GENERAL PROVISIONS

DEFINITIONS AND CLASSIFICATIONS

Section 1. Title of the Code. - This Code shall be known as the "Revised
Corporation Code of the Philippines".
Section 2. Corporation Defined. - A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its existence.
Attributes of Corporation
1. It is an artificial being
2. It is created by operation of law
3. It has the right of succession
4. It has only the powers, attributes, and properties expressly authorized by law or
incident to its existence.
I. Corporation as an artificial personality
- A corporation is not a person in reality, but the law treats it as such. It can do acts
with legal effects by itself, separate and distinct from the stockholders or owners
themselves.
Person – you have the capability to do acts with legal
effects. Natural and Juridical/Artificial persons.
- The Board of Directors is the WILL of the corporation (the one who makes the
decisions). (The Board of Directors are the ones who gives CONSENT in a
contract) (manifested through the agent (corporate secretary) who will issue the
secretary certificate)
- Any act of the corporate officers (president, secretary, treasurer)
o Corporate officers are different from the Board of Directors (board of
directors are the ones to decide whether or not they will approve the acts
of the officers)
 The board of directors can authorize/delegate certain levels of
decision making for the corporate officers and below.
 The Board can send out a resolution stating that the
manager can approve loans up to 10k, the VP to approve
loans up to 100k, the President to approve loans up to 1M,
and all above that are subject to the decision of the Board.
As a GR, unless otherwise provided by the RCC or your Articles of
Incorporation/Bylaws, you don’t need the approval of the stockholders.
o Certain actions needs the approval of the stockholders
 o The approval of the SEC is sometimes needed after the approval of the
stockholders (e.g., amendment of the articles of incorporation)
Corporate officers  Board of Directors  Shareholders (certain actions required by
the RCC and the Articles of Incorporation or bylaws)  SEC

As a consequence of this legal concept of separate personality:

1. Liability for debt/ownership of credit – the stockholder’s debt or credit is not the debt
or credit of the corporation. A corporation cannot be held liable for the personal
indebtedness or obligation of a stockholder even if he should be its president. Neither is
the latter liable for the indebtedness of the former.
2. Right to bring actions
3. Right to acquire and possess property
4. Liability for contracts – all contracts entered into in its name by its regular appointed
officers and agents are the contracts of the corporation and not the stockholders.
5. Tax exemption/Liability – A tax exemption granted to a corporation cannot be
extended to include the dividends paid by such corporation to its stockholders if such
dividends are not exempted from tax. The tax liability of a corporation cannot be
enforced against the stockholders nor the personal tax liability of the latter, against the
former.
6. Changes in individual membership – a corporation remains unchanged and
unaffected in its identity by changes in its individual membership. It would exist even if
all stockholders die.
7. Liability under exceptional circumstances

Doctrine of piercing the veil of corporate entity (or disregarding the fiction of corporate
entity or the doctrine of corporate alter ego)
- The fiction of corporate entity will be disregarded if it is being used as a cloak or
cover for fraud or illegality, and the individuals composing it will be treated as
identical with the corporation or merely as an association of individuals having no
corporation formed.
- When there are 2 corporations, they will be merged into 1, being merely regarded
as the instrumentality or alter ego of the other.
- The law will not recognize separate corporate existence, when it is clearly
established that is used as a shield for wrongdoing.
THIS HAPPENS IF the corporate fiction is being used to (VID LEC) (memorize)
1. Defeat public convenience
 2. Justify wrong
3. Protect fraud
4. Defend crime
5. Be an Alter-ego of the person of the stockholders.
> Alter-ego – you created a corporation but you don’t respect the corporation as another
person. If you don’t respect the corporation as another person, the Court will not respect
it either, it will run after you. (e.g., separate accounting (money is being inputted in one
corporation, and it leaves on the other))

Instances where this happens:

1. Where a corporation functions for the benefit of a single person who has
complete control over the funds and the said person is the sole owner thereof.
2. Where the corporation is a mere instrumentality of the individual stockholders,
the latter must individually answer for corporate obligations.
3. Where a domestic or Philippine corporation is controlled by aliens, its nationality
shall be deemed that of the controlling stockholders thereof during wartime, for
reasons of national security.
4. Where a corporation is organized by an insolvent debtor to defraud his creditors
and he transfers his properties to it in furtherance of such fraudulent purpose.
5. Where a subsidiary company is created by a parent company merely as an
instrumentality, conduit or agency of the latter.
6. Where a corporation is formed by a person for the purpose of evading his
individual contract.
7. Where a corporation is dissolved and its assets are transferred to another
corporation to avoid a financial liability of the first corporation.
Liability of Corporations for Torts
- The liabilities of the corporation for torts committed by its agent (Board of
Directors) must generally follow the rules provided by the Law on Agency. A
corporation must be held liable for all the contracts and default that arise
from those entered into by its agent within the scope of his authority, or
even those outside the scope of his authority, by which has been ratified by the
corporation, through its Board of Directors.
- The acting officer is SOLIDARILY LIABLE with the corporation for the
damages resulting from his negligence as a joint-tortfeasor.
Can the corporation be held liable for the tortuous acts of a corporate officer or
representative, in the absence of a prior express direction from the Board of Directors,
or a subsequent ratification thereof, and the tort act was not a necessary incident in
performing the authorized transaction for the corporation?
 - When the tort act arises from or is connected with a business of the corporation,
it would be safe to assume that the corporate principal would also be liable
under the premise that when acting in the legal or commercial world, every
corporation must necessarily rely upon the intervention of individuals to
act on its behalf, and therefore human imperfection that cause loss or damage
as a result of negligence and even fraud, a reasonable business risk that every
corporate principal must assume to be an integral part of the costs of doing
business, and for which the corporate coffers must cover when it does arise.
o In such case, the remedy of the corporation is to recover the damages
from the acting officer who was directly responsible for the tort act.

Non-Entitlement to Moral Damages

- In the case of Mambulao Lumber Co. v. Philippine National Bank, the SC held
that since a corporation is an artificial person, and cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock
or social humiliation, there would be no basis to grant its recovery for moral
damages.
- In the case of People v. Manero, the Court held that a corporation may be
entitled to moral damages for besmirched reputation
- In Prime White Cement Corp. v. Intermediate Appellate Court, it was held that
even when the corporation’s reputation and goodwill have been prejudiced,
“there can be no award for moral damages”
- The majority school of thought is that corporations being amoral beings are not
entitled to any form of moral damages even on the ground of besmirched
reputation.

II. Corporation as a creation of law or by operation of law

- Corporations cannot come into existence by mere agreement of the parties.
- They require the special authority or grant from the State through the legislative
department.

III. Right of succession of a corporation

- It has a capacity of continuous existence irrespective of the death, withdrawal,
insolvency, or incapacity of the individual members or stockholders and
regardless of the transfer of their interest or shares of stock.
- Under the Corporation Code, the life of the corporation is limited to the period of
time stated in the Articles of Incorporation not exceeding 50 years from the date
of incorporation unless sooner dissolved or unless said period is extended.
IV. Powers, attributes, and properties of a corporation
- A corporation may exercise only such powers as granted by the law of its creation.

Advantages of a business corporation

1. It has the legal capacity to act as a legal unit
2. It has continuity of existence because of its non-dependence on the lives of those
who compose it.
3. Its credit is strengthened by such continuity of existence
4. Its management is centralized in the board of directors
5. Its creation, organization, management and dissolution are standardized as they
are governed under one general incorporation law.
6. It makes feasible gigantic financial enterprises since it enables many individuals
to invest their separate funds in the enterprise
7. The shareholders have limited liability
8. They are not general agents of the business
9. The shares of stocks can be transferred without the consent of the other
stockholders.
Disadvantages of a business corporation
1. The corporation is relatively complicated in formation and management
2. It entails relatively high cost of formation and operation
3. Its credit is weakened by the limited liability of the stockholders
4. There is ordinarily lack of personal element in view of the transferability of shares
5. There is a greater degree of governmental control and supervision than in any
other forms of business organization
6. The stockholders’ voting rights have become theoretical particularly in large
corporations because of the use of proxies and widespread ownership
7. The stockholders have little voice in the conduct of the business
8. In large corporations, management and control are separate from ownership.

3 Levels of Corporate Relationships

1. Juridical Entity Level – treats the relationship between the State and its various
instrumentalities and the corporation as a juridical person before the law.
a. State is the creator, the corporation the creature.
2. Intra-Corporate Level
a. The corporation and its agents – directors, trustees and officers – who
represent the juridical person in the commercial world, governed by Law
on Agency
 b. The directors, trustees and officers, on one hand, and the shareholders or
members on the other, governed by Law on Business Trusts
c. The corporation and the persons composing it (shareholders or members)
d. Among the shareholders or members in a common venture
3. Business Enterprise Level – the corporation becomes a business economic unit,
encapsulated within the medium of the juridical personality.
a. With the members of the public who voluntarily deals with it – customers,
suppliers, creditors, etc. Governed by Contract Law
b. With the managers and employees, governed by Labor Law
c. With the public who are adversely affected by its commercial operations,
governed by quasi-delict or torts, and environmental laws
Advantages and Disadvantages according to Villanueva
Advantages
1. Strong juridical personality – unlike in partnerships, the corporation has a
strong legal personality separate and distinct from the shareholders composing it,
the juridical personality is unaffected by the death, incapacity, withdrawal, or
insolvency of any of its shareholders. A corporation’s creation, organization,
management and dissolution are standardized by being governed by a general
incorporation law.
2. Centralized management – the corporate powers and the exercise of the
attributes of ownership over its properties and management are centralized in the
Board of Directors or Trustees. Shareholders are not agents and cannot bind
corporations.
3. Limited liability to shareholders or members – the liability is limited to the amount
of the investment.
4. Free-transferability of units of investment – shareholders may assign, transfer, or
encumber the shares without the consent of the corporation or other
shareholders.
5. Corporate advantages over unregistered associations – unregistered
associations do not have juridical personalities

Disadvantages
1. Complicated and costly formation and maintenance
2. Lack of personal element and abuse of corporate management – lack of personal
element because of the transferability of shares. The management powers given
to Board of Directors has spawned corporate irresponsibility under the theory that
those vested with corporate powers have no personal or proprietary stake in the
corporate business enterprise.
- In large corporations, management and control are separated from the powers
and prerogatives of ownership with respect to the corporate assets and the
corporate enterprise, since control is vested in the BoD. The voting powers of
shareholders have become theoretical especially in large corporations because
of the use of
 proxies and widespread ownership. Investors have very little voice over the
conduct of the business of the corporation.

3. Limited liability hits innocent victims – limited liability has been abused by
business in order to avoid having to provide adequate protection and
compensation for victims of the business ventures they undertake. This is
countered by the doctrine of piercing the veil of corporate fiction.

4. Double taxation – corporations is subject to heavier taxation than other forms of

business organizations. The profits of the corporation which are already
subjected to corporate income tax when declared and distributed as dividends to
the shareholders are again subjected to further income tax.

Partnerships v. Corporations
1. Manner of creation – a partnership is created by agreement, corporation is by law
or operation of law
2. Commencement of juridical personality – a partnership commences to acquire
juridical personality from the moment of the execution of the contract of
partnership, a corporation begins to have juridical personality only from the date
of issuance of the certificate of incorporation by the SEC under its official seal.
3. Powers – a partnership may exercise any power authorized by the partners
provided it is not contrary to law, morals, good customs, public order or public
policy, while a corporation can exercise only the powers expressly granted by law
or implied from those granted or incident to its existence.
4. Management – in a partnership, when the management is not agreed upon,
every partner is an agent of the partnership, while in corporation, the power to do
business and manage its affairs is vested in the board of directors or trustees.
5. Effect of mismanagement – In a partnership, a partner can sue a co-partner who
mismanages, in a corporation, the suit against a member of the board of
directors or trustees who mismanages must be in the name of the corporation
6. Right of succession – partnership has no right of succession
7. Extent of liability to third persons – partnership, partners are liable
personally and subsidiarily (sometimes solidarily) for partnership debts to
3rd persons. In a corporation, the stockholders are liable only to the extent
of their investments (shares) (because XCP to the GR lang yung sa
partnership) XCP if the Court disregards the legal fiction of the juridical
personality of the corporation
8. Transferability of interest – in a partnership, a partner cannot transfer his interest
in the partnership so as to make the transferee a partner without the consent of
all existing partners, in a stock corporation, the stockholder has the right to
transfer his shares without the prior consent of the other stockholders.
 9. Dissolution – a partnership may be dissolved at any time by the will of any or all
the partners, wile a corporation may only be dissolved with the consent of the
State
10. Law that governs – partnership is governed by Civil Code, corporation is
governed by Corporation Code.

Does a defective incorporation process result into a partnership?

- When parties come together and all the elements of a particular contract are
present, although the parties may have denominated it otherwise, the law will
impose such contractual relationship upon them. The contract or legal
relationship is what the law says it is, not what the parties wish to call it.
If 5 or more persons agree to contribute money or property to a common venture to be
pursued in a corporate medium, with the intention of dividing the profits among
themselves through their agreed distribution of shares, but the business venture is
pursued without a corporation being duly incorporated and registered, would there be a
contract of partnership among the parties?
- No. (Villanueva)
1. Both corporate and partnership relationships are fundamentally contractual
relationship created by the co-venturers who consent to come together under said
relationships. If the parties had intended to create an association in the form of a
corporation, a partnership cannot be created in its stead since such is not within their
intent, and therefore does not constitute a part of their consent to the contractual
relationship.
2. The important differences between the corporation and the partnership cannot lead
one to the conclusion that in the absence of the first, the contracting parties would have
gone along with the latter. Delectus personae is the essence of partnership, not just the
underlying business venture.

Nationality of Corporations
- Serves as a legal basis for subjecting the enterprise or its activities to the laws,
the economic and fiscal powers, and the various social and financial policies, of
the state to which it is supposed to belong.
1. Place of Incorporation Test
- a corporation is a national of the country under the laws of which it has been organized
and registered. Sec 140 of the RCC states that “a foreign corporation is one 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”
- primary test of nationality of corporations in the Philippines
- also applied to determine whether a state has jurisdiction over the existence and legal
character of a corporation, its capacity or powers, internal organization, capital
structure, the rights and liabilities of directors, officers, and shareholders towards each
other and to creditors and third persons.
2. Control Test
- nationality of a corporation is determined by the nationality of the majority of the
shareholders on whom equity control is vested, on the theory that they would be able to
elect the majority of the Board of Directors.
- cannot overcome the place of incorporation test.
3. Grandfather Rule
- the method by which the percentage of Filipino equity is computed in a corporation
engaged in fully or partly nationalized areas of activities provided for under the
Constitution and other nationalization laws, in cases where corporate shareholders are
present in the situation, by attributing the nationality of the second or subsequent tiers
of ownership to determine the nationality of the corporate shareholder.
- it is suggested that the rule be applied on 2 levels of corporate relations for publicly-
held corporations or where the shares are traded in the stock exchanges; and to apply
the rule on 3 levels for closely held corporations or the shares of which are not traded in
the stock exchange (1977 internal memo issued by SEC)
3 level relationship test
1. Grandson – target company
2. Father – Holding company
3. Grandfather – person or entity holding shares in the holding company.

Section 3. Classes of Corporations. - Corporations formed or organized under

this Code may be stock or nonstock corporations. Stock corporations are those
which have capital stock divided into shares and are authorized to distribute to
the holders of such shares, dividends, or allotments of the surplus profits on the
basis of the shares held. All other corporations are nonstock corporations.
Private Corporations – according to whether their membership is represented by shares
of stock or not
1. Stock corporation
- the ordinary business corporation created and operated for the purpose of making a
profit which may be distributed in the form of dividends to stockholders on the basis of
their invested capital. The two elements mentioned in Section 3 (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) must be
present.
2. Non-stock corporation
- Do not issue stock and are created not for profit but for the public good and welfare.
- most of the religious, social, literary, scientific, civic and political organizations and
societies are of this character.
- have no capital stock which can be subscribed by their members. Their capital are
sourced from contributions and donations.

Other classifications of corporations

As to number of persons who compose them:
1. Corporation aggregate or a corporation consisting of more than one member or
corporator
2. Corporation sole or a religious corporation which consists of one member or
corporator only and his successors, such as a bishop.
As to whether they are for religious purpose or not:
1. Ecclesiastical corporation or one organized for religious purposes
2. Lay corporation or one organized for a purpose other than for religion. They may
either be eleemosynary or civil.
As to state or country under or by whose laws they have been created:
1. Domestic corporation or one incorporated under the laws of the Philippines
2. Foreign corporation or one formed, organized, or existing under any laws other
than those of the Philippines
As to their legal right to corporate existence
1. De jure corporation or a corporation existing in fact and in law
2. De facto corporation or a corporation existing in fact but not in
law As to whether they are open to the public or not:
1. Close corporation or one which is limited to selected persons or members of a
family
2. Open corporation or one which is open to any person who may wish to become a
stockholder or member thereto
As to their relation to another corporation
 1. Parent or holding corporation or one which is so related to another corporation
that it has the power either, directly or indirectly, to elect the majority of the
directors of such other corporation
2. Subsidiary corporation or one which is so related to another corporation that the
majority of its directors can be elected either, directly or indirectly, buy such other
corporation.
As to whether they are corporations in a true sense or only in a limited sense
1. True corporation or one which exists by statutory authority
2. Quasi-corporation or one which exists without formal legislative grant. It is an
exception to the general rule that a corporation can exist only by authority of law;
it may be:
a. Corporation by prescription – one which has exercised corporate powers
for an indefinite period without interference on the part of government and
which, by fiction of law, is given the status of a corporation (e.g., the
Roman Catholic Church)
b. Corporation by estoppel – one which in reality is not a corporation,
because it is so defectively formed, but is considered a corporation in
relation to those only who, by reason of their acts or admissions, are
precluded from asserting that it is not a corporation.
As to whether they are for public (government) or private purpose
1. Public corporations or those formed or organized for the government of a portion
of the State
2. Private corporations or those formed for some private purpose, benefit, or
end; Test of distinction between public and private corporation
- True test is the purpose of the corporation.
- If it is created for political or public purpose connected with the administration of
government, then it is a public corporation. If no, it is a private corporation.
In the Philippines, the public corporations are the provinces, cities, municipalities,
and barangays. These local units are also called municipal corporations or local
governments.
Private corporations include
1. Government-owned or -controlled corporations or those directly created by
special law, or if organized under the general corporation law, are owned or
controlled by the government directly through a parent corporation or subsidiary,
to the extent of at least a majority of its outstanding capital stock or of its
outstanding voting capital stock. (Examples are GSIS, National Power
Corporation, Philippine National Railways, Philippine Charity Sweepstakes, etc.)
 2. Quasi-public corporations or those which have accepted from the State the grant
of a franchise or contract involving the rendition or performance of some public
duties or service, but which are organized for profit. Also known as “Public
utilities” or “public service corporations.” (Examples are those organized as
electric, water, telephone, and transportation companies)
// according to Villanueva
1. In relation to the State
Public and private corporations
Public corporations – barangay, municipality, city, and province. It possesses all three
great powers of the government: police power, power of eminent domain, power of
taxation. They are generically called “Local Government Units”
An LGU possesses a 2-fold character:
a. Public or governmental character – it acts as agent of the state and exercises, by
delegation a part of the sovereignty of the state. They may exercise police power,
may levy taxes for certain purposes under limitations imposed by law.
b. Private, corporate or proprietary character – it acts as a private or business
corporation, and stands for the community in the administration of its local affairs
wholly beyond the sphere of public purposes for which its governmental powers
are conferred. They are empowered to mortgage their property under certain
limitations. They can sue and be sued, enter into contracts and be held liable for
damages for torts.
3 types of private corporations
a. Those organized under the Corporation Code for private ends
b. Those organized under the Corporation Code as GOCCs to achieve certain
purposes of the government
c. Those GOCCs organized with their own charters

2. As to place of incorporation
a. Domestic Corporations
- one incorporated under laws of the Philippines.
b. Foreign Corporations
- may be licensed by the SEC to do business in the Philippines only under the principle
of reciprocity, after securing a certificate of authority from the Board of Investments
under EO 226, or the Omnibus Investments Code, and after complying with the
conditions for issuance of the license on application forms, structural organizations and
capitalization.
Foreign corporations are permitted to do business in a state other than that of their
creation:
 To place them on an equality with domestic corporations
 To subject them to inspection so that their condition may be known, and
 To protect the residents of the state doing business with them by subjecting them
to the courts of the state.
3. As to legal status
a. Corporation De Jure
- if there is a full or substantial compliance with the requirements of an existing law
permitting organization of such corporation as by proper articles of incorporation duly
executed and filed.
b. Corporation De Facto (Sec 19 RCC)
- where there is a bona fide attempt to incorporate, colorable compliance with the
statute and user of corporate powers.
- the de facto corporation doctrine grew out of the necessity of promoting the security of
business transactions and to eliminate quibbling over irregularities. It would be unfair to
allow a claimant against the alleged corporation to insist on the individual liability of
innocent investors merely because of some minor flaws in its incorporation.
c. Corporation by Estoppel
- a group of persons may assume to do business as a corporation without having gone
far enough to achieve a de facto corporate existence.
- founded on procedural convenience, avoidance of inquiries into irrelevant formalities,
and fairness to all parties concerned.
- Section 20 RCC
d. Corporation by Prescription
- Roman Catholic Church, because it is an institution which “antedated by almost a
thousand years any other personality in Europe, and which existed when Grecian
eloquence still flourished in Antioch and when idols were worshipped in the temple of
Mecca”
4. As to existence of shares of stocks
a. Stock corporation – Sec 3 RCC. 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, and all other corporations not
included in such definition are nonstock corporation.
- a stock corporation has express powers under Section 42 of the RCC to distribute
dividends from retained earnings or surplus profits.
b. Nonstock corporation – Sec 86 of RCC defines a nonstock corporation as one where
no part of its income is distributable as dividends to its members, trustees or officers,
provided that any profit which a nonstock corporation may obtain as an incident to its
operations, shall, whenever necessary or proper be used for the furtherance of the
purpose or purposes for which the corporation was organized.
- Section 87 of the RCC provides that nonstock corporations may be formed or
organized for charitable, religious, educational professional, cultural, recreational,
fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry,
agriculture and like chambers, or any combination thereof, subject to the special
provisions of this title governing particular classes of nonstock corporations.

For a stock corporation to exist, 2 requisites must be complied with:

 A capital stock divided into shares
 Authority to distribute dividends
- Every time there is an express authorization in either the articles of incorporation
or bylaws to declare dividends, it is a stock corporation.
- When there is no express prohibition not to distribute dividends, it is a nonstock
corporation.

5. As to relationship of management and control

a. Parent and Holding Companies
Parent company – one that controls another as a subsidiary or affiliate by the power to
elect its management
Holding company – one which holds stocks in other companies for purposes of control
rather than for mere investment.
The International Financial Reporting Standards defines a parent company as an entity
that controls one or more entities
- Control of investee – investor controls an investee when the investor is exposed,
or has rights, to variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the investee.
Maricalum Mining Corp v. Florentino defined a holding company as being organized and
is basically conducting its business by investing substantially in the equity securities of
another company for the purposes of controlling their policies (as opposed to directly
engaging in operating activities) and holding them in a conglomerate or umbrella
structure along with other subsidiaries.
b. Affiliate Company
- an affiliate is defined by the SEC as a person that directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control with, the
person specified, through the ownership of voting shares, by contract, or otherwise.

c. Parent and Subsidiary Companies

> When a corporation has a controlling financial interest in one or more corporations,
the one having control is known as the “parent company” and the others are known as
the “subsidiary companies”
The SEC Rules and Regulations Covering Forma nd Content of Financial Statements
defines “parent” company as an enterprise that has one or more subsidiaries
“subsidiary” as an enterprise that is controlled by another enterprise (known as the parent)
Control – presumed to exist when the parent owns, directly or indirectly through
subsidiaries, more than one half of the voting power of an enterprise unless, in
exceptional circumstances, it can be clearly demonstrated that such ownership does not
constitute control.
Control also exists when the parent owns ½ or less of the voting power of an enterprise
when there is power (a) over more than one half of the voting rights by virtue of an
agreement with other investors; (b) to govern the financial and operating policies of the
enterprise under a statute or a n agreement; (c) to appoint or remove the majority of the
members of the board of directors or equivalent governing body; or (d) to cast the
majority of votes at meetings of the board of directors or equivalent governing body.

// Villanueva
Corporate Juridical Personality
- A corporation is an entity separate and distinct from its stockholders. While not in
fact and in reality a person, the law treats the corporation as though it were a
person by process of a fiction or by regarding it as an artificial person distinct and
separate from its individual stockholders.
- The granting of the corporate entity of a strong separate juridical personality is
considered as the attribute most characteristic of corporations, and from which
other attributes flow as a legal consequence.
- The corporate juridical personality has features that have made it most attractive
to businessmen and investors: right of succession, limited liability, centralized
management, and generally free-transferability of shares of stock.
 - The stability of the main doctrine of separate juridical personality is linked with
the attractiveness of the corporation as an efficient medium by which
businessmen can pursue and operate business enterprises.
Cascade of the Doctrine of Separate Juridical Personality
1. The corporate property and assets are not the property of its shareholders; nor
can the property of the controlling shareholders or the officers be treated as part
of the corporate estate.
2. A parent or holding company has no proprietary interest in the property, rights
and interests of its subsidiaries or affiliates; consequently, any suit against the
parent company does not bind the subsidiaries, and vice versa
3. A corporation may not be held liable for the obligations of the shareholders or
members composing it, or those of its officers; and neither can its shareholders
be held liable for the obligations of such corporation
4. Corporate officers are not personally liable for their officials acts in pursuing the
affairs and business of the corporation, unless it is shown that they have
exceeded their authority
5. Substantial ownership in the capital stock entitling the shareholder a significant
vote in corporate affairs allows them no standing or claims pertaining to
corporate affairs; and a suit against a corporation cannot be considered as a suit
against its shareholders, and vice versa.
6. Since the separate juridical personality is a fiction created by law for convenience
and to prevent injustice, it may be disregarded if it is used as a means to
perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues.
7. However, the following facts by themselves or in combination, would not warrant
a disregard of the veil of corporate fiction absence fraud or other public policy
consideration:
a. Mere ownership by a single shareholder or by another corporation of all or
nearly all of the capital stock
b. Substantial identity of the incorporators of two or more corporations
c. Existence of interlocking directors or officers of 2 or more corporations
d. Location of head offices or facilities in the same compound or having the
same addresses

Doctrine of Piercing the Veil of Corporate Fiction

- When the fiction is used as a means of perpetrating a fraud or an illegal act or as
a vehicle for the evasion of an existing obligation, the circumvention of statutes,
the achievement or perfection of a monopoly or generally the perpetration of
knavery or crime, the veil with which the law covers and isolates the corporation
from the members or stockholders who compose it will be lifted to allow for its
 consideration merely as an aggregation of individuals (San Juan Structural and
Steel Fabricators, Inc. v. CA)
- it is an equitable remedy (PNB v. Andrada Electric & Engineering Co.)
- used to achieve social justice in our society.

1. Nature and Consequences of the Piercing Doctrine as an Equitable Remedy

a. Piercing doctrine applies only to prevent a wrong or injustice, or to achieve equitable
ends
b. Party invoking the piercing doctrine must be a “victim of inequity”
c. Piercing doctrine a remedy of last resort
d. Piercing doctrine cannot be employed to establish a right or a cause of action
e. Piercing doctrine applies only when the corporate personality was the efficient cause
or means
f. Piercing application is essentially a judicial prerogative

2. Legal Consequences when the Piercing Doctrine is Applied

a. Treat the corporation, its controlling or accountable officers or shareholders as a
mere association
b. Piercing may apply to benefit those within and outside the intra-corporate relations
c. Application of the piercing doctrine only has res adjudicata effect
d. Piercing doctrine applies to nonstock corporations

3. Classifications of the application of the piercing doctrine

a. Fraud piercing: when the corporate entity is used to commit fraud or to justify a
wrong, or to defend a crime;
b. Alter ego piercing: when the corporate entity is used as a mere alter ego, business
conduit or instrumentality of a person or another entity
c. Defeat public convenience/equity piercing: when respect for the separate juridical
personality would defeat public convenience, or would result in unintended inequity or
injustice
Fraud Piercing Cases
1. Corporate fiction was the very means to commit fraud, evade the consequences
of the wrongful act
2. Alter ego elements in fraud piercing cases
3. Tax evasion cases
4. Evasion of the lawful obligations
5. Employing a shell or fictitious company
6. Forum shopping in fraud piercing cases
7. Parent-subsidiary scenarios in fraud piercing cases
8. Application of the piercing doctrine to impose liability on corporate officers
9. Doctrinal summation of the fraud piercing doctrine
> The piercing the veil of corporate fiction is allowed only when the
following elements are present:
a. there must be fraud or an evil motive in the affected transaction, and the mere proof
of control of the corporation would not authorize piercing
b. The corporate fiction is the very means used in the perpetration of the fraud or in the
justification of wrong, or to escape a lawful liability
c. The main action should seek for the enforcement of pecuniary claims pertaining to
the corporation against corporate officers or shareholders, or vice versa.

Section 4. Corporations Create by Special Laws or Charters. - Corporations

created by special laws or charters shall be governed primarily by the provisions
of the special law or charter creating them or applicable to them, supplemented
by the provisions of this Code, insofar as they are applicable.
- Section 4 authorizes the creation of private corporations by special laws or
charters.
- The enactment of a special act creating a private corporation is subject to the
constitutional limitation that such corporation shall be owned or controlled by the
government or any subdivision or instrumentality thereof (Art 12, Sec 16, 1987
Consti)
o This is to prevent the granting of special privileges to one body of men
without giving all others the right to obtain them in the same conditions
and
o Partly to prevent bribery and corruption of the legislature.

Section 5. Corporators and Incorporators, Stockholders and Members. -

Corporators are those who compose a corporation, whether as stockholders or
shareholders in a stock corporation or as members in a nonstock corporations.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.

4 Classes of persons composing a corporation are the following:

1. Corporators – those who compose the corporation, whether stockholders or
members. The term includes incorporators, stockholders, or members.
2. Incorporators – those corporators mentioned in the articles of incorporation as
originally forming and comprising the corporation and who executed and signed
the articles of incorporation as such. They are also shareholders, but they are
just in the articles of incorporation.
3. Stockholders / Shareholders – owners of the shares of stock in a stock
corporation. They are the owners of the corporation. Stockholders may be natural
or juridical persons but only natural persons can be incorporators.
4. Members – corporators of a corporation which has no capital stock.

// Promoters – those who try to organize the corporation prior to the incorporation. It is
possible that these promoters may fail in organizing the corporation. If they succeed in
organizing and registering the corporation, they will be incorporators.
- They enter into contracts with 3rd parties in the name of the CORPORATION (but
the corporation still is not in existence) (not necessarily saying that you have a
corporation, but the corporation will come into existence at a later time.
Therefore, there will be no corporation by estoppel.) and the other contracting
party KNOWS that there is no corporation in existence yet.
o The legal effect of this contract is VOID (there must be 2 persons in a
contract, if the corporation is not yet in existence, there is no second
party.)
o Estoppel will not apply in this case since the other party knows. However,
if the other party does not know that the corporation was non-existent,
estoppel will apply and the promoter cannot escape from his obligation.
>> Can an incorporator be a member of the board at the same time?  YES. The
directors are temporary in the form stated in Section 14. After the SEC issues the
certificate of incorporation, you can immediately have your election as provided for in
the Bylaws.
>> Articles of Incorporation and Bylaws may be submitted at the same time.
 A director should be a shareholder. An incorporator may not be necessarily a
director.

Section 6. Classification of Shares. - The classification of shares, their

corresponding rights, privileges, restrictions, and their stated par value, if any,
must be indicated in the articles of incorporations. 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.
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 be a class or series of shares with complete
voting rights.
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: 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 (₱5.00) 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.

- The classification of shares, their corresponding rights, privileges, restrictions,

and their stated par value, if any, must be indicated in the articles of
incorporations.
o 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.
“Issue” – the corporation’s selling of the stocks
“Sell” – if a stockholder sells his shares of stock. It’s not called an issue.

Power to classify shares.

1. Division into classes or series of shares – unless restricted by the law or the
provisions of its charter, a corporation may issue such classes or series of shares
as the prospects and needs of its business may require. A “series” refers to a
subdivision of a class of shares.
2. Primary classification of shares – it is common and preferred each of which may
be divided into other classes. Shares of stock usually differ with respect to voting
rights, dividend rights, and rights to corporate assets in case of liquidation.
3. At least 1 class of shares with voting rights – There must at least be 1 class of
stock, and one class of stock with voting rights.
Doctrine of Equality of Shares
- 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.
- In the absence of any provision in the Articles of incorporation and in the
certificate of stock to the contrary, all stocks enjoy equal rights and privileges.
Thus, if one class of shares has the right to vote, all other classes are presumed
to have the same voting power.
Capital Stock – amount fixed in the articles of incorporation, to be paid in by the
shareholders of a corporation, either in money or property, labor or services, at the
organization of the corporation or afterwards and upon which it is to conduct its
operation.
- It represents the equity of the stockholders in the corporate assets.
- It limits the maximum amount or number of each class of shares that may be
issued by the corporation without formal amendment of the articles of
incorporation.
- It remains the same even though the actual value of the shares as determined by
the assets of the corporation is diminished or increased, unaffected by profits and
losses.
Stock or shares of stock
- one of the units into which the capital stock is divided. It represents the interest
or right which the owner has:
o In the management of the corporation in which he takes part through his
right to vote (if voting rights are permitted for that class of stock)
o In a portion of the corporate earnings, if and when segregated in the form
of dividends.
o Upon its dissolution and winding up in the property and assets thereof
remaining after the payment of corporate debts and liabilities to creditors.
- A certificate of stock is a written acknowledgement by the corporation of the
interest, right, and participation of a person in the management, profits, and
assets of a corporation.

Classes of shares
1. Par value or no par value
2. Voting or non-voting
3. Common or preferred, and preferred may be voting, convertible, or redeemable
4. Promotion share
5. Share in escrow
6. Convertible stock
7. Founders’ share
8. Redeemable share
9. Treasury share

Par value share – one with a specific money value fixed in the articles of incorporation
and appearing in the certificate of stock for each share of stock of the same issue.
- Its primary purpose is to fix the minimum issue price of the shares thus assuring
creditors that the corporation would receive a minimum amount for its stock.
 - Not usually the price at which the investors buy or sell the stock
No par value share – one without any stated or par value appearing on the face of the
certificate of stock. It is a stock which does not state how much money it represents.
Voting share – a share with a right to vote. It is customary to give the right to vote to the
common stock and to withhold it from the preferred.
- One share, one vote, because representation in a corporation is commensurate
to extent of ownership.
Non-voting share – share without right to vote.
- Preferred or redeemable shares are the only shares that may be deprived of
voting rights, unless otherwise provided by the Code.
Common share of stock – stock which entitles the holder thereof to pro rata division of
the profits. It is the stock which private corporations ordinarily issue.
- They get only the assets left over in case of liquidation after all other securities
holders are paid.
- As a holder of a common share, you will have the right to vote, right to receive
dividends, appraisal right, preemptive right, right to examine books.
- Usually the least priority in dividends/liquidation of the company because they
have the right to vote in exchange.
- A corporation MAY issue more than 1 class of common stock (class A, class B)
Dividends – distribution of profits of the corporation.
o The fact that a corporation has profit does not mean that it would be
distributed to the stockholders. That will depend upon the decision of the
Board.

Preferred share of stock – stock which entitles the holder to certain preferences over
the holders of common stock.
- May consist in the payment of dividends or the distribution of assets of a
corporation in case of a dissolution, etc.
- If you deny a stockholder the right to vote, they are preferred shareholders.
Except of course for the list stated in section 6.
o This is in exchange of preference in receiving dividends and in the
liquidation of the properties of the corporation (sometimes they will get
dividends first, then what is left is given to holders of common stocks)
- Rarely given voting privileges.
- More than one class of preferred shares may be issued (first preferred, second
preferred, etc.)
 Common stock and preferred stock are the 2 main classes or forms of stock.
  The classification of shares must be stated in the articles of incorporation, and
such classification must also be reflected in the shares of stock of stockholders.
Section 7. Founders' Shares. - Founders' shares may be given certain rights and
privileges not enjoyed by the owners of other stock. Where the exclusive right to
vote and be voted for in the election of directors is granted, it must be for a
limited period not to exceed five (5) years from the date of incorporation:
Provided, That such exclusive right shall not be allowed if its exercise will violate
Commonwealth Act No. 108, otherwise known as the "Anti-Dummy Law";
Republic Act No. 7042, otherwise known as the "Foreign Investments Act of
1991"; and otherwise known as "Foreign Investments Act of 1991"; and other
pertinent laws.
- Founders’ shares are shares issued to the organizers and promoters of a
corporation in consideration of some supposed right or property.
- They usually share in profits only after a certain percentage has been paid upon
the common stock, but are often given special privileges over other stock as to
voting and as to division of profits in excess of a minimum dividend on the
common stock.
- Where the exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not exceeding 5 years.

Section 8. Redeemable Shares. - Redeemable shares may be issued by the

corporation when expressly provided in the articles of incorporation. They are
shares which may be purchased by the corporation from the holders of such
shares upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon such
other terms and conditions stated in the articles of incorporation and the
certificate of stock representing the shares, subject to rules and regulations
issued by the Commission.
- Redeemable or callable share is share, usually preferred, which by its terms is
redeemable at a fixed date or at the option of either the issuing corporation or the
stockholder or both at a certain redemption price.
o Redemption is when the corporation gets back some of its stock,
distributes cash or property to the shareholder, and continues in business
as before.
- Redeemable shares may only be issued when expressly so provided in the
articles of incorporation.
- All the terms and conditions affecting such shares must be stated not only in the
articles of incorporation but also in the certificates of stock representing said
shares.
- They may be deprived of voting rights in the articles of incorporation unless
otherwise provided in the code.
Section 9. Treasury Shares. - Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by the
board of directors.
- Treasury shares are shares which has been lawfully issued by the corporation
and fully paid for and later reacquired by it either by purchase, redemption,
donation, or some other lawful means.
- Treasury shares are unrealized income, and are not considered as part of
earned or surplus profits, and not distributable as dividends.
- Treasury shares have no voting rights as long as they remain in the treasury (i.e.,
uncancelled and subject to reissue)

TITLE II - INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Section 10. Number and Qualifications of Incorporators. - Any person,
partnership, association or corporation, singly or jointly with others but not more
than fifteen
(15) in number, may organize a corporation for any lawful purpose or
purposes: Provided, That natural persons who are licensed to practice a
profession, and partnerships or associations organized for the purpose of
practicing a profession, shall not be allowed to organize as a corporation unless
otherwise provided under special laws. Incorporators who are natural persons
must be of legal age.
Each incorporator of a stock corporation must own or be a subscriber to at least
one (1) share of the capital stock.
A corporation with a single stockholder is considered a One Person Corporation
as described in Title XIII, Chapter III of this Code.

SEC MEMORANDUM CIRCULAR NO. 16, S. 2019

SECTION 1. Number of Incorporators. — For the purpose of forming a new domestic
corporation under the Revised Corporation Code, two (2) or more persons, but not more
than fifteen (15), may organize themselves and form a corporation. Only a One Person
Corporation (OPC) may have a single stockholder, as well as a sole director.
Accordingly, its registration must comply with the corresponding separate guidelines on
the establishment of an OPC.
SECTION 2. Definition of Incorporators. — Incorporators are those stockholders or
members mentioned in the Articles of Incorporation as originally forming and composing
the corporation, and who are signatories thereof.
SECTION 3. Qualifications of Incorporators. — Each incorporator of a stock
corporation must own, or be a subscriber to, at least one (1) share of the capital stock.
Each incorporator of a nonstock corporation must be a member of the corporation. The
incorporators may be composed of any combination of natural person/s, SEC-registered
partnership/s, SEC-registered domestic corporation/s or association/s, as well as
foreign corporation/s. Incorporators who are natural persons must be of legal age, and
must sign the Articles of Incorporation/Bylaws.
SECTION 4. Partnerships as Incorporators. — In the event that an SEC-recorded
partnership is made an incorporator, the application for registration must be
accompanied by a Partners' Affidavit, duly executed by all the partners, to the effect that
they have authorized the partnership to invest in the corporation about to be formed and
that they have designated one of the partners to become a signatory to the
incorporation documents. Partnerships under "dissolved" or "expired" status with the
SEC shall not be authorized to become an incorporator.
SECTION 5. Domestic Corporations or Associations as Incorporators. — In the
event that an SEC-registered domestic corporation or association is made an
incorporator, its investment in the new corporation must be approved by a majority of
the board of directors or trustees and ratified by the stockholders representing at least
two- thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the
members in the case of nonstock corporations, at a meeting duly called for the purpose.
A Directors'/Trustees' Certificate or a Secretary's Certificate, indicating the necessary
approvals, as well as the authorized signatory to the incorporation documents, shall be
executed under oath and submitted by the applicant. Domestic corporations under
"delinquent," "suspended," "revoked" or "expired" status with the SEC shall not be
authorized to become an incorporator.
SECTION 6. Foreign Corporations as Incorporators. — In the event that a foreign
corporation is made an incorporator, the application for registration must be
accompanied by a copy of a document (i.e., Board Resolution, Directors' Certificate,
Secretary's Certificate, or its equivalent), duly authenticated by a Philippine Consulate
or with an apostille 2 affixed thereto, authorizing the foreign corporation to invest in the
corporation being formed and specifically naming the designated signatory on behalf of
the foreign corporation.
SECTION 7. Signatories of the Articles of Incorporation. — Each individual signing
the Articles of Incorporation/Bylaws must indicate the capacity upon which he/she is
affixing his/her signature thereto. (i.e., Incorporator or Representative of XYZ Corp.) An
individual designated to sign the Articles of Incorporation/Bylaws on behalf of an
incorporator, which is not a natural person, must also indicate the corporate or
partnership name of the entity being represented and for whom he/she is executing the
Articles of Incorporation/Bylaws.
The Taxpayer Identification Number (TIN) of the principal, as well as the designated
signatory, should both be indicated in the Articles of Incorporation.
No application for incorporation shall be accepted unless the registration documents
reflect the TIN or passport number of all its foreign investors other than foreign
corporations which have not yet been issued a Taxpayer Identification Number.
After incorporation, all the foreign investors, natural or juridical, shall secure a Taxpayer
Identification Number. All documents to be filed with the SEC after incorporation (e.g.,
General Information Sheets) shall not be accepted unless the TIN of all its foreign
investors, natural or juridical, resident or non-resident, are indicated therein.
SECTION 8. Designation of Incorporators as Directors or Trustees. — An individual
who signs the Articles of Incorporation on behalf of an incorporator, which is not a
natural person, may not be named as a director or trustee in the same Articles of
Incorporation, unless when the said individual is also the owner of at least one (1) share
of stock, or is also a member, of the corporation being formed.
SECTION 9. Foreign Nationals in the Articles of Incorporation. — The inclusion of
foreign nationals in the Articles of Incorporation shall be subject to the applicable
constitutional, statutory, and regulatory restrictions, as well as conditions, with respect
to foreign participation in certain investment areas or activities.
SECTION 10. Additional Requirements for Certain Corporations. — No Articles of
Incorporation of banks, banking and quasi-banking institutions, preneed, insurance and
trust companies, NSSLAS, pawnshops, and other financial intermediaries shall be
approved unless accompanied by a favorable recommendation of the appropriate
government agency to the effect that the Articles of Incorporation are in accordance with
law.
SECTION 11. Processing of Applications. — The processing of applications for
registration in accordance with the new provisions of the Revised Corporation Code
shall be done manually by the Company Registration and Monitoring Department and
the Extension Offices of the SEC, until further notice.

Incorporation and Organization

Number and qualifications of incorporators – p 238
1. Juridical persons now allowed as incorporators – apart form natural persons,
partnerships, associations and corporations are now allowed to be incorporators
2. No more minimum number of incorporators – although the maximum number of
incorporators at 15 has been maintained for stock corporations, there is no
longer a minimum number of incorporators required (w/c was not less than 5
under the old CC)
 3. Deletion of the rule requiring majority of the incorporators to be residents –
deleted in order to contribute to the ease of doing business, especially for foreign
investors
4. Natural persons may organize a corporation for the practice of a profession when
authorized by special laws – there is an express provision that natural persons
cannot organize a corporation for the practice of a profession “unless otherwise
provided under special laws”
> the removal of the minimum number of incorporators is intended to contribute to the
ease of doing business through the corporate medium, and to usher the One Person
Corporation in particular.

Maximum Number of Incorporating Shareholders or Members

Incorporators are those stockholders or members mentioned in the Articles of
Incorporation as originally forming and composing the corporation, and who are
signatories thereof.
- Although the maximum number of incorporators (signors) is still at 15, there is no
limit in the total number of initial subscribers to the authorized capital stock of a
corporation still in the process of incorporation.
- Subscribers to shares of the corporation in the process of incorporation beyond
the maximum 15 incorporators are deemed to be “corporators”, i.e, subscribers
who do not sign the articles of incorporation.

Section 11. Corporate Term. - A corporation shall have perpetual existence unless
its articles of incorporation provides otherwise.
Corporations with certificates of incorporation issued prior to the effectivity of
this Code and which continue to exist shall have perpetual existence, unless the
corporation, upon a vote of its stockholders representing a majority of its
outstanding capital stock, notifies the Commission that it elects to retain its
specific corporate term pursuant to its articles of incorporation: Provided, That
any change in the corporate term under this section is without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of
this Code.
A corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: Provided, That no extension may be made
earlier than three (3) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension as may be determined
by the Commission: Provided, further, That such extension of the corporate term
shall take effect only on the day following the original or subsequent expiry
date(s).
A corporation whose term has expired may apply for revival of its corporate
existence, together with all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and liabilities existing prior to
its revival. Upon approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival provides otherwise.
No application for revival of certificate of incorporation of banks, banking and
quasi-banking institutions, preneed, insurance and trust companies, non-stock
savings and loan associations (NSSLAs), pawnshops, corporations engaged in
money service business, and other financial intermediaries shall be approved by
the Commission unless accompanied by a favorable recommendation of the
appropriate government agency.

Corporate Term

Perpetual Existence now the default rule

- In order to promote the ease of doing business through the corporate medium to
avoid the varied instances under the old CC where corporate terms have lapsed
due to negligence or inattention costing corporations unnecessary expenses to
effect reincorporation to avoid the effects of dissolution.
- Avoids the need to go through the process of having to periodically incur the
costs and divert the corporate resources to undertake an extension of corporate
term; and allows the corporation to use a much-limited amount of resources only
in the rare instance when they seek to shorten the corporate life as a means of
dissolving the corporate enterprise.
Commencement of Corporate Existence
- Sec 18 of RCC provides that a private corporation commences to have corporate
existence and juridical personality and is deemed incorporated from the date the
SEC issues a Certificate of Incorporation under its official seal;
Extension of Corporate Term
- When the articles of incorporation provide for a limited or specific corporate term,
it may be extended in any single instance by an amendment in the articles of
incorporation, provided that no extension can be made earlier than 3 years prior
to the original or subsequent expiry date unless there are justifiable reasons for
an earlier extension; provided that such extension of corporate term shall take
effect only on the day following the original or subsequent expiry date.
Revival of Expired Corporations
A corporation whose term has expired may apply with the SEC for revival of its
corporate existence;
1. A corporation whose term has expired may apply with the SEC for the revival of
its corporate term;
Except: No application for revival of certificate of incorporation of banks, banking and
quasi-banking institutions, preneed, insurance and trust companies, non-stock savings
and loan associations (NSSLAs), pawnshops, corporations engaged in money service
business, and other financial intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of the appropriate government
agency.

2. Approval of the applications for revival by the SEC would have the following legal
effects:
a. The applying corporation shall be deemed revived upon issuance of the
Certificate of Revival of Corporate Existence, giving is perpetual existence,
unless the application for revival provides for a specific term
b. The corporation is revived 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.

Section 12. Minimum Capital Stock Not Required of Stock Corporations. - Stock
corporations shall not be required to have minimum capital stock, except as
otherwise specially provided by special law.
Minimum capital stock requirements
Stock corporations shall not be required to have minimum capital stock, except as
otherwise specially provided by special law.
- The authorized capital stock as indicated in the articles of incorporation serves as
the contractual maximum capitalization of each stock corporation, which can only
be increased or decreased by amendment (sec 37 of RCC)
- The RCC is not concerned with how much capital a business corporation should
have in its possession before it could lawfully operate, except in certain kinds of
private corporations like banks and insurance companies
- The law could not require beforehand how much capital a private corporation
should have for its business, because this problem belongs to the business
judgment of those in charge of the management

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

Articles of Incorporation
Nature and functions of articles
The articles of incorporation represent the highest form of contractual arrangement in
Corporate Law, defining it does the charter of the corporation and its juridical capacity to
contract and enter into various commercial relations.
The corporate charter is the contract between (a) the State and the corporation, as that
“the state and the grantee of a charter are equally bound by its provisions”; (b) the
shareholders and the State; and (c) the corporation and its shareholders. (Government
of the P.I. v. Manila Railroad Co.)
The strict rules to be followed in its registration and the manner by which any portion
thereof may be amended essentially requires the consent of all three parties
contractually bound: (1) the State, acting through the SEC; (2) the corporation as a
separate juridical entity, represented by the Board of Directors; and (3) the group of
shareholders, represented by its qualified majority ratification vote.
*The formalities required for the adoption, registration and amendment of the articles of
incorporation embodies the principle of mutuality in Contract Law, as well as the
doctrine of obligatory force binding on the articles of incorporation as a species of
contract, the contents thereof as mandated by law are treated with sacrosanct
strictness.
In Red Line Trans. Co. v. Rural Transit Co., the use of a corporate name other than
that provided for in the articles was not allowed. The incorporators “constitute a body
politic and corporate under the name stated in the certificate” and that a corporation has
the power of “succession by its corporate name” and by “that name alone is it
authorized to transact business”

> The articles of incorporation constitutes the charter

- once it is duly approved by the SEC, the articles of incorporation constitutes every duly
registered corporation’s charter, and the basis by which to adjudge whether it exists for
legal purposes, as well as the extent of its powers and capacities, or what is known as
its “juridical capacity to contract”
- The best proof of the purpose of a corporation is its articles of incorporation and by-
laws. The articles of incorporation must state the primary and secondary purposes of
the corporation, while the by-laws outline the administrative organization of the
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said
purpose. If the corporation’s purpose, as stated in the Articles of Incorporation, is lawful,
the SEC has no authority to inquire whether the corporation has purposes other than
those stated, and mandamus will lie to compel it to issue the certificate of incorporation
(Gala v. Ellice Agro-Industrial Corp)
Contents
 - The articles of incorporation filed with the SEC shall be in any of the official
languages, duly signed and acknowledged by all the incorporators, containing
substantially the following:
a. Name of the corporation
b. Purpose clause:
1. Should the corporation have more than one purpose, the articles must
distinguish the primary purpose from the secondary purpose
2. A nonstock corporation shall not include a purpose that would change or
contradict its nature
c. Place of principal office within the Philippines
d. Term of existence, if the corporation has not elected perpetual existence
e. Names, nationalities and residence addresses of the incorporators
f. Number of directors (not more than 15), or trustees (may be more than 15)
g. Names, nationalities and residence addresses of the persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected and
qualified
h. If stock corporation, amount of authorized capital stock, number of shares, par value
or no par value shares, original subscribers, amounts subscribed and paid by each
i. Such other matters consistent with law and which the incorporators may deem
necessary and convenient
j. An arbitration agreement may be provided for pursuant to Sec 181 of the RCC
> The basic contents of the articles of incorporation are considered by law to be
jurisdictional, so much so that Section 14 of the RCC provides for the basic form of
articles of incorporation

Section 14. Form of Articles of Incorporation. - Unless otherwise prescribed by

special law, the articles of incorporation of all domestic corporations shall
comply substantially with the following form:
Ninth: That has been elected by the subscribers as
Treasurer of the Corporation to act as such until after the successor is duly
elected and qualified in accordance with the bylaws, that as Treasurer, authority
has been given to receive in the name and for the benefit of the corporation, all
subscriptions, contributions or donations paid or given by the subscribers or
members, who certifies the information set forth in the seventh and eighth
clauses
above, and that the paid-up portion of the subscription in cash and/or property
for the benefit and credit of the corporation has been duly received.
Tenth: That the incorporators undertake to change the name of the corporation
immediately upon receipt of notice from the Commission that another
corporation, partnership or person has acquired a prior right to the use of such
name, that the name has been declared not distinguishable from a corporation, or
that it is contrary to law, public morals, good customs or public policy.
Eleventh: (Corporations which will engage in any business or activity reserved
for Filipino citizens shall provide the following):
"No transfer of stock or interest which shall reduce the ownership of Filipino
citizens to less than the required percentage of capital stock as provided by
existing laws shall be allowed or permitted to be recorder in the proper books of
the corporation, and this restriction shall be indicated in all stock certificates
issued by the corporation."
- Sec 14 enumerates the mandatory provisions that must be stated in the articles
of incorporation of domestic corporations, except as otherwise prescribed by the
Code or by special law.
- The incorporators may include such other matters as are not inconsistent with
law and which they may deem necessary and convenient, such as the classes of
shares which the corporation may issue, provisions on pre-emptive right, etc.
- The articles of incorporation may provide other matters or items (optional
provisions) as long as they are not contrary to any provision of the Code or
special law.

Section 15. Amendment of Articles of Incorporation. - Unless otherwise

prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by a
majority vote of the board of directors or trustees and the vote or written assent
of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code. The articles of incorporation of a
nonstock corporation may be amended by the vote or written assent of majority
of the trustees and at least two-thirds (2/3) of the members.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Amendments to the articles
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the
directors or trustees, with a statement that the amendments have been duly
approved by the
required vote of the stockholders or members, shall be submitted to the
Commission.
The amendments shall take effect upon their approval by the Commission or from
the date of filing with the said Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to the corporation.

Amendment
- Unless otherwise prescribed by therein or by special laws, and for legitimate
purposes, any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the Board of Directors or Trustees and the vote or
written consent of the shareholders representing at least 2/3s of the outstanding
capital stock, without prejudice to the appraisal right of dissenting shareholders,
or the vote or written assent of at least 2/3s of the members if it be a nonstock
corporation.
- The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Amendments to the articles
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that said amendments have been duly
approved by the required vote of shareholders or members
- The amendments shall take effect upon their approval by the Commission or
from the date of filing with the said Commission if not acted upon within six (6)
months from the date of filing for a cause not attributable to the corporation.

Appraisal Right – appraisal of the shares of the stock of the dissenting stockholders for
purposes of evaluation and you can compel the corporation to BUY your shares of
stock at the value as appraised by a third party. This is allowed to get out of the
corporation. This is exercised AGAINST the corporation.
- Subject to the condition that the corporation has a sufficient profit not covered by
the Trust Fund Doctrine (mayroon siyang sobrang pera)
2 ways of getting out of the corporation as a dissenting stockholder:
1. Selling your shares to other shareholders/ other persons.
2. Exercising your appraisal right and compelling the corporation to buy your
shareholders.
Which actions can trigger the appraisal right of a stockholder?
SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a
corporation shall have the right to dissent and demand payment of the fair value of the
shares in the following instances:
(a) In case an amendment to the articles of incorporation has the effect of changing
or restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of
all or substantially all of the corporate property and assets as provided in this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than the
primary purpose of the corporation.

Preemptive right
- Right of the shareholders to buy newly issued shares of the corporation for the
purposes of retaining his proportionate power in the corporation.
- This is done to retain the power of the current shareholder in the voting of the
corporation.
- Demandable AGAINST the corporation.
- right to subscribe to all issues or disposition of shares of any class, in proportion
to their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such preemptive right
shall not extend to shares issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares issued in good
faith with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt. (Sec 38)
Example, the corporation’s Authorized Capital Stock (ACP) is 10M. It has only sold 5M.
Before the remaining 5M can be sold to other people (not the shareholders), the
shareholders are first to be offered of the stocks IN PROPORTION TO HIS SHARES.
- If a stockholder has 5% of the total authorized capital stock, and then the ACP is
increased, he has the preemptive right to buy another 5% of the new ACP.

The right of first refusal – the corporation and its shareholders have the right of first
refusal, whereby a PERSON who wants to sell his shares of stock must first offer it to
the corporation or other shareholders before selling it to other people.
Newly issued share – ex. ACP is increased from 10M to 20M. The new 10M are the
newly issued share.
Unissued shares – ex. 10m ang ACP, ang nabili lang ng stockholder ay 5M, yung
remaining 5million is called unissued share.

Section 16. Grounds When Articles of Incorporation or Amendment May be

Disapproved. The Commission may disapprove the articles of incorporation or
any amendment thereto if the same is not compliant with the requirements of this
Code: Provided, That the Commission shall give the incorporators, directors,
trustees, or officers as reasonable time from receipt of the disapproval within
which to modify the objectionable portions of the articles or amendment. The
following are ground for such disapproval:
(a) The articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
(b) The purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral or contrary to government rules and regulations;
(c) The certification concerning the amount of capital stock subscribed and/or
paid is false; and
(d) The required percentage of Filipino ownership of the capital stock under
existing laws or the Constitution has not been complied with.
No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, preneed, insurance and trust companies,
NSSLAs, pawnshops and other financial intermediaries shall be approved by the
Commission unless accompanied by a favorable recommendation of the
appropriate government agency to the effect that such articles or amendment is
in accordance with law.
Non-Amendable Items
Matters in articles that are beyond amendment
The following provisions in the articles of incorporation which refer to facts existing as of
the date of incorporation, and hence are beyond the power of the shareholders or
members to alter or change, because they are accomplished facts, thus:
a. Names of the incorporators, incorporating directors/trustees
b. Names of the original subscribers to the capital stock and their subscribed and
paid-up capital
c. The treasurer-in-trust elected by the original subscribers
d. Members who contributed to the initial capital of a nonstock corporation
e. Witnesses and the acknowledgement thereof
All of the foregoing items refer to facts existing as of the date of incorporation and are
not subject to amendment.

Section 17. Corporation Name. - No corporate name shall be allowed by the

Commission if it is not distinguishable from that already reserved or registered
for the use if another corporation, or if such name is already protected by 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 if such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same word or phrase.
The Commission upon determination that the corporate name is: (1) not
distinguishable from a name already reserved or registered for the use of another
corporation; (2) already protected by law; or (3) contrary to law, rules and
regulations, may summarily order the corporation to immediately cease and
desist from using such name and require the corporation to register a new one.
The Commission shall also cause the removal of all visible signages, marks,
advertisements, labels prints and other effects bearing such corporate name.
Upon the approval of the new corporate name, the Commission shall issue a
certificate of incorporation under the amended name.
If the corporation fails to comply with the Commission's order, the Commission
may hold the corporation and its responsible directors or officers in contempt
and/or hold them administratively, civilly and/or criminally liable under this Code
and other applicable laws and/or revoke the registration of the corporation.

Corporate name
- Once the corporation begins to exist with the issuance by the SEC of the
certificate of incorporation, the incorporators, shareholders or members, and their
successors, shall “constitute a body corporate under the name stated in the
articles of incorporation.” (Sec 18 RCC)
- The name of a corporation is essential to the corporation’s existence; it cannot
change its name except in the manner provided by the statute; by that name
alone is it authorized to transact business; and it is by that name that a
corporation can sue and be sued, and perform all other legal acts.
- A corporation’s right to use its corporate name is a property right, a right in rem,
which it may assert and protect against the world in the same manner as it may
protect its tangible property, real or personal, against trespass or conversion.
Limitations on use of corporate name
The Corporate name must be “distinguishable” under RCC
- The use of the “not distinguishable test” allows for shorter name verification
process when compared to the old formula of “identical or deceptively or
confusingly similar”
No corporate name shall be allowed by the SEC if:
1. It is not distinguishable from that already reserved or registered for the use of
another corporation; or
2. If such name is already protected by law; or
3. When the use of such name is contrary to existing law, rules and regulations

 A proposed corporate name does not become “distinguishable” by the mere fact
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

SEC Power over the use of Corporate Names (Sec 17)

If the SEC determines 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, it may:
1. Summarily order the corporation to immediately cease and desist from using
such name and require the corporation to register a new one;
2. 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

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 SEC’s order, the SEC 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.
Section 159 of RCC criminally punishes the unauthorized use of corporate name with a
fine ranging from 10,000 to 200,000 pesos.
Legal Effects of Change of Corporate Name
- Changing the corporate name is no more the creation of a corporation than the
changing of the name of a natural person is the begetting of a natural person.
- A change of name is not a change of being.
- Although a corporation has the power to change its name by following the
procedure laid down by law, the change of name of a corporation does not result
in its dissolution
o A change in the corporate name does not make a new corporation,
whether effected by a special act or under a general law.
o It has no effect on the identity of the corporation, or on its property, rights,
or liabilities.
o The character is in no respect changed.
Use of Corporate Names of Dissolved Corporations
- The name of a corporation that has been dissolved or whose registration has
been revoked shall not be used by another corporation within 5 years from the
approval of dissolution or 5 years from the date of revocation, unless its use has
been allowed at the time of the dissolution or revocation by the shareholders or
members who represent a majority of the outstanding capital stock or
membership of the dissolved corporation, as the case may be.

Section 18. Registration, Incorporation and Commencement of Corporation

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 regulation, 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 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.
 - A corporation commences to have juridical personality and legal existence only
from the moment the SEC issues to the incorporators a certificate of
incorporation under its official seal.
- The corporation must formally organize and commence the transaction of its
business or the construction of its works within 5 years from the date of the
incorporation, otherwise, its corporate powers shall cease and it shall be deemed
dissolved.

Section 19. De facto Corporations. - 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. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
a. Corporation De Jure
- if there is a full or substantial compliance with the requirements of an existing law
permitting organization of such corporation as by proper articles of incorporation duly
executed and filed.
b. Corporation De Facto (Sec 19 RCC)
- where there is a bona fide attempt to incorporate, colorable compliance with the
statute and user of corporate powers.
- the de facto corporation doctrine grew out of the necessity of promoting the security of
business transactions and to eliminate quibbling over irregularities. It would be unfair to
allow a claimant against the alleged corporation to insist on the individual liability of
innocent investors merely because of some minor flaws in its incorporation.
Requisites of Corporation De Facto
1. A valid law under which a corporation with powers assumed might be incorporated.
2. A bona fide attempt to organize a corporation under such law; and
3. Actual user or exercise in good faith of corporate powers conferred upon it by law.
> Stockholders of a de facto corporation enjoy exemption from personal liability for
corporate obligations as do stockholders of a de jure corporation.
> A de facto corporation is basically a good faith attempt to become a corporation, but
due to some technicality, does not fulfill every requirement needed.

Section 20. Corporation by Estoppel. - All persons who assume to act as a

corporation knowing it to be without the authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible corporation is
sued on
any transaction entered by its as a corporation or on any tort committed by it as
such, it shall not be allowed to use on any its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible corporation as
such cannot resist performance thereof on the ground that there was in fact no
corporation.
c. Corporation by Estoppel
- this exists PRIOR to the existence of a corporation.
- a group of persons may assume to do business as a corporation without having gone
far enough to achieve a de facto corporate existence.
- founded on procedural convenience, avoidance of inquiries into irrelevant formalities,
and fairness to all parties concerned.
- The stockholders or members of a corporation by estoppel are precluded to deny its
existence against creditors for the purpose of escaping liability for corporate debts or for
unpaid part of a subscription to stock.
- All persons not stockholders or members who assume to act as corporation knowing it
to be without authority to do shall be solidarily liable as general partners with all their
property for all debts, liabilities and damages incurred or arising as a result thereof.
- A corporation by estoppel has NO REAL EXISTENCE IN LAW.
- It is neither de jure nor a de facto corporation, it is a mere fiction existing for the
particular case where the element of estoppel is present.
- It exists only between the persons who misrepresented their status and the parties
who relied on the misrepresentation.
Example:
1. Person A, representing a non-existent corporation ABC, entered into a contract
with person B (who is unaware that the corporation is non-existent). Person A is
estopped from saying that the corporation is non-existent and the contract is
therefore void just to get away with obligation.
2. Person A, representing a non-existent corporation ABC, entered into a contract
with person B. Person A stated explicitly that corporation ABC is not yet existent
but they are in the process of registering it. Person B acknowledged that fact.
- There is no corporation by estoppel in this case. Person B knows that he is
contracting with a non-existent corporation.
o There is NO contract. The contract is void ab initio (a contract needs 2
persons).
 3. Person A, representing a non-existent corporation ABC, entered into a contract
with person B, knowing that the corporation is still non-existent, on January 1.
The corporation came into existence in January 30.
a. Is the corporation automatically bound by the contract?
- NO. Because the contract is VOID.
When can it be binding?
- When the corporation enters into the contract again.

b. Can person B sue the corporation and make it liable? If not, can he sue
person A for personal liability?
- The corporation, NO. Person A, yes, for damages!

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

- If a corporation does not formally organize and commence its business within
five
(5) year from the date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five (5)-year period.
However, if a corporation has commenced its business but subsequently
becomes inoperative for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place the corporation under
DELINQUENT status.
A delinquent corporation shall have a period of two (2) years to resume
operations and comply with all requirements that the Commission shall
prescribed. Upon the compliance by the corporation, the Commission shall issue
an order lifting the delinquent status. Failure to comply with the requirements and
resume operations within the period given by the Commission shall cause the
revocation of the corporation's certificate of incorporation.
The Commission shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation of the
certificate of incorporation of companies under their special regulatory
jurisdiction.
- If a corporation does not formally organize and commence its business within five
(5) year from the date of its incorporation, its certificate of incorporation shall be
revoked as of the day following the end of the five (5)-year period
- If a corporation subsequently becomes inoperative for a period of at least five (5)
consecutive years, the corporation may be placed under delinquent status.
- A delinquent corporation have a period of 2 years to resume operations and
comply with the requirements. If it fails to do so within the period given by the
SEC, the certificate of incorporation will be revoked.
When is approval of the shareholders necessary?
a. Plan of distribution of assets (sec 94) upon approval of at least two-thirds (2/3) of
the members having voting rights present or represented by proxy at such
meeting.
b. Amendment of articles of incorporation (Sec 15) vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code. The articles of incorporation of a
nonstock corporation may be amended by the vote or written assent of majority
of the trustees and at least two-thirds (2/3) of the members.
c. Sale or other disposition of assets (Sec 39) 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.
d. Issuance of stock dividends shall be approved by the shareholders representing
at least 2/3s of the outstanding capital stock
e. plan of merger or consolidation (Sec 76) 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.
f. Plan of distribution of assets (Sec 94) plan of distribution shall be adopted upon
approval of at least two-thirds (2/3) of the members having voting rights present
or represented by proxy at such meeting.
When is the approval of the SEC necessary?
a. Dissolution (Sec 113), Upon approval of such declaration of dissolution by the
Commission, the corporation shall cease to carry on its operations except for the
purpose of winding up its affairs.
b. Revival of the corporate existence (Sec 11) 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.
c. Amendments of articles of incorporation (Sec 15)
 d. New corporate name (Sec 17)
e. Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness (Sec 37)
f. Consideration other than cash, or consists of intangible property (Sec 61) 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.
g. Effectivity of merger and consolidation (Sec 78) The articles of merger or of
consolidation, signed and certified as required by this Code, shall be submitted to
the Commission for its approval
h. The compensation of the provisional director shall be determined by agreement
between such director and the corporation, subject to approval of the
Commission, which may fix the compensation absent an agreement or in the
event of disagreement between the provisional director and the corporation. (Sec
103)

3 C’s of Lending in Banking

1. Character
2. Collateral
3. Capacity to pay
TITLE III
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and
Term. – Unless otherwise provided in this Code, the board of directors or trustees shall
exercise the corporate powers, conduct all business, and control all properties of
the corporation.
Directors shall be elected for a term of one (1) year from among the holders of stocks
registered in the corporation’s books, while trustees shall be elected for a term not
exceeding three (3) years from among the members of the corporation. Each director
and trustee shall hold office until the 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.
An independent director is a person who, apart from shareholdings and fees
received from the corporation, is independent of management and free from any
business or other relationship which could, or could reasonably be perceived to
materially interfere with the exercise of independent judgment in carrying out the
responsibilities as a director.
Independent directors must be elected by the shareholders present or entitled to
vote in absentia during the election of directors. Independent directors shall be subject
to rules and regulations governing their qualifications, disqualifications, voting
requirements, duration of term and term limit, maximum number of board
memberships and other
requirements that the Commission will prescribe to strengthen their independence
and align with international best practices.
>> Section 22 expresses the basic rule on corporate management that the BoD
or Trustees exercises the corporate powers, conducts all business, and controls all
properties of the corporation.
 The Board is the body which: (1) exercises all powers provided for under the
RCCP and other existing laws; (2) conducts all business of the corporation; and
(3) controls and holds all properties of the corporation.
a. It is the Board that exercises almost all the corporate powers in a corporation.
Generally, an agreement entered into by a corporate officer without Board
approval cannot bind the corporation.
b. The management of the business of a corporation is generally vested in its
Board, not its stockholders. Stockholders are just investors in a corporation. They
do not have a hand in running the day-to-day business operations of the
corporation unless they are at the same time directors or officers of the
corporation.
c. With the exception only of some powers expressly granted by law to
stockholders (or members), the Board of Directors (or Trustees) has the sole
authority to determine policies, enter into contracts, and conduct the ordinary
business of the corporation within the scope of its charter, i.e., its Articles of
Incorporation, By-Laws, and relevant provisions of law.
- The authority of the Board is restricted to the management of the regular
business affairs of the corporation, unless more extensive power is expressly
conferred.
d. A corporation can act only through its directors and officers. The Board is the
central power that authorizes the executive agents to enter into contracts and to
embark on a business.
>> In the management of affairs of the corporation, the directors are dependent
solely upon their own knowledge of its business and their own judgment as to
what the corporation’s interests require.
- The directors, not the shareholders, must make all contracts with third persons.
o Where a meeting of the stockholders is called for the purpose of passing
on the propriety of making a corporate contract, its resolutions are at most
advisory and not in any wise binding on the board.
Business Judgment Rule
- The will of the majority of the Board members controls in corporate affairs, and
contracts intra vires entered into by the board of directors are binding on the
corporation and courts will not interfere unless such contracts are so
 unconscionable and oppressive as to amount to a wanton destruction of rights of
the minority.
- The Courts cannot undertake to control the discretion of the Board about
administrative matters as to which the Board has legitimate powers of action.
o Judges are not business experts; they cannot replace their judgment for
the judgment of the directors on business matters.
- The directors will not be liable even if the corporation will suffer losses or if its
profits will decrease so long as the resolution of the Board was passed in good
faith.
- Even if there was mismanagement resulting in corporate damages and/or
business losses, still the directors may not be held liable in the absence of a
showing of bad faith in doing the acts complained of.
o If the losses are merely error in business judgment, not amounting to bad
faith or negligence, directors and/or officers are not liable.
o Bad faith does not connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill will
partaking the nature of fraud.
- Mere errors of judgment are not sufficient grounds for equity interference, for the
powers of those entrusted with corporate management is discretionary.

Requirements: The business judgment rule shields the directors only if the following are
present:
1. The presence of a business decision including decisions on policy, management
and administration.
2. The decision must be intra vires and must comply with the procedural and
substantive requirements of law.
3. Good faith
4. Due care in making the decision
5. The director must not have personal interest or must not be self-dealing or must
not otherwise be in breach of the duty of loyalty governed by provisions of the
RCCP (30-33)
Resolution. The board must act as a BODY in a lawful meeting, not individually or
separately.
- The actions of the Board are expressed in resolutions passed in its meetings.
- The Board or Trustees acts as a body and the directors are not agents individually.
- The collective body of the directors is required in order that action may be
deliberately taken after opportunity for discussion and interchange of views.
- The action of one director or trustee does not bind the corporation. Absent
any valid delegation or authorization from the Board, the declaration of an
 individual director relating to the affairs of the corporation are not binding on the
corporation.
- A board resolution authorizing an officer to act is necessary.
Proxy Not Allowed. A director CANNOT delegate his powers as director to another
person. An alternate director who will act as a director in the absence of the duly
elected director is also unacceptable under Section 52.

Term of the Directors and Trustees:

1. Directors shall be elected for a term of 1 year from among the holders of stocks
registered in the corporation’s books
2. Trustees shall be elected for a term not exceeding 3 years from among the
members of the corporation; and
3. Each director and trustee shall hold office until the successor is elected and
qualified.
>> The Bylaws cannot provide for a longer term. The rationale for the 1-year term is to
protect the corporation as well as its creditors and the public dealing with it so that if an
improvident or wrongful act is committed by the board of directors, the subsequent
board can redress or prevent the perpetration of the wrong, and thereby protect its
stockholders, creditors and the public having dealings with it.
>>> In terms of non-stock corporation, the term of the trustees is NOT MORE THAN 3
YEARS.
Qualifications for Directors or Trustees
1. He must own at least one share of the capital stock of the corporation in his own
name or if the corporation is a non-stock corporation, he must be a member
thereof.
2. He must not be disqualified under the RCCP or any applicable special law or rules
3. He must be of legal age.
4. He must possess other qualifications as may be prescribed in special laws or
regulations or in the by-laws of the corporation.

a. A director or trustee must be a natural person. The RCCP expressly allows

corporations, partnerships and associations to be incorporators. There is no
similar express provision with respect to the directors.
b. A director who ceases to own at least one share of stock or a trustee who
ceases to be a member of the corporation shall cease to be such.
c. A disqualified stockholder cannot run for election as director.
d. An incumbent director or officer CAN run for re-election, if there are no
provision in the Articles of Incorporation or By-Laws that disallows such.
Independent Directors
- Board of Directors of corporations vested with public interest shall have
independent directors constituting at least 20% of such board.
- 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.
- 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 qualification,
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.
- It is during the annual stockholders/members’ meeting that the independent
directors are elected. It is the stockholders themselves who will elect the
independent directors.
- They aren't associated with the company in any way other than serving on its
board.
- a member of the board of directors who (1) does not have a material relationship
with the company, (2) is not part of the company's executive team, and (3) is not
involved with the day-to-day operations of the company.

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.

>> The manner of electing directors is prescribed in Section 23. A corporation cannot
adopt a procedure other than what is prescribed in Section 23 for stock
corporations.
1. Voting Through Remote Communication or In Absentia
- The stockholders and members may vote in the election of directors either: (1)
personally by attending the meeting; (2) through a proxy; or (3) through remote
communication or in absentia.
> Voting through remote communication or in absentia is allowed only (a) when
authorized by the By-Laws, or (b) when authorized by a majority of the Board of
Directors, or (c) when without a provision in the By-Laws, in corporations
vested with public interest.
2. Majority vote is not necessary for the election of each director or trustee.
The candidates who will receive the highest number of votes shall be declared as
duly elected.
 3. A quorum is necessary for the election. In the absence thereof, the election will
be invalid.
4. Election of Incomplete Directors are fine. An incomplete Board may still
function so long as the remaining directors constitute a quorum.
5. The stockholders, through the SEC, may compel the Board or the officer
(authorized to call a meeting) to hold the election.

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

>> Corporate Officers – officers designated or specified as such or given that

character in the law, the Articles of Incorporation and the By-Laws of the corporation.
a. Section 24 specifies 4 corporate officers: President, Treasurer, Secretary, and
in case of a corporation vested with public interest, Compliance Officer. Section
62 recognizes the existence of a Vice-President and an Assistant Secretary.
b. The Articles of Incorporation and By-Laws may create other corporate offices.
c. The term of office of officers is one year. Sec 24 provides that election shall
ensue after the directors are elected in the annual stockholders’ meeting.
d. The Board of Directors has no power to create other corporate offices
without first amending the corporate By-Laws so as to include therein the
newly created corporate office.
> 2 Requisites must concur: (1) the creation of the position is under the
corporation’s charter or By-Laws; and (2) the election of the officer is by the
directors or stockholders.
e. It is also possible for one to have a dual role of officer and employee. Example,
the corporate secretary may concurrently act as a managerial employee.
> The officers who are appointed are not corporate officers within the meaning of
Section 24 of the RCCP. These officers are not empowered to exercise functions of the
corporate officers except those functions lawfully delegated to them.
>> The minimum qualifications and duties of the corporate officers are provided
for in the RCCP and the By-Laws.
1. The President
>> There can only be one president of the corporation (“a president”)
- The president is not covered by the compulsory retirement age for employees.
- Is often given general supervision and control over corporate operations.
- A president of a corporation possesses the power to enter into a contract for the
corporation, when the “conduct on the part of both the president and the
corporation on behalf of the company and that the company had authorized him
so to act and had recognized, approved and ratified his former and similar
actions.”
Qualifications:
1. He/she must be a director (and consequently must be a stockholder)
2. He/she cannot be concurrently the treasurer or secretary.

2. Chairman – The board chairman and his functions as executive vary so widely in
different companies.
- The chairman may be concurrently the president and may be designated as the chief
executive officer of the corporation.

3. Secretary – must be a resident and citizen of the Philippines. Other qualifications

may be provided for in the By-Laws.
- there shall only be one Corporate Secretary (“a secretary”)
- cannot be a foreigner. A foreigner cannot be appointed as an assistant corporate
secretary. It would be tantamount to a circumvention of the imperative under Sec 24 of
the RCCP.
- duty-bound to keep the corporate records and tom make proper entries thereto.

4. Treasurer- normally takes care of the funds of the corporation. It is the custodian of
the funds of the corporation with authority to disburse them in proper cases.
- In the absence of provisions in the by-laws to the contrary, the treasurer is authorized
to receive funds, issue, receipts, and keep the money of the corporation.
- Only one treasurer in the corporation (“a treasurer”)
- must still be a resident of the Philippines under the SEC’s policy.
>> The same person may hold any 2 or more positions CONCURRENTLY. The
president may serve concurrently as the chairman. A director may be the legal counsel
of the corporation.
- However, no one shall act as president and secretary or as president and
treasurer at the same time.
o The positions of secretary and treasurer as inconsistent with the position
of a president.
- No incompatible positions may be held even if the RCCP allows concurrent
positions.
o The internal auditor may not be the external auditor of the company. A
person cannot be a chairman and vice-chairman at the same time.
>> A corporate officer may concurrently be an
employee. Anti-Dummy Law
- Foreigners cannot be officers in wholly nationalized and partly nationalized
corporations. They cannot also be directors in wholly nationalized activities.
- A foreigner CAN be elected as a director in a partly nationalized activity in
proportion to the equity participation allowed to foreigners.
o A director cannot act on his own while an officer acts individually for the
corporation.
- Section 2-A of the Anti-Dummy Law provides that foreigners cannot intervene in
the management, operation, administration or control of the corporation, whether
as an officer, employee or laborer therein, with or without remuneration except
technical personnel whose employment may be specifically authorized by the
President of the Philippines.
o This applies only to corporations with businesses that are reserved by the
Constitution or law to Filipino citizens or where Filipinos own 60% of the
capital.
- A foreigner cannot be appointed as president in a corporation that is engaged in
partly nationalized activity allowing only 40% foreign equity.
o A foreign national may assume the post of Chairman of the Board even in
partly nationalized activities if the power of the Chairman is limited to that
of a presiding officer during Board meetings.

Authority of Officers
- In some cases, corporate officers like the President can also bind the corporation.
- The authority of such individuals to bind the corporation is generally derived from
the (1) law, (2) articles of incorporation, (3) corporate By-Laws, (4) authorization
from the Board either expressly or impliedly by habit, custom or acquiescence in
the general of a specific provision of law, or (5) those inherent in the office.
 - In the absence of a specific provision of law, the corporate officers and other
agents of the corporation can act for the corporation only if authorized by the
Board or the By-Laws.

- A corporation is governed by the rule that an agency may be express or implied

from the act of the principal, from his silence or lack of action or his failure to
repudiate the agency knowing that another person is acting on his behalf without
authority. Agency may be oral unless the law requires a specific form.

- A corporate officer or agent may represent and bind the corporation in

transactions with 3rd persons to the extent that the authority to do so has been
conferred upon him, and these include:

1. Powers that, in the usual course of the particular business, are incidental to
those expressly provided.
2. Powers that may be implied from the powers intentionally conferred.
3. Powers added by custom and usage, as usually pertaining to the particular
officer or agent; and
4. Apparent powers as the corporation has caused a person dealing with the
officer or agent to believe that it has conferred.
>> A contract cannot be deemed perfected if the corporation’s Board did not
accept or did not authorize an officer to accept the counter-offer (Manila Metal
Container Co. v. PNB)
> If the By-Laws provides for specific powers of an officer like the president, the officer
need not secure a separate resolution from the Board to exercise the specific power.
>> A corporate officer has implied authority if he is entrusted with the general
management and control of its business to make any contract or do any other act that is
necessary or appropriate to the conduct of the ordinary business of the corporation.
- Officers may perform all acts of an ordinary nature that by usage or necessity are
incident to his office, and may bind the corporation by contracts in matters
arising in the usual course of business.
- The existence of such authority is established, by proof of the course of
business, the usage and practices of the company and by the knowledge that the
Board of Directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation.
The acts of corporate officers exceeding their authority cannot bind the corporation,
unless the Board ratifies such acts or is estopped from disclaiming them. (It retroacts to
the date of the action)
The officer may also bind the corporation if he has apparent authority.
 - The doctrine of apparent authority is a species of the doctrine of estoppel.
- An officer may be clothed with apparent authority for specific acts.
- Apparent authority may also be deprived from practice.
- If a corporation knowingly permits its officers or any other agent, to do acts within
the scope of an apparent authority, and holds the officer or agent out to the
public as possessing power to do those acts, the corporation will, as against
any one who has in good faith dealt with the corporation through such agent, be
estopped from denying his authority.
- Apparent authority is derived not only from practice – its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act, with which it clothes him, or, (2) the
acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, with or beyond the scope of his ordinary powers.
De Facto Officers – a person is a de facto officer if he acts as such, under color of
authority, through election or appointment.
- It “is limited to 3rd persons who were originally not part of the corporation but
became such by reason of voting” certain shares.
Color of authority – authority derived from an election or appointment, although irregular
or informal, so that the incumbent must be more than a volunteer.

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.

- The rationale of this article is to give the public information, under sanction of
oath of responsible officers, of the nature of business, financial condition and
operation status of the company together with information on its key officers or
managers so that those dealing with it and those who intend to business with it
may know or have the means of knowing facts concerning the corporation’s
financial resources and business responsibility.
- The report after the annual election is to keep stockholders and the public
transacting business with domestic corporations property informed of their
organizational operational status.
Remedy if No Election is Set – The remedy of a stockholder, member, director or
trustee is to file an application with the SEC for the latter to order that the election be
held.
Emergency Quorum – “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.”
- Stockholders representing a majority of the outstanding shares, or a majority of
the members is no longer necessary for the existence of the quorum. This will
ensure that there is no prolonged tenure of hold-over directors and officers.

SEC. 26. Disqualification of Directors, Trustees or Officers. – A person shall be

disqualified from being a director, trustee or officer of any corporation if, within five (5)
years PRIOR to the election or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as “The Securities
Regulation Code”;
(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above.
 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.

>> The disqualifications under Section 26 of the RCCP are meant to assure that only
persons of rectitude can act as directors. The position of director in a corporation is a
position of trust. A director in a corporation has the personality of managing the funds
belonging to other persons or individuals.
 The list of disqualifications under Sec 26 is NOT EXCLUSIVE.
o Additional grounds for disqualification are contemplated in other provisions
of the RCCP.
The other qualifications and disqualifications may be provided for in:
1. Regulations issued by the SEC
2. Special laws applicable to specific corporations (such as the General Banking
Law for banks and the Insurance Code for insurance corporation) as well as
regulations issued by the primary regulatory agency (like the BSP or the
Insurance Commission)
3. Regulations issued by Philippine Competition Commission in its promotion of
good corporate governance
4. Decisions or orders in administrative proceedings and imposed as sanction
5. Provisions of the Articles of Incorporation or By-Laws.

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 (at its own) 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.

Right to remove – The authority to remove the directors is a prerogative reposed in the
stockholders or members of the corporation under Sec 27. The directors cannot
indirectly usurp or disregard the said power of the stockholders.
Requisites of removal:
1. It must take place either at a regular meeting or special meeting of the
stockholders or members called for the purpose
2. The call of the special meeting shall be made by the secretary on order of the
president or on the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock or of majority of the
members entitled to vote
3. There must be previous notice to the stockholders or members of the intention
to remove a director or trustee at the regular or special meeting.
4. The removal must be by a vote of the stockholders representing 2/3 of the
outstanding capital stock or 2/3 of the members entitled to vote.
5. A director/trustee who was elected by the minority must be removed only
for a cause.

 A special meeting to remove a director shall be void if it was called by an

unauthorized committee and not by the secretary as provided for in Sec 27 or the
authorized officer identified in the By-Laws. The defect cannot be ratified.
 A director who was elected by the majority may actually be removed with or
without cause. The requirement that there must be cause for removal is limited
to a director who was elected by the minority.
Removal is different from ouster because of disqualification.
- there is no need to follow the procedure of removal required under Sec 27 if the
director is disqualified. By operation of law, such director is disqualified to act as
director thereby creating vacancies in the Board.
>> Generally, the removal of the director does not result in the transfer of his
shares; the removed director remains a shareholder.
> There is a correlative authority to remove the corporate officers given to the Board of
Directors (because they are the ones that elected them). The removal of corporate
officers is a corporate act.

SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. – Any
vacancy occurring in the board of directors or trustees other than by removal or by
expiration of term may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders or members in a regular or special meeting called for that
purpose.
When the vacancy is due to term expiration, the election shall be held no
later than the day of such expiration at a meeting called for that purpose. When the
vacancy arises as a result of removal by the stockholders or members, the election
may be held on the same day of the meeting authorizing the removal and this fact
must be so stated in the agenda and notice of said meeting. In all other cases, the
election must be held no later than forty-five (45) days from the time the vacancy
arose. A director or trustee elected to fill a vacancy shall be referred to as replacement
director or trustee and shall serve only for the unexpired term of the predecessor in
office.
However, when the vacancy prevents the remaining directors from constituting a
quorum and emergency action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation, the vacancy may be temporarily filled
from among the officers of the corporation by unanimous vote of the remaining
directors or trustees. The action by the designated director or trustee shall be limited
to the emergency action necessary, and the term shall cease within a reasonable
time from the termination of the emergency OR upon election of the replacement
director or trustee, whichever comes earlier. The corporation must notify the
Commission within three (3) days from the creation of the emergency board, stating
therein the reason for its creation.
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.
 - Vacancies in the Board may be filled either by the stockholders (or members) or
by the remaining directors (or trustees) constituting a quorum depending on the
reason for the vacancy.
- Vacancy is the operative fact that justifies the election or appointment of the
replacement.
- An election to choose replacements cannot be allowed to continue if there is a
complete Board.
- There shall be one set of directors at a time and that new directors shall be
elected only as vacancies occur in the directorate by death, resignation, removal
or otherwise.

a. The stockholders or members shall replace/elect the director if the vacancy

is due to: (1) removal, (2) expiration of term, (3) a ground other than removal or
expiration of term (e.g., death, resignation, abandonment) where the remaining
directors do not constitute a quorum, or (4) increase in the number of directors.
b. If the vacancy is due to causes other than those specified, the Board (without the
concurrence of stockholders or members) can fill the vacancy, if the remaining
directors constitute a quorum.
c. Filling up of vacancies by the remaining Board members, if proper, is not
mandatory. The remaining directors MAY choose not to fill up the vacancy and
leave the matter to the stockholders.
d. The Board may still function despite a vacancy provided that there is still a
quorum. The power of the Board is not suspended by vacancies in the Board
unless the number is reduced to below a quorum.

Cause of vacancy When election of replacement should be

made

Term expiration No later than the day of such expiration at a

meeting called for that purpose

Removal by the stockholders or May be held on the same day of the

members meeting authorizing the removal, provided
that the agenda and notice of the meeting
provide for such election of a replacement
director/trustee. Or no longer than 45 days
after such removal.
Increase in the number of directors or At a regular or special meeting of
trustees stockholders or members duly called for the
purpose, or in the same meeting
authorizing
the increase in the number of directors or
 trustees if so stated in the notice of the
meeting

All other grounds No later than 45 days from the time the
vacancy arose.

>> The term of replacement of the Director or Trustee will only be for the remaining
period of the original term of the director that he replaced.

Emergency Board
- There are cases when the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent grave,
substantial, and irreparable loss or damage to the corporation.
- The vacancy may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or trustees.
The Emergency Board is subject to the following conditions:
1. The action by the designated director or trustee shall be limited to the emergency
action necessary;
2. 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; and
3. The corporation must notify the SEC within 3 days from the creation of the
emergency board, stating therein the reason for its creation.

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.

Per diem – limited to pay for a day’s services. They are allowances of money for
expenses of each day.
“Compensation” – does not imply an immediate payment. Does not imply an immediate
or direct return or the payment of cash fare or its equivalent.
- Synonymous with salary. It includes remunerations, bonuses, gifts or any
incentive for services rendered for the corporation.
Rules on Compensation:
1. The By-Laws may provide for a fixed compensation of the members of the Board
of Directors/Trustees.
2. If the By-Laws does not provide for the director/trustees’ compensation, it may
be granted to the directors/trustees by the vote of the stockholders
representing at least a majority of the outstanding capital stock or by the majority
of the members in case of a non-stock corporation.
3. Even if the By-Laws does not provide for compensation, the directors/trustees
are still entitled to reasonable per diems.
4. The total compensation of directors shall not exceed 10% of the net income
before income tax of the corporation during the preceding year
5. Directors or trustees shall not participate in the determination of their own per
diems or compensation; and
6. Corporations vested with public interest shall submit to their shareholders and to
the SEC an annual report of the total compensation of each of their directors or
trustees.
>> Directors or trustees are not entitled to salary or other compensation when they
perform nothing more than the usual and ordinary duties of their office.
o There is a presumption that directors/trustees render services gratuitously,
and that the return upon their shares adequately furnishes the motives for
service, without compensation.
>> In the absence of provisions in the By-Laws, the Board may fix the amount of their
per diems. The per diem of the directors may vary from year-to-year provided the same
is reasonable.
Limitations. The 10% limit means that the compensation can be given only if there are
profits.
 - Intended for the protection not only of the stockholders but also of the corporate
creditors and prospective investors.
“Net income before income tax of the corporation during the preceding year”
refers to the net income of the year during which the director served.
- The Board may provide for bonuses. However, the total compensation, inclusive
of the bonus, shall be subject to the 10% threshold.

Compensation of Officers are fixed by the Board.

- The salaries of officers are not covered by the 10% limit under Sec 29.
- A director is also entitled to receive a salary if he is performing functions as an
officer. (It is not subject to the restrictions on the compensation of directors under
Sec 29)

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.

3 management duties
1. Obedience
2. Diligence
3. Loyalty
- these duties are rooted in the fiduciary nature of directors.
- directors are agents.
 Liability of Directors/Officers – as a rule, directors and officers are not personally
liable or solidarily liable with the corporation. Obligations incurred by them, acting as
such corporate agents, are not theirs but the direct accountabilities of the
corporation they represent.

Personal and Solidary Liability

Personal liability may be incurred by directors/trustees and officers in the cases
enumerated below. In these cases, the liability of the directors/trustees and officers
may be solidary with the corporation. Thus, directors/trustees and officers are
personally liable even if the act was done in the name of the corporation:
1. When directors and trustees of the corporation (and officers in proper cases if
they are joint tortfeasors):
a. Vote for or assent to patently unlawful acts of the corporation
b. Act in bad faith or with gross negligence in directing the affairs of the
corporation
c. Are guilty of conflicts of interest to the prejudice of the corporation, its
stockholders or members, and other persons.
2. When a director or trustee has consented to the issuance of watered stocks or
who, having knowledge thereof, does not file with the corporate secretary his
written objection thereto
3. When the director, trustee, or officer has contractually agreed or stipulated to
hold himself personally and solidarily liable with the corporation.
4. When a director, trustee, or officer is made, by specific provisions of law,
personally liable for his corporate actions.
a. The directors and officers are the only ones personally liable if they are
either not authorized at all or somehow acted in excess of their authority
as agents or representatives of the corporation in entering into a contract.
The officer or director would be personally liable instead of the
corporation.

Patently unlawful acts – one declared unlawful by law that imposes penalties for
commission of such unlawful acts. There must be a law declaring the act unlawful and
providing the corresponding penalty. An act is not a patently unlawful act just because
the act is ultra vires.
Bad faith and fraud – bad faith imports a dishonest purpose. It means breach of a
known duty through some ill motive or interest. It partakes the nature of fraud. It imports
moral obliquity and conscious doing of a wrong.
- Fraud refers to all kinds of deception – whether through insidious machination,
manipulation, concealment or misrepresentation – that would lead an ordinarily
 prudent person into error after taking the circumstances into account. It must be
established by clear and convincing evidence.
Gross negligence – one that is characterized by the want of even slight care, acting or
omitting to act in a situation where there is duty to act, not inadvertently but willfully and
intentionally with a conscious indifference to consequences insofar as other persons
may be affected.

Watered Stocks – stocks of a corporation issued for less than their PAR or ISSUED
value or stocks issued for a consideration other than cash, valued in excess of the fair
value of such consideration.
Conflict of interest – section 30 provides for 2 cases concerning the liability of
directors, trustees, and officers for conflict of interest situations that breach their duty of
loyalty.
1. The first paragraph of Section 30 makes directors or trustees who, acquire any
personal or pecuniary interest in conflict with their duty as such directors or
trustees, liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
2. The second paragraph provides for a situation wherein a director, trustee or
officer violates his or her duty of loyalty and he/she is considered under the law
to be liable as a trustee for the corporation and as such, he/she must account
for the profits which otherwise would have accrued to the corporation
The following requirements must be present:
a. A director, trustee or officer attempts to acquire or acquires, an interest
adverse to the corporation
b. The adverse interest is on a matter that has been reposed in him in
confidence
c. Equity imposes a disability upon him/her to deal in his/her own behalf.
Officers also have the duties of obedience, loyalty, and diligence.

SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. – A

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

Self-dealing directors, trustees or officers

- Those who personally contract with the corporation in which they are directors,
trustees, or officers.
- The contract between the corporation and the self-dealing director, trustee or
officer is VOIDABLE at the option of the corporation.
o It is not required that there is intent to defraud or that the contract results
in corporate losses. It is still voidable despite the absence of fraud.
- Fourth degree of consanguinity or affinity means parents, grandparents, great-
grandparents, great-great-grandparents, spouse, children, siblings, grandchildren,
great- grandchildren, great-great-grandchildren, nieces or nephews, grand-nieces or
grand- nephews, aunts or uncles, great-aunts or great-uncles, and first cousins by virtue
of a blood relationship or marriage.
Conditions to make the contract valid:
If the following requirements for its validity are present:
1. The presence of the self-dealing director/trustee in the Board meeting wherein
the contract was approved was not necessary to constitute a quorum.
2. The vote of such director/trustee in said Board meeting was not necessary for the
approval of the contract
3. The contract is fair and reasonable under the circumstances
4. In case of corporations vested with public interest, material contracts are
approved by at least 2/3s of the entire membership of the Board, with at least a
majority of the independent directors voting to approve the material contract; and
5. In the case of an officer, there was previous authorization by the Board of
Directors/Trustees
>> The contract of the self-dealing director, trustee or officer may still be ratified by a
vote of stockholders representing at least 2/3 of the outstanding capital stock or by the
vote of at least 2/3 of the members in a meeting called for the purpose.
In order that ratification may be valid and effective, the following conditions must be
present:
1. There must be full disclosure of the adverse interest of the directors/trustees involved
that is made at the stockholders’/members’ meeting; and
2. The contract must be fair and reasonable under the circumstances.

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.

Interlocking Directorship – when one (or some or all) of the directors in one
corporation is (or are) also a director(s) in another corporation.
- This is not by itself prohibited by the RCCP.
a. The interest of the interlocking director in the corporation is SUBSTANTIAL if his
stockholdings exceed 20% of the outstanding capital stock.
b. The interest of the director is NOMINAL if his equity is 20% or less of the
outstanding capital stock.

Effect of Interlocking Directorship

- The By-Laws may contain provisions that disallow interlocking directorship in
certain cases.
- A contract between 2 or more corporations having interlocking directors shall not
be invalidated on that ground alone, except in case of fraud or where the
contract is not fair and reasonable.
- When directors of a corporation are on both sides of transaction, they are
required to demonstrate utmost good faith and most scrupulous inherent fairness
of bargain.
Effect on Contract
- If the interlocking director in one of the corporations is nominal and
substantial in the other, a contract between the 2 corporations shall be
VOIDABLE at the instance of the corporation where the interlocking director
has nominal interest, unless the following conditions are present, in which case
the contract will be considered valid:
1. The presence of the interlocking director in the Board meeting (of the corporation
where his interest is nominal) in which the contract was approved was not necessary
to constitute a quorum for such meeting
2. The vote of such director was not necessary for the approval of the contract
3. The contract is fair and reasonable under the circumstances

>> The contract is valid if the interests of the interlocking director in the
corporations are both substantial or are both nominal.
Ratification. Contracts between corporations with interlocking directors must always be
fair and reasonable. The absence of either the 1st or second condition makes the
contract voidable and capable of ratification.
 The contract may be ratified by the vote of the stockholders representing at least
2/3 of the outstanding capital stock (or at least 2/3 of the members) in a meeting
called for the purpose so long as the following requisites are present:
1. There must be full disclosure of the adverse interest of the directors/trustees involved
at such meeting; and
2. The contract must be fair and reasonable under the circumstances.

Section 32 applies if the contract results in prejudice to one of the corporations .

This rule does not apply if the corporation allegedly prejudiced is a third party, not one
of the corporations with interlocking directors.

SEC. 33. Disloyalty of a Director. – Where a director, by virtue of such office,

acquires a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, the director must account for
and refund to the latter all such profits, unless the act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director risked
one’s own funds in the venture.
 - Trustees and officers are not covered in this article. Trustees are not included
because non-stock corporations are not supposed to be engaged in business as
a main purpose.
a. Section 33 applies if there is presented to a corporate director:
> a business opportunity which the corporation is financially able to exploit
> from its nature, the business opportunity is in line with corporation’s
business
> the corporation has an interest or a reasonable expectancy in the business
opportunity; and
> by taking the business opportunity as his own, the director will thereby be
placed in a position inimical to his duties to the corporation.

b. By embracing the opportunity, the self-interest of the officer or director will be brought
into conflict with that of his corporation. The law does not permit him to seize the
opportunity even if he will use his own funds in the venture. No criminal liability
attaches to the offending director.

Profits. A director who, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, must account for and refund to the latter all such profits.
> The corporation may ratify the acts of the director. This requires a vote of 2/3 of
the outstanding capital stock.
> If a director seizes the opportunity thereby obtaining profits at the expense of the
corporation, he must account for all the profits and refund the same to the corporation
unless the act has been ratified by a vote of the stockholders owning or representing at
least 2/3 of the outstanding capital stock.

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.

>> The executive committee is a corporate body “with standing in law, although it is
an agent of the Board of Directors because it performs what otherwise is vested by
law in the Board of Directors.
 The executive committee can only be created by virtue of a provision in the
By-Laws.
Composition
- The executive committee must be composed of not less than 3 members of the
Board, to be appointed by the Board.
- There can be no members of the executive committee who are not directors
provided that at least 3 members are directors.
o A foreigner can be a member of the executive committee in proportion to
the foreign shareholdings in the corporation.
Authority
- The EC has all the authority of the Board to the extent provided in the resolution
of the Board or in the By-Laws.
- The Board cannot delegate the entire supervision and control of the corporation
to an executive committee for this is contrary to the charter and the law that
requires that the directors shall have general supervision and control of the
corporation.
- The decision of the EC are valid and unappealable.
- Resolution of the EC may be repealed by a subsequent Board resolutions unless
what is involved is an accomplished fact or a contract that is binding on 3rd
persons.
> A majority of the group of the Executive Committee constitutes the
quorum. The EC has no authority to do the following:
(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.
TITLE IV
POWERS OF CORPORATIONS
SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this
Code has the power and capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the certificate of incorporation provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the provisions of this Code;
(e) To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal
the same in accordance with this Code;
(f) In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit members to
the corporation if it be a nonstock corporation;
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons;
(i) To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign
corporation shall give donations in aid of any political party or candidate or for purposes
of partisan political activity;
(j) To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees; and
(k) To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.

3 Kinds of Corporate Powers

1. Express Powers
- Powers expressly provided in the RCCP, applicable special laws, administrative
regulations, and the Articles of Incorporation of the corporation.
2. Implied Powers – a corporation is empowered 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 (Sec 35 k)
3. Incidental Powers – powers that are deemed conferred on the corporation because
they are incidental to its existence. It includes:
- Right to succession
- Right to have a corporate name
- Right to make by-laws for its government
- Right to sue and be sued
- Right to acquired and hold properties for the purposes authorized by the charter.

Practice of Profession
- Certain professionals ARE ALLOWED to incorporate corporations for the pursuit
of their respective professions.
1. Aeronautical engineering
2. Agricultural and biosystems engineering
3. Architecture
4. Chemistry
5. Electronic Engineering
6. Environmental Planning
7. Forestry
8. Guidance and counseling
9. Interior design
10. landscape architecture
11. Naval architecture
12. Psychology
13. Real estate service
14. Sanitary engineering
15. Social work
SEC. 36. Power to Extend or Shorten Corporate Term. – A private corporation may
extend or shorten its term as stated in the articles of incorporation when approved by
a majority vote of the board of directors or trustees, and ratified at a meeting by the
stockholders or members representing at least two-thirds (2/3) of the outstanding
capital stock or of its members. Written notice of the proposed action and the time
and place of the meeting shall be sent to stockholders or members at their respective
place of residence as shown in the books of the corporation, and must either be
deposited to the addressee in the post office with postage prepaid, served personally, or
when allowed in the bylaws or done with the consent of the stockholder, sent
electronically in accordance with the rules and regulations of the Commission on the
use of electronic data messages. In case of extension of corporate term, a
dissenting stockholder may exercise the right of appraisal under the conditions
provided in this Code.

>> A corporation shall have perpetual existence unless its Articles of Incorporation
provides otherwise.
- Corporations with certificates of incorporation issued PRIOR to the effectivity of
the RCC and which continue to exist shall have perpetual existence except if
they opt to have a fixed term, whereby stockholders representing a majority of its
outstanding capital stock must vote to retain its specific term and must notify the
SEC that it elects to retain its specific corporate term pursuant to its Articles of
Incorporation.
- Since the life of the corporation is a concession of the State, the power to extend
the corporate term is not an inherent right.

Requirements for extension and shortening of the term of the corporation:

1. The action must be approved by a majority vote of the board of directors or
trustees.
2. The action must be ratified at a meeting by the stockholders representing at
least 2/3 of the outstanding capital stock or by at least 2/3 of the members in
case of non-stock corporations.
3. For purposes of such stockholders’/members’ meeting, written notice of the
proposed action and of the time and place of the meeting shall be addressed to
each stockholder or member at his/her/its place of residence as shown in the
books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally, or sent electronically.
4. A copy of the amended Articles of Incorporation shall be submitted to the SEC for
its approval.
>> In case of extension and shortening of corporate term, any dissenting stockholder
may exercise the appraisal right under the conditions provided in the code.
>> The shortening of the corporate term may be designed to have the effect of
dissolving the corporation under Section 136 of the RCC.
- Upon the expiration of the shortened term, as stated in the Amended Articles of
Incorporation, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of RCC on liquidation.
- In the case of expiration of the 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 SEC of a
certificate of dissolution.

SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase
Bonded Indebtedness. – No corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless approved by a majority
vote of the board of directors and by two-thirds (2/3) of the outstanding capital
stock at a stockholders’ meeting duly called for the purpose. Written notice of the
time and place of the stockholders’ meeting and the purpose for said meeting must be
sent to the stockholders at their places of residence as shown in the books of the
corporation and served on the stockholders personally, or through electronic means
recognized in the corporation’s bylaws and/or the Commission’s rules as a valid mode
for service of notices.
A certificate must be signed by a majority of the directors of the corporation and
countersigned by the chairperson and secretary of the stockholders’ meeting, setting
forth:
(a) That the requirements of this section have been complied with;
(b) The amount of the increase or decrease of the capital stock;
(c) In case of an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the names,
nationalities and addresses of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on the
subscription in cash or property, or the amount of capital stock or number of shares of
no-par stock allotted to each stockholder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(d) Any bonded indebtedness to be incurred, created or increased;
(e) The amount of stock represented at the meeting; and
(f) The vote authorizing the increase or decrease of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
 Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Commission, and where appropriate, of the Philippine Competition Commission.
The application with the Commission shall be made within six (6) months from the
date of approval of the board of directors and stockholders, which period may be
extended for justifiable reasons.
Copies of the certificate shall be kept on file in the office of the corporation and
filed with the Commission and attached to the original articles of incorporation. After
approval by the Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall be deemed increased or decreased and the
incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Commission shall not accept for filing
any certificate of increase of capital stock unless accompanied by a sworn
statement of the treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five percent (25%) of the increase in
capital stock has been subscribed and that at least twenty-five percent (25%) of the
amount subscribed has been paid in actual cash to the corporation or that property , the
valuation of which is equal to twenty-five percent (25%) of the subscription, has been
transferred to the corporation: Provided, further, That no decrease in capital stock
shall be approved by the Commission if its effect shall prejudice the rights of
corporate creditors.
Nonstock corporations may incur, create or increase bonded indebtedness when
approved by a majority of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose. Bonds issued by a corporation shall
be registered with the Commission, which shall have the authority to determine the
sufficiency of the terms thereof.

1. Increase or decrease of capital stock

- involves the amendment of the Articles of Incorporation.
> increase of the subscribed capital stock or paid-up capital stock does not
necessarily require amendment
The capital stock may be increased by doing any of the following:
a. By increasing the number of shares and retaining the par value; or
b. By increasing the par value of existing shares without changing the number of
shares; or
c. By increasing the number of shares and increasing the par value
The capital stock may be decreased by doing any of the following:
a. By decreasing the number of shares and retaining the par value; or
 b. By decreasing the par value of existing shares without changing the number of
shares; or
c. By decreasing the number of shares and decreasing the par value.

>> A decrease of the capital stock consequently amends the underlying contractual
relationship between the corporation and the shareholders.
- The consent of the contracting parties is required to give effect to such power of
the corporation to decrease its capital stock.
Requirements for increase or decrease of the authorized capital stock:
1. It must be approved by a majority of the Board of Directors
2. At a stockholders’ meeting duly called for the purpose, 2/3 of the outstanding
capital stock must approve the increase or decrease of the capital stock.
3. In connection with the stockholders’ meeting, written notice of the purpose of the
meeting and of the time and place of the stockholders’ meeting at which the
proposed increase or diminution of the capital stock will be presented for
approval must be addressed to each stockholder at his/her/its place of residence
as shown in the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally, or through electronic
means recognized in the corporation’s by-laws and/or the SEC rules as a valid
mode for service of notice;
4. A certificate must be signed by a majority of the directors of the corporation
and countersigned by the chairperson and the secretary of the stockholders’
meeting, setting forth;
a. That the requirements of Sec 37 has been complied with
b. The amount of the increase or decrease of the capital stock
c. In case of an increase of the capital stock, the amount of capital stock
or number of shares of no-par stock thereof actually subscribed, the
names, nationalities and addresses of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on the subscription in cash or property,
or the amount of capital stock or number of shares of no-par stock
allotted to each stockholder if such increase is for the purpose of
making effective stock dividend therefor authorized;
d. Any bonded indebtedness to be incurred, created, or increased
e. The amount of stock represented at the meeting and
f. The vote authorizing the increase or decrease of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness
SEC approval is needed in the increase or decrease in the capital stock.
 - The application with the SEC shall be made within 6 months from the date of
approval of the board of directors and stockholders, which period may be
extended for justifiable reasons.
Bonded Indebtedness
- The requirements of Section 37 do not apply to the decrease of bonded
indebtedness.
- This refers to secured indebtedness or indebtedness secured by real or
personal property that are covered by certificates.
- They refer to negotiable corporate bonds secured by mortgage on property.
- Non-stock corporations may incur, create or increase bonded indebtedness when
approved by a majority of the Board of Trustees and by at least 2/3 of the
members in a meeting duly called for the purpose.
>> Prior approval of the SEC is necessary for the creation or increase of bonded
indebtedness.

SEC. 38. Power to Deny Preemptive Right. – All stockholders of a stock corporation
shall enjoy preemptive right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless such right is denied by
the articles of incorporation or an amendment thereto: Provided, That such
preemptive right shall not extend to shares issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or to shares issued in good
faith with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.

Preemptive Right – right of shareholders to subscribe to all issues or disposition of

shares of any class in proportion to their shareholdings.
- Right granted to the stockholders to have the first option to subscribe to any
issuance or disposition of shares from the capital stock in proportion to the
stockholdings of the shareholders.
o This is to maintain the existing ratio of the shareholder’s interest and
voting power in the corporation. It should not be diluted by the issuance of
additional shares that effect his right to vote, to dividends, and to
distribution of assets upon liquidation, without first giving him the
opportunity to subscribe to such shares in proportion to his shareholdings.
- This is not available when shares are issued in exchange for shares in another
corporation if the same is the result of a merger to which the corporations are
parties.
 - The preemptive right is transferable. The right to subscribe to new issues and
disposition may be transferred by the shareholder, unless there is an express
restriction in the Articles of Incorporation.

 Preemptive right may be restricted or denied under the Articles of

Incorporation, and subject to certain exceptions and limitations.
o This is not contrary to public policy. There is no inequity, there is no
unfairness because a shareholder who feels that he does not desire to
invest because he does not have the right of pre-emption simply should
not invest.
 If he is denied the right, he is given certain preferences on other
matters (the holder will be a preferred shareholder)

Preemptive Right is not available in the following instances even if there is an

issuance or disposition of shares:
1. When the right is denied in the Articles of Incorporation
2. When shares are issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; and
3. When shares are issued in good faith with the approval of the stockholders
representing 2/3 of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of previously contracted debt.

SEC. 39. Sale or Other Disposition of Assets. – Subject to the provisions of Republic
Act No. 10667, otherwise known as “Philippine Competition Act”, and other related laws,
a corporation may, by a majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge, or otherwise dispose of its property and assets,
upon such terms and conditions and for such consideration, which may be money,
stocks, bonds, or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient.
A sale of all or substantially all of the corporation’s properties and assets ,
including its goodwill, must be authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or at least
two- thirds (2/3) of the members, in a stockholders’ or members’ meeting duly called for
the purpose.
In nonstock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient authorization for
the corporation to enter into any transaction authorized by this section.
The determination of whether or not the sale involves all or substantially all of the
corporation’s properties and assets must be computed based on its net asset value,
as shown in its latest financial statements. A sale or other disposition shall be deemed
to cover substantially all the corporate property and assets if thereby the corporation
would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
Written notice of the proposed action and of the time and place for the meeting
shall be addressed to stockholders or members at their places of residence as shown in
the books of the corporation and deposited to the addressee in the post office with
postage prepaid, served personally, or when allowed by the bylaws or done with the
consent of the stockholder, sent electronically: Provided, That any dissenting
stockholder may exercise the right of appraisal under the conditions provided in this
Code.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge, or other disposition of property and assets, subject
to the rights of third parties under any contract relating thereto, without further action
or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without
the authorization by the stockholders or members, to sell, lease, exchange, mortgage,
pledge, or otherwise dispose of any of its property and assets if the same is necessary
in the usual and regular course of business of the corporation or if the proceeds of
the sale or other disposition of such property and assets shall be appropriated for the
conduct of its remaining business.

- Does not apply if the sale of the entire property and assets is necessary in the
usual and regular course of business of the corporation; or
- If the proceeds of the sale or other disposition of such property and assets will be
appropriated for the conduct of its (the corporation’s) remaining business.
Requisites of sale of all or substantially all of the properties and assets of the
corporation, including its goodwill:
1. It must be approved by the majority of the directors or trustees;
2. There must be approval/assent of stockholders representing 2/3 of outstanding
capital stock or 2/3s of members in a meeting duly called for the purpose after
written notice.
> The sale is void if these requirements are not complied with.

 Lease, mortgage or pledge of all or substantially all of the assets of the

corporation, is included in paragraph 2 of section 39
If the transaction does NOT cover all or substantially all of the assets, the decision of
the Board is sufficient and it is not necessary to get the approval of the stockholders.
- Transfer in the regular course of business requires Board approval only.

>> The Board may abandon the sale or disposition even after the approval of the
stockholders/members (without needing to secure the approval for the abandonment of
the project to the stockholders/members). The abandonment is subject to the rights of
3rd parties under any contract relating thereto.

“Substantially All” – If the corporation would thereby be rendered incapable of

continuing the business or accomplishing the purpose for which it was incorporated.
- The test is not the amount involved but the nature of the transaction.
- A transfer of all the properties and franchise of the corporation does not
necessarily dissolve the corporation or terminate the corporate existence.

>> There is no sale in case of merger or consolidation or their equivalent. The

properties are not sold but “are deemed automatically transferred to and vested in the
surviving corporation without further act or deed.”

SEC. 40. Power to Acquire Own Shares. – Provided that the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired, a stock corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes, including the following cases:
(a) To eliminate fractional shares arising out of stock dividends;
(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.

Requirements for corporation to acquire their own shares:

1. The acquisition is for a legitimate corporate purpose or purposes; and
 2. The corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired.
>> Section 40 provides a non-exclusive list of examples of cases when the corporation
can acquire its own shares.
>> The GR is that in the absence of statutory authority, the corporation cannot acquire
its own shares.
>>The power to acquire its own shares is now an express power.
Conditions on its exercise:
1. The capital of the corporation must not be impaired.
2. A legitimate and proper corporate objective is advanced
3. The condition of corporate affairs warrants it; and
4. The transaction is designed and carried out in good faith.

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 of
stockholders and transfers to capital stock or other accounts, and which is:
o Not appropriated by its Board of Directors for corporate expansion projects
or programs;
o Not covered by a restriction for dividend declaration under a loan
agreement; and
o Not required to be retained under special circumstances obtaining in the
corporation such as when there is a need for special reserve for probable
contingencies.

SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or

for Any Other Purpose. – Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation, business, or for any
purpose other than the primary purpose for which it was organized, when approved by
a majority of the board of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of nonstock corporations, at a meeting duly
called for the purpose. Notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at the place of
residence as shown in the books of the corporation and deposited to the addressee in
the post office with postage prepaid, served personally, or sent electronically in
accordance with the rules and regulations of the Commission on the use of electronic
data message, when allowed by the bylaws or done with the consent of the
stockholders: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code: Provided, however,
That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval
of the stockholders or members shall not be necessary.

>> Investment of a corporation in a business, which is in line with its primary purpose,
requires only the approval of the Board.
>> If the corporation will pursue its secondary purpose, it is required that the
following must concur:
1. There must be approval by a majority of the board of directors or trustees;
2. The approval of the board must be ratified by the stockholders representing
at least 2/3 of the outstanding capital stock, or by at least 2/3 of the members in
the case of non-stock corporations, at a stockholders’ or members’ meeting duly
called for the purpose; and
3. In calling the stockholders’ meeting, notice of the proposed investment and the
time and place of the meeting shall be addressed to each stockholder or member
at his/her/its place of residence as shown in the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally, or sent electronically in accordance with SEC rules and regulations
on the use of electronic data message when allowed by the By-Laws or done
with the consent of the stockholders.

Appraisal right given to dissenting stockholder – because the stockholder will be

exposed to a line of business that is not being pursued when he invested in the
company. His investment will be exposed to additional risks which was not
contemplated when he made the investment.

Investment – includes money and property of the corporation.

SEC. 42. Power to Declare Dividends. – The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings which
shall be payable in cash, property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent
stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholders
until their unpaid subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose.
 Stock corporations are prohibited from retaining surplus profits in excess
of one hundred percent (100%) of their paid-in capital stock, except: (a) when
justified by definite corporate expansion projects or programs approved by the board
of directors; or (b) when the corporation is prohibited under any loan agreement with
financial institutions or creditors, whether local or foreign, from declaring dividends
without their consent, and such consent has not yet been secured; or (c) when it can
be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies.

>> The Board has the discretion to declare dividends.

- The decision of the board alone is necessary to declare cash or property dividends.
- In the case of stock dividends, the decision of the Board is subject to the
approval of the stockholders representing 2/3 of the outstanding capital of the
corporation.
Requirements for dividend declaration:
1. Unrestricted retained earnings
2. The resolution of the Board; and
3. If stock dividends are declared, there must be a resolution of the Board with the
concurrence of 2/3 of the outstanding capital stock.

>> Stockholders are entitled to dividends pro rata based on the total number of
shares and not on the amount paid for the shares. Dividends belong to the person who
owns the stock when the dividend is declared.
- The right of the stockholders to be paid dividends accrues as soon as the
declaration is made in accordance with Sec 42. From that time, the stockholder
can already demand payment thereof.
>> The amount to be declared as dividends depends upon the amount of the
unrestricted retained earnings.

Stock dividends – when stock dividends are declared, the earnings are distributed to
the stockholders in the form of shares of stock. It involves the conversion of surplus or
undivided profits into capital.

>> By way of exception, stock corporations are prohibited from retaining surplus
profits in excess of 100% of their paid-in capital. In such case, declaration of
dividends is no longer purely discretionary on the Board.
>> However, even if the retained surplus profits are in excess of 100% of the paid-in
capital, the board may still refuse to declare dividends based on any of the following
grounds:
a. It is justified by definite corporate expansion projects/programs
approved by the Board; or
b. The corporation is prohibited under any loan agreement with any
financial institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been
secured; or
c. It can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation as for example, when there is
a need for special reserve for probable contingencies.

Retained Earnings
- The accumulated profits realized out of normal and continuous operations of the
business after deducting therefrom distributions to stockholders and transfers to
capital stock or other accounts.
- It shall be the amount as shown in the financial statements audited by the
company’s independent auditor.

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 of
stockholders and transfers to capital stock or other accounts, and which is:
o Not appropriated by its Board of Directors for corporate expansion
projects or programs;
o Not covered by a restriction for dividend declaration under a loan
agreement; and
o Not required to be retained under special circumstances obtaining in the
corporation such as when there is a need for special reserve for probable
contingencies.
Where no dividends can be declared out of (subject to certain exceptions):
1. From capital – except with respect to wasting assets corporations (corporations
solely or principally engaged in the exploitation of wasting assets)
2. Paid-in surplus (premium) – because they are part of the capital. Paid-in
surplus is the difference between the par value and the issued value or selling
price of the shares and are not considered profits earned in the conduct of the
business of the corporation.
 3. Additional Paid-In Capital – involves the infusion of cash or property by a
stockholder whenever no additional shares are issued in consideration thereof.
4. Reduction surplus – where surplus arises from the reduction of the par value of
the issued shares of stock.
5. Revaluation surplus – there is this if there is an increase in the value of assets.
They are not considered earnings of the corporation.
6. Treasury shares – because they are not considered part of earned or surplus
profits. (if this is allowed, the corporation would be converted into both a debtor
and creditor for the same amount at the same time)
7. Interim Income – because they can only be determined at the end of the fiscal
year.

>> Gain from sale of real property are available for dividend declarations because they
are part of retained earnings.

SEC. 43. Power to Enter into Management Contract. – No corporation shall

conclude a management contract with another corporation unless such contract is
approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members in
the case of a nonstock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (a) where a
stockholder or stockholders representing the same interest of both the managing and
the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (b) where a
majority of the members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the stockholders of
the managed corporation owning at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a
nonstock corporation.
These shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements which relate to
the exploration, development, exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the pertinent laws or regulations.
No management contract shall be entered into for a period longer than five
(5) years for any one (1) term.
Management Contract – an agreement whereby one undertakes to manage or operate
all or substantially all of the business of another, whether such contracts are called
service contracts, operating agreements or otherwise.
- May be necessary to assure not only technical competence but also continuity in
management policy in the running of the corporation.

Section 43 applies to situations where the contract is between 2 corporations.

- Contract with a natural person is more appropriately called employment contract
rather than management contract.
>> The maximum term prescribed is 5 years. It is subject to renewal.
>> A management contract cannot be entered into with a foreign corporation for partly
or wholly nationalized activities that are covered by the Anti-Dummy Law. Intervention in
management and operation is not allowed in those activities.

The contract shall be subject to the approval of the Board and by stockholders
owning at least the majority of the outstanding capital stock, or by at least a
majority of the members in the case of a non-stock corporation, of both the managing
and managed corporation, at a meeting duly called for the purpose.
a. The management contract must be approved by the stockholders of the
managed corporation owning at least 2/3 of the total outstanding capital stock
entitled to vote, or by at least 2/3 of the members in the case of a non-stock
corporation in any of the following instances:
1. Where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control more than 1/3
of the total outstanding capital stock entitled to vote of the managing corporation;
or
2. Where a majority of the members of the Board of the managing
corporation also constitute a majority of the members of the Board of the
managed corporation.

SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall possess or exercise
corporate powers other than those conferred by this Code or by its articles of
incorporation and except as necessary or incidental to the exercise of the powers
conferred.
Ultra vires acts – those powers not conferred to the corporation by the RCCP and
special laws, by its Articles of Incorporation and those that are not implied or necessary
or incidental to the exercise of the powers so conferred.
 - One 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.
Effects of Ultra vires acts
- If the act is ultra vires, not because it is illegal, the same may be enforced.
- The contracts entered into in the exercise of ultra vires acts are merely voidable
and may become binding and enforceable when ratified by the stockholders.
- Ultra vires contracts for both partially executed and wholly executed contracts
can still be maintained on the basis of estoppel.
o However, estoppel cannot be invoked against the State. The certificate of
incorporation may be revoked by the SEC if the corporation performs ultra
vires acts. It is a violation of the contract between the State and the
corporation.
Senator Salonga summarized the rules in this wise:
1. A corporation that is engaged in ultra vires business is liable for torts committed
by its agents within their authority in the course of that business.
2. If a corporation acted outside its authority in taking or holding title to property, the
validity of the Certificate of Title cannot be questioned.
3. When the contract is fully executed on both sides, the contract is effective and
will stand as a foundation of rights acquired under it.
4. When the contract is executory on one side and has been fully performed on the
other, the party who has received benefits from the performance is estopped in
claiming that the contract is ultra vires.
5. When both contracts are wholly executory, neither party can maintain an action.
TITLE V - BYLAWS
Section 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 on
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 maybe
adopted and filed prior to incorporation; in such case, such bylaws shall be
approved and signed by all 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 any other
corporations governed by special laws, unless accompanied by a certificate of
the appropriate government agency to the effect that such by laws or
amendments are in accordance with law.

Section 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 trustees 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 officers other than
directors or trustees;
(i) The penalties for violation of the bylaws;
(j) In the case of stock corporations, the manner of issuing stock certificates; and
(k) Such other matters as may be necessary for the proper or convenient
transaction of its corporate affairs for the promotion of good governance and
anti- graft and corruption measures.
An arbitration agreement maybe provided in the bylaws pursuant to Section 181
of this Code .
Section 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 owner of two-thirds (2/3) of the outstanding capital stock
or two-third (2/3) of the members in a nonstock corporation mat 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
trustee to amend or repeal the bylaws or adopt new bylaws shall be considered
as revoke 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 majority of the directors or trustees.
The amended or new bylaws shall only be effective upon the issuance by the
Commission of certification that the same is in accordance with this Code and
other relevant laws.
Adoption of By-Laws – p 247
Nature and function of by-laws
Contractual significance of the bylaws
- Bylaws are the intramural document that govern the relationship between and
among the members of a corporate family.
- Bylaws are private documents to regulate the intra-corporate relations, so it
cannot create or be used to restrict rights.
- A corporation can adopt bylaws only insofar as they are not inconsistent with any
existing law.
- It is not the function of bylaws to take away or abridge the substantial rights of
shareholders.
- Do not bind a dealing member of the public who have no knowledge of their
provisions
- Bylaws are intended merely for the protection of the corporation, and prescribe
regulation, not restrictions; they are always subject to the charter of the
corporation (Rural Bank of Salinas v. CA)
o Restrictions on the assignment or transfer of shares cannot be provided
for in the bylaws (if provided for it is void)
- Bylaws may be necessary for the “government of the corporation,” but they are
nonetheless subordinate to the articles of incorporation, as well as to the RCC
and related statutes (Loyola Grand Villas Homeowners Assn. v. CA)
- There are cases where bylaws are unnecessary to corporate existence or to the
valid exercise of corporate powers, thus: “As the rules and regulations or private
laws enacted by the corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and directors and officers
with relation thereto and among themselves in their relation to it, bylaws are
indispensable to corporation in this jurisdiction
o Although they may not be essential to corporate birth but certainly, these
are required by law for an orderly governance and management of
corporation.
o Failure to file them within the period required by law by no means tolls the
automatic dissolution of a corporation.
- The principles that articles of incorporation and bylaws of a corporation are the
fundamental documents governing the conduct of the corporate affairs, establish
the norms of procedure for exercising rights, and reflect the purpose and
intentions of the incorporators, held with respect to bylaws.
o Bylaws are the self-imposed rules resulting from the agreement between a
corporation and its members to conduct. The bylaws are private statutes
by which a corporation is regulated, and would function
o The bylaws constitute a binding contract between a corporation and its
members, and as between the members themselves.
 o Every stockholder governed by the bylaws is entitled to access them.
o The provisions of the articles of incorporation and the bylaws must be
strictly complied with and applied to the letter (Forest Hills Golf and
Country Club v. Gardpro, Inc.)
- Bylaws have the nature of private law binding within the intra-corporate realm.
- The bylaws of a corporation are its own private laws which substantially have the
same effect as the laws of the corporation. They are in effect written into the
charter.
- They become part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply (Bernas v. Cinco)
- Bylaws are the relatively permanent and continuing rules of action adopted by
the corporation for its own government and that of the individual composing it
and having the directions, management and control of its affairs, in whole or in
part, in the management and control of its affairs and activities.
- The purpose of the bylaw is to regulate the conduct and define the duties of the
members towards the corporation and among themselves. They are self-imposed
and, although adopted pursuant to statutory authority, have no public lawm
- The legal basis of power to adopt and amend bylaws is discussed in Gokongwei, Jr. v.
SEC: It is recognized by all authorities that every corporation has the inherent power to
adopt bylaws for its internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among themselves in reference to
the management of its affairs.
- At common law, the rule was that the power to make and adopt bylaws is inherent in
every corporation as one of its necessary and inseparable legal incidents.
- In the absence of positive legislative provisions limiting it, every private corporation
has this inherent power as one of its necessary and inseparable legal incidents,
independent of any specific enabling provision in its charter or in general law, such
power of self- government being essential to enable the corporation to accomplish the
purpose of its creation.

Requisites of valid by-laws

1. Bylaw provisions cannot contravene the law
- although the power to adopt bylaws is an inherent right, and it exists even without the
law expressly granting such power, Section 35 of RCC expressly enumerates as one of
the powers of a corporation, the power to adopt bylaws “not contrary to law, morals or
public policy, and to amend or repeal the same in accordance with RCC”
- Jurisprudence has long before established that bylaw provisions cannot contravene
the law.
- Because the corporation is a creature of the law, its bylaws cannot prevail over legal
provisions and the lawful court orders and processes.
- The right to amend the bylaws lies solely in the discretion of the employer, this
being in the exercise of management prerogative or business judgment. However, this
right cannot impair the obligation of existing contracts or rights. (Salafranca v. Philamlife
Village Homeowners Assn., Inc)
2. Bylaws cannot contravene the charter
- It is a well-established principle that the contents of the bylaws that contravene the
Constitution and the laws of the land are deemed void; and that in case of contradiction
to any of the provisions of the articles of incorporation, the latter’s provision shall
prevail.
- The rule that the bylaws must be “always within the charter limits” is consistent with
the principle that since the corporation is a mere creature of the law constituted
through its charter, then the governing document covering the intra-corporate
relationship cannot alter or be contrary to the terms of the charter by which the
juridical personality is constituted.
- Any provision in the bylaws which contravenes the provision in the articles of
incorporation must give way to the article provision, even when the nature of the subject
matter is something that would normally be found provided for in the bylaws rather tan
in the articles of incorporation.
3. Bylaws must be reasonable and non-discriminatory
- Bylaw provisions must be “reasonable and calculated to carry into effect the objects of
the corporation”
- this comes from the theory that the set of bylaws, as a basic contract document,
has the sole purpose of regulating the relationship between and among the parties
within the intra-corporate relationship.
- Any bylaw provision that does not fulfill such objective is deemed to be
unreasonable and void.
- Citing American jurisprudence, Fleischer held that bylaw provisions “must not disturb
vested rights or impair substantial rights of stockholder or member, affect rights of
property or create obligations unknown to the law”
- the validity or reasonableness of a bylaw provision is a question of law, and in such
case the issue to be resolved would be whether a bylaw provision conflicts with a
provision of law, the corporate charter, or is in the legal sense unreasonable and
therefore unlawful.
- this rule is subject to the limitation that “where the reasonableness of a bylaw is
a mere matter of judgment, and one upon which reasonable minds must necessarily
differ, a court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make bylaws and who have exercised their
authority.
Binding effect
- The general rule is that a corporation, through its board of directors, should act in
the manner and within the formalities prescribed in its charter or by the general
law.
- Directors must act as a body in a meeting called pursuant to the law or the
corporation’s bylaws, otherwise, any action taken therein may be questioned by
the objecting director or shareholder.
- The rules set in the bylaws are mandatory for every member of the corporation to
respect. They are the fundamental law of the corporation with which the
corporation and its directors or officers must comply. (Bernas v. Cinco)
- Under Corporate Contract Law, bylaws constitute a binding contractual
agreement between and among the corporation, the Board of Directors and
officers, as well as with the shareholders or members.
- Being an intramural document, bylaws do not constitute a binding arrangement
against the State, and the involvement of the SEC in the registration of the
bylaws is limited to the aspect of exercising regulatory supervision over the
corporation.
Non-binding effects of bylaws to “outsiders”
- Bylaw provisions are intramural in nature and are not meant to bind parties
outside the corporate family. The public dealings with the corporation are not
supposed to be interested in the provisions of its bylaws and should not be
bound thereby.
- In order for bylaws to be binding upon 3 rd parties, such 3rd parties must have
acquired knowledge of the pertinent bylaws at the time the transaction or
agreement between said 3rd party and the shareholders was entered into. (China
Banking Corp. v. CA)
- It is the generally accepted rule that 3rd persons are not bound by bylaws, except
when they have knowledge of the provisions either actually or
constructively.
- Bylaws operate merely as internal rules among shareholders, they cannot affect
or prejudice third persons who deal with the corporation, unless they have
knowledge of the same (PMI Colleges v. NLRC)

Amendment or revision
- Section 47 of RCC provides that the Board of Directors or Trustees, by a majority
vote thereof, 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 any
bylaws or adopt new bylaws.
- It is within the power of any corporation to junk entirely its existing bylaws and
adopt an entirely new set.
- Sec 47 also provides that the owners of 2/3s of the outstanding capital stock, or
2/3s of the members in a nonstock corporation, may delegate to the Board of
Directors of Trustees the power to amend or repeal any bylaws or adopt new
bylaws; Provided that such delegated power to amend or repeal any bylaws or
adopt new bylaws shall be considered revoked whenever shareholders owning or
representing a majority of the outstanding capital stock or a majority of the
members in nonstock corporation, shall so vote at a regular or special meeting.
- The amended or new bylaws shall only be effective upon the issuance by the
SEC of a certification that the same are not inconsistent with RCC.