BUSINESS LAWS AND

REGULATIONS – CORPORATIONS
Third Trimester, Schoolyear 2021 - 2022

Atty. Manuel R. del Rosario

Part 3
INCORPORATION AND
ORGANIZATION

2
 DE JURE vs. DE FACTO
CORPORATIONS
Sections 18, 19 and 20 refer to corporations based on their compliance with the
registration requirements.

A de jure corporation is organized in full compliance with the Revised

Corporation Code - perfectly normal and 100% legal.
A de facto corporation is one that exists as a matter of fact but there is a defect
in its incorporation. To be a de facto corporation the following requisites must be
present:

(a) existence of a valid law that allows its formation;

(b) good faith compliance with all legal requirements;
(c) exercise of corporate powers by the de facto corporation

The existence of a de facto corporation may not be challenged collaterally. Only

the Solicitor General has the power and authority to question the legal existence
of a de facto corporation by a quo warranto proceeding

DE JURE – by right; DE FACTO – by fact or effect

3
 DE JURE vs. DE FACTO
CORPORATIONS
EXAMPLE: Banda Dito Bubble Tea Corporation (BDBT) was incorporated in
2020. It was registered with the SEC and it was issued its Certificate of
Registration. Unfortunately, one of the incorporators, Jennifer Salazar was only
16 years old when she signed the Articles of Incorporation. One of the
requirements of registration is that all incorporators be of legal age. Banda Dito
Bubble Tea Corporation is a de facto corporation but business partners cannot
question its legal existence.

EXAMPLE: Banda Dito Bubble Tea Corporation (BDBT) delivered P200,000

worth of bubble tea mixes to Pulilan Canteen. The buyer failed to pay so BDBT
sued in court. In its defense, Pulilan Canteen said that the suit should fail
because BDBT is not a real corporation since its registration was defective. Can
BDBT collect?

YES. Pulilan Canteen’s objection to BDBT is a collateral attack and is not

allowed. Only the Solicitor General can question BDBT’s existence.

4
 CORPORATION BY ESTOPPEL

All persons who assume to act as a corporation knowing it to be without

authority to do so shall be liable for all debts, liabilities and damages incurred or
arising as a result thereof.

When a corporation by estoppel is sued on any transaction entered into, it shall

not be allowed to use its lack of corporate personality as a defense. Section 20

EXAMPLE: Agent X-44 Transport Company was renting out vans to the general
public. One of its vehicles was involved in an accident and sustained major
damage. It was sent to DMG Motor Shop for repairs. When it was delivered,
Agent X-44 Transport refused to pay DMG Motors saying it was not a real
corporation because it was never registered with the SEC nor the LTFRB. In
essence Agent X-44 Transport is admitting that it is a fly-by-night operation and
is operating illegally. WRONG. Agent X-44 Transport is liable to DMG Motors. You
cannot run away from your obligations using your lack of legal capacity.

5
 NON-USE OF CORPORATE CHARTER

a. If a corporation does not formally organize and commence business

within 5 years from the date of its incorporation, its certificate of
incorporation shall be deemed revoked on the day following the 5 year
period. Automatic Revocation.

b. If a corporation starts operations but later on becomes inoperative for a

period of at least 5 years, the SEC may after notice and hearing place
the company under delinquent status. A delinquent corporation shall
have 2 years to resume operations and comply with all requirements. If
it still does not resume operations (7 years total) the SEC will move to
revoke its Certificate of Incorporation. Section 21 TWO STEPS
INVOLVED: Delinquency then Revocation. After notice and hearing.

motu proprio – on its own without notice and hearing

6
BOARD OF DIRECTORS / TRUSTEES
AND OFFICERS

7
 BOARD OF DIRECTORS

The Board of Directors shall exercise corporate powers, conduct all business and
control all properties of the stock corporation.

Directors are elected for a term of 1 year from among the stockholders registered
in the corporation’s books.

Each director shall hold office until a successor is elected and qualified. (holdover
rule)

A director must continue to own at least 1 share of stock while a director.

8
 BOARD OF TRUSTEES

The Board of Trustees shall exercise corporate powers, conduct all business and
control all properties of the non-stock corporation.

Trustees are elected for a term not exceeding 3 years from among the members of
the corporation.

Each trustee shall hold office until a successor is elected and qualified. (holdover
rule)

A trustee must continue to be a member while a trustee.

9
DUTIES OF DIRECTORS /
TRUSTEES

1. Obedience

2. Diligence

3. Loyalty

10
 INDEPENDENT DIRECTORS
Stock corporations vested with public interest are required to have
independent directors constituting at least 20% of the board:

• Those covered by the Revised Securities Code

• Banks, quasi-banks, pawnshops, preneed, trust and
insurance companies
• Others so declared by the SEC

An independent director is independent of management and is free from any

business or other relationship which could, or could reasonable be perceived
to materially interfere with the exercise of independent judgment in carrying
out the responsibilities as a director.

The Board has fiduciary duties to the corporation. Care requires the
minimum standards of attentiveness and prudence. Directors must
investigate the facts and circumstances surrounding an issue. A director
must avoid any perception of disloyalty or self-dealing like insider trading.

11
 INDEPENDENT DIRECTORS

EXAMPLE: The Rural Bank of San Pedro Calungsod was established in 2022. Since
it is a corporation vested with public interest it is required to have independent
directors constituting at least 20% of its Board of Directors. If it has 5 Board
Members, at least 1 of them must be independent directors. Even if it is a family-
owned corporation, it cannot have all its 5 directors be family members.

EXAMPLE: The Rural Bank of San Pedro Calungsod wants to purchase an office
building for P180M to be used as its Head Office. Atty. De Jesus is a director of the
Rural Bank. He should study the matter carefully and exercise his sound and
independent judgment in deciding on the purchase.

BUSINESS JUDGMENT RULE: This rule presumes that directors have acted in
good faith and have sufficiently investigated the facts and circumstances
surrounding an issue. A director must not be a rubber stamp of the corporation.
This rule applies to all ordinary and independent directors.

12
 ELECTION OF
DIRECTORS OR TRUSTESS

Any stockholder or member shall have the right to nominate any director
or trustee who possesses all the qualifications and none of the
disqualifications in the Code.

At all elections there must be present, either in person or through a

representative authorized to act by written proxy, the owners of majority
of the outstanding capital stock or a majority of the members entitled to
vote. 100,000,000 shares of stock outstanding = quorum is at least
50,000,001 because majority means 50% +1.

NEW: Voting may be done through remote communications or in absentia

when allowed by the Bylaws. A stockholder or member who votes
through remote communications or in absentia shall be deemed
present for purposes of quorum.

13
 ELECTION OF DIRECTORS
Stockholders entitled to vote shall have the right to vote the number of shares of stock
in their names at the time fixed in the bylaws.

There are 3 ways to vote:

1. Straight Voting: Vote are distributed equally among the candidates without
preference. MOST COMMON. EXAMPLE: Petra owns 1 share of stock. There are 7
candidates for 5 positions. Petra has 5 votes that she can give to any 5 candidates
she wants to vote for.

2. Cumulative Voting: Concentrate said shares and give the votes to only one
candidate. EXAMPLE: Petra owns 1 share of stock. There are 7 candidates for 5
positions. Petra can give her 5 votes to only 1 candidate.

3. Mixed Voting: Distribute them on the same principle among as many candidates as
the stockholder wants. EXAMPLE: Petra owns 1 share of stock. There are 7 candidates
for 5 positions. Petra can give her 2 votes to Candidate A, 1 vote to Candidate B and 2
votes to Candidate E. Any combination is allowed provided she does not overvote.

14
 REQUIRED
CORPORATE OFFICERS
A corporation must elect:

• President
• Treasurer
• Secretary
• Compliance Officer if Company is vested with public interest
• Other Officers in the Bylaws

President / Secretary and President / Treasurer not allowed.

Secretary / Treasurer is allowed

The officers shall manage the corporation and perform such duties as may
be provided in the bylaws and/or as resolved by the board of directors.

Kinds of authority – Actual authority and Apparent authority

15
 APPARENT AUTHORITY OF
CORPORATE OFFICERS

The doctrine of apparent authority provides that a corporation will be

estopped from denying an 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. Advance Paper Corp vs. Arma Traders (2013)

This concept is based on the principle of estoppel (prevent or preclude)

16
 REPORT ON ELECTION OF
DIRECTORS, TRUSTEES AND OFFICERS
Within 30 days after their election the secretary or any other officer of the
corporation shall submit to the SEC the names, nationalities, shareholdings
and residence addresses of the directors, trustees and officers.

If no elections were held, the company shall report to the SEC within 30 days
from the scheduled date of election why the elections were not held and
specify a new date for the election which shall not be later than 60 days from
the original date.

Should a director, trustee or officer die, resign or in any manner cease

to hold office, the secretary or the director, trustee or officer of the
corporation shall within 7 days from knowledge thereof report in
writing such fact to the SEC.

17
 REMOVAL OF
DIRECTORS OR TRUSTEES

Any director or trustee may be removed from office by a vote of the

stockholders holding at least 2/3 of the outstanding capital stock, or in
nonstock corporations by a vote of at least 2/3 of the members
entitled to vote. 100 shares of stock outstanding = at least 67 shares
of stock

This vote can be done either at a Regular Stockholders Meeting or at

a Special Stockholders Meeting called for the purpose with previous
notice to stockholders or members.

Removal may be with or without cause provided that removal without

cause may not be used to deprive minority stockholders of the
right of representation.

18
 REMOVAL OF
DIRECTORS OR TRUSTEES

EXAMPLE: Rachel is a director of the San Fabian Realty Corporation.

During the 2019 local elections, she ran for Mayor of San Fabian and
engaged in vote buying and other illegal election activities. She was
found guilty of these acts by the COMELEC.

If the outstanding capital stock of the company is 150,000 shares

then it will take the vote of at least 100,000 shares (at least 2/3) to
remove her as a director. Removal is with cause – may kasalanan,
may ginawang kamalian.

19
 VACANCIES IN THE OFFICE OF
DIRECTOR OR TRUSTEE

Any vacancy occurring, 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 there is still a quorum. If there is no quorum
the vacancies must be filled by the stockholders or members in a
regular or special meeting called for that purpose.

When the vacancy is due to term expiration, the election shall be held
no later than the day of such expiration at a meeting called for that
purpose.

When the vacancy is due to removal, the election may be held on

the same day as the stockholder’s meeting authorizing the removal
and this act must be stated in the agenda and stockholder’s notice of
the meeting.

20
 VACANCIES IN THE OFFICE OF
DIRECTOR OR TRUSTEE

EXAMPLE: Rachel is a director of the San Fabian Realty Corporation.

During the 2019 local elections, she ran for Mayor of San Fabian and
engaged in vote buying and other illegal election activities. She was
found guilty of these acts by the COMELEC.

A Stockholders Meeting was held on August 5, 2019 for the purpose

of removing her and electing her replacement. If the outstanding
capital stock of the company is 150,000 shares then it will take the
vote of at least 100,000 shares (at least 2/3) to remove her as a
director. Her replacement as director can also be elected on August 5,
2019.

21
 COMPENSATION OF
DIRECTORS OR TRUSTEES

GENERAL RULE: The directors or trustees SHALL NOT RECEIVE ANY

COMPENSATION in their capacity as such except reasonable per diem,
meaning per day. Per diem = per day

EXCEPTION: They can be given compensation if there is a provision

in the bylaws. In no case shall the total yearly compensation of
directors exceed 10% of the net income before taxes of the company
during the preceding year.

Corporations vested with public interest shall submit to their

shareholders and the SEC an annual report of the total compensation
of each director or trustee.

22
 LIABILITY OF
DIRECTORS OR TRUSTEES

Directors or trustees who willfully and knowingly vote for or assent to

(a) patently unlawful acts of the corporation or (b) who are guilty of
gross negligence or bad faith in directing the affairs of the corporation
or (c) acquire any personal or pecuniary (financial) interest in conflict
with their duty shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders and
other persons.

A director, trustee or officer shall not attempt to acquire or acquire

any interest adverse to the corporation in respect of any matter which
has been reposed in them in confidence and upon which equity
imposes a disability to deal in their own behalf.

23
 LIABILITY OF
DIRECTORS OR TRUSTEES

EXAMPLE: Director Rene knew that the Company was going to build a new
mall in the town of San Luis. The mall was going to be constructed in 2 years
time. Director Rene used his inside information and started to buy property
adjacent to the area of the planned mall since he knew prices will increase
once news of the planned mall construction was made public. Director Rene
used confidential information for personal benefit.

EXAMPLE: The Company was having a hard time getting a Mayor’s Permit to
build its new mall in the town of San Luis. Director Rene voted and agreed to
the plan to give the Mayor a bribe of P5M. This was reported to the NBI and
in an entrapment operations, representatives of the Company were caught
handing over the bribe to the Mayor. Director Rene and the others involved
are liable for this illegal act of the company.

24
 DEALINGS OF DIRECTORS, TRUSTEES OR
OFFICERS WITH THE CORPORATION

A contract of the corporation with one or more of its directors, trustees or

officers or their spouses and relatives within the 4th civil degree of
consanguinity or affinity is VOIDABLE, at the option of the corporation,
UNLESS all of the following conditions are present:

a) The presence of the director in the board meeting where the contract
was approved was not necessary to constitute a quorum;
b) The vote of such director was not necessary for the approval of the
contract;
c) The contract is fair and reasonable under the circumstances;
d) In case of corporations vested with public interest, material contracts
are approved by at least 2/3 of the entire membership
of the Board, with at least a majority of the independent
directors voting in favor of the material contract.

TRANSPARENCY IS IMPORTANT.

25
 DEALINGS OF DIRECTORS, TRUSTEES OR
OFFICERS WITH THE CORPORATION

EXAMPLE: Director Rene knew that the Company was planning to build a
new mall in the town of San Luis. It so happens that Director Rene owned a
parcel of land in San Luis that was in a prime location and suitable for the
location of the proposed mall. Director Rene offered the lot to the company
for P15M.

Correct procedure is for Director Rene not to participate in the deliberations of

the Board on whether or not to purchase his property. If the presence of Rene
is needed in order to meet the quorum requirement or if his vote was needed
to approve the purchase of his land, the contract is VOIDABLE. The
corporation can sue to have the contract nullified. VALID unless annulled.

The transaction can be allowed provided safeguards are in place.

26
 DISLOYALTY OF A DIRECTOR

Where a director acquires a business opportunity which should belong

to the corporation, the director must account for and refund to the
corporation all such profits, unless the act has been ratified by a vote
of 2/3 of the outstanding capital stock. This provision shall be
applicable even if the director risked his own funds in the venture.

EXAMPLE: Director Rene knew that the Company was planning to to

purchase 5,000 flu vaccines for its employees and the only supplier in
their area if XYZ Pharmacy. Director Rene purchased all the supply of
flu vaccines for P1,000 each and sold them to the Company for P2,000
each. He is liable to return to the Company the P5M profit he earned.
There is unjust enrichment on the part of Director Rene.

27
 OTHER COMMITTEES
The corporation’s bylaws may allow the Board of Directors to create
not only an Executive Committee but also a Management Committee
and other special committees.

The Executive Committee shall include not fewer than 3 directors and
it may act on matters within the competence of the Board and duly
delegated to them.

EXCEPTIONS: The following matters should be decided by the full

Board and not by a Committee only:

1. Approval of any action requiring stockholder approval;

2. Filing up vacancies in the Board;
3. Amendment, repeal or adoption of bylaws;
4. Amendment or repeal of any Board Resolution that is expressly not
authorized to be done by the Executive Committee;
5. Distribution of cash dividends.

28