CORPORATION LAW

Part III

JGA Medina
Bus. Org II, Philippine Law School
Pointers for Foreign Investments Act:
• Control Test to prevailing mode to determine nationality.
• No capitalization requirement for foreign owned export
oriented companies.
• Generally, USD200k capitalization for foreign owned
domestic market companies. USD100k under certain
conditions.
• Investment Rights of former Filipino citizens.
• Negative List
Section 23. The board of directors or trustees. –

• Corporate powers exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees.
• Elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified.
• Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation.
• Any director who ceases to be the owner of at least one (1) share of the capital
stock of the corporation of which he is a director shall thereby cease to be a
director.
• Trustees of non-stock corporations must be members thereof. A majority of the
directors or trustees of all corporations organized under this Code must be
residents of the Philippines.
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,
G.R. No. 129459, September 29, 1998:

• A corporation is a juridical person separate and distinct from its

stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporation's board of directors.

• As a general rule, the acts of corporate officers within the scope of

their authority are binding on the corporation. But when these
officers exceed their authority, their actions "cannot bind the
corporation, unless it has ratified such acts or is estopped from
disclaiming them."
Bernas v. Cinco
G.R. Nos. 163356-57 & 163368-69, July 1, 2015

• The board of directors is the directing and controlling body of the corporation. It is a creation
of the stockholders and derives its power to control and direct the affairs of the corporation
from them. The board of directors, in drawing to itself the power of the corporation,
occupies a position of trusteeship in relation to the stockholders, in the sense that the board
should exercise not only care and diligence, but utmost good faith in the management of the
corporate affairs.

• The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis. Only in
that way can the continued accountability to shareholders, and the legitimacy of their
decisions that bind the corporation's stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of power by the directors or officers over
the properties that they do not own.
Advance Paper Corp. v. Arma Traders Corp.,
G.R. No. 176897, December 11, 2013

• The doctrine of apparent authority provides that a corporation will be estopped

from denying the agent's authority if it knowingly permits one of its officers or
any other agent to act within the scope of an apparent authority, and it holds him
out to the public as possessing the power to do those acts.

• "Inasmuch as a corporate president is often given general supervision and control

over corporate operations, the strict rule that said officer has no inherent power
to act for the corporation is slowly giving way to the realization that such officer
has certain limited powers in the transaction of the usual and ordinary business
of the corporation." "In the absence of a charter or bylaw provision to the
contrary, the president is presumed to have the authority to act within the
domain of the general objectives of its business and within the scope of his or her
usual duties."
Section 24. Election of directors or trustees.

• Must be present, either in person or by representative authorized to act by

written proxy, the owners of a majority of the outstanding capital stock, or a
majority of the members entitled to vote.
• The election must be by ballot if requested by any voting stockholder or member.
• In stock corporations, every stockholder entitled to vote may vote such number
of shares for as many persons as there are directors to be elected or he may
cumulate said shares
• No delinquent stock shall be voted.
• Unless otherwise provided in the articles of incorporation or in the by-laws,
members of corporations which have no capital stock may cast as many votes as
there are trustees to be elected but may not cast more than one vote for one
candidate.
Cumulative Voting: (see internet for calculator)

• Cumulative voting is a type of voting system that helps strengthen the

ability of minority shareholders to elect a director. This method allows
shareholders to cast all of their votes for a single nominee for the
board of directors when the company has multiple openings on its
board.

• For example, if the election is for five our directors and you hold 500
shares. You are entitled to one vote per share per director for a total
of 2,500 votes.

• You could vote all 2,500 votes for one candidate or divide your votes
whichever way you want.
Section 25. Corporate officers, quorum.

• Immediately after election, directors must formally organize by the election of:
• a president, who shall be a director,
• a treasurer
• a secretary who shall be a resident and citizen of the Philippines
• Such other officers as may be provided for in the by-laws.
• Any two (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 the articles or the by-laws provide for a greater majority, a majority of the
number of directors or trustees shall constitute a quorum and every decision of at least a
majority shall be valid as a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.
• Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
Matling Industrial and Commercial Corporation v. Coros
G.R. No. 157802, October 13, 2010.

• Conformably with Section 25, a position must be expressly mentioned

in the By-Laws in order to be considered as a corporate office. Thus,
the creation of an office pursuant to or under a By-Law enabling
provision is not enough to make a position a corporate office. Only
officers of a corporation were those given that character either by the
Corporation Code or by the By-Laws; the rest of the corporate officers
could be considered only as employees or subordinate officials.
Section 26. Report of election of directors, trustees and officers.

• 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 Securities and Exchange Commission, the names, nationalities and
residences of the directors, trustees, and officers elected.

Section 27. Disqualification of directors, trustees or officers.

• No person convicted by final judgment of an offense punishable by

imprisonment for a period exceeding six (6) years, or a violation of this Code
committed within five (5) years prior to the date of his election or appointment,
shall qualify as a director, trustee or officer of any corporation. (n)
Section 28. Removal of directors or trustees. –

• By a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or of
the members entitled to vote in a regular or special meeting called for the purpose after previous notice to
stockholders or members of the intention to propose such removal at the meeting.

• A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the outstanding capital stock, or on the written demand
of a majority of the members entitled to vote.

• Should the secretary fail or refuse to call the special meeting give the notice, or if there is no secretary, the call for
the meeting may be addressed directly to the stockholders or members by any stockholder or member of the
corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by written notice.

• Removal may be with or without cause but removal without cause may not be used to deprive minority of the right
of representation.
Section 29. Vacancies in the office of director or trustee.

• Any vacancy other than by removal or by expiration of term, may be filled

by the vote of at least a majority of the remaining directors or trustees, if
still constituting a quorum, otherwise, vacancies must be filled by the
stockholders in a regular or special meeting called for that purpose. A
director or trustee so elected to fill a vacancy shall be elected only or the
unexpired term of his predecessor in office.

• Any directorship or trusteeship by reason of an increase in the number of

directors or trustees shall be filled only by an election at a regular or at a
special meeting duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the notice of
the meeting.
Section 30. Compensation of directors.

• In the absence of any provision in the by-laws fixing their

compensation, the directors shall not receive any compensation, as
such directors, except for reasonable per diems
• Any such compensation other than per diems may be granted to
directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special
stockholders’ meeting.
• In no case shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income before income
tax of the corporation during the preceding year.
Section 31. Liability of directors, trustees or officers. –

• Shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons if:

• Willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
• Guilty of gross negligence or bad faith in directing the affairs of the corporation;
• Acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees

• When a director, trustee or officer attempts to acquire or acquire, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Lozada v. Mendoza
G.R. No. 196134, October 12, 2016

• Before a director or officer of a corporation can be held personally liable for corporate
obligations,the following requisites must concur:
(1) the complainant must allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith;
and
(2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith.

• Corporate directors and officers are solidarily liable with the corporation for the termination of
employees done with malice or bad faith; and declared that bad faith did not connote bad
judgment or negligence, but a dishonest purpose or some moral obliquity and conscious doing of
wrong, or meant a breach of a known duty through some motive or interest or ill will, or partook
of the nature of fraud
Sanchez v. Republic
G.R. No. 172885, October 9, 2009

• Bad faith implies breach of faith and willful failure to respond to plain and well understood
obligation. It does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty
through some motive or interest or ill will. It partakes of the nature of fraud.
• Gross negligence is the want of even slight care, acting or omitting to act in a situation where
there is duty to act, not inadvertently but willfully and intentionally, with a conscious indifference
to consequences insofar as other persons may be affected. It evinces a thoughtless disregard of
consequences without exerting any effort to avoid them; the want or absence of or failure to
exercise slight care or diligence, or the entire absence of care.
• Section 31 lays down the "doctrine of corporate opportunity" and holds personally liable
corporate directors found guilty of gross negligence or bad faith in directing the affairs of the
corporation, which results in damage or injury to the corporation, its stockholders or members,
and other persons.
Section 32. Dealings of directors, trustees or officers with the corporation.

• A contract of the corporation with directors or trustees or officers is voidable, at the option of
such corporation, unless all the following conditions are present:
1. The presence of such director or trustee in the meeting approving the contract was not
necessary to constitute a quorum;
2. The vote of such director or trustee was not necessary for the approval of the contract;
3. The contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.

• Where any of the first two conditions set forth in the preceding paragraph, the contract may be
ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of the members in a meeting called for the purpose, provided, that full disclosure
of the adverse interest of the directors or trustees involved is made at such meeting: Provided,
that the contract is fair and reasonable under the circumstances.
Section 33. Contracts between corporations with interlocking directors.

• Except in cases of fraud, and if contract is fair and reasonable a contract between two or more
corporations having interlocking directors shall not be invalidated on that ground alone.
• If the interest of the interlocking director in one corporation is substantial (exceeding 20% of
capital stock) and his interest in the other corporation or corporations is merely nominal, he shall
be subject to the provisions Sec. 32 insofar as the latter corporation is concerned.

Section 34. Disloyalty of a director. –

• A director, by virtue of his office, acquires a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he must account to
the latter for all such profits by refunding the same, unless ratified by a vote of the owning or
representing at least two-thirds (2/3) of the outstanding capital stock. This provision apply even if
the director risked his own funds in the venture.
Prime White Cement Corp. v. Intermediate Appellate Court
G.R. No. 68555, March 19, 1993.

• A director of a corporation holds a position of trust and as such, he owes a

duty of loyalty to his corporation. In case his interests conflict with those of
the corporation, he cannot sacrifice the latter to his own advantage and
benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders.

• . . . He cannot by the intervention of a corporate entity violate the ancient

precept against serving two masters . . .
Lent v. Tullett Prebon (Philippines), Inc.,
G.R. Nos. 189158 & 189530, January 11, 2017

• The Corporation Code was intended as a regulatory measure, not

primarily as a penal statute. Sections 31 to 34 in particular were
intended to impose exacting standards of fidelity on corporate
officers and directors but without unduly impeding them in the
discharge of their work with concerns of litigation. Considering the
object and policy of the Corporation Code to encourage the use of the
corporate entity as a vehicle for economic growth, we cannot espouse
a strict construction of Sections 31 and 34 as penal offenses in
relation to Section 144 in the absence of unambiguous statutory
language and legislative intent to that effect.
Gokongwei, Jr. v. Securities and Exchange Commission
G.R. No. L-45911, April 11, 1979

• Every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.
• No vested right of stockholder to be elected director. Any person who
buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law.
• Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." "The ordinary trust relationship of directors of a
corporation and stockholders", according to Ashaman v. Miller, "is not a
matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence
of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof . . ."
• A director is a fiduciary. . . . Their powers are powers in trust. . . . He who is in such
fiduciary position cannot serve himself first and his cestuis second. . . . He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters. . . . He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of fair
play by doing indirectly through the corporation what he could not do so directly. He
cannot violate rules of fair play by doing indirectly through the corporation what he
could not do so directly. He cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how absolute in terms that power
may be and no matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be exercised for
the aggrandizement, preference, or advantage of the fiduciary to the exclusion or
detriment of the cestuis.
• The doctrine of "corporate opportunity" is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting
for two entities with competing interests. This doctrine rests fundamentally on
the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when the interest of the
corporation justly calls for protection.

• An amendment to the corporate by-law which renders a stockholder ineligible to

be director, if he be also director in a corporation whose business is in
competition with that of the other corporation, has been sustained as valid. It is a
settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation's Board of Directors.
Section 35. Executive committee.

• The by-laws of a corporation may create an executive committee,

composed of not less than three members of the board, to be appointed by
the board.
• Execom may act, by majority vote of all its members, on such specific
matters within the competence of the board, as may be delegated to it in
the by-laws or on a majority vote of the board, except:
(1) Where shareholders’ approval is also required;
(2) The filing of vacancies in the board;
(3) Amendment or repeal of by-laws or the adoption of new by-laws;
(4) 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.