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CORPORATION CODE

(B.P. Blg. 68, effective May 1, 1980)


I. GENERAL PROVISIONS

a social and legal entity, independent of

CORPORATION

state recognition and concession. (Tayag

An artificial being created by operation

vs. Benguet Consolidated, Inc., 26 SCRA

of law having the right of succession, and

242)

the powers, attributes and properties


expressly authorized by law and incident

DOCTRINE OF SEPARATE

to its existence. (Sec. 2)

PERSONALITY

corporation

has

juridical

ATTRIBUTES OF A CORPORATION

personality separate and distinct from that

1. It is an artificial being.

of its stockholders or members.

2. It is created by operation of law.

Used for purposes of convenience and

3. It enjoys the right of succession.

to subserve the ends of justice.

4. It has the powers, attributes and

Consequences/significance:

properties expressly authorized by


law or incident to its existence.

1. Liability for acts or contracts


obligations

incurred

by

corporation, acting through its


THEORIES ON THE FORMATION OF A

authorized agents are its sole

CORPORATION:

liabilities. (Creese vs. CA, 93

1. Concession Theory espouses that

SCRA 483)

a corporation is an artificial creature

2. Right to bring actions may

without any existence until it has received

bring civil and criminal actions in

the

acting

its own name in the same manner

according to law, through the SEC.

as natural persons. (Art. 46, Civil

(Tayag vs. Benguet Consolidated, Inc.,

Code)

imprimatur

of

the

state

26 SCRA 242)

3. Right to acquire and possess

2. Theory of corporate enterprise or

property property conveyed to

economic unit espouses that the

or acquired by the corporation is

corporation is not merely an artificial

in

being, but more of an aggregation of

corporation itself as a distinct

persons doing business, or an underlying

legal entity and not that of the

business unit. (Philippine Corporate Law,

stockholders or members. (Art.

Cesar Villanueva, 2001 ed.)

44(3), Civil Code)

law

the

property

of

the

3. Genossenschaft Theory treats a

4. Acquisition of court of jurisdiction

corporation as the reality of the group as

service of summons may be

made on the president, general

the governing body. (PNB vs. CA,

manager,

83 SCRA 237)

corporate

secretary,

treasurer or in-house counsel.

8. A corporation is not entitled to

(Sec. 11, Rule 14, Rules of

moral damages because it has no

Court).

feelings, no emotions, no senses.

5. Changes

in

individual

(ABS-CBN vs. Court of Appeals)

remains

9. Liability for Crimes since a

unchanged and unaffected in its

corporation is a mere legal fiction,

identity

its

it cannot be held liable for a crime

(The

committed by its officers, since it

the

does not have the essential

Philippines Annotated, Hector de

element of malice; in such case

Leon, 2002 ed.)

the responsible officers would be

membership
by

individual

changes

in

membership.

Corporation

Code

6. Entitlement

to

of

constitutional

criminally liable. (People vs. Tan

guaranties:
a. Due

Boon Kong, 54 Phil.607)

process

University

(Albert

vs.

Publishing,

13

SCRA 84)

CORPORATE ENTITY

b. Equal protection of the law


(Smith,
c.

DOCTRINE OF PIERCING THE VEIL OF

Bell

&

Co.

vs.

Requires the court to see through the


protective shroud which exempts its

Natividad, 40 Phil. 136)

stockholders from liabilities that they

Protection

ordinarily

against

would

subject

or

from

distinguishes

seizures.

seemingly separate one, were it not for

vs.

Diokno, 20 SCRA 383)


A corporation is not

corporation

to,

unreasonable searches and


(Stonehill

be

the existing corporate fiction. (Lim vs. CA,


323 SCRA 102)

entitled to invoke the right against

Rules: (Philippine Corporate Law,

self-incrimination.

Cesar Villanueva, 2001 ed.)

(Bataan

Shipyard vs. PCGG)


7. Liability for torts a corporation

1. has only a res judicata effect


2. to prevent wrong or fraud and not
available for other purposes

is liable whenever a tortuous act


is committed by an officer or

3. judicial prerogative only

agent under the express direction

4.

or authority of the stockholders or

must be with necessary and with


factual basis

members acting as a body, or,

When directors and officers are unable

generally, from the directors as

to compensate a party for a personal


obligation, it is far-fetched to allege that a

corporation

is

perpetuating

fraud

or

separating ownership from

promoting injustice, and thereby could be


held liable

therefor

by

management.

piercing the

b. If the stockholders do not

corporate veil. (Francisco Motors, Inc. vs.

respect the separate entity,

CA, G.R. No. 100812, June 25, 1999)

others

cannot

also

be

expected to be bound by the


3 CLASSES OF PIERCING (Philippine

separate juridical entity.

Corporate Law, Cesar Villanueva, 2001

c.

ed.)

Applies even when there are


no monetary claims sought to
be enforced.

1. Fraud Cases when a corporation is

3.

Equity cases when piercing the

used as a cloak to cover fraud, or to

corporate fiction is necessary to

do wrong.

achieve justice or equity.

Rules:
a. There must have been

ALTER

EGO

RULE

affected transaction and

Where one corporation is so organized

the mere proof of control

and

of

by

conducted so that it is, in fact, a mere

itself would not authorize

instrumentality or adjunct of the other, the

piercing.

fiction of the corporate entity of the

the

corporation

seek for the enforcement


of

pecuniary

pertaining

claims

to

corporation
corporate

the
against

officers

or

stockholders.
Ego

fraud or evil motive in the

b. The main action should

2. Alter

INSTRUMENTALITY

Cases

controlled

and

its

affairs

are

instrumentality may be disregarded.


Requisites:
1. There must be control, not mere
majority

or

complete

stock

control, but complete domination,


not only of finances, but of policy,
and business practice in respect

when

the

to the transaction attacked so that

corporate entity is merely a farce

the corporate entity as to this

since the corporation is an alter ego,

transaction had, at that time, no

business conduit or instrumentality of

separate mind, will or existence

a person or another corporation.

of its own (control);

Rules:

2. Such control must have been

a. It applies because of the

used by the defendant to commit

direct violation of a central

fraud or wrong, to perpetrate the

corporate law principle of

violation of a statutory or other

positive duty, or dishonest and

not

unjust act in contravention of

every partner is an

manage its affairs

plaintiffs legal rights (breach of

agent

is vested in the

duty); and

agreed

upon,

of

the

partnership

or trustees

must proximately cause the injury


Inc. vs. NLRC, 257 SCRA, 149)
Partnership

6. Effect of mismanagement
A partner as such can

The suit against a

sue a co-partner who

member

mismanages

board of directors

Corporation

or

by

agreement

mere
of

the

of

trustees

the
who

mismanages must

1. Creation
Created

and

board of directors

3. Such control and breach of duty


to the plaintiff. (Concept Builders,

business

Created by law or

be in the name of

by operation of law

the corporation

parties

7. Right of succession

2. Number of incorporators
May be organized by

Requires at least

Partnership has no

Corporation

at least two persons

five

right of succession

right of succession

incorporators

(except

8. Extent of liability to third persons

corporation sole)

Partners

3. Commencement of juridical personality


Acquires

juridical

Acquires

juridical

are

liable

personally

and

moment of execution

date of issuance of

for partnership debts

of

the

to third persons

partnership

certificate

of

9. Transferability of interest

incorporation by the
Securities

and

liable only to the


subscribed by them

(sometimes solidarily)

of

are

extent of the shares

personality from the

contract

Stockholders

subsidiarily

personality from the


the

has

Partner

cannot

Stockholder

has

Exchange

transfer his interest in

generally the right

Commission

the partnership so as

to

to

shares without prior

4. Powers

make

the

transfer

transferee a partner

consent

exercise only the

without

other stockholders

power authorized by

powers

unanimous consent of

because

the partners (provided

granted by law or

all

corporation is not

it is not contrary to

implied from those

partners because the

based

law,

granted or incident

partnership is based

principle

to its existence

on the principle of

Partnership
may

Corporation

exercise

morals,

any

good

customs, public order,

can

expressly

the

the
existing

delectus personarum

public policy)

5. Management
When management is

The power to do

10. Term of existence

of

his

on

the

this

partnership may be

corporation

established for any

not be formed for a

capacity to act and

ted in formation and

period

time

term in excess of

contract as a distinct

management

the

50 years extendible

unit in its own name

2.

to not more than 50

2.

years in any one

existence

instance

3.

of

stipulated

by

partners

may

11. Firm name

1.

has

continuity

of

1.

of

complica-

high

cost

formation

and

operations

its

credit

is

3.

by

its

weakened

strengthened
may

legal

its credit is

continuity of existence

limited

4.

feature

by

the

liability

Limited partnership is

corporation

required by law to

adopt

add the word Ltd.

provided it is not

management

To its name

the

board of directors.

personal element.

any

5.

5.

firm

management,

any

name

same

similar

as

to

registered

or

name

12. Dissolution

its

in

the

creation,

4.

lack

degree
and

governmental

dissolution

are

supervision

dissolved with the

are

ment

consent

one

any time by any or all

only
of

be
the

State

13. Governing Law


governed by the Civil

governed

by

the

Code

Corporation Code

of

organization

6.

can

of

greater

standardized as they

may be dissolved at
of the partners

centralized

governed

under
general

manageand

control

are separated from

incorporation law.

ownership.

6.

limited liability

7.

7.

shareholders

ders have little voice

Stockhol-

are not the general

in the conduct of the

agents of the business

business.

8.

transferability

of

shares

FRANCHISES OF CORPORATION
1. Primary or corporate franchise/General

Franchise
The right or privilege granted by the
ADVANTAGES

VIS--VIS

DISADVANTAGES OF

BUSINESS

CORPORATION (The Corporation Code

of the Philippines Annotated, Hector de


Leon, 2002 ed.)
ADVANTAGES

DISADVANTAGE
S

State to individuals to exist and act as a


corporation after its incorporation.
2. Secondary or special franchise
The special right or privilege conferred
upon an existing corporation to the
business

for

Example,

use

which
of

it
the

was

created.

streets

of

municipality to lay pipes or tracks, or

operation of a messenger and express

the requirements of a valid law.

delivery service.

Its existence cannot be inquired


collaterally. Such inquiry may be
SECONDARY

made by the Solicitor General in

Refers to the exercise

a quo warranto proceeding. (Sec.

franchise of being or

of

20)

existing

right

PRIMARY
Refers

to
as

the
a

corporation
Vested

rights.

Example:

of

eminent

domain
in

individuals
compose

the

Vested

in

the

who

corporation after its

the

incorporation and not

corporation

upon the individuals


who

compose

the

Requisites:
1. The existence of a valid law
under

which

may

be

incorporated;
2. A bona fide attempt in good
faith to incorporate under
such law;

corporation.
be

sold

or

3. Actual use or exercise in

Cannot be sold or

May

transferred because

transferred; subject to

good

it is inseparable from

sale

powers; and

the corporation itself.

subject to levy.

on

it

execution,

faith

of

corporate

4. Issuance of a certificate of
incorporation by the SEC as

CLASSES OF CORPORATION

a minimum requirement of

1. AS TO ORGANIZERS

continued good faith.

a. public by State only; and


b.private by private persons alone

The

only

between

difference
de

facto

or with the State.

corporation and a de jure

2. AS TO FUNCTIONS

corporation is that a de jure

a. public government of a portion


of the territory; and
b. private usually for profit-making

3. AS TO GOVERNING LAW
a. public Special Laws; and
b. private

Law

on

Private

Corporations
4. AS TO LEGAL STATUS
a. De jure corporation organized in

corporation can successfully


resist a suit by a state
brought

to

existence;

challenge
a

de

its
facto

corporation cannot sustain its


right to exist.
c. Corporation by estoppel group of
persons that assumes to act as a
corporation knowing it to be

accordance with the requirements

without authority to do so, and

of law.

enters into a transaction with a

b. De facto corporation organized


with a colorable compliance with

third person on the strength of


such appearance. It cannot be

(The

Corporation

the

Philippines

permitted to deny its existence in

corporation.

an action under said transaction.

Code

(Sec. 21) It is neither de jure nor

Annotated, Hector de Leon, 2002

de facto.

ed.)

d. Corporation by prescription

c.

of

Affiliates - company which is

exercised

subject to common control of a

corporate powers for an indefinite

mother holding company and

period without interference on the

operated as part of the system.

part of the sovereign power, e.g.

d. Parent and Subsidiary Corporation

one

which

has

Roman Catholic Church.

- separate entities with power to

5. AS TO EXISTENCE OF SHARES OF

contract with each other. The

STOCK

board of directors of the parent

a. Stock corporation a corporation

company

its

(1) whose capital stock is divided

representatives to attend and

into shares and (2) which is

vote in the stockholders meeting

authorized

to

of

or

stockholders

to

shareholders

distribute
dividends

its

subsidiary.
of

The

the

parent

allotments of the surplus profits

company demand representation

on the basis of the shares held.

in the board meetings of its

(Sec. 3)

subsidiary.

b. Non-stock corporation does not


issue

stocks

nor

7. AS

6. AS

TO

TO

PLACE

a. Domestic

RELATIONSHIP

OF

INCORPORATION

distribute

dividends to their members.

corporation-

corporation formed, organized, or

OF

existing under Philippine laws.

MANAGEMENT AND CONTROL


a.

determines

b. Foreign

Holding Corporation - it is one

corporation

as a

corporation formed, organized, or

subsidiary by the power to elect

existing under any laws other

management. It is one that holds

than those of the Philippines.

stocks in other companies for

(Sec. 123)

which controls

another

purposes of control rather than


ONE-MAN CORPORATION

for mere investment.


b.

Subsidiary Corporation - one

corporation

wherein

all

or

which is so related to another

substantially all of the stocks is held

corporation that the majority of its

directly or indirectly by one person.

directors can be elected directly

However, it should still follow the formal

or

requirements

indirectly

by

such

other

of

corporation

(e.g.

number

of

of

2. A foreign corporation licensed as doing

stockholders

business in the Philippines of which 100%

owning shares in a nominal capacity) in

of the outstanding capital stock entitled to

order to validly enjoy the attributes of the

vote is wholly owned by Filipinos; and

corporation, so as to avoid the application

However, it provides that where a

of the doctrine of piercing the veil of

corporation

corporate entity.

stockholders own stocks in a SEC-

directors

incorporators,

composed

of

board

and

its

non-Filipino

registered enterprise, at least 60% of the


TESTS TO DETERMINE NATIONALITY

capital stock outstanding and entitled to

OF CORPORATIONS

vote of both corporations and at least

60% of the members of the board of

determined by the state of incorporation,

directors of both corporations must be

regardless

Filipino citizens (double 60% rule).

1.

INCORPORATION

TEST

of the nationality

of

the

stockholders.
2.

DOMICILE TEST determined by

NOTE: The law applies the control test

both with respect to the ownership of

the state where it is domiciled.

shares

entitled

to

vote

and

the

The domicile of a corporation is the

membership in the board of directors.

place fixed by the law creating or


recognizing it; in the absence thereof, it

COMPONENTS OF A CORPORATION

shall be understood to be the place where

a. Corporators those who compose a

its legal representation is established or

corporation, whether as stockholders or

where it exercise its principal functions.

members

(Art. 51, NCC)

b.

3. CONTROL TEST determined by the

mentioned in the Articles of Incorporation

nationality of the controlling stockholders

as originally forming and composing the

or members. This test is applied in times

corporation, having signed the Articles

of war. Also known as the WARTIME

and acknowledged the same before a

TEST.

notary public. They have no powers

Incorporators

They

are

those

beyond those vested in them by the


PHILIPPINE NATIONAL UNDER THE

statute.

FOREIGN INVESTMENT ACT OF 1991

Qualifications:

(R.A. No. 7042):

1. natural person;

1. A corporation organized under the laws

2. not less than 5 but not more than

of the Philippines of which at least 60% of

15;

the outstanding capital stock entitled to

3. of legal age;

vote is owned and held by Filipino

4. majority must be residents of the

citizens;

Philippines; and

5. each must own or subscribe to at


least one share. (Sec. 10)

He is an agent of the incorporators but


not of the corporation.

GENERAL RULE: Only natural persons

Contracts by the promoter for and in

can be incorporators.

behalf

EXCEPTION: When otherwise allowed

generally bind only him, subject to and to

by law, e.g., Rural Banks Act of 1992,

the extent of his representations, and not

where

are

the corporation, unless and until after

allowed to be incorporators of rural

these contracts are ratified, expressly or

banks. Note: However, it is undeniable

impliedly,

that corporations can be corporators.

Directors/Trustees.

c. Stockholders owners of shares of

b. Subscriber persons who have

stock in a stock corporation

agreed to take and pay for original,

d.

incorporated

Members

cooperatives

corporators

of

of

proposed

by

its

corporation

Board

of

unissued shares of a corporation formed


or to be formed.

corporation which has no capital stock

c.

Underwriter

person

who

INCORPORATORS

CORPORATORS

guarantees on a firm commitment and/ or

signatory

the

stockholder

(stock

declared best effort basis the distribution

of

corporation)

or

and sale of securities of any king by

Articles

to

Incorporation

member (non-stock

another company. (Sec. 3 R.A. 8799)

corporation)
fait

accompli;

they may cease to

accomplished fact (the

be

if

they

Articles

subsequently

lose

Incorporation

of
cannot

such

their qualifications

CLASSIFICATION OF SHARES
1. COMMON SHARES
The basic class of stock ordinarily and

be amended to replace

usually issued without extraordinary rights

them)

and privileges, and the owners thereof

number is limited to 5-

no restriction as to

are entitled to a pro rata share in the

15

number

profits of the corporation and in its assets

must have contractual

may be such

upon dissolution and, likewise, in the

capacity

through a guardian

management

of

its

affairs

without

preference or advantage whatsoever.


OTHER COMPONENTS

2. PREFERRED SHARES

a. Promoter - A person who, acting alone

or with others, takes initiative in founding

preferences either with respect to (a)

and organizing the business or enterprise

assets after dissolution, (b) distribution of

of the issuer and receives consideration

dividends, or both, and other preferences.

therefor.

Limitations:

Those issued with par value, and

a. If deprived of voting rights, it shall still

4. TREASURY SHARES

be entitled to vote on matters enumerated

Shares that have been earlier issued

in Section 6 paragraph 6.

as fully paid and have thereafter been

b. Preference must not be violative of the

acquired by the corporation by purchase,

Code.

donation, and redemption or through

c. May be issued only with a stated par

some lawful means. (Sec. 9)

value.

If purchased from stockholders: The

d. The board of directors may fix the

transaction in effect is a return to the

terms and conditions only when so

stockholders

authorized by the articles of incorporation

investment

and such terms and conditions shall be

reversion of the shares to the corporation.

effective upon filing a certificate thereof

The corporation must have surplus profits

with the SEC.

with which to buy the shares so that the

3. REDEEMABLE SHARES

transaction will not cause an impairment

Those which permit the issuing

corporation to redeem or purchase its

of
in

the
the

value
company

of

their

and

of the capital.

If acquired by donation from the

own shares.

stockholders: The act would amount to a

Limitations:

surrender of their stock without getting

a. Redeemable shares may be issued


only when expressly provided for in

voluntarily given to the corporation.

the articles of incorporation;

Treasury shares need not be sold at

b. The terms and conditions affecting

par or issued value but may be sold at the

said shares must be stated both in the

best price obtainable, provided it is

articles of incorporation and in the

reasonable. When treasury shares are

certificates of stock representing such

sold below its par or issued value, there

shares;

can be no watering of stock because

c.

Redeemable

shares

may

be

such watering contemplates an original

deprived of voting rights in the articles

issuance of shares.

of

Treasury shares have no voting rights

incorporation,

unless

otherwise

provided in the Code.

back their investments that are instead,

Redeemable

shares

as long as they remain in treasury


may

be

(uncalled

and

subject

to

reissue).

redeemed, regardless of the existence of

Reason: A corporation cannot in any

unrestricted retained earnings (Sec. 8),

proper sense be a stockholder in itself

provided that the corporation has, after

and equal distribution of voting rights will

such redemption, sufficient assets in its

be effectively lost.

books to cover debts and liabilities

Neither are treasury shares entitled to

inclusive of capital stock.

dividends or assets because dividends

cannot be declared by a corporation to

d. incurring, creating or increasing

itself.

bonded indebtedness;

5. FOUNDERS' SHARE

e. increase or decrease of capital

Shares issued to organizers and


promoters

of

corporation

stock

in

f.

consideration of some supposed right or

merger

or

consolidation

of

capital stock

property.

g. investments of corporate funds

Shares classified as such in the

in

articles of incorporation which may be

another business purpose; and

given special preference in voting rights


and

dividend

payments.

But

if

another

corporation

or

h. corporate dissolution

an

exclusive right to vote and be voted for as

8. ESCROW STOCK

director is granted, this privilege is subject

Deposited with a third person to be

to approval by the SEC, and cannot

delivered to a stockholder or his assign

exceed 5 years from the date of approval.

after complying with certain conditions,

6. VOTING SHARES

usually payment of full subscription price.

Shares with a right to vote.

9. OVER-ISSUED STOCK

7. NON-VOTING SHARES

Shares without right to vote.

authorized capital stock. It is also known

The law only authorizes the denial of

as

voting rights in the case of redeemable

considered null and void.

shares and preferred shares, provided

10. WATERED STOCK

that there shall always be a class or

A stock issued not in exchange for its

series of shares which have complete

equivalent either in cash, property, share,

voting rights.

stock dividends, or services.

These redeemable and preferred

Water in the stock represents the

shares, when such voting rights are

difference between the fair market value

denied, shall nevertheless be entitled to

at the time of the issuance of the stock

vote

and the par or issued value of said stock.

on

the

following

fundamental

matters: Key: A2 SI2 MID


a. amendment

issued

spurious

in

stock.

excess
Its

of

issuance

the
is

Both par and no par stocks can thus be


of

Articles

of

Incorporation
b. adoption and amendment of
c.

Stock

watered stocks.
It includes stocks:
a. Issued without consideration.

by-laws;

b.

sale or disposition of all or

corporation has received a lesser sum of

substantially all of corporate

money than its par or issued value.

property;

Issued

as

fully

paid

when

the

c. Issued for a consideration other than

can command its transfer to his name

actual cash, the fair valuation of which is

from the issuing corporation.

less than its par or issued value.

14. CONVERTIBLE SHARE

d. Issued as stock dividend when there

A share that is changeable by the

are no sufficient retained earnings to

stockholder from one class to another at

justify it.

a certain price and within a certain period.

11. PAR VALUE SHARES

15. FRACTIONAL SHARE

Shares with a value fixed in the

A share with a value of less than one

certificates of stock and the articles of

full share.

incorporation.
12. NO PAR VALUE SHARES

DOCTRINE OF EQUALITY OF SHARES

Shares having no par value but have

Where the articles of incorporation do

issued value stated in the certificate or

not provide for any distinction of the

articles of incorporation.

shares of stock, all shares issued by the

Limitations:

corporation are presumed to be equal

a. No par value shares cannot have


an issued price of less than P5.00;

and enjoy the same rights and privileges


and are also subject to the same

b. The entire consideration for its

liabilities. (Sec. 6)

issuance constitutes capital so that no


part of it should be distributed as

DEFINITION OF TERMS:

dividends;

1. CAPITAL STOCK OR LEGAL STOCK

c.

They

cannot

be

issued

as

preferred stocks;

fixed in the corporate charter to be

d. They cannot be issued by banks,


trust

companies,

OR STATED CAPITAL - The amount

insurance

subscribed and paid in cash, kind or


property

at

the

organization

of

the

companies, public utilities and building

corporation or afterwards and upon which

and loan association;

the corporation is to conduct its operation.

e. The articles of incorporation must

2. CAPITAL The value of the actual

state the fact that it issued no par

property or estate of the corporation

value shares as well as the number of

whether in money or property. Its net

said shares;

worth (or stockholders equity) is its

f.

Once issued, they are deemed

assets less liabilities.

fully paid and non-assessable. (Sec.

3. AUTHORIZED CAPITAL STOCK - The

6)

capital stock divided into shares with par

13. STREET CERTIFICATE

values. Par value stocks are required in

A stock certificate endorsed by the

the case of corporations issuing preferred

registered holder in blank and transferee

shares, as well as in the case of banks,

trust companies, insurance companies,

4. Issuance by the SEC of the certificate

building and loan associations, and public

of incorporation

utilities. It is the total amount in the

c.

charter, which may be raised by the

COMMENCEMENT

corporation for its operations.

TRANSACTION OF BUSINESS

4. SUBSCRIBED CAPITAL STOCK - The

These are conditions subsequent,

total

which may be satisfied by substantial

amount

of

the

capital

stock

FORMAL

ORGANIZATION
OF

AND
THE

subscribed whether fully paid or not.

compliance in order that a corporation

5. OUTSTANDING CAPITAL STOCK -

may legally continue as such.

The portion of the capital stock issued to

Formal organization:

subscribers except treasury stocks.

1. Adoption of By-Laws and filing of the

6. STATED CAPITAL The capital stock

same with the SEC;

divided into no par value shares.

2. Election of board of directors/trustees,

7. PAID-UP CAPITAL The amount paid

and officers;

by the stockholders on subscriptions from

3. Establishment of principal office;

unissued shares of the corporation.

4. Providing for subscription and payment


of capital stock.

II.

INCORPORATION

AND
TERM OF CORPORATE EXISTENCE

ORGANIZATION

Limitations:
STEPS

IN

THE

CREATION

OF

a. The term shall not exceed 50 years in

CORPORATION

any one instance.

a. PROMOTION a number of business

b. The amendment is effected before the

operations peculiar to the commercial

expiration of corporate term, for after

world by which a company is generally

dissolution by expiration of the corporate

brought into existence. (18 Am. Jur. 2d

term there is no more corporate life to

647, cited in de Leon p. 116)

extend.

b. INCORPORATION

c. The extension cannot be made earlier

Steps:

than 5 years prior to the expiration date

1. Drafting and execution of Articles of

unless there are justifiable reasons as

Incorporation by the incorporators and

determined by the SEC.

other documents required for registration


of the corporation

CAPITAL STOCK REQUIREMENT

2. Filing with the SEC of the articles of

General Rule: No minimum authorized

incorporation

capital stock as long as the paid-up

3. Payment of filing and publication fees

capital is not less than P5,000.00

Except:

a. as provided for by special law


1.

Domestic

Corporations

e) Criminology
Insurance

P500T

capital

f)

Chemistry

g) Customs Brokerage

stock; 50% subscribed and the

h) Environmental Planning

balance payable in 12 months.

i)

Forestry

j)

Geology

2. Private Development Banks


- P4M for class A

k) Interior Design

- P2M for class B

l)

- P1M for class C

m) Law

3. Investment Companies paid up

Landscape Architecture

n) Librarianship
o) Marine Deck Officers

at least P500T
4. Savings and Loan Corporation

p) Marine Engine Officers

to be fixed by the Monetary

q) Master Plumbing

Board, but not less than P100T

r)

s) Social Work

5. Financing Companies
Paid up: - P2M for Metro Manila

t)

Teaching

- P1M for Cities

u) Agriculture

- P500T for others

v) Fisheries

b. provided that at least 25% of the


authorized

Sugar Technology

capital

stock

has

been

subscribed and at least 25% of the total


subscription must be paid-up

3. Retail trade enterprises with paid-up


capital

of

less

than

US$2,500,000(Sec. 5 of RA 8762)
4. Cooperatives (Ch. III, Art. 26 of RA
6938)

FILIPINO PERCENTAGE
OWNERSHIP REQUIREMENT

5. Private Security Agencies (Sec. 4 of


RA 5487)
6. Small-scale Mining (Sec. 3 of RA
7076)

NO FOREIGN EQUITY

7. Utilization of Marine Resources in


1. Mass Media except recording (Art.

archipelagic waters, territorial sea,

XVI, Sec. 11 of the Constitution;

and exclusive economic zone as well

Presidential Memorandum dated 04

as small-scale utilization of natural

May 1994)

resources in rivers, lakes, bays, and

2. Practice of all professions


a)

Engineering

b) Medicine and Allied Professions

lagoons (Art. XII, Sec. 2 of the


Constitution)
8. Ownership,

operation

and

c) Accountancy

management of cockpits (Sec. 5 of

d) Architecture

PD 449)

9. Manufacture,
and/or

repair,

distribution

of

stockpiling

15. Contracts for the construction of

nuclear

defense-related structures (Sec. 1 of

weapons (Art. II, Sec. 8 of the

CA 541)

Constitution)
10. Manufacture,
and/or

repair,

distribution

stockpiling

of

Up to Thirty Percent (30%) Foreign Equity

biological,

chemical and radiological weapons


and anti-personnel mines

(Various

16.

Advertising (Art. XVI, Sec. 11 of the


Constitution)

treaties to which the Philippines is a


signatory and conventions supported

Up to Forty Percent (40%) Foreign Equity

by the Philippines)

17. Exploration,

11. Manufacture of firecrackers and other


pyrotechnic devices (Sec. 5 of RA

development

and

utilization of natural resources (Art.


XII, Sec. 2 of the Constitution)
18. Ownership of private lands (Art. XII,

7183)

Sec. 7 of the Constitution; Ch. 5, Sec.


Up to Twenty Percent (20%) Foreign

22 of CA 141; Sec. 4 of RA 9182)


19. Operation and management of public

Equity

utilities (Art. XII, Sec. 11 of the


12. Private

radio

communications

Constitution; Sec. 16 of CA 146)


20. Ownership/establishment

network (RA 3846)

administration

of

and
educational

Up to Twenty-Five Percent (25%) Foreign

institutions (Art. XIV, Sec. 4 of the

Equity

Constitution)
21. Culture,

13. Private recruitment, whether for local

production,

processing,

trading

of

rice

and

milling,
excepting

or overseas employment (Art. 27 of

retailing,

corn

and

PD 442)

acquiring, by barter, purchase or

14. Contracts for the construction and

otherwise, rice and corn and the by-

repair of locally-funded public works

products thereof (Sec. 5 of PD

(Sec. 1 of CA 541, LOI 630) except:

194;Sec. 15 of RA 8762
22. Contracts for the supply of materials,

a) infrastructure/development
projects covered in RA 7718; and
b) projects which are foreign funded
or

assisted

and

required

to

goods

and

government-owned
corporation,

commodities
or

company,

to

controlled
agency

or

undergo international competitive

municipal corporation (Sec. 1 of RA

bidding (Sec. 2a of RA 7718)

5183)

23. Project

Proponent

and

Facility

2. It is an essential requirement for

Operator of a BOT project requiring a

the existence of a corporation, even a

public utilities franchise (Art. XII, Sec.

de facto one.

11 of the Constitution; Sec. 2a of RA


7718)
24. Operation of deep sea commercial
fishing vessels (Sec. 27 of RA 8550)
25. Adjustment Companies (Sec. 323 of
PD 612 as amended by PD 1814)
26. Ownership

of

condominium

Contents: (Sec. 14)


1. name of corporation;
2. purpose/s, indicating the primary
and secondary purposes;

units

3. place of principal office;

where the common areas in the

4. term of existence;

condominium project are co-owned by

5. names,

the owners of the separate units or

residences of incorporators;

owned by a corporation (Sec. 5 of RA

6. number, names, citizenship and

4726)

residences of directors or trustees;


7. names,

Up to Sixty Percent (60%) Foreign Equity

citizenship

nationalities,

and

and

residences of the persons who shall


act as directors or trustees until the

27. Financing companies regulated by

first regular ones are elected and

the Securities and Exchange

qualified;

Commission (Sec. 6 of RA 5980 as

8. if a stock corporation, the amount

amended by RA 8556)

of its authorized capital stock, number

28. Investment houses regulated by the

of shares and in case the shares are

SEC (Sec. 5 of PD 129 as amended

par value shares, the par value of

by RA 8366)

each share;
9. names, residences, number of

ARTICLES OF INCORPORATION (AI)


the

and paid by each of the original

persons establishing a corporation and

subscribers which shall not be less

filed with the SEC containing the matters

than 25% of authorized capital stock;

required by the Code.

10. if

Significance:

capital, the names, residences, and

The

document

prepared

by

shares, and the amounts subscribed

non-stock,

the

amount

of

1. The issuance of a certificate of

amount paid by each contributor,

incorporation signals the birth of the

which shall not be less than 25% of

corporations juridical personality;

total subscription;
11. name of treasurer elected by
subscribers; and

12. if the corporation engages in a

6. The amendments shall take effect

nationalized industry, a statement

only upon their approval by the SEC

that no transfer of stock will be

7. If the corporation is governed by

allowed if it will reduce the stock

special law, the amendments must be

ownership

accompanied

of

Filipinos

to

by

favorable

of

the

appropriate

percentage below the required legal

recommendation

minimum.

government agency.

AMENDMENT

OF

ARTICLES

OF

NON-AMENDABLE

FACTS

IN

THE

INCORPORATION

ARTICLES OF INCORPORATION

Limitations:

Those matters referring to facts

1. The amendment of any provision or

existing as of the date of the incorporation

matters

such as:

stated

in

the

articles

of

incorporation is not allowed when it will

1. Names of incorporators;

be

2. Names of original subscribers to

contrary

to

the

provisions

or

requirement prescribed by the Code or by

the

special law or changes any provision in

corporation and their subscribed

the articles of incorporation stating an

and paid up capital;

accomplished fact

capital

of

the

3. Treasurer elected by the original

2. It must be for legitimate purposes

subscribers;

3. It must be approved by the required

4. Members who contributed to the

vote of the board of directors or trustees

initial

and the stockholders or members

corporation;

4. The original articles and amended


articles

stock

together

must

contain

all

provisions required by law to be set out in


the articles of incorporation

capital

of

non-stock

5. Date and place of execution of


the articles of incorporation;
6. Witnesses to the signing and
acknowledgment of the articles.

5. Such articles, as amended, must be


indicated by underscoring the changes

GROUNDS

made, and a copy thereof duly certified

ARTICLES OF INCORPORATION OR

under oath by the corporate secretary

AMENDMENT THERETO

and a majority of the directors or trustees

1. The articles or its amendment is not

stating that the amendments have been

substantially in accordance with the form

duly approved by the required vote of the

prescribed

stockholders

2. The purposes of the corporation are

or

members

submitted to the SEC

must

be

FOR

REJECTION

OF

patently unconstitutional, illegal, immoral,

or contrary to government rules and

a director. (Sec. 23) For a non-stock

regulations

corporation,

3. The Treasurers Affidavit concerning

corporation can be elected to seat in the

the amount of capital stock subscribed

Board of Trustees.

and/or paid is false

In order to be eligible as a director,

4. The required percentage of ownership

what is material is the legal title to, not

of the capital stock to be owned by

beneficial

Filipino citizens has not been complied

appearing on the books of the corporation

with

2.

only

members

ownership

of

of

the

the

stocks

A majority of the directors/trustees

must be residents of the Philippines.


GROUNDS

FOR

SUSPENSION

OR

(Sec. 23)

REVOCATION OF CERTIFICATE OF

3. He must not have been convicted by

REGISTRATION (Pres. Decree No. 902-

final judgment of an offense punishable

A)

by imprisonment for a period exceeding 6

1. Fraud in procuring its certificate of

years or a violation of the Corporation

incorporation

Code, committed within five years from

2. Serious misrepresentation as to what

the date of his election. (Sec. 27)

the corporation can do or is doing to the

4. Only natural persons can be elected

great prejudice of, or damage to, the

directors/trustees.

general public

In case of corporate stockholders or

3. Refusal to comply with or defiance of a

members, their representation in the

lawful order of the SEC restraining the

board can be achieved by making their

commission of acts which would amount

individual representatives trustees of the

to a grave violation of its franchise

shares or membership to make them

4. Continuous inoperation for a period of

stockholders/members of record.

at least 5 years

5.

5. Failure to file the by-laws within the

prescribed

required period

Other qualifications as may be


in

the

by-laws

of

the

corporation.

6. Failure to file required reports

6. Must be of legal age

III. BOARD OF DIRECTORS/TRUSTEES

CORPORATE OFFICERS

Qualifications:

1. President must be a director;

1. For a stock corporation, ownership of

2. Treasurer may or may not be a

at least 1 share capital stock of the

director; as a matter of sound corporate

corporation in his own name, and if he

practice, must be a resident

ceases to own at least one share in his

3. Secretary need not be a director

own name, he automatically ceases to be

unless required by the by-laws; must be a

resident and citizen of the Philippines;

by a board of directors, if the articles

and

of incorporation so provide.

4. Such

other

officers

as

may

be

The power to purchase real property

provided in the by-laws.

is vested in the board of directors or


CORPORATE

CORPORATE

trustees. While a corporation may

OFFICER

EMPLOYEE

appoint agents to negotiate for the


the

purchase of real property needed by

the

the corporation, the final say will have

under the Corporation

managing officer of

to be with the board, whose approval

Code

the corporation

RTC has jurisdiction

NLRC has jurisdiction

will

in

in

Position is provided

Employed

for in the by-laws or

action

case

of

labor

dispute

by
of

case

of

OF

powers

of

RULE:

through its officers and agents when


authorized by a board resolution or by

CORPORATE

the

The

its by-laws. (Spouses Constantine


Firme vs. Bukal Enterprises and

corporate

Development Corporation, G.R. No.

corporation shall be

146608, October, 23, 2003)

exercised, all business conducted and all


property of such corporation controlled
and held by the board of directors or
trustees. (Sec. 23)
case

of

an

Executive

Committee duly authorized in the bylaws;


2. In case of a contracted manager
which

may

be

an

individual,

partnership, or another corporation.


Note: In case the contracted manager
is another corporation, the special
rule in Sec. 44 applies.
3. In case of close corporations, the
stockholders

LIMITATIONS ON POWERS OF BOARD


OR DIRECTORS/TRUSTEES
1.

EXCEPTIONS:
1. In

may

through its board of directors and

POWERS

GENERAL

transaction.

powers and transact its business

DIRECTORS/TRUSTEES

AS REPOSITORY OF

the

corporation can only exercise its

labor

disputes

BOARD

finalize

manage

the

business of the corporation instead

Limitations

Constitution,

imposed
statutes,

by
articles

the
of

incorporation or by-laws.
2. Cannot perform constituent or those
involving fundamental changes in the
corporation requiring the approval of
stockholders or members.
3. Cannot exercise powers not possessed
by the corporation. (The Corporation

Code

of

the

Philippines

Annotated,

Hector de Leon, 2002 ed.)


NATURE OF POWERS OF BOARD OF
DIRECTORS/TRUSTEES

(The

Corporation Code of the Philippines


Annotated, Hector de Leon, 2002 ed.)

THREE-FOLD DUTIES OF DIRECTORS:

a. Under the Theory of Original Power,

(Philippine

the powers of the board of directors or

Villanueva, 2001 ed.)

trustees

1. Duty of Obedience

are

ORIGINAL

and

Corporate

Law,

Cesar

UNDELEGATED. The stockholders or

To direct the affairs of the corporation

members do not confer, nor can they

only in accordance with the purposes for

revoke those powers.

which it was organized.

b. They are DERIVATIVE only in the

Legal Basis: The directors or trustees

sense of being received from the State in

and officers to be elected shall perform

the act of incorporation.

the duties enjoined on them by law and


the by-laws (Sec. 25)

BUSINESS JUDGMENT RULE

2. Duty of Diligence

A resolution or transaction pursued

Legal Basis: Directors or trustees who

within the corporate powers and business

willfully and knowingly vote for or assent

operations of the corporation, and passed

to

in good faith by the board of directors, is

corporation or who are guilty of gross

valid and binding, and generally the

negligence or bad faith in directing the

courts have no authority to review the

affairs of the corporation shall be liable

same and substitute their own judgment,

jointly and severally for all damages

even when the exercise of such power

resulting

may cause losses to the corporation or

corporation, its stockholders or members

decrease the profits of a department.

and other persons (Sec. 31)

(Philippine

3. Duty of Loyalty

Corporate

Law,

Cesar

Villanueva, 2001 ed.)

patently

unlawful

therefrom

acts

suffered

of

by

the

the

Legal Basis: Directors or trustees who


acquire

any

pecuniary

or

personal

Consequences:

interest in conflict with their duty as such

a. Resolutions and transactions entered

directors or trustees shall be liable jointly

into by the Board within the powers of the

and severally for all damages resulting

corporation cannot be reversed by the

therefrom. (Sec. 31)

courts not even on the behest of the

When
to

director

acquire

or

or

trustee

stockholders.

attempts

acquires

in

b. Directors and officers acting within

violation of his duty, any interest adverse

such business judgment cannot be held

to the corporation in respect of any matter

personally liable for such acts. (Philippine

which has been reposed in him in

Corporate Law, Cesar Villanueva, 2001

confidence as to which equity imposes a

ed.)

liability upon him to deal in his own

behalf, he shall be liable as trustee for the

a. Straight Voting every stockholder

corporation and must account for all the

may vote such number of shares for as

profits

many persons as there are directors to be

which

otherwise

would

have

accrued to the corporation (Sec. 31, 2nd

elected.

par.)

b. Cumulative voting for one candidate


Where a director, by virtue of his

a stockholder is allowed to concentrate

office, acquires for himself a business

his votes and give one candidate, as

opportunity which should belong to the

many votes as the number of directors to

corporation,

be elected multiplied by the number of his

thereby

obtaining

profits

which should belong to the corporation,

shares shall equal.

he must account to the latter for all such

c. Cumulative voting by distribution - a

profits by refunding the same (Sec. 34)

stockholder may cumulate his shares by


multiplying the number of his shares by

ELECTION OF DIRECTORS/TRUSTEES

the number of directors to be elected and

Limitations:

distribute the same among as many

a. At any meeting of stockholder or

candidates as he shall see fit.

members

called

for

the election of

directors or trustees, there must be

LIMITATIONS

present

STOCKHOLDERS RIGHT TO VOTE

either

in

person

or

by

ON

THE

representative authorized to act by written

1. Where the articles of incorporation

proxy, the owners of the majority of the

provides

outstanding capital stock or majority of

pursuant to Sec. 6, non-voting shares are

the members entitled to vote.

not entitled to vote except as provided for

b. The election must be by ballot if

in the last paragraph of Sec. 6.

requested by any voting member or

2. Preferred or redeemable shares may

stockholder.

be deprived of the right to vote unless

c. A stockholder cannot be deprived in

otherwise provided in the Code.

the articles of incorporation or in the by-

3. Fractional shares of stock cannot be

laws of his statutory right to use any of

voted.

the methods of voting in the election of

4. Treasury shares have no voting rights

directors.

as long as they remain in the treasury.

d. No delinquent stock shall be voted.

5. Holders of stock declared delinquent

e. The candidates receiving the highest

by the board of directors for unpaid

number

subscription are not entitled to vote or to

of votes

shall

elected.

be declared

classification

of

shares

a representation at any stockholders


meeting.

METHODS OF VOTING

for

6. A transferee of stock cannot vote if


his transfer is not registered in the stock

It is a familiar doctrine that if a

and transfer book of the corporation.

corporation knowingly permits one of it


officers, or any other agent, to act within

REMOVAL OF DIRECTORS/TRUSTEES

the scope of an apparent authority, it

Limitations:

holds him out to the public as possessing

a. Vote of the stockholders representing

the power to do those acts; and thus, the

at least 2/3 of the outstanding capital

corporation will, as against anyone who

stock 2/3 of the members entitled to vote

has in good faith dealt with it through

b. At a regular or special meeting after

such agent, be estopped from denying

proper notice is given

the

c. Removal may be with or without cause.

Foundation Inc., vs. Court of Appeals, et

d. A minority director elected through

al., G.R. No. 126006, January 29, 2004,

cumulative voting cannot be removed

Callejo, J.)

agents

authority.

(LapuLapu

without cause. (Sec. 28)


PERSONAL LIABILITY OF DIRECTORS
EXTENT OF POWERS OR AUTHORITY

1. Willfully and knowingly voting for and

OF CORPORATE OFFICERS

assenting to patently unlawful acts of

1. The authority which he has by virtue of

the corporation; (Sec. 31)

his office;

2. Gross negligence or bad faith in

2. The authority which is expressly

directing the affairs of the corporation;

conferred upon him or is incidental to the

(Sec. 31)

effectualness of such express authority;


3. As to third persons dealing with him
without notice of any restriction thereof,

3. Acquiring any personal or pecuniary


interest in conflict of duty; (Sec. 31)
4. Consenting

to

the

issuance

of

the authority which the corporation holds

watered stocks, or, having knowledge

the officer out as possessing or is

thereof, failing to file objections with

estopped to deny.

the secretary;(Sec. 65)

4. The nature of the corporate business

5. Agreeing or stipulating in a contract to

must also be taken into consideration;

hold

and

corporation; or

5. The nature act of an officer though


originally

unauthorized,

may

himself

liable

with

the

6. By virtue of a specific provision of law

become

upon the corporation by a subsequent

DOCTRINE OF

DOCTRINE OF

ratification. (The Corporation Code of the

LIMITED LIABILITY

IMMUNITY

Philippines Annotated, Hector de Leon,


2002 ed.)

Shields

the

corporators

from

corporate
beyond

their

contribution

Protects

The

rule

shall

be

applied

notwithstanding the fact that the director

liability

and in behalf of the

agreed

corporation

risked his own funds in the venture. (Sec.

the

acting

for

to

person

being

from
himself

capital or shareholding

personally liable for

in the corporation.

his

authorized

actions

34)
2. Contracts of self-dealing directors
Contracts which are entered into by
the corporation with one or more of its

REMEDIES IN CASE OF

own directors/trustees, or officers. (Sec.

MISMANAGEMENT

32)

1. Receivership;

They are voidable, unless:

2. Injunction, if the act has not yet been

a) The presence of such director/trustee


in the board meeting approving the

done;
3. Dissolution if the abuse amounts to a
ground for quo warranto but the

contract

was

not

necessary

to

constitute a quorum for such meeting;


b) The vote of such director/trustee in

Solicitor General refuses to act; and


4. Derivative suit or complaint filed with

the board meeting approving the


contract was not necessary for the

SEC.

approval of the contract;


c) The contract is fair and reasonable
SPECIAL

RULES

ENTERED

ON

CONTRACTS

INTO

DIRECTORS/TRUSTEES

under the circumstances;

BY

d) In the case of an officer, there was

OR

previous authorization by the board of


directors.

OFFICERS:
1. Doctrine of Corporate Opportunity

Although not all said conditions are

Unless his act is ratified, a director

present, the corporation may elect not to

shall refund to the corporation all the

attack or question the validity of the

profits

contract, without prejudice, however, to

he

realizes

on

business

opportunity which:

the liability of the director/trustee for

1. The corporation is financially able to

damages under Sec. 31.


Where any of the first two conditions is

undertake;
2. From its nature, is in line with
corporations

business

and

is

of

practical advantage to it; and


3. The corporation has an interest or a
reasonable expectancy.

absent, said contract must be ratified by


the vote of the stockholders representing
at least 2/3 of the outstanding capital
stock or 2/3 of the members in a meeting
called for the purpose, provided that full
disclosure of the adverse interest of the

director/ trustee involved is made at such

A body created by the by-laws and

meeting. (Sec. 32)

composed of some members of the board

3. Contracts of interlocking directors

which, subject to the statutory limitations,

between

has all the authority of the board to the

corporations with interlocking directors

extent provided in the board resolution or

(interest of said directors is substantial,

by-laws. (The Corporation Code of the

i.e. exceeding 20% of the outstanding

Philippines Annotated, Hector de Leon,

capital stock).

2002 ed.)

They are valid, provided that:

Must be provided for in the by laws

Contracts

entered

into

a. The contract is not fraudulent; and

and composed of not less than 3

b. The contract is fair and reasonable

members of the board appointed by the

under the circumstances.

board.
May act by a majority vote of all of its

If the interlocking directors interest in


one

corporation

or

corporations

members.

is

nominal (not exceeding 20% of the

Limitations

outstanding capital stock), then all the

Executive Committee (Sec. 35)

conditions prescribed in Sec. 32 on self-

It cannot act on the following:

dealing directors must be present with

1. Matters

respect to the corporation in which he has


nominal interest. (Sec. 33)

on

the

Powers

needing

of

the

stockholder

approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-

COMPENSATION OF DIRECTORS OR
TRUSTEES

laws;
4. Amendment

or

repeal

of

any

General Rule: They shall be entitled to

resolution of the Board which by its

reasonable per diems only

express terms is not amendable or

Except:

repealable; and

a. when their compensation is fixed in the

5. Cash dividend declaration.

by-laws
b. when granted by

the vote of

IV. POWERS OF THE CORPORATION

stockholders representing at least a

1. Express Powers - granted by law,

majority of the outstanding capital stock

Corporation Code, and its Articles of

at a regular or special meeting

Incorporation or Charter

c. when they are also officers of the

2. Inherent/Incidental

corporation

expressly stated but are deemed to be

Powers

within the capacity of corporate entities


EXECUTIVE COMMITTEE

not

3. Implied/Necessary Powers exists

cultural, scientific, civic or similar

as a necessary consequence of the

purposes, provided that no donation

exercise of the express powers of the

is given to any (i) political party, (ii)

corporation or the pursuit of its purposes

candidate and (iii) partisan political

as provided for in the Charter

activity.
10. To establish pension, retirement, and

Classification:
1. Acts in the usual course of business

other plans for the benefit of its

2. Acts to protect debts owing to the

directors,

corporation

employees.

3. Acts which involve embarking in a


different business usually to collect debts

trustees,

officers

and

11. To exercise other powers essential or


necessary to carry out its purposes.

out of profits
SPECIAL/SPECIFIC POWERS

4. Acts to protect or aid employees


5.

Acts

to

increase

business

(The

Corporation Code of the Philippines


Annotated, Hector de Leon, 2002 ed.)

(Secs.

37-44)
1. Power to extend or shorten corporate
term;
2. Increase or decrease corporate stock;

GENERAL POWERS AND CAPACITY

indebtedness;

(Sec. 36)

4. Sell, dispose, lease, encumber all or

1. To sue and be sued;

substantially all of corporate assets;

2. Of succession;

5. Purchase or acquire own shares

3. To adopt and use of corporate seal;


4. To

3. Incur, create, or increase bonded

amend

its

Articles

of

provided:
a. there is an unrestricted retained

Incorporation;
5. To adopt its by-laws;

earnings, and

6. For stock corporations: issue and sell

b. it is for a legitimate purpose.

stocks to subscribers and treasury

6. Invest corporate funds in another

stocks; for non-stock corporations:

corporation or business for other

admit members;

purpose other than primary purpose;

7. To purchase, receive, take or grant,


hold, convey, sell, lease, pledge,
mortgage and deal with real and
personal

property,

securities

and

bonds

7. Power to declare dividends out of


unrestricted retained earnings;
8. Enter into management contract with
another corporation (not with an
individual

or

powers)

partnership-within

8. To enter into merger or consolidation;

general

whereby

one

9. To make reasonable donations for

corporation undertakes to manage all

public welfare, hospital, charitable,

or substantially all of the business of

the other corporation for a period not

Corporate bond an obligation to pay

longer than 5 years for any one term.

a definite sum of money at a future time


at fixed rate of interest

CORPORATE ACTS (see ANNEX for


procedure and requisites)

BONDED

1. Power to extend or shorten corporate

DEBENTURE

INDEBTEDNESS

term

Secured by a

Serial obligations

May be used as means to voluntarily

mortgage on

or notes issued on

dissolve a corporation

corporate property. .

the

(Philippine Corporate

general credit of the

Law, Cesar

corporation.

Villanueva, 2001 ed.)

they are not bonded

2. Power to increase or decrease capital


stock
OF

WAYS
INCREASING/DECREASING

THE

CAPITAL STOCK
a. By increasing/decreasing the number
of shares and retaining the par value;
b. By increasing/decreasing the par value
of

existing

shares

increasing/decreasing

the

without
number

of

shares;
c. By increasing/decreasing the number
of shares and increasing/decreasing the
par value.
AVAILABLE

TOOLS

STOCKHOLDERS

TO

TO

THE

REPLENISH

CAPITAL
a. Additional subscription to shares of
stock of the corporation by stockholders
or by investors;
b. Advances by the stockholders to the
corporation;
c. Payment of unpaid subscription by the
stockholders; and
create

indebtedness

or

increase

of

bonded

the

Hence,

indebtedness

4. Sell, dispose, lease, encumber all or


substantially all of corporate assets;
No ratificatory vote needed:
a. If it is necessary in the usual and
regular course of business
b. if the proceeds of the sale or other
disposition of such property and assets
be appropriated for the conduct of the
remaining business
5. Power to acquire own shares
Instances:
a. To eliminate fractional shares out of
stock dividends
b.

To

collect

or

compromise

an

indebtedness to the corporation, arising


out

of

unpaid

delinquency

sale

subscription,
and

to

in

purchase

delinquent shares sold during said sale


c. To pay dissenting stockholders
d. To acquire treasury shares
e. Redeemable shares regardless of
existence of retained earnings

d. Loans from third persons.


3.Incur,

basis

f. To effect a decrease of capital stock

g. In close corporations, when there is a

corporation is prohibited from entitling

deadlock in the management of the

thereto anyone else.

business

General Rule: Stock corporations are

Note: In letters a-c, there must be

prohibited from retaining surplus profits in

unrestricted retained earnings

excess of 100% of their paid-in capital

6. Invest corporate funds in another

stock

corporation or business for other purpose

Except:

other than primary purpose

a. When justified by definite corporate

The other purposes for which the funds

expansion projects

may be invested must be among those

board of directors

enumerated as secondary purposes and

b. When the corporation is prohibited

must

under any loan agreement with any

further

comply

with

the

approved by the

requirements of Section 42.

financial

7. Power to declare dividends out of

declaring

unrestricted retained earnings

consent and such consent has not yet

RETAINED EARNINGS = ASSETS

been secured

LIABILITIES AND LEGAL CAPITAL

c. When it can be clearly shown that such

UNRESTRICTED if the retained

retention is necessary under special

earnings have not been reserved or set

circumstances

aside by the board of directors for some

corporation, such as when there is a need

corporate purpose

for

DIVIDENDS

contingencies.

Corporate profits set aside, declared,

Sources of dividends:

and ordered to be paid by the directors

GENERAL RULE: Dividends can only

for distribution among shareholders at a

be declared and paid out of actual and

fixed time.

bona fide unrestricted retained earnings.

Forms:

SPECIAL RULES:

While

or

dividends

special

creditor
without

obtaining
reserve

from
its/his

in

for

the

probable

a. Where a corporation sold its real

a. Cash

institution

b. Property

property, which is not being used for

c.

business, at a gain, the income derived

cash

Stock
dividends

due

on

delinquent shares can be applied to the

therefrom

may

be

availed

of

for

dividend distribution.

payment of the unpaid balance, stock

b. Increase in the value of a fixed asset

dividends cannot be applied as payment

as a result of its revaluation is not

for unpaid subscription.

retained earning. However, increase in

The right to dividends is based on duly

the value of fixed assets as a result of

recorded stockholdings; accordingly, the

revaluation (Revaluation surplus) may

be declared as cash or stock dividends

of wasting assets to distribute the net

provided that the company:

proceeds derived from exploitation of

(i)

Has

sufficient

income

their holdings such as mines, oil wells,

from

operations from which the depreciation

patents

and

leaseholds,

without

on the appraisal increase was charged

allowance or deduction for depletion.

(ii) Has no deficit at the time the

f. Profits realized from sale of treasury

depreciation on the appraisal increase

shares are part of capital and cannot be

was charged to operations; and

declared as cash or stock dividend as

(iii) Such depreciation on appraisal


increase

previously

charged

purchase and sale of such shares are

to

regarded

operations has not been impaired by


losses.

as

contractions

and

expansions of paid-in capital.


g. Money cannot be borrowed for the

c. Dividends can be declared out of the

payment

amount received in excess of the par


value of shares

dividends

because

indebtedness is not a retained earning

(paid-in surplus)

when:

of

of the corporation.
h. Corporate earnings which have not yet

(i) That they be declared only as

been received even though they consist

stock dividends and not cash;

in money which is due, cannot be

(ii) No creditors are prejudiced; and

included in the profits out of which

(iii) There is no impairment of

dividends may be paid.

capital.
Note that unlike par value shares,

CASH DIVIDENDS

when no par value shares are sold


at

premium,

the

entire

DIVIDENDS
1.

Involves

disbursement

capital; hence the same cannot be

stockholders

declared as dividends.

accumulated earnings

dividends.

Rule on paid-in surplus is

applicable.
e. No dividends can be declared out of

to

consideration paid is considered

d. Reduction surplus can be a source of

STOCK

the

1. Does not involve


any disbursement

of

2. When declared and

2. Since it is still

paid

part

becomes

absolute
the

property

stockholder

the
of
and

cannot be reached by

of

corporate

property, may be
reached

by

corporate creditors

capital except only in two instances: 1)

creditors

liquidating dividends; and 2) dividends

corporation

from investments in wasting asset

absence of fraud

corporation.

3. Declared only by the

3. Declared by the

It permits corporations solely or

board of directors at its

board

discretion

concurrence of the

principally engaged in the exploitation

of
in

the
the

with

stockholders

the

at

2. If the corporation is insolvent, the TFD

the

extends to the capital stock of the

outstanding capital

corporation as well as all of its property

representing
least

2/3

of

stock

at

regular/special

Exceptions to the TFD:

meeting
4. Does not increase

4. Corporate capital

the corporate capital

is increased

5.

5.

Its

declaration

No

and assets.
1. Redemption of redeemable shares
(Sec. 8)

debt

is

2. In close corporation, when there should

by

its

be a deadlock and the SEC orders the

creates a debt from the

created

corporation to each of

declaration

payment of the appraised value of the

its stockholders

stockholders share. (Sec. 104)

TRUST FUND DOCTRINE (TFD)

8. Power to enter into management

The subscribed capital stock of the

contract

corporation is a trust fund for the payment


of debts of the corporation which the

EXECUTIVE

MANAGEMENT

creditors have the right to look up to

COMMITTEE

CONTRACT

The

1. Its creation must

1. Express power of

stockholders

be provided for in

a corporation

satisfy

their

corporation

credits, and which the


may

not

creditors

may

sue

directly

for

the

dissipate.
the

latters

unpaid

subscription.
Application of the TFD:
1. Where the corporation has distributed
its capital among the stockholders
without providing for the payment of
creditors;
the

2. A governing body

2.

which functions as

company

the

itself.

always be subject to

Corporation

the superior power of

(The

Code

board

of

the

Philippines

2. Where it had released the subscribers


to

the by-laws

capital

stock

from

their

subscriptions;
3. Where it has transferred the corporate
property in fraud of its creditors; and
4. Where the corporation is insolvent.
Coverage of the TFD:
1. If the corporation is solvent, the TFD
extends to the capital stock represented
by the corporations legal capital.

Annotated,

Management
must

the board to give


specific

Hector

de Leon, 2002 ed.)

directions

from time to time or


to

recall

the

delegation

of

managerial

(The
Code

power.

Corporation
of

the

Philippines
Annotated, Hector de
Leon, 2002 ed.)

ULTRA VIRES (beyond powers) ACT

c. Part executed and part executory

An act which is beyond the conferred

principle of no unjust enrichment

powers of a corporation or the purposes

at expense of another shall apply;

or objects for which it is created as

and

defined by the law of its organization.

d. Executory contracts apparently

(Republic vs. Acoje Mining Co., Inc. 7

authorized but ultra vires the

SCRAS 361)

principle of estoppel shall apply.

An act done by a corporation outside

ULTRA VIRES ACTS AND ILLEGAL

of the express and implied powers vested

ACTS

in it by its charter and by the law. (Bar

Ultra vires (beyond powers) refers

Review Materials in Commercial Law,

only

Jorge Miravite, 2002 ed.)

corporate powers, including those that

Types:

(Philippine Corporate Law,

Cesar Villanueva, 2001 ed.)

an

act

outside

or

beyond

may ostensibly be within such powers but


are, by general or special laws, either

1. Acts done beyond the powers of


the

to

corporation as provided

prohibited or declared illegal. It is in this

context that the Code has used the term.

in the law or its articles of


incorporation;

ULTRA VIRES

2. Acts or contracts entered into in


behalf

of

corporation

by

ACTS
Not necessarily

Unlawful;

persons who have no corporate

unlawful, but outside

law, morals, public

authority (Note: This is technically

the powers of the

policy,

ultra vires acts of officers and not

corporation

order

Can be ratified

Cannot be ratified

Can bind the parties if

Cannot

wholly or partly

parties

of the corporation); and


3. Acts or contracts, which are per
se illegal as being contrary to law.

An ultra vires act may be that of:


a. The corporation;

bind

public

the

executed

and necessary relation between the act

Effects of ultra vires act on:

a. Executed contract courts will not


set aside or interfere with such
contracts;

contracts

and

may perform an act: consider the logical

c. The corporate officers.

Executory

against

TEST whether or not a corporation

b. The Board of Directors; and

b.

ILLEGAL ACTS

no

enforcement even at the suit of either


party (void and unenforceable);

questioned and the corporate purpose


expressed by law or in the charter. If the
act is lawful in itself and not prohibited,
and is done for the purpose of serving
corporate

ends,

and

reasonably

contributes to the promotion of those


ends in a substantial and not in a remote

and fanciful sense. (Montelibano vs.

and of stockholders/members towards the

Bacolod-Murcia Milling Co., Inc., 5 SCRA

corporation and among themselves

36)

e. Source of authority for corporate


officers and agents of the corporation

REMEDIES IN CASE OF ULTRA VIRES

Requisites for validity:

ACTS

a. Must not be contrary to law nor

1. State

with the Corporation Code

a. Obtain a judgment of forfeiture; or

b. Must not be contrary to morals and

b. The SEC may suspend or revoke the

public policy;

certificate of registration

c. Must not impair obligations and

2. Stockholders

contracts;

a. Injunction; or

d. Must be general and uniform;

b. Derivative suit

e. Must be consistent with the charter

3. Creditors

or articles of incorporation; and

a. Nullification of contract in fraud of

f. Must be reasonable, not arbitrary or

creditors

oppressive.
Binding effect:
a. As to members and corporation

V. BY-LAWS

Rules

of

action

adopted

by

They have the force of contract

corporation for its internal government

between the members themselves.

and for the regulation of conduct and

They are binding only upon the

prescribe the rights and duties of its

corporation and on its members and

stockholders or members towards itself

those having direction, management and

and among themselves in reference to

control of its affairs.

the management of its affairs.

b. As to third persons
They are not bound to know the by-

Functions:
a.

Supplement

laws which are merely provisions for the


the

articles

of

government of a corporation and notice to

incorporation

them will not be presumed.

b. Provide for details not important

Reason: By-laws have no extra-

enough to be stated in the articles of

corporate force and are not in the nature

incorporation

of legislative enactments so far as third

c. Continuing rule for the government of

persons are concerned.

the

corporation

and

the

individuals

composing it
d. Define the rights and duties of
corporate officers and directors/trustees

CONTENTS OF BY-LAWS

a. Time, place and manner of calling and

Essentially a contract For

conducting regular or special meetings of

between

directors or trustees

corporation

b. Time and manner of calling and


conducting regular or special meetings of
the stockholder or members
c. The required quorum in meeting of

the

internal

the government of the


and

the corporation but has

stockholders/

the

force

of

members; between the contract between the


stockholders/ member corporation and the
inter se, and between stockholders/
the corporation and the members,

and

State;

between

the

of voting therein

stockholders

and

d. The form for proxies of stockholders

members;

stockholders or members and the manner

and members and the manner of voting

Executed

them

incorporation

e.

The

qualification,

duties

before May

be

after

executed

incorporation.

Sec. 46 allows the

and

filing of the by-laws

compensation of directors or trustees,

simultaneously

officers and employees

the

f. Time for holding the annual election of

Articles

with
of

Incorporation

directors or trustees and the mode or

Amended by a majority

May be amended by

manner of giving notice thereof

of

a majority vote of

g. Manner of election or appointment and

trustees

the term of office of all officers other than

stockholders

majority

directors or trustees

representing 2/3 of the

outstanding

h. Penalties for violation of the by-laws

outstanding

capital

stock or a majority

stock, or 2/3 of the

of the member in

members in case of

non-stock

non-stock corporations

corporation

Power

Power to amend or

i. In case of stock corporations, the


manner of issuing certificates
j.

Such

other

matters

as

may

be

necessary for the proper or convenient

the

directors/
and

to

amend/repeal

articles

the

repeal

BOD

and

vote

of

capital

by-laws

or

transaction of its corporate business and

cannot be delegated

adopt new by-laws

affairs

by

stockholders/

may be delegated

members to the board

by the 2/3 of the

of directors/ trustees

outstanding

ARTICLES OF

BY-LAWS

the

stock or 2/3 of the

INCORPORATION

members

Condition precedent in Condition


the

acquisition

corporate existence;

capital

of subsequent;
absence

in

the

case of non-stock

its

corporation

merely

furnishes a ground
for the revocation of

VI. MEETINGS

the franchise

STOCKHOLDERS/MEMBERS MEETING

such person to exercise the voting rights

WHEN:

of the former.

1. REGULAR - held on the date fixed

b.

Unless otherwise provided in the

in the by-laws or if not fixed on any

proxy, it shall be valid only for the

date in April;and

meeting for which it is intended.

2. SPECIAL - held at any time

c. No proxy shall be valid and effective for

deemed necessary or as so provided

a longer period than five years at any one

in the by-laws.

time. (Sec. 58)

WHERE:

The right to vote by proxy may be

In the city or municipality where the

exercised

principal office of the corporation is

instances:

located, and if practicable, in the principal

1. Election of the board of directors or

office of the corporation.


However, in the case of non-stock

of

the

following

2. Voting in case of joint ownership of


stock;
3. Voting by trustee under voting trust

even outside the principal place of the


corporation. (Sec. 93)

any

trustees;

corporations, the by-laws may provide


that meetings may be held at any place

in

agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.

BOARD MEETING (Sec. 53)

Note: Stockholders or members may

WHEN:

attend and vote in their meetings by proxy


58);

directors

cannot

do

so.

1. REGULAR - held monthly, unless

(Sec.

otherwise provided in the by-laws;

Directors must always act in person.

and

(Sec. 25).

2. SPECIAL - held at any time upon

EXTENT OF AUTHORITY

the call of the president.

a. GENERAL PROXY confers a

WHERE:

general discretionary power to attend and

May be held anywhere in or outside of

vote at annual meeting.

the Philippines.

b.

LIMITED

PROXY

restrict

the

authority to vote to specified matters only


PROXY

and may direct the manner in which the

Limitations:

vote shall be cast

a. It must be in writing and signed by the


stockholder or member (as principal) and

VOTING TRUST

filed before the scheduled meeting with

An agreement whereby one or more

the corporate secretary, and given to

stockholders transfer their shares of

another person (as agent) authorizing

stocks to a trustee, who thereby acquires

for a period of time the voting rights

shares

(and/or any other rights) over such

transferring

shares; and in return, trust certificates are

stockholder

given to the stockholder/s, which are


transferable

like

stock

certificates,

subject, however, to the trust agreement.

Limitations:

of

the

the principal

The agreement must

Proxy need not be

be notarized

notarized

The

agreement

is

irrevocable

Revocable
except

anytime

one

with

interest

a. Cannot be entered into for a period

Trustee is not limited

Proxy can only act at

exceeding 5 years at any one time except

to

when it is a condition in a loan agreement

particular meeting

act

at

any

(if not continuing)

or for the purpose of circumventing the


law

against

monopolies

and

illegal

combinations
b. The agreement must not be used for
purposes of fraud
c. It must be in writing and notarized and
specify the terms and conditions thereof
d. A certified copy of the agreement must

specified

stockholders meeting

A trustee can vote

A proxy can only vote

and exercise all the

in the absence of the

rights

owners of the stock

of

stockholder
when

the

the
even

latter

is

present
An agreement must

A proxy is usually of

not exceed 5 years at

shorter

be filed with the corporation and with the

any one time except

although under Sec.

SEC

when the same is

58 it cannot exceed 5

e. The agreement shall be subject to

made a condition of a

years at any one time

examination by any stockholder of the

loan.

corporation

The voting right is

The right to vote is

divorced

inherent

f. Unless expressly renewed, all rights


granted

in

the

agreement

shall

from

ownership of stocks

proxy

owner rather than as

votes as agent

inseparable from the

VII. STOCKS AND STOCKHOLDERS

PROXY
The

or

stock

agreed period

The trustee votes as

in

right to ownership of

automatically expire at the end of the

VOTING TRUSTS

the

duration

holder

mere agent
The trust may vote in

The proxy must vote

person or by proxy

in person

SUBSCRIPTION

CONTRACT

any

contract for the acquisition of unissued


stock in an existing corporation or a
corporation still to be formed shall be

unless the agreement

deemed a subscription. (Sec. 60)

provides otherwise

The subscribed shares need not be

Trustee
legal

title

acquires

Proxy has no legal

paid in full in order that the subscription

to

title to the shares of

may be valid. The subscription contract is

the

a consensual contract that is perfected

sold.

upon the meeting of the minds of the

Underwriters are

There is no

parties. The name of the subscriber is

given commission.

commission.

recorded in the stock and transfer book,

The signer can

He becomes a

refuse to become a

stockholder of the

stockholder/ member

company and is liable

of the company.

to pay the amount

and from that time, such subscriber


becomes a stockholder of record entitled
to all the rights of a stockholder. Until the

due on the stock.

stocks are fully paid, it continues to be a


subsisting

liability

that

is

legally

enforceable.

STOCK OPTION

In Ong Yong, et.al, vs. David Tiu, the


Court did not allow the rescission of the
Pre-Subscription agreement since the
action was filed by the Tius in their
personal capacities. It ruled that it was
the

corporation

who

had

the

legal

personality to file the suit, it being the real


party in interest.

third

unissued capital stock of a corporation


within a certain period and under the
terms

and

conditions

of

the

grant

exercisable by the grantee at any time


within the period granted.
WARRANT
holder the right to subscribe to, the

An agreement between a corporation


a

subscribe to a certain portion of the

A type of security which entitles the

UNDERWRITING AGREEMENT
and

A privilege granted to a party to

person,

termed

the

underwriter, by which the latter agrees,


for a certain compensation, to take a
stipulated amount of stocks or bonds,
specified in the underwriting agreement, if
such securities are not taken by those to
whom they are first offered.

unissued capital stock of a corporation or


to purchase issued shares in the future,
evidenced

by

Warrant

Certificate,

whether detachable or not, which may be


sold or offered for sale to the public.
PRE-INCORPORATION
SUBSCRIPTION AGREEMENTS (PISA)
Subscription of shares of stock of a

UNDERWRITING

STOCK

AGREEMENT

SUBSCRIPTION
AGREEMENT

The signers obligate

The obligation of the

themselves to take

signer to the

the shares of stock

purchasers and to

which cannot be

the public is absolute.

corporation still to be formed shall be


irrevocable for a period of at least 6
months from date of subscription, unless:
1. All

of

the

other

subscribers

consent to the revocation;


2. The

incorporation

of

said

corporation fails to materialize


with said period or within a longer

period as may be stipulated in the

4. Previously

contract of subscription; provided


that

no

pre-incorporation

corporate

indebtedness;
5. Amounts

transferred

subscription may be revoked after

unrestricted

the submission of the articles of

stated capital,

incorporation to the SEC. (Sec.

incurred

retained

from

earning

to

6. Outstanding shares in exchange for

61)

stocks in the event of reclassification


or conversion.

MODES OF ISSUANCE OF SHARES

Note: Shares of stock shall not be issued

a. By subscription before and after

in exchange for promissory notes or

incorporation to original, unissued stock

future services.

b. By

prohibition on the use of checks, bills or

sale

of treasury

stock

after

incorporation for money, property or

notes

in

service

consideration.

Note that there is no

payment

of

the

cash

c. By subscription to new issues of stock


in case of an increase in the capital stock

SHARES OF STOCK

d. By making a stock dividend

Interest or right which owner has in the


management of the corporation, and its

VALID CONSIDERATIONS IN

surplus profits, and, on dissolution, in all

SUBSCRIPTION AGREEMENT (Sec. 62)

of its assets remaining after the payment

1. Cash actually received;

of its debt.

2. Property,

tangible

or

intangible,

actually received AND necessary or

CERTIFICATE OF STOCK

convenient for its use and lawful

purposes;

ownership of shares of stocks by a

Requisites;

document

evidencing

the

stockholder and the full payment of its

a. Necessary or proper in

issue or subscription price.

carrying on the corporate

business

and/or existence of the share of stock.

b. Ascertainable

pecuniary

value
c.

The

Capable

Where the certificate of stock reflects a


greater volume of shares than the actual

of

being

transferred and applied to


payment of debts
3. Labor or services actually rendered to
the corporation;

It is not essential to the ownership

number of shares issued or to be issued,


the following rules may be considered:
1. To the extent that there is an
overissue, the excess issuance (over
the authorized capital stock or the

stated capital) shall be void as being

shareholder

ultra vires.
2. If there is no overissue, but no
payment has been made to cover the
par or stated value of the excess
shares, the latter would constitute
watered stocks.
3. If there is no overissue and

Incorporeal

or

Concrete

and

intangible property

tangible

May be issued by the

May be issued only

corporation even if

if the subscription is

the

fully paid.

subscription

is

not fully paid.

watering of stocks, the corporation


may be bound to honor the certificate

REQUIREMENTS FOR TRANSFER OF

(if duly signed and released by its

STOCK

authorized officers) in the hands of a

a. In case of shares covered by a

holder in good faith, reserving a right

certificate, the indorsement of the owner

of recourse that an aggrieved party

or his agent coupled with delivery is

may pursue against the culpable or

essential

unjustly enriched party.

b. Where no certificate has been issued


or for some reason it is not in the
possession of the stockholder, it may be

CAPITAL STOCK

SHARES OF

transferred by means of a deed of

STOCK

assignment duly recorded in the books of

Amount paid in or

Interest or right which

secured to be paid

the stockholder has

in

the

in the management of

upon

the corporation, and

by

stockholders
which

the

corporation

is

its

surplus

profits,

third persons, the transfer must be


recorded in the stock and transfer book
d. The transferee must present the

and

its

dissolution, in all of

indorsed

operation. It is the

its assets remaining

secretary who shall effect the transfer in

property

after

the corporate books, issue a new stock

of

corporation

the
itself

c. To be valid against the corporation and

to

conduct

upon

the corporation

payment

of

corporate debts.

certificate

to

the

corporate

certificate in favor of the transferee and

(monetary value).

cancel the former certificate.


Only absolute transfers need be

SHARES OF

CERTIFICATE OF

registered. The pledge or mortgage itself

STOCK

STOCK

need not be recorded in the stock and

Unit of interest in a

Evidence

corporation

holders

of

the

ownership

of the stock and of


his

right

as

transfer book, but a chattel mortgage


must comply with the Chattel Mortgage
Law, and a pledge would require the
shares to be placed in the possession of

the

creditor/pledgee.

The

agreement

a. Extra-judicial

must appear in a public instrument to take

i. Delinquency sale

effect against third persons.

ii. Application of dividends

(Chemphil

vs. CA, 251 SCRA 257)

b. Judicial action
Note: The prescriptive period in case of

EFFECTS

OF

UNREGISTERED

subscription of shares begins to run only

TRANSFER OF SHARES

from the time the board of directors

a. It is valid and binding as between the

declares that the balance are due and

transferor and the transferee

payable. It does not begin to run from the

b. It is invalid as to the corporation except

date of the subscription. (Garcia vs.

when notice is given to the corporation for

Suarez, 67 Phil. 441)

purposes of registration
c. It is invalid as against corporate

DELINQUENCY

creditors and the transferor is still liable to

1. If the subscription contract fixes the

the corporation

date for payment, failure to pay on

d. It is invalid as to the attaching or

such date shall render the entire

executing creditors of the transferor, as

balance

well as subsequent purchasers in good

interest. Thirty days therefrom, if still

faith without notice of the transfer.

unpaid,

due
the

and

payable

shares

with

become

delinquent, as of the due date, and


ISSUANCE

OF

CERTIFICATE

OF

STOCK

subject to sale, unless the board


declares otherwise.

No certificate of stock shall be issued

2. If no date is fixed in the subscription

until the full amount of the subscription is

contract, the board of directors can

paid. Basis: Doctrine of Individuality of

make the call for payment, and

Subscription that espouses that the

specify the due date. The notice of

subscription is one, entire, indivisible, and

call is mandatory. The failure to pay

whole contract, which cannot be divided

on such date shall render the entire

into portions. (SEC Opinion)

balance

due

and

payable

with

interest. Thirty days therefrom, if still


COLLECTION

OF

UNPAID

unpaid,

the

shares

become

SUBSCRIPTION

delinquent, as of the date of call, and

1. Voluntary payment

subject to sale, unless the board

a. Upon the date specified in the

declares otherwise. (Sec. 67)

subscription contract
b. Upon call by the Board of Directors
2. Involuntary payment

Effect:

A. Upon the stockholder

1. Accelerates the entire amount of


the unpaid subscription;

PROCEDURE

OF

the balance. However, if the contract

3. Disenfranchises the shares from


that

SALE

Call by resolution demanding payment of

expenses and costs;


right

THE

DELINQUENT STOCKS (Sec. 68)

2. Subjects the shares to interest,

any

FOR

inheres

to

of subscription prescribes the date of

shareholder, except the right to

payment, no call is necessary.


Notice of the board resolution given to the

dividends (but which shall be

stockholders

by

the

corporate

applied to any amount due on

secretary, either personally or by

said shares or, in the case of

registered mail. Publication of notice

stock dividends, to be withheld by

of call is not required.

the corporation until full payment

Failure of the stockholder to pay within a

of the delinquent shares. (Sec.

grace period of 30 days from the date

43)

specified

in

the

contract

of

B. Upon the director owning delinquent

subscription or in the call, the stocks

shares

shall be declared delinquent and shall

1. He can continue serving in that

be subject to sale.

capacity unless and until said shares are

Notice of delinquency served on the

totally bidded away, he continues to be

subscribers

the owner thereof and in the interim he is

registered mail and publication in a

not disqualified.

newspaper of general circulation in

2. A delinquent stockholder seeking to be

the

elected

principal office is located for once a

candidate for, nor be duly elected to, the

week for 2 consecutive weeks. Notice

board.

shall state the amount due on each

No delinquency stock shall be voted for

subscription plus accrued interest,

or be entitled to vote or representation at

and the date, time and place of the

any stockholders meeting, nor shall the

sale which shall not be less than 30

holder be entitled to any of the rights of a

days nor more than 60 days from the

stockholder except the right to dividends

date the stocks become delinquent.

as

director

may

not

be

in accordance with the provisions of this

province

either

or

personally

the

city

or

where

Sale of the delinquent shares at public

Code until and unless he pays the

auction.

amount due on his subscription with


accrued interest, and the cost and

HIGHEST BIDDER IN A DELINQUENCY

expenses of advertisement, if any. (Sec.

SALE

71)

a.

The

person

participating

in

the

delinquency sale who offers to pay the full

amount of the balance of the subscription

and issue in lieu thereof a new certificate

together with the accrued interest, costs

of stock.

of advertisement and expenses of sale,

However, if the registered owner files

for the smallest number of shares. In

a bond or other securities as may be

other words, the amount of the bid does

necessary

not vary but only the number of shares to

certificate of stock may be issued even

be bought changes and determines the

before the expiration of one (1) year

highest bidder.

period.

b. If there is no bidder as mentioned

above, the corporation may bid for the

not apply to a case where the certificates

same, and the total amount due shall be

are in the companys possession when

credited as paid in full in the books of the

mislaid

corporation.

corporation, not the stockholder, to suffer

Such

shares

shall

be

to

the

board,

the

new

The prescribed procedure does

which

thereby

obligates

the

considered as treasury shares.

the consequences. (SEC Opinion)

PROCEDURE FOR ISSUANCE OF NEW

RIGHTS OF STOCKHOLDERS (Pandect

CERTIFICATE OF STOCK IN LIEU OF

of Commercial Law and Jurisprudence,

LOST, STOLEN OR DESTROYED ONES

Justice Jose Vitug, 1997 ed.)

(Sec. 73)

1. MANAGERIAL RIGHTS

1. Filing with the corporation an affidavit

a. Voting rights; and

in triplicate by the registered owner

b. Right to remove directors

setting forth the circumstances as to how


the

certificate

was

lost,

stolen

or

destroyed, the number of shares, serial

2. PROPRIETARY RIGHTS
a. Right to dividends;
b. Right

number of the certificate and the name of


the corporation that issued the same.

to

c.

stock

Proportionate participation in the


distribution

corporation in a newspaper of general

liquidation;

of

assets

in

d. Right to transfer of stocks in

office, once a week for 3 consecutive


weeks.

of

certificate for fully paid shares;

2. Publication of notice of loss by the


circulation in the place of the principal

issuance

corporate books;
e. Right to recover stocks unlawfully

3. After the lapse of 1 year from the date

sold for delinquent payment of

of the last publication, if no contest has

subscription

been presented, the corporation shall

f.

Preemptive right

cancel in its books the certificate of stock,

PREEMPTIVE

which has been lost, stolen or destroyed,

STOCKHOLDERS

RIGHT

OF

It is the shareholders preferential right

b. Shares requiring stock offering or

to subscribe to all issues or dispositions

minimum stock ownership by the public

of shares of any class in proportion to

c. Shares to be issued in good faith with

their present stockholdings.

the

Purpose: to enable the shareholder to

representing

retain his proportionate control in the

capital stock, in exchange for property

corporation and to retain his equity in the

needed for corporate purposes or in

surplus.

payment of a previously contracted debt

approval

of
2/3

the
of

stockholders

the

outstanding

Extends to treasury shares in case of


their reissuance.

PRE-EMPTIVE RIGHT vis--vis RIGHT

If the shares preferentially offered to a

OF

stockholder

Corporate Law, Cesar Villanueva, 2001

are

not

subscribed

or

purchased by him, it does not follow that

FIRST

(Philippine

REFUSAL

ed.)

said shares shall again be re-offered on a


pro rata basis to stockholders who

PRE-EMPTIVE

RIGHT OF FIRST

already exercised their preemptive rights.

RIGHT

REFUSAL

There is no preemptive right with respect

May be exercised

Arises only by virtue

to the share to be re-offered.

even when there is

of

In case additional issues of originally

no

stipulations

authorized shares:

provision of law

GENERAL

RULE:

There

is

express

that when a corporation at its inception


offers its first shares, it is presumed to

the
Pertains

to

unsubscribed
portion

of

the

authorized to issue.

stock. A right that

EXCEPTION: When a corporation at

may

its inception offers only a specified portion

against

of

corporation

capital

stock

for

subscription. If subsequently, it offers the


remaining unsubscribed portion, there
would be preemptive right as to the
remaining

portion

thus

offered

for

subscription.
When pre-emptive right not available:
a.

When

denied

incorporation

by

the

article

of

provisions

on

be

Exercisable

against

another stockholder

authorized

authorized

is

Close Corporation

have offered all of those which it is

its

but

also granted under

no

preemptive right. This is on the theory

contractual

capital

of the corporation of
his shares of stock

claimed
the

3. REMEDIAL RIGHTS
a. Individual suit a suit instituted
by a shareholder for his own
behalf against the corporation;
b. Representative suit a suit filed
by a shareholder in his behalf
and in behalf likewise of other

stockholders
and

with

similarly
a

situated

common

stockholder in his own right.

cause

(Bitong vs. CA, 292 SCRA 304)

against the corporation; and


c.

Derivative suit a suit filed in

LIABILITIES OF STOCKHOLDERS

behalf of the corporation by its

a. Liability to the corporation for unpaid

shareholders

subscription

whose

(not

remedies

subsidiary

creditors
are

merely

b. Liability to the corporation for interest

as

accion

on unpaid subscription

accion

c. Liability to creditors of the corporation

such

subrogatoria

and

pauliana) upon a cause of action

on the unpaid subscription

belonging to the corporation, but

d. Liability for watered stock

not duly pursued by it, against

e. Liability for dividends unlawfully paid

any

f. Liability for failure to create corporation

person

or

directors,

against

officers

the

and/or

controlling shareholders of the

VIII.

CORPORATE

corporation.

RECORDS

Requisites:

INSPECTION RIGHTS

(i) An existing cause of action in

Limitations:

BOOKS

AND

a. The right must be exercised

favor of the corporation


(ii) The stockholder/member must

during

reasonable

first make a demand upon the

business days;

hours

on

corporation or the management

b. The person demanding the right

to sue unless such a demand

has not improperly used nay

would be futile

information obtained through any

(iii)

previous

The

stockholder/member

examination

must be such at the time of the

books

objectionable acts or transactions

corporation; and

unless

the

transactions

are

c.

and

records

of

the

of

the

The demand is made in good

continuously injurious

faith or for a legitimate purpose.

(iv) The action must be brought in

(Sec. 74)

the name of the corporation

The right extends, in consonance with

The number of shares of the

equity, good faith, and fair dealing, to a

stockholder is immaterial since he

foreign subsidiary wholly-owned by the

is not suing in his own behalf

corporation.

Note: The mere trustee of shares

Books required to be kept by the

registered in his name cannot file

corporation:

a derivative suit for he is not a

1. Book of Minutes

a. minutes

of

stockholder

or

e. The SEC may or may not conduct a

members meetings; and

hearing

b. minutes of board meetings.

f. Issuance of certificate of merger or

2. Book of all business transactions;

consolidation by the SEC

3. Stock and transfer book, in case


of stock corporations.

EFFECTS

OF

MERGER

OR

Corporate records required by the SEC

CONSOLIDATION (Sec. 80)

to be kept and/or registered:

1. The constituent corporations shall

1. Books of Account;

become a single corporation which, in

2.

case of merger shall be the surviving

List of Stockholders or Members;

and

corporation
3. Financial Records.

and,

in

the

case

of

consolidation, shall be the consolidated


corporation;

IX. MERGER AND CONSOLIDATION

2.

The

separate

existence

CONSOLIDATION

constituent

A union whereby

The union of two

except that of the surviving corporation;

one or more existing

or

3.

corporations

corporations to form a

corporation

absorbed by another

new

corporation

called

privileges, immunities and powers and

are
which

existing

corporation
the

survives

and

consolidated

continues

the

corporation.

combined business.

The

surviving
shall

shall

the

MERGER

more

corporation

of

or

possess

cease,

consolidated
all

rights,

subject to all the duties and liabilities of a


corporation;
4.

The

surviving

or

consolidated

corporation shall thereafter possess all


the rights, privileges, immunities and

PROCEDURE:

franchises of each of the constituent

a. The board of directors or trustees of

corporations;

each corporation shall approve a plan of

5. All property, real or personal, and all

merger or consolidation

receivables due to, and all other interest

b. The plan shall be submitted for

of each constituent corporation, shall be

approval by the stockholders or members

deemed transferred to and vested in such

of each of such corporation at separate

surviving

corporate meetings duly called for the

without further act or deed;

purpose

6.

c. The articles of merger or consolidation

corporation shall be responsible for all the

shall be executed by

liabilities and obligations of each of the

each of the

constituent corporations
d. Submission to the SEC for approval

The

or

consolidated

surviving

or

constituent corporations;

corporation
consolidated

7.

Any claim, action or proceeding

pending

by

or

constituent

against

any

corporations

of

shares

of

stock

of

the

acquiring

the

corporation and may then distribute it as

be

liquidating dividend to its stockholders.

may

prosecuted by or against the surviving or

(Philippine

Corporate

consolidated corporations; and

Villanueva, 2001 ed.)

Law,

Cesar

8. The rights of the creditors or lien upon


the property of any of each constituent

MERGER and

corporation shall not be impaired by such

CONSOLIDATION

merger or consolidation.

1. Sale of assets is

1.merger/consolidatio

always involved

RULE:

GENERAL

When

SALE OF ASSETS

corporation, this will not operate to


dissolve the other corporation and as the

2. There is automatic

2.

assumption

corporation

of

liabilities

the

AS

TO

liable

debts

There

continuance

is
of

the

3.

for
and

The

selling

corporation ordinarily

ASSUMPTION OF LIABILITIES:

enterprise and of the

contemplates

1. If there is an express assumption of

stockholders

liquidation

a
of

the

enterprise

liabilities;
2. If there is a consolidation or merger;
3. If the purchase was in fraud of
creditors; and
4. If

not

corporation
3.

NON-

is

liabilities of the selling

separate corporate entities, one will not

EXCEPTIONS

always

Purchasing

generally

two corporations still maintaining their


answer for the debts of the other.

not

involved

one

corporation buys all the shares of another

is

the

purchaser

is

merely

continuation of the seller.

4. Title to the assets

4. Transfer of title is

are

by virtue of contract

transferred

by

operation of law
5.

The

constituent

corporations

are

5.

The

corporation

selling
is

not

automatically

dissolved by the mere

dissolved

transfer

DE FACTO MERGER

of

all

its

property

One corporation acquiring all or


substantially all of the properties of

TYPES OF ACQUISITIONS (Philippine

another corporation in exchange for

Corporate Law, Cesar Villanueva, 2001

shares

ed.)

of

stock

of

the

acquiring

corporation. The acquiring corporation

a. ASSETS-ONLY LEVEL

would

The purchaser is interested only in the

end-up

enterprise

of

with
the

the

selling

business
corporation

raw

assets

and

properties

of

the

whereas the latter would end up with

business. He is not interested in the entity

basically its remaining assets being the

of the corporate owner of the assets nor

of the goodwill and other factors relating

outstanding

to the business itself.

changing the term of corporate

The transferee would not be liable for

existence;

the debts and liabilities of his transferor

2. Sale,

shares,

or

encumbrance

b)

or

other

since there is no privity of contract over

dispositions of all or substantially

debt obligations between the transferee

all of the corporate property or

and the transferors creditors

assets. (Sec. 81)

b. BUSINESS-ENTERPRISE LEVEL

3. Merger or consolidations; and

The transferee merely continues the

4. Investment of corporate funds in

same business of the transferor since he

another

corporation

or

in

obtains the earning capability of the

purpose other than the primary

venture

purpose; (Sec. 42)

The transferee is liable for the debts

Other instances when right available:

and liabilities of the transferor

5. When a corporation invest its funds in

c. EQUITY LEVEL

another corporation or business for

The purchaser takes control and

any purpose other than its primary

ownership of the business by purchasing

purpose

the shareholdings of the corporate owner.

6. In

close

corporation,

What the purchaser actually purchased is

stockholder

the ability to elect the members of the

compel

board of the corporation who run the

purchase his shares when the

business.

corporation has sufficient assets

the

for

any

reason

corporation

to

in its books to cover its debts and


X. APPRAISAL RIGHT

liabilities

exclusive

of

capital

stock
APPRAISAL RIGHTS
The right to withdraw from the

PROCEDURE

corporation and demand payment of the

a. The dissenting stockholder shall make

fair value of his shares after dissenting

a written demand on the corporation

from certain corporate acts involving

within 30 days after the date on which the

fundamental

vote was taken for the payment of the fair

changes

in

corporate

structure, namely: Key: ASIM

value of his shares. Failure to do so, shall

1. An amendment to the articles that

be deemed a waiver of his a waiver of his

has the effect of a) changing or

appraisal right

restricting

of

b. If the proposed corporate action is

shareholders or of authorizing

implemented or effected, the corporation

preferences

shall pay to such stockholder, upon

the
over

rights
those

of

surrender of the corresponding certificate

RULE:

of stock within 10 days after demanding

GENERAL

payment of his shares

stockholder who demands payment of his

c. Upon payment of the agreed or

shares is no longer allowed to withdraw

awarded price, the stockholder shall

from his decision

transfer his shares to the corporation

Except when:
1. The

LIMITATIONS ON THE EXERCISE OF


APPRAISAL RIGHT

corporation

consents

to

the

2. The proposed corporate action is


abandoned

law for the exercise of the right must

corporation

or

rescinded

by

the

3. The proposed corporate action is

2. The dissenting stockholder must have

disapproved by the SEC where its

voted against the proposed corporate


action.

dissenting

withdrawal

1. Any of the instances provided for by


be present.

approval is necessary
4. The Commission determines that such

3. The stockholder must make a written

stockholder is not entitled to appraisal

demand within 30 days from the date

right.

that the vote was taken.


4. The price must be based on the fair

XI. NON-STOCK CORPORATION

value of the shares as of the day prior

to the date in which the vote was

eleemosynary purpose, and no part of

taken.

whose income is, during its existence,

5. Payment of the shares must be made

corporation

organized

for

an

distributable as dividends to its members,

only out of the unrestricted retained

trustees, or

officers, subject to the

earnings of the corporation.

provisions of the Corporation Code on

6. Upon payment, the stockholder must

dissolution. (Sec. 87)

transfer his shares to the corporation.

Any profit which it may obtain as an


incident to its operations shall, whenever

Effect of the Exercise of the Right:

necessary or proper, be used for the

a. All rights accruing to the such shares

furtherance of the purpose or purposes

shall be suspended

for which it was organized.

b. The dissenting stockholder shall be


entitled to receive payment of the fair
value of his shares as agreed upon

Eleemosynary purposes: charitable,

between him and the corporation or as

religious,

determined by the appraisers chosen

cultural, recreational, fraternal, literary,

by them.

scientific, social, civic service, or similar

educational,

professional,

purposes, like trade, industry, agricultural.

3. To

(Sec. 88)

transfer

membership

if

allowed by the articles or by-laws

They are governed by the same rules


established

for

stock

4. To be elected as trustee

corporations,

whenever pertinent, subject, however, to


a number of special features.

STOCK
Has

NON-STOCK

capital

stock

Does not have

divided into shares

shares and may not

Opinion)

and with authority to

distribute profits to its

1. Stock to non-stock corporation

distribute dividends to

members

RULES

ON

CONVERSION

(SEC

Conversion may be made by mere


amendment

of

the

articles

of

incorporation.

its stockholders
Stockholders may

Members

transfer their shares

transfer

The

dissolved;

corporation
mere

must

amendment

their

membership

2. Non-stock to stock corporation

cannot

allowed

first

be

of

the

unless

by

the

articles or by-laws
Cumulative voting is

Cumulative voting not

articles of incorporation would not suffice

available

available

because the conversion would change

election of directors

the corporate nature from non-profit to


monetary gain.
The conversion without dissolving it
first would be tantamount to distribution of
its assets or income to its members

in

the

unless

otherwise provided in
the articles or by-laws

Directors cannot

Trustees may exceed

exceed 15 in number

15 in number

The term of a director

The term of a trustee

is 1 year

is 3 years; 1/3 of the


Board shall be

inasmuch as after its conversion, the

elected annually

asset of the non-stock corporation would

Stockholders

now be treated as payment to the

vote by proxy

may

Members may be
deprived of the right

subscriptions of the members who will

to vote by proxy in

now

the articles or by-laws

become

stockholders

of

the

corporation.

Officers are elected

Officers may be

by

directly elected by the

the

Board

of

Directors

RIGHTS OF MEMBERS

members unless
otherwise provided in

1. To be entitled to 1 vote unless


otherwise provided in the articles
or by-laws
2. To

vote

by

proxy

unless

the articles or by-laws


Stockholders

and

Members

may

be

directors must act in

allowed by the by-

laws to vote by mail

meeting,

except

otherwise provided in the articles

where a mere written

or

or by-laws

assent is sufficient or

means

other

similar

formal

not organized for profit, as may be

meeting

unnecessary

specified in a plan of distribution.


The plan of distribution shall be

RULES

FOR

DISTRIBUTION

OF

approved by a majority vote of the board

ASSETS IN CASE OF DISSOLUTION

of trustees and by 2/3 of the members

(SEC. 94)

having voting rights at a meeting

1. All liabilities and obligations of the


corporation shall be paid, satisfied and

XII. CLOSE CORPORATION

discharged or adequate provision shall be

A special kind of stock corporation:

made therefor

1. whose articles of incorporation

2. Assets held by the corporation upon a

should provide that:

condition requiring return, transfer or

a. the number of stockholders

conveyance, and which condition occurs

shall not exceed 20;

by

be

b. issued stocks are subject to

returned, transferred or conveyed in

transfer restrictions, with a right of

accordance with such requirements

preemption

3. Assets received and held by the

stockholders or the corporation;

corporation

and

reason

of

dissolution,

subject

to

shall

limitations

in

favor

of

the

permitting their use only for charitable,

c. the corporation shall not be

religious,

or

listed in the stock exchange or its

similar purposes but not held upon a

stocks should not be publicly

condition requiring return, transfer or

offered; AND

benevolent,

educational

conveyance by reason of dissolution,

2. whose at least 2/3 of the voting

shall be transferred or conveyed to one or

stocks or voting rights should not be

more

owned

corporations,

societies

or

or

controlled

by

another

organizations engaged in activities in the

corporation which is not a close

Philippines substantially similar to those

corporation. (Sec. 96)

of the dissolving corporation pursuant to a


plan of distribution
4.

Other

distributed

assets,
in

Characteristics:
1. Stockholders may act as directors

if

any,

accordance

shall

be

without need of election and

with

the

therefore are liable as directors;

provisions of the articles of incorporation

2. Stockholders who are involved in

or the by-laws

the

5. In any other case, assets may be

corporation are liable in the same

distributed to such persons, societies,

manner as directors are.

organizations or corporations, whether or

management

of

the

3. Quorum may be greater than


mere majority;

4. Transfers of stocks to others,

CORPORATION

which would increase the number

Its

of stockholders to more than the

incorporation

maximum are invalid;

only

5. Corporate actuations

may

be

binding even without a formal


board meeting, if the stockholder

articles

of
need

contain

contain

must

the

special

matters prescribed by

matters

Sec. 97, aside from

enumerated in Sec.

the general matters in

14 of the Code.

Sec. 14. Failure to do

general

so precludes a de jure
close

informal action of the others;

corporation

status.

6. Preemptive right extends to all


stock issues;

Its

status

as

ordinary

7. Deadlocks in board are settled by

corporation

the SEC, on the written petition

affected

by any stockholder; and

ownership

8. Stockholder may withdraw and


avail of his right of appraisal.
Note: Special rules are provided for close
corporations because it is essentially an
partnership.

articles

the

had knowledge or ratified the

incorporated

Its

(The

an

2/3 of its voting stock

stock

or voting rights must

is
by
of

not

not

be

the

controlled by another

its

corporation which is

voting stock or voting

not

rights.

corporation.

Its

articles

cannot

Its

a
articles

Business

of

the

corporation

is

board of directors.

by

the

managed

the

by

stockholders

the

if

so

the

provide,

but they are liable as

The following cannot be a close

directors.
The

d. banks;

of

corporation may be

articles

c. stock exchanges;

may

Business

Annotated, Hector de Leon, 2002 ed.)

b. oil companies;

close

classify its directors.

managed

a. mining companies;

or

classify its directors.

Corporation Code of the Philippines

corporation:

owned

corporate

Its

articles

may

officers

and

provide that any or all

employees

are

of

the

corporate

elected by a majority

officers or employees

vote

of

all

the

may be elected or

e. insurance companies;

members

of

the

appointed

f. public utilities;

board of directors.

stockholders.

The pre-emptive right

The pre-emptive right

is

is

by

the

g. education institutions;
h. other corporations declared to be
vested with public interest. (Sec.
96)
ORDINARY

CLOSE

STOCK

CORPORATION

subject

to

the

subject

to

no

exceptions found in

exceptions

unless

Sec. 39.

denied in the articles

The appraisal right may

The appraisal right may

be

be

exercised

by

stockholder only in the

exercised

and

compelled against the

cases provided in Secs.

corporation

81 and 42 of the Code.

stockholder

by

for

any

of

an

reason.

Except

6. Dissolve the corporation


7. Granting such other relief as the

as

regards

In

redeemable

shares,

arbitration of an intra-

the purchase by the

corporate deadlock by

corporation of its own

the

stock must always be

corporation may be

1. EDUCATIONAL CORPORATION

made

the

ordered to purchase

A stock or non-stock corporation

unrestricted retained

its own shares from

organized to provide facilities for teaching

earnings.

the

from

case

5. Appoint a provisional director

SEC,

the

stockholders

regardless

of

the

availability
unrestricted

of
retained

earnings.

circumstances may warrant.


XIII. SPECIAL CORPORATIONS

or instruction.
A favorable recommendation of the
DECS is essential for the approval of its
articles and by-laws.

Arbitration of intra-

Arbitration

intra-

It is primarily governed by special laws

corporate

corporate deadlock by

and suppletorily by the provisions of the

by the SEC is not a

the

Code.

remedy in case the

available remedy in

directors

or

case the directors or

NON-STOCK

EDUCATIONAL

stockholders are so

stockholders are so

divided

respecting

divided respecting the

EDUCATIONAL

CORPORATION

the management of

management of the

the corporation.

corporation.

deadlock

of

SEC

is

an

IN

non-stock

corporation

POWERS OF THE SEC IN CASE OF


DEADLOCK

CORPORATION

CLOSE

A special corporation
which may a stock or
non-stock

Governed by the

Governed by special

provisions on non-

laws and by the

CORPORATIONS

stock corporations

general provisions of

1. Cancel or alter any provision in the

and suppletorily by

the Corporation Code

articles of incorporation or bylaws

the provisions on

2. Cancel, alter or enjoin any resolution

stock corporations

of the corporation
3. Direct or prohibit any act of the
corporation

The number of board

The number of the

of trustees may be

board of trustees

more than 15

should not be less


than 5 but not more

4. Require the purchase at their fair

than 15.

value of shares of any stockholder

The term of office of

The term of office of

either by any stockholder or by the

the board of trustees

the board of trustees

corporation

shall be 3 years

shall be 5 years

regardless

of

the

availability of unrestricted retained


earnings.

2. RELIGIOUS CORPORATION

ii. Where creditors are affected

A corporation composed entirely of

spiritual persons and which is organized


for the furtherance of a religion or for

b) Shortening of the corporate term by


amending the articles of incorporation.
2. Involuntary

perpetuating the rights of the church or

a) Expiration of the corporate term;

for

or

b) Failure to organize and commence

religious work or property. It is different

business within 2 years from the date

from an ordinary non-stock corporation

of

organized for religious purposes.

incorporation

Kinds:

SEC has opined that the dissolution in

the

administration

of

church

issuance

of

the

(Note:

certificate

of

However, the

this case is not automatic. The

a) CORPORATION SOLE
- A special form of corporation,

corporation continues to exist as such,

usually associated with the clergy,

notwithstanding

consisting of one person only and his

status

successors, who is incorporated by

dissolution after notice and hearing.)

law to give some legal capacities and

c) Legislative dissolution;

advantages; and

d) Quo warranto suit against a de facto

b) RELIGIOUS SOCIETIES
-

non-stock

It

is

corporation

incorporated

the

non-operational
SEC

orders

its

corporation;

governed by a board but with religious


purposes.

until

its

by

e)

Minority

stockholders

suit

for

dissolution on justifiable grounds; or

an

f) SEC dissolution, upon complaint and

aggregate of persons, e.g. religious order,

after notice and hearing, on the following

diocese, synod, sect, etc.

grounds:
i. The corporation was illegally

XIV. DISSOLUTION AND WINDING UP


(LIQUIDATION)

organized;
ii.

Continuous

inactivity

(subsequent to incorporation,
DISSOLUTION

organization

Extinguishment of the franchise of a

commencement of business)

corporation and the termination of its

for at least 5 years;

corporate existence.

and

iii. Serious dissension in the


corporation; or

Modes:
1. Voluntary
a) Application for dissolution with the
SEC

iv.

Commission

the

corporation of illegal or ultra


vires acts or violations of the
Code.

i. Where no creditors are affected

by

EFFECTS OF DISSOLUTION

3. By a management committee or

a. Transfer of legal title to corporate

rehabilitation receiver appointed by the

property to the stockholders who become

SEC.

co-owners thereof

Note: The 3-year period of liquidation

b. Continuation of corporate business

does not apply to Methods 2 and 3 as

merely as an association without juridical

long as the trustee or the receiver is

personality

appointed within the said period.

c. Conveyance by the stockholders of

their respective shareholdings toward the

juridical entity does not by itself cause the

creation of a new corporation to continue

extinction or diminution of the rights and

the business of the old

liabilities of such entity nor those of its

d.

Reincorporation

of

the

dissolved

The termination of the life of a

owners and creditors alike (see Sec.

corporation by refilling new articles of

145).

incorporation and by-laws

e. The corporation continues as a body

corporation statute must be understood in

corporate for 3 years for purposes of

its general concept which could include

winding up

the counsel to whom was entrusted the

f. Cessation of corporate existence for all

prosecution of the suit filed by the

purposes upon the expiration of the

corporation. (Spouses Gelano vs. CA)

winding up period of 3 years. (The

The word trustee as sued in the

LIQUIDATION

REHABILITATION

Corporation Code of the Philippines

Connotes a winding

Connotes a

Annotated, Hector de Leon, 2002 ed.

up or settling with

reopening or

creditors and debtors

reorganization

Winding up process

Contemplates a

so that assets may be

continuance of

distributed to those

corporate life in an effort

LIQUIDATION
The process by which all the assets of
the corporation are converted into liquid
assets (cash) in order to facilitate the

entitled

distributed

to

the

stockholders

or

members.
Methods:
1. By the corporation itself through its
board of directors/trustees;
2. By a trustee to whom the corporate
assets have been conveyed; and

corporation to its former


successful operation

payment of obligations to creditors, and


the remaining balance, if any, is to be

to restore the

XV. FOREIGN CORPORATION


A corporation formed, organized or
existing under any law other than those of
the Philippines, and whose laws allow
Filipino citizens and corporations to do
business in its own country or state. (Sec.
123)

The

definition

espouses

the

incorporation test and the reciprocity rule


and is significant for licensing purposes.
It is not permitted to transact or do
business in the Philippines until it has
secured a license for that purpose from
the SEC and a certificate of authority from
the appropriate government agency.

7.

A statement of its authorized capital


stock

8. A statement of its outstanding capital


stock
9. A statement of the amount actually
paid in
10. Such additional information as may
be necessary to enable the SEC to
determine whether such corporation

RESIDENT AGENT

is entitled to license

An individual, who must be of good


moral character and of sound financial

GROUNDS FOR REVOCATION OF

standing, residing in the Philippines, or a

LICENSE

domestic corporation lawfully transacting

1. Failure to file annual reports required

business in the Philippines, designated in

by the Code;

a written power of attorney by a foreign

2. Failure to appoint and maintain a

corporation authorized to do business in

resident agent;

the Philippines, on whom any summons

3. Failure to inform

and other legal processes may be served

change of residence of the resident

in all actions or other legal proceedings

agent;

against the foreign corporation. (Sec.

4. Failure to submit copy of amended

127-128)

articles or by-laws or articles of merger or

the SEC of the

consolidation;
CONTENTS FOR APPLICATION OF

5. A

LICENSE

matters in reports;

1. Date and term of incorporation

6. Failure to pay taxes, imposts and

2. The address of the principal office in

assessments;

the country of incorporation


3. The name and address of resident
4.

misrepresentation

in

material

7. Engage in business unauthorized by


SEC;

agent

8. Acting

The place in the Philippines where it

corporation; and

intends to operate

9. Not licensed to do business in the

5. The specific purpose or purposes

as

dummy

of

foreign

Philippines. (Sec. 134)

6. The names and addresses of the


present directors and officers of the

TEST OF DOING OR TRANSACTING

corporation

BUSINESS IN THE PHILIPPINES:

The Corporation Code does not define

whether called liaison offices or

the

branches;

phrase

doing

or

transacting

business.

b) Appointing

or

(Philippine

distributors

domiciled

in

the

Corporate Law, Cesar Villanueva, 2001

Philippines

or

in

any

ed.)

calendar year stay in the country

1. Twin characterization test

for a period or periods totaling

A.

Jurisprudential Tests

representatives

a) Whether the foreign corporation is


maintaining

or

c) Participating in the management,

Philippines the body or substance of

supervision or control of any

the

organized

for

or

which

whether

in

180 days or more;

the

business

continuing

who

it

was

domestic business, firm or entity

it

has

or corporation in the Philippines;

substantially retired from it and turned

and

it over another (Substance Test); and

d) Any other act or acts that imply a

b) Whether there is continuity of

continuity of commercial dealings

commercial

or

dealings

and

arrangements,

and

arrangements, contemplating to some

contemplate to that extent the

extent the performance of acts or

performance of acts or works, or

works or the exercise of some

the exercise of some of the

functions normally incident to and in

functions normally incident to,

progressive

and in progressive prosecution of,

prosecution

of,

the

purpose and object of its organization

commercial

(Continuity Test).

purpose

2. Contract Test

gain
of

or

the

of

the

business

organization.

Whether the contracts entered into

2. Implementing Rules of R.A. No. 7042

by the foreign corporation, or by an

Acts not constituting doing business:

agent acting under the control and

a) Mere

investment
in

as

direction of the foreign corporation,

shareholder

domestic

are consummated in the Philippines.

corporation and/or the exercise of


rights as such investor;

B. Statutory Tests

b) Appointing a representative or

1. Foreign Investment Act of 1991 (R.A.

distributor

domiciled

No. 7042)

Philippines

which

Acts constituting doing business:

business in its own name and for

a) Soliciting
contracts,

orders,

service

opening

offices,

its own account;

in

the

transacts

c) Publication

of

general

contained in the questioned law. The

advertisement through any print

parties were considered as being in pari

or broadcast media;

delicto because they equally violated R.A.

d) Maintaining a stock of goods in


the Philippines solely for the

3. Estoppel Rule

purpose of having the same

A party is estopped from questioning

processed by another entity in the

the capacity of a foreign corporation to

Philippines;

institute an action in our courts where it

e) Consignment

f)

5455

by

the

foreign

had obtained benefits from its dealings

corporation of equipment with a

with

local company to be used in the

thereafter committed a breach or sought

processing of products for export;

to renege on its obligations. (European

Collecting

Resources vs. Ingnieburo)

information

in

the

such

foreign

corporations

and

Philippines; and
g) Performing services auxiliary to

EFFECTS OF LACK OF LICENSE

an existing isolated contract of

A. On suits

sale

1. Foreign corporation doing business in

which

are

not

on

continuing basis.

the Philippines:
a) may not sue or intervene in any

C. Jurisprudential Rules

action

1. Doctrine of Isolated Transactions

administrative

Foreign corporations, even unlicensed

Philippines; but

ones,

can

sue

or

be

sued

on

in

any

court

agency

of

or
the

b) may be sued on any valid cause of

transaction or series of transactions set

action

recognized

in

the

apart from their common business in the

Philippines (under the doctrine of

sense that there is no intention to engage

quasi-estoppel by acceptance of

in a progressive pursuit of the purpose

benefits). (Sec. 133)

and object of business transaction. (Eriks

2. Foreign corporation not doing business

Pte.Ltd vs. CA, 267 SCRA 567)

in the Philippines:

2. In Pari Delicto Rule

a) Generally, it may not sue and be

In the case of Top-Weld Manufacturing

sued in any court or administrative

vs. ECED, S.A., the Court denied the

agency of the Philippines;

relief prayed for by petitioner when it

b) However, it may sue and be sued

ruled that the very purpose of the law was

for isolated transactions, as well

circumvented and evaded when the

as for those which are casual or

petitioner

incidental thereto.

agreements

entered
despite

into
the

the

said

prohibition

B. On contracts

The contracts contemplated are those

ORIGINAL

AND

EXCLUSIVE

that satisfy the contract test or those

JURISDICTION OF THE RTC (Sec. 5 in

that make a foreign corporation as one

relation to Sec. 5.2 OF RA 8799):

doing business in the Philippines.

1. Fraudulent devices and schemes

GENERAL RULE: The contracts are

employed by directors detrimental to

unenforceable. They are enforceable only

the public interest and to other firms;

upon securing a license.

2. Intra-corporate disputes;

EXCEPTION: However, the contracts

3. Disputes with the state in relation to

are null and void if they are contrary to

their franchise and right to exist as

law, morals, good customs, public order

such;

and public policy.

4. Controversies

in

election,

appointment of directors or trustees;


INSTANCES

WHEN

FOREIGN

CORPORATION MAY SUE IN THE


PHILIPPINES
LICENSED

WHETHER
TO

DO

OR

NOT

BUSINESS

5. Petition to be declared in a state of


suspension of payments;
6. Petition for rehabilitation; and
7. Appointment of rehabilitation receiver

THEREAT

or

management

committee

1. To seek redress for an isolated

(provisional remedies).

business transaction;
2. To protect its corporate reputation,

Note: A corporate officers dismissal is

name, and goodwill;

always a corporate act and/or an intra-

3. To enforce a right not arising out of a

corporate

business

corporate officers contemplated are those

transaction,

e.g.

tort

that

controversy.

offices

are

However,

occurred in the Philippines;

whose

created

4. When the parties have contractually

Corporation Code or the by-laws.

by

the
the

stipulated that Philippines is the venue of


actions; and

INTRA-CORPORATE DISPUTE

5. When the party sued is barred by the

Elements:

principle of estoppel and/or principle of

1. Status or relationship of the parties

unjust enrichment from questioning the

controversy must be between and

capacity of the foreign corporation.

among

corporators,

between

corporators and the corporation


SECURITIES AND EXCHANGE
COMMISSION REORGANIZATION
DECREE (P.D. No. 902-A)

2. Nature of the question intrinsic


connection with the regulation or the
internal affairs of the corporation
Examples:

1. Action by a corporate officer to


recover

compensation

from

the

corporation

partnerships

and

associations pursuant to P.D. 902-A


Steps:

2. Action by a stockholder to compel


issuance of certificate of stocks
Allegations

in

the

1.

Filing

verified

petition

with

the

appropriate RTC by:

3. Action for recovery of corporate funds


Note:

corporations,

complaint

determines jurisdiction.

a. corporate debtor who foresees the


impossibility of meeting its debts
when they respectively fall due; or
b. creditors holding at least 25% of

GROUNDS

FOR

SUSPENSION

OR

the debtors total liabilities;

CANCELLATION OF CERTIFICATE OF

2. The following shall be annexed to the

REGISTRATION (SEC. 6[L])

petition:

1. fraud in procuring registration;


2. serious

misrepresentation

a. audited financial statements at end


as

to

objectives of corporation;

of its last fiscal year;


b. interim financial statement;

3. refusal to comply with lawful order of


SEC;

c. schedule of debts and liabilities;


d. inventory of assets;

4. continuous inoperation for at least 5


years;

e. rehabilitation plan;
f. schedule

5. failure to file by-laws within required


period;

of

disposition

of

payments
assets

and

effected

within 3 months preceding the

6. failure to file reports; and

filing of the petition;

7. Others similar grounds.

g. schedule of cash flow for the last 3


months

INTERIM RULES OF PROCEDURE ON


CORPORATE REHABILITATION

h. statement of possible claims;


i. affidavit

(effective December 15, 2000)

of

general

financial

condition;
j. at

CORPORATE REHABILITATION

least

nominations

for

rehabilitation receiver;

A process to try to conserve and

k. certificate under oath that directors

administer the corporations assets in the

and stockholders have irrevocably

hope that it may eventually be able to

approved/

return from financial stress to solvency.

actions/matters necessary under

Nature: in rem, summary, and non-

the rehabilitation plan.

adversarial

to

all

3. The court shall issue the stay order not

Applicability:
petitions

consented

for

These Rules apply to


rehabilitation

filed

by

later than 5 days from the filing of the


petition, which among others, shall:

a. appoint a rehabilitation receiver;

dissipation,

if

it

were

left

b. stay all actions for claims against

possession of any of the parties.

in

the

the debtor, which shall cover both

He acts in a fiduciary capacity and with

secured and unsecured creditors;

impartiality towards all interested.

c. set an initial hearing for the

He

does

not

take

over

the

petition (not earlier than 45 days

management and control of the debtor,

but not later than 60 days from

but shall closely oversee and monitor the

filing of the petition); and

operations of the debtor during the

d. direct the creditors to file their

pendency

of

the

(Bar

proceedings.

verified comment or opposition not

Review Materials in Commercial Law,

later than 10 days before the initial

Jorge Miravite, 2002 ed.)

hearing; their failure to do so


would

bar

them

from

any

participating in the proceedings.

POWERS

AND

MANAGEMENT

FUNCTIONS

OF

COMMITTEE

OR

4. Publication of the stay order in a

REHABILITATION RECEIVER (Sec. 6[d],

newspaper of general circulation once a

P.D. 902-A)

week for 2 consecutive weeks;

1. To take custody of, and control over,

5. Referral

of rehabilitation

plan to

rehabilitation receiver;

such entities under management;

6. Meetings between corporate debtor


with creditors.

all the existing assets and property of

Discussions on the

2. To evaluate the existing assets and


liabilities, earnings and operations of

rehabilitation plan;

such corporations, partnerships or

7. Submission of final rehabilitation plan

other associations;

to the RTC for approval;

3. To determine the best way to salvage

8. The petition shall be dismissed (which

and

protect

the

interest

results into the automatic lifting of the

investors and creditors;

of

the

stay order unless RTC ordered otherwise)

4. To study, review and evaluate the

if no rehabilitation plan is approved after

feasibility of continuing operations

180 days from initial hearing;

and structure and rehabilitate such

9.

Approval

or

disapproval

of

the

rehabilitation plan by RTC.

entities if determined to be feasible by


the RTC;
5. To report and be responsible to the

REHABILITATION RECEIVER

RTC until dissolved; and

A person appointed by the RTC, in

6. May overrule or revoke the actions of

behalf of all the parties for the purpose of

the previous management and board

preserving and conserving the property

of directors

and preventing its possible destruction or

management,

of the entity
notwithstanding

under
any

provision

of

incorporation

law,
or

articles

by-laws

to

of

the SEC alone. The filing of civil/intra-

the

corporate case before SEC does not

contrary.

preclude

the

simultaneous

and

concomitant filing of a criminal action


among

before the regular courts; such that a

stockholders as to the affairs of the

fraudulent act may give rise to liability for

corporation would not in itself suffice as a

violation of the rules and regulations of

ground

the SEC cognizable by the SEC itself, as

management committee. At least where

well as criminal liability for violation of the

there is no imminent danger of loss of

Revised Penal Code cognizable by the

corporate property or of any other injury

regular courts, both charges to be filed

to

of

and proceeded independently, and may

corporate business should not be wrested

be simultaneously with the other. (Fabia

away from duly elected officers, who are

vs. CA, G.R.No. 132684. September 11,

prima facie entitled to administer the

2002.)

Mere

disagreement

for

the

appointment

stockholders,

of

management

affairs of the corporation, and placed in


the hands of the management committee.

Automatic Stay

However, where the dissension among

stockholders is such that the corporation

management committee or rehabilitation

cannot successfully carry on its corporate

receiver

functions

All actions for claims against the

the

management

appointment
committee

of

becomes

Effect

corporation

of

appointment

shall

be

of

suspended

imperative. (Ramon Jacinto and Jaime

accordingly.

Colayco

Purpose/justification: To enable the

vs.

First

Womens

Credit

Corporation, G.R. No. 154049, August

management

28, 2003)

rehabilitation

committee
receiver

to

or

the

effectively

exercise its powers free from any judicial


RA 8799 effectively amended Sec. 5 of

or extrajudicial interference that might

PD

unduly hinder or prevent the rescue of the

902-A,

jurisdiction

over

intra-

corporate disputes is now vested in the

debtor company. (Rubberworld v. NLRC)

RTCs. However, while Sec. 5 was

No definite duration; deemed to apply

amended, there is no repeal of Sec. 6

during the entire period that the corporate

thereof declaring that the fraudulent acts

debtor is under management committee

or

or the rehabilitation receiver. (BF Homes

schemes,

which

the

SEC

shall

exclusively investigate and prosecute, are


those in violation of any law or rules and
regulations administered and enforced by

v. CA)

SECURITIES REGULATION CODE

5. Prohibition on fraud, manipulation

(SRC)

and insider trading (Sections 24, 25,

(R.A. No. 8799)

26 and 27);
6. Regulations

PURPOSES:

Securities

Market

Professionals (Section 28);

1. To establish a socially conscious,


free market that regulates itself
2. To

of

encourage

participation

the

of

registration of brokers, dealers and

widest

ownership

in

enterprises

salesmen and associated persons


(Section 29);
8. Restrictions

3. To enhance the democratization


of wealth

on

the capital market

about securities
trading

and

or
and

related

organizations

10. Registration

of

clearing

other

manipulative

practices

which

amount

of

credit

that

12. Civil

liabilities

arising

market. (Sec. 2)

statement (Section 56)


13. Civil

in

the

liabilities

arising

FEATURES WHICH ARE INTENDED TO

statements

PROTECT THE INVESTING PUBLIC

prospectus,

1. All securities are required to be

reports (Section 57)

registered before they can be sold to


the public (Section 8);
revocation

registration of securities (Section 13);


3. Regulation

of

pre-need

plans.

(Section 16);
4. Protection of shareholder interests
(Section 19);

be

or

from

false

registration
from

omissions

false

in

communications

the
and

14. Protection against manipulation of


security

of

may

extended on any security (Section 49)


statement

and

agencies

11. Limitations on margin trading or the

create distortions in the free

2. Rejection

of

(Section 42);

7. To minimize if not totally eliminate


fraudulent

associations

(Section 29);

6. To ensure full and fair disclosure

insider

of

securities brokers, dealers and other


securities

5. To protect investors

over-the-counter

markets (Section 32);


9. Self-regulation

4. To promote the development of

devices

7. Revocation, refusal or suspension of

prices,

manipulative

and

deceptive devices (Section 59), fraud


in pre-need plans and commodities
futures

contracts

(Section

60),

fraudulent transactions (Section 58),


and insider trading (Section 61);
15. Establishment
compensate

of

trust

funds

investors

to
for

extraordinary losses or damage they

may suffer due to business failure or

12. Issue subpoena duces tecum and

fraud

summon witnesses to appear in any

or

mismanagement

of

the

persons with whom they transact

proceedings of the Commission; and

(Section 36.5[a]).

13. Exercise such other powers as may


be provided by law which are necessary

POWERS AND FUNCTIONS OF THE

or incidental to the carrying out its

SEC

express powers. (Sec. 5)

1.

Supervision

over

corporations,

partnerships, and grantees of primary

SECURITIES

franchise;

Shares, participation or interest in a

2.

Approve,

reject

registration

corporation or in a commercial enterprise

statements/licensing applications;

or profit-making ventures and evidenced

3.

by a certificate, contract, instrument

Suspend, revoke, after notice and

hearing primary franchise on grounds;


4.

Regulate/supervise

activities

whether written or electronic in character.


of

(Sec. 3)

persons to ensure compliance;

Kinds:

5.

1. Shares of stocks, bonds, debentures,

Supervise monitor, suspend or take

over, exchanges, clearing agencies and

notes,

SROs;

asset-backed securities;

6.

Recommend

propose

policies,

legislation

to

advise,

Congress

evidence

of

indebtedness,

2. Investment contracts, certificates of

on

interest or participation in a profit-

securities market;

sharing

7.

deposit for a future subscription

Prepare, approve, amend or repeal

rules, regulations, issue opinions


8.

any

and

all

certificates

of

3. Fractional undivided interests in oil,

Enlist the aid and support of and/or

deputize

agreement,

enforcement

agencies of the Government as well as

gas, or other mineral rights;


4. Derivatives like options and warrants;
5.

Certificates of assignments and

any private institution, corporation, firm,

participation, trust certificates, voting

association

trust certificates or similar instruments;

or

person

in

the

implementation of its powers;


9.

6.

Issue cease and desist orders to

membership

prevent fraud or injury;


10. Punish

for

contempt

Proprietary

or

non-proprietary

certificates

in

corporations;
of

the

7. Other instruments as may in the future

Commission;

be determined by the SEC. (Sec. 3)

11. Compel the officers of any registered

Classes:

corporation

1.

or

association

to

meetings of stockholders or members;

call

Exempt

securities

and

securities

covered by exempt transactions; and

2. Securities that are not exempt or the

and substance prescribed by the SEC,

sale

shall

of

which

is

not

an

exempt

transaction.

be

made

available

to

each

prospective purchaser. (Sec. 8)

EXCEPTIONS:
DERIVATIVE

1. Exempt securities; and

financial

options

and

instrument,

warrants,

including

whose

2. Exempt transactions.

value

depends on the interest in or performance

EXEMPT SECURITIES (Sec. 9)

of an underlying security, but which does

1. Any security issued or guaranteed by

not require any investment of principal in

the Government of the Philippines, or

the underlying security.

by any political subdivision or agency

Kinds:

thereof, or by any person controlled by

1. OPTIONS contracts that give the

and acting as an instrumentality of

buyer the right, but not the obligation,

said Government.

to buy or sell an underlying security at

2. Any security issued or guaranteed by

a predetermined price, called the

the government of any country with

exercise or strike price, on or before a

which

predetermined date, called the expiry

diplomatic relations, or by any state,

date, which can only be extended in

province or political subdivision or

accordance with Exchange rules.

agency

2. WARRANTS rights to subscribe

reciprocity.

the

Philippines

thereof

on

the

maintains

basis

of

or purchase new shares or existing

3. Certificates issued by a receiver or by

shares in a company, on or before a

a trustee in bankruptcy duly approved

predetermined date, called the expiry

by the proper adjudicatory body.

date, which can only be extended in

4. Any security or its derivatives the sale

accordance with Exchange rules.

or transfer of which, by law, is under

Warrants generally have a longer

the supervision and regulation of the

exercise period than options. (SRC

Office of the Insurance Commission,

Rule 3.1-1)

Housing and land Use Regulatory


Board, or the Bureau of Internal

REGISTRATION OF SECURITIES

GENERAL

RULE:

registration

statement duly filed and approved by the


SEC is necessary before securities may
be sold and offered for sale or distribution

Revenue.
5. Any security issued by a bank except
its own shares of stock.
6. Any securities added by the SEC by
rule or regulation after public hearing.

within the Philippines. Prior to any sale,


information on the securities, in such form

EXEMPT TRANSACTIONS (Sec. 10)

1. Judicial

sale

administrator,

by

executor,

guardian/receiver

in

2. Sale of pledged or mortgaged security


to liquidate a bona fide debt.
on

isolated

of a public company.
It is mandatory to make a tender offer

insolvency or bankruptcy.

3. Sale

other persons to acquire equity securities

for equity shares of a public company in


an amount equal to the number of shares

transactions

by

owner.

that the person intends to acquire in the


following circumstances:

4. Distribution of stock dividends.

a. The person intends to acquire 15% or

5. Sale of capital stock exclusively to

more of the equity shares of a public

stockholders where no commission is

company pursuant to an agreement

paid.

made between or among the person

6. The issuance of bonds or notes

and one or more sellers;

secured by mortgage upon real estate

b. The person intends to acquire 30% or

or tangible personal property, where

more of the equity shares of a public

the entire mortgage are sold to a

company within a period of 12 months;

single purchaser at a single sale.

or

7. Issuance of security in exchange of


any

security

from

same

issuer

pursuant to right of conversion.

that would result in ownership of more


than 50% of the equity shares of a

8. Brokers transactions
9. Pre-incorporation

c. The person intends to acquire shares

public company. (SRC Rule 19)

subscription

and

subscription pursuant to an increase of


the ACS.

Tender offer is made:


1. By filing with the SEC a declaration to
make a tender offer;

10. Exchange of securities by issuer with

2. By

furnishing the

issuer

or

the

existing security holders exclusively

originator of the security a statement

11. Sale to less than 20 persons during

containing such information required

any 12- month period

under Sec. 17 of the SRC:

12. Sale of securities to banks, registered


investment

house,

insurance

i. Annual Report (includes balance


sheet, profit and loss statement); and

companies, pension fund or retirement

ii. Periodical reports for interim fiscal

plan maintained by the government or

periods; and

other persons authorized by the BSP


to engage in trust functions.

3. By

publishing

all

requests

or

invitations for tender, or materials,


making a tender offer or requesting or

TENDER OFFER

inviting letters of such a security.

A publicly announced intention by a


person acting alone or in concert with

PUBLIC COMPANY

1. Any corporation with a class of equity

DEFINITION OF TERMS:

securities listed on an Exchange; or

1. SHORT SALE A contract for sale of

2. Any corporation with assets in excess

shares of stock which the seller does not

of P50M and having 200 or more holders,

own, or certificates which are not within

at least 200 of which are holding at least

his control, so as to be available for

100 shares of a class of its equity

delivery at the time when delivery must

securities.

be made.
2. STOP-LOSS ORDER The direction

UNLAWFUL ACTS

by a customer to his broker that if the

1. For any beneficial owner, director, or

commodity touches the price named, the

officer to sell any security if the seller

broker shall close the trade at the best

or his principal does not own or does

available price.

not deliver it within 20 days from sale.

3. PUT An option that, in consideration

(Sec. 23.3)

of a premium paid, gives the purchaser

2. Manipulation of security prices. (Sec.


24.1)

the right to make the seller take from him


a given number of shares of a named

3. Employment

of

manipulative

or

stock between a given time at a stipulated

deceptive device or contrivance in

price which is usually below the prevailing

connection with purchase and sale of

market price of the stock at the time the

authorities. Execution of short sale,

put is purchased.

stop-loss order not in accordance

4. CALL - An option that, in consideration

with SEC rules. (Sec. 24.2)

of a premium paid, entitles the buyer the

4. For any member of Exchange directly

right to compel the seller to deliver to him

or indirectly endorse or guarantee the

a certain number of shares within a given

performance

call,

time at a stipulated price which is usually

straddle, option or privilege in

higher than the prevailing market price at

relation to any security registered.

the time the call is bought. Call is the

(Sec. 25)

reverse of put.

of

any

put,

5. Fraudulent transactions in the sale of


securities. (Sec.26)

a put and a call, and secures to the

6. Insider trading (Sec. 27)


7. For

an

insider

5. STRADDLE The double privilege of

to

holder the right to demand of the seller at


communicate

a certain price within a certain time a

material non-public information about

certain number of shares of specified

the issuer or security. (Sec. 27.3)

stock, or to require him to take, at the

8. Unlawful Tender Offer. (Sec 27.4)

price within the same time, the same

9. Use of Extensive Credit. (Sec 48.1)

shares of stock.

6. WASH SALE The operation of

issuer or the security. It is considered

simultaneously buying and selling the

unlawful unless:

same stock. It is any transaction in any

1. The insider proves that the information

security which involves no change in the

was not gained from such relationship,

beneficial ownership thereof. It is the

or

reverse
wherein

of

MATCHED

there

is

ORDERS

change

in

the

2. If the other party selling to or buying


from the insider (or his agent) is
identified, the insider proves:

ownership of the securities.


7. SHORT SWING TRANSACTION -

a. that he disclosed the information

One where a person buys securities and

to the other party, or

sells the same within a period of six

b. that he had reason to believe that

months.

the other party otherwise is also in

8. FLOOR TRADER - A professional

possession of the information. (Sec.

trader in securities who acts for himself

27.1)

and not for the account of others, hence,


receives no commission at all.

INSIDER

9. HYPE AND DUMP Engaging in

A person who, with respect to a

buying activity at increasingly higher

particular security, may be any of the

prices and then selling securities in the

following:

market at higher securities.

1. The issuer;

10. BOILER ROOM SALES The use of

2. The director or officer of, or a person

high-pressure sales tactics to promote

controlling the issuer;

purchases and sales of securities.

3. A person whose relationship or former

11. OVER

relationship to the issuer gives him

THE

COUNTER

TRANSACTION

access to material information about the

Transactions which are not made at the

issuer or the security that is not generally

stock exchange, but directly between the

available to the public;

broker and the customer.

4. A government employee, or director,

12. OVER-THE-COUNTER MARKET

or officer of an exchange, clearing agency

A market created other than a

and/or self-regulatory organization who

registered stock exchange for both the

has access to material information about

purchase and sale of any security.

an issuer or a security that is not


generally available to the public; or

INSIDER TRADING

5. A person who learns such information

The selling or buying of a security by

by a communication from any of the

an insider while in possession of material

foregoing insiders. (Sec. 3.8)

non-public information with respect to the

MATERIAL

NON-PUBLIC

Sum of money, or its equivalent,

INFORMATION (formerly Fact of Special

placed in the hands of a broker by

Significance)

principal or persons on whose account

a. Information about the issuer or the

the purchase is to be made, as a security

security which has not been generally

to the former against losses to which he

disclosed to the public and would likely

may

affect the market price of the security

depression in the market value of the

after being disseminated to the public

stock.

be

exposed

by

subsequent

and the lapse of a reasonable time for


the market to absorb the information;

Margin Call

or

Demand made by the broker on the

b. Information about the issuer or the

investor to deposit money or securities

security which would be considered by

with the broker when a purchase is made

a reasonable person important under

or when the investors equity in a margin

the circumstances in determining his

account falls below a minimum standard

course of action to buy, sell or hold

set by the exchange or broker.

security. (Sec. 27.2)


MARGIN TRADING
A kind of trading that allows a broker to
advance for the customer/investor part of
the purchase price of a security and to
keep it as a collateral for such advance.
The credit extended must be for an
amount not greater than whichever is
higher of:
1. 65% of current market price of
the security
2. 100% of the lowest market price
of security during the preceding
36 calendar months, but not
greater than 75% of the current
market price. (Sec. 48)
Margin