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stockholders or members and regardless of the transfer of their

interest or shares of stock.

CORPORATION LAW
BP Blg. 68 the present CORPORATION CODE of the Philippines.

See Section 11 for Corporate Term

Section 2. A corporation is an artificial being created by operation of law, o


having the right of succession and the powers, attributes and properties
4.
expressly authorized by law or incident to its existence.
-

Refers only to corporations organized under the Corporation Code or


o
to private corporations.
Artificial being
Artificial intellectual being
o
A collection of many individuals
A legal institution

Attributes of a Corporation
1.

It is an artificial being

Not a natural person;

Judicial person with


stockholders/members.

It has only the powers, attributes, and properties expressly authorized


by law or incident to its existence.
May exercise only such powers as are granted by the law of its
creation.
All powers which may be implied from those expressly provided by law
and those which are incidental or essential to the corporations
existence may also be exercised.

Doctrine of Corporate Entity

separated

personality

from

its

A corporation is a legal or judicial person with a personality separate


and apart from its individual stockholders or members and from any
other legal entity to which it may be connected or related.

The law treats it as though it were a person by process of fiction.

General rule is that obligations incurred by a corporation, acting Doctrine of Piercing the Veil of Corporate Entity
through its authorized agents, are its sole liabilities.
Where the fiction of corporate entity is being used as a cloak or cover
for fraud or illegality, or to defeat public convenience, justify wrong,
The separate personality of a corporation is a shield against personal
protect fraud, or defend crime, or for ends of subversive of the policy
liability of its officers.
and purpose behind its creation, this fiction will be disregarded and
the individuals composing it or two corporations will be considered
A corporation cannot be held liable for the personal indebtedness of a
identical.
stockholder even if he should be its president.
Corporate officers cannot be held personally liable for the consequences of their acts, for as long as they are for and on behalf
of the corporation, within the scope of their authority and in good faith.
The property of the corporation is not the property of the stockholders
or members and may not be sold by the stockholders or members
without express authorization of its board of directors or trustees.

Disregarding the fiction of corporate entity or doctrine of corporate


alter ego.
Removes the barrier between the corporation from the persons
comprising it to thwart the fraudulent and illegal schemes of those
who use the corporate personality as a shield for undertaking
proscribed activities.

Liability will attach personally or directly to the officers and


Personal liability may attach when the director/trustee or officer acted stockholders.
maliciously or in bad faith, or with gross negligence, or agreed to hold
himself personally and solidarily liable with the corporation, or made,
by specific provision of law, personally liable for corporate action or it Application of doctrine in three areas:
is proven that the officer used the fiction of separate corporate
1. Defeat of public convenience
personality to defraud a third party or for wrongful ends.
2. Fraud cases
A corporation may incur obligations and bring civil and criminal 3. Alter ego cases
actions in its own name in the same manner as a natural person.
The absence of any of the three elements below prevents piercing of the
A corporation may have a good reputation which, if debased or corporate veil:
besmirched resulting in social humiliation, may be a ground for
1. Instrumentality or control test complete dominion
recovery of moral damages and attorneys fees.

The place of business of the suing corporation is considered its 2.


residence.

Fraud test control must have been used by the defendant at the time
the acts complained of took place, to commit fraud or wrong.

It may acquire and possess property of all kinds.

3.

Harm/causal connection test control and breach of duty must


proximately cause the injury or just loss complained of.

While a share of stock represents a proportionate interest in the


property of the corporation, it does not vest the owner thereof with any 4.
legal right or title to any of the properties of the corporation.

The court must acquire jurisdiction first over the corporation or


corporations involved before it can apply the doctrine.

The interest of shareholders in corporate property is purely inchoate 5.


and therefore, does not entitle them to intervene in a litigation
involving corporate property.

The doctrine must be raised during a full-blown trial over a cause of


action duly commenced involving parties duly brought under the
authority of the court.

2.

Created by operation of law

Consent is granted by the State, expressed in terms of special/general


incorporation law.

No corporation can exist without the consent or grant of the sovereign,


and that the power to create corporations is one of the attributes of
sovereignty.

Special incorporation law or charter: directly creates the corporation;


authorizes creation of only one corporation (government
owned/controlled corporations)

General corporation law: under which individuals desiring to be and


act as a corporation may incorporate; authorizes creation of
corporations in general; no limit; BP 68/Act 1459.

3.

It has the right of succession

A corporation has a capacity of continuous existence irrespective of


the death, withdrawal, insolvency, or incapacity of the individual

DISTINCTIONS BETWEEN PARTNERSHIP & CORPORATION


Partnership
Corporation
Mere agreement of
Created by law or
Manner of Creation
the parties
operation of law
Number of
At least 5
Only two persons
Incorporators
incorporators
From the date of
From the moment of
issuance of the
Commencement of
execution of the
certificate of
Juridical Personality
contract of
incorporation by the
partnership
SEC
Any power
authorized by the
Only those expressly
partners, as long as it
granted by law or
is not contrary to law,
Powers
implied from those
morals, good
granted or incident
customs, public
to its existence.
order or public
policy.

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Management

When not agreed


upon, every partner is
an agent of the
partnership.

Effect of
Mismanagement

A partner as such
can sue a co-partner
for mismanagement.

Right of Succession

No right of
succession.

Extent of Liability to
Third Persons

Partners may be
personally and
subsidiarily
(sometimes
solidarily) liable for
partnership debts.

Transferability of
Interest

Delectus personarum

Term of Existence

May be established
for any period of
time.

Firm Name

Limited partnership
bears Ltd.

Dissolution

At any time

Laws which Govern

Civil Code

Vested in the board


of trustees or
directors.
The suit against a
member of the board
who mismanages
should be in the
name of the
corporation.
A corporation has
such right.
Stockholders are
liable only to the
extent of their
investment as
represented by the
shares subscribed by
them.
A stockholder has
the right to transfer
his shares without
prior consent of the
others.
50 years, extendible
for another 50 years.
May adopt any name
provided it is not
identical or
deceptively similar to
any registered firm
name or contrary to
law.
Can only be
dissolved with the
consent of the State.
Corporation Code

4.

Centralized management;

4. Lack of personal element;

5.

Standardized
organization,
management
dissolution;

5.
Greater
governmental
supervision;

5.
6.

6. Management and control are


separated from ownership in
large corporations.

7.

Shareholders have limited


liability

7. Stockholders voting rights


have become theoretical;

8.

They are not general


agents of the business;

8. Stockholders have little voice


in the conduct of the business.

9.

Shares of stocks can be


transferred without the
consent of the other
stockholders.

Section 3. Classes of Corporations


Stock Corporations corporations which have capital stock divided into
shares and are authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the shares
held.
Non-Stock Corporations one where no part of its income is distributable
as dividends to its members, trustees, or officers. Section 87
Other classifications:
1.

4.

Because the identity of the corporation is lost or merged.


Limitation is based on public policy.
5.
It would permit the corporate assets to be subjected to risks and
liabilities not contemplated by the stockholders at the time of making
their investment.

EXCEPTIONS:

As to number of persons who compose them:


a.
b.

Corporation as a Partner

1.
2.
3.

6.

Corporation aggregate
Corporation sole

As to whether they are for religious purposes or not:


a.
b.

Ecclesiastical Corporation
Lay Corporation

As to whether they are for charitable purposes or not:


a.
b.

Eleemosynary corporation
Civil corporation

As to State under or by whose laws they have been created:


a.
b.

Domestic
Foreign

As to their legal right to corporate existence:


a.
b.

De jure
De Facto

As to whether they are open to the public or not:

1.

Joint venture where the nature of that venture is in line with the
business authorized by their charters.

a.
b.

2.

Where the partnership agreement provides that the two partners will 7.
manage the partnership so that the management of the corporate
interest is not surrendered.

As to their relation to another corporation:

3.

With a foreign corporation licensed to do business in the Philippines


and a domestic corporation for the purpose of undertaking certain
phases of the construction of an economic development project 8.
registered as a pioneer enterprise with the Board of Investments,
provided that both parties shall be jointly & severally liable for all the
obligations of the partners in the Philippines.

ADVANTAGES of a BUSINESS
CORPORATION
1.

2.
3.

DISADVANTAGES of a BUSINESS
CORPORATION

Legal capacity to act and


contract as a distinct unit;

1.
Relatively
complicated
formation and management;

Continuity of existence;

2. High cost of formation and


operations;

Credit is strengthened;

3. Credit is weakened by the


limited liability of stockholders;

of
and

Makes feasible gigantic


financial undertakings;

2.
Separate juridical personality
Can act only through agents
Composed of an aggregate of individuals
Distributes its profits to those who contribute to the capital of the
business
3.
Organized only when there is a law authorizing its organization
Taxable

GENERAL RULE: Corporations cannot ordinarily enter into partnership with


other corporations or individuals.

and

degree
control

6.

Similarities between Partnership and Corporation:


1.
2.
3.
4.

creation,

9.

a.
b.
c.

Close
Open

Parent or Holding
Subsidiary
Affiliated

As to whether they are for public or private purpose:


a.
b.

Public provinces, cities, municipalities, barangays


Private includes GOCCs, quasi-public corporations

As to whether they are corporations in a true sense or in a limited


sense:
a.
b.

True corporation
Quasi-corporation Defective corporations
corporation by prescription and by estoppel

such

Important distinctions between public and private corporations:


A.

Governmental control
1.

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Public subject to governmental visitation and control

as

2.
B.

C.

Private not subject to visitation, control or change by the State conduct its business, such contribution being made either directly through
except in the exercise of police power.
stock subscription or indirectly through the declaration of dividends.
Public corporation may be created without consent of the locality to
be affected, which consent of the incorporators is necessary to the a. Authorized Capital Stock amount of capital stock as specified in the
creation of a private corporation.
articles of incorporation.
Taxation, liability for torts or negligence of officers and agents and to b.
various other questions.

Subscribed Capital Stock amount of the capital stock subscribed,


whether fully paid or not.

Section 4. Corporations created by special laws or charters:


-

a)

Governed primarily by the provisions of the special law or charter


creating them or applicable to them, supplemented by this Code,
c.
insofar as they are applicable.

Outstanding Capital Stock portion of the capital stock which is


issued and held by persons other than the corporation itself; the total
shares of stock issued to subscribers or stockholder whether or not
fully or partially paid, except treasury shares.

This section authorizes the creation of private corporations by special


laws or charters.
d.

Section 5. Corporators and incorporators, stockholders and members.

Paid-up Capital Stock portion of the subscribed or outstanding


capital stock that is actually paid.

Corporators those who compose a corporation, whether as stockholders


e.
or as members.

Unissued Capital Stock portion of the capital stock that is not issued
or subscribed.

Incorporators stockholders or members mentioned in the articles of


incorporation as originally forming and composing the corporation and f.
who are signatories thereof.

Legal Capital amount equal to the aggregate par value and/or issued
value of the outstanding capital stock.

Capital used broadly to indicate the entire property or assets of the


corporation. It includes the amount invested by the stockholders plus the
undistributed earnings less losses and expenses.

Stockholders or shareholders Corporators in a stock corporation.


Members Corporators in a non-stock corporation.

Stock Dividends amount that the corporation transfers from its surplus
profit account to the capital account.

Three other classes:


1.

Subscription contract any contract for the acquisition of


unissued stock in an existing corporation or a corporation still to
be formed.

Promoters persons who bring about or cause to bring about the


formation and organization of a corporation by bringing together the
incorporators or persons interested in the enterprise, procuring
subscriptions or capital, and setting in motion the machinery which
leads to the incorporation of the corporation itself.

2.

Subscribers persons who agreed to take and pay for original,


unissued shares of a corporation formed or to be formed.

3.

Underwriter a person, usually an investment banker, who has agreed


to buy at stated terms an entire issue of securities or a substantial part
thereof/ guaranteed the sale of an issue/ has agreed to use his best
efforts to market all or part of an issue/ has offered for sale stock he
purchased from a controlling stockholder.

CAPITAL
Actual
corporate
concrete thing.

property;

CAPITAL STOCK
An amount; abstract.

Fluctuates or varies from day to


day according as there are profits
or losses or appreciation or
depreciation of assets.

Amount fixed in the articles of


corporation, unaffected by profits
and losses.

Belongs to the corporation.

When issued, belongs to the


stockholders.
Always personal.

May either be real or personal


property.

Agreement or contract with a corporation:


There shall be an agreement between the corporators and the Stock or Share of stock one of the units into which the capital stock is
divided. It represents the interest or right which the owner has:
corporation creating a contractual relation between them.
1.

Section 6. Classification of Shares

To participate in the management of the corporation Sec 23;

No share may be deprived of voting rights except those classified and 2. Share in the surplus earnings/assets/profits or unrestricted earnings
Sec 43;
issued as preferred or redeemable shares, unless otherwise
provided in this Code.
3. Share in the remaining properties after dissolution, if any Sec 122.
There shall always be a class or series of shares which have complete
Certificate of Stock written acknowledgment by the corporation of the
voting rights.
interest, right and participation of a person in the management, profits and
Shares of capital stock issued without par value shall be deemed fully assets of a corporation.
paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto: Provided, Formal written evidence of the holders ownership of one or more shares
that shares without par value may not be issued for a consideration and is a convenient instrument for the transfer of title.
less than the value of five pesos per share.
SHARE OF STOCK
CERTIFICATE OF STOCK
When Classification of Shares may be made:
Incorporeal or intangible property; Tangible property;
Represents the right/interest of a Written
evidence
of
that
1. First determined by the incorporators as stated in the articles of
person in a corporation;
right/interest;
incorporation filed with the SEC.
-

2.

May
be
issued
even
if
subscription is not fully paid,
except in no par shares;
Situs is deemed to be the State
where the corporation has its
domicile.

After the corporation comes into existence, they may be altered by the
board of directors and stockholders by amending the articles of
incorporation.

Doctrine of Equality of Shares


-

Except as otherwise provided by the articles and stated in the


certificate of stock, each share shall be in all respects equal to every
other share.

Capital Stock and Capital Explained

May have a situs at the place


where it is located or at the
domicile of the owner, even
though the corporation
is
domiciled elsewhere.

Classes of Shares in General:


1.

Capital Stock the amount fixed in the articles of incorporation, to be


subscribed and pain in or agreed to be pain in by the stockholders of a
corporation, in money, property, services, or other means at the
organization of the corporation or afterwards and upon which it is to

May not be issued unless the


subscription is fully paid;

Par Value/ No Par Value


a.

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Par Value one with specific money value fixed in the articles of
incorporation and appearing in the certificate of stock.
- May be issued without payment, as long as there is a valid
subscription and date of payment is indicated at the subscription.

- Face Value
- Assessable
- Represents the amount of money or property contributed by the
shareholder to the capital stock of the corporation.
b.
-

2.

No Par Value one without any stated value appearing on the face
of the certificate of stock. It is a stock which does not state how
much money it represents.
No face value
Deemed fully paid
Non-assessable
It always has an issued value the consideration fixed by the
corporation for its issuance.
Issued value may be fixed by the articles of incorporation or by the
board of directors or by stockholders representing majority of OCS
and shall not be less than P5/share.
Conversion of the no par value to par value is allowed by SEC
provided there would be no change in the stockholders percentage
interest in the total assets of the corporation.

c)

May be issued only with a stated par value;

d)

Board of directors may fix the terms and conditions of preferred


shares or any series thereof only when so authorized by the articles
and shall be effective upon filing of a certificate with the SEC.

Kinds of Preferred Shares as to Dividends:

Cumulative preferred share entitles the holder not only to the


payment of current dividends but also to dividends in arrears.

Non-cumulative preferred share entitles the holder to the payment


of current dividends only in preference to common stockholders.

Participating preferred share gives the holder not only the right to
receive the stipulated dividends at the preferred rate but also to
participate with the holders of common shares in the remaining profits
pro rata after the common shares have been paid.

Non-participating preferred share entitles the holder thereof to


receive the stipulated preferred dividends and no more.

Voting or Non-Voting

Voting Share share with right to vote.


- Each common share shall be equal in all respects to every other
common share.
- Only shares classified and issued as preferred or redeemable may 4.
be deprived of voting rights.
- One share, one vote because representation in a corporation is
commensurate to extent of ownership.
b. Non-Voting Share share without right to vote.
- Where the articles of incorporation provide for non-voting shares in 5.
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
a.

a)
b)
c)

Amendment of the articles of inc.;


Adoption and amendment of by-laws;
Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
Incurring, creating or increasing bonded indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the corporation with another
corporation/s;
Investment of corporate funds in another corporation or business
in accordance with this Code; and
Dissolution of the corporation.

d)
e)
f)
g)
h)
3.

Common or Preferred:
a.

Cumulative participating preferred share combination of the


cumulative share and the participating share.
Promotion Share issued to promoters, or those in some way
interested in the company, for incorporating the company, or for
services rendered in launching or promoting the welfare of the
company.
Share in Escrow subject to an agreement by virtue of which the share
is deposited by the grantor or his agent with a third person to be kept
by the depository until the performance of a certain condition or the
happening of a certain event contained in the agreement.

6.

Convertible Share convertible or changeable by the stockholder


from one class to another class at a certain price and within a certain
period.

7.

Founders share

8.

Redeemable share

9.

Treasury share

Limitations or Restrictions imposed by law regarding the issuance of No


Par Value shares:

Common Share one which entitles the holder thereof to a pro rata 1.
division of the profits, if there are any, and in its assets upon
dissolution, without any preference or advantage in that respect
over other stockholders or class of stockholders but equally with all
2.
other stockholders except preferred stockholders.
It is the basic class of stock which private corporations generally
issue or because its holders stand upon an equal footing, without
3.
extraordinary rights or privileges.
Have complete voting rights.
Residual owners of the corporation.
Has preference in the matter of management.

Banks, trust companies, insurance companies, and building and loan


associations shall not be permitted to issue no par value shares of
stock;
Preferred shares of stock of any corporation may be issued only with
a stated par value;
Shall be deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in
respect thereto. Holder shall not be liable beyond the issued price,
notwithstanding a change in their value;

4. May not be issued for a consideration less than 5 pesos per share;
Preferred Share one with a stated par value which entitles the
holder thereof to certain preferences over the holders of common
5. Shall be treated as capital, and therefore, shall not be available for
stock.
distribution as dividends.
- Designed to induce persons to subscribe for shares of a
corporation.
ADVANTAGES OF PAR VALUE
DISADVANTAGES OF PAR VALUE
- Unless otherwise provided, preferred stocks are presumed to be
SHARES
SHARES
voting although they are rarely given voting privileges.
Subscribers are liable to
- Cannot be converted into common and cannot be changed without
Easily sold as the public is more
corporate creditors for their
the consent of the stockholders.
attracted to buy this kind of
unpaid subscription;
shares;
Kinds of Preferred Shares:
Stated face value of the share is
Greater protection to creditors;
not an accurate criterion of its
a) Preferred share as to assets gives the holder thereof preference
true value.
in the distribution of the assets of the corporation in case of
liquidation;
Unlikelihood of sale of
subsequently issued shares at a
b) Preferred share as to dividends share the holder of which is
lower price;
entitled to receive dividends o said share to the extent agreed upon
Unlikelihood of distribution of
before any dividends at all are paid to the holders of common stock.
dividends that are only ostensible
profits.
Limitations regarding issuance of preferred shares:
b.

a)

Preferred shares deprived of voting rights in the articles of inc., shall


be entitled to vote on matters enumerated in Section 6, although
they shall not be entitled to vote on other matters;

b)

Must not be violative of the provisions of the Code;

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Section 7. Founders shares

Steps in Incorporation:

a.
b.
c.
d.

Classified as such in the articles, may be given certain rights and


privileges not enjoyed by the owners of other stocks, provided that
where the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to exceed 5
years subject to the approval of the SEC. 5-year period commences
upon such approval by the SEC.
3)

Drafting and execution of the articles of incorporation;


Filing with the SEC of the articles of incorporation;
Payment of the filing and publication fees;
Issuance by the SEC of the certificate of incorporation.

Formal organization and commencement of business operations

Shares issued to the organizers and promoters of a corporation in Section 11. Corporate Term
consideration of some supposed right or property.
A corporation shall exist for a period not exceeding fifty years from the
date of incorporation unless sooner dissolved or unless said period is
Section 8. Redeemable shares
extended. That corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty years in

May be issued by the corporation when expressly so provided in the


any single instance by an amendment of the articles of incorporation,
articles. They may be purchased or taken up by the corporation upon
in accordance with this Code: Provided, that no extension can be made
the expiration of a fixed period, regardless of the existence of
earlier than five years prior to the original or subsequent expiry date(s)
unrestricted retained earnings in the books of the corporation, and
unless there are justifiable reasons for an earlier extension as may be
upon such terms and conditions stated in the articles of incorporation,
determined by the SEC.
which terms and conditions must also be stated in the certificate of
stock representing said shares.
If the authorized capital stock of 5,000.00 is fully subscribed (100%)
Section 9. Treasury shares
and the total subscription (5,000.00) is fully paid up capital stock
(5,000.00), then a corporation can be organized.

Shares of stock issued and fully paid for but subsequently reacquired
by the issuing corporation, by purchase, redemption, donation, or Section 12. Minimum capital stock required of stock corporations
through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors.
Stock corporations incorporated under this Code shall not be required
to have any minimum authorized capital stock except as otherwise
Section 10. Number and Qualifications of Incorporators
provided for by special law, and subject to the provisions of the
following section.
- Any number of natural persons not less than five but not more than
fifteen, all of legal age and a majority of whom are residents of the Section 13. Amount of capital stock to be subscribed and paid for purposes
Philippines, may form a private corporation for any lawful purpose or of incorporation
purposes. Each of the incorporators of a stock corporation must own or
be a subscriber to at least one share of the capital stock of the At least 25% of the authorized capital stock as stated in the articles of
corporation.
incorporation must be subscribed at the time of incorporation, and at
least 25% of the total subscription must be paid upon subscription, the
balance to be payable on the date/s fixed in the contract of
PRIMARY
(CORPORATE) SECONDARY
(SPECIAL)
subscription, without any need of call, or in the absence of fixed date/s,
FRANCHISE
FRANCHISE
upon call for payment by the board of directors: Provided, however,
Right or privilege granted to Franchise to exercise powers
that in no case shall the paid-up capital be less than 5,000 pesos.
individuals by the State to be and and privileges granted to such
act as a corporation after its corporation to the business for
Corporation with ACS of only 5,000 may be organized: it has to be fully
incorporation.
which it was created, including
subscribed then fully/entirely paid up.
those conferred for purposes of
public benefit such as the power
Section 14. Contents of Articles of Incorporation
of eminent domain and other
powers and privileges enjoyed by
1) Name of the corporation (Section 18)
public utilities.
Should not be identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law
Granted to the incorporators; Conferred upon the corporation
or is patently deceptive, confusing, or contrary to existing laws.
enables them to act for certain after its incorporation and not
designated purposes as a single upon the individuals who
2) Specific purpose/s for which the corporation is being incorporated
individual and exempts them, compose the corporation.
Must be lawful
unless otherwise provided, from
Must be stated with sufficient clarity
individual liability for corporate
Primary purpose must be stated
debts.
Purposes must be capable of being lawfully combined
Inalienable; it is part of the
corporation and cannot be sold
or assigned. It may be conveyed
provided there is express
legislative authority to do so.

May ordinarily be conveyed or


mortgaged under a general
power granted to a corporation to
dispose of its property, except
such franchises as are charged
with a public use.

Steps in the Creation of a Corporation:


1)
-

Place where the principal office of the corporation is to be located,


which must be within the Philippines
Place of the principal office place where its books and records are
ordinarily kept and its officers usually meet for the purpose of
managing the affairs and transacting the business of the corporation.

4)

Term for which the corporation is to exist

5)

Names, nationalities and residences of the incorporators

Promotion
6)
A number of business operations peculiar to the commercial world by
which a company is generally brought to existence.
7)
Make known to the general public that they are forming a corporation;
invite prospective incorporators.

Number of directors/trustees, which shall not be less than 5 nor more


than 15

Stages in Corporate Promotion

8)

If it be a stock corporation, the amount of its authorized capital stock


in lawful money of the Philippines, the number of shares into which it
is divided, and in case the shares are par value shares, the par value
of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his
subscription, and if some or all of the shares are without par value,
such fact must be stated

9)

If it be a non-stock corporation, the amount of its capital, names,


nationalities and residences of the contributors and the amount
contributed by each

a.
b.
c.
2)

3)

Discovery represent a new product or service, or the promoter


may simply organize another company in an existing line of
business;
Investigation analysis of needs
Assembly bringing together the property, money and personnel
into an organization.

Incorporation

Page 5 of 10

Names, nationalities and residences of the persons who shall act as


directors/trustees until the first regular directors/trustees are duly
elected and qualified (Incorporating Directors)

10) Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
-

Sworn statement of the Treasurer elected by the subscribers showing


at least 25% of the ACS has been subscribed, and at least 25% of the
total subscription has been fully paid, such paid up capital being not
less than 5,000.

which such corporation may be a party. Such inquiry may be made by


the Solicitor General in a quo warranto proceeding.
De Jure Corporation one created in strict or substantial conformity with
the mandatory statutory requirements for incorporation and the right of
which to exist as a corporation cannot be successfully attacked or
questioned by any party even in a direct proceeding for that purpose by the
State.

Section 15. Forms of Articles of Incorporation

De Facto Corporation exists for all practical purposes as a corporation


Articles of Incorporation document prepared by the persons establishing but which has no legal right to corporate existence as against the State; did
a corporation and filed with the SEC containing the matters required by the not substantially comply with requirements of law (colourable compliance).
Code.
Requisites of a de facto corporation:
Defines the charter of the corporation and the contractual
relationships between the State and the corporation, the stockholders 1. Valid law under which a corporation with powers assumed might be
incorporated;
and the State, and between the corporation and stockholders.
2. Bona fide attempt to organize a corporation under such law;
3. Actual user or exercise in good faith of corporate powers conferred
Section 16. Amendment of Articles of Incorporation
upon it by law.
Any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors/trustees and the Defects precluding creation of corporation:
vote or written assent of the stockholders representing at least 2/3 of
the outstanding capital stock, without prejudice to the appraisal right 1. Absence of articles of incorporation
of dissenting stockholders in accordance with the provisions of this 2. Failure to file articles of incorporation with the SEC
Code, or the vote or written assent of 2/3 of the members if it be a non- 3. Lack of certificate of incorporation from the SEC
stock corporation.
Defects resulting in creation of de facto corporation:
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such 1. Articles of incorporation fails to state all the matters required by the
Code, or state some of them incorrectly;
articles, as amended, shall be indicated by underscoring the change/s
made, and a copy thereof duly certified under oath by the corporate 2. Name of the corporation closely resembles that of a pre-existing
corporation
secretary and a majority of the directors or trustees stating the fact
that said amendment/s have been duly approved by the required vote 3. Incorporators or a certain number of them are not residents of the
Philippines
of the stockholders or members, shall be submitted to the SEC.
4. Acknowledgment of the articles of incorporation or certificate of
incorporation is insufficient or defective in form, or it was
- Amendments shall take effect upon approval by the SEC or from the date
acknowledged before the wrong officer;
of filing with the said commission if not acted upon within 6 months from
5. Percentage of Filipino ownership of the capital stock is less than that
the date of filing for a cause not attributable to the corporation.
prescribed by law;
Section 17. Grounds when articles of incorporation or amendment may be 6. Minimum paid-up capital stock has not been paid to and received by
the corporate treasurer contrary to his affidavit
rejected or disapproved.
7. Failure to submit its by-laws on time
1. Articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed therein;
ADVANTAGES OF NO PAR
DISADVANTAGES OF NO PAR
VALUE SHARES
VALUE SHARES
2. Purpose/s of the corporation are patently unconstitutional, illegal,
Issued as fully paid and nonLegalize large issues of stock
immoral, or contrary to government rules and regulations;
assessable;
property;
3. Treasurers affidavit concerning the amount of capital stock
Conceal the money or property
Flexible price;
subscribed and/or paid is false;
represented by the shares;
Low-priced stocks enjoy wider
Promote issuance of watered
4. Percentage of ownership of the capital stock to be owned by citizens
distribution;
stock;
of the Philippines has not been complied with as required by existing
They tell no untruth concerning
laws or the Constitution.
the value of the stockholders
Lesser protection to creditors.
contributions;
Grounds for suspension or revocation of certificate of registration of
Stock dividends are more easily
corporations:
issued.
1)

Fraud in procuring its certificate of incorporation;

2)

Serious misinterpretation as to what the corporation can do or is doing


to the great prejudice of, or damage to, the general public;

Questioning validity of corporate existence

3)

Refusal to comply with or defiance of a lawful order of the commission


restraining the commission of acts which would amount to a grave
violation of its franchise;

4)

Continuous inoperation for a period of at least five years;

5)

Failure to file by-laws within the required period;

6)

Failure to file required reports in appropriate forms as determined by Direct attack the State, in a proceeding for that purpose, attacks the
existence of an association claiming to be a corporation.
the commission within the prescribed period.

- De facto corporation cannot be collaterally attacked either by the State


or by private individuals.
- The State must bring a direct proceeding (quo warranto) against the
corporation to oust it from the exercise of corporate powers usurped
by it and to have it dissolved.

Collateral attack one whereby corporate existence is questioned in some


incidental proceedings not provided by law for the express purpose of
A private corporation formed or organized under this Code attacking the corporate existence.
commences to have corporate existence and juridical personality and
Rationale: public policy
is deemed incorporated from the date the SEC issues a certificate of
incorporation xxx
It is the regular courts, not the SEC, that have jurisdiction over
disputes or controversies among them.

Section 19. Commencement of corporate existence


-

Section 20. De Facto Corporations


-

Proof of Corporate Existence:

The due incorporation of any corporation claiming in good faith to be


a corporation under this Code, and its right to exercise corporate 1)
powers, shall not be inquired into collaterally in any private suit to

Page 6 of 10

De Jure existence valid law creating or authorizing such a


corporation; valid organization under it; and substantial compliance
with all conditions precedent.

GENERAL RULE: directors or trustees must act as a body and personally to


De Facto existence law under which the alleged corporation might bind the corporation.
have been formed; a colourable bona fide compliance with that law;
assumption or user of corporate powers.
EXCEPTION: Extraordinary situations or conditions to justify the act of
stockholders or corporate officers as to make a board action as nothing
Section 21. Corporation by estoppel
more than a mere formality.
2)

All persons who assume to act as a corporation knowing it to be


without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, that when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its
lack of corporate personality.

Term of office of directors or trustees one year and until their successors
are elected and qualified.
Hold-over the office has a fixed term which has expired, and the
incumbent is holding the succeeding term. A hold-over board has the
power to declare the position of the President vacant and elect another.

Qualifications of directors or trustees:


One who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact 1) Stock corporations
no corporation.
a. Must own at least one share of the capital stock
b. Share of stock held by the director must be registered in his name
Two aspects of a corporation by estoppel:
on the books of corporation
c. Must continuously own at least a share of stock during his term;
1. Stockholders/members of a pretended or ostensible corporation who
otherwise he shall automatically cease to be a director
participated in holding out as a corporation are generally estopped to
d. Majority of directors must be residents of the Philippines
deny its existence against creditors for the purpose of escaping
liability for corporate debts or for unpaid part of a subscription to
2) Non-stock corporations
stock.
-

2.

Third persons who deal with such a corporation recognizing it as such


and the pretended corporation itself, estopped from denying its
existence and raising the defense of its lack of corporate personality
for the purpose of defeating a liability growing out of the contractual
relation between them and such entity, or later taking advantage of
their non-compliance with the law, chiefly in cases where such
persons have received the benefits of the contract.

Section 22. Effects of non-use of corporate charter and continuous


inoperation of a corporation

a.
b.

Members in good standing thereof


Majority must be residents of the Philippines

Only natural persons can be elected as directors or trustees and


they must be elected from among the stockholders or members.

No citizenship requirement demanded of the members of the


board of directors under this Code.

Additional qualifications of directors or trustees may be


prescribed by the by-laws but their qualifications may not be
modified if such modification would be in conflict with the
requirements prescribed by the corporation law.

if a corporation does not formally organize and commence the


transaction of its business or the construction of its works within 2
years from the date of its incorporation, its corporate powers cease
and the corporation shall be deemed dissolved. However, if a Section 24. Election of directors or trustees.
corporation has commenced the transaction of its business but
There must be present, either in person or by representative
subsequently becomes continuously inoperative for a period of at authorized to act by written proxy, the owners of a majority of the
least 5 years, the same shall be a ground for the suspension or
outstanding capital stock, or if there be no capital stock, a majority of
revocation of its corporate franchise or certificate of incorporation.
the members entitled to vote.
This provision shall not apply if the failure to organize, commence the
By ballot, if requested by any voting stockholder or member.
transaction of its business or the construction of its works, or to continuously operate is due to causes beyond the control of the
Stock corporations every stockholder entitled to vote shall have the
corporation as may be determined by the SEC.
right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the stock
Section 23. The board of directors or trustees.
books of the corporation, or where the by-laws are silent, at the time
of the election.
the corporate powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of such
Voting is on the bases of the number of shares and not on the number
corporations controlled and held by the board of directors or trustees of stockholders present in the stockholders meeting.
to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold
Voting by viva voce or roll call is valid except when there is a request
office for one year until their successors are elected and qualified.
that the election be by ballot in which case such voting is mandatory.
Every director must own at least one share of the capital stock of the
corporation of which he is a director, which share shall stand in his name Mere designation by the stockholders or by a corporate officer
on the books of the corporation. Any director who ceases to be the owner
empowered by the stockholders without election of directors in the
of at least one share of the capital stock of the corporation of which he is a
manner provided in the by-laws or the Code will not be sufficient.
director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or Methods of Voting:
trustees of all corporations organized under this Code must be residents of
the Philippines.
1) Straight Voting every stockholder may vote such number of shares
for as many persons as there are directors to be elected.
Powers of the Board:
2) Cumulative voting for one candidate stockholder is allowed to
1. Exercise all corporate powers (Sections 36-44)
concentrate his votes and give one candidate as many votes as the
2. Conduct the business of the corporation
number of directors to be elected multiplied by the number of his
3. Hold and control all properties of the corporation
shares shall equal.
Governing body of the corporation board of directors or trustees
In the absence of authority or valid delegation from the board of directors
or trustees, no person, not even its officers, can validly bind a corporation.
3)

Limitations on powers of board of directors or trustees:


1.
2.
3.

Limitations or restrictions imposed by the Constitution, statutes,


articles of incorporation, or by-laws of the corporation;
Cannot perform constituent acts, that is, acts involving fundamental
or major changes in the corporation, which require the approval or
ratification of the stockholders or members;
Cannot exercise powers not possessed by the corporation.

Page 7 of 10

For the purpose of giving minority stockholders representation in


the board of directors.

Cumulative voting by distribution stockholder may cumulate his


shares by multiplying also the number of his shares by the number of
directors to be elected and distribute the same among as many
candidates as he sees fit.

Voting in a non-stock corporation voting members may cast as


many votes as there are trustees to be elected but may not case
more than one vote for one candidate.

Section 25. Corporate officers, quorum.


-

or at an unreasonable time if the immediate consequence would be to


leave the interest of the corporation without proper care and
protection.
Resignation need not be in any particular form.
Resignation has to be reported to the SEC immediately.
Unless otherwise provided, resignation becomes complete and his
office becomes vacant the moment the resignation is made to the
proper office or body.
It is not necessary that the resignation be accepted or that someone
be elected to take his place.

Immediately after their election, the directors of a corporation must


formally organize by the election of a :

president, who shall be a director,

a treasurer who may or may not be a director,

a secretary who shall be a resident and citizen of the Philippines,

Such other officers as may be provided for in the by-laws.

Any two or more positions may be held concurrently by the same


person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
Abandonment of office and failure to attend meetings
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles or by-laws provide for a greater majority, a majority
of the number of directors/trustees as fixed in the articles shall
constitute a quorum for the transaction of corporate business, and
every decision of at least a majority of the directors/ trustees present
at a meeting at which there is a quorum shall be valid as a corporate
act, except for the election of officers which shall require the vote of a
majority of all the members of the board.

Acceptance of incompatible office


Absence for an unreasonable length of time
Mere absence or continued failure to attend meetings where there has
been no resignation, does not have the effect of vacating his seat or
terminating his term of office, unless there is some express provision
to such effect.

Section 29. Vacancies in the office of director/trustee.


-

Any vacancy occurring in the board other than by removal by the


stockholders or members or expiration of term, may be filled by the
vote of at least a majority of the remaining directors/trustees, if still
constituting a quorum.

Otherwise, said vacancies must be filled by the stockholders in a


regular/special meeting for that purpose.

Within 30 days after the election, the secretary or any other officer of the corporation, shall submit to the SEC, the names, nationalities, and
residences of the directors, trustees, and officers elected.
-

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


to hold office, his heirs in case of his death, the secretary, or any other
officer of the corporation or the director, trustee, or officer himself
shall immediately report such fact to the SEC.

A director/trustee so elected to fill a vacancy shall be elected only for


the unexpired term of his predecessor in office.
Any directorship/trusteeship to be filled by reason of an increase in
the number of directors or trustees shall be filled only by an election
at a regular/special meeting called for the purpose, or in the same
meeting authorizing the increase, if so stated in the notice of the
meeting.

Directors/trustees cannot attend or vote by proxy at board meetings.

Quorum such number of the membership of a collective body as is


competent to transact business or do any other corporate act.

Section 26. Report of election of directors, trustees, and officers.

Grounds for replacement during term:

Section 27. Disqualification of directors, trustees or officers.


-

1. Resignation/removal
No person convicted by final judgment of an offense punishable by 2. When his position is otherwise lawfully vacated
imprisonment for a period exceeding six years, or a violation of this
Code, committed within five years prior to the date of his election or Filling of vacancies in any of the following cases:
appointment, shall qualify as a director, trustee or officer of any
corporation.
A. By stockholders/members:

Section 28. Removal of directors or trustees


-

Stock corporation - By a vote of the stockholders holding or


representing 2/3 of the outstanding capital stock

Non-stock Corporation - 2/3 of the members entitled to vote.

Such removal shall take place either at a regular meeting of the


corporation or at a special meeting called for the purpose, after
previous notice to stockholders/members of the intention to propose B.
such removal at the meeting.

Special meeting must be called by the secretary on order of the


president or on the written demand of the stockholders representing
or holding at least a majority of the outstanding capital stock or on the
written demand of a majority of the members entitled to vote.

Should the secretary fail or refuse to give notice, or if there is no


secretary, the call for the meeting may be addressed directly to the
stockholders or members by any stockholder or member signing the C.
demand.

Removal may be with or without cause, provided that removal without


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

Requisites for removal of directors/trustees:


1.
2.
3.

By members of the board:


Allowing the remaining directors/trustees to fill up vacancies avoid
the expenses and inconveniences attending the calling of
stockholders or members meeting;
The power of the board is not suspended by vacancies in the board
unless the number is reduced below the quorum.
Board has no power to fill any directorship/trusteeship by reason of
an increase in the number of directors/trustees.
Where vacancy caused by resignation of a holdover director
Stockholders, and not the remaining members of the board, have the
power to elect a director to fill the vacancy.
Holdover period that time from the lapse of one year after a
members election to the board and until his successors election and
qualification, is not a part of the directors original term, nor is it a new
term.

Take place either at a regular/special meeting;


Section 30. Compensation of directors
Previous notice to stockholders/members of the intention to propose
such removal;
In the absence of any provision in the by-laws fixing their
Vote of the stockholders holding 2/3 of the outstanding capital stock
compensation, the directors shall not receive any compensation, as
or 2/3 of the members entitled to vote.
such directors, except for reasonable per diems.

Resignation of directors or trustees

Vacancy results from the removal by the stockholders/members or


the expiration of term;
Vacancy occurs other than by removal or by expiration of term, e.g.
death, resignation, abandonment, disqualification;
Vacancy may be filled by remaining directors/trustees, but the board
refers the matter to the stockholders or members;
Vacancy is created by reason of an increase in the number of directors
or trustees.

May resign at any time;


A corporation continues to exist despite the resignation of the
directors/trustees.
A director cannot resign as part of fraudulent scheme to prejudice the
corporation or its stockholders and make profit to his own advantage

Page 8 of 10

Any such compensation other than per diems may be granted to


directors by vote of the stockholders representing at least a majority
of the outstanding capital stock at a regular/special stockholders
meeting

In no case shall the total yearly compensation of directors, as such, Sec. 33. Contracts between corporations with interlocking directors.
exceed 10% of the net income before income tax of the corporation
- Except in cases of fraud, and provided the contract is fair and reasonable
during the preceding year.
under the circumstances, a contract between two or more corporations
having interlocking directors shall not be invalidated on that ground alone:
Section 31. Liability of directors, trustees, or officers.
Provided, That if the interest of the interlocking director in one corporation
is substantial and his interest in the other corporation or corporations is
Cases when directors/trustees/officers are liable for damages:
merely nominal, he shall be subject to the provisions of the preceding
1. Wilfully and knowingly votes or assents to patently unlawful acts of section insofar as the latter corporation or corporations are concerned.
the corporation;
2. Guilty of gross negligence or bad faith in directing affairs of the Stockholdings exceeding twenty (20%) percent of the outstanding capital
stock shall be considered substantial for purposes of interlocking directors.
corporation;
Acquires any personal or pecuniary interest in conflict with his duty as Contracts between corporations with interlocking directors.
such director or trustee.
- Contract is valid between two or more corporations which have
interlocking directors (sec. 44). However, if the interest of the
4. Consents to the issuance of watered stocks or who, having knowledge
interlocking director in one corporation is substantial, the rules of sec.
thereof, does not forthwith file with the corporate secretary his written
32 on self-dealing directors shall apply insofar as the latter corporation
objection thereto;
is concerned.
5. When he is made, by a specific provision of law, to personally answer
- This section pertains to transaction between corporations with
for his corporate action;
interlocking directors resulting in the prejudice to one of the
corporations. This does not apply where the corporation allegedly
6. When he agrees to hold himself personally and solidarily liable with
prejudiced a third party, not one of the corporations with interlocking
the corporation.
directors. (DBP v. CA 2001)
Three-fold duty of directors: OBEDIENCE, LOYALTY, DILIGENCE
Evils of interlocking directorates.
Sec. 32. Dealings of directors, trustees or officers with the corporation. - A
contract of the corporation with one or more of its directors or trustees or 1. Validity of by-laws prohibiting interlocking directorates.By-laws
which prohibit a director of a corporation form serving at the same time
officers is voidable, at the option of such corporation, unless all the
as director of a competing corporation, have been upheld as valid and
following conditions are present:
reasonable. (Gokongwei v. SEC 1979)
1. That the presence of such director or trustee in the board meeting in
Reason: The interlock permits the coordination of policies between
which the contract was approved was not necessary to constitute a
nominally independent firms to an extent that competition between
quorum for such meeting;
them may be completely eliminated. Indeed, if a director, for example,
is to be faithful to both corporations, some accommodation may result.
2. That the vote of such director or trustee was nor necessary for the

approval of the contract;


2. No absolute prohibition of interlocking directorates.Contracts
between corporations having directors in common are not rendered
3. That the contract is fair and reasonable under the circumstances;
void or voidable on that ground alone. An individual may be a
stockholder in different corporation and it is not unusual to find a
4. That in case of an officer, the contract has been previously authorized
director or corporate officer occupying the same position in another
by the board of directors.
corporation not only because he has investments therein but also
because his services may have been proven to be valuable. However,
Where any of the first two conditions set forth in the preceding paragraph
while such situation is allowable, dealings of interlocking directors are
is absent, in the case of a contract with a director or trustee, such contract
subject to section 31, 33, and 34.
may be ratified by the vote of the stockholders representing at least twothirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3)
of the members in a meeting called for the purpose: Provided, That full Sec. 34. Disloyalty of a director.
disclosure of the adverse interest of the directors or trustees involved is
made at such meeting: Provided, however, That the contract is fair and - Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining
reasonable under the circumstances.
profits to the prejudice of such corporation, he must account to the latter
for all such profits by refunding the same, unless his act has been ratified
Self-dealing directors/trustees or officers.
by a vote of the stockholders owning or representing at least two-thirds
GENERAL RULE: Contract is void voidable at the option of the corporation (2/3) of the outstanding capital stock. This provision shall be applicable,
a contract of such corporation with one or more of its directors/trustees or notwithstanding the fact that the director risked his own funds in the
venture.
officers
3.

Reason: Being its agents and entrusted with the management of its affairs,
the directors/trustees and other officers of a corporation occupy a fiduciary
relation toward it, and cannot be allowed to contract with the corporation,
directly or indirectly, or to sell or purchase property to or from it, where they
act both for the corporation and for themselves.

Doctrine of Corporate Opportunity

A director who, by virtue of his office, acquires for himself a business


opportunity which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, is guilty of disloyalty and
should, therefore, account to the latter for all such profits by refunding the
But, this does not require that the corporation suffers injury or damage as same, notwithstanding that he risked his funds in the venture.
a result of the contract.
Note: This section applies only to directors. If the disloyalty is committed
EXCEPTIONS: Contract shall be valid and cannot be set aside in any of the by an officer, he is liable under the 2nd paragraph of sec. 31.
ff. instances:
When doctrine not applicable.
1. all the conditions enumerated in this section are present;
1. Enterprise engaged in, distinct from corporation business. The
doctrine does not preclude a director from engaging in a distinct
2. not all the conditions set forth are present but the corporation (board)
enterprise of the same general class of business as that which his
elects not to question the validity of the contract without prejudice to
corporation is engaged in, so long as he acts in good faith.
the liability of the consenting directors or trustees for damages under
sec. 31 a dissenting stockholder may file a derivative suit in behalf
2. Opportunity not in conflict with corporations business. The doctrine
of the corporation (sec. 64); or
is not applicable where the director or officer does not exploit
opportunity by employment of companys resources, or where the
3. contract is ratified by the required vote of stockholders or members in
director or officer embracing opportunity personally is not brought into
a meeting called for the purpose, provided that full disclosure of the
direct competition with the corporation. Note: The profits must have
adverse interest of the directors or trustees involved is made at such
been obtained by the director to the prejudice of the corporation.
meeting
3. Opportunity ceases to be a corporate opportunity. When does
corporate opportunity cease to be such? It is when this corporate
opportunity transforms into a personal opportunity where the
corporation is definitely no longer able to avail itself of the opportunity,

Page 9 of 10

which may arise from financial insolvency, or form legal restrictions, or 9. Quorum and voting. The general rule for quorum requirements is the
from any other factor which prevents it from acting upon the
same as that for board of directors. A majority of the committee
opportunity for its own advantage
constitute a quorum. To bind the corporation, it is essential that the
executive committee acts by a majority vote of all its members.
Ratification by stockholders of disloyal act.
10. Membership of a foreigner. While foreigners are disqualified from
The guilty director will only be exempt from liability to the corporation to
being elected/appointed as corporate officers in wholly or partially
account for the profits he realized if his disloyal act is ratified by the vote of
nationalized business activities, they are allowed representation in the
the stockholders owning or representing at least 2/3 of the OCS. (This does
board of directors or governing body of said entities in proportion to
not apply in sec.31)
their shareholdings.Reason for exception: The board of directors
performs specific duties as a body. Unlike corporate officers, each
Sec. 35. Executive committee.
member if the board of directors/governing body has no individual
power of authority to perform management functions.
- The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be appointed by
the board. Said committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board, except with
respect to:
1.
2.
3.
4.
5.

Approval of any action for which shareholders' approval is also


required;
The filing of vacancies in the board;
The amendment or repeal of by-laws or the adoption of new by-laws;
The amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and
A distribution of cash dividends to the shareholders

Executive committee.
1. Need for an executive committee. The Board delegates to an
executive committee composed of some members of the board
corporate powers to assure prompt and speedy action and solution to
important matters without the need for a board meeting, especially
where such meetings cannot readily be held. ExeCom directly manages
the operations of the corporation between meetings of the board,
thereby reducing the workload of the latter.
2. Express provision in the by-law. ExeCom must be provided for in the
by-laws and composed of not less than three (3) members of the board.
The same may be vested by a board resolution. The board cannot
create or appoint an ExeCom in the absence of authority in the by-laws.
In such case, the principle of de facto officers may be applied insofar
as third persons are concerned. However, insofar as the corporation is
concerned, the unauthorized act of appointment of an exec may be
subject to sec. 144, which provides for penalties in case of any violation
of this Code.
3. Committee contemplated. The ExeCom should be distinguished from
any other committees which are within the competence of the board to
create at any time and whose actions require confirmation by the board
itself.
4. Matters excepted from delegation by board. Matters enumerated
with respect to which only the board duly called and assembled as such
can act upon. Thus, the ExeCom can function as the board itself in all
matter delegated to it other than the excepted matters. However, the
board cannot validly delegate to the ExeCom blanket or general
authority to act for the board if the delegation constitutes in effect an
abdication of the corporate powers and duties vested in it by law. The
board cannot delegate entire supervision and control of the corporation
to an ExeCom for this will be violative of sec. 23.
5. Enlargement by board of restrictions. The restrictions on the power
of the ExeCom as provided in this section may be enlarged by the board
to cover other matters.
Note: Under no.4 The ExeCom may amend or repeal any resolution
of the board unless by its express terms it is not so amendable or
repealable.
6. Authority to function as the board itself. As a matter of business
practice, the use of an ExeCom in many companies may reduce the
directors to little more than a supervising and ratifying committee.
7. Membership. Non-members of the board may be appointed as
members of the ExeCom provided that there are at least three members
of the board who are members of the committee.An Executive
Committee is a governing body which functions as the board itself.
Thus, membership therein shall be governed by the same law / rules
applicable to the board of directors as provided in Sec. 35.
8. Ultimate control by the board, Where the committee is made up of,
or includes persons who are not directors, such committee shall be
subject to norm restrictions and requirements relating to undue
abdication of authority by the board. Thus, while the ExeCom may
manage the day to day operation of the business of the corporation, the
business affairs thereof shall be controlled and all corporate powers
shall be exercised under the ultimate discretion of the board as
provided in sec. 23.

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