BUSINESS LAW MIDTERMS

AND REGULATION Lecture/ Second Semester PROFESSOR: Torre W. Dalilis

CONTRACT OF PARTNERSHIP (GENERAL PROVISION)

 Partnership with immovable property contributed, if without

requisite inventory, signed and attached to public instrument,
Essential Elements of Partnership
shall not acquire any juridical personality because the
contract itself is void. This is also true for secret associations
❖ Art. 1767. By the contract of partnership two or more
or societies
persons bind themselves to contribute money, property, or
industry to a common fund with the intention of dividing the
profits among themselves.
Organizing a partnership is not an absolute right
❖ Intention to form a contract of partnership
❖ Participation in both profits and losses  It is but a privilege which may be enjoyed only
❖ Community of interests under such terms as the State may deem
necessary to impose.
Characteristic of a Partnership
 Art. 1769. In determining whether a partnership
1. It has a separate juridical personality. (Art. 1768, CC) exists, these rules shall apply:

2. It must have a lawful object or purpose and for the 1. Except as provided by Article 1825, persons who
common benefit or interest of the partners. (Art. 1770, are not partners as to each other are not partners
CC) as to third persons.

3. The partners are liable to the creditors of the
partnership with their own property, even beyond
their contribution. (Art. 1803[1], CC)
4. It is founded on the right to choose with whom a
person wishes to associate himself, otherwise known
as the doctrine of delectus personae. (Ortega vs. Court
of Appeals, G.R. No. 109248, July 3, 1995)
5. As a general rule, all the partners shall be considered
agents and whatever any one of them may do alone
shall bind the partnership. This is the doctrine of
mutual agency. (Art. 1803[1], 1818, CC)
Partnership, a Juridical Person
 Art. 1768. The partnership has a juridical personality
separate and distinct from that of each of the partners
even in case of failure to comply with the requirements
of Article 1772, first paragraph.
2. Co-ownership or co-possession does not of itself
establish a partnership, whether such co-
ownership or co-possessors do or do not share
any profits made by the use of the property.
3. The sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common
right or interest in any property from which the
returns are derived.
4. The receipt by a person of a share of the profits of
a business is prima facie evidence that he is a
partner in the business, but no such inference
shall be drawn if such profits were received in
payment:
 As a debt by installments or otherwise.
 As wages of an employee or rent to a landlord.

Effects of failure to comply with statutory requirements  As an annuity to a widow or representative of

 Under Art 1772
 Partnership still acquires personality despite failure to
comply with the requirements of execution of public
instrument and registration of name in SEC.
 Under Arts 1773 and 1775
a deceased partner.
 As interest on a loan, though the amount of
payment vary with the profits of the business.
 As the consideration for the sale of a goodwill
of a business or other property by
installments or otherwise.

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 Lawful Object and Purpose of Partnership
 Art. 1770. A partnership must have a lawful object or
purpose, and must be established for the common
benefit or interest of the partners.
When an unlawful partnership is dissolved by a judicial
decree, the profits shall be confiscated in favor of the
State, without prejudice to the provisions of the Penal
Code governing the confiscation of the instruments and
effects of a crime.
 LEGALITY OF THE OBJECT
•The object is unlawful when it is contrary to law, morals,
good customs, public order or public policy (Art. 1306). If
there is an unlawful object, the contract is inexistent and
void ab initio (Art. 1409 [1]).
•Hence, a partnership may be organized for any purpose
except that it may not engage in an enterprise for which
the law requires a specific form of business organization.
 PURPOSE IS TO OBTAIN PROFITS
•The sharing is not necessarily in equal terms. The
contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs,
public order, or public policy (Art. 1306).
•It is not necessary that the parties agree upon a system of
sharing. The law provides rules of distribution of profits and
losses if there is no agreement among the partners. (Art.
1797)
Form of Partnership
 It may be constituted in any form. (Art. 1771, CC)
 Art. 1771. A partnership may be constituted in any
form, except where immovable property or real rights
are contributed thereto, in which case a public
instrument shall be necessary.
 However, in the following instances, it should be in writing:
1. When, by its terms, it is not to be performed within a year
from the making thereof. (Art. 1403[2][a], CC)
2. Where immovable property or real rights are contributed
thereto. (Art. 1771, CC)
 Aside from being in writing, it should also be in a public
instrument. Also, the following provisions are important.
3. Where the capital is P3,000.00 or more, in money or
property. (Art. 1772, CC)
 Art. 1772. Every contract of partnership having a
capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which
must be recorded in the Office of the Securities and
Exchange Commission.
Failure to comply with the requirements of the
preceding paragraph shall not affect the liability of the
partnership and the members thereof to third
persons.
 The following provisions are important:
 Art. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an
inventory of said property is not made, signed by the
parties, and attached to the public instrument.
 Art. 1774. Any immovable property or an interest
therein may be acquired in the partnership name. Title
so acquired can be conveyed only in the partnership
name.
 Art. 1775. Associations and societies, whose articles
are kept secret among the members, and wherein any
one of the members may contract in his own name
with third persons, shall have no juridical personality,
and shall be governed by the provisions relating to co-
ownership.
Concept of Co-Ownership
Kinds of Partnership and Partners & Other Important
Provisions (Art. 1776-1783)
 Art. 1776. As to its object, a partnership is either universal or
particular. As regards the liability of the partners, a partnership
may be general or limited.
 Art. 1777. A universal partnership may refer to all the present
property or to all the profits.
 Art. 1778. A partnership of all present property is that in which
the partners contribute all the property which actually belongs
to them to a common fund, with the intention of dividing the
same among themselves, as well as all the profits which they
may acquire therewith.
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 Art. 1779. In a universal partnership of all present property, the
property which belongs to each of the partners at the time of
the constitution of the partnership, becomes the common
property of all the partners, as well as all the profits which they
may acquire therewith.
A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may
acquire subsequently by inheritance, legacy, or donation cannot
be included in such stipulation, except the fruits thereof.
 Art. 1780. A universal partnership of profits comprises all that the
partners may acquire by their industry or work during the existence of
the partnership.
Movable or immovable property which each of the partners may
possess at the time of the celebration of the contract shall continue to
pertain exclusively to each, only the usufruct passing to the
partnership.
 Art. 1781. Articles of universal partnership, entered into without
specification of its nature, only constitute a universal partnership of
profits.
 Art. 1782. Persons who are prohibited from giving each other any
donation or advantage cannot enter into universal partnership.
 Art. 1783. A particular partnership has for its object determinate
things, their use or fruits, or specific undertaking, or the exercise of a
profession or vocation.
Kinds of Partners
As to the extent of liability
 Capitalist – contributes either money or property to the
common fund; he can also contribute and intangible like credit,
such as promissory note or other evidence of obligation, or
even a goodwill.
 Industrial – contributes only his industry
As to the time of entry
 Original – one who became a partner at the time of the
constitution of the partnership
 Incoming – one who became a partner as a new member of
an existing partnership.
Other kinds
 Managing – one entrusted with the management of the
partnership.
 Liquidating – one who takes charge of the liquidation and
winding up of the partnership affairs.
 Retiring – those who cease to be a part of the partnership
 Continuing – one who continues the business of a partnership
after it has been dissolved by reason of the admission of a new
partner, or the retirement, death, or expulsion of one of more
partners.
 Dormant, Silent, Secret – one whose connection to the
partnership is concealed and who does not take any active part
in it.
 Partner by Estoppel – although not an actual partner, he has
made himself liable as such by holding himself out as a partner
of allowing himself to be held out. (Art. 1815, NCC).
Based on Object:
1. UNIVERSAL PARTNERSHIP
 OF ALL PRESENT PROPERTY (NCC, Art. 1778) - The partners
contribute all the property which actually belongs to them to a
common fund, with the intention of dividing the same among
themselves, as well as all profits they may acquire therewith. The
following become the common fund of all the partners:
 Property which belonged to each of the partners at the time
of the constitution of the partnership
 Profits which they may acquire from all property contributed
Classification of Partnership
Based on Object:
1. UNIVERSAL PARTNERSHIP
 OF ALL PROFITS (NCC, Art. 1780) – Comprises all that the
partners may acquire by their industry or work during the
existence of the partnership as well as the usufruct of all
movable or immovable property which each of the partner
may possess at the time of the celebration of the contract
of partnership.
2. PARTICULAR PARTNERSHIP
 It is one which has for its object, determinate things,
their use and fruits, or a specific undertaking or the
exercise of a profession or a vocation (NCC, Art.
1783).
Based on Duration:
1. Partnership at Will
 the partnership has an indefinite term and would
dissolve only when an act or cause of dissolution
happens or arises.
Based on Object:
2. Partnership with a fixed period or Partnership for a
particular undertaking
 the partnerships are automatically dissolved upon
the expiration of the stipulated term or the
achievement of the particular undertaking
stipulated in the contract of partnership.
Based on Liability of the Partners:
1. General Partnership
 One where ALL PARTNERS ARE GENERAL PARTNERS
who are liable even with respect to their individual
properties, after the assets if the partnership have
been exhausted.
2. Limited Partnership
 One formed by two or more persons having as
members one or more general partners and one or
more limited partners, the latter not being
personally liable for the obligations for the
obligations of the partnership (NCC, Art. 1843).
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 BLIGATION OF PARTNERS (Article 1784-1827)
Rights and Obligations of a Partnership
- As a juridical person, the partnership may:
o Acquire and possess property of all kinds
o Incur obligations
o Bring civil or criminal actions
- The personality of the partnership is separate and distinct from
that of each partner
o the partners cannot be held liable for the obligations of the
partnership unless it is shown that the legal fiction of a
different juridical personality is being used for5 fraudulent,
unfair, or illegal purposes
ARTICLE 1796. The partnership shall be responsible to every
partner for the amounts he may have disbursed on behalf of the
partnership and for the corresponding interest, from the time the
expenses are made; it shall also answer to each partner for the
obligations he may have contracted in good faith in the interest of
the partnership business, and for risks in consequence of its
management. (1688a)
The amount to be refunded (to the partners) is necessarily limited
to the partnership’s total resources. In other words, it can only pay
out what it has in its coffers, which consists of all its assets.
However, before the partners can be paid their shares, the
creditors of the partnership must first be compensated. After all
the creditors have been paid, whatever is left of the partnership
assets becomes available for the payment of the partners' shares.
(Villareal vs. Ramirez, G.R. No. 144214, July 14, 2003).
Rights and Obligations of Partners Among Themselves
 Rights:
A. As co-owner with his partners of specific partnership
property (read further provisions at Art. 1811, CC)
B. Interest in the partnership (i.e., share of the profits and
surplus) (Art. 1812, CC)
• Division of the profits shall be in accordance with the
rules stated in Art. 1797 and 1798, CC.
Art. 1812. A partner's interest in the partnership is his share of the
profits and surplus.
Art. 1797. The losses and profits shall be distributed in conformity
with the agreement. If only the share of each partner in the profits
has been agreed upon, the share of each in the losses shall be in the
same proportion.
In the absence of stipulation, the share of each partner in the profits
and losses shall be in proportion to what he may have contributed,
but the industrial partner shall not be liable for the losses. As for the
profits, the industrial partner shall receive such share as may be just
and equitable under the circumstances. If besides his services he
has contributed capital, he shall also receive a share in the profits in
proportion to his capital.
Art. 1811. A partner is co-owner with his partners of specific
partnership property.
The incidents of this co-ownership are such that:
(1) A partner, subject to the provisions of this Title and to any
agreement between the partners, has an equal right with his
partners to possess specific partnership property for partnership
purposes; but he has no right to possess such property for any
other purpose without the consent of his partners;
(2) A partner's right in specific partnership property is not
assignable except in connection with the assignment of rights of all
the partners in the same property;
(3) A partner's right in specific partnership property is not
subject to attachment or execution, except on a claim against the
partnership. When partnership property is attached for a
partnership debt the partners, or any of them, or the
representatives of a deceased partner, cannot claim any right
under the homestead or exemption laws;
(4) A partner's right in specific partnership property is not
subject to legal support under Article 291.
Art. 1798. If the partners have agreed to entrust to a third person
the designation of the share of each one in the profits and losses,
such designation may be impugned only when it is manifestly
inequitable. In no case may a partner who has begun to execute
the decision of the third person, or who has not impugned the
same within a period of three months from the time he had
knowledge thereof, complain of such decision.
C. To participate in the management (Art. 1800 to 1803, CC)
D. To demand a formal accounting (Art. 1809, CC)
• This right is not available to an assignee of a partner.
(Realubit vs. Jaso, G.R. No. 178782, September 21,
2011)
Art. 1800. The partner who has been appointed manager in the
articles of partnership may execute all acts of administration
despite the opposition of his partners, unless he should act in bad
faith; and his power is irrevocable without just or lawful cause. The
vote of the partners representing the controlling interest shall be
necessary for such revocation of power.
A power granted after the partnership has been constituted may be
revoked at any time.
Art. 1801. If two or more partners have been intrusted with the
management of the partnership without specification of their
respective duties, or without a stipulation that one of them shall
not act without the consent of all the others, each one may
separately execute all acts of administration, but if any of them
should oppose the acts of the others, the decision of the majority
shall prevail. In case of a tie, the matter shall be decided by the
partners owning the controlling interest.
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Art. 1802. In case it should have been stipulated that none of the
managing partners shall act without the consent of the others, the
concurrence of all shall be necessary for the validity of the acts, and the
absence or disability of any one of them cannot be alleged, unless there is
imminent danger of grave or irreparable injury to the partnership.
Art. 1803. When the manner of management has not been agreed upon,
the following rules shall be observed:
(1) All the partners shall be considered agents and whatever any one of
them may do alone shall bind the partnership, without prejudice to the
provisions of Article 1801.
(2) None of the partners may, without the consent of the others, make
any important alteration in the immovable property of the partnership,
even if it may be useful to the partnership. But if the refusal of consent by
the other partners is manifestly prejudicial to the interest of the
partnership, the court's intervention may be sought.
Art. 1809. Any partner shall have the right to a formal account as to
partnership affairs:
(1) If he is wrongfully excluded from the partnership business or
possession of its property by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by article 1807;
(4) Whenever other circumstances render it just and reasonable.
Art. 1807. Every partner must account to the partnership for any benefit,
and hold as trustee for it any profits derived by him without the consent
of the other partners from any transaction connected with the formation,
conduct, or liquidation of the partnership or from any use by him of its
property.
 Obligations:
A. To contribute money or property (Art. 1786, 1787, CC)
• A partner who undertakes to contribute money and fails or delays
is a debtor of the partnership and liable for interest. (Art. 1788,
CC)
• The contribution shall be in accordance with the agreement or, in
the absence thereof, in equal shares. (Art. 1790, CC)
• The failure or refusal of a partner to deliver his promised
contribution is not a ground for dissolution of the partnership.
The remedy is to sue the partner for specific performance.
Art. 1786. Every partner is a debtor of the partnership for
whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with
regard to specific and determinate things which he may have
contributed to the partnership, in the same cases and in the same
manner as the vendor is bound with respect to the vendee. He
shall also be liable for the fruits thereof from the time they
should have been delivered, without the need of any demand.
Art. 1787. When the capital or a part thereof which a partner is
bound to contribute consists of goods, their appraisal must be
made in the manner prescribed in the contract of partnership,
and in the absence of stipulation, it shall be made by experts
chosen by the partners, and according to current prices, the
subsequent changes thereof being for account of the partnership.
Art. 1788. A partner who has undertaken to contribute a sum of
money and fails to do so becomes a debtor for the interest and
damages from the time he should have complied with his
obligation.
The same rule applies to any amount he may have taken from the
partnership coffers, and his liability shall begin from the time he
converted the amount to his own use.
Art. 1790. Unless there is a stipulation to the contrary, the
partners shall contribute equal shares to the capital of the
partnership.
B. Not to engage in business
• An industrial partner cannot engage in any business for
himself without the express consent of the partnership.
(Art. 1789, CC)
• A capitalist partner cannot engage in a business of the
same kind as the partnership. (Art. 1808, CC)
C. To answer to the partnership for damages it suffered through
his/their fault (Art. 1794, CC)
Art. 1789. An industrial partner cannot engage in business for
himself, unless the partnership expressly permits him to do so;
and if he should do so, the capitalist partners may either exclude
him from the firm or avail themselves of the benefits which he
may have obtained in violation of this provision, with a right to
damages in either case.
Art. 1808. The capitalist partners cannot engage for their own
account in any operation which is of the kind of business in
which the partnership is engaged, unless there is a stipulation to
the contrary.
Art. 1794. Every partner is responsible to the partnership for
damages suffered by it through his fault, and he cannot
compensate them with the profits and benefits which he may
have earned for the partnership by his industry. However, the
courts may equitably lessen this responsibility if through the
partner's extraordinary efforts in other activities of the
partnership, unusual profits have been realized.
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 Obligations of Partners/Partnership to Third Persons
 All partners, including industrial ones, shall be liable pro
rata with all their property (after all the partnership assets
are exhausted) for the contracts entered into in the name
and for the account of the partnership. (Art. 1816, CC)
• Any stipulation exempting any partner from this
liability shall not bind third persons, but may be
enforced only between the partners. (Art. 1817, CC)
Art. 1816. All partners, including industrial ones, shall be
liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the
account of the partnership, under its signature and by a
person authorized to act for the partnership. However, any
partner may enter into a separate obligation to perform a
partnership contract.
Art. 1817. Any stipulation against the liability laid down in
the preceding article shall be void, except as among the
partners
 The partnership is solidarily liable with the erring
partner for the damages caused to a third person. (Art.
1822, 1823, 1824, CC)
Art. 1822. Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of the
partnership or with the authority of co-partners, loss or
injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is
liable therefor to the same extent as the partner so acting
or omitting to act.
Art. 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his
apparent authority receives money or property of a third
person and misapplies it; and
(2) Where the partnership in the course of its business
receives money or property of a third person and the
money or property so received is misapplied by any
partner while it is in the custody of the partnership.
Art. 1824. All partners are liable solidarily with the
partnership for everything chargeable to the partnership
under Articles 1822 and 1823.
Partnership by Estoppel
 It arises when a person, by words spoken or written, or by
conduct, represents himself or consents to another
representing him to anyone, as partner in an existing
partnership, or with one or more persons not actual
partners; he is liable to any such person to whom such
representation has been made, who has, on the faith of
such representation given credit to the actual or apparent
partnership. (Art. 1825, CC)
 Art. 1825, CC does not create a partnership as between
the alleged partners. A contract, express or implied, is
essential to the creation of a partnership. The law
considers them partners and the association as a
partnership only to protect third persons.
Art. 1825. When a person, by words spoken or written or by
conduct, represents himself, or consents to another representing
him to anyone, as a partner in an existing partnership or with one
or more persons not actual partners, he is liable to any such
persons to whom such representation has been made, who has,
on the faith of such representation, given credit to the actual or
apparent partnership, and if he has made such representation or
consented to its being made in a public manner he is liable to
such person, whether the representation has or has not been
made or communicated to such person so giving credit by or with
the knowledge of the apparent partner making the
representation or consenting to its being made:
(1) When a partnership liability results, he is liable as though he
were an actual member of the partnership;
(2) When no partnership liability results, he is liable pro rata with
the other persons, if any, so consenting to the contract or
representation as to incur liability, otherwise separately.
When a person has been thus represented to be a partner in an
existing partnership, or with one or more persons not actual
partners, he is an agent of the persons consenting to such
representation to bind them to the same extent and in the same
manner as though he were a partner in fact, with respect to
persons who rely upon the representation. When all the
members of the existing partnership consent to the
representation, a partnership act or obligation results; but in all
other cases it is the joint act or obligation of the person acting
and the persons consenting to the representation.
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 DISSOLUTION AND WINDING UP (ART 1828 – 1842)
Definition of terms:
 Dissolution is the change in the relation of the partners caused
by any partner ceasing to be associated in the carrying on of
the business. (Art. 1828, CC) It is that point of time the partners
cease to carry on the business together.
 Winding up is the process of settling business affairs after
dissolution. (Ex: paying previous obligations, collecting assets
previously demandable, even new business if needed to wind
up)
 Termination is the point in time after all the partnership affairs
have been wound up.
Causes of Dissolution (Art. 1830, CC)
 Those without violating the agreement between the
partners;
 In contravention of the agreement between the partners, by
the express will of any partner at any time;
 By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on
in partnership; (Ex: Prohibition against a partnership to
operate a fishpond [Deluao vs. Casteel, L-21906, August 29,
1969])
 When a specific thing, which a partner had promised to
contribute to the partnership, perishes before the delivery,
or when the thing, the enjoyment or use of which was
transferred to the partnership, is lost;
 By the death of any partner;
 By the insolvency of any partner or of the partnership;
 By the civil interdiction of the partner;
 By the decree of court in the situations provided under Art.
1831, CC.
Art. 1831. On application by or for a partner the court shall
decree a dissolution whenever:
(1) A partner has been declared insane in any judicial proceeding
or is shown to be of unsound mind;
(2) A partner becomes in any other way incapable of performing
his part of the partnership contract;
(3) A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business;
(4) A partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in
matters relating to the partnership business that it is not
reasonably practicable to carry on the business in partnership
with him;
(5) The business of the partnership can only be carried on at a
loss;
(6) Other circumstances render a dissolution equitable.
Effects of Dissolution (Art 1832 – 1835)
 It terminates all authority of any partner to act for the
partnership. (Art. 1832, CC)
 Each partner is liable to his co-partners for his share of any
liability created by any partner not knowing of the cause of the
dissolution. (Art. 1833, CC)
Art. 1832. Except so far as may be necessary to wind up
partnership affairs or to complete transactions begun but not
then finished, dissolution terminates all authority of any partner
to act for the partnership:
(1) With respect to the partners:
(a) When the dissolution is not by the act, insolvency or death
of a partner; or
(b) When the dissolution is by such act, insolvency or death of
a partner, in cases where article 1833 so requires;
(2) With respect to persons not partners, as declared in article
1834. (n)
Art. 1833. Where the dissolution is caused by the act, death or
insolvency of a partner, each partner is liable to his co-partners
for his share of any liability created by any partner acting for the
partnership as if the partnership had not been dissolved unless:
(1) The dissolution being by act of any partner, the partner acting
for the partnership had knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner,
the partner acting for the partnership had knowledge or notice of
the death or insolvency.
 A partner, however, can bind the partnership by:
• Any act appropriate for winding up partnership affairs or
completing transactions unfinished at dissolution;
• Any transaction which would bind the partnership if a third
person had extended credit to the partnership prior to the
dissolution and had no knowledge of said dissolution, or had
extended credit to the partnership after the dissolution but he
had no knowledge of said dissolution and the fact of said
dissolution was not advertised in a newspaper of general
circulation.
BUT the partnership is not bound by any act of the partner
were
(a) the partnership is dissolved because it is unlawful to
carry on the business,
(b) the partner has become insolvent,
(c) the partner has no authority to wind up partnership
affairs, unless,
(a) the third person had extended credit prior to the
dissolution and he had no knowledge of said dissolution
(b) the third person had extended credit to the
partnership after the dissolution but he had no knowledge of
said dissolution and the fact of said dissolution was not
advertised in a newspaper of general circulation. (Art. 1834, CC)
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 The dissolution of the partnership does not of itself
discharge the existing liability of any partner. He can
only be discharged by an agreement to that effect
between himself, the partnership creditor and the
person or partnership continuing the business. (Art.
1835, CC)
Rights of a Partner upon Dissolution (Art. 1836 - 1838, CC)
 Right to wind up partnership affairs (Art. 1836, CC)
 Right to apply the partnership property to discharge its
liabilities, and to apply the surplus to pay in cash the net
amount owing to the respective partners (Art. 1837, first par.,
CC)
 Right to damages in case of breach of the agreement (Art.
1837, second par., (1) (b), CC)
Art. 1836. Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal representative
of the last surviving partner, not insolvent, has the right to wind
up the partnership affairs, provided, however, that any partner,
his legal representative or his assignee, upon cause shown, may
obtain winding up by the court. (n)
Art. 1837. When dissolution is caused in any way, except in
contravention of the partnership agreement, each partner, as
against his co-partners and all persons claiming through them in
respect of their interests in the partnership, unless otherwise
agreed, may have the partnership property applied to discharge
its liabilities, and the surplus applied to pay in cash the net
amount owing to the respective partners. But if dissolution is
caused by expulsion of a partner, bona fide under the partnership
agreement and if the expelled partner is discharged from all
partnership liabilities, either by payment or agreement under the
second paragraph of Article 1835, he shall receive in cash only
the net amount due him from the partnership.
When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
(1) Each partner who has not caused dissolution wrongfully shall
have:
(a) All the rights specified in the first paragraph of this article,
and
(b) The right, as against each partner who has caused the
dissolution wrongfully, to damages breach of the agreement.
 Right to be paid in cash his net interest only (less any
damage caused to his co-partners), if he is the partner
who caused the dissolution wrongfully, and the
partnership business is continued by the other partners
(Art. 1837, second par., (3) (b), CC)
Art. 1837.
When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
(3) A partner who has caused the dissolution wrongfully shall
have:
(b) If the business is continued under the second paragraph,
No. 2, of this article, the right as against his co-partners and all
claiming through them in respect of their interests in the
partnership, to have the value of his interest in the partnership,
less any damage caused to his co-partners by the dissolution,
ascertained and paid to him in cash, or the payment secured by a
bond approved by the court, and to be released from all existing
liabilities of the partnership; but in ascertaining the value of the
partner's interest the value of the good-will of the business shall
not be considered.
 The partner who has a right to rescind the contract on the
ground of fraud or misrepresentation of one of the parties
thereto has the right of lien or retention of surplus of the
partnership property, or to be subrogated to the rights of the
partnership creditors whom he has paid, or to be indemnified
by the person guilty of fraud or misrepresentation against all
debts and liabilities of the partnership. (Art. 1838, CC)
Art. 1838. Where a partnership contract is rescinded on the
ground of the fraud or misrepresentation of one of the parties
thereto, the party entitled to rescind is, without prejudice to any
other right, entitled:
(1) To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership liabilities to
third persons for any sum of money paid by him for the purchase
of an interest in the partnership and for any capital or advances
contributed by him;
(2) To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership for any
payments made by him in respect of the partnership liabilities;
and
(3) To be indemnified by the person guilty of the fraud or making
the representation against all debts and liabilities of the
partnership.
Note:
 A share in a partnership can be returned only after the
completion of the latter's dissolution, liquidation and
winding up of the business. (Villareal vs. Ramirez, G.R. No.
144214, July 14, 2003)
8|Page
 Manner of Winding Up (Art. 1839, CC)
A. The assets of the partnership are:
a) The partnership property; and
b) The contributions of the partners necessary for the
C.
payment of liabilities
• The assets shall be applied in this particular order.
B. Order of Preference of Liabilities of the Partnership:
a) Those owing to creditors other than partners
b) Those owing to partners other than for capital
and profits
c) Those owing to partners in respect of capital
d) Those owing to partners in respect of profits
After the exhaustion of the partnership property, the
partners shall contribute pro rata with their own property.

Art. 1839. In settling accounts between the partners after dissolution,

the following rules shall be observed, subject to any agreement to the
contrary:

(1) The assets of the partnership are:

(a) The partnership property,

(b) The contributions of the partners necessary for the payment of

all the liabilities specified in No. 2.

(2) The liabilities of the partnership shall rank in order of payment, as

follows:

(a) Those owing to creditors other than partners,

(b) Those owing to partners other than for capital and profits,

(c) Those owing to partners in respect of capital,

(d) Those owing to partners in respect of profits.

(3) The assets shall be applied in the order of their declaration in No.
1 of this article to the satisfaction of the liabilities.

(4) The partners shall contribute, as provided by article 1797, the

amount necessary to satisfy the liabilities.

(5) An assignee for the benefit of creditors or any person appointed

by the court shall have the right to enforce the contributions specified
in the preceding number.

(6) Any partner or his legal representative shall have the right to
enforce the contributions specified in No. 4, to the extent of the
amount which he has paid in excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for

the contributions specified in No. 4.

(8) When partnership property and the individual properties of the

partners are in possession of a court for distribution, partnership
creditors shall have priority on partnership property and separate
creditors on individual property, saving the rights of lien or secured
creditors.

(9) Where a partner has become insolvent or his estate is insolvent,

the claims against his separate property shall rank in the following
order:

(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;

(c) Those owing to partners by way of contribution.

9|Page
BUSINESS LAW
AND REGULATION Lecture/ Second Semester
TOPIC 5: REVISED CORPORATION CODE OF THE PHILIPPINES (RA 11232)
I. DEFINITION OF CORPORATION
• A Corporation is an artificial being created by operation of
.
law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incident to its
existence. [Sec. 2, unless otherwise indicated, all sections
cited herein are from RA 11232, or the Revised Corporation
Code
ATTRIBUTES OF A CORPORATION
A. An Artificial Being
• A corporation is a juridical entity that exists apart from its
stockholders. It has its own set of rights and obligations as
provided for by law. Technically, it has no physical existence
although it occupies a principal place of business.
• Being only a juridical entity, the physical acts of the corporation,
like the signing of documents, can be performed only by natural
persons duly authorized for such purpose by corporate by-laws
or by a special act of the Board of Directors (BOD). [Swedish
Match Philippines, Inc. v. Treasurer of the City of Manila, G.R.
No. 181277 (2013)]
• A corporation, upon coming into existence, is invested by law
with a personality separate and distinct from those persons
composing it as well as from any other legal entity to which it
may be related. [Yutivo Sons Hardware v. CTA, G.R. No. L-13203
(1961)]
B. Created by Operation of Law
• Mere consent of the parties to form a corporation is not
sufficient. The State must give its consent either through a
special law (in case of government corporations) or a general
law (i.e., Revised Corporation Code in case of private
corporations).
• A corporation comes into existence upon the issuance of the
certificate of incorporation. Then, and only then, will it
acquire juridical personality to sue and be sued, enter into
contracts, hold or convey property or perform any legal act in
its own name.
FINALS
PROFESSOR: Torre W. Dalilis
C. Has the Right of Succession
• Since one of the attributes of a corporation is that it is an
artificial being with a distinct personality, the corporation’s
existence is unaffected by a change in the composition of
stockholders. Its existence is limited only by the Articles of
Incorporation (AOI), may be subject to Quo Warranto
proceedings (Rule 66 of the Rules of Court), and may be
shortened by dissolution (Title XIV).
D. Has the Powers, Attributes and Properties
Expressly Authorized by Law or Incident to its
Existence
• A corporation has no power except those expressly
conferred on it by the Revised Corporation Code and by its
articles of incorporation, those which may be incidental to
such conferred powers, those that are implied from its
existence, and those reasonably necessary to accomplish
its purposes. In turn, a corporation exercises said powers
through its BOD and/or its duly authorized officers and
agents. [Monfort Hermanos Agricultural Dev. Corp. v.
Monfort III, G.R. No. 152542 (2004)]Being a creature of the
law, its powers are limited by:
• The law (see Sec. 35 for general powers and Secs.
36 to 43 for specific powers);
• By the express terms of its AOI as well those
essential or necessary to carry out its purpose or
purposes under such Articles (see Sec. 35, last
par.); and
• By those necessary or incidental to its powers so
conferred (see Sec. 44)
II. CLASSES OF CORPORATIONS
A. Stock Corporation
• Stock corporations – corporations 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 shares held. [Sec. 3] It is
organized for profit.
• The governing body of a stock corporation is usually the
BOD (except in certain instances, e.g. one person
corporations, close corporations).
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Note:
A corporation is deemed to have the power to declare OTHER DISTINCTIONS
dividends. So long as the corporation has capital stock
and there is no prohibition in its Articles of
Incorporation or in its by-laws for it to declare
dividends, such corporation is a stock corporation. Stock Non-Stock
[Sec. 42] Cumulative voting in election of Cumulative voting in election
directors is provided by law of trustees is only available if
[Sec. 23] provided in AOI or BL [Sec. 23]
B. Non-Stock Corporation Maximum of 15 directors May be more than 15 [Sec. 91]
except in merger or
All other corporations are non-stock corporations. [Sec. 3] consolidation of banks [Sec.
13]
Non-stock corporations – One where no part of the income Term of director is 1 year [Sec. Maximum term of a trustee is 3
is distributable as dividends to its members, trustees, or 22] years [Sec. 91]
officers, subject to the provisions of the Code on
dissolution. [Sec. 86] It is not organized for profit. Stockholders’ meetings must May be anywhere within
be in the principal office as set Philippine territory as provided
Its governing body is usually the Board of Trustees (BoT). forth in the AOI or, if not by BL. [Sec. 92]
practicable, in the city or
However, non-stock corporations may, through their
municipality where the principal
articles of incorporation or their by-laws, designate their
office is located [Sec. 50]
governing boards by any name other than as board of
trustees. [Sec. 174] One class of shares must Right to vote of members of
always have complete voting any class may be denied in the
rights [Sec. 6,] AOI or BL [Sec. 88]
Stock Non-Stock
There is free transfer of shares. Transfer of membership
Have capital divided into No part of income is Membership is not personal to cannot be made without
[Sec. 3,]stock shares distributable as dividends the stockholder. consent of the corporation.
to its members or [Sec. 89] Membership is
trustees [Sec. 86] Note: Subject to provisions on personal.
close corporations.
Are authorized to Any profit may obtain as
distribute to the holders an incident to its May always vote by proxy [Sec. Vote by proxy can be denied in
of such shares, dividends operations shall, when 57] the AOI or BL [Sec. 88]
or allotments of surplus necessary or proper, be
Upon transfer of share, seller is Membership may be
profits on the basis of the used for the furtherance
no longer part of corporation. terminated according to
shares held [Sec. 3] of its purpose or
Transfer may only be subject to causes provided in the BL.
purposes [Sec. 86,]
restrictions noted down in AOI, [Sec. 90]
Composed of Composed of members BL, and stock certificate, and
stockholders must not be more onerous than
the right of first refusal. [Sec.
It is for profit It is not for profit [Sec.87] 97]

Note: Transfer restrictions

imposed in a Shareholders
Agreement may be binding
upon the stock holders who are
parties thereto, since they are
chargeable with notice, unless
palpably unreasonable under
the circumstances (SEC
Opinion, [June 8, 1995])
Residual assets are to be Generally, members are not
distributed to the stockholders allowed to participate in
upon dissolution, after payment distribution of assets. Assets
of creditors. Dissolution is are to be distributed to such
effected through the methods persons, societies,
provided in the Code. [Sec. organizations or corporations
133] as may be specified in a plan
of distribution. [Sec. 93]

11 | P a g e
 C. One Person Corporations
One Person Corporations - A corporation with a single
stockholder. Only a natural person, trust, or an estate
may form a One Person Corporation.
Banks and quasi-banks, pre-need, trust, insurance,
public and publicly-listed companies, and non-
chartered government owned and controlled
corporations may not incorporate as One Person
Corporations.
A natural person who is licensed to exercise a
profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under special
laws. [Sec. 116,]
D. Other Corporations
1. Public Corporation
Public corporation – one formed or organized for the
government of a portion of the state. Its purpose is for the
general good and welfare. [Sec. 3, Act 1456]
2. Private Corporation
Private corporation – One formed for some private
purpose, benefit, aim or end [Sec. 3, Act 1456]; it may be
either stock or non-stock, government-owned or
controlled or quasi-public.
The test to determine whether GOCC or private
corporation: if a corporation is created by its own charter
for the exercise of a public function, then GOCC; if by
incorporation under the general corporation law, then
private corporation. [Baluyot v. Holganza, G.R. No. 136374
(2000)]
3. Close Corporation
Close corporation – One whose articles of incorporation
provide that:
1. All issued stock, exclusive of treasury shares,
shall be held by persons not exceeding 20;
2. All issued stock shall be subject to one or more
specified restrictions on transfer; and
3. The corporation shall not list in any stock
exchange or make any public offering of any of
its stock of any class.
Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least 2/3 of its voting
stock or voting rights is owned or controlled by another
corporation which is not a close corporation. [Sec. 95]
Any corporation may be incorporated as a close
incorporation, except:
1. Mining or oil companies;
2. Stock exchanges;
3. Banks;
4. Insurance companies;
5. Public utilities;
6. Educational institutions; and
7. Corporations declared to be vested with public
interest. [Sec. 95]
4. Educational Corporation
Educational corporation – One organized for educational purposes.
[Sec. 105]
If organized as a non-stock corporation
Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen (15).
Provided, however, that the number of trustees shall be in multiples
of five (5). They shall classify themselves in such a way that the term
of 1/5 of them expires every year. [Sec. 106]
If organized as a stock corporation
For institutions organized as stock corporations, the number and
term of directors shall be governed by the provisions on stock
corporations. [Sec. 106]
5. Religious Corporation
Classes of Religious Organization
(i) Corporation Sole – incorporated by one person; and
(ii) Religious Societies – incorporated by more than one person. [Sec.
107]
Corporation sole – is one formed for the purpose of administering
and managing, as trustee, the affairs, property and temporalities of
any religious denomination, sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding elder of such religious
denomination, sect or church. [Sec. 108]
Religious Society (Corporation Aggregate)
Corporation aggregate – A religious corporation incorporated by
more than one person.
6. Eleemosynary Corporation
Eleemosynary corporation– One organized for a charitable purpose.
7. Domestic Corporation
Domestic corporation – One formed, organized, or existing under the
laws of the Philippines.
8. Foreign Corporation
Foreign corporation – One formed, organized or existing under any
laws other than those of the Philippines and whose law allows
Filipino citizens and corporations to do business in its own country
and state. [Sec. 140]
9. Corporation Created By Special Laws Or Charter
Corporation created by special laws or charter - Corporations which
are governed primarily by the provisions of the special law or charter
creating them. Corporation Code has suppletory application. [Sec. 4]
10. Subsidiary Corporation
Subsidiary corporation – One in which control, in the form of
ownership of majority of its shares, is in another corporation (the
parent corporation).
11. Parent Corporation
Parent corporation – Its control lies in its power, directly or
indirectly, to elect the subsidiary’s directors thus controlling its
management policies.
Holding company – a parent company which has no other business
aside from the holding of the shares of its subsidiaries, which it
controls.
Investment company – a company which holds shares in other
corporations not for the purpose of controlling them but merely to
invest therein.
12 | P a g e
12. Corporation De Jure
Corporation de jure – A corporation organized in accordance
with the requirements of the law. If the Commission finds
that the submitted documents and information are fully
complaint with the regulations of the RCC, other laws, rules
and regulations, the Commission shall issue the certificate of
incorporation. [Sec. 18]
13. De facto Corporation
De facto corporation – A corporation where there exists a
flaw in its incorporation.
General Rule: The defect in the juridical personality of a
corporation cannot be inquired into by private individuals,
much less used as a defense to avoid claims.
Exception: In quo warranto proceedings brought on behalf of
the State where the main action is to question the validity or
existence of such juridical personality. [Villanueva]
14. Corporation By Estoppel
Corporation by estoppel – Where a group of persons
misrepresent themselves as a corporation, they are
subsequently estopped from claiming lack of corporate life in
order to avoid liability. Also, a third party who had dealt with
an unincorporated association as a corporation is precluded
from denying its corporate existence on a suit brought by the
alleged corporation on the contract.
EFFECTS OF CORPORATION BY ESTOPPEL
As to liability
All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or
arising as a result thereof. [Sec. 20]
As to the defense of lack of corporate personality
When such ostensible corporation is sued, it shall not be
allowed to use its lack of corporate personality as a
defense. [Sec. 20]
As to third party
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. [Sec. 20]
III. NATIONALITY OF CORPORATIONS
The nationality of a corporation serves as a legal basis for
subjecting an 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. [SEC OGC Opinion No. 22-07]
Place of Incorporation Test
Under the incorporation theory, a corporation is a national
of the country under whose laws it is organized or
incorporated.
Domestic corporations – organized and governed under
and by Philippine laws.
Foreign corporations – one formed, organized or existing
under laws other than those of the Philippines’ and whose
laws allow Filipino citizens and corporations to do business
in its own country or State. It shall have the right to
transact business in the Philippines after obtaining a
license for that purpose. [Sec. 140]
While the incorporation test serves as the primary test
under Philippine jurisdiction, other tests such as the
Control Test and the Grandfather Rule must also be
applied in determining compliance with the provisions of
the Constitution and of other laws on nationality
requirements. [SEC OGC Opinion No. 11-42]
A. Control Test
The nationality of the private corporation is determined by
the citizenship of the controlling stockholders.
Under the “liberal” Control Test, there is no need to
further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a
corporation which is at least 60% Filipino-owned is
considered as Filipino. [Narra Nickel Mining &
Development Corp. v. Redmont Consolidated Mines Corp.,
G.R. No. 195580, April 21, 2014]
The "control test" is still the prevailing mode of
determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. XII of the 1987
Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of
the Philippines. When in the mind of the Court, there is
doubt, based on the attendant facts and circumstances of
the case, in the 60-40 Filipino equity ownership in the
corporation, then it may apply the "grandfather rule."
[Narra Nickel Mining & Development Corp. v. Redmont
Consolidated Mines Corp., G.R. No. 195580, April 21, 2014]
B. Grandfather Rule
The Grandfather Rule is a method of determining the
nationality of a corporation, which is owned in part by
another corporation, by breaking down the equity
structure of the shareholder corporation. [de Leon]
The Grandfather Rule is applied if doubt exists as to the
locus of the “beneficial ownership” and “control” of a
corporation, even if the 60-40 Filipino to foreign equity
ratio is apparentlymet by the subject or investee
corporation. [Narra Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No. 195580, April
21, 2014]
It is only when there is doubt, based on the Control Test,
that the Grandfather Rule is applied.
13 | P a g e
 IV. CORPORATE JURIDICAL PERSONALITY
Corporate existence and juridical personality commences
from the date the SEC issues a certificate of incorporation
under its official seal. [Sec. 18]
Persons desiring to incorporate must submit to the SEC:
1.The intended corporate name for verification, and
2.The articles of incorporation and bylaws. [Sec. 18]
Note: One person corporations are not required to submit
and file bylaws. [Sec. 119]
A. Doctrine of Separate Juridical Personality
Concept
A corporation has a personality separate and distinct from
that of its stockholders and members and is not affected
by the personal rights, obligations, and transactions of the
latter.
General Rule: Due the corporation’s separate juridical
personality, a stockholder may not be made to answer for
acts or liabilities of said corporation, and vice-versa. [Land
Bank of the Philippines v. CA, G.R. No. 127181 (2001)]
Exceptions:The corporation’s separate juridical
personality cannot be invoked to escape liability when:
1.This legal fiction is used for ends subversive to the
policy and purpose behind its creation or which
could not have been intended by law to which it
owes its being (i.e. to defeat public convenience,
justify wrong, protect fraud, defend crime, confuse
legitimate legal or judicial issues, used as a vehicle
for the evasion of an existing obligation, perpetrate
deception or otherwise circumvent the law).
2.The corporate entity is a mere alter ego, adjunct, or
business conduit for the sole benefit of the
stockholders or of another corporate entity. [Land
Bank of the Philippines v. CA, G.R. No. 127181
(2001)]
Property
Corporate property is owned by the corporation as a
juridical person, and the stockholders have no claim on
corporate property as owners. The latter only have a mere
expectancy or inchoate right to the same upon dissolution
of the corporation and after all corporate creditors have
been paid. Such right is limited only to their equity interest
(doctrine of limited liability).
Liability for Tort and Crime
Being an entity with a separate juridical personality, a
corporation can be held liable for torts committed by its
officers under express direction from the stockholders or
directors, acting as a body. [PNB v. CA G.R. No. L-27155
(1978)]
Recovery of Damages
A corporation, being an artificial person, has no feelings,
emotions nor senses; therefore, it cannot experience
physical suffering and mental anguish, which are bases for
moral damages under Art. 2217 of Civil Code. [Manila
Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018)].
B. Doctrine of Piercing the Corporate Veil
A corporation will be looked upon as a legal entity as a
general rule, and until sufficient reason to the contrary
appears but when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud or
defend crime, the law will regard the corporation as an
association of persons.
Piercing the veil of corporate entity is an equitable remedy
developed to address situations where the separate
corporate personality of a corporation is abused or used
for wrongful purposes. [PNB v. Ritratto Group, G.R. No.
142616 (2001)]
Effect of Piercing the Corporate Veil
The corporation will be considered as a mere association
of persons. Thus, the liability will directly attach to the
stockholders or to the other corporation. [China Banking v.
Dyne-Sem, G.R. No. 149237 (2006)]
For the juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and
convincingly established, and cannot be presumed. [Del
Rosario v. NLRC, G.R. No. 85416 (1990)]
V. CAPITAL STRUCTURE
A. Number and Qualification of Incorporators
Number: Not more than fifteen [Sec. 10]
• The Revised Corporation Code removed the
prescribed minimum number of incorporators.
Previously, the incorporators must be no less
than five except for special corporations.
[Herbosa, 2019]
• A corporation with a single stockholder is
considered a One Person Corporation
Qualifications
1. Any person, natural or juridical, may organize a
corporation [Sec. 10]
a. Juridical entities (partnership, association or
corporation, singly or jointly with others) are
now permitted to be incorporators, and not
merely initial subscribers under theOld Code.
b. The following are NOT allowed to organize as a
corporation, except as provided under special
laws:
i. Natural persons who are licensed to practice
a profession
ii. Partnerships or associations organized for
the purpose of practicing a profession
2. Natural persons must be of legal age
3. Each incorporator must subscribe to at least one
share of the capital stock
Note: The RCC removed the Philippine residency
requirement for the majority of the incorporators.
14 | P a g e
B. Subscription Requirements
No minimum capital requirement
Under the Old Corporation Code (CC), at least 25% of the
authorized capital stock as stated in the AOI must be
subscribed at the time of incorporation, and at least 25%
of the total subscription must be paid upon subscription
[Sec 13, CC].
Section 13 has been removed in the Revised Corporation
Code, thus removing such minimum capital requirements
[Sec 12]. However, the increase in capital remains subject
to the 25% subscription and 25% payment of subscription
rule [Sec. 37].
Subscription Agreements
Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed
shall be deemed a subscription contract. This is
notwithstanding the fact that the parties may refer to it as
a purchase or some other contract. [Sec. 59]
Nature of Subscription Contracts
A subscription contract is indivisible. Consequently, where
stocks were subscribed and part of the subscription
contract price was not paid, the whole subscription shall
be considered delinquent, and not only the shares which
correspond to the amount not paid.
Nevertheless, holders of subscribed shares not fully paid,
which are not delinquent, shall have all the rights of a
stockholder. [Sec. 71]
• SEC has opined that the entire subscription,
although not yet fully paid, may be transferred to
a single transferee, who as a result of the transfer
must assume the unpaid balance. [SEC Opinion,
9 Oct. 1995]
• It is necessary, however, to secure the consent of
the corporation because such transfer
contemplates a novation which under Art. 1293
(NCC) cannot be made without consent of the
creditor.
C. Corporate Term
Perpetual existence
General Rule: The Revised Corporation Code provides
that a corporation shall have perpetual existence. The
AOIs of existing corporations shall be deemed amended
to reflect their perpetual term.
Exception: The AOIs of corporations created under the
effectivity of this Code provide for a specific period. [Sec
11]
Extending or shortening the corporate term
General Rule: If a corporation wishes to extend its
corporate term, it may amend its AOI at least 3 years prior
to the expiration of its term. Previously, such change
should be made at least 5 years prior to the expiration.
[Sec. 11]
Requisites: A private corporation may extend or shorten its
term as stated in the articles of incorporation when –
1. Approved by a majority vote of the board of
directors or trustees, and
2. 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
Note: In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal [Sec. 36]
Revival of Corporate Existence
Corporations with an expired term upon the effectivity of the
RCC, may apply with the SEC for revival of its corporate
existence. Upon approval by the SEC, it will then issue a
certificate of revival giving it perpetual existence, with all its
rights and privileges, and subject to all its duties, debts and
liabilities prior to revival, unless it requests for a limited term.
[Sec. 11]
This benefit does not extend to corporations whose
dissolution was decreed by the SEC or the courts.
D. Classification of shares
Nature of Shares of Stock
Shares of stock are units into which the capital stock is divided.
A share of stock represents interest of the holder thereof to
participate in the management of the corporation, to share
proportionally in the profits of the business and, upon
liquidation, to obtain an aliquot part of corporate assets after
all corporate debts have been paid. [Campos]
Classes of Shares of Stock
The shares in stock corporations may be divided into classes
or series of shares, or both. The rights, privileges, or
restrictions, and the stated par value of the class or series of
shares must be indicated in the Articles of Incorporation. [Sec.
6]
General Rule: No share may be deprived of voting rights [Sec.
6]
Exceptions
• Preferred non-voting shares
• Redeemable shares,
• Provided by the Code (e.g. Treasury shares)
There shall always be a class/series of shares which have
COMPLETE VOTING RIGHTS. [Sec. 6]
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 stated in the certificate
of stock. [Sec. 6]
15 | P a g e
Classification of shares:
• Preferred Shares vs. Common Shares
• Scope of Voting Rights Subject to Classification
• Founders’ Shares
• Redeemable Shares
• Treasury Shares
• Par value shares vs. No-par value shares
i. Preferred Shares vs. Common Shares
PREFERRED SHARES
Stocks which are given, by the issuing corporation:
1. Preference in dividends
2. Preference in the distribution of assets of the
corporation in case of liquidation, or
3. Preference in both dividends and distribution, or
4. Such other preferences as may be stated in the
Articles of Incorporation which do not violate the
Corporation Code.
Note: Preferred shares may be issued only with a stated par
value. [Sec. 6]
Unless the right to vote is clearly withheld, a preferred
stockholder would have such right as it is an incident to stock
ownership. The Board of Directors may fix the terms and
conditions only when so authorized by the Articles of
Incorporation and such terms and conditions shall be
effective upon filing a certificate thereof with the SEC. [Sec.
6]
Kinds of Preferred Shares
1. Preferred Shares as to Assets vs. Preferred Shares
as to Dividends
2. Cumulative vs. Non-Cumulative
3. Participating vs. Non-participating
Preferred Shares as to Assets vs. Preferred Shares as to
Dividends
a. Preferred shares as to assets –gives the holder
preference in the distribution of the assets of the
corporation in case of liquidation.
b.Preferred shares as to dividends - entitled to receive
dividends on said share to the extent agreed upon
before any dividends at all are paid to the holders of
common stock.
Cumulative vs. Non-cumulative
In the absence of any express stipulation, preferred stocks
are deemed cumulative.
1. Cumulative - regardless of lack of profits in any given
year, and lack of declaration of dividends, the arrears
for such year have to be paid to the preferred stocks in
a subsequent year (once profits are made) before any
dividends can be paid to the common stocks.
2. Non-Cumulative – entitlement to receipt of dividends
essentially depends on declaration of such; types:
(i) Discretionary – right to dividends in a particular
year depends on the discretion of the board, even
if the corporation has profits.
(ii) Mandatory – a positive duty is imposed to declare
preferred dividends every year that profits are
earned.
(iii) Earned cumulative or dividend credit – board has
discretion not to declare dividends, even if there were
profits in a certain year; however, once the board decides
that dividends will be declared, the preferred
stockholders have a right to arrears in dividends for the
years when there were profits but no dividend was
declared.
Participating and Non-participating
Unless otherwise provided, preferred stocks are non-
participating.
a.Participating - those which, after getting their fixed dividend
preference, share with common stocks the rest of the
dividends.
b.Non-participating - those which, after getting their fixed
dividend preference, have no more right to share in the
remaining dividends with the common stocks.
COMMON SHARES
A common stock represents the residual ownership interest in
the corporation. It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges and entitles
the shareholder to a pro rata division of profits.” [CIR v. CA,
301 SCRA 152 (1999)]
The owners thereof are entitled to management (via exclusive
right to vote) of the corporation and to equal pro-rata division
of profits.
i. Scope of Voting Rights Subject to Classification
Only preferred and redeemable shares may be deprived of the
right to vote [Sec. 6], except as otherwise provided in the
Revised Corporation Code.
General Rule: Non-Voting Shares are not entitled to vote. The
law only authorizes the denial of voting rights in the case of
redeemable shares and preferred shares, provided that there
shall always be a class or series of shares which have complete
voting rights. [Sec. 6]
Exception: These redeemable and preferred shares, when such
voting rights are denied, shall nevertheless be entitled to vote
on the following fundamental matters:
1. Amendment of the Articles of Incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, other disposition of all or
substantially all of the corporate property
4. Incurring, creating or increasing bonded
indebtedness
5. Increase or decrease of capital stock
6. Merger and consolidation
7. Investment of corporate funds in another
corporation or business
8. Dissolution of the corporation
9. Founders’ Shares
Founders’ Shares are shares classified as such in the AOI,
which are given certain rights and privileges not enjoyed by the
owners of other stocks. These may be given special preference
in voting rights and dividend payments.
Where exclusive right to vote and be voted for in the election
of directors is granted, such right must be for a limited period
not to exceed 5 years, subject to approval by SEC The 5-year
period shall commence from date of approval by SEC
16 | P a g e
Founder’s shares given the exclusive right to vote and be voted
for are not allowed to exercise that right in violation of the
Anti-Dummy Law and the Foreign Investment Act. [Sec. 7]
ii. Redeemable Shares
Redeemable Shares 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.
The RCC made the redemption subject to the rules and
regulations that may be issued by SEC, in addition to what may
be stipulated in the AOI and Certificate of Stock. [Sec. 8]
Limitations
1. Redeemable shares may be issued only when
expressly provided for in the AOI [Sec. 8].
2. The terms and conditions affecting said shares must
be stated both in the AOI and in the certificate of
stock [Sec. 8].
3. Redeemable shares may be deprived of voting rights
in the AOI. [Sec. 6]
4. The corporation is required to maintain a sinking
fund to answer for redemption price if the
corporation is required to redeem. [SEC-OGC
Opinion No. 07-03]
5. The redeemable shares are deemed retired upon
redemption, unless otherwise provided in the AOI
(i.e., if the AOI allows for reissuance of such shares).
[SEC Rules Governing Redeemable and Treasury
Shares, 26 April 1982]
6. Unrestricted retained earnings are NOT necessary
before shares can be redeemed, but there must be
sufficient assets to pay the creditors and to answer
for operations. [Republic Planters Banks v. Agana,
G.R. No. 51765 (1997)]
7. Redemption cannot be made if such redemption will
result in insolvency or inability of the corporation to
meet its obligations. [SEC Opinion, 24 Aug 1987]
Kinds of redeemable shares
1. Compulsory - the corporation is requiredto redeem
the shares.
2. Optional - the corporation is not mandated to
redeem the shares.
iii. Treasury Shares
Treasury Shares are shares which have been issued and fully
paid for, but subsequently re-acquired by the issuing
corporation by purchase, redemption, donation or through
some other lawful means. Such shares may again be disposed
of for a reasonable price fixed by the BOD. [Sec. 9]
Pre-emptive right of stockholders in close corporations shall
extend to reissuance of treasury shares, unless otherwise
provided in the AOI. [Sec. 101]
Delinquent stocks, which are stocks that have not been fully
paid, may become treasury stocks upon bid of the corporation
in absence of other bidders. [Sec.67]
Limitations on treasury shares
1. They may be re-issued or sold again as long as it is
for a reasonable price fixed by the BOD.
2. Cannot participate in dividends.
3. It has no voting right as long as such shares remain
in the Treasury. [Sec. 56]
4. It cannot be represented during stockholder’s
meetings.
5. The amount of URE equivalent to the cost of treasury
shares being held shall be restricted from being
declared and issued as dividends
Note: When treasury shares are sold below its par or issued
value, there can be no watering of stock because such
watering of stock contemplates an original issuance of shares.
For both stock corporations and close corporations, the pre-
emptive right of stockholders extends to the re-issuance or
sale treasury shares, unless the articles of incorporation
provide otherwise. [Sec. 38 and 101; SEC Opinion, 14 January
1993]
Treasury shares distributed by way of dividends
Treasury shares may also be distributed as property dividends.
In order for treasury shares to be distributed as property
dividends, the amount of the retained earnings previously
used to support their acquisition must nothave been impaired
by losses. Further, such retained earnings must not be used to
justify the distribution of treasury shares as property
dividends. They may only be distributed out of the other
earnings of the corporation. [SEC-OGC Opinion No. 12-06,
dated April 20, 2012]
i. Par Value Shares vs. No-Par Value Shares
Par value shares
These are shares with a stated or fixed value set out in the
Articles of Incorporation, which remains the same regardless
of the profitability of the corporation. This gives rise to
financial stability, and is the reason why banks, trust
corporations, insurance companies and building and loan
associations must always be organized with par value shares.
Par value is minimum issue price of such share in the Articles
of Incorporation which must be stated in the certificate. [Sec
61]
No par value shares
These are shares without a stated value in the AOI. They are
without nominal value. They may be issued for the amount
stipulated in the AOI, or fixed by the Board. [Sec 61]
Limitations on no par value shares [Sec. 6]
1. Cannot have an issue price of less than P5.00 per
share
2. Once issued, they shall be deemed fully paid and
non-assessable, and the holders of such shares shall
not be liable to the corporation or to its creditors in
respect thereto
3. Entire consideration received by the corporation
shall be treated as capital and shall not be available
for distribution as dividends
17 | P a g e
 4. The AOI must state the fact that the corporation
issues no-par shares and the number of shares
5. Cannot be issued as preferred stock
6. Cannot be issued by banks, insurance companies,
public utilities and building and loan associations
7. Cannot be issued by all corporations authorized to
obtain or access funds from the “public”
Note: A new addition in the Revised Corporation Code is the
prohibition on the issuance of no-par shares being imposed on
all corporations authorized to obtain or access funds from the
“public.” This prohibition is not anymore limited to banks,
insurance companies, public utilities and building and loan
associations.

18 | P a g e
 Topic No. 6: Revised Corporation Code of the Philippines (RA 11232)
I. INCORPORATION AND ORGANIZATION OF
CORPORATIONS
A. Promoter
Promoters – persons who, acting alone or with others, take
initiative in founding and organizing the business or enterprise
of the issuer and receives consideration therefor. [Sec. 3.10,
RA 8799, The Securities Regulation Code]
Promoter’s Contracts
Promoter’s contracts are those types of contracts entered into
in behalf of a corporation which is in the process of
organization and incorporation, and such fact is acknowledged
as an essential ingredient in the process of perfection.
[Villanueva]
ii. Liability of Promoter
General rule: the promoter binds himself personally and
assumes the responsibility of looking to the proposed
corporation for reimbursement.
• The promoter binds himself to ensure that the
corporation, once formed, will ratify the contract
entered into in its name.
• Otherwise, he becomes personally liable for such
contract in the event that corporation does not
ratify.
Exceptions:
1. Express or implied agreement to the contrary
2. Novation, not merely adoption or ratification, of the
contract
i. Liability of Corporation for Promoter’s Acts
General rule: A corporation is NOT bound by the contract. A
corporation, until organized, has no life and no legal existence.
It could not have had an agent [the promoter] who could
legally bind it. [Cagayan Fishing Development Co., Inc. v.
Sandiko, G.R. No. L-43350 (1937)]
Exceptions: A corporation may be bound by the contract if it
makes the contract its own by:
• Adoption or ratification of the ENTIRE contract after
incorporation.
a. Novation or the intent to novate the original
contract is required to adopt or ratify the pre-
incorporation contract. [Campos]
b.The Court’s ruling in Cagayan Fishing v. Teodoro
Sandiko, that “a corporation should have a full and
complete organization and existence as an entity
before it can enter into any kind of a contract or
transact any business”, is not absolute. One of the
exceptions recognized by American courts is that
“a contract made by the promoters of a
corporation on its behalf may be adopted,
accepted or ratified by the corporation when
organized”. [Rizal Light v. PSC and Morong Electric
(1968)]
• Acceptance of benefits under the contract with
knowledge of the terms thereof.
• Performance of its obligation under the contract.
The contract must of course be one which is within the
powers of the corporation to enter. [Builders’ Duntile Co. v.
Dunn Mfg. Co. (1929)] The corporation adopts the entire
contract, not only parts which are beneficial. [Campos]
B. Subscription Contract
A subscription contract is any contract for the acquisition of
unissued stock in an existing corporation, or corporation still
to be formed.
C. Pre-incorporation Subscription Agreements
A pre-incorporation subscription agreement is a type of
promoter’s contract for the acquisition of unissued stock in a
corporation still to be formed.
Subscription for shares of stock of a corporation still to be
formed shall be irrevocable for a period of at least six (6)
months from the date of subscription, UNLESS:
1. All of the other subscribers consent to the
revocation; or
2. The corporation fails to incorporate within the
same period or within a longer period stipulated
in the contract of subscription.
No pre-incorporation subscription may be revoked after the
articles of incorporation is submitted to the Commission. [Sec.
60]
D. Consideration for Stocks
Stocks shall not be issued for a consideration less than the par
or issued price thereof. Consideration for the issuance of stock
may be:
a. Actual cash paid to the corporation;
b. Property, tangible or intangible, which must be:
i. Actually received by the corporation; and
ii. Necessary or convenient for its use and
lawful purposes
iii. At a fair valuation equal to the par or
issued value of the stock issued;
c. Labor performed for or services actually rendered to
the corporation;
d. Previously incurred indebtedness of the
corporation;
e. Amounts transferred from unrestricted retained
earnings to stated capital;
f. Outstanding shares exchanged for stocks in the
event of reclassification or conversion;
g. Shares of stock in another corporation; and/or
h. Other generally accepted form of consideration.
[Sec. 61]
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Invalid Consideration F. Corporate Name; Limitations on Use of Corporate Name

The following cannot be exchanged for the issuance of shares The name of a corporation is essential not only for its existence
of stock: [Sec. 61] as a juridical person, but also in the manner of dealing with it,
and it cannot be changed except in the manner provided for
a. Promissory notes by law. [Villanueva]
b. Future service
Criteria for Allowable Corporate Names
Valuation of Consideration
Under present law, no corporate name shall be
Where the consideration is other than actual cash, or consists allowed by the Commission if it is:
of intangible property, the valuation thereof shall initially be a. Not distinguishable from that already reserved
determined by the stockholders or the board of directors, or registered for the use of another
subject to the approval of the Commission. [Sec. 61] corporation, or
b. Already protected by law, or c. Used contrary
to existing law, rules and regulations. [Sec. 17]
E. Articles of Incorporation (AOI)
A name is not distinguishable even if it contains one or more
The AOI is a basic contract document, defining the charter of of the following:
the corporation, and serves as the basis by which to judge
whether it exists for legal purposes. The charter of the a. The word “corporation”, “company”,
corporation is a contract between 3 parties: “incorporated”, “limited”, “limited liability”, or an
abbreviation of one of such words; and
a. between the State and the corporation; b. Punctuations, articles, conjunctions, contractions,
b. between the stockholders and the State; prepositions, abbreviations, different tenses,
c. between the corporation and its stockholders. spacing, or number of the same word or phrase.
[Villanueva] [Sec. 17]
d. among the stockholders [Campos]
Note: Instead of being distinguishable, the old criteria under
The AOI must be filed with the SEC for the issuance of the the Sec. 18 of the OLD Corporation Code to determine whether
Certificate of Incorporation. The AOI and its amendments can or not a corporate name should be allowed is whether it is
be filed electronically. [Sec. 13] “identical or deceptively or confusingly similar” to that of any
i. Contents existing corporation or which is “patently deceptive or
patently confusing”.
The Articles of Incorporation must contain:
a. Corporate Name;
b. Purpose Clause; If the SEC determines that a corporation’s name is not allowed,
c. Principal Office; it may:
d. Corporate Term if the corporation has not elected a. Summarily order the corporation to immediately
perpetual existence; cease and desist from using a non-distinguishable
e. Incorporators; name and require it to register a new one,
f. Trustees/Directors; b. Cause the removal of all visible signages, marks,
g. For stock corporations: advertisements, labels, prints and other effects
i. The authorized capital stock, bearing such corporate name. [Sec. 17]
ii. Number of shares into which it is divided,
iii. The par value of each share, Business or trade name which is different from the corporate
iv. Names, nationalities, and residence addresses or partnership name shall be indicated in the articles of
of the original subscribers, incorporation or partnership. A company may have more than
v. Amount subscribed and paid by each on the one business or trade name. [SEC Memorandum Circular No.
subscription, and 13 s. 2019]
vi. A statement that some or all of the shares are Change of Corporate Name
without par value, if applicable
h. For nonstock corporations: A change of corporate name requires the amendment of the
i. Amount of its capital, Articles of Incorporation which must be approved by:
ii. The names, nationalities, and a. Majority vote of the board; and
iii. Residence addresses of the contributors, and b. The vote or written assent of stockholders holding
iv. Amount contributed by each 2/3 of the outstanding capital stock. [Sec. 16]
i. Other matters (including arbitration agreement
pursuant to Sec. 181). [Sec. 13] Unless the Articles of Incorporation provides for a higher
voting requirement.

20 | P a g e
G. Registration, Incorporation, and Commencement of
Corporate Existence
A private corporation organized under the RCC commences its
corporate existence and juridical personality from the date the
SEC issues the certificate of incorporation under its official
seal. [Sec. 18]
1. Thereupon, the incorporators, stockholders or
members, and their successors constitute a body
politic and corporate under the name stated in the
AOI, for the period of time mentioned therein. [Sec.
18]
2. AOIs do not become binding as the charter of the
corporation unless they have been filed and
registered with, and certified by the SEC.
DOCUMENTS TO BE FILED WITH SEC:
a. Articles of Incorporation, and By-Laws (if crafted
prior to incorporation)
b. Certification concerning the amount of capital stock
subscribed and/or paid
ISSUANCE OF CERTIFICATE OF INCORPORATION BY SEC
Effect: Commencement of corporate existence and juridical
personality. [Sec. 18]
Ground for revocation of certificate of incorporation: If, after
due notice and hearing, the Commission finds that any
provision of this Code, rules or regulations, or any of the
Commission’s orders has been violated - Depending on the
extent of participation, nature, effects, frequency and
seriousness of the violation. [Sec. 158]
GROUNDS FOR DISAPPROVING THE ARTICLES OF
INCORPORATION:
a. Does not substantially comply with form prescribed
b. Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
c. The certification concerning the amount of capital
stock subscribed and/or paid is false
d. Required percentage of ownership of Filipino
citizens has not been complied with when required
by existing laws or the Constitution. [Sec. 16]
SEC shall give the incorporators reasonable time to
correct or modify objectionable portions of the articles or
amendment. [Sec. 16]
H. Election of Directors or Trustees
When Elections are Held
The time for holding the annual election of directors of
trustees and the mode or manner of giving notice thereof are
provided in the by-laws. [Sec. 49]
Nomination
General Rule: Each stockholder or member shall have the right
to nominate any director or trustee who possesses all of the
qualifications and none of the disqualifications set forth in this
Code.
Exception: When the exclusive right to nominate directors or
trustees is reserved for holders of founders’ shares under
Section 7 of the RCC. [Sec. 23]
Required Participation
At all elections of directors or trustees, there must be present,
either in person or through a representative authorized to act
by written proxy:
a. Stock Corporations: The owners of majority of the
outstanding capital stock
b. Non-Stock Corporations: A majority of the members
entitled to vote. [Sec. 23]
Voting via Remote Communication/In Absentia
The stockholders or members may also vote through remote
communication or in absentia:
a. By a resolution of the majority of the board of
directors; Provided, That the resolution shall only be
applicable for a particular meeting.
b. Notwithstanding the absence of a provision in the
bylaws of the corporation [SEC Memorandum
Circular No. 6, s. 20]
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. [Sec.
23]
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.
Voting 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
–
i. 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
ii. ii. No delinquent stock shall be voted. [Sec. 23]
21 | P a g e
Nominees for directors receiving the highest number of votes
shall be declared elected. They shall perform their duties as
prescribed by law, rules of good corporate governance, and
bylaws of the corporation. [Sec. 23]
Voting in Non-Stock Corporations
General Rule: 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.
Exception: Unless otherwise provided in the articles of
incorporation or in the bylaws. [Sec. 23]
Nominees for trustees receiving the highest number of votes
shall be declared elected. They shall perform their duties as
prescribed by law, rules of good corporate governance, and
bylaws of the corporation. [Sec. 23]
Report to SEC
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 elected trustees’ and officers’:
a. Names
b. Nationalities
c. Shareholdings, and
d. Residence addresses [Sec. 25]
When No Election is Held
The meeting may be adjourned if:
(1) If no election is held; or
(2) 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.
a. 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.
(1) Notwithstanding any provision of the
articles of incorporation or bylaws to the
contrary.
Election of Officers
Immediately after the election of directors, the directors must
formally organize by electing the corporate officers. They are
tasked to carry out the policies laid down by the Board, the AOI
and the by- laws. [Sec. 24]
Who are the Corporate Officers
a. President – must be a director;
b. Treasurer – may or may not be a director; must be a
resident
c. Secretary – need not be a director unless required
by the by-laws; must be a citizen and resident of the
Philippines; and
d. Other officers as may be provided in the by-laws.
e. Compliance officer – only for corporations vested
with public interest. [Sec. 24]
Note: Any 2 or more positions may be held concurrently by the
same person, EXCEPT that no one shall act as president and
secretary or as president and treasurer at the same time,
unless otherwise allowed in the Code. [Sec 24]
The number of officers is not limited to those three
enumerated in Sec. 24. A corporation may have such other
officers as may be provided for by its by-laws. [Garcia v.
Eastern Telecommunications Philippines, Inc., G.R. No. 173115
(2009)].
Qualifications of Corporate Officers

Report to SEC
After such adjournment, 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. [Sec.
25]
The report shall specify a new date for the election, which shall
not be later than sixty (60) days from the scheduled date.
SEC Order to Hold Election
If no new date has been designated, or if the rescheduled
election is likewise not held:
b. The Commission may summarily order that an
election be held.
(1) Upon the application of a stockholder,
member, director or trustee; and
(2) After verification of the unjustified non- Additional qualifications of officers may be provided for in the
holding of the election by-laws. [Sec. 46(f)]
c. The Commission shall have the power to issue such
orders as may be appropriate, including orders I. Adoption of By-Laws
directing the issuance of a notice stating the:
By-laws are regulations, ordinances, rules or laws adopted by
(1) Time and place of the election,
an association or corporation for its internal governance,
(2) Designated presiding officer, and
including rules for routine matters such as calling meetings.
(3) The record date or dates for the
[SMC v. Mandaue, G.R. No. 152356 (2005)]
determination of stockholders or
members entitled to vote. [Sec. 25]

22 | P a g e
 May be done either:
1. Prior to incorporation - approved and signed by all
the incorporators and submitted to SEC together
with Articles of Incorporation; or
2. After incorporation - The requirement of adoption
of by-laws one (1) month after receipt of the notice
of issuance of certificate of incorporation has been
deleted in the RCC. [Sec. 45]
Nature: It is a product of agreement of the stockholders or
members. [Campos]
Function: It establishes the rules for internal government of
the corporation [Campos]. It also regulates the affairs and
relationship between and among stockholders, BOD and
corporation. [Lopez]
REQUISITES OF VALID BY-LAWS CORPORATIONS
the affirmative vote of the stockholders representing at least
a MAJORITY of the outstanding capital stock, or majority of
members. [Sec. 45]
If filed pre-incorporation: Must be approved and signed by all
incorporators.
Record-Keeping: Must be kept in the principal office of the
corporation, subject to inspection by any director, trustee,
stockholder or member of the corporation in person or by a
representative at reasonable hours on business days. [Sec. 45]
Filing with SEC: A copy of the by-laws 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. [Sec. 45]
No provision of the by-laws can be adopted if it is contrary to
law. Since the provision in question is contrary to law, the fact
that for fifteen years it has not been questioned or challenged
but, on the contrary, appears to have been implemented by
the members of the association cannot forestall a later
challenge to its validity. [Grace Christian High School v. CA, G.R.
No. 108905 (1997)]
c. Contents of By-laws
Matters Usually Found in By-Laws
a. The time, place and manner of calling and conducting regular
or special meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or
special meetings and mode of notifying the stockholders or
members thereof;
c. The required quorum in meetings of stockholders or members
and the manner of voting therein;
d. The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes;
e. The form for proxies of stockholders and members and the
manner of voting them;
f. The directors’ or trustees’ qualifications, duties and
responsibilities, the guidelines for setting the compensation of
directors or trustees and officers, and the maximum number
of other board representations that an independent director
or trustee may have which shall, in no case, be more than the
number prescribed by the Commission;
g. The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
h. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
i. The penalties for violation of the bylaws;
j. In the case of stock corporations, the manner of issuing stock
certificates; and
k. Such other matters as may be necessary for the proper or
convenient transaction of its corporate affairs for the
promotion of good governance and anti-graft and corruption
measures.
l. An arbitration agreement may be provided in the bylaws
pursuant to Section 181 of RCC. [Sec. 46]
Note: In close corporations - restrictions on the right to
transfer shares must appear in both the articles of
incorporation and in the by-laws as well as in the certificate of
stock; otherwise, restriction shall not be binding on any
purchases of good faith. [Sec. 97]
MattersvThat Cannot Be Provided for in the By-laws (must
be in the AOI)
• Classification of shares of stock and preferences
granted to preferred shares
• Provisions on founder’s shares
• Providing for redeemable shares
• Provisions on the purposes of the corporation
• Providing for the corporate term of existence
• Capitalization of stock corporations
• Corporate Name
• Denial of pre-emptive rights [Villanueva]
a. Binding Effects
When Binding: ONLY from date of issuance of SEC of a
certification that the by-laws are not inconsistent with the
Code [Sec. 45] Pending such approval, they cannot bind
stockholders or corporation.
Effect on third parties: Mere internal rules among
stockholders cannot affect or prejudice 3rd persons who deal
with the corporation unless they have knowledge of the same
[China Banking Corp v CA G.R. No. 117604 (1997)].
b. Amendments
Effected by: majority vote of the members of the board and
majority vote of owners of the Outstanding Capital Stock or
members, in a meeting duly called for the purpose. [Sec. 47]
Unless a higher requirement is provided in the by-laws
23 | P a g e
Delegation to BOD of power to amend:
By vote of stockholders representing 2/3 of the Outstanding
Capital Stock or 2/3 of the members. [Sec. 47]
Delegation to BOD may be revoked
Any power delegated to the BOD or trustees to amend or
repeal any by-laws or adopt new by-laws shall be considered
as revoked whenever stockholders owning or representing a
majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular
or special meeting. [Sec. 47]
Filing with SEC
Whenever the bylaws are amended or new bylaws are
adopted, the corporation shall file with the Commission:
1. Such amended or new bylaws; and,
2. If applicable, the stockholders’ or members’ resolution
authorizing the delegation of the power to amend and/or
adopt new bylaws, duly certified under oath by the
corporate secretary and a majority of the directors or
trustees. [Sec. 47]
3. Effectivity of Amended By-Laws
4. The amended or new bylaws shall only be effective upon
the issuance by the Commission of a certification that the
same is in accordance with this Code and other relevant
laws. [Sec. 47]
5. J. Effects of Non-Use of Corporate Charter
6. Failure to Organize
7. If a corporation does not formally organize and commence
its business within five (5) years from the date of its
incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five
(5) year period. [Sec. 21]
8. Continuous Inoperation 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. [Sec. 21]
9. ● A delinquent corporation shall have a period of two (2)
years to resume operations and comply with all
requirements that the Commission shall prescribe.
10. ● Upon compliance by the corporation, the Commission
shall issue an order lifting the delinquent status.
11. ● 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. [Sec. 21]
II. CORPORATE POWERS
A. Capacity [Sec. 35]
General Powers
Every corporation has the power and capacity:
g) To sue and be sued in its corporate name;
h) To have perpetual existence;
- Unless the certificate of incorporation provides
otherwise
i) To adopt and use a corporate seal;
j) To amend its articles of incorporation in accordance
with the provisions of this Code;
k) To adopt bylaws, and to amend or repeal the same in
accordance with this Code;
- Must not contrary to law, morals or public policy
a) 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 In
case of non-stock corporations: To admit members
to the corporation;
b) 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
c) To enter, with natural and juridical persons, into a:
- i. Partnership, (Note: New in the RCC)
- ii. Joint venture, (Note: New in the RCC)
- iii. Merger,
- iv. Consolidation, or
- v. Any other commercial agreement
d) 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;
- Note: Under OLD Corporation Code, both
domestic and foreign corporations were
prohibited from giving donations in aid of any
political party or candidate or for purposes of
partisan political activity.
e) To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers,
and employees; and
f) 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]
A corporation has:
a) Express Powers – such powers as are expressly
granted by law and its articles of incorporation;
b) Implied Powers – those reasonably necessary to
accomplish its purposes, as stated in its articles of
incorporation; and Note: Such implied powers are
deemed to exist because of the following provisions
–
- “Except such as are necessary or incidental to
the exercise of thepowers so conferred” [Sec.
44]
- “Such powers as are essential or necessary to
carry out its purpose or purposes as stated in
the Articles of Incorporation” – catch-all phrase.
[Sec. 35(k)]
c) Incidental Powers – those which may be incident to
its existence as a juridical entity [Pilipinas Loan v.
SEC, 356 SCRA 193 (2001)]
- Examples of incidental powers may include the
right to succession, the right to have a corporate
name, right to make bylaws, and the right to
hold properties for the purposes that are
allowed by its charter.
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 The Theory of General Capacity states that a corporation is
said to hold such powers as are not prohibited or withheld
from it by general law.
D. Specific Powers; Theory of Specific Capacity [Secs.
36-43, 15]
The Theory of Specific Capacity states that the corporation
cannot exercise powers except those expressly/impliedly
given. Under the Theory of Specific Capacity, the specific
powers of a corporation are as follows:
- Power to extend or shorten corporate term [Sec. 36]
- Power to increase or decrease capital stock, or incur,
create, increase bonded indebtedness [Sec. 37]
- Power to deny pre-emptive rights [Sec. 38]
- Power to sell or dispose corporate assets [Sec. 39]
- Power to acquire own shares [Sec. 40]
- Power to invest corporate funds in another corporation
or business, or for any other purpose [Sec. 41]
- Power to declare dividends [Sec. 42] Power to enter into
management contract [Sec. 43]
- Power to amend AOI [Sec. 15]
E. Power to Extend or Shorten the Corporate Term [Sec. 36]
A private corporation may extend or shorten its term as
stated in the articles of incorporation. [Sec. 36]
Perpetual existence under the RCC applies to existing
corporations. AOIs shall be deemed amended to reflect its
perpetual term, unless the corporation elects to retain its
limited term [Herbosa, 2019].
When Exercised
Period to extend the corporate term has been reduced by the
RCC to three years before expiration. When the term expires,
it is not ipso facto dissolved but may apply for a revival of its
corporate existence. [Divina, 2020]
Requirements
a) Approval by majority vote of the boardof directors or
trustees, and
b) Ratification at a meeting by the stockholders or
members representing at least two-thirds (2/3) of the
outstanding capital stock or of its members.
c) Notice Requirement – Written notice of the proposed
action and the time and place of the meeting shall be:
a. Sent to stockholders or members at their
respective place of residence as shown in the
books of the corporation, and
b. Either:
i. Deposited to the addressee in the post office with
postage prepaid, served personally, OR
ii. Sent electronically in accordance with the rules and
regulations of the Commission on the use of
electronic data messages, when allowed in the by-
laws or done with the consent of the stockholder.
[Sec. 36]
Exercise of Appraisal Right
In case of extension of corporate term, a dissenting
stockholder may exercise the right of appraisal under the
conditions provided in this Code. [Sec. 36]
When a dissenting shareholder disagrees with a firm's
actions, they can exercise appraisal rights; appraising their
shares, and being paid the fair market value for them.
B. Power to Increase or Decrease Capital Stock or
Incur, Create, Increase Bonded Indebtedness [Sec.
37]
A corporation may increase or decrease its capital stock or
incur, create or increase any bonded indebtedness. [Sec. 37]
Power to Increase or Decrease Capital Stock An increase or
decrease of the capital stock amends the underlying
contractual relationships between and among members of
the corporation.
Aside from the requisites in Sec. 37, when the capital stock is
increased or decreased, the provisions of Sec. 15 on the
amendment of the articles of incorporation must also be
complied with. [Villanueva]
Power to Incur, Create, or Increase Bonded Indebtedness
“Bonded indebtedness” are long term debts of the
corporation, secured by mortgage on real or personal
property of the corporation, which are:
a) Structured in denominated units of indebtedness
b) Intended to eventually circulate within the
investing public as securities, representing units of
investment.
Thus, the power to incur, create, or increase bonded
indebtedness is a form of distributing liability securities to the
public, and constitutes an aspect of the inherent power of
every corporation to borrow or to incur loan obligations.
[Villanueva]
For the requirements, see (Sec. 37)
C. Power to Deny Pre-Emptive Rights [Sec. 38]
Preemptive right
The preferential right of shareholders to subscribe to all issues
or disposition of shares of any class in proportion to their
present shareholdings. [Sec 38] The purpose of pre-emptive
right is to enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the
surplus.
General Rule: All shareholders of a stock corporation have the
preemptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings.
Exception: If such right is denied by the AOI or an amendment
thereto. [Sec. 38]
For the requirements, see (Sec. 38)
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 F. Power to Sell or Dispose Corporate Assets [Sec. 39]
A corporation may sell, lease, exchange, mortgage, pledge, or
otherwise dispose of its property and assets:
• For such consideration as its board of directors or
trustees may deem expedient, which may be:
o Money
o Stocks
o Bonds, or
o Other instruments for the payment of
money or
o Other property or consideration
• Subject to the provisions of Republic Act No. 10667,
otherwise known as “Philippine Competition Act”,
and other related laws.
For the requirements, see (Sec. 39)
G. Power to Acquire Its Own Shares [Sec. 40]
The power of a corporation to acquire its own shares
A stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or
purposes.
This corporate power does not need shareholder’s approval.
Discretion solely rests on the board, subject to the existence
of unrestricted retained earnings (“URE – those that are
available for distribution”) and for a legitimate corporate
purpose/s. [Sec. 40]
Additional notes:
Unrestricted Retained Earnings
This is defined as the amount which is:
a) The accumulated profits and gains realized out of the
normal and continuous operations of the company
AFTER deducting therefrom:
- Distributions to stockholders and
- Transfers to capital stock or other
accounts, and
b) NOT appropriated by its Board of Directors for corporate
expansion projects or programs:
c) NOT covered by a restriction for dividend declaration
under a loan agreement; and
d) NOT required to be retained under special
circumstances obtaining in the corporation such as
when there is a need for a special reserve for probable
contingencies. [SEC Memorandum Circular No. 11-08,
(December 5, 2008)]
H. Power to Invest Corporate Funds in Another Corporation
or Business [Sec. 41]
General Rule: The corporation is not allowed to engage in a
business different from those enumerated in its AOI.
Exception: The purpose will be amended to include the
desired business activity among its secondary purpose.
Rules in case a corporation wants to invest in an undertaking
a) Investment of a corporation in a business which is in
line with its primary purpose requires only the
approval of the board.
b) Investment of assets for any of its secondary
purposes requires the prior approval of its
shareholders/members
c) If the investment is outside the purpose/s for which
the corporation was organized, Articles of
Incorporation must be amended first, otherwise it
will be an Ultra Vires act (any acts that lie beyond
the authority of a corporation to perform).
For the requirements, see (Sec. 41)
Exercise of Appraisal Right
Any stockholder who disagrees from the investment of
corporate funds in another corporation or business may
exercise his appraisal right.
I. Power to Declare Dividends [Sec. 42]
Requirements
a) Must be distributed out of URE
b) Payable in cash, in property, or in stock to all
shareholders on the basis of outstanding stock held
by them
c) Resolution by the Board
Additional requirement for stock dividend Approved by 2/3
of shareholders representing the outstanding capital stock at
a regular/special meeting called for that purpose
- Note: The approval requirement for the declaration
of stock dividends underscores that the payment of
dividends to a stockholder is not a matter of right
but a matter of consensus. [Republic Planters Bank
v. Agana, 269 SCRA 1 (1997)]
A corporation must have also a sufficient number of
authorized unissued shares for distribution to stockholders (if
ACS is insufficient, corporation must apply for increase in
capital stock).
Source of dividends
Dividends may only be declared out of actual and bona fide
unrestricted retained earnings.
Prohibition imposed by law on UREs of a stock corporation
Stock corporations are prohibited from retaining surplus
profits in excess of 100% of their paid-in capital stock, except:
A. When justified by definite corporate expansion
projects or programs approved by the BOD;
B. When the corporation is prohibited under any loan
agreement with any financial institution or creditor
from declaring dividends without its consent, and
such consent has not yet been secured;
C. When it can be clearly shown that such retention is
necessary under special circumstances obtaining in
the corporation.
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Note: In case a corporation unjustifiably retains surplus profits
in excess of one hundred (100%) percent of the paid-in
accumulated capital, it will be liable for Improperly
Accumulated Earnings Tax (IAET) equal to 10% of the
improperly accumulated taxable income. [Sec. 29 (A), NIRC]
Moreover, it will also be liable to pay a penalty imposed by the
SEC. [SEC Memo. Circ. No. 6, s. 2005]
Forms of dividends
1. Cash - Any cash dividend due on delinquent stock
shall first be applied to the unpaid balance on the
subscription plus cost and expenses. [Sec. 42]
2. Stock - Stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription
is fully paid; Stock dividends cannot be issued to a
person who is not a stockholder in payment of
services rendered.
3. Property - Stockholders are entitled to dividends
pro-rata based on the total number of shares and
not on the amount paid on shares.
J. Power to Enter into Management Contracts [Sec. 43]
Management Contract
Any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another
corporation, whether such contracts are called service
contracts, operating agreements or otherwise.
This refers only to a management contract with another
corporation and does not apply to management contracts
entered into by a corporation with natural persons. Corollary
to this, management contract with a natural person need not
comply with the requisites of Sec. 43
Period of every management contract General Rule: No
management contract shall be entered into for a period longer
than 5 years for any one term.
Exception: Service contracts or operating agreements which
relate to exploration, development, exploitation or utilization
of natural resources may be entered into for such periods as
may be provided in the pertinent laws and regulations.
For the requirements, see (Sec. 42)
K. Limitations
Ultra Vires Acts
Those acts which a corporation is not empowered to do or
perform because they are outside or beyond the express and
implied powers conferred by its Articles of Incorporation or by
the Revised Corporation Code, or not necessary or incidental
to the exercise of the powers so conferred. [Sec. 44]
Types of Ultra Vires Acts
a) Acts done beyond the powers of the corporation as
provided in the law or its articles of incorporation;
b) Ultra Vires acts of officers and not of the corporation
c) Acts or contracts, which are per se illegal as being
contrary to law. [Villanueva]
Kinds of Ultra Vires acts by reason
a) By reason of Lack of Authority (ultra vires acts)
b) By reason of Illegality (illegal acts)
Consequences of Ultra Vires Acts
Ultra vires acts, which are per se illegal are generally void.
While ultra vires acts which are not illegal but are within the
scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by
stockholders. [Montelibano v. BacolodMurcia Milling Co., Inc.,
G.R. No. L-15092 (1962)]
Consequences of Ultra Vires Acts with respect to contracts:
a) Executed contract – courts will not set aside or
interfere with such contracts; \
b) Executory contracts – no enforcement even at the
suit of either party (void and unenforceable);
c) Partly executed and partly executory – principle of
“no unjust enrichment at expense of another” shall
apply;
d) Executory contracts apparently authorized but
Ultra Vires – the principle of estoppel shall apply.
L. Doctrine of Individuality of Subscription
The Doctrine of Individuality of Subscription states that a
subscription is one entire and indivisible whole contract.
It cannot be divided into portions.
Consequently, where stocks were subscribed and part of
the subscription contract price was not paid, the whole
subscription shall be considered delinquent, and not only
the shares which correspond to the amount not paid.
Nevertheless, holders of subscribed shares not fully paid,
which are not delinquent, shall have all the rights of a
stockholder. [Sec. 71]
M. Doctrine of Equality of Shares
The doctrine of equality of shares states that all stocks issued
by the corporation are presumed equal with the same
privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences. [Sec. 6]
There is a presumption of equality of the rights and features
of shares when nothing is expressly provided to the contrary.
- Although a corporation has the power to classify its
shares of stock, provide for preferences and other
conditions, no presumption should exist to
distinguish one share from another.
- Sec. 6 of the RCC now requires that the
distinguishing features be stated also in the
Certificate of Stock.
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 N. Trust Fund Doctrine
The Trust Fund Doctrine states that the capital stock,
properties and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors.
- All funds received by the corporation in payment of
the shares of stock shall be held in trust for the
corporate creditors and other stockholders of the
corporation.
- No fund shall be used to buy back the issued shares
of stock except only in instances specifically allowed
by the Corporation Code. [Boman Environmental
Development Corporation v. CA, G.R. No. 77860
(1988)]
Exceptions to the Trust Fund Doctrine --- When Distribution
of Corporate Capital is Allowed
The Trust Fund Doctrine, first enunciated by this Court in the
1923 case of Philippine Trust Co. v. Rivera is the underlying
principle in the procedure for the distribution of capital assets,
embodied in Corporation Code, which allows the distribution
of corporate capital only in three instances:
1. Amendment of the AOI to reduce the authorized
capital stock,
2. Purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained
earnings, and
3. Dissolution and eventual liquidation of the
corporation.
The creditors of a corporation have the right to assume that
so long as there are debts and liabilities, the BOD will not use
corporate assets to purchase its own shares of stock or to
declare dividends to its stockholders when the corporation is
insolvent. [Steinberg v. Velasco, G.R. No. L-30460 (1929)]
III. STOCKHOLDERS AND MEMBERS
b. Fundamental Rights of a Stockholder
1. Direct or indirect participation in management [Sec. 6]
2. Voting rights [Sec. 6]
3. Right to remove directors [Sec. 27]
4. Proprietary rights
a) Right to dividends [Sec. 42 and 70]
b) Appraisal rights [Sec. 80]
c) Right to issuance of stock certificate for fully paid
shares [Sec. 63]
d) Proportionate participation in the distribution of
assets in liquidation [Sec. 139]
e) Right to transfer of stocks in corporate books [Sec.
62]
f) Pre-emptive right [Sec. 38]
5. Right to inspect books and records [Sec. 73]
6. Right to be furnished with the most recent financial
statements/reports [Sec. 73]
7. Right to recover stocks unlawfully sold for delinquent
payment of subscription [Sec. 68]
8. Right to file individual suit, representative suit and
derivative suits
Sec. 88 of the Revised Corporation Code specifically provides
that in a non-stock corporation, the right of members of any
class or classes to vote “may be limited, broadened or denied
to the extent specified in the articles of incorporation or the
by-laws.”
a. Participation in Management
Proxy
Stockholders and members may vote in person or by proxy in
all meetings. [Sec. 57]
The word “proxy” may be understood in two ways:
(1) First, it may refer to the person duly authorized by
a stockholder to vote in his behalf in a
stockholder’s meeting.
(2) Secondly, it may refer to the document which
evidences this authority. [CAMPOS]
Right to Issue a Proxy
The right to issue a proxy is vested with public interest when
it comes to stock corporations.
- Although it may be regulated under the bylaws, it
cannot be denied, since it is an aspect of ownership
interest of stockholders.
- However, the right of members to vote by proxy
may be denied under the articles of incorporation or
bylaws of a non-stock corporation. [Sec. 88;
CAMPOS]
Requisites for a Valid and Enforceable Proxy:
1. It must be in writing;
2. Signed by the stockholder or member of record; and
3. Filed with the corporation before the scheduled
meeting with the Corporate Secretary. [Sec. 57]
Period of Effectivity
Unless otherwise provided in the proxy, it shall be valid only
for the meeting for which it is intended. No proxy shall be valid
and effective for a period longer than five (5) years at any one
time. [Sec. 57]
Voting Trust
Voting Trust — An arrangement created by one or more
stockholders:
a) For the purpose of conferring upon a trustee or
trustees the right to vote and other rights
pertaining to the shares;
b) For a period not exceeding 5 years at any time
[Sec. 58].
Under a voting trust agreement, a stockholder of a stock
corporation parts with the naked or legal title, including the
power to vote, of the shares and only retains the beneficial
ownership of the stock.
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Voting trustee — A share owner vested with colorable and
naked title of the shares covered for the primary purpose of
voting upon stocks that he does not own.
A voting trust agreement shall be ineffective and
unenforceable unless:
1. It is in writing and notarized;
2. It specifies the terms and conditions thereof; and
3. A certified copy of such agreement is filed with the
corporation and with the SEC. [Sec. 58]
Period of Effectivity
General Rule: Voting trust agreements shall not exceed five
(5) years at any one time.
Exception: Voting trust agreements may be for a period
exceeding five (5) years if it is specifically required as a
condition in a loan agreement.
Such voting trust agreement conditioned upon a loan
agreement, however, shall automatically expire upon full
payment of the loan. [Sec. 58]
Right to Inspect
The voting trust agreement filed with the corporation shall be
subject to examination by any stockholder in the same
manner as any other corporate record. [Sec. 58]
Both the trustor and trustee may exercise the right of
inspection of all corporate books and records in accordance
with the provisions of the RCC. [Sec. 58]
Limitation of a Voting Trust Agreement
No voting trust agreement shall be entered into for the
purposes of circumventing the laws against:
• Anti-competitive agreements;
• Abuse of dominant position;
• Anti-competitive mergers and acquisitions;
• Violations of nationality and capital requirements;
or
• Fraud. [Sec. 58]
a. Amendment of the articles of incorporation;
b. Adoption and amendment of by-laws;
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 capital stock;
f. Merger or consolidation;
g. Investment of corporate funds in another
corporation or business; and
h. Dissolution of the corporation. [Sec. 6]
Right to Vote in Non-Stock Corporations
In non-stock corporations, the voting rights attach to
membership. Members vote as persons, in accordance with
the law and the by-laws of the corporation.
General Rule: Each member shall be entitled to one vote. [Sec.
88]
• Executors, administrators, receivers, and other legal
representatives duly appointed by the court may
attend or vote in behalfof stockholders without
need of any written proxy. [Sec. 54]
Exception: Unless the right to vote is limited, broadened, or
denied in the articles of incorporation or by-laws.
• When the principle for determining the quorum for
stock corporations is applied by analogy to non-
stock corporations, only those who are actual
members with voting rights should be counted. [Sec.
88]

Cases When Stockholders’ Action is Required

Right to Vote in Stock Corporations
General Rule: Each share of stock is entitled to vote. [Sec. 6]
1. The stockholder of record has the right to
participate and to vote [Villanueva]
2. Executors, administrators, receivers, and other legal
representatives duly appointed by the court may
attend or vote in behalf of stockholders without
need of any written proxy. [Sec. 54]
3. Exception: Unless otherwise provided in the articles
of incorporation or declared delinquent under Sec.
66. [Sec. 6]
4. Note: “Outstanding capital stock” means stocks
entitled to VOTE.
5. Nevertheless, ALL stockholders, regardless of
classification as voting or non-voting, are entitled to
vote in the following matters:

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c. Proprietary Rights
i. Right to Dividends
Concept of Dividends
A dividend is —
• That portion of the profits of the corporation set
aside, declared and ordered by the directors to be
paid ratably to the stockholders on demand or at a
fixed time.
• Payment to the stockholders as a return upon their
investment. [Villanueva]
Discretion of Board to Declare Dividends General Rule: The
board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings to all
stockholders on the basis of outstanding stock held by them.
[Sec. 42]
• Upon lawful declaration of dividends by the BOD,
dividends become a debt owing to the shareholders.
No revocation can be made.
Exceptions:
- Dividends are revocable if NOT yet announced or
communicated to the stockholders.
- Stock dividends, even if already declared, may be
revoked prior to actual issuance since these are not
distributions but merely representations of changes
in the capital structure.
In case of no-par value shares, 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. [Sec. 6]
ii. Appraisal Right
Appraisal Right — The right to withdraw from the corporation
and demand payment of the fair value of the shares after
dissenting from certain corporate acts involving fundamental
changes in corporate structure. [Sec. 80]
Who is Entitled to Exercise
A prejudiced stockholder who dissented in the meeting where
the proposal was approved. Mere silence or abstention does
not suffice. The stockholder must have voted against the
corporate action. [Villanueva]
Amount Paid to Dissenting Stockholder
The amount paid to the stockholder is the fair value of his
shares as of the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in
anticipation of the corporate action. [Sec. 81]
iii. Right to Inspect
Basis of Right
As the beneficial owners of the business, the stockholders
have the right to know the financial condition and
management of corporate affairs.
A stockholder’s right of inspection is based on his ownership
of the assets and property of the corporation. Therefore, it is
an incident of ownership of the corporate property, whether
this ownership or interest is termed an equitable ownership,
a beneficial ownership, or quasi-ownership. Such right is
predicated upon the necessity of self-protection. [Gokongwei
Jr. v. SEC, G.R. No. L-45911 (1979)
Records Subject to Inspection [Sec. 73] Every corporation
shall keep and carefully preserve at its principal office all
information relating to the corporation including, but not
limited to:
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 a) The AOI and by-laws of the corporation and all their
amendments;
b) The current ownership structure and voting rights of
the corporation, including lists of stockholders or
members, group structures, intra-group relations,
ownership data, and beneficial ownership;
c) The names and addresses of all the members of the
BOD or BOT and the executive officers;
d) A record of all business transactions;
e) A record of the resolutions of the BOD or BOT and of
the stockholders or members;
f) Copies of the latest reportorial requirements
submitted to the Commission; and
g) The minutes of all meetings of stockholders or
members, or of the BOD/BOT, which shall set forth
– Non-Voting Shares
i. Time and place of the meeting held;
ii. How meeting was authorized;
iii. Notice given;
iv. Agenda;
v. Whether meeting was regular or special
(its object, if special)
vi. Those present and absent
vii. Every act done or ordered done at the
meeting
h) Upon demand of the BOD/BOT/stockholder or
member –
i. Time when any director, trustee,
stockholder or member entered or left the
meeting must be noted in the minutes;
ii. The yeas and nays must be taken on any
motion or proposition, and a record
thereof carefully made;
iii. The protest of a director, trustee,
stockholder or member on any action or
proposed action
Requirements for the exercise of the right of inspection [Sec.
73]
a) The records are open to inspection only by any
director, trustee, stockholder or member of the
corporation in person or by a representative.
b) Must be done at reasonable hours on business days.
c) A demand in writing may be made by the director,
trustee or stockholder at their expense, for such
records or excerpts from the records.
d) The inspecting or reproducing party shall remain
bound by confidentiality rules under prevailing laws
such as:
• Intellectual Property Code
• Data Privacy Act
• Securities Regulation Code
• Rules of Court
iv. Preemptive Right
• (refer to our previous discussion and handout)
v. Right to Vote
Nature of the Right to Vote
The right to vote is inherent and incidental to the ownership
of corporate stocks. [Tan v. Sycip, 499 SCRA 216 (2016)]
It represents the right of a stockholder to participate in the
control and management of the corporation. However, it is
subject to the rule of the majority. [Villanueva]
General Rule: No share may be deprived of voting rights.
Exception: Shares classified and issued as “preferred” or
“redeemable” may be deprived of voting rights: Provided, that
there shall always be a class or series of shares with complete
voting rights. [Sec. 6]
Non-voting shares are not entitled to vote, except as provided
for in par. 3 of Sec. 6. Holders of nonvoting shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of bylaws;
3. Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating, or increasing bonded
indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except in the above cases, the vote necessary to approve a
particular corporate act shall be deemed to refer only to
stocks with right to vote. [Sec. 6]
vi. Right of First Refusal
Right of First Refusal — Obligates a stockholder who may wish
to sell or assign his shares to first offer the shares to the
corporation or to the other existing stockholders under terms
and conditions which are reasonable.
• Grants the existing stockholders or the corporation
the option to purchase the shares of the transferring
stockholder. [Sec. 97]
• Only when the corporation or the other
stockholders do not or fail to exercise their option,
is the offering stockholder at liberty to dispose of his
shares to third parties.
An agreement entered into between the two majority
stockholders of a corporation, whereby they mutually agreed
not to sell, transfer, or otherwise dispose of any part of their
shareholdings till after one year from the date of the
agreement is valid. [Lambert v. Fox G.R. No. L-7991 (1914)]
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 d. Remedial Rights
Individual Suit
A suit brought by the shareholder in his own name against the
corporation when a wrong is directly inflicted against him.
Representative Suit
A suit brought by the stockholder in behalf of himself and all
other stockholders similarly situated when a suit brought by
the shareholder in his own name against the corporation
when a wrong is directly inflicted against him or a wrong is
committed against a group of stockholders.
Derivative Suit
Definition
A suit brought by a stockholder for and on behalf of the
corporation for its protection from the wrongful acts
committed by the directors/trustees of the corporation, when
the stockholder finds that he has no redress because the
directors/trustees, are the ones vested by law to decide
whether or not to sue.
remote communication or in absentia.
a) Stockholder-grantor [Sec. 54]
b) Secured creditor, if expressly empowered by the
stockholder-grantor [Sec. 54]
c) Executors, administrators, receivers and other legal
representatives duly appointed by the court,
without need of any written proxy [Sec. 54]
d) ALL joint owners of stocks, or any of them with the
consent of ALL the co-owners, unless there is a
written proxy, signed by all the co-owners [Sec. 55]
e) Any one of the joint owners of shares owned in an
“and/or” capacity or a proxy thereof [Sec. 55]
Who Calls the Meeting
Any petitioning stockholder or member upon order of the SEC
when there is no person authorized to call a meeting. The
petitioning stockholder or member shall preside until at least
a majority of the stockholders/members present have chosen
from among themselves, a presiding officer. [Sec. 49]

• It is an action brought by minority shareholders in Who Presides at the Meeting

the name of the corporation to redress wrongs General Rule: The chairman or, in his absence, the president
committed against the corporation, for which the shall preside at all meetings of the directors or trustees as well
directors refuse to sue. as of the stockholders or members.
• It is a remedy designed by equity and has been the Exception: The bylaws provide otherwise. [Sec. 53]
defense of minority shareholders against abuses by
the majority. [Villanueva]
Business Judgment Rule
As a general rule, when a wrong is committed against a
corporation, whether to bring the suit or not primarily lies
within the discretion and exercise of business judgment of the
BOD.
• But where corporate directors are guilty of a breach
of trust, not of mere error of judgment or abuse of
discretion, and intacorporate remedy is futile or
useless, a shareholder may institute a derivative suit
in behalf of himself and other stockholders and for
the benefit of the corporation,
• The purpose of the suit is to bring about a redress of
the wrong inflicted directly upon the corporation
and indirectly upon the stockholders. [Bitong v. C.A.,
G.R. No. 123553 (1998)]
f. Meetings
General Rule: Stockholders’ or members’ approval is
expressed in a meeting duly called and held for the purpose.
Exception: In case of amendment of AOI, approval may be
expressed by referendum or written assent of the
stockholders or members. [Sec. 15]
Who May Attend and Vote
f) Stockholders [Sec. 23]
i. In person
ii. By proxy
iii. Via remote communication (only if allowed by
by-laws or by majority of BOD/BOT, except if
vested with public interest)
iv. In absentia (only if allowed by bylaws or by
majority of BOD/BOT, except if vested with
public interest)
v. Note: The SEC shall issue the rules and
regulations governing participation and voting
through

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I. BOARD OF DIRECTORS AND TRUSTEES
A. Repository of Corporate Powers
Doctrine of Centralized Management BOARD IS SEAT OF
CORPORATE POWERS
General Rule: 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. [Sec. 22]
Exceptions:
1. In case of an Executive Committee duly authorized in the
by-laws; [Sec. 34]
Exception to Exception: The following may not be
delegated to the executive committee:
(1) Approval of any action for which shareholders'
approval is also required; (2) The filing of vacancies in the
board; (3) The amendment or repeal of by-laws or the
adoption of new by-laws;
(4) The amendment or repeal of any resolution of the
board which by its express terms is not so amendable or
repealable; and
(5) A distribution of cash dividends to the shareholders.
[Sec. 34]
2. In case of a contracted manager which may be an
individual, a partnership, or another corporation.
Note: In case the contracted manager is another
corporation, the special rule in Sec. 43 applies.
3. In case of close corporations, the stockholders may
manage the business of the corporation rather than by a
BOD, if the Articles of Incorporation so provide [Sec. 96]
C. Tenure, Qualifications, and Disqualifications
of Directors or Trustees
Tenure
Directors – Term of 1 year from among the holders of stocks
registered in the corporation’s books. [Sec. 22]
Trustees – Term not exceeding 3 years from among the
members of the corporation. [Sec. 22]
Holdover Principle
Upon failure of a quorum at any meeting of the stockholders
or members called for an election, the directorate naturally
holds over and continues to function until another directorate
is chosen and qualified. Each director and trustee shall hold
office until the successor is elected and qualified. [Sec. 22]
The failure to elect does not terminate the terms of incumbent
officers nor dissolve the corporation.
Holdover Principle
Upon failure of a quorum at any meeting of the stockholders or
members called for an election, the directorate naturally holds
over and continues to function until another directorate is chosen
and qualified. Each director and trustee shall hold office until the
successor is elected and qualified. [Sec. 22]
The failure to elect does not terminate the terms of incumbent
officers nor dissolve the corporation.
Qualifications
a) Director: Must own at least one (1) share of stock.
Trustee: Must be a member of the corporation.
• 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. [Sec. 22]
• In order to be eligible as a director, what is material is the
legal title to, not beneficial ownership of, the stock as
appearing on the books of the corporation. [Lee v. CA,
G.R. No. 93695 (1992)]
b) Must be a natural person, of legal age, possess full legal
capacity
c) Must not be convicted by final judgment of an offense
punishable by imprisonment for a period exceeding 6 years
[Sec. 26]
d) Other qualifications as may be prescribed in the by-laws of
the corporation. [Sec. 46]
• While additional qualifications may be prescribed, this
cannot be in conflict with the requirements as set by the
RCC.
Note: The RCC removed the requirement that majority of the
directors or trustees must be residents of the Philippines.
Disqualifications
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:
• Convicted by final judgment:
• Of an offense punishable by imprisonment for a
period exceeding six (6) years;
• For violating this Code; and
• For violating Republic Act No. 8799, otherwise
known as “The Securities Regulation Code”;
• Found administratively liable for any offense involving fraud
acts; and
• By a foreign court or equivalent foreign regulatory authority
for acts, violations or misconduct similar to those
enumerated in paragraphs (a) and (b) above. [Sec. 26]
B. Requirement of Independent Directors
Independent Directors
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. [Sec. 22]
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 - Independent director acts as a guide, coach, and
mentor to the Company.
Requirement for Independent Directors Corporations vested
with public interest are now required to have independent
directors constituting at least twenty percent (20%) of the
board. [Sec. 22] This is in order to promote good governance.
These corporations include:
(1) Corporations covered by the Securities Regulation
Code, namely:
a. one whose securities are registered with
the Commission;
b. Corporations listed with an exchange or
with assets of at least Fifty million pesos
(P50,000,000.00); and
c. Having two hundred (200) or more
holders of shares, each holding at least
one hundred (100) shares of a class of its
equity shares;
(2) Banks and quasi-banks, NSSLAs, pawnshops,
corporations engaged in money service business,
pre-need, trust and insurance companies, and
other financial intermediaries;
(3) Other corporations engaged in business vested
with public interest similar to the above, as may be
determined by the Commission. [Sec. 22]
Manner of Election
Independent directors must be elected by the shareholders
present or entitled to vote in absentia during the election of
directors. [Sec. 22]
E. Elections [Sec. 23]
Directors: Not more than fifteen (15)
Trustees: May be more than fifteen (15) [Sec. 13 and 91]
The RCC removed the minimum number of directors which
stood at five (5) under the old code. [Sec. 14, Old Corporation
Code]
Election of Directors or Trustees
i. Cumulative Voting
Methods of Voting
(1) Straight voting
(2) Cumulative voting for one candidate
(3) Cumulative voting by distribution
Rules Governing all Methods of Voting
a) 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
b) No delinquent stock shall be voted. [Sec. 23]
Straight Voting
Every stockholder may vote such number of shares for as
many persons as there are directors to be elected. [Sec. 23]
Cumulative Voting
Cumulative Voting For One Candidate A stockholder is allowed
to concentrate his votes and give one candidate as many votes
as the number of directors to be elected multiplied by the
number of his shares shall equal. [Sec. 23]
• Illustration: If there are 5 directors to be elected and
Pedro, as shareholder, has 100 shares, Pedro can give 500
(5 x 100 shares) votes to just one candidate.
Cumulative Voting By Distribution
A stockholder may cumulate his shares by multiplying the
number of his shares by the number of directors to be elected
and distribute the same among as many candidates as he shall
see fit. [Sec. 23]
• Illustration: In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100 votes to
candidate 2, 100 votes to candidate3, 150 votes to
candidate 4, and 50 votes to candidate 5.
ii. Quorum
At all elections of directors or trustees, there must be present,
either in person or through a representative authorized to act
by written proxy:
• Stock Corporations: The owners of majority of the
outstanding capital stock
• Non-Stock Corporations: A majority of the members
entitled to vote. [Sec. 23]
It is necessary that there be a quorum. An election without
quorum is invalid.
If 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. [Sec. 23]
Election Contests
All matters affecting the manner and conduct of the election
of directors are properly cognizable by the regular courts.
Otherwise, these matters may be brought before the SEC for
resolution based on the regulatory powers it exercises over
corporations, partnerships, and associations. [SEC v. CA, 739
SCRA 99 (2014)]
D. Removal
General Rule: Any Director or Trustee of a corporation may be
removed from office, with or without cause. [Sec. 27]
Exception: If the director was elected by the minority, there
must be cause for removal because the minority may not be
deprived of the right to representation to which they may be
entitled to under Sec. 23 of the Code. [Sec. 27]
Note: The right to representation refers to the right to
cumulative voting for one candidate.
Requisites for removals, see Sec. 27
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New Power of the SEC under the Revised Corporation Code
[Sec. 27]
The Commission shall, motu proprio or upon verified
complaint, and after due notice and hearing, order the
removal of a director or trustee elected despite the
disqualification, or whose disqualification arose or is
discovered subsequent to an election.
The removal of a disqualified director shall be without
prejudice to other sanctions that the Commission may impose
on the board of directors or trustees who, with knowledge of
the disqualification, failed to remove such director or trustee.
[Sec. 27]
F. Filling of Vacancies [Sec. 28]
Ways which the filling of a vacancy may occur:
• Expiration of term;
• Removal;
• Grounds other than the above, but the remaining
directors can constitute a quorum.
• Grounds other than the above, but the remaining
directors cannot constitute a quorum for the purpose of
filling the vacancy;
• By reason of an increase in the number of directors or
trustees.
Designation of director or trustee
A vacancy may be temporarily filled from among the officers
of the corporation by unanimous vote of the remaining
directors or trustees 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 action by the designated director or trustee shall be
limited to the emergency action necessary. [Sec. 28]
Term of designated director or trustee
The term of the designated director or trustee shall cease:
• Within a reasonable time from the termination of the
emergency; or
• Upon election of the replacement director or trustee,
whichever comes earlier. [Sec. 28]
G. Compensation]
General Rule: Directors or trustees are only entitled to
reasonable per diems. They are not entitled to
compensation as directors or trustees. [Sec. 29]
Exceptions:
a. When Articles of Incorporation, by-laws, or an advance
contract provides for compensation.
b. Compensation other than per diems may also be granted
to directors by the vote of the stockholders representing
at least a majority of the Outstanding Capital Stock or a
majority of the members at a regular or special
stockholders’ meeting.
Note: The total yearly compensation of directors shall not
exceed 10% of the net income before income tax of the
corporation during the preceding year. [Sec. 29]
Added in the RCC
• The 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.
• Compensation of Directors as Corporate Officers
• The position of being Chairman and Vice-Chairman, like
that of treasurer and secretary, are not considered
directorship positions, but officership positions that
would entitle the occupants to compensation.
• Likewise, the limitation placed under Sec. 30 (now Sec. 29,
RCC) of the Corporation Code that directors cannot
receive compensation exceeding 10% of the net income
of the corporation would not apply to the compensation
given to such positions since it is being given in their
capacity as officers of the corporation and not as board
members. [Western Institute of Technology v. Salas, G.R.
No. 113032 (1997)]
H.Disloyalty
i. Duties of Directors and Trustees
THREE-FOLD DUTY
In this jurisdiction, the members of the BOD have a three-
fold duty: duty of obedience, duty of diligence, and duty of
loyalty.
1. Duty of Obedience - shall direct the affairs of the
corporation only in accordance with the purposes for
which it was organized;
2. Duty of Diligence - shall not willfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or act in bad faith or with gross negligence
in directing the affairs of the corporation; and
3. Duty of Loyalty - shall not acquire any personal or
pecuniary interest in conflict with their duty as such
directors or trustees. [Strategic Alliance Development
Corp v. Radstock Securities Ltd., G.R. No. 178158
(2009)]
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 I. Business Judgment Rule
General Rule: Questions of policy or management are left
solely to the honest decision of officers and directors of a
corporation and the courts are without authority to
substitute their judgment for the judgment of the board of
directors.
The board is the business manager of the corporation and
so long as it acts in good faith, its orders are not reviewable
by the courts or the SEC. [Montelibano v. Bacolod-Murica
Milling Co., G.R. No. L-15092 (1962); Phil. Stock Exchange,
Inc. v. CA, G.R. No. 125469, (1997)]
Exceptions:
• If the contracts are so unconscionable and oppressive
as to amount to a wanton destruction of the rights of
the minority [Ingersoll v. Malabon Sugar, G.R. No. L-
27770 (1927)];
• If they violate their duties under Sec. 30 (director
willfully and knowingly assents to patently unlawful
acts of the corporation, or are guilty of gross
negligence or bad faith);
• If they violate Sec. 33 (disloyalty of a director who
acquires for himself a business opportunity that
should have belonged to the corporation, unless his
act is ratified by a 2/3 vote of stockholders).
CONSEQUENCES OF THE BUSINESS JUDGMENT RULE
• The resolution, contracts and transactions of the
board cannot be reversed or set aside by the
Courts even on the behest of stockholders or
members, under the principle that the business of
the corporation has been left to the hands of the
board.
• Directors and duly authorized officers cannot be
held personally liable for acts or contracts done
with the exercise of their business judgment.
J. Solidary Liabilities for Damages
V.
Solidary Liability For Damages
• The directors and trustees are solidarily liable for
damages arising from the ff.:
• Willfully and knowingly voting for and assenting to
patently unlawful acts of the corporation; [Sec. 30]
• Gross negligence or bad faith in directing the affairs of
the corporation; [Sec. 30]
• Acquiring any personal or pecuniary interest in conflict
of duty; [Sec. 30]
• Consenting to the issuance of watered stocks, or,
having knowledge thereof, failing to file objections
with secretary; [Sec. 64]
• Agreeing or stipulating in a contract to hold himself
liable with the corporation; or
• By virtue of a specific provision of law.
LIABILITY FOR WATERED STOCKS
Watered Stocks — Shares issued as fully paid when in truth
no consideration is paid, or the consideration received is
known to be less than the par value or issued value of the
shares. [Sec. 64]
Any director or officer of a corporation shall be solidarily
liable with the stockholder concerned to the corporation
and its creditors for the difference in value for:
• Consenting to the issuance of watered
stocks or;
• Failing express his objection in writing and
file the same with the corporate secretary
despite having knowledge thereof of such
issuance [Sec. 64].
K. Personal Liabilities
III. Personal Liabilities
General rule: Members ofIV. the Board, who purport to act in
good faith for and on behalf of the corporation within the
lawful scope of their authority, are not liable for the
consequences of their acts. When the acts are of such
nature and done under those circumstances, they are
attributed to the corporation alone and no personal liability
is incurred. [Price v. Innodata Phils., Inc., G.R. No. 178505
(2008)].
Exception: When sufficient proof exists on record that the
officers acted fraudulently, beyond his authority or when
the officer agrees to be personally liable on behalf of the
corporation.
Note:
• Members of the BOD who are also officers are held to
a more stringent liability because they are in-charge of
day-to-day activities. [Campos]
• The provisions on seizing corporate opportunity and
disloyalty [Secs. 30 and 33] shall also apply to
corporate officers. [Price v. Innodata Phils., Inc., G.R.
No. 178505 (2008)]
I. Responsibility for Crimes
II.
Since a corporation is a person by mere legal fiction, it
cannot be proceeded against criminally because it cannot
commit a crime in which personal violence or malicious
intent is required.
Note: However, violations of the Code, if it is committed by
a corporation, the same may, after notice and hearing, be
dissolved in appropriate proceedings before the
Commission. [Sec. 170]
If the offender is a corporation, the penalty may, at the
discretion of the court, be imposed upon:
36 | P a g e
 • Such corporation and/or upon its directors,
trustees, stockholders, members, officers, or
employees responsible for the violation or
indispensable to its commission; or
• Anyone who shall aid, abet, counsel, command,
induce, or procure any violation of this Code, or
any rule, regulation, or order of the Commission.
[Sec. 171-172]
Criminal Liability of Corporate Agents Criminal action is
limited to the corporate agents guilty of an act amounting
to a crime and never against the corporation itself.
Since the BOD is the repository of corporate powers and
acts as the agent of the corporation, the directors may be
held criminally liable. [Time Inc. v. Reyes, G.R. No. L-28882
(1971)]
Corporations, partnerships, associations and other juridical
entities cannot be put to jail. Hence, the criminal liability
falls on the human agent responsible for the violation of the
Trust Receipts Law. [Ong v. CA, G.R. No. 119858 (2003); see
also Sec. 13, P.D. 115]

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