1

COMPARISON PARTNERSHIP CORPORATION

Manner of Creation By mere agreement of the parties By law or operation of law

No. of Parties At least 2 persons Not more than 15

New Law: One Person Corporation is allowed
Old Law: At least 5 incorporators

Commencement of Execution of the contract From the date of issuance of the Certificate of
Juridical Personality Incorporation by the SEC

Powers May exercise powers authorized Can exercise only the powers expressly granted
by partners provided the same are not contrary to by law or incident to its existence
law, morals, good customs, public policy or public
order.

Liability Partners (except limited partners) are liable Stockholders are liable only to the extent of their
personally and subsidiarily for partnership debts to investments as represented by the shares
third persons subscribed by them
Important: Veil of Corporate Fiction applies only to
a Corporation

Management Absence of any agreement, every partner is an Power to do business is vested in the Board of
agent of the partnership Directors (BOT) or Board of Trustees

Transferability of Needs consent of all partners (based on delectus Does not need prior consent of the stockholders
Interest personae)

Ability of Owners to Generally, partners acting on behalf of the Generally, stockholders cannot bind corporation
Bind the Firm partnership are agents thereof since its official acts are through a board of
directors

Right of Succession No right of succession (Death, retirement, There is right of succession

insolvency, civil interdiction, or insanity of a partner
dissolves the partnership)

Term of Existence May be established for any period of time May not be formed for a term in excess of 50 years
stipulated by the partners extendible to not more than 50 years. (Now with
perpetual existence under the Revised Corporation
Code)

Firm Name A limited partnership is required to add the word A corporation may adopt a firm name provided it is
‘Ltd.’ to its name not identical or deceptively similar to any
registered firm name or contrary to existing laws

Dissolution May be dissolved at any time by the will of any or May only be dissolved with the consent of the state
all partners

Governing Laws Civil Code Corporation Code

Remedies in Case of A partner can sue another partner who A stockholder cannot sue a director who
Mismanagement mismanages mismanages, it must be in the name of the
corporation, through a derivative suit.

Nationality A partnership is a national of the country where it Generally, under whose laws it was and created as
was created, and dependent on percentage of to whether domestic or foreign, and as to
ownership nationality, on the ownership of the outstanding
capital stock
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CHAPTER 1

PARTNERSHIP
ARTICLE 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the
exercise of a profession.

Other Definition
● A partnership is a contract of two or more competent persons to place their money, effects, labor and skill, or some or all of
them, in lawful commerce or business and to divide the profits and bear the losses in certain proportions.
● A partnership is an association of two or more persons to carry on as co-owners of a business for profit.
● A partnership is a legal relation based upon the express or implied agreement of two or more competent persons whereby
they unite their property, labor or skill in carrying on some lawful business as principals for their joint profit.
● A partnership is the status arising out of a contract entered into by two or more persons whereby they agree to share as
common owners the profits of a business carried on by all or any of them on behalf of all of them.
● A partnership is an organization for production of income to which each partner contributes one or both of the ingredients of
income, which are capital or service.
● A partnership is an entity, distinct and apart from the members composing it, and, for the purpose of which it was created, it is
a person having its own assets and liabilities and any benefit or liability attaching to a member of the partnership, results from
the partnership relation.
● A partnership is a joint undertaking to share in the profit and loss.

Partnership is a legal concept, but the determination of the existence of a partnership may involve inferences drawn from an analysis of
all the circumstances attending its creation and operation. As a form of business organization, it falls between two extremes of
organizational form - the single proprietorship and the corporation.

CORPORATION
SEC. 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.
Characteristic Elements of Partnership
1. Consensual, because it is perfected by mere consent, that is, upon the express or implied agreement of two or more persons
2. Nominate, because it has a special name or designation in our law;
3. Bilateral or multilateral, because it is entered into by two or more persons and the rights and obligations arising therefrom are
always reciprocal;
4. Onerous, because each of the parties aspires to procure for himself a benefit through the giving of something;
5. Commutative, because the undertaking of each of the partners is considered as the equivalent of that of the others;
6. Principal, because it does not depend for its existence or validity upon some other contracts; and
7. Preparatory, because it is entered into as a means to an end, i.e., to engage in business or specific venture for the realization
of profits with the view of dividing them among the contracting parties.
A partnership contract, in its essence, is a contract of agency. (see Art. 1818.)

Principles Applicable
1. Affectio Societatis - desire to formulate an active union with people among whom there exist mutual confidence and trust
2. Delectus Personae (personal choices) - right to choose who to associate with

Essential Features of Partnership

1. There must be a valid contract;
a. Partnership relation fundamentally contractual
i. Form - evidenced by the terms of the contract which may be oral or written, express or implied from the acts
and declarations of the parties
ii. Articles of Partnership - stating the name, nature or purpose and location of the firm, and defining, among
others, the powers, rights, duties, and liabilities of the partners among themselves, their contributions, the
manner by which the profits and losses are to be shared, and the procedure for dissolving the partnership
iii. Requisites - Consent, Object and Cause
b. Partnership relation fiduciary in nature
i. Right to choose co-partners
ii. Power to dissolve partnership
iii. Application of principles of estoppel
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2. The parties (two or more persons) must have legal capacity to enter into the contract;
a. Unemancipated minors
b. Insane or demented persons
c. Deaf-mutes who do not know how to write
d. Persons who are suffering from civil interdiction
e. Incompetents who are under guardianship.
3. There must be a mutual contribution of money, property, or industry to a common fund;
4. The object must be lawful; and
5. The primary purpose must be to obtain profits and to divide the same among the parties.
It is also required that the articles of partnership must not be kept secret among the members; otherwise, the association shall have no
legal personality and shall be governed by the provisions of the Civil Code relating to co-ownership. (Art. 1775.)

Classifications of Partnership
1. As to the extent of its subject matter
a. Universal partnership or one which refers to all the present property or to all profits. (Art. 1777)
i. Universal partnership of all present property - A partnership of all present property is that in which the
partners contribute all the property which actually belongs to them to a common fund, with the intention of
dividing the same among themselves, as well as all the profits which they may acquire therewith. (Art. 1778)
ii. Universal partnership of profits - A universal partnership of profits comprises all that the partners may
acquire by their industry or work during the existence of the partnership. (Art. 1780)
b. Particular partnership - A particular partnership has for its object determinate things, their use or fruits, or a specific
undertaking, or the exercise of a profession or vocation. (Art. 1783)
● A husband and wife may form or be partners in a general professional partnership since a General
Professional Partnership is only a Particular Partnership for the exercise of a common profession or
occupation.
2. As to liability of the partners.
a. General partnership or one consisting of general partners who are liable pro rata and subsidiarily (Art. 1816.) and
sometimes solidarily (Arts. 1822-1824.) with their separate property for partnership debts
b. Limited partnership or one formed by two or more persons having as members one or more general partners and one
or more limited partners, the latter not being personally liable for the obligations of the partnership. (Art. 1843.)
3. As to its duration
a. Partnership at will or one in which no time is specified and is not formed for a particular undertaking or venture and
which may be terminated at anytime by mutual agreement of the partners, or by the will of any one partner alone; or
one for a fixed term or particular undertaking which is continued by the partners after the termination of such term or
particular undertaking without express agreement (see Art. 1785.)
b. Partnership with a fixed term or one in which the term for which the partnership is to exist is fixed or agreed upon or
one formed for a particular undertaking, and upon the expiration of the term or completion of the particular enterprise,
the partnership is dissolved, unless continued by the partners.
4. As to the legality of its existence
a. De jure partnership or one which has complied with all the legal requirements for its establishment (Arts. 1772, par. 2;
1773.)
b. De facto partnership or one which has failed to comply with all the legal requirements for its establishment.
5. As to representation to others
a. Ordinary or real partnership or one which actually exists among the partners and also as to third persons
b. Ostensible partnership or partnership by estoppel or one which in reality is not a partnership, but is considered a
partnership only in relation to those who, by their conduct or admission, are precluded to deny or disprove its
existence. (Art. 1825.)
6. As to publicity
a. Secret partnership or one wherein the existence of certain persons as partners is not avowed or made known to the
public by any of the partners
b. Open or notorious partnership or one whose existence is avowed or made known to the public by the members of the
firm.
7. ​As to purpose
a. Commercial or trading partnership or one formed for the transaction of business27 (Art. 1767.)
b. Professional or non-trading partnership or one formed for the exercise of a profession.
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Kinds of Partners
Partners are classified according to their interests in the partnership business, or their obligations to the partnership, or their liabilities to
third persons.
1. Under the Civil Code
a. Capitalist partner or one who contributes money or property to the common fund (Art. 1767.);
b. Industrial partner or one who contributes only his industry or personal service (Arts. 1789, 1767.);
Capitalist-industrial partners - furnishes both
c. General/real partner or one whose liability to third persons extends to his separate property; he may be either a
capitalist or industrial partner. (Arts. 1843, 1816.)
d. Limited/special partner or one whose liability to third persons is limited to his capital contribution. (Art. 1843.)
The terms “general partner” and “limited partner” have relevance only in a limited partnership;
e. Managing partner or one who manages the affairs or business of the partnership; he may be appointed either in the
articles of partnership or after the constitution of the partnership. (Art. 1800.) He is also known as general or real
partner;
f. Liquidating partner or one who takes charge of the winding up of partnership affairs upon dissolution (Art. 1836.);
g. Partner by estoppel or one who is not really a partner, not being a party to a partnership agreement, but is liable as
a partner for the protection of innocent third persons. (see Art. 1825.) He is one who is represented as being in fact a
partner, but who is not so as between the partners themselves. He is also known as partner by implication or
nominal partner. The term “quasi-partner” is sometimes used;
h. Continuing partner or one who continues the business of a partnership after it has been dissolved by reason of the
admission of a new partner, or the retirement, death, or expulsion of one or more partners (Art. 1840.);
i. Surviving partner or one who remains after a partnership has been dissolved by the death of any partner (Art. 1842.);
j. Subpartner or one who, not being a member of the partnership, contracts with a partner with reference to the latter’s
share in the partnership. (Art. 1804.)
2. Other classifications
a. Ostensible partner or one who takes active part and known to the public as a partner in the business (Art. 1834, par.
2.), whether or not he has an actual interest in the firm. Thus, he may be an actual partner or a nominal partner. If he
is not actually a partner, he is subject to liability by the doctrine of estoppel (Art. 1825.);
b. Secret partner or one who takes active part in the business but is not known to be a partner by outside parties
nor held out as a partner by the other partners (Ibid.), although he participates in the profits and losses of the
partnership. He is an actual partner. He is also an active partner in the sense that he participates in the management
of the partnership affairs;
c. Silent partner or one who does not take any active part in the business although he may be known to be a partner.
(Ibid.) Thus, he need not be a secret partner. If he withdraws from the partnership, he must give notice to those
persons who do business with the firm to escape liability in the future;
d. Dormant/sleeping partner or one who does not take active part in the business and is not known or held out as
partner. (Art. 1834, par. 2.) He would be both a silent and a secret partner. He may retire from the partnership without
giving notice and cannot be held liable for obligations of the firm subsequent to his withdrawal. His only interest in
joining the partnership would be the sharing of the profits earned.
e. Original partner or one who is a member of the partnership from the time of its organization;
f. Incoming partner or a person lately, or about to be, taken into an existing partnership as a member;
g. Retiring partner or one withdrawn from the partnership; a withdrawing partner.
All partners in any of these six classes are subject to liability for all partnership obligations.

Formal Requirements
General Rule: A partnership may be constituted in any form. (Art. 1771)
Except: A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not
made, signed by the parties, and attached to the public instrument. (Art. 1773)

Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public
instrument, which must be recorded in the Office of the Securities and Exchange Commission. (Art. 1772) This does not in any way
affect the validity of the partnership as it is intended only to affect third persons. The partnership has a juridical personality separate and
distinct from that of each of the partners, even in case of failure to comply with the requirements of article 1772, first paragraph. (Art.
1768)
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Rules on Management

ARTICLE 1800. The partner who has been appointed manager in the articles of partnership may execute all acts of administration despite the opposition
of his partners, unless he should act in bad faith; and his power is irrevocable without just or lawful cause. The vote of the partners representing the
controlling interest shall be necessary for such revocation of power.
A power granted after the partnership has been constituted may be revoked at any time. (1692a)

ARTICLE 1801. If two or more partners have been intrusted with the management of the partnership without specification of their respective duties, or
without a stipulation that one of them shall not act without the consent of all the others, each one may separately execute all acts of administration, but if
any of them should oppose the acts of the others, the decision of the majority shall prevail. In case of a tie, the matter shall be decided by the partners
owning the controlling interest. (1693a)

ARTICLE 1802. In case it should have been stipulated that none of the managing partners shall act without the consent of the others, the concurrence of
all shall be necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless there is imminent danger of
grave or irreparable injury to the partnership. (1694)

ARTICLE 1803. When the manner of management has not been agreed upon, the following rules shall be observed:
1. All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to the
provisions of article 1801.
2. None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even
if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the
partnership, the court’s intervention may be sought. (1695a)

1. When a partner has been appointed manager in the articles of partnership

a. Scope of authority - The managing partner may execute all acts of administration despite the opposition of his or her partners
unless he or she acts in bad faith.
b. Revocation of appointment of managing partner
i. With just or lawful cause - the appointment of the managing partner can be revoked by the vote of the partners owing
the controlling interest (more than 50% of the partnership capital)
ii. Without just or lawful cause - the appointment of the managing partner can be revoked only with the consent of all the
partners including the managing partner because such revocation would be a novation of the terms thereof
2. When a partner has been appointed manager after the partnership has been constituted
a. Scope of authority - The managing partner may execute all acts of administration but in case of opposition by other partners, the
partners owning the controlling interest may resort to voting for his or her removal as manager
b. Revocation of appointment of managing partner - The managing partner may be removed with or without just or lawful cause by
the vote of the partners owning the controlling interest. This is so because such partner (managing partner) is only an agent whose
authority may be revoked at any time by his or her principal which is the partnership.
3. When two or more partners have been appointed as managers
a. When there is a specification of their respective duties
i. Scope of Authority - Each managing partner shall perform only the duties specified in his or her appointment.
b. When there is no specification of their respective duties or there is no stipulation that one shall not act without the consent
of the others
i. Scope of Authority - Each managing partner may separately execute all acts of administration.
ii. Rule in case of opposition of the other managers
a. The decision of the majority of the managing partners shall prevail (per head).
b. In case of a tie, the decision of the managing partner/s owning the controlling interest shall prevail.
c. When there is a stipulation that none of the managing partners shall act without the consent of the others
a. Vote required - The concurrence of all of them shall be necessary for the validity of the acts.
b. Rule in case of absence or disability of one of the managing partners - The absence or disability
of one managing partner cannot be alleged, i.e., the other managing partners are not authorized to
act for the partnership unless there is imminent danger of grave or irreparable injury to the partnership
4. When the manner of management has not been agreed upon
a. All of the partners shall be considered agents of the partnership (all of them are managers). However, none of them, without the
consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the
partnership. But if the refusal to give consent by the other partners is manifestly prejudicial to the interest of the partnership, the
court’s intervention may be sought.
b. Whatever any one of them may do alone shall bind the partnership.
c. Rule in case of opposition of the other partners.
i. The decision of the majority shall prevail (per head).
ii. In case of a tie, the decision of the managing partner/s owning the controlling interest shall prevail.
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Obligations of Partners
I. To give his contribution
1. Amount: Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership.
2. When: As a rule, the contribution must be provided upon perfection of the contract, except if the partners stipulate otherwise.
3. Delay: A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he
should have complied with his obligation. Thus, no demand shall be necessary since the law specifically provides for the liability in case of delay.
4. A partner is likewise liable similar to a vendor:
a. He is bound to deliver the fruits thereof from the time they should have been delivered, without need of demand (Article 1786).
b. A partner must exercise due diligence in preserving the thing promised to be contributed; otherwise, he shall be liable for loss and
deterioration.
c. Warrant the thing delivered against eviction

Risk of Loss
Loss borne by the partner:
1. Thing contributed is specific and determinate which is NOT fungible and only their use and fruits may be for the common benefit; and
2. There is stipulation that he shall bear the loss of the thing brought and appraised in the inventory.
Loss borne by the partnership
1. Thing contributed are
a. Fungible
b. Cannot be kept without deteriorating
c. They were contributed to be sold
2. There was appraisal in the inventory and no stipulation that partner will bear the loss

II. To give additional contribution in case of imminent losses

In case of an imminent loss of the business of the partnership, partners are required to give additional contributions. Who are required:
1. Capitalist partners (generally required; unless there is a stipulation to the contrary)
2. Industrial partners if there is a stipulation to that effect (not generally required)
Consequence of failure: any partner who refuses to contribute an additional share to the capital to save the venture shall be obliged to sell his interest to the
other partners. (Interest: share in profits and surpluses, not capital)

III. Not to engage in another business

Industrial partners - cannot engage in business for himself except when the capital partners permit him to do so.
Effect of non-compliance: The capitalist partners may either
1. Exclude him from the firm or
2. Avail themselves of the benefits which he may have obtained in violation of this provision
Capitalist partners - the prohibition is limited to businesses in the same industry as that of the partnership which may result in competition
Exceptions
1. When it is expressly stipulated that the capitalist partner can so engage himself
2. When the other partners allow him to do so, whether expressly or impliedly;
3. During the period of liquidation and winding up, when the partnership is already non-existent.
4. When the general-capitalist partner becomes a limited partner in a competitive enterprise.
Effect of non-compliance
1. He shall bring to the partnership all the profits illegally obtained
2. He is liable, personally, for all the losses
3. He may be ousted for loss of trust and confidence

IV. Credit to the firm payment made by a common debtor to the managing partner
Rules: Applicable to a managing partner only
1. Dependent on the choice first of the debtor
2. The creditor can choose to which obligation it will apply and indicate the same in the receipt

D owed ABC partnership and A, the managing partner, P7,000 and P3,000, respectively. A was able to collect P5,000 from D.
1. If A issued a receipt in the name of the partnership, the whole amount of P5,000 will be applied to the partnership credit.
2. If A issued a receipt in his own name, the P5,000 shall be applied as follows:
a. P3,500 (P5,000 x P7,000 / P10,000) to the partnership credit
b. P1,500 (P5,000 x P3,000 / P10,000) to A’s credit.
3. The above will not apply if the debt to the managing partner is more onerous, to the debtor and the latter chooses to apply the payment to such debt.

Other obligation of a partner to the partnership and to the other partners

1. Not to convert partnership funds / property for his own use (Article 1788)
2. To account for and hold as trustee, unauthorized (or secret) personal profits (Art. 1807)
3. Pay for damages caused by his fault (Art. 1794)
4. Share with other partners the share of the partnership credit which he has received from an insolvent firm debtor (Art. 1743)
5. Keep the partnership books in the principal office (except when otherwise agreed) and allow other partners to have access, inspect and copy the same
6. Reimburse the partnership of damages suffered by it through his fault
a. The liability for damages is not compensable with profits and benefits for the partnership
b. Damages, however, may be decreased by courts if through the partner’s extraordinary efforts, the partnership earned unusual profits
7. To inform the other partners on all matters affecting the partnership or relative to partnership affairs.
8. To observe the diligence of a good father of a family in all his dealings
9. To adhere to the partnership agreement and decisions of appointed managing partner
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Obligations of a Partner to Third Persons
ARTICLE 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners. Those who,
not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner.

Firm Name
● Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners
● Strangers who include their name in the firm are liable as partners because of estoppel but do not have the rights of partners - this is to protect
customers from being misled
● If a limited partner included his name in the firm name, he shall be liable as a general partner

ARTICLE 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been
exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person
authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract.

ARTICLE 1817. Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners. (n)

A, B, C and D partners ABCD Partnership agreed on equal distribution of profits. As regards third parties, however, they exempted C, an industrial
partner. Total assets of the partnership amounted to P200,000 while the remaining liabilities to X amounts to P800,000. In this case:
1. The liabilities can be settled first through the remaining partnership assets of P200,000.
2. The P600,000 shall be borne by all partners: A, B, C and D and they shall share pro-rata (proportionally), but since nothing in the problem
indicated a different sharing agreement, or capital contributions, it shall be presumed equal. So each, may be made liable by the creditor for
P150,000 each.
3. C may also be made liable by the creditor since as to X (creditor), the stipulation exempting C is void.
4. C, however, if made to pay P150,000 can seek reimbursement from A, B and D since the agreement exempting him is valid as to the third
parties.

Authority to act for and in behalf of the partnership

Every partner is an agent of the partnership for the purpose of its business.
The authority of the partner to act in behalf of the partnership may be:
1. Express - those expressly granted to the partner
2. Implied - those which may be implied from the express authority
3. Apparent - when he apparently carries on the usual business of the partnership and the person to whom he is dealing has no knowledge of the
fact that he has no such authority.
If the partner is not carrying on the usual business of the partnership, the act will not bind the partnership unless it is authorized by the other partners.

Consent of ALL partners necessary to:

1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership
2. Dispose of the good-will of the business
3. Do any other act which would make it impossible to carry on the ordinary business of a partnership
4. Confess a judgment
5. Enter into a compromise concerning a partnership claim or liability
6. Submit a partnership claim or liability to arbitration
7. Renounce a claim of the partnership
Except when authorized by the other partners or unless they have abandoned the business.

Admissions and Notices

Admission of Partners: an admission made by one partner within the scope of his authority is evidence against the partnership
Notice to a partner: operates as notice to the partnership, except in case of fraud committed by such partner

Syllabus for Partnership

1. Partnerships (Art. 1767 – Art. 1867 of the Civil Code)
a. Nature and as distinguished from corporation
b. Kinds of partnerships
c. Formalities required (Art. 1768, 1771-1773)
d. Rules of management (Art. 1800 –1803)
e. Obligations of partners
i. To the partnership and to the partners (Art 1784 – 1808) exc. Provisions on management rules and sharing of profits and
losses
ii. To third persons (Art. 1815-1827)
f. Rights of a partner (Art. 1809 -1814)
g. Sharing of profits and losses (Art. 1797, 1798, 1799)
h. Dissolution and winding up (Art 1828 -1842)
i. Limited Partnership (Art 1843 – 1867)
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Distribution of Profits or Losses
Objective: To distribute profits and losses in the most reasonable and equitable way

ARTICLE 1797. The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been
agreed upon, the share of each in the losses shall be in the same proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial
partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital. (1689a)

To avoid complications, it is important that from the beginning, the partners create the distribution of profits or losses in writing.

Pactum Leonina: A stipulation which excludes one or more partners from any share in the profits or losses - void.

Rules for Distribution of Profits and Losses

DISTRIBUTION OF PROFITS DISTRIBUTION OF LOSSES

With agreement According to agreement According to agreement

Without agreement 1. Share of capitalist partner is in proportion to his 1. If sharing of profits is stipulated - apply to
capital contribution sharing of losses
2. Share of industrial partner is not fixed - as may 2. If no profit sharing stipulated - losses shall be
be just and equitable under the circumstances borne according to capital contribution
3. Purely industrial partner not liable for losses

As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he has
contributed capital, he shall also receive a share in the profits in proportion to his capital.
Note: Article 140 of the Code of Commerce states that an industrial partner is placed in the distribution in the same position as the capitalist partner
having the smallest interest in the partnership.

Methods of Profit Distribution

Agreements may be stated as follows:
1. Equal sharing
2. Preset ratio
3. Capital ratio
a. Original capital contribution
b. Capital at the beginning of the current period - additional investments during the accounting period may be discouraged because the
partners making such investment are not compensated in the division of income until a later period
c. Capital at the end of the current period - year-end investments are encouraged by their inclusion in determining each partner’s share
of income, but no incentive exists for a partner to make any investments before year-end. Also, no penalty exists for withdrawals if
the amounts withdrawn are reinvested before the period’s end.
d. Average capital balances - The weighted average capital balances provide the fairest basis for allocating partnership income. A
weighted average interpretation of capital should be assumed in the absence of evidence to the contrary.
i. Simple average - ( Beginning + Ending ) / 2
ii. Weighted average
4. Multiple profit allocation bases
a. Bonus to a partner and the balance to be divided equally
b. Salary allowances to partners and the remainder in an agreed ratio
c. Interest is allowed on partners’ capital and the remainder in an agreed ratio
d. Salaries to partners, interest on partner’s capital, and the remainder in an agreed ratio

ARTICLE 1798. If the partners have agreed to intrust to a third person the designation of the share of each one in the profits and losses, such
designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third
person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision.

The designation of losses and profits cannot be intrusted to one of the partners. (1690)

ARTICLE 1799. A stipulation which excludes one or more partners from any share in the profits or losses is void. (1691)
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Rights of a Partner (Art. 1809 -1814)
I. Right to share in profits
II. Property rights of a partner
A. His rights in specific partnership property - a partner is a co-owner with his partners of specific partnership property. The incidents of such
co-ownership are:
1. A partner, subject to any agreement between the partners, has an equal right with his partners to possess specific partnership property for
partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners
2. A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in
the same property
3. A partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When
partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot
claim any right under the homestead or exemption laws
4. A partner’s right in specific partnership property is not subject to legal support
B. His interest in the partnership - a partner’s interest in the partnership is his share of the profits and surplus
Effect of conveyance of a partner’s whole interest:
1. Does not, in itself, dissolve the partnership. The partnership is deemed dissolved only if there is stipulation to that effect.
2. The conveyance does not necessarily become a partner and such has no right to
a. Demand accounting and settlement
b. Interfere in the management or administration of the partnership business
c. Demand information, accounting and inspection of the partnership books
Rights of the assignee/conveyee
1. To get profits the assignor-partner would have obtained
2. To avail of the usual remedies in case of fraud in the management
3. Receive assignor’s interest in the event of a dissolution
Partner’s interest may be subject to a charge or attachment by the court
1. Only the profits and surplus of the partner and not his share in the specific properties of the partnership but priority is still given to creditors
of the partnership
2. Such interest may be redeemed prior to foreclosure with
a. The separate property of any one or more of the partners
b. Partnership property with the consent of all the other partners
C. His right to participate in the management (Rules of Management)
III. Other Rights of a Partner
A. To associate with another person in his share (Art. 1804) - every partner may associate another person with him in his share, but the associate
shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager
B. To inspect and copy partnership books (Art. 1805) - the partnership books shall be kept in the principal place of business unless otherwise agreed
C. To demand a formal account (Art. 1809) in the following cases:
1. A partner was wrongfully excluded from the partnership business or possession of its property by his co-partners
2. When there is a stipulation granting such right
3. As to information affecting partnership affairs, such as secret profits earned by other partners
D. To ask for a dissolution of the firm at the proper time (Art. 1830-31) and the right to return of capital and advancements - subject to the rules of
distribution of partnership assets during liquidation
E. Right to compensation - exists only when there is an agreement or stipulation granting such right or entitlement
F. Right to reimbursement - the partnership is responsible to every partner for the amounts he may have disbursed on behalf of the partnership and for
the corresponding interest from the time the expense was made

Rules of Management (Art. 1800 –1803)

One managing partner
Managing partner in the Articles of Partnership: May execute all acts of administration, in good, even with opposition from the other partners;
The power to execute all acts of administration can only be revoked if
1. With just or lawful cause
2. By a vote of the partners representing the controlling interest

Managing partner AFTER partnership has been constituted: The power as manager may be revoked by a vote of the partners representing the controlling interest even
without just or lawful cause.

II. Multiple managing partners

1. With stipulation that no managing partner may act without the consent of the others - no one can perform an act of administration without the others’
consent
2. Specification of duties - each managing partner can perform an act of administration within their respective duties
3. Without specification of their respective duties, or without a stipulation that one of them shall not act without the consent of all the others
a. Each managing partner may separately execute all acts of administration
b. Should one of the managing partners oppose the act of another, the matter shall be decided by a majority of the managing partners per head count
c. Should there be a tie in the votes of the managing partners, the controlling interest of ALL the partners shall prevail

No managing partner: with stipulation that no partner cannot act without the support of partners
The concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged.
Except: If there is imminent danger or grave or irreparable injury to the partnership.

No agreement as to management
All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of Article 1801 (on
Multiple Managing Partners)
Except: None of the partners may, without the consent of others, make any important alteration in the immovable property of the partnership, even if it may be useful to the
partnership.
Exception to the exception: If the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may be sought.
 10
Dissolution and Winding Up (Art 1828 -1842)
ARTICLE 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (n)

ARTICLE 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. (n)

Three Final Stages

1. Dissolution (Art. 1828) - change in the relation of the partners caused by any partner ceasing to be associated in the carrying of the business;
partnership is not terminated but continues until the winding up of partnership affairs is completed
2. Winding up (Article 1829) - process of settling the business or partnership affairs after dissolution
3. Termination - that point when all partnership affairs are completely wound up and finally settled; signifies the end of the partnership life

EXTRA-JUDICIAL CAUSES
ARTICLE 1830. Dissolution is caused:
1. Without violation of the agreement between the partners:
a. By the termination of the definite term or particular undertaking specified in the agreement;
b. By the express will of any partner, who must act in good faith, when no definite term or particular undertaking is specified;
c. By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either
before or after the termination of any specified term or particular undertaking;
d. By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the
partners;
2. In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this
article, by the express will of any partner at any time;
3. By operation of law
a. By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership;
b. When a specific thing, which a partner had promised to contribute to the partnership, perishes before the delivery; in any case by the loss of
the thing, when the partner who contributed it having reserved the ownership thereof, has only transferred to the partnership the use or
enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquired
the ownership thereof;
c. By the death of any partner;
d. By the insolvency of any partner or of the partnership;
e. By the civil interdiction of any partner;
f. By decree of court under the following article. (1700a and 1701a)
Note: Insanity is not an extrajudicial cause. It is a sub-judicial cause.The extrajudicial declaration of insanity is required in dissolution of partnership.

JUDICIAL CAUSES
ARTICLE 1831. On application by or for a partner the court shall decree a dissolution whenever:
1. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
2. A partner becomes in any other way incapable of performing his part of the partnership contract;
3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
4. A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the
partnership business that it is not reasonably practicable to carry on the business in partnership with him;
5. The business of the partnership can only be carried on at a loss;
6. Other circumstances render a dissolution equitable.

EFFECTS OF DISSOLUTION
1. The mutual agency is terminated. As a rule, the partners can no longer act to bind the partnership, subject to the following rules:
a. If the cause of dissolution is Acts, Insolvency, or Death (AID) - NOTICE should be given by the partners to terminate the mutual agency
b. If the cause is NOT AID - the mutual agency is terminated and the dissolution is binding even without notice.
2. The following acts are still binding even after dissolution:
a. Acts to for winding-up of the affairs of the partnership
b. Contracts with creditors who had no notice of the dissolution
3. The partners may continue the partnership after dissolution of the old partnership. Such continuation still dissolves the old partnership and a new
partnership is created. The creditors of the old partnerships are also creditors of the person or partnership continuing the business.

Winding Up or Liquidation - process of liquidating the partnership assets and distributing the proceeds to satisfy the claims against the partnership
● Collecting all receivables
● Paying all outstanding obligations (1. outside creditors; 2. partner who is also creditor)
● Selling the remaining assets

Liquidator
1. A party who has not wrongfully caused the dissolution
2. The legal representative of the last surviving partner (if all are dead) if not insolvent
3. The court, upon cause shown by a partner, his legal representative or assignee

Distribution of Assets - transferring of cash or property by a partnership to a partner with respect to their interest or shares in the partnership capital or income.
Will be done in the following order:
1. Those owing to creditors other than partners
2. Those owing to partners other than for capital and profits
3. Those owing to partners in respect of capital
4. Those owing to partners in respect of profits
Note: In the distribution of a Limited Partnership’s assets, priority is given to the share of partners as to the profits over their share as to capital.

Partners’ Liability
In case the assets of the partnership are not sufficient to cover the liabilities, the remaining claims may be satisfied against the separate assets of the partners.
However, where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order:
a. Those owing to separate creditors;
b. Those owing to partnership creditors;
c. Those owing to partners by way of contribution.

Some evidences that a partnership still exist: unsold goods; uncollected receivables; unpaid debts
 11
Limited Partnership (Art 1843 – 1867)
Limited partnership (Art. 1843): formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or
more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. (At least 1 general partner and 1 limited partner)
Limited liability: a limited partners’ liability is limited only to his capital contribution. Such that, after exhaustion of partnership assets, he cannot be made to contribute to
answer the remaining liabilities to third parties.

Formation: ARTICLE 1844. Two or more persons desiring to form a limited partnership shall: Sign and swear to a certificate, which shall state —
1. The name of the partnership, adding thereto the word “Limited”;
2. The character of the business;
3. The location of the principal place of business;
4. The name and place of residence of each member, general and limited partners being respectively designated;
5. The term for which the partnership is to exist;
6. The amount of cash and a description of and the agreed value of the other property contributed by each limited partner;
7. The additional contributions, if any, to be made by each limited partner and the times at which or events on the happening of which they shall be made;
8. The time, if agreed upon, when the contribution of each limited partner is to be returned;
Note, however, that the limited partner may nevertheless demand the return of is contribution:
a. After he has six months’ notice in writing to all other members, if no time is specified in the certificate, wither for the return of the contribution or for the
dissolution of the partnership
b. On the dissolution of a partnership
9. The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution;
10. The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the terms and conditions of the substitution;
However, the assignee does not necessarily become a substitute limited partner.
Substitute limited partner: person admitted to all the rights of a limited partner who has died or has assigned his interest in a partnership: Provided:
a. All the partners consent
b. The assignor (limited partner) being thereunto empowered by the certificate, gives the assignee that right.
Limited Partners’ interest or his share in the profits and surplus may likewise be the subject of assignment or attachment/execution. However, unlike the interest of a general
partner, a limited partners’ interest may only be redeemed with the general partners’ property and not with partnership property.
11. The right, if given, of the partners to admit additional limited partners;
12. The right, if given, of one or more of the limited partners to priority over other limited partners, as to contributions or as to compensation by way of income, and the
nature of such priority;
13. The right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil interdiction, insanity or insolvency of a
general partner; and
14. The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution.
File for record the certificate in the Office of the Securities and Exchange Commission.
A limited partnership is formed if there has been substantial compliance in good faith with the foregoing requirements.

Limitation on a Limited Partner

1. Cannot be an industrial partner. His contribution must always be money or property.
2. The surname of a LP shall not appear in the partnership name unless:
a. It is also the surname of a general partners
b. Prior to the time when the LP became such, the business has been carried on under a name in which his surname appeared.
3. Cannot take part in the management of the partnership
Consequence for violation: LP will be treated as general partner.

Rights of a Limited Partner: ARTICLE 1851. A limited partner shall have the same rights as a general partner to:
1. Have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to inspect and copy any of them;
2. Have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances render it just
and reasonable; and
3. Have dissolution and winding up by decree of court.
4. Receive a share of the profits or other compensation by way of income, and to the return of his contribution until:
a. All liabilities of the partnership, except liabilities to general partners and to limited partners on account of their contributions, have been paid or there
remains property of the partnership sufficient to pay them;
b. The consent of all members is had, unless the return of the contribution may be rightfully demanded under the provisions of the second paragraph; and
c. The certificate is canceled or so amended as to set forth the withdrawal or reduction.
5. Rightfully demand the return of his contribution:
a. On the dissolution of a partnership, or
b. When the date specified in the certificate for its return has arrived, or
c. After he has given six months’ notice in writing to all other members, if no time is specified in the certificate, either for the return of the contribution or
for the dissolution of the partnership.
6. Have his written consent or ratification be sought by the general partners in order to:
a. Do any act in contravention of the certificate;
b. Do any act which would make it impossible to carry on the ordinary business of the partnership;
c. Confess a judgment against the partnership;
d. Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose;
e. Admit a person as a general partner;
f. Admit a person as a limited partner, unless the right so to do is given in the certificate;
g. Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right
so to do is given in the certificate.
7. A limited partner also may loan money to and transact other business with the partnership, subject to the following restrictions:
a. He cannot receive or hold as collateral security any partnership property, or
b. He cannot receive any payment conveyance, or release from liability, if at the time the assets of the partnership are not sufficient to discharge
partnership liabilities to persons not claiming as general or limited partners.
Any violation of the above restrictions would be in fraud of creditors and may thus be treated as a rescissible contract.

Dissolution and Winding-Up: The retirement, death, insolvency, insanity or civil interdiction of a General Partner dissolves the partnership. Except: If the partnership
business is continued by the remaining general partners under a right to do so as stated in the Certificate of Limited Partnership OR with the consent of all the partners. A
limited partner may have the partnership dissolved and its affairs wound up when he rightfully but unsuccessfully demands the return of his contribution.

General Limited Partner: ARTICLE 1853. A person may be a general partner and a limited partner in the same partnership at the same time, provided that this fact shall be
stated in the certificate. He shall have all the rights and powers and be subject to all the restrictions of a general partner. Except that, in respect to his contribution, he shall
have the rights against the other members which he would have had if he were not also a general partner.

Liquidation of a Limited Partnership: The distribution of the partnership assets shall be as follows:
1. Those owing to creditors other than partners 5. Those owing to general partners other than for capital and profits
2. Those owing to partners other than for capital and profits 6. Those owing to general partners in respect of profits
3. Those owing to partners in respect of profits 7. Those owing to general partners in respect to capital
4. Those owing to partners in respect of capital
 12
NOTES

Partnership Corporation

Definition ARTICLE 1767. By the contract of partnership two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves. Two or more persons may also form a
partnership for the exercise of a profession.
SEC. 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.

Creation Agreement Operation of law

No. of parties At least 2 persons Not more than 15

New Law: One person corporation is allowed (natural person,
trust or restate)
Old Law: At least 5 incorporators

Juridical Execution of a contract Issuance of the Certificate of Incorporation by the SEC

personality

Elements of Partnership
1. Consent
2. Object / purpose
3. Cause / consideration
4. Form - may be constituted in any form
Exception
a. Capital of ₱3,000 or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities
and Exchange Commission (does not affect the validity of the partnership as it is intended to affect third persons)
b. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by
the parties, and attached to the public instrument.

Universal Partnership (no specific purpose)

1. Universal partnership of all present property - partners contribute all the property which actually belongs to them to a common fund, with
the intention of dividing the same among themselves, as well as all the profits which they may acquire therewith. A stipulation for the common
enjoyment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy, or
donation cannot be included in such stipulation, except the fruits thereof.
2. Universal partnership of profits - partners may acquire by their industry or work during the existence of the partnership. Movable or
immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively
to each, only the usufruct passing to the partnership.
Particular Partnership (specific purpose is mentioned)
● Has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation
● A husband and wife may form or be partners in a general professional partnership since a General Professional Partnership is only a
Particular Partnership for the exercise of a common profession or occupation.

Capitalist: money or property

Industrial: skills, knowledge, industry or service

Rules for Distribution of Profits and Losses

Profits Losses

With agreement 1. According to agreement 1. According to agreement

Without agreement 2. Proportional - share of capitalist partner is in proportion to
his capital contribution
3. Just and equitable - share of industrial partner is not fixed -
as may be just and equitable under the circumstances
2. If sharing of profits is stipulated - apply to the sharing of
losses
3. Proportional - If no profit sharing stipulated, losses shall
be borne according to capital contribution
4. Purely industrial partner not liable for losses

ARTICLE 1798. If the partners have agreed to intrust to a third person the designation of the share of each one in the profits and losses, such
designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third
person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision.
The designation of losses and profits cannot be intrusted to one of the partners.
General rule: Consent
Exception: Inequitable / unreasonable
Exception to the Exception:
1. Began to execute the decision
2. Failure to impugn - estoppel - considered giving consent

ARTICLE 1799. A stipulation which excludes one or more partners from any share in the profits or losses is void.
Agreement - contract of partnership
Excludes in profit - void; Excludes in loss - valid
Industrial partners’ effort in vain
 13
ARTICLE 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.
Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner.

ARTICLE 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been
exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person
authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract.

ARTICLE 1817. Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners.

Obligations of partners among themselves

1. Contribution
a. Money - interest
b. Property - fruits, damages and warranty against eviction
● DOGFF - Diligence of a good father of a family
c. Goods - appraisal
2. Obligation not to engage in business
a. Article 1789. Industrial
i. General Rule: Prohibited to engage (absolute)
ii. Exception: Expressly permits
iii. Consequence: Exclusion, availment of benefit and damages
b. Article 1808. Capitalist
i. General Rule: Prohibited (same kind)
ii. Exception: Stipulation to the contrary
iii. Consequence: Profit, losses (personally bear), and damages
3. Obligation to add capital contribution (excluding industrial)
a. Article 1791. Capitalist
i. General Rule: Not required
ii. Exception: Agreement
iii. Requisites: Refusal, imminent loss, majority of capitalist partners (decide) and no agreement
iv. Consequence: Obliged to sell interest to the other partners
4. Obligation of managing partner who collects debt
a. Article 1792. If a partner authorized to manage collects a demandable sum, which was owed to him in his own name, from a person
who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to
their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the
partnership credit, the amount shall be fully applied to the latter. The provisions of this article are understood to be without prejudice
to the right granted to the debtor by article 1252, but only if the personal credit of the partner should be more onerous to him.
i. General Rule: Application in proportion
ii. Exception: on account of the partnership and collecting partner is not the managing partner
iii. If no rule: Application of payment applied (OBLICON)
2 debts, 1 to partnership and 1 to partner
5. Obligation of partner who receives partnership credit
a. Article 1793. A partner who has received, in whole or in part, his share of a partnership credit, when the other partners have not
collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he
received even though he may have given receipt for his share only.
i. Requisites: receives the debt, insolvent and other partners have not collected their share

Rules of Management
1. Managing partner appointed in the Articles of Partnership
a. Power: All acts of administration > delegated
b. Generally irrevocable
i. Just and lawful cause - part of the contract
ii. Majority of partners’ controlling interest
2. Managing partner after constitution
a. Power: All acts of administration
b. Revocable
i. With or without just or lawful cause - only an agent; not part of the contract - violation
ii. Majority of partners’ controlling interest
3. Two or more managing partners
a. With specification as to duties
b. Without stipulation, one shall not act without consent of other
i. General Rule: Each or any may act
ii. Exception: Majority per head but in case of a tie, majority of controlling interest
c. With stipulation that none of the managing partners shall act without the consent of other
i. General Rule: Consent of all
ii. Exception: Imminent danger or grave irreparable injury to the partnership (ID GIIP)

ARTICLE 1806. Partners shall render on demand true and full information of all things affecting the partnership to any partner or the legal representative
of any deceased partner or of any partner under legal disability.

ARTICLE 1807. Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of
the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.
 14
CORPORATION. REPUBLIC ACT NO. 11232
A. Definition of corporation iv. Redeemable shares
B. Classes of corporations v. Treasury shares
C. Nationality of corporations F. Incorporation and organization
a. Control test a. Promoter
b. Grandfather rule b. Subscription contract
D. Corporate juridical personality c. Pre-incorporation subscription agreements
a. Doctrine of separate juridical personality d. Consideration for stocks
i. Liability for tort and crimes e. Articles of Incorporation
ii. Recovery of damages i. Contents
b. Doctrine of piercing the corporate veil ii. Non-amendable items
i. Grounds for application of doctrine f. Corporate name; limitations on use of corporate name
ii. Test in determining applicability g. Registration, incorporation and commencement of
E. Capital structure corporate existence
a. Number and qualifications of incorporators h. Election of directors or trustees
b. Subscription requirements i. Adoption of by-laws
c. Corporate term i. Contents of by-laws
d. Classification of shares ii. Binding effects
i. Preferred shares versus common shares iii. Amendments
ii. Scope of voting rights subject to classification j. Effects of non-use of corporate charter
iii. Founder’s shares

I. GENERAL PROVISIONS. DEFINITIONS AND CLASSIFICATIONS

SEC. 1. Title of the Code. – This Code shall be known as the “Revised Corporation Code of the Philippines”.
SEC. 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.
● Artificial being - a corporation has personality separate and distinct from its owners
● Created by operation of law - only the state through the Securities and Exchange Commission (SEC) can grant a business license to operate as a corporation
● Right of succession - a corporation continues to exist for a period for which it has been formed regardless of the changes in the ownership
● Limited capacity - in line with the doctrine of limited capacity, a corporation can exercise only the powers expressly conferred upon it by law and its articles of
incorporation, those implied from such powers expressly granted, and those that are inherent to its existence.

Classes of Corporation
SEC. 3. Classes of Corporation
1. Stock corporations - 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.
● Have capital stock distributed to shareholders; created for the purpose of profit which is distributed to stockholders in the form of dividends (e.g.
financial institutions
2. Non-stock corporations - a corporation where no part of its income is distributable as dividends to its members, trustees, or officers: provided, that any profit
which it may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes of which the
corporation was organized
● Does not have capital stock distributed to members; created for the public welfare or public good (e.g. religious, charitable, scientific and literary)

Other Classes
As to purpose
1. Public corporation - formed or organized for the government of a portion of the state which have for their purpose the general good and welfare
2. Private corporation - formed for some private purpose, benefit, aim. (The Corporation Law, Sec. 3)
3. Quasi-public corporation - private corporations supported by the government in the performance of public duties (e.g. public utilities - electric, water, and
transportation)
4. Government-owned and controlled corporation (GOCC) - any agency organized as a stock or nonstock corporation vested with functions relating to public
needs whether governmental or proprietary in nature, and owned by the Government of the Republic of the Philippines directly or through its instrumentalities
either wholly or, where applicable as in the case of stock corporations, to the extent of at least a majority of its outstanding capital stock
As to legal right to corporation existence
1. De jure corporation – a corporation created in strict or substantial conformity with the mandatory statutory requirements for incorporation and the right of which to
exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the State
2. De facto corporation – the due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate
powers shall not be inquired into collaterally in any private suit to which such corporation may be a party
3. 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
4. Corporation by prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the government
As to laws of incorporation
1. Domestic corporation – a corporation incorporated under the laws of the Philippines
2. Foreign corporation – a corporation formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or State
As to whether they are open to the public or not
1. Open corporation – a corporation which is open to any person who may wish to become a stockholder or member thereto
2. Close corporation – one whose articles of incorporation provide that: (1) all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding 20; (2) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer; and (3) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any class
As to relationship of management and control
1. Parent or holding corporation – a corporation that hold stocks in another corporation for the purpose of control
2. Subsidiary corporation – a corporation more than 50% of the voting stock of which is controlled directly or indirectly by another corporation, which thereby
becomes its parent corporation
As to the number of persons who compose them
1. Corporation aggregate – a corporation consisting of more than one member
2. Corporation sole – a corporation consisting of only one member for the purpose of administering and managing, as trustee, the affairs, property and temporalities
of any religious denomination, sect, or church
As to whether they are for religious purposes or not
1. Ecclesiastical corporation – a corporation organized for religious purposes
2. Lay corporation – a corporation organized for purpose other than for religion
As to whether they are for charitable purpose or not
1. Eleemosynary corporation – a corporation organized for charitable purposes
2. Civil corporation – a corporation organized for business or profit
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SEC. 4. 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.
● The primary law governing corporations created by special law or charters will be the law creating them. RCC will apply suppletorily. (e.g. GOCC)

Nationality of Corporations
1. Foreign corporation - 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 certificate of authority from the appropriate government agency. (RCC Sec. 140)
● Doing business - implies a continuity of commercial dealings and arrangements
2. Domestic corporations - formed, organized or existing under Philippine laws

Incorporation test - the primary test under Philippine jurisdiction in determining the nationality of a corporation is the incorporation test, where a corporation is considered a
national of the country under whose laws it was incorporated. (SEC-OGC Opinion No. 12-02)
● Nationality is determined by the state of incorporation
● Exception: Foreign Investment Act of 1991
○ Corporation organized or incorporated abroad
○ Registered as doing business in the Philippines under the RCC
○ 100% of the outstanding capital stock and entitled to vote is wholly owned by Filipinos
a. Control test (liberal rule) - test used to determine the eligibility of a corporation, which has foreign equity participation in its ownership structure, to engage in
nationalized or partly nationalized activities. If a corporation is at least 60% Filipino-owned, then all shares (100%) are recorded as Filipino shares. The
constitutional requirement of at least 60% Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the
corporation.
● Nationalized activities/industries under the constitution - of whose capital is owned by Filipino citizens
○ Exploitation and development of natural resources - 60%
○ Public utilities - 60%
○ Advertising - 70%
○ Mass media - 100%; no foreign equity mandate of the 1987 Constitution
○ Up to 25% foreign equity - private recruitment, whether for local or overseas employment by mandate of PD No. 442
○ Up to 40% foreign equity - ownership of private lands by mandate of the Constitution
b. Grandfather rule (strict rule) - If a corporation is less than 60% Filipino-owned, then the corresponding percentage belonging to Filipino shall be the only shares to
be recorded as Filipino shares. GR is applied to corporations where the 60-40 Filipino-foreign ownership is in doubt.

Illustration: ABC Corporation is applying to engage in the manufacture of firearms (up to 40% foreign ownership). ABC Corp. claims that it has 70-30 Filipino-foreign
ownership. This was in fact correct but further investigation revealed that ABC Corp. is a subsidiary of XYZ Corp. with 60-40 Filipino-foreign ownership and furthermore, XYZ
Corp. is a subsidiary of DEF Corp. with 59-41 Filipino-foreign ownership. These facts led to the Filipino-foreign ownership of ABC in doubt.

ABC Corp = 70% x 60% x 59% = 24.78 Filipino

Ruling: Therefore, the corporation should not be allowed to manufacture firearms or to engage in partly nationalized activity because it did not reach the 60% requirement.

Can a corporation become a partner in a partnership? NO

Exceptions
● The authority to enter into a partnership relation is expressly conferred by the charter of (or) the articles of incorporation of the corporation and the nature to be
undertaken by the partnership is in line with business of the corporation.
● If it is a foreign corporation, must obtain a license to transact business in the Philippines.

Corporate juridical personality

1. Doctrine of separate juridical personality - corporate has a separate juridical personality. A creditor cannot go after a director or officer for the debts of a
corporation.
● TORTS: Is a corporation liable for torts (quasi-delict)? YES, whenever a tortious act is committed by an officer or agent under the express direction or authority of
the stockholders or members acting as a body, or, generally, from the directors as the governing body.
● CRIMES: Is a corporation liable for crimes? NO, since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it
does not have the essential element of malice; in such the responsible officers would be criminally liable.
○ Exception: If the penalty of the crime is only fine or forfeiture of license or franchise
● DAMAGES: Can a corporation recover damages? YES
○ Exception: Moral damages
○ Exception to the exception: The corporation may recover moral damages under item 7 of Article 2219 of the New Civil Code because said provision
expressly authorizes the recovery of moral damages in cases of libel, slander, or any other form of defamation. Article 2219 (7) does not qualify
whether the injured party is a natural or juridical person. Therefore, a corporation, as a juridical person, can validly complain for libel or any other form
of defamation and claim for moral damages.
○ Exception to the exception: When the corporation has a reputation that is debased, resulting in its humiliation in the business realm.
2. Doctrine of piercing the corporate veil - A doctrine that disregards the separate personality of a corporation if this separate personality is used as an alter ego
of another entity and was used to justify wrong, protect fraud, perpetrate deception, or defeat public convenience. This may also be used to achieve equity; to
remove the barrier to make the guilty directors or officers liable for the fraud committed; a creditor can go after the guilty director or officer
● Grounds for application of doctrine - shield for fraud; creditors will have the burden of proof because he who alleges must prove
● Test in determining applicability - fraud test, alter ego or instrumentality test, or conduit cases, public convenience or objective test, and equity cases/test

Illustration: When Company X is established by Company Y to evade taxes.

Ruling: The courts can disregard the corporate veil of Company X and make the true owner (Company Y) liable for legitimate taxes.

Capital Structure
SEC. 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.
1. Any Person, partnership, association or corporation, singly or jointly with others, may now be incorporators
2. Must be a Stockholder or Member of the corporation
3. Not more than Fifteen (15) in number
4. No minimum number is required
5. Majority of incorporators need not be Philippine residents
6. Of legal Age (if natural person)
7. Any Single natural person, trust, or an estate is now allowed to form a corporation by himself.
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Subscription Requirements
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.
● Initial subscription requirements were removed in the RCC
● Certain industries require capital such as mining, pawnshop, school, etc. https://www.sec.gov.ph/wp-content/uploads/2019/12/2015PR_MinimumPaidUpCapital.pdf

Subscription Requirements
● No required minimum subscribed capital and paid-up capital under the Revised Corporation Code of the Philippines
● Exceptions are corporations governed by special laws that require a minimum subscribed and/or paid-up capital

Authorized Capital
● Maximum value of the property or estate of the corporation fixed in the Articles of Incorporation that may be sourced from stock subscriptions or from members’
contributions for the purpose of pursuing the business for which the corporation is organized
● Maximum amount of assets a corporation may have that can be held liable for any debts the corporation may incur from the time it incorporated until its dissolution
○ Stock corporations - capital is divided into shares of stock in accordance with the AOI and is referred to as the authorized capital stock
○ Nonstock corporations - capital is not divided and instead referred to as authorized capital contribution

Unissued Capital Stock

● portion of the authorized capital stock in a stock corporation that has not been issued and subscribed
● Does not vote and draws no dividends

Subscribed Capital Stock

● Portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not

Outstanding Capital Stock

● Total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except treasury shares

Paid-up Capital
● Portion of the authorized capital that is subscribed and paid

Additional Paid-In Capital

● Considered a contribution of a stockholder over and above the par value of shares and falls under the concept of corporate Trust Fund upon its recording in the
books of the corporation (SEC Opinion dated June 11, 2004)

Trust Fund Doctrine (TFD)

● Provides that 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
● Not limited to reaching the stockholders’ unpaid subscriptions
● Scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as
a trust fund for the payment of corporate debts
● All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders,
regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim
● Established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that
the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts

Corporate Term
General rule: Perpetual existence
Exception: Unless its articles of incorporation provides otherwise
Old code: maximum of 50 years
Effectivity of RCC: February 23, 2019

Basic Rules on Corporate Term

1. General rule: corporate term is perpetual
2. The AOI of new corporations can specify a fixed term – the incorporators can choose not to have a perpetual term and specify a fixed term in the AOI
3. Corporations duly incorporated prior to the effective date of the Revised Corporation Code and still existing shall also automatically have perpetual term
4. If existing corporations do not want a perpetual term, they must notify the SEC that they want to maintain their fixed term
5. A corporation with a fixed term may be dissolved by shortening its term;
6. Corporations with fixed terms may extend their term
7. No extension can be made earlier than three (3) years prior to the original or subsequent expiry date.

SEC. 11. Corporate term. A corporation shall have perpetual existence unless its articles of incorporation provide 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.
● Appraisal right - dissenting stockholder can demand for the payment of the fair value of his share/s.

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).

Remedy: File for Application of Revival

A corporation whose term has expired may apply for a revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation and
subject to all of its duties, debts 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 quasibanking 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.

● How about expired corporations whose certificates of incorporation have been revoked by the SEC due to non-filing of reports, can they still apply for revival of
corporate existence? YES but the corporation has to file a Petition to Lift Revoked Status.
● How about expired corporations whose certificates of registration have been suspended by SEC, can they still file an application for revival? YES but the
corporation has to file a Petition to Lift Suspended Status.
● How about an expired corporation whose name has been validly reused by another corporation, can they still file an application for revival? YES, however, the
corporation must change its name within 30 days from the issuance of the certificate of revival of corporate existence.
● Expired corporations who have completed the liquidation of their assets can no longer apply for revival of corporate existence.
● Expired corporations whose certificate of registration have been revoked on grounds other than non-filing of reports can lo longer file an application for revival.
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Classification of Shares
SEC. 6. Classification of Shares - The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be indicated in the
articles of incorporation. Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of
stock.
● Common shares and preferred shares ● Founders’ shares, redeemable shares and treasury shares
● Voting shares and non-voting shares ● Convertible shares, watered stocks, fractional shares, shares in
● Par value shares and no par value shares escrow, over-issued stock, street certificate and promoters’ stock

The shares in stock corporations may be divided into classes or series of shares, or both. No share may be deprived of voting rights except those classified and issued as
“preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, That there shall always be a class or series of shares with complete voting rights.

Scope of voting rights subject to classification

Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters:
a. Amendment of the articles of incorporation;
b. Adoption and amendment of bylaws;
c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another corporation or other corporations;
g. Investment of corporate funds in another corporation or business in accordance with this Code; and
h. Dissolution of the corporation
Except as provided in the immediately preceding paragraph, the vote required under this Code to approve a particular corporate act shall be deemed to refer only to stocks
with voting rights.

The shares or series of shares may or may not have a par value, except for (par value shares only): Provided, That banks, trust, insurance, and preneed companies, public
utilities, building and loan associations, and other corporations authorized to obtain or access funds from the public, whether publicly listed or not, shall not be permitted to
issue no-par value shares of stock.

Preferred shares of stock issued by a corporation may be given preference in the distribution of dividends and in the distribution of corporate assets in case of
liquidation, or such other preferences: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in
the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, further, That such terms and conditions shall be
effective upon filing of a certificate thereof with the Securities and Exchange Commission, hereinafter referred to as the “Commission”.

Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation
or to its creditors in respect thereto: Provided, That no-par value shares must be issued for a consideration of at least Five pesos (P5.00) per share: Provided, further,
That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A
corporation may further classify its shares for the purpose of ensuring compliance with constitutional or legal requirements.

Preferred Shares
● Shares which are entitled the holders thereof to certain preferences over the holders of common stock
● May be: (1) As to assets, (2) As to dividends; or (3) As may be determined by the board of directors when so authorized to do so
● May be deprived of voting rights in the AOI subject to the limitations imposed in Sec. 6 of the Corporation Code
○ Provided preferred shares are issued only with par value
○ Preference shareholders have only a limited or fixed return on investment

Common Shares
● A basic class of stock ordinarily and usually issued without extraordinary rights and privileges.
● Outstanding common shares are granted all the ordinary rights granted to a share under the law and subject to the ordinary limitations provided under the law
● GENERAL RULE: Common shares are always voting shares.
● EXCEPTION: Delinquent shares
○ No fixed or specific return on investment

Scope of voting rights subject to classification

1. Voting shares
● There shall always be a class or series of shares which have complete voting rights
● Whenever a vote is necessary to approve a particular corporate act, such vote refers only to stocks with voting rights except in certain cases when
even nonvoting shares may also vote
2. Non-voting shares
● Shares may be deprived of voting rights when they are classified as “redeemable” or “preferred” shares (RCC, Sec. 6, par. 2)
● NOTE: Redeemable shares or preferred shares may still have voting rights.

SEC. 7. Founder’s shares. Founders’ shares may be given certain rights and privileges not enjoyed by the owners of other stocks. 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 other pertinent laws.
● Shares offered to organizers or promoters of corporation

SEC. 8. Redeemable shares (Other term: callable 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.
● Shares already sold by the corporation but have the option to buy back such shares
● Optional: May or may not redeem the shares
● Can redeem even without the existence of unrestricted retained earnings. Retained earnings are the accumulated earnings of the corporation that has not been
restricted for a particular purpose, in short free earnings.
● General rule: (Sec. 40) When a corporation reacquires shares, there must be the existence of unrestricted retained earnings.
● Exception: Sec. 8
● Effect of redemption: Shares are retired. The corporation can no longer sell them again, UNLESS otherwise stated in the Articles of Incorporation.

Special Rules on Redeemable Shares

1. May be issued by the corporation only when it is expressly authorized by the AOI
2. The terms and conditions affecting said shares must be stated both in the AOI and in the certificates of stock representing such shares
3. May be deprived of voting rights in the AOI unless otherwise provided

Limitation on the Issuance of Redeemable Shares

1. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings
2. The terms and conditions affecting said shares must be stated both in the Articles of Incorporation and in the certificate of stock representing such share;
3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless otherwise provided in the Code
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4. The corporation is required to maintain a sinking fund to answer for redemption price if the corporation is required to redeem
5. The redeemable shares are deemed retired upon redemption, unless otherwise provided in the Articles of Incorporation
6. Unrestricted retained earnings are not necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for
operations
7. Redemption cannot be made if such redemption will result in insolvency or inability of the corporation to meet its obligations.

By express provision of law, redemption of redeemable shares is not subject to Section 41 which provides that the acquisition of the corporation’s own shares requires
sufficient unrestricted retained earnings.

However, redemption may not be done if after such redemption, there shall be insufficient assets in its books to cover debts and liabilities inclusive of capital stock. In other
words, redemption may not be done if redemption will result to insolvency or illiquidity.

Effects of Redemption
1. When redeemable shares are reacquired, the same shall be considered retired and no longer issuable unless otherwise provided for in the AOI
2. If by provision of the AOI they can be reissued, they shall be considered as treasury shares
3. Where reissuance of redeemed shares is prohibited, the number of authorized shares of the capital stock of the corporation reduced accordingly, and the AOI must
be amended

SEC. 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 that have been sold by the corporation and fully paid for and corporation reacquires them
● There must be unrestricted retained earnings to reacquire such shares
● Effect of reacquisition: Shares become the property of the corporation. The corporation can sell the treasury shares at a price fixed by the board of directors.

Limitation of Re-acquisition
Acquisition of own shares may be done only when the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired and
acquisition is for the following purposes:
1. To eliminate fractional shares arising out of stock dividends
2. To purchase delinquent shares
3. To pay dissenting or withdrawing stockholders entitled to exercise appraisal right

Shares, once re-acquired, become treasury shares. They are not canceled or retired but retain their status as issued and subscribed shares which may be resold or
redisposed by the board of directors at reasonable prices.
● NOTE: Treasury shares are currently owned by the corporation and not its shareholders. As an owner of the treasury shares, the corporation may opt to retire, sell
or distribute the treasury shares as property dividends.

Resale of Treasury Shares Below Par Value

Treasury Shares are already deemed issued and subscribed and may be resold even below par-value because the corporation is not issuing the shares but merely selling it in
its capacity as shareholder and owner of such shares as personal property. The only limitation is that the price is reasonable, even if it is below par-value.

Components of a corporation
1. Corporators - those who compose a corporation, whether as stockholders or members
2. Incorporators - those mentioned in Articles of Incorporation as originally forming and composing the corporation and who are signatories thereof
3. Directors and trustees - the Board of Directors is the governing body in a stock corporation while the Board of Trustees is the governing body in a non-stock
corporation
4. Corporate officers - officers who are identified as such in the Corporation Code, the Articles of Incorporation, or the By-laws of the corporation
5. Stockholders - owners of shares of stock in a stock corporation
6. Members - corporators of a corporation which has no capital stock. They are not owners of shares of stocks, and their membership depends on terms provided in
the Articles of Incorporation or by-laws (Sec. 91)
7. Promoter - a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives
consideration therefore
8. Subscriber - person who have agreed to take and pay for original unissued shares of a corporation formed or to be formed
9. Underwriter - person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of securities of any kind by another

INCORPORATOR CORPORATOR

Signatory of the Articles of Incorporation May or not be signatory of the Articles of Incorporation

Does not cease to be an incorporator upon sale of his shares Cease to be a corporator by sale of his shares in case of stock corporation. In case
of non-stock corporation, when the corporator ceases to be a member

Maximum of 15 stockholders (stock) No limit

May or may not be more than 15; no limit (nonstock)

Originally forms part of the corporation Not necessarily

Filipino ownership not a requirement if the corporation is engaged in nationalized or partly nationalized industries

Incorporation and Organization

Promoter
● A person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor
● Before incorporation, the promoter is an agent of the incorporators but not of the corporation
● A promoter cannot act as agent for a corporation that does not yet exist
Liability of Corporation for Promoter’s Contracts
● GENERAL RULE: Corporation, as a separate juridical person, is not bound to a contract made by a promoter before its incorporation
● EXCEPTIONS: When the corporation, after it has been organized:
○ Adopts or ratifies the contract; or
○ Accepts its benefits with knowledge of the terms thereof
Limitations on Ratification by Corporation
1. The contract must be adopted in its entirety and not only that part that is beneficial to the corporation and discard that which is burdensome; and
2. The contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority
to enter
Liability of Promoter - promoters are personally liable on their contracts even if made on behalf of the corporation to be formed.
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SEC. 59. Subscription contract - contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. It is considered as such
notwithstanding the fact that the parties refer to it as purchase or some other contract.

Ways to become a stockholder of a corporation

1. Subscription contract with the corporation
2. Purchase or acquisition of shares from existing stockholders
3. Purchase of treasury shares from the corporation
4. Death of Stockholder (Succession)

Doctrine of Indivisibility of Subscription Contract

No certificate of stock may be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due,
has been paid. The failure to pay any of the installments due would necessarily affect all other installments, because the subscription is to be treated as one, whole, entire and
indivisible contract. The default of payment on any of the installment results in the entire subscription becoming due and demandable. All partial payments on one subscription
shall be deemed applied proportionately among the number of shares.

Nature of Subscription Contracts

● A subscription contract is essentially a contract between the corporation and the subscribing person
● The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed
● A subscription contract is formed by an offer by one of the parties, the corporation, or the subscriber, as the case may be, and an acceptance of this offer by the
other. There is binding contract of subscription as soon as the offer to take shares made by a person to a corporation is accepted by the corporation as soon as the
person to whom the offer is made accepts an offer of shares by a corporation
● Even if subscribers have legal standing to sue for rescission of subscription contract based on breach of contract, such action cannot prosper since rescission will
violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code
NOTE: A subscription contract may cover one or more shares. But even if it covers two or more shares, the contract is an indivisible contract

Subscriber - person who has agreed to take and pay for original and unissued shares of a corporation formed or to be formed.

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.
● It is one entered into before incorporation. It constitutes a binding contract between the subscriber and the incorporators, as well as the subscribers amongst
themselves.

Pre-incorporation Subscription Generally Irrevocable

A contract to subscribe to shares of a corporation yet to be incorporated cannot be revoked:
1. For a period of at least six (6) months from the date of subscription unless
a. All of the other subscribers consent to the revocation; or
b. The incorporation fails to materialize
2. After the submission of the AOI to the SEC
NOTE: A person who subscribes for a stock in a corporation to be formed and who does not consent to any change in the subscription is not liable if the corporation
afterwards formed, is a different corporation from that contemplated by the subscription

Post-incorporation Subscription
● A subscription entered into after the incorporation for the acquisition of issued but unsubscribed stock
NOTE: The subscriber becomes a stockholder upon acceptance by the corporation of the subscriber’s offer or by the subscriber of the corporation’s offer even though he has
not paid for his shares unless the subscription agreement or charter otherwise provides, or when there is a constitutional, statutory, or charter provision to the contrary or
except in instances of increase in authorized capital stock

SEC. 61. Consideration for Stocks – Stocks shall not be issued for a consideration less than the par or issued price thereof.
Valid Considerations in Subscription Agreements
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par
or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion;
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration.
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.

Prohibited Considerations
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.

Compensation payable for services actually rendered to the corporation is credit which is property and whose value is ascertainable. An agreement to issue stock for services
before the same is rendered is void and the corporation is not estopped to deny the services constituted payment of the stock subscription even though it has received the
benefit thereof.

The corporation cannot agree that the subscription price shall be paid only through the dividends that will be declared later. This is illegal and in fraud of other subscribers. It is
settled that a corporation has no power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers by subjecting the particular subscriber
to lighter burdens or by giving him greater rights and privileges.

A corporation cannot issue its stock as a gratuity but it is lawful for a corporation to issue watered stock as a bonus to officers or employees as incentives or for services
actually rendered to the corporation for in such case, the stock cannot be considered gratuitous

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.
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Articles of Incorporation
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:
1. Name of the corporation;
2. 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;
3. Place where the principal office of the corporation is to be located, which must be within the Philippines;
4. Term for which the corporation is to exist, if the corporation has not elected perpetual existence;
5. Names, nationalities, and residence addresses of the incorporators;
6. Number of directors, which shall not be more than 15 (stock) or the number of trustees which may be more than 15 (nonstock);
7. 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;
8. If it be a stock corporation
a. the amount of its authorized capital stock
b. number of shares into which it is divided
c. the par value of shares, or a statement that some or all of the shares are without par value, if applicable; and
d. names, nationalities, and residence addresses of the original subscribers, amount subscribed and paid by each on the subscription,
9. If it be a nonstock corporation,
a. the amount of its capital
b. the names, nationalities, and residence addresses of the contributors, and amount contributed by each; and
10. Such other matters consistent with law and which the incorporators may deem necessary and convenient
An arbitration agreement may be provided in the articles of incorporation pursuant to Section 181 of this Code.

The articles of incorporation and applications for amendments thereto may be filed with the Commission in the form of an electronic document, in accordance with the
Commission’s rules and regulations on electronic filing.

Non-amendable items of the Articles of Incorporation

Names of the incorporators, the first set of directors and subscribers, the initial treasurer, their original subscription and the place and date of execution of the first Articles of
Incorporation cannot be amended.
● The amendment may involve a change of the corporate name, increase in the authorized capital stock, and other similar changes.
● Amendments cannot be allowed if they go against the nature of the corporation. For example, there can be no amendment of the Articles of Incorporation of a
non-stock corporation to convert it into a stock corporation with the members as shareholders.

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 corporation will be ordered to immediately cease and desist from using such name and require the corporation to register a new one.
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

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.

Right to a Corporate Name

● A corporation’s right to use its corporate and trade name is a property right, a right in rem, which it may assert or protect against the whole world in the same
manner as it may protect its tangible property against trespass or conversion
● Under the Priority of Adoption Rule, the corporation that first adopts a corporation name has the right thereto and a subsequent corporation cannot use the same
name

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption, in which two requisites must be proven, to
wit:
1. That the complainant corporation acquired a right over the use of such corporate name; and
2. That the proposed name is either:
a. Identical; or
b. Deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or
c. Patently deceptive, confusing or contrary to existing law

Doctrine of Secondary Meaning as Applied to Corporation Names

● The doctrine of secondary meaning provides that “a word or phrase originally incapable of exclusive appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that,
in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product.”
● The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names since the right to use
a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename.

Change of Corporate Name

● A corporation can change the name originally selected by it by amending its AOI in accordance with Sec. 16 of the Corporation Code [Sec. 15 of the RCC]
● A mere change in corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the
corporation, or on its property, rights, or liabilities
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SEC. 18. Registration, Incorporation and Commencement of Corporate Existence – A person or group of persons desiring to incorporate shall submit the intended
corporate name to the Commission for verification. If the Commission finds that the name is distinguishable from a name already reserved or registered for the use of
another corporation, not protected by law and is not contrary to law, rules and regulations, the name shall be reserved in favor of the incorporators. The incorporators shall
then submit their articles of incorporation and bylaws to the Commission.

If the Commission finds that the submitted documents and information are fully compliant with the requirements of this Code, other relevant laws, rules and regulations, the
Commission shall issue the certificate of incorporation.

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

Grounds for Rejection or Disapproval of AOI or Amendment

1. That the AOI or any amendment thereto is Not substantially in accordance with the form prescribed in the Corporation Code;
2. That the purpose or purposes of the corporation are patently Unconstitutional, illegal, immoral, or contrary to government rules and regulations;
3. That the Certification concerning the amount of capital stock subscribed and/or paid is false;
4. That the required percentage of Filipino Ownership of the capital stock under existing laws or the Constitution has not been complied with (RCC, Sec. 16).

Due Process in Rejection of AOI

Before rejecting the AOI, the SEC should 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 amendments.

Any decision of the Commission rejecting the AOI or disapproving any amendment thereto is appealable by Petition for Review to the CA in accordance with the pertinent
provisions of the Rules of Court.

SEC. 23. Election of Directors or Trustees – Except when the exclusive right is reserved for holders of founders’ shares under Section 7 of this Code, each stockholder or
member shall have the right to nominate any director or trustee who possesses all of the qualifications and none of the disqualifications set forth in this Code.

At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy, the owners of majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. When so authorized in the bylaws or by a majority of the board of directors,
the stockholders or members may also vote through remote communication or in absentia: Provided, That the right to vote through such modes may be exercised in
corporations vested with public interest, notwithstanding the absence of a provision in the bylaws of such corporations.

A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum.

The election must be by ballot if requested by any voting stockholder or member.

In stock corporations, stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own names in the stock books of the corporation
at the time fixed in the bylaws or where the bylaws are silent, at the time of the election. 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.

If no election is held, or the owners of majority of the outstanding capital stock or majority of the members entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting, such meeting may be adjourned and the corporation shall proceed in accordance with Section 25 of this Code.

The directors or trustees elected shall perform their duties as prescribed by law, rules of good corporate governance, and bylaws of the corporation.

Time of Annual Elections

● Elections must be held once every year. The Revised Corporation Code authorizes the corporation to provide in the by-laws the time for holding the annual
election of directors or trustees and the mode or manner of giving notice thereof.
● NOTE: In practice, elections are held during the annual regular stockholder’s meeting. However, no provision of law requires that the election of officers be done at
the regular meeting.

Quorum for Purposes of Election

● At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy, the owners of majority
of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote.
● A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum.

Nomination General Rule

● Each stockholder or member shall have the right to nominate any director or trustee who possesses all of the qualifications and none of the disqualifications set
forth in this Code.
● EXCEPTION: When the exclusive right to nominate directors or trustees is reserved for holders of founders’ shares under Section 7 of the RCC

Mode of Voting of Directors and Trustees

Stockholders or members may vote in the following ways:
1. In person;
2. Through a representative authorized to act by written proxy; or
3. Through remote communication or in absentia, provided that:
a. It is so authorized in the by laws, or
b. By a majority of the board of directors.

Voting in absentia in corporations vested with public interest may be done, notwithstanding the absence of a provision in the by-laws of such corporations.
Internal Procedures for Voting through Remote Communication or in Absentia
● For the convenience of their stockholders and members, corporations shall issue their own internal procedures embodying the mechanisms for participation in
meetings and voting through remote communication or in absentia.
● The internal procedures may take into account the corporation's number of stockholders and members, location of stockholders or members, importance of the
matters to be discussed and voted upon in the meeting, promotion of minority rights and other factors consistent with the protection and promotion of stockholders'
or member's rights.
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The internal procedures may provide for the following

1. Mechanism to verify the identity of the stockholders or members and who among them have the right to vote during the meeting
2. Measures to ensure that all stockholders or members have the opportunity to participate in the meeting including an opportunity to read or hear the discussion
substantially
3. Mechanism to enable stockholders or members to vote during the meeting including ensuring that the integrity and secrecy of the votes are protected
4. Procedures for documenting the meeting and any process/motion which may be done afterwards and
5. Mechanism in making the record of the meeting, either video or audio recording, available to the stockholders or members and
6. Other matters to address administrative, technical and logistical issues

The election must be by ballot if requested by any voting stockholder or member.

Methods of Voting in Stock Corporations
1. Straight Voting – A stockholder may vote such number of shares for as many persons as there are directors to be elected
2. Cumulative Voting for One Candidate – A stockholder may 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; 3. Cumulative Voting by Distribution – A stockholder may distribute them on the same principle among as
many candidates as may be seen fit.

Illustration: Stockholder A owns 5,000 shares out of the 15,000 outstanding shares of XYZ Corp. The articles of incorporation provide for 12 directors.
● Stockholder A has a total of 60,000 votes.
Voting (stock corporation)
Amount of vote = stocks owned X directors to be elected

Manners of voting
● Straight - choose 12 directors totaling 60,000
● Cumulative - one or combination of candidates
○ 1 candidate
○ Distributed
Number of shares need to elect desired number of = [(outstanding shares entitled to vote x desired number of directors to be elected ) / (total number of directors to be elected
+ 1)] + 1

Methods of Voting in Non-stock Corporations

● Members of non-stock corporations may cast as many votes as there are trustees to be elected but may cast not more than one vote for one candidate. This is the
manner of voting in non-stock corporations unless otherwise provided in the AOI (RCC, Sec. 23)
● NOTE: Cumulative voting is not available unless allowed and provided for by the AOI or by-laws (RCC, Sec. 23).

Election by Plurality - Nominees for directors or trustees receiving the highest number of votes shall be declared elected (REVISED CORPORATION CODE, Sec 23).
● NOTE: A majority vote is not necessary.

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.

Procedure for Adoption

1. If Adopted Prior to Incorporation
a. Signature and approval by all of the incorporators
b. Filing with the SEC together with the AOI
2. If Adopted and Filed After Incorporation
a. The affirmative vote of the stockholders representing at least a majority of the Outstanding Capital Stock (OCS) or Membership, entitled to vote (VM),
in the meeting duly called for such purpose
b. Signature and approval by the shareholder/ member voting for it
c. Certification of a copy of the by-laws by a majority of the board countersigned by the secretary of the corporation
d. Filing of the certified copy with the SEC
● NOTE: The original copy shall be kept in principal office of the corporation and made available for inspection.

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
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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.
Binding effect of bylaws
● The provisions of the By-Laws are binding not only upon the corporation but also on its stockholder, members and those having direction, management and control
of its affairs.
● However, the provisions of the By-Laws are not binding on subordinate employees having no actual knowledge of the provisions thereof. As to third persons, the
ByLaws provisions are also not binding unless there is actual knowledge.
1. As to the members and shareholders
a. they have the force of contract between the members themselves (officers, directors and stockholders; not necessarily members of nonstock)
b. there is a conclusive presumption that they know the provisions of the corporate bylaws by the fact of their being such is charged with notice of
by-laws. If he remains actually ignorant of the provision, he does so at his peril
2. As to corporate directors and its officers
a. they are bound by and must comply with them unless and until they are changed
b. subordinate employees without actual knowledge of the by-laws are not bound
3. As to third persons - they are not bound to know the by-laws unless they have notice, actual or constructive

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.

Ways to Amend or Repeal of By-Laws or Adopt New By-Laws

1. By Stockholders/Members Themselves
a. The affirmative vote of the stockholders representing at least a majority of the OCS or VM, in the meeting duly called for such purpose
b. Certification of a copy of the by-laws by a majority of the board countersigned by the secretary of the corporation
c. Filing of the certified copy with the SEC.
2. By the Board Pursuant to Delegated Authority
a. Delegation of the power to amend, repeal, or adopt new by-laws by a vote of 2/3 of the OCS/VM, in a meeting duly called for such purpose
b. The affirmative vote of the majority of the members of the board at a regular or special board meeting duly called for the purpose
c. Certification of a copy of the by-laws by a majority of the board countersigned by the secretary of the corporation
d. Filing of the certified copy with the SEC

Authority to Delegate Does Not Include Adoption of Original By-Laws

● The power to adopt the first original by-laws cannot be delegated to the board of directors or trustees; only the power to adopt new by-laws and to amend the
bylaws can be validly delegated.

When Delegated Power Deemed

● The delegated power shall be considered as revoked whenever stockholders owning or representing a majority of OCS/VM shall so vote at a regular or special
meeting.

SEC. 21. Effects of Non-Use of Corporate Charter and Continuous Inoperation

Corporation never started after incorporating - 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.

Corporation started but afterwards stops operations - 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.

Effects of non-use of corporate charter

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.

Three Violations of Conditions Subsequent to Incorporation

1. Failure to organize within five years from incorporation
2. Failure to commence business within five years from incorporation
3. Becoming continuously inoperative for a period of at least five consecutive years

Period to Organize - While the five-year period to commence business or to organize is counted from the date of incorporation, the five-year period in case of continuous
inoperation may commence thereafter or on a date after the date of incorporation.

Effect of Failure to Organize and Commence - The corporation’s certificate of incorporation shall be deemed revoked as of the day following the end of the five-year period.

When will a Corporation Become Delinquent

1. Delinquency for Non-Operation - The SEC may place a corporation under delinquent status if it fails to operate for at least five consecutive years.
2. Failure to Submit Reports - The SEC may place the corporation under delinquent status in case of failure to submit the reportorial requirements three (3) times,
consecutively or intermittently, within a period of five (5) years.

Resumption of Operations - A delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the Commission shall
 24
prescribe. Upon compliance by the corporation, the Commission shall issue an order lifting the delinquent status.

Meaning of Organization - Organization as used in reference to corporations has a well-understood meaning, which is the election of officers, providing for the subscription
and payment of the capital stock, the adoption of bylaws, and such other similar steps
Thus, organization under SEC Rules include
1. Adoption, filing by the corporation and approval by the SEC of the 4. Providing for the subscription and payment of capital stock and
corporate By-laws after incorporation 5. Taking such steps as are necessary to endow the legal entity with
2. Election of Directors or Trustees and Officers capacity to transact the legitimate business for which it was created
3. Establishment of the principal office

Meaning of Commencement of Business

Corporation shall be considered to have commenced the transaction of its business when it has performed preparatory acts geared toward the fulfillment of the purposes for
which it was established such as but not limited to the following:
1. Entering into contracts or negotiation for lease or purchase of properties to be used as business or factory site
2. Making plans for and the construction of the factory and
3. Taking steps to expedite the construction of the company’s working equipment.

G. Corporate powers
● General powers; theory of general capacity ● Power to invest corporate funds in another corporation or business
● Specific powers; theory of specific capacity ● Power to declare dividends
● Power to extend or shorten corporate term ● Power to enter into management contract
● Power to increase or decrease capital stock or incur, create, increase ● Ultra vires acts
bonded indebtedness ● Doctrine of individuality of subscription
● Power to deny pre-emptive rights ● Doctrine of equality of shares
● Power to sell or dispose corporate assets ● Trust fund doctrine
● Power to acquire own shares

Corporate Powers
1. Sec. 35. General powers; theory of general capacity
● A corporation is empowered to exercise any act which is in direct and immediate furtherance of its business, fairly incident to the express powers, and reasonably
necessary to their exercise, even if said power is not expressly granted in the Revised Corporation Code
● If the act is lawful in itself and not prohibited and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s
business, fairly incident to the express powers and reasonably necessary to their exercise
● A corporation holds such powers which are not prohibited or withheld from it by general law.
● General Powers of a Corporation
1. To sue and be sued in its corporate name
2. To have perpetual existence unless the certificate of incorporation provides otherwise
3. To adopt and use a corporate seal
4. To amend its Articles of incorporation in accordance with the provisions of this Code
5. To adopt Bylaws, not contrary to law, morals or public policy, and to amend or repeal the same in accordance with this Code
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a nonstock corporation
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution
8. To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, that no foreign corporation shall give donations in aid of any political party or candidate or for purposes of partisan political activity
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.

2. Specific powers; theory of specific capacity

● Under the Theory of Specific Capacity, a corporation cannot exercise powers except those expressly or impliedly given to it.
1. Sec. 42. Power to declare dividends out of unrestricted retained earnings
2. Sec. 37. Power to increase or decrease capital stock / power to incur, create or increase bonded indebtedness
3. Sec. 38. Power to deny pre-emptive right
4. Sec. 39. Sell, dispose, lease, encumber all or substantially all of corporate assets
5. Sec. 40. Power to acquire own shares
6. Sec. 41. Invest corporate funds in another corporation or business or for any other purpose other than the primary purpose
7. Sec. 43. Power to enter into management contract
8. Sec. 36. Extension/shortening of corporate term; and
9. Sec. 11. To Revive its corporate existence

3. Sec. 36. Power to extend or shorten corporate term

● Requirements for extending or shortening the corporate term
a. Majority vote of the board of directors or trustees
b. Ratification by stockholders representing 2/3 of Outstanding Capital Stock (OCS) or Membership in the meeting duly called for such purpose; and
❖ Note: Sec. 6. With or without voting rights
c. Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders or members at their respective place of
residence served personally or sent electronically.
d. Sec. 15. Favorable endorsement of the appropriate government agency in case of special corporations
❖ In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal.
● Sec. 11. Period for Extension of Corporate Term / Power to Revive its Corporate Existence
a. GENERAL RULE: Amendment to extend the corporate term cannot be made earlier than three (3) years prior to the expiration of the present term
EXCEPTION: There may be an earlier extension for justifiable reasons as determined by the SEC upon application
b. Amendments to extend or shorten the term must be done before the term expires.
No extension of corporate life is allowed by amendment of articles of incorporation to be effected during the three-year statutory period for liquidation
when its original term had already expired.

4. Sec. 37. Power to increase or decrease capital stock or incur, create, increase bonded indebtedness
No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by:
● Power to increase or decrease capital stock: Requirements
a. Majority vote of the board of directors
b. Ratification by 2/3 of the OCS in the meeting duly called for such purpose
❖ Note: Stockholders who may vote are those with or without voting rights.
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c. Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders or members at their respective place of
residence served personally or sent electronically.
d. 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:
i. That the requirements of this section have been complied with
ii. The amount of the increase or decrease of the capital stock
iii. 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
iv. Any bonded indebtedness to be incurred, created or increased;
v. The amount of stock represented at the meeting; and
vi. The vote authorizing the increase or decrease of the capital stock;
e. 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
f. 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
● Incurring, Creating, or Increasing Bonded Indebtedness
a. Majority vote of the board of directors
b. Ratification by 2/3 of the OCS in the meeting duly called for such purpose
❖ Note: Stockholders who may vote are those with or without voting rights
c. Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders or members at their respective place of
residence served personally or sent electronically
d. 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:
i. That the requirements of this section have been complied with
ii. Any bonded indebtedness to be incurred, created or increased
iii. The amount of stock represented at the meeting; and
iv. The vote authorizing the incurring, creating or increasing of any bonded indebtedness
e. 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.

5. Sec. 38. Power to deny pre-emptive rights

● Pre-emptive right: preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings
○ Purpose: enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus
● GENERAL RULE: All stockholders of a stock corporation may enjoy such pre-emptive right (unissued / newly issued shares)
● EXCEPTION
a. Such right is denied by the articles of incorporation or an amendment thereto
b. Such preemptive right shall not extend to shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the
public; or
c. 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
● When a corporation reacquires its own shares which thereby become treasury shares, all shareholders are entitled to pre-emptive right when the corporation
reissues or sells these treasury shares.
● Pre-emptive right may be waived by the stockholder when the stockholder fails to exercise his pre-emptive right after being notified and given an opportunity to
avail of such right.
● Pre-emptive right of a stockholder is transferable unless there is an express restriction in the AOI.

6. Sec. 39. Power to sell or dispose corporate assets

● GENERAL RULE: Par. 1. 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 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 in: (a) money, (b) stocks, (c) bonds, or (d) other instruments for the payment
of money or other property or consideration, as its board of directors or trustees may deem expedient
● EXCEPTION: Par. 2. If the sale involves all or substantially all of the corporation's properties and assets, including its goodwill, it 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
● EXCEPTION TO THE EXCEPTION: Par. 7. (sale need not have the approval of shareholders) If sale, lease, exchange, mortgage, pledge or other disposition is:
a. Necessary in the usual and regular course of business of said corporation or;
● Example: Substantially all of a corporation's assets is its inventory for sale as part of its principal business
b. If the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business

● Par. 4. How to Determine if the Sale Involves All or Substantially All of the Corporation’s Properties
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.
● Par. 6. Abandonment of Sale
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.
NELL Doctrine EDWARD J. NELL COMPANY, v. PACIFIC FARMS, INC., G.R. No. L-20850. November 29, 1965
GENERAL RULE: The sale or transfer of the assets of one corporation to another does not ipso facto (by the fact itself) include the debts and liabilities of the transferor
EXCEPTIONS: The transferee of corporate assets or property is liable for the debts of the transferor in case of:
a. Express Assumption of Liability – Where the transferor expressly or impliedly agrees to assume the debts of the transferee
b. Sec. 79. Disposition Amounting to Merger or Consolidation – The surviving or the consolidated corporation shall possess all the rights, privileges, immunities,
and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code
c. Business Enterprise Transfer – Where the transferee corporation is merely a continuation or successor-in-interest of the transferor corporation; and
d. Disposition in Fraud of Creditors – Where the transaction is entered into fraudulently in order to escape liability for such debts (CIVIL CODE, Art.1381(3))

7. Sec. 40. Power to acquire own shares

A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases:
Provided that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:
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
 26
during said sale; and
c. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code
● Effect of Acquisition of Outstanding Shares
Redeemable shares are generally deemed retired. Except if otherwise provided. Shares acquired by the corporation shall become treasury shares.
Conditions for the Exercise of the Power:
1. That there shall be unrestricted retained earnings; and
2. That it be for a legitimate and proper corporate purpose
● When Availability of Unrestricted Retained Earnings Not Required for Acquiring Shares
a. Sec. 8. Redemption of redeemable shares
b. Sec. 103. When the shares are reacquired by a close corporation in case of a deadlock
❖ Note: In both cases, the acquisition of the shares using capital funds should not prejudice creditors.

8. Power to invest corporate funds in another corporation or business

● Sec. 41. Invest Corporate Funds for Primary Purpose - 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
● Investment in Pursuit of Secondary Purposes - The Corporation may opt to invest its funds in the secondary purposes stated in its AOI. In which case however,
Section 41 of the Revised Corporation Code applies.
● Requirement
a. Majority vote of the board of directors
b. Ratification by 2/3 of the OCS in the meeting duly called for such purpose
❖ NOTE: Stockholders who may vote are those with or without voting rights.
c. Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders or members at their respective place of
residence served personally or sent electronically.

9. Sec. 42. Power to declare dividends

● The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings to all stockholders on the basis of outstanding
stock held by them which shall be payable in: (a) Cash, (b) Property, or (c) Stock
● Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock
EXCEPTIONS
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.
● If there is a wrongful or illegal declaration of dividends, the BOD is liable. The stockholders should return the dividends to the corporation (solutio indebiti)
● Stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered.
● Unrestricted Retained Earnings
The amount of accumulated profits and gains realized out of the normal and continuous operations of the company after deducting therefrom distributions to
stockholders and transfers to capital stock or other accounts, and which is:
a. Not appropriated by its Board of Directors for corporate expansion projects or programs
b. Not covered by a restriction for dividend declaration under a loan agreement; and
c. Not required to be retained under special circumstances obtaining in the corporation such as when there is a need for a special reserve for probable
contingencies
● Major Classes of Dividends
a. Cash Dividend – Dividends payable in cash
b. Property Dividend – Dividends distributed to the stockholders in the form of property, whether real or personal, other than in cash or cash equivalents;
and
❖ NOTE: Dividends payable using treasury stocks are considered property dividends and not stock dividends.
c. Stock Dividend – Dividends payable in unissued shares of the corporation.
The declaration of stock dividends is akin to forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion of its entire unrestricted
restrained earnings either to its working capital or for capital asset acquisition or investments.
➔ Liquidating “Dividends” - Dividends which are actually distributions of the remaining assets of the corporation after dissolution after all the obligations
and liabilities of the corporation had been extinguished. They are strictly not “dividends” within the meaning of Section 43 of the Corporation Code as
they are not paid out of the profits of the corporation’s business but from the capital assets. They are in fact the return of the capital invested rather
than a distribution of profits.
● Some Common Purposes of Declaring Stock Dividends
a. Allows the payment of dividends in cases where the corporation may not have sufficient cash to pay such dividends in cash
b. Allows the corporation to capitalize its surplus profits; and
c. Allows shareholders to forestall the imposition of final income tax since they are not taxed until the dividends are paid in cash
● How Dividends are Declared
a. Cash or Property Dividends – by approval of majority of the board of directors; or
b. Stock Dividends
i. Board approval; and
ii. Ratification by stockholders representing at least 2/3 of OCS in a meeting duly called for such purpose

10. Sec. 43. Power to enter into management contract

Any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service
contracts, operating agreements, or otherwise.
● GENERAL RULE: The conclusion of a management contract shall be 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 non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose.
● EXCEPTION: The management contract shall be approved by the stockholders of the managed corporation owning at least ⅔ of the total outstanding
capital stock entitled to vote, or by at least ⅔ of the members in the case of non-stock corporation in the following instances:
a. When the stockholder or stockholders representing the same interest of both the managing and the managed corporation own or control more than
one-third (1/3) of the total outstanding capital stock and titled to vote of the managing corporation; or
b. Where 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
● Limit on Term of Management Contract
○ GENERAL RULE: No management contract shall be entered into for a period longer than five (5) years for any one (1) term
○ EXCEPTIONS: Contracts which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such
periods as may be provided by pertinent laws or regulations

11. Sec. 44. Ultra vires acts

● No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of the powers so conferred
● Acts not within the express, implied and inherent powers of the corporation
○ Not illegal - voidable (generally)
 27
○ Illegal - void
● An act is ultra vires when it is committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the
powers conferred upon it by law
● An Ultra Vires Act May Be That of:
1. The Corporation - if the act is
a. Not one primary or secondary purposes stated in its AOI; or
b. Not reasonably implied or incidental to those powers as may be provided by law or its charter
2. The Board of Directors - if the act of the Board is within corporate powers but it is done—
a. Beyond the competence of the board
b. Without the requisite quorum
c. Without the requisite majority even if there is quorum
d. Without the concurrence of the shareholders or members when required and/or in the manner prescribed by law; or
e. Otherwise in contravention of the AOI or bylaws.
3. The Corporate Officers - if the act of corporate officers is not within the scope of their authority as prescribed in the AOI or the by-laws.

12. Doctrine of individuality of subscription / Doctrine Of Indivisibility Of Subscription Contract – Covered by previous handout
Doctrine of Indivisibility of Subscription Contract
No certificate of stock may be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due,
has been paid. The failure to pay any of the installments due would necessarily affect all other installments, because the subscription is to be treated as one, whole, entire and
indivisible contract. The default of payment on any of the installment results in the entire subscription becoming due and demandable. All partial payments on one subscription
shall be deemed applied proportionately among the number of shares.

Nature of Subscription Contracts

● A subscription contract is essentially a contract between the corporation and the subscribing person
● The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed
● A subscription contract is formed by an offer by one of the parties, the corporation, or the subscriber, as the case may be, and an acceptance of this offer by the
other. There is binding contract of subscription as soon as the offer to take shares made by a person to a corporation is accepted by the corporation as soon as the
person to whom the offer is made accepts an offer of shares by a corporation
● Even if subscribers have legal standing to sue for rescission of subscription contract based on breach of contract, such action cannot prosper since rescission will
violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code
NOTE: A subscription contract may cover one or more shares. But even if it covers two or more shares, the contract is an indivisible contract

13. Sec. 6. Doctrine of equality of shares

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

14. Trust fund doctrine (TFD) – covered by previous handout

● Provides that 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
● Not limited to reaching the stockholders’ unpaid subscriptions
● Scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in
equity as a trust fund for the payment of corporate debts
● All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders,
regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim
● Established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that
the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts

Stockholders and Members

● Fundamental rights of a stockholder ● Remedial rights
● Participation in management 1. Individual suit
1. Proxy 7.3.8.2.2 Voting trust 2. Representative suit
2. Cases when stockholders' action is required 3. Derivative suit
3. Manner of voting ● Obligations of a stockholder
● Proprietary rights ● Meetings
1. Appraisal right 1. Regular or special
2. Right to inspect 2. Notice of meetings
3. Preemptive right 3. Place and time of meetings
4. Right to vote 4. Quorum
5. Right to dividends 5. Minutes and agenda of meetings
6. Remote communication
Kinds of Powers of a Corporation
1. Express powers - granted by law, Corporation Code, and its Articles of Incorporation or Charter, and administrative regulations
a. General powers (Sec. 35) b. Specific powers (Sec. 36-43)
2. Inherent/incidental - are deemed to be within the capacity of corporate entities
● Power of succession ● Power to acquire, hold or dispose property as its business
● Power to have a corporate name may reasonably require
● Power to adopt a corporate seal ● Power to adopt and amend its bylaws
3. Implied/necessary - exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in
the Charter
● Acts in the usual course of business business
● Acts to protect debts due to the corporation ● Acts designed to protect or aid employees
● Acts which involve embarking on a different line of ● Acts to increase the business of the corporation
Stockholders and Members
Fundamental rights of a stockholder
PROPRIETARY RIGHTS: These rights pertain to certain economic benefits that accrue to his shares, such as:
1. Right to receive dividends
2. Right to participate in the assets of the corporation upon dissolution and liquidation
❖ NOTE: Members of a non-stock corporation have no proprietary rights except as to the right to participate in the distribution of the remaining capital contribution
subject to the rules of distribution under Section 93 of the RCC.

REMEDIAL RIGHTS: These refer to remedies of the stockholder may pursue depending on the issues involve, such as:
1. Appraisal right
2. Pre-emptive right
3. Right to inspect
4. Right to copy of the financial statements of the company; and
5. Right to file a derivative suit

MANAGEMENT RIGHTS: These refer to participation in the conduct of business of the corporation exercised through the following:
1. Right to vote on all corporate acts requiring stockholder’s approval
2. Right to elect the directors of the corporation
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Participation in management
I. Sec. 57. Proxy - It is a written authorization given by one person to another so that the second person can act for the first such as that given by the shareholder to someone
else to represent him and vote his shares at a shareholder’s meeting.

Requirements for Validity:

1. It shall be Filed before the scheduled meeting with the corporate secretary
2. No proxy shall be valid and effective for a period longer than five (5) years at any one time; 3. It shall be Signed by the stockholder or member concerned
3. Proxies shall be in Writing; and
4. Unless otherwise provided in the proxy form, it shall be Valid only for the meeting which it was intended

Revocation of Proxies - Proxies, even those with irrevocable terms, have always been considered as revocable, unless coupled with an interest.

Revocation may be Made Through:

1. Formal Notice
2. Verbal Communication; or
3. Conduct i.e., when the stockholder votes or attends the meeting personally notwithstanding his appointment of a proxy. In such case, the proxy is deemed revoked

Sec. 88. Right to Vote by Proxy May be Denied in NonStock Corporations

In non-stock corporations, the right to vote by proxy, or even the right to vote itself may be denied to members in the AOI or the by-laws as long as the denial is not
discriminatory

II. SEC. 58. Voting Trusts – One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in
a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be
in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Commission;
otherwise, the agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall
be issued in the name of the trustee or trustees, stating that they are issued pursuant to said agreement. The books of the corporation shall state that the transfer in the name
of the trustee or trustees is made pursuant to the voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors, voting trust certificates, which shall be transferable in the same manner and with the same effect as
certificates of stock.

The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or
record: Provided, That both the trustor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of
this Code.

Any other stockholder may transfer the shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be
bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for purposes of circumventing the laws against anti-competitive agreements, abuse of dominant position, anti-competitive
mergers and acquisitions, violation of nationality and capital requirements, or for the perpetuation of fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period. The voting trust certificates as well as the
certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the trustors.
The voting trustee or trustees may vote by proxy or in any manner authorized under the bylaws unless the agreement provides otherwise.
Voting Trust Agreement (VTA)
The law simply provides that a voting trust agreement is an agreement in writing whereby one or more stockholders (or members) of a corporation consent to transfer his or
her shares to a trustee in order to vest in the latter voting or other rights pertaining to share shares for a period of not exceeding 5 years and upon such other terms and
conditions specified in the agreement.
❖ Note: A VTA is not governed by the law on agency. It is instead governed by Section 58 of the Revised Corporation Code and suppletorily by the general law on
trusts.

Sec. 58. Powers or Rights of Voting Trustees

1. They shall possess the right to vote and other rights pertaining to the shares so transferred and registered in his or their names subject to the terms and conditions
of and for the period specified in the agreement
2. May vote in person or by proxy unless the agreement provides otherwise
3. The trustee may exercise the rights of inspection of all corporate books and records; and
4. The trustee is the legal title holder or owner of the shares so transferred under the agreement. He is therefore qualified to be a director.

Effect of VTA on Qualification for Directorship or Trusteeship

Because a VTA results in the parting of legal title from the trustor to the trustee, a shareholder or member who assigns his membership or all of his shares in a VTA ceases to
become a shareholder or member of the corporation. Thus, he/she is disqualified from being elected as director or trustee. If he/she is an incumbent, he/she is immediately
disqualified and the position is vacated.

VOTING TRUST AGREEMENT PROXY PROXY

As to Nature The trustee votes as owner. The proxy holder votes as special agent.
As to Form of Instrument The agreement must be notarized. Proxy need not be notarized.
As to Legal Title Trustee acquires legal title to the shares of the transferring stockholder; Proxy has no legal title to the shares of the principal.
only beneficial title remains with the stockholder.
As to Manner of Voting The trustee may vote in person or by proxy unless the agreement provides The proxy must vote in person.
otherwise.
As to Actions Allowed Trustee is not limited to act at any particular meeting. Proxy can only act at a specified stockholder’s meeting (if not continuing).
As to Restrictions on A trustee can vote and exercise all the rights of the stockholder even when A proxy can only vote in the absence of the owners of the stock.
Voting the latter is present.
As to Separability of The voting right is divorced from the ownership of stocks. The right to vote is inherent in or inseparable from the right to ownership of
Ownership and Voting stock.
Right
As to Revocability Sec. 58 Revocable anytime, except if coupled with interest.
GENERAL RULE: Irrevocable for 5 years. EXCEPTION: If specifically
required as a condition in a loan agreement, it may be for a period
exceeding 5 years, but shall automatically expire upon full payment of the
loan
 29

III. Cases when stockholders' action is required

A. MAJORITY VOTE OF THE OUTSTANDING CAPITAL STOCK
1. To enter into Management contract
2. To amend or repeal bylaws
3. To dissolve a corporation when creditors are not affected
B. 2/3 VOTE OF THE OUTSTANDING CAPITAL STOCK
1. To amend the AOI, except when mere written assent is allowed
2. To extend or shorten the corporate term
3. To increase or decrease capital stock, and create or incur bonded indebtedness
4. To amend the AOI to deny pre-emptive right
5. To sell or dispose of all or substantially all of the corporate assets
6. To invest corporate funds in another corporation or business or for any other purpose
7. To declare stock dividends
8. To enter into management contract if:
a. A stockholder /s representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total OCS
entitled to vote of the managing corporation; or
b. Where a majority of the members of the BOD of the managing corporation also constitute a majority of the members of the BOD of the managed
corporation
9. Merger or consolidation
10. Dissolution where creditors are affected

IV. Manner of voting

Stockholders/Members may vote
1. Directly, in person; or
2. Indirectly
a. Sec. 49. By means of a proxy
b. Sec. 49. Through remote communication or in absentia
c. Sec. 58. By a trustee under a voting trust agreement; or
d. By executors, administrators, receivers, or other legal representatives duly appointed by the court

i. Proprietary rights
Sec. 80-85. Appraisal right
It is the right to demand payment of the fair value of his shares after dissenting from a proposed corporate action involving a fundamental change in the corporation in the
cases provided by law. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code.

ACTION
Stockholder’s written demand on the corporation for the payment of his shares.
Appraisal of three disinterested persons in case of disagreement between the
stockholder and corporation of the fair value of the shares.
Payment by the corporation of the award of the appraisers.
Restoration of voting and dividend rights to the dissenting stockholder.
Submission by stockholder of his certificates of stock to the corporation for notation
that such shares are dissenting shares.
PERIOD
Within 30 days after the date on which the vote on the proposed corporate action was
taken.
Within 60 days from the date the corporate action was approved by the stockholders.
Within 30 days after such award was made.
Immediately after the passage of 30 days after the award and the dissenting
stockholder is still not paid the value of his shares
Within 10 days after demanding payment for the stockholder’s shares.

INSTANCES WHEN APPRAISAL RIGHT MAY BE EXERCISED

1. An Amendment to the articles that has the effect of:
a. Changing or Restricting the Rights of Shareholders; or
b. Of Authorizing Preferences over those of Outstanding Shares; or
c. Changing the Term of Corporate Existence
2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets
3. Investment of corporate funds in another corporation or in a purpose other than the primary purpose
4. Merger or consolidation and
5. In a close corporation, a stockholder may, for Any reason, compel the corporation to purchase his shares when the corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock.

CONDITIONS FOR EXERCISE OF APPRAISAL RIGHT

1. Dissenting stockholder must have voted Against the proposed action
2. Any of the Instances set forth by law must be present
3. Demand for payment must be made within 30 days from the date vote is taken thereon
4. Submission by withdrawing stockholder of his shares to the corporation for notation of being dissenting stockholder within 10 days from written demand
5. Price must be based on Fair value as of the day prior to date on which vote was taken
6. Payment must be made only when the corporation has Unrestricted retained earnings in its books; and
7. Stockholder must Transfer his shares to the corporation upon payment by the corporation.

Sec. 82. EXERCISE AND TERMINATION OF APPRAISAL RIGHT

1. All rights accruing to such shares shall be suspended from the time of demand for payment of the fair value of the shares until either the abandonment of the
corporate action or the purchase of the said shares by the corporation
2. The dissenting stockholder shall be entitled to receive payment of the fair value of his shares as agreed upon between him and the corporation or as determined
by the appraisers chosen by them
3. If not paid within 30 days after the award, his voting and dividend rights shall be immediately restored
4. Upon such payment, all his rights as stockholder are terminated, not merely suspended. But if before he is paid the proposed corporate action is abandoned, his
rights and status as a stockholder shall thereupon be permanently restored.
5. Payment may be made only if the corporation has unrestricted retained earnings in its books to cover the same

ii. Sec. 73. Right to inspect

How Right is Properly Exercised
1. The right must be exercised during reasonable hours on business days
2. In case he/she demands for a copy of excerpts of the records or minutes, the copies shall be made at the expense of the inspecting D/T/SH/M
3. The demand is made in good faith or for a legitimate purpose; and
4. The person demanding the right has NOT improperly used any information obtained through any previous examination of the books and records of the corporation;
and
5. The person demanding is not a competitor, director, officer, controlling stockholder or otherwise represents the interest of a competitor
 30
❖ NOTE: Right to inspect subsists even after dissolution of the corporation during the three-year liquidation period.

Requisites to Give Rise to Cause of Action for Denial of Right to Inspect

1. A Director/Trustee/Shareholder/Member has made a proper demand for exercise of his/her right to inspect; and
2. Any officer or agent of the concerned corporation, by himself, or by voting to do so in a board resolution, shall refuse to allow the said D/T/SH/M to examine and
copy said excerpts

iii. Preemptive right / Pre-emptive right

The preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings
● GENERAL RULE: All stockholders of a stock corporation may enjoy such pre-emptive right.
● EXCEPTION
1. Such right is denied by the articles of incorporation or an amendment thereto
2. Such preemptive right shall not extend to shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or
3. 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.

iv. Right to vote

1. Sec. 6. Stock Corporations
No share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided by law. There shall
always be a class or series of shares which have complete voting rights.

Ownership includes the right to enjoy, dispose of, exclude, recover, a thing without limitations other than those established by law or by the owner. The right to vote
shares is a mere incident of ownership of voting shares
2. Sec. 88. In Non-Stock Corporations
The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws.
Unless so limited, broadened, or denied, each member, regardless of class, shall be entitled to ONE (1) vote.

INSTANCES WHEN VOTING RIGHT IS NOT AVAILABLE

1. Sec. 56. Treasury shares
2. Escrow shares
3. Fractional shares
4. Sec. 70. Delinquent stocks
5. Sec. 6. When provided for in the AOI; and
6. Sequestered Shares

MANNER OF VOTING
Stockholders/Members may vote:
1. Directly, in person; or
2. Indirectly
a. Sec. 49. By means of a proxy
b. Sec. 49. Through remote communication or in absentia
c. Sec. 58. By a trustee under a voting trust agreement; or
d. Sec. 54. By executors, administrators, receivers, or other legal representatives duly appointed by the court

v. Right to dividends
Corporate profits allocated, lawfully declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time.
Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property.
Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the declared dividend taken from the unrestricted retained
earnings of a corporation .
Major Classes of Dividends
1. Cash Dividend – Dividends payable in cash
2. Property Dividend – Dividends distributed to the stockholders in the form of property, whether real or personal, other than in cash or cash equivalents; and
❖ Note: Dividends payable using treasury stocks are considered property dividends and not stock dividends.
3. Stock Dividend – Dividends payable in unissued shares of the corporation.

Nature of Stock Dividends

The declaration of stock dividends is akin to forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion of its entire unrestricted restrained
earnings either to its working capital or for capital asset acquisition or investments.

Liquidating “Dividends”
“Dividends” which are actually distributions of the remaining assets of the corporation after dissolution after all the obligations and liabilities of the corporation had been
extinguished. They are strictly not “dividends” within the meaning of Section 43 of the Corporation Code as they are not paid out of the profits of the corporation’s business but
from the capital assets. They are in fact the return of the capital invested rather than a distribution of profits.

Remedial Rights
INDIVIDUAL SUIT REPRESENTATIVE SUIT DERIVATIVE SUIT
Who Brings the Action Stockholder or member against the A person in his own behalf and on behalf One or more stockholders or members in the name and on
corporation. of all similarly situated behalf of the corporation
Basis for the Action Direct violation of the stockholder’s or Common injury caused to the To redress wrongs committed against the corporation or to
member’s personal stockholders or members protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue or are the ones to be sued or hold
control of the corporation

DERIVATIVE SUIT: Basis

A stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties.

Requisites of Derivative Suit

1. Party bringing the suit should be a Shareholder as of the time of the act or transaction complained of
❖ NOTE: An exception to this rule is a situation where the transactions continue and are injurious to the stockholders or affect him especially and specifically in some
other way
2. Cause of action actually belongs to the corporation
3. Exhaustion of Intra-Corporate Remedies
❖ NOTE: Includes non-availability of appraisal right to dissenting stockholders
4. Not a Nuisance or harassment suit
5. The action must be bought in the Name of the corporation. It is sine qua non that the corporation is impleaded or made a party to a case.
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Obligations of a stockholder
A STOCKHOLDER SHALL BE LIABLE FOR THE FOLLOWING: If stocks are not yet fully paid but are not yet delinquent.
1. Sec. 66. Payment of the balance of the subscription and/or
2. Sec. 65. Interest on the unpaid subscription

Sec. 66. UNPAID SUBSCRIPTION: When Payment Shall Be Made

1. On the date specified in the subscription contract; or
2. On the date stated in the call made by the board

Sec. 66. Effect of Failure to Pay

Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a
different interest rate is provided in the subscription contract.

DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION CONTRACT

The failure to pay any of the installments due would necessarily affect all other installments, because subscription is to be treated as one, whole, entire, and indivisible
contract. The default of payment on any of the installment results to entire subscription becoming due and demandable.

Sec. 65. INTEREST ON UNPAID SUBSCRIPTION

● GENERAL RULE: No interest shall be due on the unpaid subscription.
● EXCEPTION: If so required by and at the rate of interest fixed in the subscription contract. If no rate of interest is fixed in the subscription contract, the prevailing
legal rate shall apply

MEETINGS OF STOCKHOLDERS/MEMBERS (SEC. 48, 49, 50, 51, & 53)

i. Regular or special
REGULAR MEETINGS SPECIAL MEETINGS
As to Purpose 1. Principal - (a) Election of new board and officers, (b) Ratification of corporate acts Any purpose authorized by law, the AOI, or the by-laws
2. Secondary - Any other valid corporate agenda which require the convening of the shareholder
As to Venue Stock Corporations
1. The city/municipality where the principal office of the corporation is located.
2. If practicable, in the principal office of the corporation.
❖ NOTE: Sec. 50. Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan areas shall be considered as cities or municipalities.
Non-Stock Corporations At any place within the Philippines provided in their bylaws
As to When Held Sec. 49. Annually on a date fixed in the by-laws. If not fixed, on any date after April 15 of Sec. 49. Any time when deemed necessary or as provided
every year as decided by the board in the by-laws
As to Period of Written notice must be given to SH/M at least twenty-one (21) days prior to the meeting Written notice must be given to SH/M at least one week
Notice unless: prior to the meeting unless:
1. Otherwise provided in the by-laws, law, or regulation; or 1. Otherwise provided in the by-laws, law, or
2. Waived by the SH/M regulation; or
2. Waived by the SH/M
As to Who May Call In the following order:
1. The person authorized in the AOI/B-L
2. The petitioning SH/M upon order of the SEC grating a petition that shows good cause therefor
As to Who Presides In the following order:
1. The person authorized in the AOI/BL
2. The Chairman of the corporation
3. The President of the corporation (in the absence of the Chairman)
4. The person chosen by the majority of the SH/M from among themselves
5. The petitioning SH/M until a SH/M shall have been chosen by a majority of the
SH/M present in meetings called by order of the SEC

REQUIREMENTS FOR STOCKHOLDERS’ OR MEMBERS’ MEETING

1. It must be called by the person duly authorized by the by-laws, the Corporation Code, or by the SH/M
2. There must be a written notice sent to the address of the SH/M of record in the period prescribed by statute or by law
3. The notice must state the purpose of the meeting, the date and time of the meeting, and the venue of the meeting
4. It must be held at the proper venue
5. It must be held at the Date and time stated in the notice or at a reasonable time thereafter; and
6. There must be a Quorum

ii. Sec. 49. Electronic Notice of Meeting

A written notice of regular meetings may be sent to all stockholders or members of record through electronic mail or such other manner as the Commission shall allow under
its guidelines

iii. Sec. 50. Place and Time of Meetings of Stockholders or Members

Stockholders’ or members’ meetings, whether regular or special, shall be held in the principal office of the corporation as set forth in the articles of incorporation, or, if not
practicable, in the city or municipality where the principal office of the corporation is located: Provided, That any city or municipality in Metro Manila, Metro Cebu, Metro Davao,
and other Metropolitan areas shall, for purposes of this section, be considered a city or municipality.

Notice of meetings shall be sent through the means of communication provided in the bylaws, which notice shall state the time, place and purpose of the meetings.
Each notice of meeting shall further be accompanied by the following:
a. The agenda for the meeting
b. A proxy form which shall be submitted to the corporate secretary within a reasonable time prior to the meeting
c. When attendance, participation, and voting are allowed by remote communication or in absentia, the requirements and procedures to be followed when a
stockholder or member elects either option; and
d. d. When the meeting is for the election of directors or trustees, the requirements and procedure for nomination and election.

All proceedings and any business transacted at a meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the
meeting is improperly held or called: Provided, That all the stockholders or members of the corporation are present or duly represented at the meeting and not one of them
expressly states at the beginning of the meeting that the purpose of their attendance is to object to the transaction of any business because the meeting is not lawfully called
or convened.
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iv. Quorum: It is that number of members of a body which, when legally assembled in their proper places, will enable the body to transact its proper business or that number
which makes a lawful body and gives it power to pass upon a law or ordinance or do any valid act.

Sec. 51. Quorum of Meetings of Shareholders or Members

● GENERAL RULE: A quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of
non-stock corporationsL
● EXCEPTION: Unless otherwise provided for in the Code or in the by-laws
A corporation is authorized to provide in its by-laws a quorum less than majority. However, the provision in the by-laws relative to quorum will not hold true in those instances
where the Corporation Code or applicable special law explicitly prescribes the proportion of stockholders or members necessary to resolve or carry out a particular corporate
proposal.

Effect of Lack of Quorum

Any matter or transaction must necessarily fail if the number of votes attained is less than what is prescribed for the particular transaction. If an issue to be resolved requires a
majority for it to be passed and there is a deadlock, the issue or proposition simply loses. There, is therefore, no need to break the deadlock.

v. Minutes and agenda of meetings

Contents of Book of Minutes
1. Date and time of meeting 8. Every act done or ordered done at the meeting
2. Place of meeting 9. In addition, the following upon demand of any director, trustee,
3. How the meeting was authorized stockholder or member, (Director/Trustee/Shareholder/Member)
4. The fact that notice was given a. Time when any D/T/SH/M entered or left the meeting
5. Whether the meeting was regular or special b. Record of yeas or nays on any motion or proposition; and
6. If the meeting was special, its objective/s must be stated c. The protest of any D/T/SH/M on any motion or proposition
7. Those present and absent; and

vi. Remote communication

The stockholders or members of corporations may also vote through remote communication or in absentia:
a. When so authorized in the bylaws; or
b. By a majority of the board of director

I&J. Board of Directors and Trustees

1. Repository of corporate powers 11. Responsibility for crimes
2. Tenure, qualifications and disqualifications of directors 12. Special fact doctrine
3. Corporations vested with public interest 13. Inside information
4. Independent directors 14. Contracts
5. Elections 15. Between corporations with interlocking directors
6. Removal 16. Executive and other special committees
7. Filling of vacancies 17. Meetings
8. Compensation a. Regular or special
9. Disloyalty b. Who presides?
a. Business judgment rule c. Quorum
b. Solidary liabilities for damages d. Remote communication
10. Personal liabilities e. Rule on abstention

Board of Directors and Trustees

Repository of Corporate Powers

Functions: Board of Directors (Sec. 22)

● Exercise the corporate powers
● Conduct all business
● Control all properties of the corporation

Doctrine of Centralized Management

● Corporate powers are vested in a body, called board of directors for a stock corporation and board of trustees for a nonstock corporation
○ Except instances where S/M approval is required for certain acts

Commencement of operations
● S/H elect board of D/T
● D/T elect officers

Tenure, qualifications, and disqualifications of directors

Term: time during which the officer may claim hold to the office as a right and fixes the interval after which the several incumbents shall succeed one another
● Fixed by statute and does not change simply because office may have become vacant nor successor has not been elected and has failed to qualify
● 1 year term (director); 3 years term (trustees); Exception: Principle of Holdover
Tenure: represents his actual incumbency; may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent
● Extends until successor is duly elected and qualified

Principle of Holdover: Each director and trustee shall hold office until the successor is elected and qualified
● If his successor is not elected and qualified, the D/T may continue to perform his duties in a holdover capacity
● Holdover period is not part of the term of office of the D/T
● Vacancy can only be filled by the stockholders in a meeting duly called for the purpose and not by BOD even though the remaining directors may still constitute a
quorum
● A public officer whose term has expired or services have been terminated is allowed to continue holding his office until his successor is appointed or chosen and
had qualified.
● Purpose: Public interest. It is to prevent a hiatus in the government pending the time when a successor may be chosen and inducted into office.

Qualifications of D/T (Sec. 10)

1. Any Person, partnership, association or corporation, singly or jointly with others, may now be incorporators
2. Of legal age if natural person
3. Owner of at least 1 share of stock and must be a S/M of the corporation
● Bylaws MAY enlarge the share ownership requirement provided that it is not intended to deprive the minority representation. Additional qualifications of
D&T may be prescribed under bylaws (Sec. 46).
4. Not more than 15 (nonstock: no limit), no minimum number is required
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5. Except with respect to independent trustees of nonstock corporations vested with public interest, only a member of the corporation shall be elected
6. Trusteed of educational institutions organized as nonstock corporations or religious societies shall not be less than 5 not more than 15. However, with respect to
educational institutions, the number of trustees shall only be multiples of 5.
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 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.

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.’

Independent director
● 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
○ a director who has no direct or indirect material relationship with the company other than membership on the Board
● must be elected by the shareholders present or entitled to vote in absentia during the election of 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

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:
1. Convicted by final judgment:
a. Of an offense punishable by imprisonment for a period exceeding six (6) years;
b. For violating this Code; and
c. For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”;
2. Found administratively liable for any offense involving fraudulent acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other disqualifications, which the Commission, the primary regulatory agency, or the Philippine Competition Commission
may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings.

Requisites for election of D/T to be valid

1. Each stockholder or member shall have the right to nominate any director or trustee to be elected
● Except when the exclusive right is reserved for holders of founders’ shares under Section 7 of this Code
2. Notice of meeting sent to stockholders
3. Owners of the majority of the OCS or majority members entitled to vote must be present, either in person or by a written proxy. If voting through remote
communication or in absentia will be allowed, voter shall be deemed present for purposes of counting the majority/quorum.
4. Meeting must be presided by the officer indicated under the bylaws
5. Election must be by ballot if requested by any voting stockholder or member
6. For SC, stockholders may cast such number of votes based on the shares registered in their names in the books multiplied by the whole number of directors to be
elected
7. For NSC, unless otherwise provided in their AOI or BL, members 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
8. Nominees receiving the highest number of votes shall be duly elected as D/T
9. Elected D/T must possess all of the qualifications and none of the disqualifications under RCC and the BL of the corporation
a. Cumulative voting b. Quorum

SEC. 23. Election of Directors or Trustees. – Except when the exclusive right is reserved for holders of founders’ shares under Section 7 of this Code, each stockholder or
member shall have the right to nominate any director or trustee who possesses all of the qualifications and none of the disqualifications set forth in this Code.

At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy, the owners of majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. When so authorized in the bylaws or by a majority of the board of directors,
the stockholders or members may also vote through remote communication or in absentia: Provided, That the right to vote through such modes may be exercised in
corporations vested with public interest, notwithstanding the absence of a provision in the bylaws of such corporations.

A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum.
The election must be by ballot if requested by any voting stockholder or member.

In stock corporations, stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own names in the stock books of the corporation
at the time fixed in the bylaws or where the bylaws are silent, at the time of the election. 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.

If no election is held, or the owners of majority of the outstanding capital stock or majority of the members entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting, such meeting may be adjourned and the corporation shall proceed in accordance with Section 25 of
this Code. The directors or trustees elected shall perform their duties as prescribed by law, rules of good corporate governance, and bylaws of the corporation.

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.
 34
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.
SEC. 25. Report of Election of Directors, Trustees and Officers, Non-holding of Election and Cessation from Office. – Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Commission, the names, nationalities, shareholdings,
and residence addresses of the directors, trustees, and officers elected.

The non-holding of elections and the reasons therefor shall be reported to the Commission within thirty (30) days from the date of the scheduled election. The
report shall specify a new date for the election, which shall not be later than sixty (60) days from the scheduled date.

If no new date has been designated, or if the rescheduled election is likewise not held, the Commission may, upon the application of a stockholder, member, director or
trustee, and after verification of the unjustified non-holding of the election, summarily order that an election be held. The Commission shall have the power to issue such
orders as may be appropriate, including orders directing the issuance of a notice stating the time and place of the election, designated presiding officer, and the
record date or dates for the determination of stockholders or members entitled to vote.

Notwithstanding any provision of the articles of incorporation or bylaws to the contrary, the shares of stock or membership represented at such meeting and entitled to vote
shall constitute a quorum for purposes of conducting an election under this section.
Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the director, trustee or officer of the corporation, shall, within seven (7)
days from knowledge thereof, report in writing such fact to the Commission.

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 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.

Causes of Removal: 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.

A D/T may be removed from office by the vote of stockholders or the SEC.
● STOCKHOLDER: Only SH/M have the power to remove the D/T elected by them. The BOD/T may remove an officer but not a D/T.
○ Absences or nonpayment of dues and assessment of the D/T can be considered as just cause for removal. D/T may be removed by the SH
representing ⅔ of the OCS, or ⅔ of the members, even if he is a representative of the minority group.
● SEC: Power to remove a D/T may be exercised by SEC motu proprio or upon receiving a verified complaint. The removal, however, cannot be carried out without
due notice and hearing, consistent with due process requirements. The removal is without prejudice to the imposition of sanctions against the responsible D/T.

Requisites for Removal

1. Takes place at regular or special meeting called for the purpose
If special meeting, must be called by secretary:
● On order of president; or written demand by stockholder holding at least majority of outstanding capital stock, or majority of members
2. Previously notice of intention to propose removal given to stockholders or members
3. Vote of holders with at least ⅔ outstanding capital stock, or ⅔ of members entitled to vote for a non-stock corporation
4. May be with or without cause, however, removal without cause may not be used to deprive minority stockholders or members of the right of representation
5. Vacancy brought by the removal may be filled at the same stockholders’ meeting as long as it was stated in the agenda and notice of the said meeting, or in a
separate meeting called for that purpose

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.

Within what period should the vacancies be filled:

1. 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.
1. 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.
2. 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.

Requisites to create an Emergency Board

1. vacancy prevents the remaining directors from constituting a quorum and
2. emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation,
3. the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees
4. 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.

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.

Causes of vacancy in the position of board D/T

a. Expiration of term, removal or increase in the number of board seats
b. Resignation, retirement, withdrawal, death, abandonment, or similar grounds
SH have the sole power to fill the vacancy in the following cases
a. Cause of vacancy is the expiration of term, removal of a director or increase in the number of board seats
b. Cause of the vacancy is not any of the three grounds referred to above but the remaining directors do not constitute a quorum
BOD may fill the vacancy if the following requisites are present
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a. Cause of the vacancy is due to any ground other than expiration of term, removal of a director or increase in the number of board seats
b. Remaining directors constitute a quorum
Replacement director - director elected to fill a vacancy shall be referred to as a replacement director and shall serve only for the unexpired term of the predecessor in office
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.

General Rule: D/T are not entitled to compensation in their capacity as such, because they are supposed to render their services to the corporation gratuitously, and the
return upon their shares adequately furnishes the motives for service, without compensation.
Exception: Instances when D/T may receive compensation
1. The bylaws authorize the said compensation
2. Stockholders representing at least majority of the OCS or majority of members grant the D/T with compensation and approve the amount thereof at a regular or
special meeting
3. They render services in their capacity other than D/T, even though the payment of compensation is not authorized by the bylaws or stockholders

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 twothirds (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.

Doctrine of Corporate Opportunity

● If the director acquired for himself a business opportunity that should belong to the corporation, he must account to the corporation for all the profits he obtained
unless his act was ratified by the stockholders representing at least ⅔ of the OCS
● Director of the corporation is prohibited from competing with the business in which the corporation is engaged in, as otherwise, he would be guilty of disloyalty,
where profits he may realize will have to go to the corporate funds except if the disloyal act is ratified
● Obligation to account and remit is not excused even if he risked his own funds unless the act was ratified by the stockholders representing at least ⅔ of the OCS

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.

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.

Fiduciary (three-fold) duties of directors

1. Obedience - directors must restrict their acts within the scope of the powers of the corporation; means that they will direct the affairs of the corporation only in
accordance with the purposes for which it was organized
2. Diligence - directors are obligated to perform their duties with the diligence of a good father of a family (directors are protected by the business judgment rule)
3. Loyalty - forbids director from acquiring business deals that belong to the corporation

Business judgment rule - not absolute

● GR: Courts will not interfere in the decisions made by the BOD as regards the internal affairs of the corporation as long as it acts in good faith
● Exception: Contrary to law; unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of rights of the minority.

Solidary liabilities for damages

● GR: Directors or officers are not liable for any action taken on behalf of the corporation by reason of their separate and distinct personalities.
● Exception:
1. Willfully and knowingly vote for and assent to patently unlawful acts of the corporation
2. Guilty of gross negligence or bad faith in directing the affairs of the corporation
3. Acquire any personal or pecuniary interest in conflict with their duty (conflict of interest)

Personal liabilities: D/T/O may be held personally liable in the following cases
1. Knowingly voting or assenting to patently unlawful acts of the corporation
2. Gross negligence or bad faith in directing the affairs of the corporation
3. Acquiring any personal or pecuniary interest in conflict with his duty as D/T/O resulting in damage to the corporation
4. Consent to the issuance of watered stocks or who, having knowledge thereof, failing to file objections with the corporate secretary his written objection (Sec. 65)
5. Agrees to hold himself personally and solidarily liable with the corporation
6. By virtue of a specific provision of Law, to personally answer for his corporate action
7. Acting without the authority or in excess of authority or are motivated by ill-will, malice or bad faith, which gives rise to consequent damages

Responsibility for crimes: Officers and directors are liable if it can be proven that they participated therein
A director is not liable for the misconduct of his co-directors or other officers. Unless he connives or conspires or participates in such misconduct or he is negligent in not
discovering or not acting to prevent that misconduct.
● If they authorized the conduct or
● If they knew about the conduct and did nothing

Special Fact Doctrine: makes a D/O liable when he takes advantage of an information b virtue of his office to the disadvantage of the corporation

Inside Information / insider information: information not known to the public that one has obtained by virtue of being an insider
● A director may be held liable for obtaining insider information if he trades securities based on such insider information. Trading on insider information amounts to
an unfair manipulation of the free market.

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;
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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.

Under this provision, such a contract is voidable at the option of the corporation, meaning valid, until annulled by the corporation. The option to void the contract ceases if the
foregoing requisites are duly complied with.

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.

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.

MEETINGS OF DIRECTORS / TRUSTEES (SEC. 48, 52, & 53)

Requisites of a valid board meeting
a. Must be held on the date fixed in the bylaws or in accordance with law
b. Prior written notice of such meeting must be sent to all D/T
c. Must be called by the proper party
d. Must be held at the proper place
e. Quorum and voting requirements must be met

SEC. 48. Kinds of Meetings. – Meetings of directors, trustees, stockholders, or members may be regular or special.

SEC. 52. Regular and Special Meetings of Directors or Trustees; Quorum. – Unless the articles of incorporation or the bylaws provides for a greater majority, a majority of
the directors or trustees as stated in the articles of incorporation shall constitute a quorum to transact corporate business, and every decision reached by at least a majority of
the directors or trustees constituting a quorum, except for the election of officers which shall require the vote of a majority of all the members of the board, shall be valid as a
corporate act.

Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the bylaws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the bylaws.

Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the bylaws provide otherwise. Notice of regular or special
meetings stating the date, time and place of the meeting must be sent to every director or trustee at least two (2) days prior to the scheduled meeting, unless a longer time is
provided in the bylaws. A director or trustee may waive this requirement, either expressly or impliedly.

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.

A director or trustee who has a potential interest in any related party transaction must recuse from voting on the approval of the related party transaction without prejudice to
compliance with the requirements of Section 31 of this Code.

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.

REGULAR SPECIAL

WHEN 1. On the date fixed in the by-laws At any time upon the call of the president or as
2. If there is no date fixed in the by-laws, monthly provided in the by-laws

WHERE 1. As fixed in the by-laws

2. If there is no provision in the by-laws anywhere in or outside of the Philippines

NOTICE 1. Must state the date, time, and place of the meeting
2. Sent to every D/T
a. Within the period provided in the by-laws
i. A D/T may waive this requirement
b. At least 2 days prior to the scheduled meeting
3. Need not be in writing, unless the bylaws require otherwise

PRESIDING OFFICER 1. Person designated in the by-laws

2. If none, chairman, or in his absence, the president
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Frequency

Regular SH/ M Once a year

BOD/T Once a month unless the bylaws provide otherwise

Special SH/M Whenever needed

BOD/T

Notice

Regular SH/ M At least 21 days prior written notice unless the bylaws provide otherwise

BOD/T At least 2 days notice unless bylaws provide otherwise

Special SH/M At least 1 week written notice unless bylaws provide otherwise

BOD/T At least 2 days notice unless bylaws provide otherwise

Quorum

Regular SH/M at least majority of the outstanding capital stock or majority of the members unless the
RCC or the bylaws provide otherwise. The bylaws may provide for less or greater than
majority in determining quorum

Special BOD/T at least majority of the board of directors or trustees as fixed in the articles of
incorporation or bylaws. The bylaws may provide for a greater but not lesser than
majority of the board members for quorum purposes

Venue

SH/M principal office of the corporation and if not practicable in the city or municipality where
the principal office is located (nonstock: anywhere within the Philippines provided in
the bylaws)

BOD/T Anywhere unless otherwise provided in the bylaws

Mode of presence

SH/M In person or by proxy, or through remote communication or in absentia when provided

by the bylaws

BOD/T Proxy voting is not allowed

Presiding officer

SH/M In the following order:

1. The person authorized in the AOI/BL
2. The Chairman of the corporation
3. The President of the corporation (in the absence of the Chairman)The person
chosen by the majority of the SH/M from among themselves
4. The petitioning SH/M until a SH/M shall have been chosen by a majority of the
SH/M present in meetings called by order of the SEC

BOD/T 1. Person designated in the by-laws

2. If none, chairman, or in his absence, the president
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K. Capital Affairs
1. Certificate of stock ii. Capital stock requirement
2. Watered stocks iii. Articles of incorporation and by-laws
3. Payment of balance of subscription iv. Corporate name
4. Sale of delinquent shares v. Corporate structure and officers
5. Alienation of shares vi. Nominee
6. Corporate books and records vii. Liability
a. Records to be kept at principal office viii. Conversion of corporation to one person
b. Right to inspect corporate records corporations and vice-versa
c. Effect of refusal to inspect corporate record e. Foreign corporations
7. Dissolution and liquidation i. Bases of authority over foreign corporations
a. Modes of dissolution ii. Necessity of a license to do business
b. Methods of liquidation iii. Personality to sue
8. Other corporations iv. Suability of foreign corporations
a. Non-stock corporations v. Instances when unlicensed foreign
b. Educational corporations corporations may be allowed to sue (isolated
c. Religious corporations transactions)
d. One person corporations vi. Grounds for revocation of license
i. Excepted corporations

L. Merger and consolidation

1. Definition and concept 5. Procedure, effectivity, limitations, and effects
2. Distinguish: constituent and consolidated corporation 6. Investigations, offenses, and penalties
3. Plan of merger or consolidation 7. Authority of Commissioner
4. Articles of merger or consolidation

M. Investigation and prosecution of offenses

1. Contempt 5. Penalties
2. Sanctions for violations 6. Who are liable?
3. Administrative sanctions 7. Authority of the Securities and Exchange Commission
4. Prohibited Acts

N. Corporate Governance
1. Publicly listed companies
2. Public companies and registered issuers