Incorporation, Formation and Powers fact that the parties refer to it as a purchase or

some other contract.

of the Corporation
Share of Stock
 Interest or right which owner has in the
management of the corporation, and its surplus
profits, and, on dissolution, in all of its assets
remaining after the payment of its debt.
Doctrine of Equality of Shares
 When the articles of incorporation do not provide
for any distinction of the shares of stock, all
shares issued by the corporation are presumed to
be equal and enjoy the same rights and privileges
and are also subject to the same liabilities.
Capital and Authorized Capital
CAPITAL – actual property or estate of the corporation
whether in money or property.
AUTHORIZED CAPITAL STOCK – total amount in the
Articles of Incorporation, which may be raised by the
corporation for its operations.
Trust Fund Doctrine
 Provides that the Subscribed capital stock of the
corporation is a trust fund for the payment of
debts of the corporation which the creditors have
the right to look up to satisfy their credits.
Corporation may not dissipate this, and the
creditors may sue stockholders directly for the
unpaid subscription.
How does one Become a Shareholder?
A person becomes a shareholder the moment he:
1. Enters into a Subscription Contract with an
Existing Corporation (Meeting of His offer and
acceptance by the juridical entity)
2. Purchases Treasure Shares from the Corporation
3. Acquires shares from the existing shareholders by
sale or any other contract or acquires shares by
operation of law like succession.
Subscription Contract
 Any contract for the acquisition of unissued stock
in an existing corporation or a corporation still to
be formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the
Pre-Incorporation Subscription Contract
Subscription of shares of stock of a corporation still to be
formed shall be irrevocable for a period of at least 6
months from the date of subscription, unless:
1. All of the other subscriber’s consent to the
revocation.
2. The incorporation of said corporation fails to
materialize with said period or within a longer
period as may be stipulated in the contract of
subscription; provided that no pre-incorporation
subscription may be revoked after the submission
of the articles of incorporation to the SEC. (Sec.
60, RCC)
Post Incorporation Subscription Contract
 Entered into after Incorporation. After the SEC
has release your Certification of Incorporation.
What is an Underwriting Agreement?
 It is an agreement between the Corporation and
the “underwriter” by which the latter agrees for a
certain compensation to take the stipulated
amount of stocks or bonds specified, if such
shares are not taken by those to whom they are
first offered.
Valid Consideration for Subscription
1. Cash
2. Property
3. Labor or services actually rendered to the
corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted retained
earning to stated capital.
6. Outstanding shares in exchange for stocks in the
event of reclassification or conversion.
NOTE: Shares of stock shall not be issued in exchange for
promissory notes or future services.
DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION
 A subscription is one entire and indivisible whole
contract.
 It cannot be divided into portions.
Minimum Capitalization
 Stock corporations are still not required to have a
minimum capital stock, unless specifically
provided by a special law.
 Moreover, the RCC removed the requirement
that 25% of the authorized capital stock be
subscribed and that 25% of the subscribed capital
stock be paid for purposes of incorporation as
previously mandated under Section 13 of the
Corporation Code, which was deleted in its
entirely. (Sec. 12.)
 However, the 225%-25% requirements was
retained for any increased in the authorized
capital stock.
2. Implied – can be inferred from necessary for its
existence
3. Incidental – those that are incident to the
existence of the Corporation.
THEORY OF GENERAL CAPACITY
 Corporation is said to hold such powers as are not
prohibited for withheld from it by general law
(everything is allowed except when prohibited.)
THEORY OF SPECIAL CAPACITY
 Corporation cannot exercise powers except those
expressly or impliedly given. (everything is
prohibited except when allowed.)

Corporations Required to have Minimum Capitalization General Corporate Powers and Capacity (Sec. 35 of the
RCC)
1. Domestic Insurance Corporations
2. Private Domestic Banks 1. To sue and be sued
3. Investment Companies – paid up of atleast 2. Of succession
P500,000. 3. To adopt and use of corporate seal
4. Savings and Loan Corporations 4. To amend Articles
5. Financing Companies 5. To adopt by-laws
6. Listed companies under the Philippine Stock 6. For stock corporation – issue and sell stocks to
Exchange subscribers and treasury stocks, for non-stock
corporations – admit members
Process of Incorporation in the Philippines 7. Purchase, receive, take, grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with
I. Pre-Incorporation Phase
real and personal property pursuant to its lawful
II. Subscription Contract – Those to Original
business. “Known as the property rights of the
Shareholders/Incorporators
Corporation”
III. Articles of Incorporation signed and passed to the
SEC Sec. 35 of the RCC
IV. Certification of Incorporation then issued by the
SEC 8. To enter into partnership, joint venture, merger
V. Post Incorporation – Subscription Contract to or consolidation
those interested to Subscribe from the Unissued 9. To make reasonable donations for:
Shares a. Public welfare
b. Hospital
Certificate of Stock c. Charitable
d. Cultural
 Evidence of holder’s ownership of the stock and
e. Scientific
of his right as a shareholder and up to the extent
f. Civic, and similar purposes
specifies therein
Prohibitions: No foreign corporation can enter donation
Remember: A stock certificate is only issued when you
to:
have fully paid your subscription.
I. Political party
Subscription is different from issuance.
II. Consolidate
Power of the Corporation III. Partisan political activity

1. Express – those explicitly listed in the RCC and the

AOI
 10. To establish
a. Pension
b. Retirement
c. And other plans for the benefit of:
i. Directors
ii. Trustees
iii. Officers
iv. Employees
11. Other powers essential or necessary to carry out
its purposes
Special Powers
1. Power to extend or shorten corporate term
o Perpetual existence is now provided in
the RCC unless otherwise provided by the
Articles of Incorporation of a specific
corporation
2. Increase/Decrease Corporate Stock – Authorized
Capital Stock
o A corporation increases its capital stock in
order to facilitate expansion and invite
other investors to be their Stockholders.
3. Incur, Create bonded indebtedness
o Refers to the power of the Corporation to
contract loans and raise funds by ISSUING
BONDS/SHARES OF STOCK to pay to
another a specified sum of money at a
specified date or dates in the future.
4. Sell, dispose, lease, encumber all or substantially
all of corporate assets
o When the corporation sell all or almost of
its assets and properties thereby
rendering the juridical entity incapable of
continuing its business or accomplish the
purpose for which it was incorporated.
5. Purchases or acquire own shares provided
I. There are unrestricted retained
earnings
II. For legitimate purpose
6. Invest corporate funds in another corporation or
business for other purpose rather than primary
purpose
7. Power to declare dividend out of unrestricted
retained earnings
o Dividend are declared when there are
profits earned by the Corporation.
8. Enter into management contract
Management Contract
 Contract entered into between two corporations
whereby one corporation undertakes to manage
all or substantially all of the business of the other
corporation for certain period of time, whether
such be a service contract, operation agreement
or otherwise.
Who exercises there Powers?
Unless otherwise provided by the Code, the corporate
powers of all corporation shall be exercised, all business
conducted and all property such corporations controlled
and held by the board of directors or trustees to be
elected from among the members of the corporation,
who shall hold office for one yar and until their successors
are elected and qualified.
Except:
1. Executive Committee
2. The corporation enters into a management
contract.
Executive Committee
 A body created by the By-Laws and composed of
not less than 3 members appointed by the Board
of Directors to act on Matters as expressly
authorized by the Board.
However, it cannot act on the following:
1. Matters needing stockholder approval
2. Filling up of board of vacancies
3. Amendment, repeal or adoption of by-laws
4. Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable
5. Cash dividend declaration
What is an Ultra Vires Act?
 It is an act committed outside the object for
which a corporation was created as defined by
the Articles of Incorporation and therefore
beyond the powers conferred by the Revised
Corporation
Distinguished from an Illegal Act:
 An ultra vires act is merely VOIDABLE, which can
be enforced ratification or estoppel, while an
illegal act is VOID from the beginning and cannot
be validated.
Ultra Vires Act v. Unauthorized Act
An act may be within the purposes by which a
Corporation was created but not within the powers of a
particular corporate officer.
Example:
An IT Company is authorized to purchase additional
equipment related to IT Maintenance. However, its
Corporate Secretary purchased 500,000 worth of
equipment from third part supplier.
Here the act of purchase may be valid, but it was done by
an Authorized individual.
Hence, it is not an ultra vires act of the corporation but an
Ultra vires act of a corporate officer.
Foreign Corporations
Foreign Corporation
 A corporation that is organized under the laws
of the a Foreign Country, provided said foreign
country allows Filipinos and Philippine
corporations to do business there.
General Rule:
 Foreign Corporation (FC) can have no legal
corporation or status beyond the bounds of the
State or sovereignty by which it is created or
incorporated
Foreign Corporations are allowed to do business in the
Philippines
1. CONSENT DOCTRINE
 the Foreign Corporation may act in another
State or country with the latter’s express or
implied consent, however, subject to
conditions and restrictions it may impose
2. DOING BUSINESS WITH REGARD TO FC
 continuity of commercial dealings incident to
prosecution of purpose and object of the
organization. Isolated, occasional, or casual
transactions do not amount to engaging in
business. But where the isolated act is not
incidental/casual but indicates the Foreign
Corporation’s intention to do other business,
said single act constitutes engaging in
business in the Philippines
What constitutes doing business in the Philippines?
1. Continuity Test – Doing business implies a
continuity of commercial dealings and
arrangements, and contemplates to some extent
the performance of acts or works or the exercise
of some functions normally incident to and in
progressive prosecution of, the purpose and
object of the Organization
2. Substance Test – Whether the Foreign
Corporation is continuing a body or substance
of the business or enterprise for which it was
organized or whether it has substantially retired
from it and turned it over to another
Necessity of a License
A foreign corporation has the right to transact business in
the Philippines after it has obtained a license to do
business.
 In order to subject a foreign corporation
doing business in the country to the
jurisdiction of our courts, it must acquire a
license from SEC and appoint an agent for
service of process. Without such license, it
cannot institute a suit in the Philippines
Isolated Transactions
 When a single or isolated acts, contracts, or
transactions of FC are not regarded as a doing
or carrying on of business
 When series of transactions which are
occasional, incidental, and casual not of a
character to indicate a purpose to engage in
business.
Instances when a Foreign Corporation was allowed to
Sue
1. To protect Its corporate reputation, name and
goodwill
2. To enforce its right not arising out of a business
transaction
3. To seek redress for an isolated business
transaction
4. The subject contracts provide that Phil. Courts
will be venue to controversies
 5. A license subsequently granted enables the FC to
sue on contracts executed before the grant of the
license (Subsequent Compliance)
6. Recovery of misdelivered property
7. Where unlicensed FC has a domestic corporation
8. Estoppel when after contracting or accepting
benefits with a FC, a domestic firm or individual
can no longer deny the former’s capacity to sue
9. Wrongful assumption of Jurisdiction by a court
Remember: Suability of Foreign Corporations
FOREIGN CORPORATIONS SUABILITY
Doing Business in the May sue and can be sued
Philippines, With a License in the Philippines
Doing Business in the Cannot sue, but may be
Philippines, Without a sued in the Philippines
License
Not doing Business in the May sue and May be
Philippines, but on sued
Isolated Transactions
What Constitutes Doing Business?
(Under Sec.3(d) of Foreign Investments Act of 1991)
a. Soliciting orders
b. Service Contracts
c. Opening offices, whether called “liaison” offices
or branches
d. Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period/s
totaling 180 days or more
e. Participating in the management, supervision or
control of any domestic business, firm, entity or
corporation in the Philippines
f. Any other act/s that imply continuity of
commercial dealings or arrangements, and
contemplate to that extent, performance
normally incident to, and in progressive
prosecution of commercial gain or of the purpose
and object of the business organization
Not Doing Business in the Philippines
Doing business” shall not be deemed to include:
a. Mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to
do business and/or exercise of rights as such by
the investor
b. Having a nominee director or officer to represent
its interests in such corporation and
c. Appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own account
How to Apply for a License to Do Business
SEC will issue a license if the following Conditions are
met:
a. Submit AOI ang By-laws with an Application
under Oath
b. Appointment of a Resident Agent
I. Either a Filipino or domestic
corporation
II. Power of attorney for SEC to receive
process
c. Must prove that FC’s country grants reciprocal
rights to Filipinos and Philippine corporations
(Oath of Reciprocity)
d. Establish an office in the Philippines
e. The application for a license to transact business
in the Philippines shall likewise be accompanied
by a statement under oath of the president or
any other person authorized by the corporation,
showing to the satisfaction of the Commission
and when appropriate, other governmental
agencies that the applicant is solvent and in
sound financial condition
f. Within sixty (60) days from the issuance of the
license, it Must file a bond of P500,000 which
may be in the ff. form:
I. Surety bond
II. Government Securities
III. Securities of political subdivisions
IV. Shares of stock of registered with SEC
V. Shares of stock of any corporation
being sold at the stock exchange
That within 6 months after each fiscal year, SEC shall
require the deposit of additional securities equivalent to
2% of the amount more than P10,000,000 of the gross
income.
Who can be a Resident Agent?
 A resident agent may be either an individual
residing in the Philippines or a domestic
corporation lawfully transacting business in the
 Philippines: Provided, That an individual resident h. Transacting business in the Philippines as agent of
agent must be of good moral character and of or acting on behalf of any foreign corporation or
sound financial standing: Provided, further, That entity not duly licensed to do business in the
in case of a domestic corporation who will act as Philippines
a resident agent, it must likewise be of sound i. Any other ground as would render it unfit to
financial standing and must show proof that it is transact business in the Philippines.
in good standing as certified by the Commission.
Laws Applicable
Resident Agent must file the Power of Attorney with the
 A foreign corporation lawfully doing business in
SEC
the Philippines shall be bound by all laws, rules
 As a condition to the issuance of the license for a and regulations applicable to domestic
foreign corporation to transact business in the corporations of the same class, except those
Philippines, such corporation shall file with the which provide for the creation, formation,
Commission a written power of attorney organization or dissolution of corporations or
designating a person who must be a resident of those which fix the relations, liabilities,
the Philippines, on whom summons and other responsibilities, or duties of stockholders,
legal processes may be served in all actions or members, or officers of corporations to each
other legal proceedings against such corporation, other or to the corporation
and consenting that service upon such resident
In sum, the reportorial requirements are still applicable to
agent shall be admitted and held as valid as if
Foreign Corporations doing business in the Philippines
served upon the duly authorized officers of the
foreign corporation at its home office.

The form and substance of the authority given must be in

Merger and Consolidations
accordance with the requirements set forth by the SEC.
What is a Merger?
License to do Business can be revoked by the SEC
MERGER – one corporation absorbs the other and
a. Failure to file its annual report or pay any fees as
remains in existence while the other is dissolved (Sec. 76).
required by this Code
b. Failure to appoint and maintain a resident agent Example:
in the Philippines as required by this Title
c. Failure, after change of its resident agent or A Corporation plus B Corporation
address, to submit to the Commission a Equals
statement of such change as required by this Title
d. Failure to submit to the Commission an Either A or B Corporation
authenticated copy of any amendment to its What is Consolidation?
articles of incorporation or bylaws or of any
articles of merger or consolidation within the CONSOLIDATION – a new corporation is created, and
time prescribed by this Title consolidating corporations are extinguished (Sec. 76).
e. A misrepresentation of any material matter in any
Example:
application, report, affidavit or other document
submitted by such corporation pursuant to this A Corporation plus B Corporation
Title
Equals
f. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to C Corporation
the Philippine Government or any of its agencies
or political subdivisions Three Levels of Transfers and Acquisitions
g. Transacting business in the Philippines outside of 1. ASSET ONLY LEVEL.
the purpose or purposes for which such o Purchase of raw assets of the enterprise.
corporation is authorized under its license
Transferee is NOT liable for the debts and liabilities of the
transferor corporation as there is no privity of contract
between transferee and creditors except when there is
fraud, assumption of liability, or take over of the assets of
a dissolved corporation.
2. Business Enterprise Level
o Purchase of substantially all the assets of
the corporation extending to its “going
concern”.
This includes the ability to do business and make money,
goodwill, clientele,stock-in-trade and the transferee is
liable for the debts and liabilities.
A “free and harmless clause” holding the transferee free
from the liabilities of the transferor is binding only
between them and cannot prejudice creditors who are
not parties thereto.
Remember, Bulk Sales Law applies in the sale of all or
substantially all assets of the corporation
3. Equity Level
o Purchaser takes control of the business
by purchasing the shareholdings.
Purchasing corporation is still protected by the limited
liability feature but the same can be pierced.
Procedure for Merger/ Consolidation
The Board of Each corporation shall draw-up a:
I. Plan of merger or consolidation setting forth
a. Names of corporations involved
b. Terms and mode of carrying it out
c. Statement of changes, if any in the
present articles of surviving corporation;
or the articles of the new corporation to
be formed in case of consolidation
d. Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable
II. Approval of the Plan of Merger/ Consolidation
The affirmative vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least
two thirds (2/3) of the members in the case of nonstock
corporations shall be necessary for the approval of such
plan.
Any dissenting stockholder may exercise the right of
appraisal in accordance with this Code: Provided, That if
after the approval by the stockholders of such plan, the
board of directors decides to abandon the plan, the right
of appraisal shall be extinguished.
Note: Notice of such meetings shall be given to all
stockholders or members of the respective corporations
in the same manner as giving notice of regular or special
meetings under Section 49 of this Code. The notice shall
state the purpose of the meeting and include a copy or a
summary of the plan of merger or consolidation.
III. Amendment on the Plan of
Merger/Consolidation
Any amendment to the plan of merger or consolidation
may be made: Provided, That such amendment is
approved by a majority vote of the respective boards of
directors or trustees of all the constituent corporations
and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such plan, together
with any amendment, shall be considered as the
agreement of merger or consolidation.
IV. Articles of Merger/ Consolidation
o After the approval by the stockholders or
members, the articles of merger or
articles of consolidation shall be executed
by each of the constituent corporations
by the president or vice president and
certified by the secretary or assistant
secretary of each corporation setting
forth:
a. The plan of the merger or the plan of
consolidation
b. As to stock corporations, the number of shares
outstanding, or in the case of non-stock
corporations, the number of members
c. As to each corporation, the number of shares or
members voting for or against such plan,
respectively
d. The carrying amounts and fair values of the assets
and liabilities of the respective companies as of
the agreed cut-off date
 e. The method to be used in the merger or surviving or consolidated corporation had itself
consolidation of accounts of the companies incurred such liabilities or obligations; and any
f. The provisional or pro forma values, as merged or pending claim, action or proceeding brought by
consolidated, using the accounting method or against any of such constituent corporations
g. Such other information as may be prescribed by may be prosecuted by or against the surviving or
the Commission. consolidated corporation. The rights of creditors
or liens upon the property of any of such
Mergers under the Philippine Competition Law
constituent corporations shall not be impaired by
Parties to the merger or acquisition agreement where the such merger or consolidation.
value of the transaction exceeds One Billion Pesos
(P1,000,000,000.00) are required to notify the Philippine
Competition Commission (PCC) of such agreement, and
they cannot consummate the same without the approval
Appraisal Right
of the PCC.
Any stockholder of a corporation shall have the right to
The PCC may also prescribe other criteria (e.g., increased
dissent and demand payment of the fair value of the
market share in the relevant market in excess of
shares in the following instances:
minimum thresholds) that would trigger this notification
requirement a. In case an amendment to the articles of
incorporation has the effect of changing or
The PCC investigates and evaluates mergers and
restricting the rights of any stockholder or class of
acquisitions which are likely to substantially prevent,
shares, or of authorizing preferences in any
restrict, or lessen competition in the relevant market or in
respect superior to those of outstanding shares of
the market for goods or services.
any class, or of extending or shortening the term
Effects of Merger/Consolidation of corporate existence
b. In case of sale, lease, exchange, transfer,
1. The constituent corporations shall become a
mortgage, pledge or other disposition of all or
single corporation
substantially all of the corporate property and
2. The separate existence of the constituent
assets as provided in this Code
corporations shall cease, except that of the
c. In case of merger or consolidation
surviving or the consolidated corporation
d. In case of investment of corporate funds for any
3. The surviving or the consolidated corporation
purpose other than the primary purpose of the
shall possess all the rights, privileges, immunities
corporation.
and powers and shall be subject to all the duties
and liabilities of a corporation organized under How is the Appraisal Right Exercised?
this Code
Any dissenting stockholder who votes against a proposed
4. The surviving or the consolidated corporation
corporate action may exercise the right of appraisal by
shall possess all the rights, privileges, immunities
making a written demand on the corporation for the
and franchises of each constituent corporation;
payment of the fair value of shares held within thirty (30)
and all real or personal property, all receivables
days from the date on which the vote was taken:
due on whatever account, including subscriptions
Provided, That failure to make the demand within such
to shares and other choses in action, and every
period shall be deemed a waiver of the appraisal right.
other interest of, belonging to, or due to each
constituent corporation, shall be deemed If the proposed corporate action is implemented, the
transferred to and vested in such surviving or corporation shall pay the stockholder, upon surrender of
consolidated corporation without further act or the certificate or certificates of stock representing the
deed stockholder’s shares, the fair value thereof as of the day
5. The surviving or consolidated corporation shall be before the vote was taken, excluding any appreciation or
responsible and liable for all the liabilities and depreciation in anticipation of such corporate action.
obligations of each of the constituent
corporations in the same manner as if such When Shares are yet paid to the Dissenting Stockholder
If, within sixty (60) days from the approval of the
corporate action by the stockholders, the withdrawing
stockholder and the corporation cannot agree on the fair
value of the shares, it shall be determined and appraised
by three (3) disinterested persons, one of whom shall be
named by the stockholder, another by the corporation,
and the third by the two (2) thus chosen.
The findings of the majority of the appraisers shall be
final, and their award shall be paid by the corporation
within thirty (30) days after such award is made:
Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such
payment: Provided, further, That upon payment by the
corporation of the agreed or awarded price, the
stockholder shall forthwith transfer the shares to the
corporation.
Effect of Demand for Payment and Termination of Rights
 From the time of demand for payment of the fair
value of a stockholder’s shares until either the
abandonment of the corporate action involved or
the purchase of the said shares by the
corporation, all rights accruing to such shares,
including voting and dividend rights, shall be
suspended in accordance with the provisions of
this Code, except the right of such stockholder to
receive payment of the fair value thereof:
Provided, That if the dissenting stockholder is not
paid the value of the said shares within thirty (30)
days after the award, the voting and dividend
rights shall immediately be restored.
What if the Stockholder changes his mind, can he
withdraw the exercise of his Appraisal Right?
Answer. Yes. With the Consent of the Corporation.
In this instance the right of the stockholder to be paid the
fair value of the shares shall cease, the status as the
stockholder shall be restored, and all dividend
distributions which would have accrued on the shares,
shall be paid to the stockholder
What happens if the Corporation withdraws the planned
Corporate Action, or the SEC denies the plan of Merger/
Consolidation
Answer. Same as the Earlier Scenario, Section 83 of the
RCC.
In this instance the right of the stockholder to be paid the
fair value of the shares shall cease, the status as the
stockholder shall be restored, and all dividend
distributions which would have accrued on the shares,
shall be paid to the stockholder
Meetings of Corporations and
Corporate Records
Meetings of the Corporation
Regular Meetings of Stockholders
Date:
Regular meetings of stockholders or members shall be
held annually on a date fixed in the bylaws, or if not so
fixed, on any date after April 15 of every year as
determined by the board of directors or trustees:
Venue:
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:
That written notice of regular meetings shall be sent to all
stockholders or members of record at least twenty-one
(21) days prior to the meeting, unless a different period is
required in the bylaws, law, or regulation
Contents of the Notice
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
d. When the meeting is for the election of directors
or trustees, the requirements and procedure for
nomination and election.
Remember: For Notices and Agenda
Primary Corporate Officer Responsible:
Corporate Secretary - 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.
Take Note Also:
A director, trustee, stockholder, or member may propose
any other matter for inclusion in the agenda at any
regular meeting of stockholders or members.
Contents of the Preliminary Report
At each regular meeting of stockholders or members, the
board of directors or trustees shall endeavor to present
to stockholders or members the following:
a. The minutes of the most recent regular meeting
which shall include, among others
I. A description of the voting and vote
tabulation procedures used in the
previous meeting
II. A description of the opportunity
given to stockholders or members to
ask questions and a record of the
questions asked and answers given
III. The matters discussed and
resolutions reached
IV. A record of the voting results for each
agenda item
V. A list of the directors or trustees,
officers and stockholders or members
who attended the meeting
VI. Such other items that the
Commission may require in the
interest of good corporate
governance and the protection of
minority stockholders.
b. A members’ list for non-stock corporations and,
for stock corporations, material information on
the current stockholders, and their voting rights
c. A detailed, descriptive, balanced and
comprehensible assessment of the corporation’s
performance, which shall include information on
any material change in the corporation’s
business, strategy, and other affairs
d. A financial report for the preceding year, which
shall include financial statements duly signed and
certified in accordance with this Code and the
rules the Commission may prescribe, a statement
on the adequacy of the corporation’s internal
controls or risk management systems, and a
statement of all external audit and non-audit fees
e. An explanation of the dividend policy and the fact
of payment of dividends or the reasons for
nonpayment thereof
f. Director or trustee profiles which shall include,
among others, their qualifications and relevant
experience, length of service in the corporation,
trainings and continuing education attended, and
their board representations in other corporations
g. A director or trustee attendance report, indicating
the attendance of each director or trustee at each
of the meetings of the board and its committees
and in regular or special stockholder meetings
h. Appraisals and performance reports for the board
and the criteria and procedure for assessment
i. A director or trustee compensation report
prepared in accordance with this Code and the
rules the Commission may prescribe
j. Director disclosures on self-dealings and related
party transactions
k. The profiles of directors nominated or seeking
election or reelection. A director, trustee,
stockholder, or member may propose any other
matter for inclusion in the agenda at any regular
meeting of stockholders or members.
Board Meetings
Regular Meetings of Directors:
Meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws
provide otherwise.
Venue:
Meetings of directors or trustees of corporations may be
held anywhere in or outside of the Philippines, unless the
by-laws provide otherwise.
Notice:
Notice of regular 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
Are General Waivers of the Notice and Agenda allowed
for Stockholders?
Answer: General waivers of notice in the articles of
incorporation or the bylaws shall not be allowed.
While waivers for a particular meeting can be done by the
Stockholder either expressly or impliedly.
Who presides the Stockholders/Directors Meeting?
Answer: 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.
Special Meetings
Stockholders’ Meetings:
Special meetings of stockholders or members shall be
held at any time deemed necessary or as provided in the
bylaws: Provided, however, That at least one (1) week
written notice shall be sent to all stockholders or
members, unless a different period is provided in the
bylaws, law or regulation. A stockholder or member may
propose the holding of a special meeting and items to be
included in the agenda.
Board of Directors Meetings:
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. Notice of 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
What is a Proxy?
 A proxy is a formal authority given by a
stockholder empowering another to exercise his
right to vote. It is a special form of agency, and a
proxy holder is in the eye of the law an agent and
as such a fiduciary.
Formalities of a Proxy
FORM – in writing, signed by the Shareholders or member
and filed before the scheduled meeting with the
corporate secretary.
PERIOD OF VALIDITY – unless otherwise provided in the
proxy, it should be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a
longer period than five years at any one time.
Proxies are also considered as corporate devise for
securing voting control of the corporation.
INSTANCES WERE THE RIGHT TO VOTE BY PROXY ARE
EXPLICITLY PROVIDED FOR:
1. election of the board of directors or trustees
2. voting in case of joint ownership of stock
3. voting by trustee under voting trust agreement
4. pledged or mortgaged share
5. as provided for in its by-laws
What is a Voting Trust Agreement?
A voting trust agreement is a contractual agreement in
which shareholders with voting rights transfer their
shares to a trustee, in return for a voting trust certificate.
This gives the voting trustees temporary control of the
corporation.
One or more Shareholders 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 one time.
Purpose of a Voting Trust Agreement
 This represents a person or group trying to gain
control of a company often created for a specific
vote, the voting trust is usually more permanent,
intended to give a bloc of voters increased power
as a group—or indeed, control of the company,
which is not necessarily the case with proxy
voting.
Formalities of a Voting Trust Agreement
1. A voting trust agreement must be in writing and
notarized, and shall specify the terms and
conditions thereof.
2. A certified copy of such agreement shall be filed
with the corporation and with the Commission;
 otherwise, the agreement is ineffective and
unenforceable.
3. 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.
4. 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
5. The term is for not longer than five (5) years
However, if the voting trust was a requirement
for a loan agreement, period may exceed 5 years
but shall automatically expire upon full payment
of the loan
Voting Trust Agreement must be registered in the Stock
and Transfer Book
 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.
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.
meeting meeting (if not
continuing)
A trustee can vote and A proxy can only vote in
exercise all the rights of the absence of the owners
the stockholder even of the stock
when the latter is present
9. An agreement must not A proxy is usually of
exceed 5 years at any one shorter duration although
time except when the under RCC it cannot
same is made a condition exceed 5 years at any one
of a loan time.
How do we Vote shares that are Co-owned?
 The consent of all the co-owners shall be
necessary in voting shares of stock owned jointly
by two (2) or more persons, unless there is a
written proxy, signed by all the co-owners,
authorizing one (1) or some of them or any other
person to vote such share or shares: Provided,
That when the shares are owned in an “and/or”
capacity by the holders thereof, any one of the
joint owners can vote said shares or appoint a
proxy therefor.
Can Treasury Shares Vote?

Proxy v. Voting Trust Agreement
VOTING TRUSTS
1. The trustee vote as
owner rather than as
mere agent
2. The trust may vote in
person or by proxy unless
the agreement provides
otherwise
3. The beneficial owner
ceases to be recognized as
a shareholder of record
and the trustee assumes
practically all the rights of
a stockholder
4. Trustee acquires legal
title to the shares of the
transferring stockholder
5. The agreement must be
notarized
6. The agreement is
irrevocable
7. Trustee is not limited to
act at any particular
PROXY
The proxy holder votes as
agent
The proxy must vote in
person
The principal in a proxy
does not cease to be a
stockholder
Proxy has no legal title to
the shares of the principal
Proxy need not be
notarized
Revocable anytime except
one with interest
Proxy can only act at a
specified stockholder’s
Answer: No. Treasury shares shall have no voting right as
long as such shares remain in the Treasury.
Treasury shares may be re-issued by the Corporation and
once sold, stockholders can now use them for voting
depending on its rights and privileges.
What if Stocks were used to Secure a Loan, can the
Creditor for the said
Shares?
Answer: NO. In case a stockholder grants security interest
in his or her shares in stock corporations, the stockholder-
grantor shall have the right to attend and vote at
meetings of stockholders, unless the secured creditor is
expressly given by the stockholder-grantor such right in
writing which is recorded in the appropriate corporate
books.
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend
and vote in behalf of the stockholders or members
without need of any written proxy.
What is Stock Certificate?
It is an instrument that is issued formally by the
corporation, with the intention that the same constitute
the best evidence of the issuance of shares of stock that
are fully paid and no longer assessable.
It is the evidence of a holder’s interest and status in a
corporation.
It is a written instrument signed by the proper officer of a
corporation stating or acknowledging that the person
named in the document is the owner of a designated
number of shares of its stock.
It is prima facie evidence that the holder is a shareholder
of a corporation
Are Stock Certificates Negotiable?
Answer: Partly. Yes. These are Quasi-Negotiable with
normal mode of dealing with such certificates is by the
process of endorsement and delivery.
It must be noted that “endorsement and delivery”
of certificates of stock may be for any of the three
purposes
a. For sale or assignment of the shares
b. Pursuant to a trust or nominee arrangement
c. By way of pledge or encumbrance of the shares.
Endorsement and Delivery
Endorsement is an essential ingredient in dealing with
certificates of stock, and generally cannot be dispensed
with.
The delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the
lawful owner to the new transferee.
Registration of the transfer of the share in the stock and
transfer books is necessary to complete the process of
negotiation of the certificate of stocks.
How to Validly Transfer Shares?
1. The certificate must be endorsed by the owner or
his attorney-in-fact or other persons legally
authorized to make the transfer;
2. There must be delivery of the stock certificate;
and
3. To be valid against third parties, the transfer must
be recorded in the books of the corporation.
What is a Stock and Transfer Book?
“Record of all Stockholders”
Contents
a. All stocks in the names of the stockholders
alphabetically arranged
b. The installment paid and unpaid on all stock for
which subscription has been made, and the date
of payment of any installment
c. A statement of every alienation, sale or transfer
of stock made
d. Such other entries as the by-laws may prescribe
Corporate Secretary is in charge of the Stock and
Transfer Book
Entries made on the stock and transfer book by any
person other than the CORPORATE SECRETARY, such as
those made by the President and Chairman, cannot be
given any valid effect.
It is the CORPORATE SECRETARY’s duty and obligation to
register valid transfers of stock and if said corporate
officer refuses to comply, the transferor-stockholder may
rightfully bring suit to compel performance
What happens to Stocks not Fully Paid?
This will be subject of a Delinquency Sale
1. The Board of Directors must make a call by
resolution demanding the payment of the
balance of the subscription. This is called the
NOTICE OF CALL.
2. The NOTICE OF CALL shall be served on each
stockholder either personally or by registered
mail.
3. If the stockholders do not pay the amount due on
the date designated in the notice, the Board shall
issue, by resolution, a NOTICE OF DELINQUENCY.
4. NOTICE OF DELINQUENCY shall be served on then
Non-paying subscriber either personally or by
registered mail plus Publication in a newspaper of
general circulation in the province or city where
the principal office of the corporation is located
5. PERIOD FOR PUBLICATION Once a week for two
consecutive weeks.
Contents of the Notice of Delinquency
1. The amount due on each subscription plus
accrued interest.
2. The date, time and place of the sale.
In the public auction, the highest bidder is the one who is
willing to pay the amount of the balance of the
subscription for the least number of shares.
After the bidding, the corporation will give the highest
bidder the certificate of stock in the number of his bid
while the remaining number, if any, will be issued a
certificate of stock in favor of the original subscriber as
fully paid.
On the other hand, if there are no bidders, then the
corporation must bid for the whole number of shares
(regardless of how much the stockholder has paid), which
shall then pertain to the corporation as fully-paid treasury
stock
What if your Stock Certificates got lost, stolen or
destroyed?
You can ask for a replacement through the following
procedure
a. The registered owner of certificates of stock or
his legal representative shall file with the
corporation an affidavit setting forth, if possible:
i. The circumstances as to how the
certificates were lost, stolen or
destroyed;
ii. The number of shares represented by
each certificate, the serial numbers of the
certificates;
iii. The name of the corporation which
issued the same
iv. He shall submit such other information
and evidence which he may deem
necessary
b. The corporation shall publish a notice in a
newspaper of general circulation published in the
place where the corporation has its principal
office, once a week for three (3) consecutive
weeks at the expense of the registered owner.
c. However, instead of waiting for one (1) year, the
registered owner may file a bond or
other security running for a period of one (1) year
for a sum and in such form and with such sureties
as may be satisfactory to the board of directors in
which case a new certificate may be issued even
before the expiration of the one (1) year period
provided
d. Provided, That if there is a pending contest
regarding the ownership of said certificates of
stock the issuance of the new certificates of stock
in lieu thereof shall be suspended until the final
decision by the court.
Important Records of the Corporation- Must be at
Principal Office
a. The articles of incorporation and by-laws of the
corporation and all their amendments;
b. The current ownership structure and voting rights
of the corporation, including lists of stockholders
or members, group structures, intra-group
relations, ownership data, and beneficial
ownership; (Stock and Transfer Book)
c. The names and addresses of all the members of
the board of directors or trustees and the
executive officers;
d. A record of all business transactions;
e. A record of the resolutions of the board of
directors or trustees and of the stockholders or
members;
f. Copies of the latest reportorial requirements
submitted to the Commission
g. The minutes of all meetings of stockholders or
members, or of the board of directors or trustees.
Request for Financial Statements
A corporation shall furnish a stockholder or member,
within ten (10) days from receipt of their written request,
its most recent financial statement, in the form and
substance of the financial reporting required by the
Commission.
Dissolution and Liquidation of
Corporations
Dissolution of a Corporation
DISSOLUTION OF A CORPORATION – extinguishment of
the franchise of a corporation and the termination of its
corporate existence
A corporation formed or organized under the provisions
of Revised Corporation Code may be dissolved voluntarily
or involuntarily
Voluntary Dissolution
Where no creditors are affected (Sec. 134)
Procedure:
 1. administrative application filed with the SEC by a Documentary Requirements for Voluntary Dissolution
majority vote of the BOD
1. Amendment of AOI
2. notice thru registered mail or delivered twenty
2. Publication
(20) days prior to the meeting
3. Oath undertaking by majority of SH or officers to
3. Publication of the notice in a newspaper of
personally answer for obligations
general circulation
4. BIR clearance of tax liability
4. Resolution approved by majority of the OCS
5. Listing of creditors and Consent to the shortening
5. Copy of Resolution Certified by majority of BOD
of the term
countersigned by secretary;
6. Affidavit of assumption of liability by SH
6. Within fifteen (15) days from receipt of the
7. Latest audited financial statement of corporation
verified request for dissolution, and in the
absence of any withdrawal within said period, the Involuntary Dissolution
Commission shall approve the request and issue
the certificate of dissolution A corporation may be dissolved by the Commission motu
proprio or upon filing of a verified complaint by any
Where creditors are affected (Sec 135 of RCC); interested party. The following may be grounds for
dissolution of the corporation:
Procedure:
(a) Non-use of corporate charter as provided
1. Petition signed by majority of BOD/trustees/
under Section 21 of this Code;
verified by President/ Secretary/ Director
(b) Continuous inoperation of a corporation
2. Claims and demands must be stated in the
as provided under Section 21 of this
petition
Code;
a. the reason for the dissolution
(c) Upon Receipt of a lawful Order of Court.
b. the form, manner, and time when the
(d) Upon finding by final judgment that the
notices were given; and
corporation procured its incorporation
c. the date, place, and time of the meeting
through fraud;
in which the vote was made.
(e) Upon finding by final judgment that the
3. Stockholders’ approval representing 2/3 OCS
corporation
4. SEC order Setting date for objections
i. Was created for the purpose of
5. Publication of the order and Posting
committing, concealing or aiding
a. a copy of the order shall be published at
the commission of securities
least once a week for three (3)
violations, smuggling, tax evasion,
consecutive weeks in a newspaper of
money laundering, or graft and
general circulation/principal place of
corrupt practices
business
ii. Committed or aided in the
6. Hearing
commission of securities
Remember violations, smuggling, tax evasion,
money laundering, or graft and
Upon five (5) days’ notice, given after the date on which
corrupt practices, and its
the right to file objections as fixed in the order has
stockholders knew
expired, the Commission shall proceed to hear the
iii. Repeatedly and knowingly
petition and try any issue raised in the objections filed;
tolerated the commission of graft
and if no such objection is sufficient, and the material
and corrupt practices or other
allegations of the petition are true, it shall render
fraudulent or illegal acts by its
judgment dissolving the corporation and directing such
directors, trustees, officers, or
disposition of its assets as justice requires, and may
employees.
appoint a receiver to collect such assets and pay the
debts of the corporation. Effect of Involuntary Dissolution

The dissolution shall take effect only upon the issuance If the corporation is ordered dissolved by final judgment
by the Commission of a certificate of dissolution. pursuant to the grounds set forth in subparagraph (e)
hereof, its assets, after payment of its liabilities, shall,
upon petition of the Commission with the appropriate
court, be forfeited in favor of the national government.
This is called ESCHEAT.
Such forfeiture shall be without prejudice to the rights of
innocent stockholders and employees for services
rendered, and to the application of other penalty or
sanction under this Code or other laws.
Shortening of Corporate Term
SHORTENING OF CORPORATE TERM. HOW DONE:
 It refers to the dissolution of a corporation prior
to the expiration of its term as fixed in the articles
of incorporation.
 This is done by following amendment of the AOI
following the procedural requirements of the
Revised Corporation Code.
Expiration of Corporate Term
In the case of expiration of corporate term, dissolution
shall automatically take effect on the day following the
last day of the corporate term stated in the articles of
incorporation, without the need for the issuance by the
Commission of a certificate of dissolution.
Effects of Dissolution
1. Transfer of Legal Title to Corporate Property
2. Ceases to be a Body Corporate for the
Continuation of Business.
3. Creation of a New Corporation- Consolidation of
Corporations
4. Cessation of all Corporate Existence upon the
Expiration of the three(3) year period.
Appointment of a Trustee
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property
to trustees for the benefit of stockholders.
Corporate Liquidation
The process by which all the assets of the corporation are
converted into liquid assets (cash) in order to facilitate
the payment of obligations to creditors, and the
remaining balance, if any, is to be distributed to the
stockholders or members.
NOTE:
A dissolved corporation continues to be a body corporate
for 3 years from the time it is dissolved for the purpose of
liquidation or winding up its corporate affairs. The
termination of the life of a juridical entity does not by
itself cause the extinction or diminution of the rights and
liabilities of such entity nor those of its owners and
creditors alike
Corporate Proceedings under the FRIA LAW
The applicable law is Republic Act No. 10142, known as
the Financial Rehabilitation and Insolvency Act of 2010
(FRIA).
The FRIA took effect on 18 July 2010.
FRIA Law was enacted to “encourage debtors, both
juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing
claims and property rights” and to “ensure a timely, fair,
transparent, effective and efficient rehabilitation or
liquidation of debtors.
Rationale of the FRIA LAW
Under this law, rehabilitation refers to the restoration of
the debtor to a condition of successful operation and
solvency. When rehabilitation is not feasible, it is in the
interest of the State to facilitate a speedy and orderly
liquidation of these debtor’s assets and the settlement of
their obligations.
On the other hand, liquidation is a process by which
assets are converted to cash.
The proceedings involved under FRIA are considered as in
rem, which means that it binds the whole world.
Jurisdiction over all persons affected by the proceedings
shall be considered as acquired upon publication of the
notice of the commencement of the proceedings in any
newspaper of general circulation in the Philippines.
Coverage of the FRIA LAW
The definition of a debtor is important to be able to
determine if the parties may avail of the proceedings
provided by FRIA. The term debtor covers a:
1. sole proprietorship duly registered with the
Department of Trade and Industry (DTI),
2. a partnership duly registered with the Securities
and Exchange Commission (SEC),
3. a corporation duly organized and existing under
Philippine laws,
4. an individual debtor who has become insolvent.
However, the term debtor does not include banks,
insurance companies, pre-need companies, and national
and local government agencies or units.
Exception of Banks under the Coverage of the FRIA LAW
Section 138. Application of Relevant Legislation. - The
liquidation of bank, financial institutions, insurance
companies and pre-need companies shall be determined
by relevant legislation. The provisions in this Act shall
apply in a suppletory manner.
The rehabilitation of banks, insurance companies and pre-
need companies is governed by Republic Act No. 7653
(the New Central Bank Act), Presidential Decree No. 612
(Insurance Code of the Philippines) and Republic Act No.
9829 (Pre-Need Code of the Philippines), respectively
Rehabilitation under the FRIA LAW
Rehabilitation refers to the restoration of the debtor to a
condition of successful operation and solvency,
There are three types of rehabilitation, namely:
1. Court-supervised rehabilitation
2. Pre-negotiated rehabilitation; and
3. Out-of-court/Formal Restructuring
Court-Supervised Rehabilitation
An insolvent debtor may file a verified petition for
rehabilitation when approved by the owner in the case of
a sole proprietorship, or by a majority of the partners in
the case of a partnership or, in the case of a corporation,
by a majority vote of the board of directors or trustees
and authorized by the vote of the stockholders
representing at least two-thirds of the outstanding capital
stock, or of the members, in a stockholders’ or members’
meeting duly called for the purpose. The petition must
establish the insolvency of the debtor and the viability of
its rehabilitation (FRIA section 12).
If the court finds the petition to be sufficient in form and
substance, it will issue a commencement order, which
shall, among other things:
1. appoint a rehabilitation receiver;
2. summarize the requirements and deadlines for
creditors to establish their claims against the
debtor;
3. prohibit suppliers of goods or services from
withholding supply for as long as the debtor
makes prompt payments;
4. prohibit the debtor from making any payment of
its outstanding liabilities; and
5. issue a stay or suspension order (FRIA section 16).
Who is a Rehabilitation Receiver?
Rehabilitation receiver shall refer to the person or
persons, natural or juridical, appointed as such by the
court pursuant to the FRIA LAW and which shall be
entrusted with such powers and duties as set forth
herein.The rehabilitation receiver shall have the following
minimum qualifications:
1. A citizen of the Philippines or a resident of the
Philippines in the six (6) months immediately
preceding his nomination;
2. Of good moral character and with acknowledged
integrity, impartiality and independence;
3. Has the requisite knowledge of insolvency and
other relevant commercial laws, rules and
procedures, as well as the relevant training
and/or experience that may be necessary to
enable him to properly discharge the duties and
obligations of a rehabilitation receiver; and
4. Has no conflict of interest: Provided, That such
conflict of interest may be waived, expressly or
impliedly, by a party who may be prejudiced
thereby.
Duties of a Rehabilitation Receiver
The Rehabilitation Receiver is in charge of a Rehabilitation
Plan
Rehabilitation Plan shall refer to a plan by which the
financial well-being and viability of an insolvent debtor
can be restored using various means including, but not
limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion en pago,
debt-equity conversion and sale of the business (or parts
of it) as a going concern, or setting-up of new business
entity as prescribed in Section 62 of the FRIA LAW hereof,
or other similar arrangements as may be approved by the
court or creditors.
Pre-Negotiated Rehabilitation
The second way of rehabilitation is the pre-negotiated.
Under this preceding, an insolvent debtor, by itself or
jointly with any of its creditors, may file a verified petition
with the court for the approval of a pre-negotiated
Rehabilitation Plan which has been endorsed or approved
by creditors holding at least two-thirds (2/3) of the total
liabilities of the debtor, including secured creditors
holding more than fifty percent (50%) of the total secured
claims of the debtor and unsecured creditors holding
more than fifty percent (50%) of the total unsecured
claims of the debtor.
Out of Court Rehabilitation
For an out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan to qualify, it must meet
the following minimum requirements:
1. The debtor must agree to the out-of-court or
informal restructuring/workout agreement or
Rehabilitation Plan;
2. It must be approved by creditors representing at
least sixty-seven (67%) of the secured obligations
of the debtor;
3. It must be approved by creditors representing at
least seventy-five percent (75%) of the unsecured
obligations of the debtor; and
4. It must be approved by creditors holding at least
eighty-five percent (85%) of the total liabilities,
secured and unsecured, of the debtor.
Summary of Rehabilitation under FRIA Law
There are three types of rehabilitation, namely:
1. Court-supervised rehabilitation
 2/3 of the OCS or Total Membership
2. Pre-negotiated rehabilitation
 Approved by all Creditors holding at least 2/3
of the TL = At least 50% of the SC and At least
50% of the USC.
3. Out-of-court/Formal Restructuring
 85% of all Creditors = At least 67% of the SC
and 75% of the USC
Debtors under Rehabilitation will be managed by the
Management Committee
The management committee shall take the place of the
management and the governing body of the debtor and
assume their rights and responsibilities.
The qualifications and disqualifications of the members of
the management committee shall be set forth in the
procedural rules, taking into consideration the nature of
the business of the debtor and the need to protect the
interest of all stakeholders concerned.
Stay Order in Rehabilitation Proceedings
The commencement order in rehabilitation proceedings
includes a stay or suspension order that suspends all
actions or proceedings, in court or otherwise, for the
enforcement of claims against the debtor and suspends
all actions to enforce any judgment, attachment or other
provisional remedies against the debtor (FRIA section
16(q)).
Attempts to seek legal or other recourse against the
debtor outside the rehabilitation proceedings shall be
sufficient to support a finding of indirect contempt of
court (FRIA section 17).
Liquidation under the FRIA
Liquidation is the process by which assets are converted
to cash.
A liquidator is a natural person or juridical entity
appointed as such by the court and entrusted with such
powers and duties as set forth under the FRIA. If the
liquidator is a juridical entity, it must designate a natural
person who possesses all the qualifications and none of
the disqualifications as its representative, it being
understood that the juridical entity and the
representative are solidarity liable for all obligations and
responsibilities of the liquidator.
Liquidation can be voluntary or involuntary
Voluntary Liquidation under the FRIA
In Voluntary Liquidation, an insolvent debtor may apply
for liquidation by filing a petition for liquidation with the
court. The petition shall be verified, shall establish the
insolvency of the debtor and shall contain, whether as an
attachment or as part of the body of the petition:
1. a schedule of the debtor’s debts and liabilities
including a list of creditors with their addresses,
amounts of claims and collaterals, or securities, if
any;
2. an inventory of all its assets including receivables
and claims against third parties; and
3. the names of at least three (3) nominees to the
position of liquidator.
At any time during the pendency of court-supervised or  If there is still an excess after satisfying the
pre-negotiated rehabilitation proceedings, the debtor claims or liens under Article 2244 – all other
may also initiate liquidation proceedings by filing a common credits shall be satisfied pro rata.
motion in the same court where the rehabilitation
Involuntary Liquidation under the FRIA
proceedings are pending to convert the rehabilitation
proceedings into liquidation proceedings. In case of Involuntary Liquidation, three (3) or more
creditors the aggregate of whose claims is at least either
The motion shall be verified, shall contain or set forth the
One million pesos (Php1,000,000,00) or at least twenty-
same matters required in the preceding paragraph, and
five percent (25%) of the subscribed capital stock or
state that the debtor is seeking immediate dissolution
partner’s contributions of the debtor, whichever is higher,
and termination of its corporate existence.
may apply for and seek the liquidation of an insolvent
Voluntary Liquidation under the FRIA debtor by filing a petition for liquidation of the debtor
with the court. The petition shall show that:
If the petition or the motion, as the case may be, is
sufficient in form and substance, the court shall issue a 1. there is no genuine issue of fact or law on the
Liquidation Order. claims/s of the petitioner/s, and that the due and
demandable payments thereon have not been
An individual debtor whose properties are not sufficient
made for at least one hundred eighty (180) days
to cover his liabilities, and owing debts exceeding Five
or that the debtor has failed generally to meet its
hundred thousand pesos (Php500,000.00), may apply to
liabilities as they fall due; and
be discharged from his debts and liabilities by filing a
verified petition with the court of the province or city in 2. there is no substantial likelihood that the debtor
which he has resided for six (6) months prior to the filing may be rehabilitated.
of such petition. He shall attach to his petition a schedule
3. At any time during the pendency of or after a
of debts and liabilities and an inventory of assets. The
rehabilitation court-supervised or pre-negotiated
filing of such petition shall be an act of insolvency.
rehabilitation proceedings, three (3) or more
Rules on Preference of Credits creditors whose claims is at least either One
million pesos (Php1,000,000.00) or at least
The Liquidation Order shall not affect the right of a
twenty-five percent (25%) of the subscribed
secured creditor to enforce his lien in accordance with
capital or partner’s contributions of the debtor,
the applicable contract or law, unless he waives his
whichever is higher, may also initiate liquidation
right. Thus, there is preference accorded to secured
proceedings by filing a motion in the same court
creditors, but they must file a manifestation that reflect
where the rehabilitation proceedings are pending
their desire to maintain their rights under the security or
to convert the rehabilitation proceedings into
lien.
liquidation proceedings.
In the settlement of the assets of an insolvent debtor,
Involuntary Liquidation under the FRIA
the priority of claims depend on the type of property
used to satisfy the debt, as follows: In case of an individual debtor, involuntary liquidation
takes place when a creditor or group of creditors with a
 If personal or movable property is involved –
claim of, or with claims aggregating at least Five hundred
the preference shall follow Article 2241 of the
thousand pesos (Php500,000.00) files a verified petition
Civil Code.
for liquidation with the court of the province or city in
 If real or immovable property is involved –
which the individual debtor resides.
the preference shall follow Article 2242 of the
Civil Code.
 If none of the foregoing claims apply to Proceedings under the FRIA are independent actions to
personal or real properties – the preference the formal Dissolution under the RCC
shall follow Article 2244 of the Civil Code as
A Corporation has the option to rehabilitate or liquidate
amended by Article 100 of the Labor Code
its assets under the FRIA Law before/during proceeding to
formal Corporate Dissolution.
Thus, while rehabilitation and liquidation are under the
jurisdiction of the courts (FRIA section 4(g)), corporate
liquidation is under the jurisdiction of the SEC

An important difference between the two is the

automatic stay of claims in the rehabilitation or
liquidation under the FRIA, which is not present in
corporate liquidation.