time?
A: Yes but you cannot hold the concurrent
position of being the president and being the
corporate secretary or being the president and
treasurer at the same time.
Categories:
1. Statutory Corporate Officers - the 4 in
Sec. 24
2. As provided by the By-Laws - must be
clearly stated in the By-Laws that such
office is a corporate office.
3. Those designated by the Board of
Directors provided the Board of Directors
is authorized to do so by the By-Laws.
SEC. 24. Corporate Officers. – 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.
 Disqualifications of a director, trustee or
officer? (Section 26)
- (1) Final Judgement over a crime which
punishes the offense for six years and
more
- (2) One of the violation which can make
you be disqualified as director, is if you
deprive a stockholder the right to
see/inspect the corporate books when
necessary. (*When they are allowed to do
that and then you deprive them of that
which is looking at the books then you
can be liable for an administrative case in
the SEC.)
22
SEC. 26. 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:
(a) Convicted by final judgment:
(1) Of an offense punishable by
imprisonment for a period exceeding
six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799,
otherwise known as “The Securities
Regulation Code”;
(b) Found administratively liable for any
offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign
regulatory authority for acts, violations
or misconduct similar to those
enumerated in paragraphs (a) and (b)
above.
Note:
- If by a foreign court you were adjudged
to be liable for A and B , in other words
if you were convicted of final judgement
in another jurisdiction which essentially
punishes the same crime or the same
administrative liability then you would be
disqualified in becoming a director or
officer here in the country.
- For Example: Let’s say you created a
ponzi scheme (like a pyramiding scam) in
United States and then you were held
liable by the SEC Counterpart in US, you
cannot become a director here.
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.
Note:
- For example: If you will be held guilty by
the Philippine Competition Commission
(PCC) of creating barriers to entry, you
can be disqualified from holding
positions as a director or an officer in an
entirely different corporation.
*Scenario #3: (in the finals)
- There are 7 directors namely: A,B,C,D,E,F,
and G.
- Let’s say A, B and C died of COVID-19 during
the middle of their term.
Q: Who will then decide their replacements?
A: It would be the remaining directors who
would name the replacement of the late
directors.
- Then, for example D also died of COVID-19.
Q: Who will now select the replacements?
- The first thing you need to know is the
reason for the vacancy, and in this case it was
because A,B,C and D died.
o If the reason for vacancy is because
of removal of the directors or
expiration of the term, automatically
the one who will elect their
replacement would be the
stockholders.
o (Because the one who decided the
removal of a director are
stockholders so they would also be
same people who can elect or find
replacement for the directors)
o (On the other hand, If their term ends
then it means a new set of directors
is needed.)
- A: So, in these two instances, it would be the
stockholders who would select the
replacement.
- However, if the grounds for the vacancy
where other than removal or expiration of
the term, the rule would be that it would be
the Board of Directors who will elect the
replacement provided that they could
constitute quorum. If they can no longer
constitute quorum, then that’s the time that
they will have to seek the vote of the
stockholders.
SEC. 28. Vacancies in the Office of Director or
Trustee; Emergency Board. – Any vacancy
occurring in the board of directors or trustees other
than by removal or by expiration of term may be
filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by
the stockholders or members in a regular or special
meeting called for that purpose.
When the vacancy is due to term expiration, the
election shall be held no later than the day of such
expiration at a meeting called for that purpose. 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. In all other cases, the
election must be held no later than forty-five (45)
days from the time the vacancy arose. A director or
trustee elected to fill a vacancy shall be referred to as
replacement director or trustee and shall serve only
for the unexpired term of the predecessor in office.
23
Note for this part:
- Now, at least no later than forty-five (45)
days the vacancy should be filled in. In
the past this rule was not included in the
article but now it is and must be followed.
However, when the vacancy prevents the remaining
directors from constituting a quorum and 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. The action by the
designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease
within a reasonable time from the termination of the
emergency or upon election of the replacement
director or trustee, whichever comes earlier. The
corporation must notify the Commission within
three (3) days from the creation of the emergency
board, stating therein the reason for its creation.
Note for this part:
- Q: What is an Emergency Board?
- A: The Emergency Board is when because
of removal or vacancy prevents the
remaining directors in constituting a
forum, and why would they convene an
Emergency Board? For there is an
emergency act that is required.
- They really need the composition of the
board in order to transact.
- Remember: That when there’s a meeting
and you cannot constitute quorum, what
was the act that one should do? A: Uwi na
lang. But, another option is that you can
also call other members of the board to
constitute a quorum.
- Truth be told, If there is no quorum, then
there was a vacancy, it should be the
stockholders already. The only exception
to this rule is when there’s an emergency
in which case you need to create an
emergency board.
- Q: Is it easy to create an emergency
board or are there limitations to the
creation of this board?
A: There are limitations in terms of the
length. It’s limited to only the emergency
action necessary. So, after the emergency
is over the board must be disbanded.
Any directorship or trusteeship to be filled by
reason of an increase in the number of directors
or trustees shall be filled only by an election at a
regular or at a special meeting of stockholders or
members duly called for the purpose, or in the
same meeting authorizing the increase of
directors or trustees if so stated in the notice of the
meeting.
In all elections to fill vacancies under this section, the
procedure set forth in Sections 23 and 25 of this Code
shall apply.
----
 How can directors/trustees be removed?
- The stockholders has the power to
remove however there is a voting
requirement.
- The question is what is the voting
requirement? What is the threshold
needed to be met in order to remove
directors or trustees?
o A: For Stock Corporation, Any
director of a corporation may be
removed from office by a vote of
the stockholders holding or
representing at least two-thirds
(2/3) of the outstanding capital
stock.
o A: For Non-Stock Corporation,
majority of the members that are
able to vote.
 Who can remove directors/trustees?
 Should a meeting be held?
- Yes. It must be opened up at must be
participated by stockholders and
members.
 What are the grounds for removal?
- Q: Can a director be removed because of
his political views?
A: According to Sec. 27, it may be with or
without cause. So, the moment they no
longer have confidence in the directors,
they can have them removed. Same thing
with the trustees. It is because they
served for the pleasure of these
stockholders.
SEC. 27. Removal of Directors or Trustees. –
Any director or trustee of a corporation may be
removed from office by a vote of the stockholders
holding or representing at least two-thirds (2/3)
of the outstanding capital stock, or in a
nonstock corporation, by a vote of at least two-
thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place
either at a regular meeting of the corporation or
at a special meeting called for the purpose, and
in either case, after previous notice to
stockholders or members of the corporation of
the intention to propose such removal at the
meeting. A special meeting of the stockholders
or members for the purpose of removing any
director or trustee must be called by the
secretary on order of the president, or upon
24
written demand of the stockholders representing
or holding at least a majority of the outstanding
capital stock, or a majority of the members
entitled to vote. If there is no secretary, or if the
secretary, despite demand, fails or refuses to
call the special meeting or to give notice
thereof, the stockholder or member of the
corporation signing the demand may call for
the meeting by directly addressing the
stockholders or members. Notice of the time
and place of such meeting, as well as of the
intention to propose such removal, must be given
by publication or by written notice prescribed in
this Code. Removal may be with or without
cause: Provided, That removal without cause
may not be used to deprive minority
stockholders or members of the right of
representation to which they may be entitled
under Section 23 of this Code.
The Commission 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.
 Do directors receive compensation?
- As a rule they do not receive
compensation, they are not being paid by
way of salary or wages.
- Remember: There is a difference between
salaries and wages.
o Salaries are much higher than
wages.
o Wages speaks of daily wage.
o Nevertheless, both of them are
considered as compensation
packages.
- Directors are not being paid monthly or
daily. It is not what you commonly receive
on a regular basis.
- Q: What do they receive as a whole?
A: Per diems is per day. That’s why there
is a kasabihan, Carpe Diem which means
seize the day.
Q: What is being paid here?
A: If you attend, then give you a
representation allowance and
transportation allowance (RATA).
o The point here is that they don’t
receive normal salaries or sweldo.
- They could have compensation in this
part of the article: Provided, 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.
-
o The limitation in this is that as long
as it does not exceed 10% of the
net income of the corporation
before taxes in the preceding year.
- So, they can have compensation naman
pala then why was the compensation
only an exception?
o To motivate them to do better, coz
if they receive salary then they
would look at it like just the same
work with a normal position
o If you become elected as a
Director, it comes with the
prestige that you are supposed to
do your best. You’re supposed to
exert your effort in sailing the
corporation into a clear and better
source. At the end of the day, to
motivate them to do well, you’re
not given a regular salary.
This is not like that you will go
to office from 8am-5pm just to
fulfill your duties. The real
reward comes in if you were
able to direct the corporation
to success. If you were able to
bring success to the
corporation, then that’s the
time that you will reap the
benefits. And, How will you
reap these benefits?
Remember, that these
directors have shares and the
more shares they have, it could
lead to or be realized as
dividends that they had good
decision making and hard
work.
Then, it could translate to
money eventually.
There are also directors who
have small shares in the
corporation so does that mean
that they would be less
motivated? Answer: No,
because they could still be
given compensation by the
stockholders.
25
SEC. 29. Compensation of Directors or Trustees. –
In the absence of any provision in the bylaws 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.
Directors or trustees shall not participate in the
determination of their own per diems or
compensation.
Corporations vested with public interest shall submit
to their shareholders and the Commission, an annual
report of the total compensation of each of their
directors or trustees.
 What is business judgement rule?
- It protects the board from frivolous
lawsuits.
- We have this rule because if a director
decides for a corporation, the
presumption is that he/they made it in
good faith.
- The courts cannot intervene with respect
to the judgement of the board.
- Remember: When you make decisions as
part of the board, the presumption is that
you made it in good faith. However
sometimes there are business decisions
which you may regret eventually. But if
they were business decisions rather than
decisions motivated by bad faith. The
courts cannot tell the BOD na like ito sana
yung dapat ginawa niyo. The courts
cannot substitute their discretion with
that of the Board.
o For when the board made that
decision, while it may turn out as a
bad business decision, it does not
mean that they committed
something illegal.
- However, there is a thin line between the
business judgement rule and violation of
a law.
o If the decision made is oppressive
or was done in bad faith to the
minority.
o Another is that if they accented or
allowed to the issuance of watered
stocks. This can be used against
them because the issuance of this
stocks are definitely illegal. For
they are issued less than its par
value.
- Remember that there is a difference on
doing something in good faith and doing
something out of bad faith.
o There’s also a difference between
doing something while in good
faith supposedly but because the
law requires you to know, you can
never be in good faith. What do
you mean by this?
o In COBLAW1, it says there that
ignorance of the law excuses no
one in the compliance therewith.
Definition in the PPT:
What is Business Judgment Rule?
General Rule: Courts will NOT Interfere in the
decisions made by the Board of Directors on
matters concerning 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., G.R. No. L-- 16977,
Apr. 21, 1922)
Still has connection with Business Judgment
Rule:
SEC. 30. 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.
Note: (*Included in Exam)
- Jointly and severally is just a fancy term
for solidary
- Like what is the liability? Is it joint or
Solidary. The answer is Solidary.
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.
26
 Who is a disloyal director?
- 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 disability upon
themselves to deal in their own behalf;
otherwise the said director, trustee or
officer shall be liable as trustee for the
corporation and must account for the
profits which otherwise would have
accrued to the corporation.
- If you are soliciting the business of the
corporation for your own benefit or for
the benefit of another corporation.
- For example: The corporation will buy a
land in which the area where it is situated
is very profitable then the owner of the
land was your friend so you bought the
land before the corporation was able to
do so. You knew that there opportunity
behind it because you were also a
director.
SEC. 33. 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.
 Who is a self-dealing director? (Sec.31)
- The director who contracts with the
corporation.
- Q: Why are trustees, officers or fourth civil
degree of consanguinity are also
included in this prohibition?
A: As under the revised corporation code,
it even applies to contracts entered into
by the corporation with the relative of the
director or to the relative of the officer up
to the fourth civil degree.
o Fourth Civil Degree - for example:
A’s father is B and his brother is C
- this only a two degrees
consanguinity. If affinity or in-laws.
o A,B,C,D and E or up to the first
cousin. This is the fourth degree of
consanguinity.
Self-dealing Director
- For example: A,B,C,D, and E are the
directors of X & Co. The company is
looking for a warehouse to lease or rent.
They looked into different places and
they couldn’t find anything, only a
property belonging to A.
- So if A enters into contract of lease. With
X & Co. in his personal capacity. He is a
self-dealing director. Because he’s a
director in the same company who will be
dealing with him in his personal capacity.
For he is part of the one who will make a
decision for he is a director in the
company. So, he is a director in the
company at the same time, the
contracting party.
- The rule is if the same situation happens,
the contract entered into by A and X &
Co. is merely voidable. And as learned
from COBLAW1, the contract is valid until
annulled. It can also be ratified. It is still
valid however it is susceptible to being
annulled by the stockholders.
- Q: How are we going to make this kind of
contract completely valid?
A: There are requisites mentioned in Sec.
31.
o The first requisite for it to be valid
is that A’s presence in the meeting
wherein the contract would be
approved should not be necessary
to constitute quorum.
Example: Only 3 Directors are
present, A,B, and C.
Q: Is there a quorum here?
A: Yes there is quorum because
3 out of 5 attended.
Q: Is A’s presence necessary to
constitute the quorum?
A: Yes
- So, in this example the first pre-requisite
has not been satisfied which is that for it
to be completely valid, A’s presence
should not be present for it to constitute
quorum.
For example: If 4 of them
already attended, A,B,C and D.
Q: Is there a quorum?
A: Yes
Q: Is A’s presence needed to
constitute quorum?
A: No, for B,C and is already
present
27
 o The second requirement is that A’s
vote should not be needed for the
contract to be approved.
For example: The votes was
Y|N|Y|Y. Was A’s vote necessary
to approve the contract?
A: No, so the requirement was
satisfied.
When will the requirement be
not satisfied?
A: If for example, E attended
and he voted No. Y|N|Y|Y|N.
Q: Was the second
requirement satisfied in this
instance? Was A’s vote not
necessary in order to approve
the contract?
A: No, because his vote was
need for the contract to be
approved.
o The third requirement is that the
contract must be fair and
reasonable.
You have to look at the
contract. Like how much is the
price, how long would be the
terms, what is the going rate
now and more.
o The forth requirement is a newly
added one in the article.
With respect to corporations
which requires independent
directors because there is a
public interest involved. It is
needed that 2/3 of the entire
membership of the board must
have approved it plus the
independent directors must
have also approved it.
o The last pre-requisite was just
repeated in the previous article.
When it comes to the officers,
if they are involved, it should
have been previously
authorized by the board of
directors.
- Now, if these pre-requisites are not
present, the contract is only voidable and
it could be voided or annulled by the 2/3
votes of the stockholders.
SEC. 31. 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.
 Who is an interlocking director?
- For example: A, B, C, D, and E are directors
in X & Co. Then, we have F, G, H, I and A
which are directors in Y & Co.
Q: Do we have a common director in both
companies?
A: Yes, it’s A.
- So, if both of the companies will have a
contract and for they have a common
director, the rule is that it is a interlocking
director and the rules for this might be
applied.
- So, in X & Co. - A has 80% shares. In Y &
Co. - A has 5%. (*It may be that A loves X
& Co. for he has more shares in that
company compared to Y & Co.)
- So, if there two same directors in both
companies, he holds a substantial
number of shares and number of interest
(*which is more than 20% or 21% above.)
that is considered substantial.
- A having 80% shares in X & Co. means it’s
substantial. Then, in another corporation
28
 he holds a nominal interest (*here 20% or
less.)
- Imagine the directors in Y & Co., they
might think that they are being taken
advantage of because of all the
companies which they could have a
contract with, it is with the company of A
who has also shares in Y & Co. If this
happens, they can apply the rule in self-
dealing director in this situation.
o In short, if they want a contract to
be approved in Y & Co., we need
to subject A to the same rules as a
self-dealing director.
o So, all the mentioned pre-
requisite earlier like the first one
wherein A’s presence or vote
would not be needed to constitute
quorum. Along with the other pre-
requisites they must all be present
in order to approve the contract as
far as Y & Co. is concerned.
- Remember: This rule does not apply if
both companies A’s shareholding is both
substantial or both nominal. The rules in
interlocking director would not apply.
o It would only apply if the same
director has a substantial interest
in one of the companies and has a
nominal interest on the other
company.
SEC. 32. 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 percent (20%) of
the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.
5th Synch Class
SEC. 34. Executive, Management, and Other
Special Committees. – If the bylaws so provide,
the board may create an executive committee
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,
except with respect to the:
(a) approval of any action for which shareholders’
approval is also required;
(b) filling of vacancies in the board;
(c) amendment or repeal of bylaws or the
adoption of new bylaws;
(d) amendment or repeal of any resolution of the
board which by its express terms is not
amendable or repealable; and
(e) distribution of cash dividends to the
shareholders.
The board of directors may create special
committees of temporary or permanent nature
and determine the members’ term, composition,
compensation, powers, and responsibilities.
Notes:
- It doesn’t mean that the rest of the board
of directors are no longer directors. They
are still directors, the only thing is that for
the purpose of doing things easier and to
facilitate things better. They will create a
board within the board so that these
minimum of 3 directors would then
decide on certain matters.
o So, this is only to facilitate how
they do things but it doesn’t mean
that the rest of the directors are no
longer directors.
- Q: What can the Executive Committee
decide upon?
A: Generally, all things with the exception
of these 5.
o For example: (a) If there is any act
which requires the approval of the
stockholders. If the board cannot
do it in its full capacity then much
less the executive committee.
o For example: (b) filing of vacancies
in the board - In this case, even the
executive committee cannot do
that because it requires the full
determination of the board.
o For example: *© They can’t also do
this.
o For example: (d) They created a
resolution specifically stating that
this resolution will subsist unless
and until appealed or repealed by
the amended or repealed by the
29
 BOD in which case, the execom special committee has already been
cannot go against that expressed convened and once the purpose has been
directive from the complete created or is over, then the board or that
board. particular committee shall be disbanded as
o For example: (e) As a general rule, well.
A stockholder cannot demand for
the distribution of the dividends,  What are the classes of corporate
it’s really up to the corporation to powers?
whether or not it will distribute or
declare dividends for in so far the A. Classes of Corporate Powers
stockholders are concerned, the
1. Express - those expressly authorized in
money that they have allotted
the Corporation Code and other laws,
there is an investment so if there is
and its Articles of Incorporation or
an unrestricted retained earnings,
Charter.
then there will be dividends that
o Powers which are granted to the
would be declared, if there is not
corporation by the virtue of law
then they don’t have the right to
and it’s Articles of Incorporation.
demand the declaration of
Q: Why is it important to know the
dividends.
Articles of Incorporation?
However, it doesn’t mean that
A: As what Sir have told us, The
the director could always
Corporation can only do the
refuse to declare dividends
purposes it has disclosed to the
even if there is they have
SEC. It is not allowed that its
money. Why? The losses that if
declared purpose is different from
the unrestricted retained
the company is actually doing.
earnings of the corporation
Otherwise, the government could
exceeds 100% of the paid in
have required the corporation to
capital which means those that
undergo a different type of
was paid already (the
licensing or would have required
subscription)/. The excess in
additional requirements.
their profits must be declared
o Remember: So, it is important for
as dividends.
someone who’ll be setting up a
Another implication, tax
business or to incorporate that
implication. If they did not
you draft the purpose of the
declare dividends and they hid
Articles of Incorporation very
it behind their paid in capital,
seriously and carefully. It is
they will be assessed with
important to think about what the
additional payment by the
real purpose of the business
government because they are
because outside that purpose you
holding too much money.
might be creating an ultra vires (?)
- But to say, there are two type of
act.
dividends, the cash/property dividends
or stock dividends.
2. Implied - those that can be inferred from
o If cash dividends, it’s really up to
or necessary for the exercise of the
the board.
powers.
o If stock dividends, there should be
o These are powers which are
prior approval not only by the
implied from the express meaning
board but by the stockholders
it was not specifically specified in
also.
the Articles of Incorporation.
But the execom, cannot buy
Nevertheless, it is deemed that the
itself cash dividends and
corporation has it because it is
distribute them. Majority of the
necessary for it to perform its
quorum of the complete board
express powers.
should decide.
o For example: [A classic example]
- Second Paragraph of the Article: speaks of
The case involving a mining
the ad hoc committees, it is created
corporation.
specifically for a specific purpose. Once that
A
A Tele Site Site
30

- Obviously, the purpose of the mining
corporation (A) is to mine. They also built
a site. Then, the mining corporation built
a telegram site in their office (A). Back
then, this was the best way to
communicate with each other in two far
flung distances. The mining corporation
(A) uses the site to communicate with the
mining site. Later on, someone
questioned why the company was
allowed to build a telegram facility for
they weren’t engaged to the business of
selling communication for a fee.
o The SC told them that it is an
implied power for it is a TG site.
The mining site is very far from the
office which makes the
communication in between them
difficult. The SC said that it is a
good example of an implied
power.
3. Incidental - those that are incidental to
the existence of the corporation
o these are powers which are
incidental to the corporation by
the virtue of its very existence. In
short, the mere fact that a
corporation exists, we must have
this powers.
o For example: The power to acquire
or dispose properties. (*you won’t
be able to facilitate a business if
you don’t have these kind of
Effects of Ultra Vires Acts:
powers.)
Note:
- It doesn’t mean that if it’s an express
powers meaning it was stated by the law,
it can’t be incidental anymore. There are
certain incidental powers which at the
same time are expressed. But, the mere
fact that it is stated by the law doesn’t
mean that if they were not stated then
they don’t have that power anymore. The
law merely recognizes that power.
- For example: The power to have a name.
How would you tell a corporation from
the other if it doesn’t have a name so that
is both an incidental and expressed
power.
 What are ultra vires acts?
- These are acts which are outside the
scope of the authority given to the
corporation.
[PPT Definition]
- An act committed outside the object for
which a corporation is created as defined
by the law of its organization and
therefore beyond the power conferred
upon it by law.
- For example: Let’s say the corporation is
engaged in the Airline Industry.
Q: Can it engage in Farming?
A: No.
o What would be the implication if
the corporation will do this?
Aside from violating certain
rules which the SEC has
provided, the stockholders
have a right to question the
decision making of the
corporation. For the money of
the corporation is used for
other purposes other than the
main purpose of it which is in
the Airline Industry. If they lose
money in that field then
everyone will lose money.
- The effects of Ultra Vires Acts differs
depending on the stage of the contract.
o For example: A is an Airline
Industry which engaged with B
which is in the Farming Industry.
The SC stated that there are three
stages which will lead to the
implication.
1. Executed Contract - courts will not set
aside or interfere with such contracts.
- Contracts which were already completed
or fulfilled. (*for example: A already
fulfilled their job with B. The exchange of
payment between parties has been done
already. Also, if the stockholders didn’t
do anything about it, the stockholders
cannot later on complain about the
contract. If they wanted to complain, they
should have made it before the
performance of the contract or during
the performance of the contract. They
cannot hold the directors liable coz the
contract is already completed.)
2. Executory Contract - no enforcement
even at the suit of either party.
- In this part, both parties have not yet
performed their parts in the contract but
31
 they already had an agreement regarding
the act.
- From the example: The stockholders of A
can later object the performance of the
act. If the contract is yet to be performed,
the SC will say that neither A or B can
enforce the contract. They should stop it
already and should not proceed with the
performance of the contract.
3. Partly executed and Partly executory
contract - principle against unjust
enrichment shall apply.
- In this contract, the act was already
performed however it is not yet done. In
this case, the SC will say that whatever
they have done already, that act should
not be continued anymore or tapusin na
agad. If company A has already done
something for company B, B should just
pay A whatever collectible they have
(*babayaran na lang dapat ni B si A).
- The reason for this is simple, allowing
them to proceed with the contract may
entail losses or could create further losses
for the corporation because it is not
supported by the stockholders and the
purpose is different otherwise.
 Do corporations have the power to enter
into partnerships?
- Yes they do have the power.
- Back then they don’t have the power. The
jurisprudence (/SC) they cannot enter
into partnerships but can enter into joint
ventures.
o Joint Ventures - are like sort of
partnerships but not quite.
Partnerships have going concern.
When it’s joint venture, they only
have a specific purpose and after
that purpose has been completed,
it’s finished already. Usually these
are for certain undertaking which
are short-term and after the
undertaking is finished, that’s it.
The joint venture is disbanded.
- Nowadays, because of the amendment
introduced by the Revised Corporation
Code, corporations are expressly
empowered to enter into partnerships.
- It is now allowed also one of the
members of the partnership could be a
corporation.
SEC. 35. Corporate Powers and Capacity. – Every
corporation incorporated under this Code has
the power and capacity:
(h) To enter into a partnership, joint venture,
merger, consolidation, or any other commercial
agreement with natural and juridical persons;
Notes (rest of sec. 35)
SEC. 35. Corporate Powers and Capacity. – Every
corporation incorporated under this Code has the
power and capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the
certificate of incorporation provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in
accordance with the provisions of this Code;
(e) To adopt bylaws, not contrary to law, morals
or public policy, and to amend or repeal the same
in accordance with this Code;
(f) 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;
(g) 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;
(i) 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;
(j) To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers, and employees; and
(k) 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.
 Do corporations have the power to
donate for partisan political activity?
32
• Partisan Political Activity - these are
activities whose purpose/s are geared
towards the success or defeat of a
particular political candidate/party.
o For example: You are donating for
a candidate whose running for the
office of the mayor.
o Take note: This activity is not only
limited to supporting a particular
candidate but also whenever you
spend money in order to destroy
the reputation or advance the
defeat of a particular candidate.
o Q: Do corporations have the
power to donate for partisan
political activity?
A: Foreign Corporations are not
allowed while Domestic
Corporations are allowed.
Take note: That if you support
an election of a candidate
through a donation outside the
country like for example
supporting Joe Biden. It really
depends on the law of USA. If
they prohibits that which they
actually do then you can be
held liable in US.
Here in the country, political
candidates are allowed to
accept donations. What
allowed here in the Philippines
is the donation by an individual
or by a corporation that is
domestic. So, if the donor or
the person donating is a
domestic corporation, that is
allowed. However, if the donor
is a foreign corporation that is
NOT allowed. Why?
*To avoid the control in the
economic activities of the
country.
For example: A candidate is
accepting donations from a
Chinese corporation.
Q: Is there anything wrong with
this? Why are foreign
corporations not allowed?
A: There might be a hidden
agenda behind it. We are
talking about here a
corporation which has a
foreign character. So, it is
possible for these corporations
to be used as vehicles by
foreign powers in order to
meddle with our domestic
affairs. So, to prevent that from
happening, we prevent these
foreign corporations from
donating to Partisan Political
Activity.
To exercise the following powers, the corporate
act must be approved by the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded
Indebtedness
5. Power to Invest Corporate Funds in
Another Corporation or Busines or for
any other purpose
6. SLEMPoD
7. Management Contract
Notes:
- During these instances, the corporation
has the power to perform all of these
things. However, it is not allowed that
only the Board of Directors will exercise
that powers meaning it’s not really just
up to them. They have to get the prior
imprimatur of the stockholders.
o For No.1 and 2 (needs 2/3 of the
outstanding capital stock)
o SLEMPoD - Sales, lease,
Exchanges, Mortgages, Pledge or
other disposition of all or
substantially all of the assets of the
corporation.
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, setting forth:
33
(a) That the requirements of this section have
been complied with;
(b) The amount of the increase or decrease of
the capital stock;
(c) In case of an increase of the capital stock,
the amount of capital stock or number of
shares of no-par stock thereof actually
subscribed, the names, nationalities and
addresses of the persons subscribing, the
amount of capital stock or number of no-
par stock subscribed by each, and the
amount paid by each on the subscription in
cash or property, or the amount of capital
stock or number of shares of no-par stock
allotted to each stockholder if such
increase is for the purpose of making
effective stock dividend therefor
authorized;
(d) Any bonded indebtedness to be incurred,
created or increased;
(e) The amount of stock represented at the
meeting; and
(f) The vote authorizing the increase or
decrease of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
(g) Any increase or decrease in the capital
stock or the incurring, creating or
increasing of any bonded indebtedness
shall require prior approval of the
Commission, and where appropriate, of
the Philippine Competition
Commission. The application with the
Commission shall be made within six (6)
months from the date of approval of the
board of directors and stockholders, which
period may be extended for justifiable
reasons.
(h) Copies of the certificate shall be kept on
file in the office of the corporation and filed
with the Commission and attached to the
original articles of incorporation. After
approval by the Commission and the
issuance by the Commission of its
certificate of filing, the capital stock shall
be deemed increased or decreased and the
incurring, creating or increasing of any
bonded indebtedness authorized, as the
certificate of filing may declare: Provided,
That the Commission shall not accept for
filing any certificate of increase of capital
stock unless accompanied by a sworn
statement of the treasurer of the
corporation lawfully holding office at the
time of the filing of the certificate,
showing that at least twenty-five
percent (25%) of the increase in capital
stock has been subscribed and that at
least twenty-five percent (25%) of the
amount subscribed has been paid in
actual cash to the corporation or that
property, the valuation of which is equal
to twenty-five percent (25%) of the
subscription, has been transferred to the
corporation: Provided, further, That no
decrease in capital stock shall be approved
by the Commission if its effect shall
prejudice the rights of corporate creditors.
(i) Nonstock corporations may incur, create
or increase bonded indebtedness when
approved by a majority of the board of
trustees and of at least two-thirds (2/3) of
the members in a meeting duly called for
the purpose.
(j) Bonds issued by a corporation shall be
registered with the Commission, which
shall have the authority to determine the
sufficiency of the terms thereof.
Notes:
- Remember that a corporation has the
power to increase or decrease his capital
stock.
o For example: A corporation can
have an authorized capital stock of
1M then they’ll increase it to 2M,
that is allowed. But then again, it
has to have the approval of not
only by the board but by 2/3 of the
outstanding capital stock.
- Also in the past if you file an Articles of
Incorporation, it should be that 25% of
your authorized capital stock is
subscribed and 25% of that subscribed is
paid up. Now, it has changed. However, if
you plan to increase or decrease your
authorized capital stock, you must
comply with the 25-25 requirement.
- The law does not require upon
incorporation that you comply with the
25-25 requirement but since it is required
that you increase your capital stock that
you have to comply the 25-25
requirement, so you might as well comply
it at the get go.
- When you increase the authorized capital
stock, one of the things that you must
remember would be that the
stockholders are granted pre-emptive
right.
 What is pre-emptive right?
- [recited] It is the right of an existing
shareholders to purchase newly issued
stocks before they will be offered to
others.
- [PPT] The right granted to stockholders
to have the first option to subscribe to
any future issuance or disposition of
shares from the capital stock of a
corporation in proportion to their
respective shareholdings in the
corporation.
34
 Q: Why is this important to give pre-emptive
right the existing stockholders before we
even offer the newly issued shares for sale to
others?
A: It protects the exisiting stockholders from
losing their voting powers as more shares are
sold. (?) But it’s not just the voting powers
but also the right to the dividends.
Demonstration of Pre-Emptive Right
For example:
X Inc. has 5 shareholders namely A, B, C, D
and E. Let’s say the authorized capital stock
is 1M with 10/par value which means there
is 100,000 shares.
A = 50K shares = 50%
B = 20K = 20%
C = 5K = 5%
D = 10K = 10%
E = 15K = 15%
Total: 100K shares
Q: Technically speaking, how much is the equity of
A? percentage wise?
A: He has 50% equity.
Scenario: What if the shares will be increased to
200K shares then with a par value of 10.
Q: If that is what had happened, and 100K of the
newly issued shares were sold to Mr. Y. Does
that affect the equity shareholding of A?
A: Yes, back then he used to own 50% of the
company. However, because Y was able to buy
100K newly issued shares, how much then is the
new equity of A?
A: The new equity of A is 25%. So, from 50% it
decreased to 25%. It would be the same with the
equity of the other shareholders.
- So the relative control of A in the past
when it comes to voting will decrease. At
the same time, if the dividends will be
declared, it will also decrease.
Main Reason for the purpose of pre-emptive
right:
- That is why, existing shareholders should
be given pre-emptive right to give Mr. A,
a chance to purchase the shares
(Remember, A is not required to purchase
the shares if he don’t like to buy it we
can’t force but A must be given that
opportunity to maintain and retain his
shareholding in the corporation.
- Remember: Pre-emptive right is the right
to refuse but is not compulsory on the
part of the stockholder to purchase that
share. That’s why it is important that a
stockholder or all of the stockholder were
notified of the meeting and that a
meeting should be held whenever the
decision that the corporation is about to
reach could lead to the increase or
decrease of the capital stock.
 When can pre-emptive right be denied?
- The time that it can be denied is
whenever the articles of Incorporation
says so. If the Articles of Incorporation
says that pre-emptive right is not
available then there is no pre-emptive
right. This is allowed, as long as it is stated
in the Articles of Incorporation.
- However, if the Articles of Incorporation
is silent with respect to the existence of
pre-emptive right the presumption is that
it exists.
- Other instances where pre-emptive right
is not existing:
o If for example you are
participating in a public offering. If
your shares are publicly offered
meaning it’s available over-the-
counter on Stock Exchange. SEC
requires that there should be no
pre-emptive right because
everybody can buy those shares.
SEC. 38. Power to Deny Preemptive Right. – All
stockholders of a stock corporation shall enjoy
preemptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is
denied by the articles of incorporation or an
amendment thereto: Provided, That such
preemptive right shall not extend to shares issued in
compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares
issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
*Insert Sec 39 - 42 (NOT DISCUSSED)*
SEC. 39. Sale or Other Disposition of Assets. –
Subject to the provisions of Republic Act No.
10667, otherwise known as “Philippine
Competition Act”, and other related laws, a
corporation may, by a majority vote of its board of
35
directors or trustees, sell, lease, exchange,
mortgage, pledge, or otherwise dispose of its
property and assets, upon such terms and
conditions and for such consideration, which may
be money, stocks, bonds, or other instruments for
the payment of money or other property or
consideration, as its board of directors or trustees
may deem expedient.
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.
The determination of whether or not the sale
involves all or substantially all of the
corporation’s properties and assets must be
computed based on its net asset value, as shown
in its 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.
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 bylaws 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.
After such authorization or approval by the
stockholders or members, the board of directors
or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage,
pledge, or other disposition of property and
assets, subject to the rights of third parties under
any contract relating thereto, without further
action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the
power of any corporation, without the
authorization by the stockholders or members, to
sell, lease, exchange, mortgage, pledge, or
otherwise dispose of any of its property and
assets if the same is necessary in the usual and
regular course of business of the corporation or if
the proceeds of the sale or other disposition of
such property and assets shall be appropriated
for the conduct of its remaining business.
SEC. 40. Power to Acquire Own Shares. –
Provided that the corporation has unrestricted
retained earnings in its books to cover the shares
to be purchased or acquired, a stock corporation
shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or
purposes, including the following cases:
(a) To eliminate fractional shares arising out of
stock dividends;
(b) To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale;
and
(c) To pay dissenting or withdrawing
stockholders entitled to payment for their shares
under the provisions of this Code.
SEC. 41. Power to Invest Corporate Funds in
Another Corporation or Business or for Any
Other Purpose. – Subject to the provisions of this
Code, a private corporation may invest its funds
in any other corporation, business, or for any
purpose other than the primary purpose for
which it was organized, when approved by a
majority of the board of directors or trustees and
ratified by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock,
or by at least two thirds (2/3) of the members in
the case of nonstock corporations, at a meeting
duly called for the purpose. Notice of the
proposed investment and the time and place of
the meeting shall be addressed to each
stockholder or member at the place 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 sent
electronically in accordance with the rules and
regulations of the Commission on the use of
electronic data message, when allowed by the
bylaws or done with the consent of the
stockholders: Provided, That any dissenting
stockholder shall have appraisal right as provided
in this Code: Provided, however, That where the
investment by the corporation is reasonably
necessary to accomplish its primary purpose as
stated in the articles of incorporation, the
approval of the stockholders or members shall
not be necessary.
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
36
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.
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.
*(NOT DISCUSSED)*
 What is a management contract?
- A contract which involves two
corporations.
- For example: There are 2 corporations, A
Inc. and it would be managing B Inc. Also,
there are safeguards in the law which will
ensure that both of the corporations
agree to that terms.
- o B Inc. has their own set of
o Magpapasakop na yung B sa A.
Although, B Inc. has BOD the one
that will be followed will be the
BOD from A Inc.
- The first safeguard is that both
corporations must approve the
management contract.
Q: By what vote?
A: By majority vote of both the managing and
the managed corporations.
Note: In the past, Sir told us that there are only
2 ways in voting threshold. It can either be 2/3
or majority. However, in this part this is the only
exception. Why?
- In this instance, it can be majority or 2/3
votes of the managed corporation.
o 2/3 - It would be needed if:
A. if you have a common
stockholder involved. And, in
the example (B which will be
managed), the same
stockholder owns more than
1/3 of the shares.
In short if for example A, B, C,
D, and E are the stockholders of
A Inc. On the other hand, B Inc.
has A, F, G, H and I. So they
have both have common
stockholder which is A. In A Inc.
Mr. A has 1/3.
Q: Why is this so important?
Why is it 1/3?
A: Remember, if you own more
than 1/3, other stockholders
will have a hard time to meet
the threshold of more than 2/3.
- If you are very powerful in both
companies, 2/3 votes is needed not only
the majority.
Another Situation:
- If there are common directors in both
corporations A Inc. & B Inc. Then, the
majority of the directors in A Inc. is same
with the majority of the directors in B Inc.
, 2/3 votes of the outstanding capital
stock is needed.
Q: Why is it important that we have
safeguards when it comes to
management contracts?
A: Basically, what you have here is a
situation wherein B Inc. as the managed
corporation will be ceding the power to
A Inc.
stockholders and even directors.
And, they would not want to be
under control by A Inc. so to
ensure that the management
contract has the approval of the
corporation including the
stockholders, there are these
provided safeguards.
- Remember that any management
contract can only last for 5 years at the
maximum for every one term. It is
renewable but for every one term, it
should be 5 years max.
 What is the required vote for its
approval?
SEC. 43. Power to Enter into Management
Contract. – No corporation shall conclude a
37
management contract with another corporation
unless such contract is approved by the board of
directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at
least a majority of the members in the case of a
nonstock corporation, of both the managing and
the managed corporation, at a meeting duly called
for the purpose: Provided, That (a) where a
stockholder or stockholders representing the
same interest of both the managing and the
managed corporations own or control more than
one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing
corporation; or (b) where a majority of the
members of the board of directors of the
managing corporation also constitute a majority
of the members of the board of directors of the
managed corporation, then the management
contract must be approved by the stockholders of
the managed corporation owning at least two-
thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a nonstock
corporation.
These shall apply to any contract whereby a
corporation undertakes to manage or operate all
or substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise: Provided, however, That such service
contracts or operating agreements which relate
to the exploration, development, exploitation or
utilization of natural resources may be entered
into for such periods as may be provided by the
pertinent laws or regulations.
No management contract shall be entered into for
a period longer than five (5) years for any one (1)
term.
 What are they by-laws?
- These are the internal laws of the
corporation. As supposed to the Articles
of Incorporation which goes out of the
corporation. Basically, this is a statement
from the incorporators na like this is the
corporation that we are about to build, it
is the representation to the SEC, the
world and the PH government.
- The By-Laws are the rules that will govern
the internal relationship between the
stockholders, directors and the officers.
 How are they adopted?
- By-Laws is affirmative vote of the majority
of the outstanding capital stock.
 When are they adopted?
- They can be adopted either before the
incorporation or after the incorporation.
- So, it can be prior. How? It can be that
when you submitted Articles of
Incorporation in the SEC, the By-Laws are
already included.
o Similar to the Articles of
Incorporation having a format, the
By-Laws also has a format which
can be used.
- So, it can also be filed, the By-Laws, after
the Certificate of Incorporation has been
issued already. That is also allowed and
now there is no time frame for this for the
congress has already removed it.
- Remember that By-Laws are still part of
your reportorial requirement meaning
whenever you submit a general
information sheet every year which
updates the SEC of the new stockholders
and BOD, even the By-Laws are included
in it.
TITLE V BYLAWS
SEC. 45. Adoption of Bylaws. – For the adoption
of bylaws by the corporation, the affirmative vote
of the stockholders representing at least a
majority of the outstanding capital stock, or of
at least a majority of the members in case of
nonstock corporations, shall be necessary. 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.
In all cases, bylaws shall be effective only upon the
issuance by the Commission of a certification that
the bylaws are in accordance with this Code.
The Commission shall not accept for filing the
bylaws or any amendment thereto of any bank,
banking institution, building and loan association,
trust company, insurance company, public utility,
educational institution, or other special
corporations governed by special laws, unless
accompanied by a certificate of the appropriate
government agency to the effect that such bylaws
or amendments are in accordance with law.
 Are by-laws binding to--
1. Officers? - Yes
2. Directors/Trustees? - Yes
38
 3. Stockholders/Members? - Yes
4. Third persons? - No
Q: When is it binding with respect to third
persons?
A: If the third person knew, either by way of
actual notice or constructive notice.
Example: (Chinabank vs. Valley Golf)
Mr. X is a stockholder of Valley Golf. Now,
he borrowed money from Chinabank. He used
and surrendered his certificate of stock that he
has in valley golf as a security that he can pay
back the money he borrowed.
Chinabank wrote valley golf a letter
informing valley golf that Mr. X a stockholder
pledged his Certificate of Stock and if he will not
be able to pay his debt, they will fforeclose the
certificate then they can sell it through a public
auction.
Later on, Mr. X wasn’t able to pay his debt
and Chinabank foreclosed the pledge.
Eventually, there was a public auction and the
one with the highest bid was Chinabank. CB then
became the owner.
CB then wrote a new letter to valley golf
asking to transfer the ownership of the
certificate to CB from Mr. X. However, Valley Golf
refused it because in their by-laws if there are
unpaid dues, the shares can’t be transferred. Mr.
X wasn’t paying the dues when he was still part
of the club and it is stated in their by-laws that
if they aren’t paying then the shares cannot be
transferred and there’s no right to demand for
it.
The case reached the SC, and what he SC
said was that Valley Golf cannot hold CB
responsible for a specific provision in their by-
laws because it is a third person. They are not a
stockholder, an officer or even a director. So,
they are not bound to pay. If they want CB to
bind with the by-laws, they should already had
taken an action when CB first wrote a letter to
them, they should have given CB a copy of their
by-laws. They did not do this so CB is not
knowledgeable of the by-laws and therefore is
not bound by the by-laws
The lesson is that if you have a company and
there are third persons and that the by-laws
could affect the third person, you furnish that
third person with a copy of the by-laws to
appraise him of that particular provision.
SEC. 46. Contents of Bylaws. – A private
corporation may provide the following in its
bylaws:
(a) The time, place and manner of calling and
conducting regular or special meetings of the
directors or trustees;
(b) The time and manner of calling and
conducting regular or special meetings and mode
of notifying the stockholders or members thereof;
(c) The required quorum in meetings of
stockholders or members and the manner of
voting therein;
(d) The modes by which a stockholder, member,
director, or trustee may attend meetings and cast
their votes;
(e) The form for proxies of stockholders and
members and the manner of voting them;
(f) The directors’ or trustees’ qualifications,
duties and responsibilities, the guidelines for
setting the compensation of directors or trustees
and officers, and the maximum number of other
board representations that an independent
director or trustee may have which shall, in no
case, be more than the number prescribed by the
Commission;
(g) The time for holding the annual election of
directors or trustees and the mode or manner of
giving notice thereof;
(h) The manner of election or appointment and
the term of office of all officers other than
directors or trustees;
(i) The penalties for violation of the bylaws;
(j) In the case of stock corporations, the manner
of issuing stock certificates; and
(k) Such other matters as may be necessary for
the proper or convenient transaction of its
corporate affairs for the promotion of good
governance and anti-graft and corruption
measures.
An arbitration agreement may be provided in the
bylaws pursuant to Section 181 of this Code.
Notes:
- Usually the contents of the by-laws are
the schedule of the regular meetings, the
voting system, the quorum, the corporate
officers and so on.
 Whose vote is/are necessary to approve
the by-laws?
- As mentioned the majority. Also, this is
true with respect to the adoption and
amendment of the by-laws.
- So for example, they will just adopt and
there was still by-laws in the first place,
39
 majority of the outstanding capital
stockholders and the board of directors
needs to vote. Same goes along with the
amendment of the by-laws which is
majority of the outstanding capital stock.
- However, it is possible that the
stockholders can say that they have
meetings and that the by-laws are always
changed for they may still be learning.
Instead of doing it every time, it is
possible that they can delegate the task
to the board of directors or board of
trustees on the decisions whether or not
to amend the bylaws. Provided that 2/3
of the outstanding capital stock allowed
the delegation.
o So, it will be delegated to the BOD
and then they will decide on
whether or not to amend the
bylaws.
Q: Now, what if the stockholders would
like to regain or withdrew that power
from the Board?
A: They only need the majority so that
they would be able to revoke that power.
- Why? For the BOD may eventually abuse
that delegated power.
o They may already be creating
bylaws which defeats the interest
of the stockholders.
- Revoking the power is easier for it only
needs the majority instead of the 2/3.
- Take note: Any amendment in the bylaws
would only take effect upon the issuance
of the Certification of the SEC that it has
approved of the bylaws.
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 nonstock 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.
Articles of Incorporation By-Laws
External Affairs Internal Affairs
Affects the status of Does not affect the
existence of the status of the
corporation existence but has
impact on the
existence; failure to
submit is a ground for
disenfranchisement
Joint decision of the General Rule: joint
board and stockholders decision
Exception: Delegates
the power to amend
the By-Laws to the
Board
TITLE VI
MEETINGS
Types of Meetings
SEC. 48. Kinds of Meetings. – Meetings of
directors, trustees, stockholders, or members
may be regular or special.
Notes for the Table:
Why is it April 15? Remember a
corporation declares its taxes every
quarter and every year. For there is a rule
that the income tax return of
corporations and individuals shall be filed
on a yearly basis, 15 days after the end of
the first quarter of every year. That’s why
it is April 15.
o Also, the presumption is that at
the very least, the corporation
already has a Financial Statement.
So at the time that there will be a
stockholders meeting, one of the
things that will be presented are
the Financial Statements.
o Also, the corporation are free to
choose whatever date but by
default it’s any date after April 15.
When it comes to the stockholders
meeting, at the very least it should be
held in the city or municipality where the
40
 principal place of business is located. But,
preferably in the specific place of the
principal place of business.
o Take note that Metro Manila,
Metro Cebu and Metro Davao are
considered one big city. So for
example, your principal place of
business is in Paranaque and since
Manila or Quezon city is within
Metro Manila, then you can hold
your regular stockholders meeting
there.
 Can stockholders waive notice to
meetings?
- Yes but the waiver must be individual.
- Notice of any meeting may be waived,
expressly or impliedly, by any stockholder
or member: Provided, That general
waivers of notice in the articles of
incorporation or the bylaws shall not be
allowed: Provided, further, That
attendance at a meeting shall constitute a
waiver of notice of such meeting, except
when the person attends a meeting for the
express purpose of objecting to the
transaction of any business because the
meeting is not lawfully called or convened.
 If a stockholder’s meeting is cancelled,
should there be notice of cancellation?
- In case of postponement of stockholders’
or members’ regular meetings, written
notice thereof and the reason therefor
shall be sent to all stockholders or
members of record at least two (2) weeks
prior to the date of the meeting, unless a
different period is required under the
bylaws, law or regulation.
 Will the corporate books be accessible
before the meeting?
- Yes but it is closed 20 days prior to the
meeting and the reason for that is to
prevent tampering.
 Can a corporation whose principal of
business is in Quezon City holds its
stockholder’s meeting in Pasig?
- Yes. As what Sir has told, Metro Manila,
Metro Cebu and Metro Davao are
considered as one big city.
 What about the meeting of members in
non-stock corporation where are they
held?
- It can be held anywhere within the country
and is not allowed outside the country.
Q: Why is it different to a stock corporation?
A: In a stock corporation, they have
investments and that they should be able to
attend.
 Can the director’s meeting be held
online?
- As long as it is agreed upon and is
present in the bylaws.
- 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.
Directors or trustees cannot attend or
vote by proxy at board meetings.
 Who preside at meeting of directors?
- The chairman but in the absence of the
chairman, it would be the president.
SEC. 53. 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.
41
Scenario: Voting in Case of Joint Ownership of
Stock
- In the Certificate of Stock, A and B owns
10K shares.
Q: Can A go to the meeting alone and exercise
his vote over the 10K shares?
A: No.
Q: How about if A only wanted to exercise his
right over 5K of the shares? Is that allowed?
A: No, for the shares are indivisible and they
both own it.
Q: So, what if the Certificate of Stock, A and/or
B is stated for the voting right?
A: Yes for the right to vote can now either be A
or B.
Voting Trust Demonstration
SEC. 55. Voting in Case of Joint Ownership of
Stock. – The consent of all the co-owners shall be
necessary in voting shares of stock owned jointly
by two (2) or more persons, unless there is a
written proxy, signed by all the co-owners,
authorizing one (1) or some of them or any other
person to vote such share or shares: Provided,
That when the shares are owned in an “and/or”
capacity by the holders thereof, any one of the
joint owners can vote said shares or appoint a
proxy therefor.
 What is a proxy?
- A proxy is an agent legally authorized to
act on behalf of a stockholder of record.
 How does one vote by proxy? What is the
procedure? Do proxies prescribe?
- Proxies shall be in writing, signed and
filed, by the stockholder or member, in
any form authorized in the bylaws and
received by the corporate secretary
within a reasonable time before the
scheduled meeting. Unless otherwise
provided in the proxy form, it shall be
valid only for the meeting for which it is
intended. No proxy shall be valid and
effective for a period longer than five (5)
years at any one time.
Notes:
- Q: Who signs the proxies?
A: The stockholders or members. In this
case they will make a proxy form and
usually the corporation already has a
form. The proxy will then bring it to the
corporate secretary. Also, there is what
you call Stock and Transfer Book (STB).
The Secretary will look at it and will tally
it with the proxy and look for the
representative.
- “No proxy shall be valid and effective for
a period longer than five (5) years at any
one time.”
o [example] In short, if the rule that
was stated for the proxy that is
only for the May 5 meeting then
it’s effectivity will only be up to
that date. However, if it is not
stated in the forms like indefinitely
then it means that it’ll last only up
to five (5) years that it can be
effective.
 What is a voting trust agreement? How
does it work?
- In a TRUST relationship, there are three
parties: trustor, trustee and the
beneficiary.
o The trustor will entrust the legal
title meaning the ownership of the
thing to trustee. Si Trustee ang
lumalabas na may-ari. However,
yung pagmamay-ari ni Trustee is
only holding it for the benefit of
the beneficiary.
In law the beneficiary is what
you call the Cestuique Trust.
o Sometimes, the Trustor and
Beneficiary are one and the same.
 What is a voting trust agreement? How
does it work?
- For example: Mr. X is the stockholder of
record which means he has the right to
vote and to be voted to the BOD.
o Mr. Y then came to Mr. X who is
interested to buying his shares.
However, Mr. X doesn’t want to
sell his shares.
o Mr. Y then offered the voting trust
agreement.
o When they execute the voting
trust agreement, the Certificate of
Stock will be sent to the
Corporation and then the
corporate secretary will register
and will be sent to the SEC that’s
why it should be notarized. Now,
the Certificate of Stock that was
issued under the name of Mr. X
will now be cancelled. The
corporation will then issue a new
42
 Certificate of Stock with respect to
Mr. Y and because of this the new
stockholder in record is Mr. Y.
This gives him the right to elect
and to become a member in
the board.
Q: Now, how about Mr. X?
A: The corporation will give him a
Voting Trust Certificate wherein Y
also signed it. This certificate will
give Mr. X dividends. He will have
the right to receive dividends.
- So, Mr. Y has the right to elect. Mr. X has
the right to own.
- Also, the Voting Right Certificate can be
sold or transferred to other people.
Q: How can this agreement last?
A: Maximum of 5 years. However, if for example
the reason why they executed a voting trust
agreement was because Mr. Y extended a loan
to Mr. X. Then, the Voting Trust Agreement can
subsist until the loan is paid.
Q: Now, what happens if it reached 5 years and
the loan was paid already?
A: The Certificate of Stock by Mr. Y will be
canceled as well as the Voting Trust Certificate
of Mr. X. The corporation will issue another
Certificate of Stock again in the name of Mr. X
consolidating again with the power to earn and
elect.
 Is there a difference with this and a
proxy?
- Yes, here Mr. Y has complete ownership
while the proxy doesn’t have one.
6th Synch Class
 What is a subscription contract?
- It is a method of acquiring shares.
- Q: Are all subscriptions fully paid?
A: No not all. Basically it’s a promise to
pay but you already have a contract that
you are buying that however it still
depends on what the corporation and the
subscriber will be settling with if it would
be full paid or he will be given time to pay
for those shares.
- So, this is also like a contract of sales. For
example: You’ll be buying a product and
then the price that you’ll be going to pay
depends on the contractual obligations
of the parties.
- Take Note: The way of payment depends
on the subscription contract of the
corporation.
SEC. 59. Subscription Contract. – Any contract
for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed
shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some
other contract.
 Is pre-incorporation subscription
revocable or irrevocable?
Notes:
- So before the incorporation, there is
already a subscription.
- The birth of a corporation takes place
when the Certificate of Incorporation is
issued to the corporation.
- Pre-incorporation subscription are
subscriptions which takes place before
the issuance of the Certificate of
Incorporation.
- Irrevocable means it can no longer be
reversed.
A: Basically, the rule is that pre-incorporation
subscriptions are irrevocable within 6 months.
- Additional Q: After 6 months is it now
revocable?
A: Yes they are. Usually the one who
revokes it is the subscriber.
- Additional Q: Why did the law make it
irrevocable?
A: It prevents speculation as to the
creation of the corporation.
So for example: you promised that you’ll
put up a corporation. Then suddenly
someone wants to backout from the plan,
the corporation may not be formed
because everyone may also simply
backout.
o So, to prevent people from
backing out in the agreement to
form the corporation, there is the
43
 pre-incorporation subscriptions
being irrevocable.
For if they will back out last minute then
you’ll not be able to meet the required
capital that you want. The point here is
that within 6 months, your subscription
cannot be revoked.
- So beyond the 6 months, it is now
allowed. If within 6 months, it still haven’t
incorporated then there must be
something wrong or something is not
working out. The person has now the
power to revoke it.
- Additional Q: So what if on the 7th month
you still haven’t revoked the
subscription? Can a subscriber do that?
A: Yes he can do that.
- Additional Q: After the 7th month, the
Articles of Incorporation has been
submitted to the SEC, and then he had a
change of heart. The day after the Articles
of Incorporation we’re submitted he
wants to back out and revoke his
subscription. Can he still do that?
A: It is not anymore allowed.
SEC. 60. Pre-incorporation Subscription. – A
subscription of shares in a corporation still to be
formed shall be irrevocable for a period of at least
six (6) months from the date of subscription,
unless all of the other subscribers consent to the
revocation, or the corporation fails to incorporate
within the same period or within a longer period
stipulated in the contract of subscription. No pre-
incorporation subscription may be revoked after
the articles of incorporation is submitted to the
Commission.
----
 What are valid consideration for stocks?
- [recited] Cash, Properties that may be
tangible or intangible (like stocks,
copyrights, patent, trademark)
SEC. 61. Consideration for Stocks. – Stocks shall
not be issued for a consideration less than the par
or issued price thereof. Consideration for the
issuance of stock may be:
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purposes at
a fair valuation equal to the par or issued value
of the stock issued;
(b) Labor performed for or services actually
rendered to the corporation;
- Take note: Future labor is not allowed.
- Q: Why is it actually rendered?
A: The entry for this in accounting is payable.
For when it is an accounts payable you will be
able to use it as consideration because utang
mo yon. So, labor actually performed
translates to accounts payable. The labor done
can equate to shares.
(d) Previously incurred indebtedness of the
corporation;
(e) Amounts transferred from unrestricted
retained earnings to stated capital;
- Unrestricted retained earnings are the
accumulated profits. So, that can be used
as a consideration for shares.
- The corporation can also buy the shares so
they can use the unrestricted retained
earnings to buy those shares.
(f) Outstanding shares exchanged for stocks in
the event of reclassification or conversion; (g)
Shares of stock in another corporation;
and/or
(h) Other generally accepted form of
consideration.
- Q: Can electronic form of money be used to
buy stocks like GCASH?
A: It is accepted and therefore can be used.
Where the consideration is other than actual
cash, or consists of intangible property such as
patents or copyrights, the valuation thereof
shall initially be determined by the
stockholders or the board of directors, subject
to the approval of the Commission.
Shares of stock shall not be issued in exchange
for promissory notes or future service. The
same considerations provided in this section,
insofar as applicable, may be used for the
issuance of bonds by the corporation.
The issued price of no-par value shares may
be fixed in the articles of incorporation or by
the board of directors pursuant to authority
conferred by the articles of incorporation or
the bylaws, or if not so fixed, by the
stockholders representing at least a majority
of the outstanding capital stock at a meeting
duly called for the purpose.
 What are Certificates of Stocks?
- It is a written instrument signed by an
officer of the corporation. It signifies that
you are the owner of the stock.
44
 - It is usually issued for the stockholder
who bought the stock.
- Q: Is there a Certificate of Stock issued to
a subscriber that hasn’t paid in full yet or
hasn’t paid at all?
A: No, it will be issued once the
subscription is fully paid. You must pay
first the entire subscription. It is what you
call Indivisibility of Subscription.
- The certificate of stock is the evidence or
proof of ownership of the share.
- The reckoning point here is if it is in the
Stock and Transfer Book so you need to
make sure that it is recorded in the Stock
and Transfer Book.
[Definition in the PPT]
- The capital stock or corporations shall be
divided into shares for which certificates
signed by the president or vice president,
countersigned by the secretary or
assistant secretary, and sealed with the
seal of the corporation shall be issued in
accordance with the bylaws.
 When are they issued?
- Upon full payment of the subscription.
[Definition in the PPT]
SEC. 63. Issuance of Stock Certificates. – No
certificate of stock shall be issued to a subscriber
until the full amount of the subscription together
with interest and expenses (in case of delinquent
shares), if any is due, has been paid.
 How are they transferred?
- There are three ways:
a. Endorse and Deliver
- You sign it and then you deliver it
physically. Why physically? Because it is
like a bearer instrument. You were able to
get the Certificate of Stock and then
you’ll transfer it another person then
you’ll at the back of it and you’ll
physically transfer it.
b. Execute a Deed of Assignment
- You’ll assign your shares to another
person in a separate document.
- You can photocopy the Certificate of
Stock then you’ll attach it and surrender
the Certificate of Stock.
- Q: Why is it important to surrender the
Certificate of Stock to the Buyer?
A: That is what the buyer will bring to the
corporation.
c. Judicial
- For example: Later on, there will be a case
then there will be a court order for the
transfer of the shares.
[Definition in the PPT]
- May be transferred by delivery of the
certificate or certificates endorsed by the
owner, his attorney-in-fact, or any other
person legally authorized to make the
transfer. No transfer, however, shall be
valid, except as between the parties, until
the transfer is recorded in the books of
the corporation showing the names of
the parties to the transaction, the date of
the transfer, the number of the certificate
or certificates, and the number of shares
transferred.
Note:
- Remember that after you buy a share
from an individual you need to make sure
that is registered in the corporation.
 What are uncertificated or scripless
shares?
- The trading system where settlement is
carried out via book-entries rather than
by the movement of physical securities.
In other words, paperless trading.
- For example: Instead of settling via
endorsement or delivery you use book
entries instead of physical movement of
security.
- Usually this is used in stocks which are
traded publicly.
Under the RCC:
- The commission may require
corporations whose securities are traded
in trading markets and which can
reasonable demonstrate their capability
to do so to issue their securities or shares
of stock in uncertificated or scripless from
in accordance with the rules of the
Commission.
- No shares of stock which the corporation
holds any unpaid claim shall be
transferrable in the books of the
corporation.
 What are watered stocks?
- Issues which are issued for no value or
less than the amount that it is actually
sold.
45
 - When it is par value, you cannot sell
below par value.
 What is the liability of directors if a
corporation issues watered stocks?
- They are solidary liable.
SEC. 64. Liability of Directors for Watered
Stocks. – A director or officer of a corporation
who: (a) consents to the issuance of stocks for a
consideration less than its par or issued value; (b)
consents to the issuance of stocks for a
consideration other than cash, valued in excess of
its fair value; or (c) having knowledge of the
insufficient consideration, does not file a written
objection with the corporate secretary, shall be
liable to the corporation or its creditors,
solidarily with the stockholder concerned for
the difference between the value received at the
time of issuance of the stock and the par or issued
value of the same.
Remember: In a corporation, you will not be
personally held liable because a corporation has a
very strong separate juridical personality. You
have to pierce the veil of corporate entity to get
to the directors, the stockholders, and the officers.
 What is a call?
- Remember in COBLAW1, even though
there is a due date, what makes it due is
not actually the arrival of the due date
but the demand. Upon demand and as
soon as he receives it, he needs to pay it.
If he doesn’t pay up then the next thing
that will happen that he will be sued.
- The call is actually a demand from the
board of directors saying that you should
already pay up the shares.
- Q: Is it always needed?
A: No, for example in the subscription
contract, this is the due date without
further demand. Then that doesn’t need
a call. However, if it is stated that the due
date is on this, then there will be a call
and that is actually the demand from the
corporation asking you to pay up.
[Definition in the PPT]
- The board of directors may, by resolution,
order the sale of delinquent stock and
shall specifically state the amount due on
each subscription plus all accrued
interest, and the date, time and place of
the sale which shall not be less than thirty
(30) days nor more than sixty (6)0 days
from the date the stocks become
delinquent.
 How do shares become delinquent?
- If for example the shareholder did not
pay the shares on time, the share will
become delinquent.
- The shares if not paid can be sold
through public auction (after the notice,
it will be published in a newspaper of
general circulation so that notice is for
the public who’ll be interested to buy that
share) or the corporation can file a case
against the shareholder for the collection
of a sum of money.
[Definition in the PPT]
- AFTER THE CALL, notice of the sale, with
a copy of the resolution, shall be sent to
every delinquent stockholder either
personally, by registered mail, or through
other means provided in the bylaws. The
same shall be published once a week for
two (2) consecutive weeks in a newspaper
of general circulation in the province or
city where the principal office of the
corporation is located.
 Are all unpaid subscriptions delinquent?
- It only be delinquent if there was a call
that happened already or also it can be
that it becomes due without further
demand.
- The point here is that it doesn’t mean that
you weren’t able to pay something is that
you’re already delinquent, there should
still be a demand to pay.
- If the shareholder has still not paid in full
yet, it doesn’t mean that the subscription
is delinquent, it’s just not fully paid.
- It important to know if the shares are
delinquent because there are
consequence if it is.
SEC. 71. Rights of Unpaid Shares,
Nondelinquent. Holders of subscribed shares
not fully paid which are not delinquent shall
have all the rights of a stockholder.
 What are the effects of delinquency to
the shares and shareholders?
1. To the right to vote or be voted for
- You cannot use it to vote and you cannot
run in an election to be voted using those
shares.
2. The right to attend or be represented in
any meeting.
- The shareholder is entitled to receive
notices but you cannot attend meetings
nor send proxy’s to represent yourself in
the meeting.
46
 3. The right to receive dividends.
- The shareholders can still receive
dividends however it’s only cash
dividends. They can’t receive stock
dividends.
o Receiving of stock dividends is not
allowed because you still have an
utang sa corporation and yet
you’ll receive stock dividends.
o Stock dividends are for fully paid
shareholders because the
consideration for it is the
unrestricted retained earnings.
Remember: The Dividends ay
hinuhugot from the
unrestricted retained earnings
kasi ito yung sobra-sobrang
kita.
SEC. 70. Effect of Delinquency. – No
delinquent stock shall be voted for, be
entitled to vote, or be represented at any
stockholder’s meeting, nor shall the holder
thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code,
until and unless payment is made by the
holder of such delinquent stock for the
amount due on the subscription with accrued
interest, and the costs and expenses of
advertisement, if any.
Notes:
- If for example, you’re a delinquent
stockholder, you are entitled to receive
cash dividends. However, before the
corporation gives the money they’ll
deduct the amount of the unpaid shares
from it.
 What are the options of the corporation
as regards delinquent share?
SEC. 67. Delinquency Sale. … Unless the
delinquent stockholder pays to the corporation,
on or before the date specified for the sale of the
delinquent stock, the balance due on the former’s
subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the
board of directors otherwise orders, said
delinquent stock shall be sold at a public
auction to such bidder who shall offer to pay
the full amount of the balance on the
subscription together with accrued interest,
costs of advertisement and expenses of sale,
for the smallest number of shares or fraction
of a share.
SEC. 69. Court Action to Recover Unpaid
Subscription. – Nothing in this Code shall
prevent the corporation from collecting through
court action, the amount due on any unpaid
subscription, with accrued interest, costs and
expenses.
Scenario No. 2
X subscribed for 100 shares with par value of
P100 each. X was only able to pay the
corporation Php 50,000 out of P100,000.
The subscription became delinquent and the
shares were sold at a public auction, with costs
for advertisement, sale and interest amounting
to Php 20,000
Bidders:
A. P70K for 500 shares
B. P70K for 400 shares
C. 50K for 300 shares
Who is the winning bidder?
- It’s B. Here you need to be able to pay the
minimum which is to pay the remaining
part of subscription that became
delinquent which is 50K and the
advertising fee which is 20K.
- It is also allowed to pay higher than that
but the point is that if there are similar
bids like for A and B, bidder who bids for
the lowest number of shares for which
amount is already required, he will be
considered as the winning bidder.
Additional Q: For the remaining 600 shares,
where will it go?
A: It will go to X because he was the original
bidder and he has also paid for it.
Additional Q: What if there’s no winning bid?
What will happen?
A: Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with
accrued interest, costs of advertisement, and
expenses of sale, for the smallest number of
shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid
for the same, and the total amount due shall be
credited as fully paid in the books of the
corporation. Title to all the shares of stock
covered by the subscription shall be vested in
the corporation as treasury shares.
- And they will get it from the unrestricted
retained earnings.
47

Sec. 67. Delinquency Sale. xxx
Said delinquent stock shall be sold at a public
auction to such bidder who offers to pay the full
amount of the balance on the subscription
together with accrued interest, costs of
advertisement, and expenses of sale, for the
smallest number of shares or fraction of a share.
The stock so purchased shall be transferred to
such purchase in the books of the corporation and
a certificate for such stock shall be issued in the
purchaser’s favor. The remaining shares, if any,
shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such
shares.
--
Scenario on lost stock certificates:
- You were able to buy stocks from a
corporation and they issued you a
certificate but then because of an
incident you lost it.
o In this scenario, it’s okay because
a stock is an intangible asset and
the certificate is just an evidence
that you owned a stock. Also, it’s
written in the books.
- The corporation can issue another
certificate of stock and there is a
procedure.
SEC. 72. Lost or Destroyed Certificates. – The
following procedure shall be followed by a
corporation in issuing new certificates of stock in
lieu of those which have been lost, stolen or
destroyed:
1. The registered owner of a certificate of stock in
a corporation or such person’s legal
representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the
circumstances as to how the certificate was lost,
stolen or destroyed,
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, the corporation shall publish a
notice in a newspaper of general circulation in the
place where the corporation has its principal
office, once a week for three (3) consecutive
weeks at the expense of the registered owner of
the certificate of stock which has been lost, stolen
or destroyed.
3. After the expiration of one (1) year from the
date of the last publication, if no contest has been
presented to the corporation regarding the
certificate of stock, the right to make such contest
shall be barred and the corporation shall cancel
the lost, destroyed or stolen certificate of stock in
its books. In lieu thereof, the corporation shall
issue a new certificate of stock, unless the
registered owner files a bond or other security as
may be required, effective for a period of one (1)
year, for such amount and in such form and with
such sureties as may be satisfactory to the board
of directors, in which case a new certificate may
be issued even before the expiration of the one (1)
year period provided herein.
Notes: It can happen that in less than a year, you
will receive a new certificate of stock if you’ll get
a bond. Wherein it will be a security for the
company that whatever happens, they will be
liable for it.
- If you want to not wait for a year then you
can get the bond.
Q: Why is it that the law wants that it would be
still after a year that the Certificate of Stock will
be reissued?
A: It is possible that the Certificate was never lost
and the shareholder must have sold it to other
people or he must just have kept it or wasn’t even
destroyed.
- Q: What is the danger in this?
A: It is possible that he will have 2
Certificate of Stock, and he can sell both of
the certificates to other people. Later on,
they may go to the corporation asking for
the share to be transferred wherein fact,
the owner is still there.
 What are dividends?
- These are returns of one’s investments.
It’s not an utang of the corporation to it’s
stockholders. The only time that it will be
considered as an utang if upon
declaration is hindi nabayaran.
- The expectation that the corporation will
declare dividends does not mean that a
stockholder has a right to demand the
corporation to declare dividends. For the
corporation can use the kita or the
earnings in many ways. It could be for
investments, expansions or more.
- It is sufficient to say that if sobra-sobra na
yung earnings, for example: If the
corporation surplus profits is in excess of
100% of the paid-in capital stock, it
should now be declared as dividends. It
now becomes a duty on part of the Board
of Directors.
 Who decides on whether to declare
them?
48
 - The Board of Directors declares them.
With respect to cash dividends and
property dividends, only the BOD can
declare them.
- When it comes to stock dividends, it
should be approved not only by the BOD
but also by 2/3 of the Outstanding
Capital Stock.
o Why? They may also want to have
cash dividends other than stock
dividends. (The example was that
you may have bought shares in a
low price but the company does
not release cash dividends and
only focus on stock dividends. You
are not earning money, you’ll be
able to earn only when you sell
that shares so the 2/3 of the
Outstanding Capital Stock may
want to say something about this)
 When should they be declared?
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.
7th Synch Class
 Is dissolution the end-all and be-all of
corporate life?
- Remember that if you put up a business
and you decided to quit the business, you
can’t simply do that. You have to
remember that there are people who
more or less have expectation to your
business. They expect to be paid, to be
served, in case the contract pre-existed
the dissolution. Now, this also included
the investors, partners and stockholders.
All of them must be satisfied first with
their claims before you actually end the
business.
- No, it’s not the end. The actual end would
be termination.
Timeline of Corporate Life
Promotion → Filing of AI → Issuance of Cert. of
Incorporation → Going Concern → Dissolution
→ Winding Up → Termination
Notes:
- Everything starts with promotion, this is
where the promoters gather the people or
those who are interested in joining the
venture.
- Then, filing the Articles of Incorporation. →
Issuance of Cert. of Incorporation
o The Issuance of Cert. of AI
signifies the beginning or the
birth of the corporate existence.
- Then going concern, → Dissolution →
Winding up and Termination.
 What are the different modes of
dissolving a corporation?
(a.) Voluntary Dissolution and;
 It is the corporation that initiates the
dissolution
 There are 2 Types under Voluntary
Dissolution:
a. No Creditor are affected
b. Creditors are affected
1. Voluntary Dissolution wherein No
Creditors are Affected
Q: What is the required votes to dissolve
a corporation where there a no creditors
affected?
- A: The dissolution may be effected by
majority vote of the board of directors or
trustees, and by a resolution adopted by
the affirmative vote of the stockholders
49
 owning at least majority of the
outstanding capital stock or majority of
the members of a meeting to be held
upon the call of the directors or trustees.
Q: Should the vote be obtained in a
meeting call for the purpose?
- A: Yes there should be a meeting for it.
Q: Should there be a prior notice? If so,
how many days? Publication, where?
How many times should it be published?
- A: Yes there should be a prior notice.
- 20 days prior.
- Publication through newspaper or any
news company in the city or region where
the principal place is located. If there is
not, then a newspaper of general
circulation in the Philippines.
- It should be published once prior to the
date of the meeting.
- Take note: When it comes to voluntary
dissolution wherein there is no creditors
affected, you only publish it once.
Q: What does the corporation file with
the SEC to dissolve?
- A: A verified request for dissolution. It is
important that it is verified to ensure that
everyone agreed for the dissolution. Also,
if someone lied about it, he can be held
liable for that action. It should be
notarized.
What actions will the SEC perform after it
receives the verified request for
dissolution?
- A: The commission shall accept the
request and issue a certificate of
dissolution.
- A: From the law, Within fifteen (15) days
from receipt of the verified request for
dissolution, and in the absence of any
withdrawal within said period, the
Commission shall approve the request
and issue the certificate of dissolution.
The dissolution shall take effect only
upon the issuance by the Commission of
a certificate of dissolution.
Notes:
- Usually this kind of event happens when
in the process of organization and then
all of a sudden before they close any deal
with a third person, they decides to quit.
So, they may have thought all of a
sudden that they don’t fit to work
together so they already quit in which
case no creditors are affected.
- It is not allowed that the company will
just quit all of a sudden, they still need to
undergo Voluntary Dissolution.
o b. Involuntary Dissolution
It can be the government like
the SEC can revoke the
Certificate of Incorporation
which can lead to dissolution.
2. Voluntary Dissolution where there are
creditors affected
Q: What is the required vote to dissolve?
- A: Majority of the directors and trustees
and 2/3 of the outstanding capital stock
o Additional Q: Why is that in this
part the required vote is 2/3 but
when there are no creditors are
affected, majority will suffice?
What is the difference in the
threshold that should be met
before dissolution takes place?
A: (2/3 is more difficult to achieve
than the majority) The rationale
here is that if its 2/3, it means it’s a
higher threshold meaning there
must be really that kind of
decision and it’s not just a simple
decision wherein the majority will
win. Because, in that the threshold
is very slim.
-* Remember that 51% opposed
to 49% is still majority. So, in that
kind of voting, it is okay for there
are no creditors affected. When
there are creditors affected, it
means that you have an obligation
on them. Also, you are already
expecting a profit from them.
Why? The creditors doesn’t only
speak to the people whom you
borrowed money with, these are
also obligees meaning persons
who you contracted with that
you’ll do something with
expectation of returns.
-* For example: You’ll be creating
a bridge, in return you’ll be
earning money from it.
-* So, the other stockholders may
not be so keen in dissolving yet,
they still haven’t earned
something but then the company
50
 will already be dissolved. That was
not the reason why they invested
the money.
-* The point is that there are more
people involved, there are more
things at stake and so therefore,
2/3 is the best mode of voting
rather than majority.
-* Here you’ll be needing at least
67%, it is to really ensure that it is
what the company wants.
Q: Should there be a meeting?
- A: It depends on the by-laws but
technically speaking there should be a
meeting. If the by-laws allow other means
of participating in the meeting, it is
allowed.
Q: Should there be a prior notice, how
many days? Publication, where?
- A: Yes there should be. Here you need
to publish at least once a week for three
consecutive weeks.
o Additional Q: Why is it that here,
it’s once a week for three
consecutive weeks?
A:
Q: What does the corporation file with
the SEC?
- A: You’ll file a petition not a request.
o Additional Q: When the SEC gets
the petition, will they immediately
grant the petition?
A: If the petition is sufficient in
form and substance, the
Commission shall, by an order
reciting the purpose of the
petition, fix a deadline for filing
objections to the petition which
date shall not be less than thirty
(30) days nor more than sixty (60)
days after the entry of the order.
o Additional Q: Who will file the
objection?
A: The creditors. The people who
are affected by the petition. Why?
What are the possible objections
they will make?
-* They may say that they should
not dissolve for they may be using
it to evade their liabilities. Also, if
for example they have a debt and
they stated a wrong figure so that
can be a reason for objection.
Q: What actions will the SEC perform?
SEC. 133. Methods of Dissolution. – A
corporation formed or organized under the
provisions of this Code may be dissolved
voluntarily or involuntarily.
SEC. 134. Voluntary Dissolution Where No
Creditors are Affected. – If dissolution of a
corporation does not prejudice the rights of any
creditor having a claim against it, the dissolution
may be effected by majority vote of the board of
directors or trustees, and by a resolution
adopted by the affirmative vote of the
stockholders owning at least majority of the
outstanding capital stock or majority of the
members of a meeting to be held upon the call of
the directors or trustees.
At least twenty (20) days prior to the meeting,
notice shall be given to each shareholder or
member of record personally, by registered mail,
or by any means authorized under its bylaws
whether or not entitled to vote at the meeting, in
the manner provided in Section 50 of this Code
and shall state that the purpose of the meeting is
to vote on the dissolution of the corporation.
Notice of the time, place, and object of the
meeting shall be published once prior to the
date of the meeting in a newspaper published in
the place where the principal office of said
corporation is located, or if no newspaper is
published in such place, in a newspaper of general
circulation in the Philippines.
A verified request for dissolution shall be filed
with the Commission stating: (a) the reason for
the dissolution; (b) the form, manner, and time
when the notices were given; (c) names of the
stockholders and directors or members and
trustees who approved the dissolution; (d) the
date, place, and time of the meeting in which the
vote was made; and (e) details of publication.
The corporation shall submit the following to the
Commission: (1) a copy of the resolution
authorizing the dissolution, certified by a
majority of the board of directors or trustees and
countersigned by the secretary of the
corporation; (2) proof of publication; and (3)
favorable recommendation from the appropriate
regulatory agency, when necessary.
Within fifteen (15) days from receipt of the
verified request for dissolution, and in the
absence of any withdrawal within said period,
the Commission shall approve the request and
issue the certificate of dissolution. The
dissolution shall take effect only upon the
issuance by the Commission of a certificate of
dissolution.
No application for dissolution of banks, banking
and quasi-banking institutions, preneed,
51
insurance and trust companies, NSSLAs,
pawnshops, and other financial intermediaries
shall be approved by the Commission unless
accompanied by a favorable recommendation of
the appropriate government agency.
SEC. 135. Voluntary Dissolution Where
Creditors are Affected; Procedure and
Contents of Petition. Where the dissolution of a
corporation may prejudice the rights of any
creditor, a verified petition for dissolution shall
be filed with the Commission. The petition shall
be signed by a majority of the corporation’s board
of directors or trustees, verified by its president
or secretary or one of its directors or trustees, and
shall set forth all claims and demands against it,
and that its dissolution was resolved upon by the
affirmative vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or at least two-
thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose.
The petition shall likewise state: (a) the reason for
the dissolution; (b) the form, manner, and time
when the notices were given; and (c) the date,
place, and time of the meeting in which the vote
was made. The corporation shall submit to the
Commission the following: (1) a copy of the
resolution authorizing the dissolution, certified
by a majority of the board of directors or trustees
and countersigned by the secretary of the
corporation; and (2) a list of all its creditors.
If the petition is sufficient in form and substance,
the Commission shall, by an order reciting the
purpose of the petition, fix a deadline for filing
objections to the petition which date shall not
be less than thirty (30) days nor more than
sixty (60) days after the entry of the order.
Before such date, a copy of the order shall be
published at least once a week for three (3)
consecutive weeks in a newspaper of general
circulation published in the municipality or city
where the principal office of the corporation is
situated, or if there be no such newspaper, then in
a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for
three (3) consecutive weeks in three (3) public
places in such municipality or city.
Upon five (5) days’ notice, given after the date on
which the right to file objections as fixed in the
order has expired, the Commission shall
proceed to hear the petition and try any issue
raised in the objections filed; and if no such
objection is sufficient, and the material
allegations of the petition are true, it shall render
judgment dissolving the corporation and
directing such disposition of its assets as justice
requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation.
The dissolution shall take effect only upon the
issuance by the Commission of a certificate of
dissolution.
 Can the corporation withdraw its
request/petition for dissolution?
- A: They can withdraw the request for
dissolution.
o Additional Q: What is the
required vote if they will withdraw
the decision?
A: Whatever way they used to
approve the dissolution, they’ll
use the same method for the
voting to withdraw.
 Until when can the corporation withdraw
its decision to dissolve?
- A: The withdrawal shall be submitted no
later than fifteen (15) days from receipt
by the Commission of the request for
dissolution.
 Is the SEC bound to approve the
withdrawal?
- A: Upon receipt of a withdrawal of
request for dissolution, the Commission
shall withhold action on the request for
dissolution and shall, after investigation:
(a) make a pronouncement that the
request for dissolution is deemed
withdrawn;
(b) direct a joint meeting of the board of
directors or trustees and the stockholders
or members for the purpose of
ascertaining whether to proceed with
dissolution; or
(c) issue such other orders as it may deem
appropriate.
- Notes: The SEC will conduct an
investigation for there maybe factions
within the corporation who wants to
have dissolution and those that do not.
o Also, the SEC want to ensure that
all documents are in order.
SEC. 137. Withdrawal of Request and Petition
for Dissolution. – A withdrawal of the request for
dissolution shall be made in writing, duly verified
by any incorporator, director, trustee,
shareholder, or member and signed by the same
number of incorporators, directors, trustees,
shareholders, or members necessary to request
for dissolution as set forth in the foregoing
sections. The withdrawal shall be submitted no
later than fifteen (15) days from receipt by the
Commission of the request for dissolution.
Upon receipt of a withdrawal of request for
dissolution, the Commission shall withhold action
on the request for dissolution and shall, after
investigation: (a) make a pronouncement that
the request for dissolution is deemed
52
withdrawn; (b) direct a joint meeting of the
board of directors or trustees and the
stockholders or members for the purpose of
ascertaining whether to proceed with
dissolution; or (c) issue such other orders as it
may deem appropriate.
A withdrawal of the petition for dissolution
shall be in the form of a motion and similar in
substance to a withdrawal of request for
dissolution but shall be verified and filed prior
to publication of the order setting the
deadline for filing objections to the petition.
Dissolution by shortening corporate term
- In a way, shortening the corporate term
is a mode of dissolution. Because, in the
revised code, corporation is now
perpetual.
- Q: Can the corporation opt to have a
shorter period?
A: Yes and upon the arrival of that period,
the corporation will be dissolved.
- For example: A corporation only wants
the corporation to last for 50 years but he
can still opt to shorten this to 10 years.
1. What is the required vote?
- Majority of the board and then ratified by
the 2/3 of the outstanding capital stock.
- 2/3 of the outstanding capital stock is
needed because the first thing that will
be done is amending the articles of
incorporation.
2. Who votes? Notice? Publication? How is
this done?
- Yes it is needed.
SEC. 136. Dissolution by Shortening Corporate
Term. – A voluntary dissolution may be effected
by amending the articles of incorporation to
shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended
articles of incorporation shall be submitted to the
Commission in accordance with this Code.
Upon the expiration of the shortened term, as
stated in the approved amended articles of
incorporation, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of this
Code on liquidation.
In the case of expiration of corporate term,
dissolution shall automatically take effect on
the day following the last day of the corporate
term stated in the articles of incorporation,
without the need for the issuance by the
Commission of a certificate of dissolution.
 What are the grounds for involuntary
dissolution?
- If the corporation becomes inactive for 5
consecutive years.
SEC. 138. Involuntary Dissolution. – A
corporation may be dissolved by the Commission
motu proprio or upon filing of a verified
complaint by any interested party. The following
may be grounds for dissolution of the
corporation:
(a) Non-use of corporate charter as provided
under Section 21 of this Code;
(b) Continuous inope ration of a corporation as
provided under Section 21 of this Code;
(c) Upon receipt of a lawful court order dissolving
the corporation;
(d) Upon finding by final judgment that the
corporation procured its incorporation through
fraud;
(e) Upon finding by final judgment that the
corporation:
(1) Was created for the purpose of committing,
concealing or aiding the commission of securities
violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices;
(2) Committed or aided in the commission of
securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt practices,
and its stockholders knew; and
(3) Repeatedly and knowingly tolerated the
commission of graft and corrupt practices or
other fraudulent or illegal acts by its directors,
trustees, officers, or employees.
If the corporation is ordered dissolved by final
judgment pursuant to the grounds set forth in
subparagraph (e) hereof, its assets, after payment
of its liabilities, shall, upon petition of the
Commission with the appropriate court, be
forfeited in favor of the national government.
Such forfeiture shall be without prejudice to the
rights of innocent stockholders and employees for
services rendered, and to the application of other
penalty or sanction under this Code or other laws.
The Commission shall give reasonable notice to,
and coordinate with, the appropriate regulatory
agency prior to the involuntary dissolution of
companies under their special regulatory
jurisdiction.
Note:
- The point here is that there are also
causes for dissolution which are triggered
53
 not by the stockholders themselves but
more so by the government.
 What happens after the corporation is
dissolved?
- It’s the winding up phase. In this phase,
you settle obligations with the creditors.
 Can the corporation still enter into
contracts during winding-up stage?
- You cannot enter into new contracts but
if you have contracts which you have
made before the dissolution then that
can be allowed.
 What happens during the winding-up
period?
- Termination
 What happens after the corporation has
winded-up?
 How many years can a corporation wind-
up its affairs? Is there an exception to this
rule?
- A corporation can wind-up its affairs for
3 years.
 What is liquidation?
- You convert the assets into cash.
- [Definition in the PPT] It is the process by
which all the assets of the corporation are
converted into liquid assets in order to
facilitate the payment of obligations to
creditors, and the remaining balance if
any is to be distributed to the
stockholders.
SEC. 139. Corporate Liquidation. – Except for
banks, which shall be covered by the applicable
provisions of Republic Act No. 7653, otherwise
known as the “New Central Bank Act”, as
amended, and Republic Act No. 3591, otherwise
known as the Philippine Deposit Insurance
Corporation Charter, as amended, every
corporation whose charter expires pursuant to its
articles of incorporation, is annulled by forfeiture,
or whose corporate existence is terminated in any
other manner, shall nevertheless remain as a
body corporate for three (3) years after the
effective date of dissolution, for the purpose of
prosecuting and defending suits by or against it
and enabling it to settle and close its affairs,
dispose of and convey its property, and distribute
its assets, but not for the purpose of continuing
the business for which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to
convey all of its property to trustees for the
benefit of stockholders, members, creditors
and other persons in interest. After any such
conveyance by the corporation of its property
in trust for the benefit of its stockholders,
members, creditors and others in interest, all
interest which the corporation had in the
property terminates, the legal interest vests in
the trustees, and the beneficial interest in the
stockholders, members, creditors or other
persons-in-interest.
Except as otherwise provided for in Sections 93
and 94 of this Code, upon the winding up of
corporate affairs, any asset distributable to any
creditor or stockholder or member who is
unknown or cannot be found shall be escheated in
favor of the national government.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation
shall distribute any of its assets or property
except upon lawful dissolution and after payment
of all its debts and liabilities.
 Can the corporation extend its winding up
phase? If so, until when?
- Remember that a corporation has only 3
years to wind up and what the
corporation do is that within that 3 years,
they will transfer to a trustee, the
ownership of the properties. Once the
trustees owns the properties now, it can
now go beyond 3 years. The trustee is
simply holding the property in trust, in
favor of the creditor. So if you do this, the
transferring of the properties to a trustee
and make it explicit that it is his duty to
hold the properties in favor of the
creditors, then that could be done. The
trustee can hold onto or manage the
properties for a indefinite number of
years.
o Additional Q: You know who’ll you
be paying however you cannot
find that person? What can be the
case that will be filed by the
corporation?
A: The proceeding that you file in
case the creditor does not appear
after so many years and there is
reason to believe that he no
longer exists or dead and no
known heirs - escheat
proceedings.
What is Escheat?
A: It is when you hand over the
properties to the government.
Q: Why would it go to the
environment?
54
 A: Remember that escheat is
the same when you amass so
much properties and you don’t
have heirs. It will go to the
government. This is under the
theory that if it weren’t for the
PH government, you would not
have had the opportunity to
amass such wealth. If the
government did not give you
an environment wherein you’ll
gain profits, then you won’t
have profits at all. So, in a
sense, you owe it to the general
to return that particular
property in case you are no
longer interested or there are
no known persons that can
collect those.
 Is dissolution the same as rehabilitation?
- No, they are not the same.
Rehabilitation connotes a reopening or
reorganization. Contemplates a continuance of
corporate existence in an effort to restore the
corporation to its former successful operation.
Purpose: To make the corporation financially
viable again.
Ground for rehabilitation:
1. When there is imminent danger of
dissipation or wastage of corporate
assets
2. Serious paralyzation of business which
would work to the prejudice of the
stockholders and creditors of the
corporation.
*Mere misconduct of an officer is not a ground
for corporate rehabilitation.
*A corporation cannot ask for corporate
rehabilitation and at the same time dissolution.
Notes:
- So, instead of dissolving the corporation,
the company can file for rehabilitation. In
that rehabilitation, there must be a plan
on how to like revive the company then
they’ll appoint a receiver.
- A receiver can either be a liquidating
receiver or rehabilitation receiver.
- Liquidating Receiver is for dissolution
then Rehabilitation receiver is for the
rehabilitation of the company.
o The rehabilitation receiver must be
carefully chosen because he will
have so much power to control the
things that must be done to be
able to rehabilitate the company.
He also has the power to override
the decision made by the board, if
he thinks it is needed to be able to
revive the corporation.
What is a Stay Order?
It stops or suspends the enforcement of all
claims for money or otherwise whether
enforcement is by court or not, until
rehabilitation proceedings are terminated.
Notes:
- An order usually from the SEC or BSP. It
is usually issued in the banks.
o If you recall in COBLAW1, bank
deposits are not really deposits
per se, they are loans
o For example: When you go to a
bank and you surrender money
amounting to 100K then you
deposit it. The question is that if is
it a contract of deposit? The
money you surrendered is not
really a deposit per se. A deposit,
for example when you surrender a
car, you expect that you can get
the car again (*that was just safe
keeping) That is the definition of
deposit. Here, when you surrender
money to the bank, it’s more of
like you lent the bank money. SO,
the bank becomes a debtor and
the depositor becomes the
creditor.
- The stay order is an order to stop the
company from paying its debts for a
certain period of time.
- Obviously, this is not the same with
dissolution because here you’ll only order
for it to be stopped.
 How are the corporate assets of a non-
stock corporation distributed?
SEC. 93. Rules of Distribution. – The assets of a
nonstock corporation undergoing the process of
dissolution for reasons other than those set forth
in Section 139 of this Code, shall be applied and
distributed as follows:
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(a) All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be made
therefor;
(b) Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements;
(c) Assets received and held by the corporation
subject to limitations permitting their use only for
charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
requiring return, transfer or conveyance by
reason of the dissolution, shall be transferred or
conveyed to one (1) or more corporations,
societies or organizations engaged in
activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution adopted
pursuant to this Chapter;
(d) Assets other than those mentioned in the
preceding paragraphs, if any, shall be distributed
in accordance with the provisions of the articles
of incorporation or the bylaws, to the extent that
the articles of incorporation or the bylaws
determine the distributive rights of members, or
any class or classes of members, or provide for
distribution; and
(e) In any other case, assets may be distributed to
such persons, societies, organizations or
corporations, whether or not organized for profit,
as may be specified in a plan of distribution
adopted pursuant to this Chapter.
Notes:
- The remaining properties of a dissolving
non-stock corporation shall be
transferred or conveyed to one (1) or
more corporations, societies or
organizations engaged in activities in the
Philippines substantially similar to those
of the dissolving corporation according to
a plan of distribution adopted pursuant to
this Chapter;
- So for example, Bantay Bata 163
dissolved, educational materials or other
equipment’s left will be given to other
homes/orphanages like for children and
infants for they are places who have
similar purposes with the corporation.
8th Synch Class
 What are foreign corporations?
SEC. 140. Definition and Rights of Foreign
Corporations. – 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.
- We do not simply recognize foreign
corporations only because they have
been incorporated in some other
country, the qualifying factor is that they
must have been existing under the laws
of another country and that country
allows Filipinos and Filipino Corporations
to do business there.
Q: How come PH adapts this kind of policy? Why
are we only recognizing countries who are
willing to also do such for the PH?
A: The point is that if this provision is not here
and then we allow foreign corporations to do
business here even though their country
prevents us from doing business there, we
would be at a great disadvantage. What
happens is that we cannot earn profits from their
country but they can here in the PH. At the same
time if this what happens, our foreign
corporations ay malulugi because foreign corps
can penetrate in the country with ease but when
our foreign corporations who will also do the
same in their country will not be allowed. That’s
why as much as possible we only extend the
same courtesy, if they are willing to do the same
for us.
- This is also called the laws on reciprocity.
 What are the tests to determine a
corporation’s nationality?
- There are three tests used to determine:
Incorporation Test, Control Test and
Grandfather Rule
o Incorporation Test - kung saan
siya naincorporate, that is the
corporation’s nationality.
[Definition in the PPT]
 Corporation’s citizenship is where the
corporation is incorporated.
Example: If a corporation was
incorporated in the PH then it’s
nationality is Filipino
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 Example: If a corporation was
incorporated in China then it’s
nationality is Chinese
o Control Test - Instead of looking at
the papers (Articles of
Incorporation), we look at the
equity.
[Definition in the PPT]
 The citizenship of a particular
corporation is to be determined by
the citizenship of the controlling
stockholders
Example: Majority of those
shares belong to a particular
individual whose nationality is
this then it would be deemed
as that nationality.
This is usually used when we
are in conflict with another
country.
o Grandfather Rule - to arrive at
Filipino ownership, both the direct
and indirect shareholding in the
corporation is determined. Used
by the court as supplement to
determine citizenship when the
attendant circumstances raise
doubts as to Filipino equity.
Scenario:
The Facts on this Scenario
Fact No.1: X Corp was incorporated in the
Philippines, and its 40% equity is owned by
Foreigners, 40% by Filipino individuals, and 20%
by Y corp.
Foreigners = 40%
Filipino Individuals = 40%
Y Corp = 20%
Fact No. 2: Y Corp. is a Filipino corporation under
the incorporation test
Let’s examine X Corp. under the GF Rule.
If Y is 60% Filipino and 40% Foreigner. That
means the 7% of Y’s 20% is foreign owned (40%
of 30 = 8%
So X Corp. is 48% Foreign-owned and 52%
Filipino-owned
Notes:
- If we simply apply the Incorporation Test
& Control Test, X Corp. is a Filipino
Corporation. (If we will just look in the
skin then X Corp. has Filipino Nationality)
- However, we have to apply the
grandfather rule as there is a doubt to
what really is the nature of the citizenship
or the nationality of the corporation.
- If to apply the grandfather rule, 52%
Filipino and 48% Foreign.
Q: What if the required equity under the law
says it should be 60-40 because it’s a mining
company? Was the equity requirement
breached?
A: Yes because in the example the foreign
corporation owns 48% instead of just 40%.
- So, we simply broke down the parts to be
able to understand more of the
corporation. That is the GF rule. We don’t
simply look at the direct shareholdings,
we also see the attained direct.
 If a foreign corporation wants to do
business in the Philippines, what should it
do?
- The corporation should have License to
Operate and Certificate of Authority.
SEC. 140. Definition and Rights of Foreign
Corporations. – 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.
- License to Operate (LTO) is really the
license of a foreign corporation if they
were to do business here in the country.
- The thing is the SEC would tell you that
before you even dream of procuring a
license with us, you must first get a
certificate of authority from the
appropriate government agency.
 What is doing business? How are we
supposed to know if a company is doing
business?
- There are two tests, the substance test
and continuity test.
Substance Test
- Provides that: a foreign corporation is
doing business in the country if it is
57
 continuing the body or substance of the
enterprise of business for which it was
organized.
- When you say substance test, the
substance or the bulk of the services or
the goods or the functions of the
operations are being held here in the
Philippines.
- Example: Japanese Airlines. They have a
telemarketer here in the country. They
were asked by the PH to pay taxes
because they are earning here in the
Philippines. The reasoning of Japanese
Airlines is that the ticket still comes from
Japan and tickets are sent to their
customers via email.
Q: Is Japanese Airlines doing business
here in the PH?
A: SC rules yes it is doing business here in
the Philippines. If it weren’t for the
telemarketers, they wouldn’t have been
able to sold tickets and earn money. So,
what happened after is that they were
held doing business here in the
Philippines and they were assessed of
taxes. That is substance test.
Continuity Test
- Provides that: doing business implies a
continuity of commercial dealings and
arrangements, and contemplate to some
extent the performance of acts or works
or the exercise of some functions
normally incident to and in progressive
prosecution of, the purpose and object of
its organization.
- Under the National Internal Revenue
code as amended, the requirement is that
if a person is a non-resident alien (not yet
a Filipino) but he was doing business here
in the PH for a period of 6 months or
more in a year whether continuous or
broken is deemed to be doing business
here in the Philippines.
- For example: January to March then you
return June then stayed up to September,
even though there is a break within the
timeline, it was more than 6 months so
you are deemed to have done business
here in the Philippines.
 What will happen should a corporation
NOT procure a license to operate nor
certificate of authority, before it does
business in the Philippines?
- They cannot sue but they can be sued.
SEC. 150. Doing Business Without a License. –
No foreign corporation transacting business in
the Philippines without a license, or its successors
or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines;
but such corporation may be sued or proceeded
against before Philippine courts or administrative
tribunals on any valid cause of action recognized
under Philippine laws.
Take Note:
- If the corporation is not licensed to do
business in the Philippines, but does so
anyway, they cannot sue, but they can be
sued.
General Rule: They have no access in Philippine
Courts. BUT THEY Can be sued.
Exceptions:
1. Isolated transaction (one time transactions)
2. Infringement of Intellectual Property
*International offense can be sued
anywhere.
3. Non-business transactions
 How to obtain a license to operate?
- See procedure outlined in Sections 142
and 143.
Highlights:
1. Submission to SEC of foreign corp.’s
articles of incorporation and bylaws,
certified in accordance with law, and their
translation to an official language in
accordance with law, and their translation
to an official language of the Philippines,
if necessary.
2. Appointment of its resident agent
SEC. 144. Who May be a Resident Agent. – A
resident agent may be either an individual
residing in the Philippines or a domestic
corporation lawfully transacting business in
the Philippines: Provided, That an individual
resident agent must be of good moral
character and of sound financial standing:
Provided, further, That in case of a domestic
corporation who will act as a resident agent,
it must likewise be of sound financial standing
and must show proof that it is in good
standing as certified by the Commission.
What are the functions of a resident agent?
- on whom summons and other legal
processes may be served in all actions or
other legal proceedings against such
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 corporation, and consenting that service
upon such resident agent shall be
admitted and held as valid as if served
upon the duly authorized officers of the
foreign corporation at its home office
3. Attestation by the President that the
applicant is solvent and in sound financial
condition.
- Attestation is simply a president saying
something that is documented and
usually notarized.
4. Within sixty (60) days after the issuance
of the license to transact business in the
Philippines, the license shall provide the
SE C with securities.
SEC. 145. Resident Agent; Service of Process. –
As a condition to the issuance of the license for a
foreign corporation to transact business in the
Philippines, such corporation shall file with the
Commission a written power of attorney
designating a person who must be a resident of
the Philippines, on whom summons and other
legal processes may be served in all actions or
other legal proceedings against such corporation,
and consenting that service upon such resident
agent shall be admitted and held as valid as if
served upon the duly authorized officers of the
foreign corporation at its home office.
 What if the Resident Agent cannot be
found, to whom will the summons be
served?
SEC. 145. Such foreign corporation shall likewise
execute and file with the Commission an
agreement or stipulation, executed by the proper
authorities of said corporation, in form and
substance as follows: “The (name of foreign
corporation) hereby stipulates and agrees, in
consideration of being granted a license to
transact business in the Philippines, that if the
corporation shall cease to transact business in the
Philippines, or shall be without any resident agent
in the Philippines on whom any summons or
other legal processes may be served, then service
of any summons or other legal process may be
made upon the Commission in any action or
proceeding arising out of any business or
transaction which occurred in the Philippines and
such service shall have the same force and effect
as if made upon the duly authorized officers of the
corporation at its home office.”
- If the resident agent cannot be found then
the summon will be served to the SEC.
 If a corporation amends its articles of
incorporation or by-laws, should they be
approved by the SEC first before they come
into effect?
- They do not need to seek approval from
the SEC. They only need to notify the SEC.
This is the general rule.
SEC. 147. Amendments to Articles of
Incorporation or Bylaws of Foreign
Corporations. – Whenever the articles of
incorporation or bylaws of a foreign corporation
authorized to transact business in the Philippines
are amended, such foreign corporation shall,
within sixty (60) days after the amendment
becomes effective, file with the Commission, and
in the proper cases, with the appropriate
government agency, a duly authenticated copy of
the amended articles of incorporation or bylaws,
indicating clearly in capital letters or
underscoring the change or changes made, duly
certified by the authorized official or officials of
the country or State of incorporation. Such filing
shall not in itself enlarge or alter the purpose or
purposes for which such corporation is
authorized to transact business in the Philippines.
 When is prior approval of the SEC
necessary?
- There are two exceptions. If it wants to
change its corporate name and the
purpose.
- When changing its corporate name, it
tries to avoid having a similar or exactly
the same name with an existing business
or corporation here in the PH.
- About the purpose, because there are
different regulations for every kind of
business.
SEC. 148. Amended License. – A foreign
corporation authorized to transact business in the
Philippines shall obtain an amended license in the
event it changes its corporate name, or desires to
pursue other or additional purposes in the
Philippines, by submitting an application with the
Commission, favorably endorsed by the
appropriate government agency in the proper
cases.
 Can a foreign corporation merge with
another foreign corporation in its home
country?
SEC. 149. Merger or Consolidation Involving a
Foreign Corporation Licensed in the
Philippines. – One or more foreign corporations
authorized to transact business in the Philippines
may merge or consolidate with any domestic
corporation or corporations if permitted under
Philippine laws and by the law of its
incorporation: Provided, That the requirements
59
on merger or consolidation as provided in this
Code are followed.
Whenever a foreign corporation authorized to
transact business in the Philippines shall be a
party to a merger or consolidation in its home
country or State as permitted by the law
authorizing its incorporation, such foreign
corporation shall, within sixty (60) days after the
effectivity of such merger or consolidation, file
with the Commission, and in proper cases, with
the appropriate government agency, a copy of the
articles of merger or consolidation duly
authenticated by the proper official or officials of
the country or State under whose laws the merger
or consolidation was effected: Provided, however,
That if the absorbed corporation is the foreign
corporation doing business in the Philippines, the
latter shall at the same time file a petition for
withdrawal of its license in accordance with this
Title.
 Can a foreign corporation’s license to
operate be revoked?
SEC. 151. Revocation of License. – Without
prejudice to other grounds provided under
special laws, the license of a foreign corporation
to transact business in the Philippines may be
revoked or suspended by the Commission upon
any of the following grounds:
(a) Failure to file its annual report or pay any fees
as required by this Code;
(b) Failure to appoint and maintain a resident
agent in the Philippines as required by this Title;
(c) Failure, after change of its resident agent or
address, to submit to the Commission a statement
of such change as required by this Title;
(d) Failure to submit to the Commission an
authenticated copy of any amendment to its
articles of incorporation or bylaws or of any
articles of merger or consolidation within the
time prescribed by this Title;
(e) A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
(f) Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
or political subdivisions;
(g) Transacting business in the Philippines
outside of the purpose or purposes for which such
corporation is authorized under its license;
(h) Transacting business in the Philippines as
agent of or acting on behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
(i) Any other ground as would render it unfit to
transact business in the Philippines.
SEC. 152. Issuance of Certificate of Revocation.
– Upon the revocation of the license to transact
business in the Philippines, the Commission shall
issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate
government agency in the proper cases.
The Commission shall also mail the notice and
copy of the certificate of revocation to the
corporation, at its registered office in the
Philippines.
 Can a foreign corporation withdraw its
license to operate? What are the
requisites?
SEC. 153. Withdrawal of Foreign Corporations.
– Subject to existing laws and regulations, a
foreign corporation licensed to transact business
in the Philippines may be allowed to withdraw
from the Philippines by filing a petition for
withdrawal of license. No certificate of
withdrawal shall be issued by the Commission
unless all the following requirements are met:
(a) All claims which have accrued in the
Philippines have been paid, compromised or
settled;
(b) All taxes, imposts, assessments, and penalties,
if any, lawfully due to the Philippine Government
or any of its agencies or political subdivisions,
have been paid; and
(c) The petition for withdrawal of license has
been published once a week for three (3)
consecutive weeks in a newspaper of general
circulation in the Philippines.
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