Mere consent of the parties to form a
Corporation Law
(Prelim Reviewer)
Batas Pambansa blg. 68 (The Corporation Code of
the Philippines)
Corporation - A corporation is an artificial being
created by operation of law, having the right of
succession and the powers, attributes and
properties expressly authorized by law or incident
to its existence. (Sec. 2)
ATTRIBUTES OF THE CORPORATION
AN ARTIFICIAL BEING
A corporation exists by fiction of law. Hence, it can
act only through its directors, officers and
employees. Being only a juridical entity, the
physical acts of the corporation, like the signing
of documents, can be performed only by natural
persons duly authorized for the purpose by
corporate by-laws or by a special act of the
Board of Directors (Shipside, Inc. v. Court of
Appeals, 2001).
Notes:
(1) Moral Damages cannot be awarded in
favor of corporations because they do not have
feelings and mental state. They may not even claim
moral damages for besmirched reputation
(NAPOCOR v. Philipp Brothers Oceanic,
2001).However, a corporation can recover moral
damages under Art 2219 (7) if it was the victim of
defamation (Pilipinas Broadcasting Network v.
Ago Medical and Educational Center, 2005).
(2) Criminal Liability Since a corporation as a
person is a mere legal fiction, it cannot be
proceeded against criminally because it cannot
commit a crime in which personal violence or
malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act
amounting to a crime and never against the
corporation itself (West Coast Life Ins. Co. v. Hurd
[1914], Time Inc. v. Reyes, 1971)
(2) Doctrine of Separate Personality: A Feliciano vs. COA (G.R. No. 147402
corporation, upon coming into existence, is
invested by law with a personality separate and
distinct from those persons composing it as well
as from any other legal entity to which it may
be related. (Yutivo Sons Hardware v. CTA,
1961)
CREATED BY OPERATION OF LAW
1
corporation is not sufficient. The State must give
its consent either through a special law (in case
of government corporations) or a general law
(i.e., Corporation Code in case of private
corporations).
A corporation comes into existence upon the
issuance of the certificate of incorporation. Then
and only then will it acquire juridical personality
to sue and be sued, enter into contracts, hold
or convey property or perform any legal act in its
own name (Ladia)
HAS THE RIGHT OF SUCCESSION
Its continued existence during its stated term
cannot be affected by any change in the members
or stockholders or by any transfer of shares by a
stockholder to a 3rd person.
HAS THE POWERS, ATTRIBUTES AND PROPERTIES
EXPRESSLY AUTHORIZED BY LAW OR INCIDENT
TO ITS EXISTENCE
A corporation has no power except those
expressly conferred on it by the Corporation Code
and by its articles of incorporation, those which
may be incidental to such conferred powers,
those that are implied from its existence, and those
reasonably necessary to accomplish its purposes.
In turn, a corporation exercises said powers
through its Board of Directors and/or its duly
authorized officers and agents. (Monfort
Hermanos Agricultural Dev. Corp. v. Monfort III,
2004).
Classes of corporations (sec. 3)
1. Stock -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.
2. Non-stock - All other corporations are non-
stock corporations
January 14, 2004)
Facts:
COA assessed Leyte Metropolitan Water District
(LMWD) auditing fees. Petitioner Feliciano, as
General Manager of LMWD, contended that the
water district could not pay the said fees on the
basis of Sections 6 and 20 of P.D. No. 198 as well
as Section 18 of R.A. No. 6758. He primarily claimed
that LMWD is a private corporation not covered by
COA's jurisdiction. Petitioner also asked for refund
of all auditing fees LMWD previously paid to COA.
COA Chairman denied petitioners requests.
Petitioner filed a motion for reconsideration which
COA denied. Hence, this petition.
Issue:
w/o LMWD is a GOCC subject to the COAs audit
jurisdiction.
Ruling:
- The Constitution and existing laws mandate
COA to audit all government agencies,
including government-owned and
controlled corporations ("GOCCs") with
original charters. An LWD is a GOCC with
an original charter.
- Private corporations may exist only under a
general law. If the corporation is private, it
must necessarily exist under a general law.
Stated differently, only corporations
created under a general law can qualify as
private corporations.
- The Constitution authorizes Congress to
create government-owned or controlled
corporations through special charters.
Since private corporations cannot have
special charters, it follows that Congress
can create corporations with special
charters only if such corporations are
government owned or controlled.
Obviously, LWDs are not private
corporations because they are not created
under the Corporation Code. LWDs are not
registered with the Securities and
Exchange Commission.
- LWDs exist by virtue of PD 198, which
constitutes their special charter. Since
under the Constitution only government-
owned or controlled corporations may have
special charters, LWDs can validly exist only
if they are government-owned or
controlled. To claim that LWDs are private
corporations with a special charter is to
admit that their existence is constitutionally
infirm.
- By the term "original charters," what
exactly do we mean?
Ans: they were created by law, by an act of
Congress, or by special law.
- GOCCs without original charters refer to
corporations created under the Corporation
Code but are owned or controlled by the
government.
2
Filipinas Broadcasting Network vs. AGO Medical
and Educational Center (G.R. No. 141994
January 17, 2005)
- A juridical person is generally not entitled
to moral damages because, unlike a natural
person, it cannot experience physical
suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or
moral shock.
- Nevertheless, AMECs claim for moral
damages falls under item 7 of Article 2219
of the Civil Code. This provision expressly
authorizes the recovery of moral damages
in cases of libel, slander or any other form
of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical
person such as a corporation can validly
complain for libel or any other form of
defamation and claim for moral damages.
Corporators and incorporators,
stockholders and members. (Sec. 5)
Corporators are those who compose a
corporation, whether as stockholders or as
members.
Incorporators are those stockholders or
members mentioned in the articles of
incorporation as originally forming and
composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a
non-stock corporation are called members.
Classification of shares (Sec. 6)
Shares of stock of stock corporations may
be divided into classes or series of shares
or both. Each class or series of shares may
have rights, privileges or restrictions, as
stated in the AOI.
Classification of shares:
(1) Common shares
(2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founders shares
(6) Redeemable shares
(7) Treasury shares
(8) Convertible shares
(9) Non-voting shares
General rule: No share may be deprived of
voting rights (Sec. 6)
Exceptions:
(1) Preferred or
(2) Redeemable shares,
(3) SProvided by the Code (e.g., Treasury
shares)
- There shall always be a class/series of shares
which have a COMPLETE VOTING RIGHTS (Sec.
6)
Doctrine of Equality of Shares: Each share
shall be EQUAL in ALL respects to every other
share, except as otherwise provided in the
AOI (Articles of Incorporation) and stated in
the certificate of stock
(Sec. 6)
Common shares
The most common type of shares, which
enjoy no preference but the owners thereof
are entitled to management of the
corporation and to equal pro-rata division of
profits after preference. It represents a
residual ownership interest in the corporation.
Preferred shares
Stocks which are given preference by the
issuing corporation in dividends and the
distribution of assets of the corporation in case
of liquidation or such other preferences as may
be stated in the AOI which do not violate
the Corporation Code.
Limitations:
(1) Preferred shares can only be issued with
par value.
(2) Preferred shares must be stated in the
Articles of Incorporation and in the certificate
of stock.
(3) The BOD may fix the terms and conditions
only when so authorized by the AOI and such
terms and conditions shall be effective upon
filing a certificate thereof with the SEC.
Par value shares
These are shares with a stated value set out in
the AOI. This remains the same regardless of
the profitability of the corporation. This
gives rise to financial stability and is the
reason why banks, trust corporations,
insurance companies and building and loan
associations must always be organized with
par value shares.
Par value is minimum issue price of such
share in the AOI which must be stated in the
certificate
No-par value shares
These are shares without a stated value.
A no par share does not purport to
represent any stated proportionate interest
in the capital stock measured by value, but
only an aliquot part of the whole number of
such shares of the issuing corporation
(Agbayani)
Limitations:
3
(1) No-par value shares cannot have an issue
price of less than P5.00 per share (Sec. 6).
(2) They shall be deemed fully paid and non-
assessable and the holders of such shares shall
not be liable to the corporation or to its
creditors in respect thereto (Sec. 6).
(3) Entire consideration received by the
corporation for its no-par value shares shall be
treated as capital and shall not be available for
distribution as dividends (Sec. 6).
(4) AOI must state the fact that the corporation
issues no par shares and the number of shares.
(5) Banks, insurance companies, trust
companies, building and loan associations, and
public utilities cannot issue no-par value shares
(Sec. 6).
(6) The issued price may be fixed in the AOI,
or by the BOD pursuant to authority conferred
upon it by the AOI, or, in the absence thereof,
by majority vote of the outstanding shares in a
meeting called for the purpose (Sec. 62).
Non-voting shares (Sec. 6)
General rule: Non-Voting Shares are not
entitled to vote.
Exceptions:
(1) Amendment of the AOI
(2) Adoption and amendment of by-laws
(3) Sale, lease, exchange, other disposition
of all or substantially all of the corporate
property
(4) Incurring, creating or increasing bonded
indebtedness
(5) Increase or decrease of capital stock
(6) Merger and consolidation
(7) Investment of corporate funds in another
corporation or business
(8) Dissolution of the corporation
Founders shares (Sec. 7)
These are shares, classified as such in the
AOI, which are given certain rights and
privileges not enjoyed by the owners of other
stocks.
Where exclusive right to vote and be voted
for in the election of directors is granted,
such right must be for a limited period not
to exceed 5 years subject to approval by
SEC. The 5 year period shall commence from
date of approval by SEC.
Redeemable shares (Sec. 8)
These are shares which permit the issuing
corporation to redeem or purchase its shares.
Limitations:
(1) Redeemable shares may be issued only
when expressly provided for in the AOI (Sec.
8).
(2) The terms and conditions affecting said
shares must be stated both in the AOI and in
the certificate of stock (Sec. 8).
 (3) Redeemable shares may be deprived of
voting rights in the AOI.
(4) The corporation is required to maintain a
sinking fund to answer for redemption price if
the corporation is required to redeem.
(5) The redeemable shares are deemed retired
upon redemption unless otherwise provided in
the AOI (i.e., if the AOI allows for reissuance of
such shares).
(6) URE (unrestricted retains earnings) is NOT
necessary before shares can be redeemed
but there must be sufficient assets to pay the
creditors and to answer for operations
(Republic Planters Banks v. Agana, 1997).
Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
obligations (SEC Opinion, 24 Aug
1987).
Note: Redeemable shares reacquired shall be
considered retired and no longer issuable, unless
otherwise provided in the Articles of the redeeming
corporation (SEC Rules Governing Redeemable
and Treasury Shares, 26 April 1982).
Treasury shares (Sec. 9)
These are shares which have been issued and
fully paid for, but subsequently re-acquired by
the issuing corporation by purchase,
redemption, donation or through some other
lawful means. Such shares may again be
disposed of for a reasonable price fixed by the
BOD. Treasury shares are therefore issued
shares, but being in the treasury, do not have
the status of outstanding shares. Consequently,
although a treasury share, not retired by
reacquisition, may be re-issued or resold,
such share, as long as it is held by the
corporation as a treasury share, participates
neither in the dividends, because dividends
cannot be declared by the corporation to
itself nor in the
meetings of the corporation as voting stock,
for otherwise equal distribution of voting
powers among stockholders will be effectively
lost and the directors will be able to
perpetuate their control of the corporation,
though it still represents a paid for interest
in the property of the corporation. (CIR v.
Manning, 1975)
Note: Delinquent stocks, which are stocks
that have not been fully paid, may become
treasury stocks upon bid of the corporation in
absence of other bidders (Sec.68).
Convertible shares
A type of preferred stock that the holder can
exchange for a predetermined number of
common shares at a specified time.
4
Nationality of Corporations
PLACE OF INCORPORATION TEST
The corporation is a national of the country
under whose laws it is organized or
incorporated (Sec. 123).
Domestic corporations organized and
governed under and by Philippine laws
Foreign Corporations organized under laws
other than those of the Philippines and can
operate only in the territory of the state under
whose laws it was formed. However, they may
be licensed to do business here (Campos).
CONTROL TEST
A corporation shall be considered a Filipino
corporation if the Filipino ownership of its
capital stock is at least 60%, and where the
60-40 Filipino-alien equity ownership is NOT in
doubt (SEC Opinion dated 6 November 1989;
DOJ Opinion No. 18, s. 1989).
Therefore, its shareholdings in another
corporation shall be considered to be of Filipino
nationality when computing the percentage of
Filipino equity of that second corporation
(SEC Opinion dated 23 November 1993).
Control test is applied in the following:
(1) Exploitation of natural resources - Only
Filipino citizens or corporations whose capital
stock are at least 60% owned by Filipinos
can qualify to exploit natural resources.
(Sec. 2, Art. XII, Consti.)
(2) Public Utilities - xxx no franchise,
certificate or any other form of authorization
for the operation of a public utility shall be
granted except to citizens of thePhilippines
or to corporations or associations organized
under the laws of the Philippines at least 60%
of whose capital is owned by such citizens.
(Sec.11, Art. XII, Consti.)
Note: In the recently decided case of Gamboa
vs. Teves (G.R. No. 176579, June 28, 2011),
the SC ruled as follows:
The term "capital" in Section 11, Article
XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election
of directors, and thus in the present case only
to common shares, and not to the total
outstanding capital stock (common and non-
voting preferred shares).
The 60 percent of the "capital" assumes, or
should result in, "controlling interest" in the
corporation. Compliance with the required
Filipino ownership of a corporation shall be
determined on the basis of outstanding
capital stock whether fully paid or not, but
only such stocks which are generally entitled
to vote are considered.
For stocks to be deemed owned and held
by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the
required Filipino equity. Full beneficial
ownership of the stocks, coupled with
appropriate voting rights is essential. Thus,
stocks, the voting rights of which have been
assigned or transferred to aliens cannot be
considered held by Philippine citizens or
Philippine nationals.
Individuals or juridical entities not meeting
the aforementioned qualifications are
considered as non Philippine nationals.
In the later 2012 case of Gamboa v. Teves,
(G.R. No. 176579, October 9, 2012) The SC
reversed the previous ruling and held that:
Since the constitutional requirement of at least
60 percent Filipino ownership applies not only
to voting control of the corporation but also
to the beneficial ownership of the
corporation, it is therefore imperative that such
requirement apply uniformly and across the
board to all classes of shares, regardless of
nomenclature and category, comprising the
capital of a corporation. Under the
Corporation Code, capital stock consists of
all classes of shares issued to stockholders,
that is, common shares as well as preferred
shares, which may have different rights,
privileges or restrictions as stated in the
articles of incorporation.
Since a specific class of shares may have
rights and privileges or restrictions different
from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of
the Constitution must apply not only to
shares with voting rights but also to shares
without voting rights. Preferred shares,
denied the right to vote in the election of
directors, are anyway still entitled to vote
on the eight specific corporate matters
mentioned above under Section 6 of the
Corporation Code. Thus, if a corporation,
engaged in a partially nationalized industry,
issues a mixture of common and preferred
non-voting shares, at least 60 percent of
the common shares and at least 60 percent of
the preferred nonvoting shares must be
owned by Filipinos. Of course, if a
corporation issues only a single class of
shares, at least 60 percent of such shares
must necessarily be owned by
Filipinos.
In short, the 60-40 ownership requirement in
favor of Filipino citizens must apply separately
5
to each class of shares, whether common,
preferred non-voting, preferred voting or any
other class of shares. This uniform application
of the 60-40 ownership requirement in favor of
Filipino citizens clearly
breathes life to the constitutional command
that the ownership and operation of public
utilities shall be reserved exclusively to
corporations at least 60 percent of whose
capital is Filipino-owned. Applying uniformly the
60-40 ownership requirement in favor of
Filipino citizens to each class of shares,
regardless of differences in voting rights,
privileges and restrictions, guarantees
effective Filipino control of public utilities, as
mandated by the Constitution.
GRANDFATHER RULE
Method used to determine the nationality of a
corporation, in cases where corporate
shareholders are present in the situation, by
which the percentage of Filipino equity in
a corporation engaged in nationalized and/or
partly nationalized areas of activities, is
computed by attributing the nationality of
second or even subsequent tier ownership to
determine the nationality of the corporate
shareholder (Villanueva).
It involves the computation of Filipino
ownership of a corporation in which another
corporation of partly Filipino and partly
foreign equity owns capital stock. The
percentage of shares held by the second
corporation in the first is multiplied by the
latters own Filipino equity, and the product of
these percentages is determined to be the
ultimate Filipino ownership of the subsidiary
corporation (SEC Opinion re; Silahis Intl Hotel
May 4, 1987).
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity
or business.
Compliance with the constitutional
limitation(s) on engaging in nationalized
activities must be determined by ascertaining
if 60% of the investing corporations
outstanding capital stock is owned by Filipino
citizens, or as interpreted, by natural or
individual Filipino citizens. If such investing
corporation is in turn owned to some extent by
another investing corporation, the same
process must be observed. One must not stop
until the citizenships of the individual or
natural stockholders of layer after layer of
investing corporations have been established,
the very essence of the Grandfather Rule
(Redmont Consolidated Mines, Corp
McArthur Mining, Inc., et al., 2010).
Corporate Juridical Personality
A private corporation formed or organized
under this code commences to have
corporate existence and juridical personality
and is deemed incorporated from the date
the SEC issues a certificate of incorporation
under its official seal(Sec. 19)
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
(Asked in 1995, 1996, 1999, 2000)
Concept: A corporation has a personality
separate and distinct from that of its
stockholders and members and is not
affected by the personal rights, obligations,
and transactions of the latter.
Merely a legal fiction for purposes of
convenience and to sub-serve the ends of
justice
Property: Sharesholders have no claim on
corporate property as owners, but mere
expectancy or inchoate right to the same upon
dissolution of the corporation after all
corporate creditors have been paid. Such right
is limited only to their equity interest (doctrine
of limited liability). Although a stockholders
interest in the corporation may be attached by
his personal creditor, corporate property cannot
be used to satisfy his claim (Wise & Co. v. Man
Sun Lung, 1940).
LIABILITY FOR TORTS AND CRIMES
As a separate juridical personality, a
corporation can be held liable for torts
committed by its officers for corporate
purpose (PNB v. CA, 1978).
RECOVERY OF MORAL DAMAGES
General rule: A corporation has the power
to sue in its corporate name. (Sec. 36)
Exception: Moral Damages cannot be
awarded in favor of corporations because they
do not have feelings and mental state. They
may not even claim moral damages for
besmirched reputation (NAPOCOR v. Philipp
Brothers Oceanic, 2001).
However, a corporation can recover moral
damages under Art 2219 (7) if it was the
victim of defamation (Pilipinas Broadcasting
Network v. Ago Medical and Educational
Center, 2005).
Constitutional rights: Corporate entities are
entitled to due process, equal protection,
and protection against unreasonable searches
and seizures. However, a corporation is not
v. entitled to the privilege against self-
incrimination (Bataan Shipyard & Engg Co. v.
PCGG, 1987)
DOCTRINE OF PIERCING THE CORPORATE
VEIL
Piercing the veil of corporate entity is
merely an equitable remedy, and may be
granted only in cases when the corporate
fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime
(Yutivo Sons v. CTA, 1961) or where the
corporation is a mere alter ego or business
conduit of a person. (Koppel Phil v. Yatco)
Note: The corporate veil may be lifted only if it
has been used to shield fraud, defend
crime, justify a wrong, defeat public
convenience, insulate bad faith or perpetuate
injustice. (PNB case)
GROUNDS FOR APPLICATION OF DOCTRINE
(1) If done to defraud the government of taxes
due it.
(2) If done to evade payment of civil liability.
(3) If done by a corporation which is merely
a conduit or alter ego of another corporation.
(4) If done to evade compliance with
contractual obligations.
(5) If done to evade financial obligation to its
employees.
Only in these and similar instances may the veil
be pierced and disregarded: to ward off a
judgment credit, to avoid inclusion of
corporate assets as part of the estate of
the decedent, to escape liability arising from
a debt, or to perpetuate fraud and/or confuse
legitimate issues either to promote or to shield
unfair objectives to cover up an otherwise
blatant violation of the prohibition against
forum shopping (PNB v. Andrada Electric
&Engineering Co., 2002).
Q: Is a corporation liable for the individual
acts of its stockholders or members? Is there
an exception to the general rule?
A: It is settled that a corporation has a
personality separate and distinct from its
individual stockholders or members, and is
not affected by the personal rights,
obligations and transactions of the latter. The
corporation may not be held liable for the
obligations of the persons composing it, and
neither can its stockholders be held liable for its
obligation.
Of course, this Court has recognized
instances when the corporations separate
personality may be disregarded.
However, we have also held that the same
may only be done in cases where the
6
corporate vehicle is being used to defeat public
convenience, justify wrong, protect fraud, or
defend crime. Moreover, the wrongdoing must
be clearly and convincingly established. It
cannot be presumed.
(Seaoil vs Autocorp Group, 2008, Nachura)
TEST IN DETERMINING APPLICABILITY
General rule: The mere fact that a
corporation owns all or substantially all of the
stocks of another corporation is NOT sufficient
to justify their being treated as one entity.
Exception: The subsidiary is a mere
instrumentality of the parent corporation.
Circumstances rendering subsidiary an
instrumentality (PNB v. Ritratto Group, 2001):
(1) The parent corporation owns all or most
of the subsidiarys capital stock.
(2) The parent and subsidiary corporations
have common directors or officers.
(3) The parent corporation finances the
subsidiary.
(4) The parent corporation subscribes to all
the capital stock of the subsidiary or
otherwise causes its incorporation.
(5) The subsidiary has grossly inadequate
capital.
(6) The parent corporation pays the salaries
and other expenses or losses of the subsidiary.
(7) The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation.
(8) In the papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a department or
division of the parent corporation or its
business or financial responsibility is referred
to as the parent corporations own.
(9) The parent corporation uses the property
of the subsidiary as its own.
(10) The directors or executives of the
subsidiary do not act independently in the
interest of the subsidiary but take their orders
from the parent corporation in the latters
interest.
(11) The formal ledger requirements of the
subsidiary are not observed.
Incorporation and Organization
PROMOTER
Promoters are persons who, acting alone or
with others, take initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor (RA
8799, The Securities Regulation Code).
LIABILITY OF PROMOTER
7
General rule: The promoter binds himself
PERSONALLY & assumes the responsibility of
looking to the proposed corporation for
reimbursement.
Exceptions:
(1) Express or implied agreement to the
contrary
(2) Novation, not merely adoption or
ratification of the contract
LIABILITY OF CORPORATION FOR
PROMOTERS CONTRACTS
General rule: A corporation is NOT bound by
the contract. A corporation, until organized, has
no life and no legal existence. It could not
have had an agent (the promoter) who
could legally bind it. (Cagayan Fishing
Development Co., Inc. v. Sandiko)
Exceptions: A corporation may be bound by the
contract if it makes the contract its own by:
(1) Adoption or ratification of the ENTIRE
contract after incorporation.
Notes:
(a) Power of the corporation to adopt
a contract must be understood to be
limited to such contracts as the
corporation itself, after its organization,
would be authorized to make. (Builders
Duntile Co. v. Dunn Mfg.
Co.)
(b) Novation or the intent to novate the
original contract is required to adopt or
ratify the pre-incorporation contract.
(Campos, 1990)
(2) Acceptance of benefits under the
contract with knowledge of the terms thereof.
(3) Performance of its obligation under the
contract.
NUMBER AND QUALIFICATIONS OF
INCORPORATORS
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a
subscriber to at
least 1 share of the capital stock of the
corporation (Sec.
10)
CORPORATE NAME LIMITATIONS ON USE
CORPORATE NAME (SEC. 18)
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or
contrary to existing laws
Required by law to include the word
Corporation or Inc.
(Campos, 1990)
Change of corporate name requires the
amendment of the AOI: majority vote of the
board and the vote or written assent of
stockholders holding 2/3 of the outstanding
capital stock (Sec. 16).
Amendment of a corporations AOI changing
its corporate name does not extinguish the
personality of the original corporation. It is
the same corporation with a different name,
and its character is not changed.
Consequently, the new corporation is still
liable for the debts and obligations of the old
corporation. Republic Planters Bank v. CA
(1992)
(3) After the submission of the AOI to the SEC.
CORPORATE TERM (Sec. 11)
General rule: A corporation shall exist for a
period not exceeding 50 years from the date of
incorporation
Exceptions:
(1) Sooner dissolved
(2) Period extended
(a) For periods not exceeding 50 years
in any single instance by an amendment
of the AOI
(b) Extensions may not be made earlier
than 5 years prior to the original or
subsequent expiry date(s) EXCEPT if the
SEC determines that there are justifiable
reasons for an earlier extension
Rationale: Corporations are creatures of the law
through the State legislature, the State is
therefore concerned that this privilege be
enjoyed by corporations only under the
conditions and not beyond the period that
it sees fit to grant; and particularly, that it not
be abused in fraud and to the detriment of
other parties; and for this reason, it has
been ruled that the limitation to a definite
period is an exercise of control in the
interest of the public. (Benguet Consolidated
Mining Co. v. Pineda98 Phil. 711 Smith v.
Eastwood Wine Manufacturing Co., 43 Atl.
568 cited in Lopez, 1994)
MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENT (Sec. 12)
8
MINIMUM CAPITAL STOCK
Stock corporations incorporated under the
Corporation Code shall not be required to
have a minimum authorized capital stock
Exception: As provided for by special law and
subject to the provisions of Sec. 13
SUBSCRIPTION REQUIREMENT
The amount of capital stock to be
subscribed and paid for the purposes of
incorporation (Sec. 13):
(1) At the time of incorporation, at least
25% of the authorized capital stock stated
in the AOI should be subscribed;
(2) At least 25% of the said 25% above, must
be paid upon subscription;
(3) The balance to be payable on
(a) Dates fixed in the subscription contract
or
(b) Upon call by the BOD in the absence of
fixed dates
(4) The paid-up capital can in no case be
lower than P5,000.00
ARTICLES OF INCORPORATION
NATURE AND FUNCTION OF ARTICLES
(1) Constitutes the charter of the corporation
and sets forth the rules and conditions upon
which the association or corporation is
founded
(2) Defines the contractual relationships
between the State and the corporation, the
stockholders and the State, and the corporation
and the stockholders
The Articles must be filed with the SEC for the
issuance of the Certificate of Incorporation.
CONTENTS
(1) Corporate Name
(a) Must not be identical or deceptively
or confusingly similar to that of any
existing corporation or to any other name
already protected by law
(b) Not patently deceptive, confusing or
contrary to existing laws
Required by law to include the word
Corporation or Inc.
(Campos, 1990)
Change of corporate name requires the
amendment of the AOI: majority vote of
the board and the vote or written assent
of stockholders holding 2/3 of the
outstanding capital stock (Sec. 16).
Amendment of a corporations AOI
changing its corporate name does not
extinguish the personality of the original
corporation. It is the same corporation
with a different name, and its character
is not changed. Consequently, the new
corporation is still liable for the debts and
 obligations of the old corporation.
(Republic Planters Bank v. CA, 1992)
(2) Purpose Clause
(a) Must indicate the PRIMARY and
SECONDARY purposes if there is more
than one purpose, which should not
contradict or change the nature of the
corporation (Sec. 14(2))
(b) Must not be patently unconstitutional,
illegal, immoral, and contrary to
government rules and regulations (Sec. 17
(2)).
(c) Must not be for the purpose of
practicing a profession (People v. United
Medical Service, 200 N.E. 157, cited in
Campos)
(3) Principal Office
(a) Must be within the Philippines (Sec. 14
(3))
(b) AOI must specify both province or city
or town where it is located
(c) A specific address is now required;
Metro Manila is no longer allowed
(Sundiangand Aquino citing SEC Circular
No. 3-2006).
Important for:
(a) Determining venue in an action by or
against the corporation, and
(b) determining the province where a
chattel mortgage of shares should be
registered (Chua Gan vs. Samahang
Magsasaka, 1935).
(4) Corporate Term
(a) Maximum life of 50 years.
(b) Extendible for a period not
exceeding 50 years at any one instance.
No extension, however, can be made
earlier than 5 years before the end of the
term. (Sec. 11) Extension requires an
amendment of the AOI subject to the
exercise of appraisal right by the
dissenting stockholder (Sec. 37).
(5) Names, citizenship and residences of
incorporators
(6) Number, names, citizenship and
residences of directors/ trustees (Asked in
2005 and 2008)
Stock corporations: Directors
Non-stock corporations: Trustees
General rule: Not less than 5 but not
more than 15 directors/ trustees
Exception: Non-stock corporations whose
articles or bylaws may provide for more
than 15 trustees (Sec. 92)
Educational non-stock corporations:
(a) trustees may NOT be less than 5
NOR exceed 15
9
(b) number of trustees shall be in
multiples of 5 (Sec. 108)
Nationalized or partially-nationalized
industries:
Aliens may be directors but only in such
number as may be proportional to their
allowable ownership of shares
(7) If stock corporation
(a) authorized capital stock in lawful
money of the Philippines
(b) the number of shares into which
the ACS is divided
(c) if with par value shares, the par
value of each share (Sec. 14(8), Sec.
15(7)).
(d) names, citizenship and
residences of original subscribers
(e) Amount subscribed and paid on
each subscription
(f) Fact that some or all shares are
without par value
(8) If non-stock corporation
(a) amount of capital
(b) names, nationalities & residences
of contributors
(c) amount contributed by each
(9) Amount paid by each subscriber on
their subscription, which shall not be less
than 25% of subscribed capital and shall
not be less than P5,000 (Sec. 15 (8 & 9)
(10) Name of treasurer elected by the
subscribers (Sec. 15 (10)
(11) Other matters
(a) Classes of shares, as well as
preferences or restrictions on any
such class (Sec. 6).
(b) Denial or restriction of pre-
emptive right (Sec.39).
(c) Prohibition against transfer of
stock which would reduce stock
ownership to less than the
required minimum in the case of
a nationalized business or activity
(Sec. 15(11)).
AMENDMENT
Amendment of the Articles of Incorporation
Any provision or matter stated in the
articles of incorporation may be amended
(1) By a majority vote of the board of
directors or trustees
(2) And the vote or written assent of:
(a) 2/3 of the outstanding capital
stock, without prejudice to the
appraisal right of dissenting
stockholders in accordance with the
provisions of this Code,
 (b) 2/3 of the members if it be a
non-stock corporation. (Sec. 16)
Limitations
(1) Cannot effect amendment when it
will contravene any provision of
requirement imposed by the Code or by
special laws
(2) The amendment must be for a
legitimate purpose
(3) Must be approved by the
directors/trustees and the
stockholders/members through the vote
requirement
(4) Appraisal Right
(5) Both the original and the amended
articles together must contain all the
provisions required by law to be set out in
the articles.
(6) If the corporation is governed by a
special law the amended articles must be
accompanied by a favorable
recommendation of the appropriate
government agency to the effect that such
amendment is in accordance with law
(Lopez, 2004)
(7) Will take effect only
(a) Upon their approval by the SEC
by the issuance of a certificate of
amended articles
(b) Or from the date of filing with the
SEC if not acted upon within 6 months
from the date of filing for a cause not
attributable to the corporation
Procedure
(1) The original and amended articles
together shall contain all provisions
required by law to be set out in the articles
of incorporation
(2) The articles, as amended shall be
indicated by underscoring the change or
changes made
(3) A copy shall be submitted to the SEC
(a) Duly certified under oath by the
corporate secretary and a majority of
the directors or trustees
(b) Stating the fact that the
amendment or amendments have
been duly approved by the
required vote of the stockholders
or members
The following items are amendable under
Sec. 16:
(1) Change of name of the Corporation
(2) Adding to or changing the purpose/s
(3) Change of principal office
(4) Change in the number of directors or
trustees
(5) Increase or decrease in authorized
capital stock (subject to Sec. 38)
10
NON-AMENABLE ITEMS
The following items state accomplished
facts, therefore, cannot be amended:
(1) The names, nationalities and residences
of the incorporators (Otherwise, an
amendment would go against the definition
of incorporators in Sec. 5)
(2) First set of directors or trustees
(3) Original stock subscriptions and paid-in
capital
(4) Treasurer-in-trust
(5) Place and date of execution
(6) Witnesses (De Leon)
Notes: AOI must be accompanied by
Treasurers sworn statement of compliance
with Sec. 13 on amount of capital to be
subscribed and paid for the purposes of
incorporation; otherwise, SEC shall not
accept the AOI. (Sec. 14)
REGISTRATION AND ISSUANCE OF
CERTIFICATE OF INCORPORATION
Registration of articles of incorporation
Documents to be filed with SEC (Asked in 2002):
[BAT-LaNG]
(1) Articles of Incorporation
(2) Treasurers Affidavit certifying that 25% of
the total authorized capital stock has been
subscribed and at least 25% of such has been
fully paid in cash or property.
(3) Bank certificate covering the paid-up
capital.(Note: Current SEC rules no longer require
this if payment for shares is made in cash)
(4) Letter authority authorizing the SEC to
examine the bank deposit and other corporate
books and records to determine the existence of
paid-up capital.
(5) Undertaking to change the corporate Name
in case there is another person or entity with
same or similar name that was previously
registered.
(6) Certificate of authority from proper
Government agency whenever appropriate like BSP
for banks and Insurance Commission for insurance
corporations. (Sundiang and Aquino)
ISSUANCE OF CERTIFICATE OF INCORPORATION
BY SEC
Effect: Commencement of corporate existence and
juridical personality (Sec. 19)
Revocation of certificate of incorporation: If
incorporators are found guilty of fraud in procuring
the same after due notice and hearing (Sec. 6(i),
PD 902-A)
GROUNDS FOR DISAPPROVING AOI (SEC.17)
(F2P2)

(1) AOI does not SUBSTANTIALLY comply with
the form prescribed
(2) Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
(3) Treasurers Affidavit concerning the amount of
capital subscribed and or paid is false
(4) Required percentage of ownership of Filipino
citizens has not been complied with.
Remedy in case of rejection of AOI: Petition
for review in accordance with the Rules of Court
(Sec. 6, last par., PD 902-A)
SEC shall give the incorporators reasonable time
to correct or modify objectionable portions of the
articles or amendment (Sec. 17)
Doctrine of Non-use (sec. 22)
If a corporation does not formally organize and
commence the transaction of its business or the
construction of its works within two (2) years from
the date of its incorporation, its corporate powers
cease and the corporation shall be deemed
dissolved. However, if a corporation has
commenced the transaction of its business but
subsequently becomes continuously inoperative for
a period of at least five (5) years, the same shall be
a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to
organize, commence the transaction of its
businesses or the construction of its works, or to
continuously operate is due to causes beyond the
control of the corporation as may be determined by
the Securities and Exchange Commission.
ADOPTION OF BY-LAWS
WHEN ADOPTION IS MADE (SEC. 46)
(1) Prior to incorporation approved and signed
by all the
incorporators & submitted to SEC together with AOI
(2) After incorporation within 1 month after
receipt of official notice of the issuance of its
certificate of incorporation by the SEC.
EFFECT OF FAILURE TO FILE THE BY-LAWS
WITHIN THE PERIOD
Does not imply the "demise" of the corporation. By-
laws may be required by law for an orderly
governance and management of corporations but
they are not essential to corporate birth.
Therefore, failure to file them within the period
required by law by no means tolls the automatic
dissolution of a corporation (Loyola Grand Villas
Homeowners Assn. v. CA (1997)
Note: Section 22 on the effect of failure to formally
organize within 2 years from incorporation, the
11
corporations corporate powers cease and the
corporation is deemed dissolved. Organization
includes: the filing & approval of bylaws with the
SEC and the election of directors and officers
(Campos).
NATURE AND FUNCTION OF BY LAWS
(1) Product of agreement of the
stockholders/members and establish the rules for
internal government of the corporation (Campos
(2) A rule or law of a corporation for its
government (13 Am. Jur., 283)
(3) Mere internal rules among stockholders and
cannot affect or prejudice 3rd persons who deal
with the corporation unless they have knowledge
of the same (China Banking Corp v CA, 1997)
(4) According to its function, by-laws may be
defined as the rules and regulations or private laws
enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns
and its stockholders or members and directors
and officers with relation thereto and among
themselves in their relation to it. (9 Fletcher
Cyc. Corp., 1963 rev. ed., Sec. 4166 at 622 cited in
Lopez, 1994)
REQUISITES OF VALID BY-LAWS
1. Must not be contrary to law nor with CC;
2. Must not be contrary to morals and public
policy;
3. Must not impair obligations and contracts;
4. Must be general and uniform in their
operation and not directed against
particular individuals;
5. Must be consistent with the charter or
articles of incorporation; and
6. Must be reasonable, not arbitrary or
oppressive.
BINDING EFFECTS
ONLY from date of issuance of SEC of certification
that bylaws are not inconsistent with the Code
Pending approval, they CANNOT bind
stockholders or corporation
AMENDMENT OR REVISION
Effected by: Majority vote of the members of the
Board and majority vote of the owners of the
OCS or members, in a meeting duly called for the
purpose.
Delegation to the BOD of the power to amend
or repeal bylaws: by vote of stockholders
representing 2/3 of the OCS or 2/3 of the members
How delegation is revoked: Any power
delegated to the board of directors or trustees
to amend or repeal any bylaws or adopt new by-
laws shall be considered as revoked whenever
stockholders owning or representing a majority of
the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote
at a regular or special meeting.
Board of Directors and Trustees
DOCTRINE
OF CENTRALIZEDMANAGEMENT
BOARD IS SEAT OF CORPORATE POWERS
General rule: Unless otherwise provided in this
Code, the corporate powers of all corporations
formed under this Code shall be exercised, all
business conducted and all property of such
corporations controlled and held by the board
of directors or trustees 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 office for one (1) year until their
successors are elected and qualified. (Sec. 23)
Exceptions:
(1) In case of an Executive Committee duly
authorized in the by-laws; (Sec. 35)
(2) In case of a contracted manager which may be
an individual, a partnership, or another corporation
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.
(3) In case of close corporations, the stockholders
may manage the business of the corporation rather
than by a board of directors, if the AOI so provide.
(Sec. 97)
The power to purchase real property is vested in
the board of directors or trustees. While a
corporation may appoint agents to negotiate for
the purchase of real property needed by the
corporation, the final say will have to be with the
board, whose approval will finalize the
transaction. (Spouses Constantine Firme v. Bukal
Enterprises and Development Corporation, 2003)
The Corporation Code of the Philippines vests in the
board of directors the exercise of the corporate
powers of the corporation, save in those instances
where the Code requires stockholders approval
for certain specific acts. (Great Asian Sales Center
Corp v. CA, 2002)
Indisputably, one of the rights of a stockholder is
the right to participate in the control or
management of the corporation. This is exercised
through his vote in the election of directors
because it is the board of directors that controls or
manages the corporation. (Gamboa v. Teves,
2011)
Section 23 of the Corporation Code expressly
provides that the corporate powers of all
corporations shall be exercised by the board of
12
directors. The power and the responsibility to
decide whether the corporation should enter
into a contract that will bind the corporation
are lodged in the board, subject to the articles
of incorporation, by-laws, or relevant provisions of
law. In the absence of authority from the board of
directors, no person, not even its officers, can
validly bind a corporation.
However, just as a natural person may authorize
another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its
functions and powers to its officers, committees or
agents. The authority of these individuals to bind
the corporation is generally derived from law,
corporate by-laws or authorization from the board,
either expressly or impliedly by habit, custom or
acquiescence in the general course of business.
(Banate v. Philippine Countryside Rural Bank, 2010)
Requisites of a valid corporate act by the
Board of Directors
(1) The Board must act as a BODY in a meeting
(2) There must be a VALIDLY constituted meeting
(3) There act must be supported by a
MAJORITY OF THE QUORUM duly assembled
(Exception: Election of officers requires a vote of
majority of ALL the members of the board
(4) The act must be within the powers conferred
to the Board.
Limitations on powers of Board of
Directors/Trustees
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws
(2) Certain acts of the corporation that require
joint action of the stockholders and board of
directors:
(a) Removal of director (Sec. 28)
(b) Amendments of AOI (Sec. 16)
(c) Fundamental changes (Sec. 6)
(d) Declaration of stock dividends (Sec. 43)
(e) Entering into management contracts (Sec.
44)
(f) Fixing of consideration of non-par shares
(Sec. 62)
(g) Fixing of compensation of directors (Sec.
30)
(3) Cannot exercise powers not possessed by the
corporation.
PRINCIPLE ON DELEGATION OF BOARD POWER
Under Sec 23, the power and the responsibility
to decide whether the corporation should enter
into a contract that will bind the corporation is
lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of
law. However, just as a natural person may
authorize another to do certain acts for and on his
behalf, the board of directors may validly delegate
some of its functions and powers to officers,
committees or agents. The authority of such
individuals to bind the corporation is generally
derived from law, corporate by-laws or
authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in
the general course of business. (Peoples
Aircargo v. CA, 1998)
BUSINESS JUDGMENT RULE
General rule: Directors cannot be held liable for
mistakes or errors in the exercise of their
business judgment if they acted in good faith,
with due care & prudence. Contracts intra vires
entered into by the board of directors are binding
upon the corporation & courts will not interfere.
Exception: If the contracts are so
unconscionable & oppressive as to amount to a
wanton destruction of the rights of the minority
or if they violate their duties under Sections 31
& 34.
CONSEQUENCES OF THE BUSINESS JUDGMENT
RULE
Sec. 23 embodies the essence of the Business
Judgment Rule, that unless otherwise provided
in the Code, all corporate powers and prerogatives
are vested directly in the Board of Directors.
Consequently:
(1) The resolution, contracts and transactions of
the board cannot be overturned or set aside by the
stockholders or members and not even by the
courts under the principle that the business of the
corporation has been left to the hands of the board
(2) Directors and duly authorized officers cannot
be held personally liable for acts or contracts
done with the exercise of their business judgment.
Exceptions:
(1) When the Corporation Code expressly provides
otherwise
(2) When the Directors or officers acted with fraud,
gross negligence or in bad faith.
(3) When Directors or officers act against the
corporation in conflict of interest situation.
(Villanueva)
REMEDIES IN CASE OF MISMANAGEMENT
(1) Receivership
(2) Injunction if the act has not yet been done
(3) Dissolution if abuse amounts to a ground
for quo warranto but Solicitor General Refuses to
act
(4) Derivative suit or complaint filed with the SEC
(now the RTC) (PD 902-A)
Note: Dean Villanueva opined that a derivative
suit may be an exception to such Rule: this
occurs when it is apparent that the Board is
13
not in a position to validly exercise its business
judgment for the protection of the corporation,
e.g., when the Board itself has committed an
act causing damage to the corporation or when the
Board is placed in a conflict of interests scenario
whereby it is unlikely that it would use such
business discretion to file such suit for the best
interest of the corporation.
TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS OR
TRUSTEES
TENURE
Directors shall hold office for one (1) year until
their successors are elected and qualified (Sec. 23).
Term: One (1) year
Tenure: The period within which the director
actually holds office, including the holdover
period after the end of his term.
In several cases, we have defined "term" as the
time during which the officer may claim to hold
the office as of right, and fixes the interval
after which the several incumbents shall succeed
one another. The term of office is not affected by
the holdover. The term is fixed by statute and it
does not change simply because the office may
have become vacant, nor because the incumbent
holds over in office beyond the end of the term
due to the fact that a successor has not been
elected and has failed to qualify.
Term is distinguished from tenure in that an
officers "tenure" represents the term during
which the incumbent actually holds office. The
tenure may be shorter (or, in case of holdover,
longer) than the term for reasons within or
beyond the power of the incumbent.
Based on the above discussion, when Section
23 of the Corporation Code declares that "the
board of directorsshall hold office for one (1)
year until their successors are elected and
qualified," we construe the provision to mean
that the term of the members of the board of
directors shall be only for one year; their term
expires one year after election to the office.
The holdover period that time from the lapse
of one year from a members election to the
Board and until his successors election and
qualification is not part of the directors
original term of office, nor is it a new term;
the holdover period, however, constitutes part of
his tenure. (Valle Verde Country Club v. Africa,
2009)
QUALIFICATIONS
(1) If STOCK, director must own at least 1
share of the capital stock, which stock shall
stand in his own name (Sec. 23).
Exception: Trustee in a voting trust may be elected
director/trustee.
(2) If NON-STOCK, trustee must be a member.
(3) Majority of the directors/trustees must be
residents of the Philippines.
(4) Natural person
(5) Of Legal Age
(6) Other qualifications as may be prescribed in the
by-laws of the corporation.
DISQUALIFICATIONS (SEC. 27)
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period exceeding
6 years; or
(2) A violation of the Corporation Code,
committed within five years from the date of
his election. This includes violations of rules and
regulations issued by the SEC to implement the
provisions of the Corporation Code.
EXECUTIVE COMMITTEE CREATION
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 (Sec. 35).
LIMITATION ON ITS POWERS
Cannot act on the following:
(1) Matters needing stockholder approval (Sec.35);
(2) Filling up of board vacancies;
(3) Amendment, repeal or adoption of by-laws
(Sec. 35);
(4) Amendment or repeal of any resolution of
the Board which by its express terms is not
amendable or repealable (Sec. 35);
(5) Cash dividend distribution (Sec. 35); and
(6) Acts which would render the BOD powerless
and free from all responsibilities imposed on it by
law (Campos)
ELECTIONS
CUMULATIVE VOTING
Cumulative voting for one candidate
A stockholder is allowed to concentrate his votes
and give one candidate as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal.
Illustration: If there are 5 directors to be elected
and Pedro, as shareholder, has 100 shares, Pedro
can give 500 (5 x 100 shares) votes to just one
candidate.
Cumulative voting by distribution
14
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit.
Illustration: In the illustration above, Pedro
instead may choose to give 100 votes to
candidate 1, 100 votes to candidate 2, 100
votes to candidate 3, 150 votes to candidate 4,
and 50 votes to candidate 5.
STRAIGHT VOTING
Every stockholder may vote such number of shares
for as many persons as there are directors to be
elected.
QUORUM
There must be present, in person or by
representative authorized to act by written proxy,
the owners of majority of the OCS or majority of the
members entitled to vote in the meeting.
Election must be by ballot if requested.
A stockholder cannot be deprived in the articles
of incorporation or in the by-laws of his statutory
right to use any of the methods of voting in the
election of directors. No delinquent stock shall be
voted. The candidates receiving the highest number
of votes shall be declared elected.
REMOVAL
General rule: Any Director or Trustee of a
corporation may be removed from office, with or
without cause. (Sec. 28)
Exception: Directors who have been elected by
minority stockholders exercising cumulative
voting can only be removed for cause. Removal
without cause may not be used to deprive minority
stockholders or members of the right of
representation to which they may be entitled under
Section
24.
Other requisites:
(1) by a vote of the stockholders holding or
representing 2/3 of the outstanding capital stock,
or if the corporation be a non-stock corporation,
by a vote of 2/3 of the members entitled to vote
(2) at a regular or special meeting after proper
notice is given
FILLING OF VACANCIES
VACANCY (1) BY REMOVAL, (2) BY EXPIRATION OF
TERM, OR (3) WHEN THE REMAINING DIRECTORS
DO NOT CONSTITUTE A QUORUM
Vacancy/ies must be filled by the stockholders in a
regular or special meeting called for that purpose.
A director or trustee elected to fill a vacancy
in shall be elected only for the unexpired term
of his predecessor in office.

VACANCY BY REASON OF INCREASE IN THE
NUMBER OF THE DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the stockholders:
(1) In a regular or special meeting called for that
purpose; or
(2) in the same meeting authorizing the
increase of directors or trustees if so stated in
the notice of the meeting.
VACANCY BY OTHER CAUSES
Vacancy/ies may be filled by the vote of at least a
majority of the remaining directors or trustees, if
still constituting a quorum.
A director or trustee elected to fill a vacancy
in shall be elected only for the unexpired term
of his predecessor in office.
COMPENSATION (Sec. 30)
General rule: Directors are only entitled to
reasonable per diems. They are not entitled to
compensation as directors.
Exception:
(1) When AOI, by-laws, or an advance contract
provides for compensation.
(2) Compensation other than per diems may
also be granted to directors by the vote of the
stockholders representing at least a majority of the
OCS at a regular or special stockholders meeting.
The total yearly compensation of directors shall not
exceed 10% of the net income before income tax
of the corporation during the preceding year.
COMPENSATION OF DIRECTORS AS CORPORATE
OFFICERS
The position of being chairman and Vice-Chairman,
like that of treasurer and secretary, are not
considered directorship positions but officership
positions that would entitle the occupants to
compensation. Likewise, the limitation placed under
Sec. 30 of the Corporation Code that directors
cannot receive compensation exceeding 10% of
the net income of the corporation would not apply
to the compensation given to such positions since it
is being given in their capacity as officers of the
corporation and not as board members.(Western
Institute of Technology v. Salas, 1997)
FIDUCIARY DUTIES AND LIABILITY RULES
DUTIES
In this jurisdiction, the members of the board
of directors have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty.
Accordingly, the members of the board of directors
(1) Duty of Obedience - shall direct the affairs of
the corporation only in accordance with the
purposes for which it was organized;
15
(2)Duty of Diligence - shall not willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or act in bad faith or with
gross negligence in directing the affairs of the
corporation; and
(3) Duty of Loyalty - shall not acquire any
personal or pecuniary interest in conflict with
their duty as such directors or trustees. (Strategic
Alliance Development Corpv.Radstock Securities
Ltd., 2009)
Duty of obedience
The Directors or Trustees and Officers to be elected
shall perform the duties enjoined on them by law
and by the bylaws of the corporation (Sec. 25).
Duty of diligence
Directors or trustees who (1) willfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or (2) who are guilty of gross
negligence or (3) bad faith in directing the
affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or
members and other persons. (Sec 31)
Duty of loyalty
Directors and trustees should not acquire any
personal or pecuniary interest in conflict with
their duty as such directors or trustees,
otherwise they shall be held liable jointly and
severally for all damages resulting therefrom
suffered by the corporation, its stockholders or
members and other persons. (Sec. 31)
Where a director, 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, he
must account to the latter for all such profits by
refunding the same, unless his act has been
ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock (Sec. 34)
Doctrine of corporate opportunity
Unless his act is ratified, a director shall refund
to the corporation all the profits he realizes on
a business opportunity which:
(1) corporation is financially able to undertake (2)
from its nature, is in line with corporations business
and is of practical advantage to it; and
(3) one in which the corporation has an interest
or a reasonable expectancy.
The rule shall be applied notwithstanding the fact
that the director risked his own funds in the
venture. (Sec. 34)
By embracing the opportunity, the self-interest of The provisions on seizing corporate opportunity and
the officer or director will be brought into conflict disloyalty (Secs. 31 and 34) shall also apply to
with that of his corporation. Hence, the law corporate officers.
does not permit him to seize the opportunity
even if he will use his own funds in the Note: Members of the BOD who are also officers are
venture. (Sundiangand Aquino) held to a more stringent liability because they are
in charge of dayto-day activities (Campos)
Note: Differences between Section 31 and Section
34:
(1) While both involve the same subject matter Doctrine of Limited Doctrine of
(business opportunity) they concern different Liability Immunity
personalities; Sec. 34 is applicable only to Shields the corporators Protects a person
directors and not to officers, whereas Sec. 31 from corporate liability acting for and in
applies to directors, trustees and officers. beyond their agreed behalf of the
(2) Sec. 34 allows a ratification of a transaction contribution to the corporation from
by a self-dealing director by vote of stockholders capital or shareholding being himself
representing at least 2/3 of the outstanding capital in the corporation. personally liable for
stock. (Villanueva) his authorized actions

SOLIDARY LIABILITY FOR DAMAGES Liability of Director, Trustee or Officer (Asked

(1) Willfully and knowingly voting for and
assenting to patently unlawful acts of the
corporation; (Sec. 31)
(2) Gross negligence or bad faith in directing the
affairs of the corporation; (Sec. 31)
(3) Acquiring any personal or pecuniary interest in
conflict of duty; (Sec. 31)
(4) Consenting to the issuance of watered stocks,
or, having knowledge thereof, ailing to file
objections with secretary; (Sec. 65)
(5) Agreeing or stipulating in a contract to hold
himself liable with the corporation; or
(6) By virtue of a specific provision of law
LIABILITY FOR WATERED STOCKS
Watered Stocks stocks issued for a consideration
less than its par or issued value or for a
consideration in any form other than cash, valued
in excess of its fair value.
Any director or officer of a corporation
consenting to the issuance of watered stocks or
who, having knowledge thereof, does not
forthwith express his objection in writing and
file the same with the corporate secretary shall
be solidarily liable with the stockholder concerned
to the corporation and its creditors for the
difference in value (Sec. 65).
PERSONAL LIABILITIES
General rule: Members of the Board, who
purport to act in good faith for and in behalf
of the corporation within the lawful scope of
their authority, are not liable for the
consequences of their acts. When the acts are
of such nature and done under those
circumstances, they are attributed to the
corporation alone and no personal liability is
incurred. (Price v. Innodata Phils., Inc., 2008)
16
in 96 and 97)
Personal liability of a corporate director, trustee
or officer along (although not necessarily) with
the corporation may so validly attach, as a rule,
only when:
(1) He assents (a) to a patently unlawful act
of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict
of interest, resulting in damages to the corporation,
its stockholders or other persons;
(2) He consents to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his
written objection thereto;
(3) He agrees to hold himself personally and
solidarily liable with the corporation; or
(4) He is made, by a specific provision of law, to
personally answer for his corporate action (Tramat
Mercantile, Inc. vs. CA, 1994, reiterated in Atrium
Management Corp. v. CA, 2001)
SPECIAL FACTS DOCTRINE
Even though a director may not be under the
obligation of a fiduciary nature to disclose to a
shareholder his knowledge affecting the value of
the shares, that duty may exist in special cases.
(Strong v. Rapide, 1909)
General rule: (Majority view) Directors only owe
its duty to the corporation. They owe no fiduciary
duty to stockholders but they may deal with each
other at fair and reasonable terms, as if they
were unrelated. No duty to disclose facts known to
the director or officer.
Exception: Special Facts Doctrine: Conceding the
absence of a fiduciary relationship in the ordinary
case, courts nevertheless hold that where special
circumstances or facts are present which make it
inequitable for the director to withhold
information from the stockholder, the duty to
disclose arises and concealment is fraud. (Strong
v. Rapide,
1909)
RESPONSIBILITY FOR CRIMES
Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against criminally
because it cannot commit a crime in which
personal violence or malicious intent is required.
Criminal action is limited to the corporate agents
guilty of an act amounting to a crime and never
against the corporation itself (West Coast Life Ins.
Co. v. Hurd,1914; Time Inc. v. Reyes,1971).
Since the BOD is the repository of corporate
powers and acts as the agent of the
corporation, the directors may be held criminally
liable.
The Trust Receipts Law recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation.
Hence, if the entrustee is a corporation, the law
makes the officers or employees or other persons
responsible for the offense liable to suffer the
penalty of imprisonment. The reason is obvious:
corporations, partnerships, associations and other
juridical entities cannot be put to jail. Hence, the
criminal liability falls on the human agent
responsible for the violation of the Trust Receipts
Law. (Ong v. CA, 2003)
INSIDE INFORMATION
The fiduciary position of insiders, directors, and
officers prohibits them from using confidential
information relating to the business of the
corporation to benefit themselves or any competitor
corporation in which they may have a mere
substantial interest.
Note: Insider means: (a) the issuer; (b) a director
or officer (or person performing similar functions)
of, or a person controlling the issuer; (c) a
person whose relationship or former relationship
to the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public; (d) a
government employee, or director, or officer of
an exchange, clearing agency and/or self-
regulatory organization who has access to material
information about an issuer or a security that is not
generally available to the public; or (e) a person
who learns such information by a communication
from any of the foregoing insiders (3.8, Sec
Regulations Code)
Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
has a cause of action as long as there is unfair
use of inside information
17
It is inside information if it is not generally
available to others and is acquired because of the
close relationship of the director or officer of the
corporation
CONTRACTS
BY SELF-DEALING DIRECTORS WITH THE
CORPORATION
General rule: A contract of the corporation with one
or more of its directors or trustees is VOIDABLE,
at the option of such corporation. (Sec. 32)
Exception: Such contract is VALID if all of the
following conditions are present:
(1) That the presence of such director or
trustee in the board meeting in which the contract
was approved was not necessary to constitute a
quorum for such meeting;
(2) That the vote of such director or trustee
was not necessary for the approval of the contract
(3) That the contract is fair and reasonable
under the circumstances; and
(4) That in case of an officer, the contract has
been previously authorized by the board of
directors.
Ratification: In case of absence of the first two
conditions above, contract may be ratified if:
(1) Stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the
members
in a meeting called for the purpose voted to
ratify the contract.
(2) Full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting.
(3) Contract is fair and reasonable under the
circumstances
BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
If the interests of the interlocking director in
the corporations are both substantial
(stockholdings exceed 20% of outstanding
capital stock).
General rule: A contract between two or more
corporations having interlocking directors shall not
be invalidated on that ground alone. (Sec. 32)
Exception: If contract is fraudulent or not fair and
reasonable under the circumstances
If the interest of the interlocking director in
one of the corporations is nominal
(stockholdings 20% or less) while
substantial in the other, the contract shall be
VALID, if the following conditions are met:
(1) The presence of such director or trustee in
the board meeting in which the contract was
approved was NOT necessary to constitute a
quorum for such meeting
(2) That the vote of such director or trustee was
not necessary for the approval of the contract
(3) That the contract is fair and reasonable under
the circumstances.
Where (1) and (2) are absent, the contract can be
ratified by the vote of the stockholders representing
at least 2/3 of the outstanding capital stock or at
least 2/3 of the members in a meeting called for the
purpose voted to ratify the contract, provided that:
(a) Full disclosure of the adverse interest of the
directors/trustees involved is made on such
meeting;
(b) The contract is fair and reasonable under the
circumstances.
Corporate Powers
GENERAL POWERS, THEORY OF GENERAL
CAPACITY(Sec. 36)
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt by-laws;
(6) For stock corporations - issue or sell stocks
to subscribers and sell treasury stocks; for non-
stock corporation - admit members to the
corporation;
(7) Purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, pursuant to
its lawful business;
(8) Enter into merger or consolidation with other
corporations as provided in the Code;
(9) Make reasonable donations, including those
for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, no corporation, domestic or foreign, shall
give donations in aid of any political party or
candidate or for purposes of partisan political
activity;
(10) Establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
employees; and
(11) Exercise such other powers as may be
essential or necessary to carry out its purposes
Note: The Corporation has implied powers which
are deemed to exist because of the following
provisions:
(1) Except such as are necessary or
incidental to the exercise of the powers so
conferred (Sec. 45)
(2) Such powers as are essential or necessary
to carry out its purpose or purposes as stated
in the AOI catch-all phrase (Sec. 36(11)).
18
SPECIFIC POWERS, THEORY OF SPECIFIC
CAPACITY (Sec. 37-44) (BADD PIT MC)
(1) Power to Extend or Shorten Corporate Term
(2) Power to Increase or Decrease Capital Stock
or Incur, Create, Increase Bonded Indebtedness
(3) Power to Deny Pre-Emptive Rights
(4) Power to Sell or Dispose of Corporate Assets
(5) Power to Acquire Own Shares
(6) Power to Invest Corporate Funds in Another
Corporation or Business
(7) Power to Declare Dividends
(8) Power to Enter Into Management Contract
EXTEND OR SHORTEN THE CORPORATE TERM
(SEC. 37)
(1) Must be approved by majority vote of the Board
of Directors/ Board of Trustees (BOD/BOT)
(2) Ratified at a meeting by 2/3 of SH representing
the outstanding capital stock/ 2/3 of members of
non-stock corporations
(3) Written notice of meeting (includes proposed
action, time and place of meeting) shall be
addressed to each SH/member at his place of
residence and deposited to the addressee in the
post office, or served personally
(4) In case of extension of corporate term,
appraisal right may be exercised by the dissenting
stockholder
INCREASE OR DECREASE CAPITAL STOCK
(SEC. 38)
INCUR, CREATE OR INCREASE BONDED
INDEBTEDNESS (SEC. 38)
(1) Same requirements above from 1-3
(2) A certificate in duplicate must be signed by a
majority of the directors of the corporation
(countersigned by the chairman and the
secretary of the SH meeting), setting forth:
(a) That requirements of this section have
been complied with
(b) The amount of the increase or diminution
of the capital stock
(c) In case of increase,
(i) The amount of capital stock or number
of shares of no par stock actually
subscribed
(ii) Names, nationalities and residences of
the persons subscribing
(iii) The amount of no-par stock subscribed
by each
(iv) the amount paid by each on his
subscription, or the amount of capital
stock or number of shares of no-par
stock allotted to each stockholder if such
increase is for the purpose of making
effective stock dividend
(d) any bonded indebtedness to be incurred,
created or increased
(e) the actual indebtedness of the corporation
on the day of the meeting
 (f) the amount of stock represented at the
meeting
(g) the vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness
(3) prior approval of SEC is required
(4) duplicate certificates shall be kept on file
in the office of the corporation and the other shall
be filed with the SEC, attached in the original
articles of incorporation.
(a) From and after approval of the SEC of
its certificate of filing, the capital stock shall
stand increased or decreased and the
incurring, creating or increasing of any
bonded indebtedness authorized
(b) SEC shall not accept for filing any certificate
of increase unless accompanied by the sworn
statement of the treasurerof thecorporation
showing:
(i) That at least 25% of such increased
capital stock have been subscribed and
(ii) that at least 25% of the amount
subscribed has been paid or that there
has been transferred to the corporation
property the value is equivalent to 25%
of the subscription
(c) SEC shall not approve any decrease in the
capital stock if its effect shall prejudice the
rights of corporate creditors
(5) Bonds issued by a corporation shall be
registered with the SEC
DENY PREEMPTIVE RIGHT (SEC. 39)
(1) All SH of a Stock Corporation have preemptive
right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings
(2) Except if such right is denied by the AOI or an
amendment thereto
(3) Pre-emptive right shall not extend to:
(a) shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public
(b) shares to be issued in good faith with
the approval of 2/3 of the stockholders
representing outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously
contracted debt
SELL OR DISPOSE OF SUBSTANTIALLY ALL ITS
ASSETS (SEC. 40)
(1) Same requirements from 1-3 as Sec. 37 above
(2) Any dissenting SH may exercise his appraisal
right
(3) Deemed to cover substantially all the corporate
property and assets
(4) After authorization by the SH/members, the
BOD/BOT may abandon such sale, lease,
exchange, mortgage,
19
pledge or other disposition, subject to the rights
of third parties under any contract relating thereto,
without further action or approval by the SH/
members
(5) Corporation is not restricted in its power to
dispose assets:
(a) if the same is necessary in the usual and
regular course of business of the corporation or
(b) if the proceeds of the sale will be
appropriated for the conduct of its remaining
business
ACQUIRE ITS OWN SHARES (SEC. 41)
(1) For a legitimate corporate purpose/s, including
but not limited to the following:
(a) To eliminate fractional shares arising out of
stock dividends
(b) To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency sale,
and to purchase delinquent shares sold
during said sale; and
(c) To pay dissenting or withdrawing
stockholders
(2) Provided there are unrestricted retained
earnings (URE) in the corporate books to cover the
shares purchased or acquired
INVEST IN ANOTHER CORPORATION OR BUSINESS
(SEC. 42)
(1) Same requirements from 1-3 as Sec. 37 above
(2) Any dissenting SH shall have appraisal right
(3) Where the investment is reasonably necessary
to accomplish the corporations primary purpose,
the approval of the SH/ members is not necessary
Notes:
(a) If it is for the same purpose, or incidental,
or related to its PRIMARY purpose, the board
can invest the corporate fund WITHOUT the
consent of the stockholders. No appraisal
right.
(b) If the investment is in another
corporation of different business or purpose
BUT in pursuance of the SECONDARY
purpose, the affirmative vote of majority of the
board consented by stockholders/ members
is required.
(c) If the investment is OUTSIDE the
purpose/s for which the corporation was
organized, AOI must be amended first,
otherwise it will be an Ultra Vires act.
DECLARE DIVIDENDS (SEC. 43)
(1) Out of URE
(2) Payable in cash, in property, or in stock to
all SH on the basis of outstanding stock held by
them
(3) Any cash dividend due on delinquent stock shall
first be applied to the unpaid balance on the
subscription plus costs and expenses
(4) Stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription
is fully paid
(5) Should be approved by 2/3 of SH representing
the outstanding capital stock at a regular/special
meeting called for that purpose
(6) Stock corporations- prohibited from retaining
surplus profits in excess of 100% of their paid-
in capital stock, except:
(a) When justified by definite corporate
expansion projects or programs approved by
the BOD
(b) When the corporation is prohibited under
any
Loan agreement with any financial institution or
creditor from declaring dividends without its
consent, and such consent has not yet been
secured
(c) When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation
ENTER INTO MANAGEMENT CONTRACTS (SEC. 44)
(1) Should be approved by the BOD and by
SH owning at least the majority of the
outstanding capital stock or at least a majority of
the members of both the managing and the
managed corporation at a meeting duly called for
that purpose
(2) Should be approved by the 2/3 of stockholders
owning outstanding capital stock/members of the
managedcorporation when:
(a) A stockholder or stockholders
representing the same interest of both the
managing and managed corporations own
more than 1/3 of the total outstanding capital
stock entitled to vote of the
managingcorporation; or
(b) A majority of the members of the BOD of
the managing corporation also constitute a
majority of the BOD of the managed
corporation
(3) No management contract shall be entered
into for a period longer than 5 years for any one
term
(4) 1-3 above applies to any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such are called service
contracts, operating agreements or otherwise
(5) Service contracts or operating agreements
which relate to exploration, development,
exploitation or utilization of natural resources
may be entered into for such periods as may
be provided in the pertinent laws and regulations
Notes: Two general restrictions on the power of
the corporation to acquire and hold properties:
(1) property must be reasonably and necessarily
required by the business
20
(2) that the power shall be subject to the
limitations prescribed by other special laws and
the Constitution (corporation may not acquire
more than 30% of voting stocks of a bank;
corporations are restricted from acquiring public
lands except by lease of not more than 1000
hectares)
ULTRA VIRES ACTS
Definition: Ultra vires acts are those acts which
a corporation is not empowered to do or
perform because they are not conferred by its
AOI or by the Corporation Code, or not
necessary or incidental to the exercise of the
powers so conferred (Sec. 45).
Types of ultra vires Acts:
(1) Acts done beyond the powers of the
corporation as provided in the law or its articles of
incorporation;
(2) Acts or contracts entered into in behalf of a
corporation by persons who have no corporate
authority (Note: This is technically ultra vires acts
of officers and not of the corporation);
(3) Acts or contracts, which are per se illegal
as being contrary to law. (Villanueva)
Applicability of ultra vires doctrine
It is a question, therefore, in each case of the logical
relation of the act to the corporate purpose
expressed in the charter.
If that act is one which is lawful in itself, and not
otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary
to the promotion of those ends, in a substantial,
and not in a remote and fanciful sense, it may
fairly be considered within the charter powers.
The test to be applied is whether the act in
question is in direct and immediate furtherance
of the corporations business, fairly incident to
the express powers and reasonably necessary to
their exercise. If so, the corporation has the power
to do it; otherwise, not. (Montelibano v.
Bacolod-Murcia Milling Co., Inc., G.R. No. 15092,
May 18, 1962)
Consequences of ultra vires Acts
(1) Executed contract courts will not set aside
or interfere with such contracts;
(2) Executory contracts no enforcement even at
the suit of either party (void and unenforceable);
(3) Partly executed and partly executory
principle of no unjust enrichment at expense of
another shall apply;
(4) Executory contracts apparently authorized
but ultra vires the principle of estoppel shall
apply.
 Ultra Vires Acts Illegal Acts
Not necessarily Unlawful; against law,
unlawful, but outside morals, public policy,
the powers of the and public order
corporation
Can be ratified Cannot be ratified
Can bind the parties if Cannot bind the parties
wholly or partly
executed
An ultra vires act is distinguished from illegal act,
the former being voidable which may be
enforced by performance ratification, or estoppel,
while the latter is void and cannot be validated.
(Seaoilvs. Autocorp Group, 2008, Nachura)
Remedies in Case of Ultra Vires Acts
(1) State:
(a) Forfeiture by judgment of Court
(b) Suspension or revocation of the certificate
of registration by the SEC
(2) Stockholders:
(a) Injunction
(b) Derivative suit
(3) Creditors: Nullification of contract in fraud of
creditors
DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION
Section 64 of the Corporation Code implicitly sets
forth the doctrine that subscription is one entire
and indivisible contract. Thus, if the stockholder
has not paid the full amount of his subscription,
he cannot transfer part of it in view of the
indivisible nature of subscription contract. It is
only upon full payment of the whole
subscription that a stockholder can transfer a
portion of his subscription.
However, the entire subscription although not yet
fully paid, may be transferred to a single
transferee. It is necessary, however, to secure the
consent of the corporation since the transfer of
subscription right contemplates a novation of
contract which, under Article 1293 of the Civil
Code of the Philippines, cannot be made without
the consent of the creditor. Likewise, it has to
be emphasized that under Section 63 of the
Corporation Code, no transfer shall be valid,
except as between the parties, until the transfer
is recorded in the books of the corporation.
(SEC Opinion, August 7, 1991)
The transferee must also undertake to pay the
balance of the subscription amount when due or
upon call by the BOD.
DOCTRINE OF EQUALITY OF SHARES
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise provided in
the AOI and stated in the certificate of stock (Sec.
6)
21
HOW (CORPORATE POWERS) EXERCISED
BY THE SHAREHOLDERS
Corporate acts requiring approval of stockholdersor
members (voting and non-voting shares)
General rule: Vote necessary to approve a
particular corporate act as provided in this Code
shall be deemed to refer only to stocks with voting
rights (Sec. 6)
Exceptions (Sec. 6): Voting and non-voting
shares shall be entitled to vote in the following
cases:
(1) Amendment of AOI
(2) Adoption, Amendment and Repeal of By-Laws
(Sec. 48)
(3) Sale, Lease, Mortgage or Other Disposition
of Substantially all corporate assets (Sec. 40)
(4) Incurring, Creating or Increasing Bonded
Indebtedness (Sec. 38)
(5) Increase or Decrease of Capital Stock (Sec. 38)
(6) Merger and Consolidation(Sec. 76-80)
(7) Investment of funds in another corporation
or business or for any purpose other than the
primary purpose for which it was organized (Sec.
42)
Requisites (Sec. 42) (Asked in 95):
(a) Approval of majority of the board of
directors or trustees
(b) Ratification by the stockholders
representing at least 2/3 of the OCS or the
members at a meeting duly called for the
purpose
(c) Written notice addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation
(d) Appraisal right available to dissenting
stockholders or members
(8) Dissolution of the Corporation (Sec. 118-121)
Corporate acts requiring approval of
stockholdersor members (voting shares only)
(1) Declaration of Stock Dividends (Sec. 43)
(2) Management Contracts (Sec. 44)
(3) Fixing the Consideration of No-Par shares (Sec.
62)
(4) Fixing the Compensation of Directors (Sec. 30)
BY THE BOARD OF DIRECTORS
Board as repository of corporate powers
General rule (doctrine of centralized management):
The corporate powers of the corporation shall
be exercised, all business conducted and all
property of such corporation controlled and held
by the board of directors or trustees.
(Sec. 23)
Exceptions:
(1) Executive Committee duly authorized in the
by-laws(Sec. 35);
(2) A contracted manager which may be an
individual, a partnership, or another corporation.
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.
(3) In case of close corporations, the stockholders
may manage the business of the corporation rather
than by a board of directors, if the AOI so provide
(Sec. 97)
The power to purchase real property is vested in
the board of directors or trustees. While a
corporation may appoint agents to negotiate for
the purchase of real property needed by the
corporation, the final say will have to be with the
board, whose approval will finalize the
transaction. (Spouses Constantine Firme v. Bukal
Enterprises and Development Corporation, 2003)
Requisites of a valid corporate act by the
Board of Directors (Sec. 25)
(1) The Board must act as a BODY in a meeting.
(Note:Current SEC regulations allow BOD
meetings by teleconferencing or videoconferencing
(2) There must be a VALIDLY constituted meeting.
(3) Their act must be supported by a MAJORITY
OF THE QUORUM duly assembled (Exception:
Election of officers requires a vote of majority of
ALL the members of the board)
(4) The act must be within the powers conferred
to the Board.
TRUST FUND DOCTRINE
Under Sec. 43 of Code, the corporation can
declare dividends only out of "unrestricted
retained earnings;" and that under Sec. 122, no
corporation shall distribute any of its assets or
property except upon lawful dissolution and after
payment of all its debts and liabilities. These
provisions in essence provide for the "trust fund
doctrine" where the "subscription to the capital
of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their
claims." Philippine Trust Co. v. Rivera, 44 Phil. 469
(1923) (cited in Villanueva)
The Trust Fund Doctrine, first enunciated by this
Court in the 1923 case of Philippine Trust Co. v.
Rivera, provides that subscriptions to the capital
stock of a corporation constitute
a fund to which the creditors have a right to
look for the satisfaction of their claims.
This doctrine is the underlying principle in the
procedure for the distribution of capital assets,
embodied in Corporation Code, which allows the
distribution of corporate capital only in three
instances:
(1) amendment of the Articles of Incorporation
to reduce the authorized capital stock,
22
(2) purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings, and
(3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is
articulated in Sec. 41 on the power of a
corporation to acquire its own shares and in Sec.
122 on the prohibition against the distribution of
corporate assets and property unless the
stringent requirements therefore are complied
with. (Ong Yong v. Tiu, 2003)
Trust Fund Doctrine means that the capital
stock, properties and other assets of a corporation
are regarded as equity in trust for the payment
of corporate creditors.
Stated simply, the trust fund doctrine states that
all funds received by the corporation in payment
of the shares of stock shall be held in trust for
the corporate creditors and other stockholders of
the corporation. Under such doctrine no fund shall
be used to buy back the issued shares of stock
except only in instances specifically allowed by
the Corporation Code. (Boman Environmental
Development Corporation v. CA, 1988):
The creditors of a corporation have the right to
assume that so long as there are debts and
liabilities, the Board of Directors will not use
corporate assets to purchase its own shares of
stock or to declare dividends to its stockholders
when the corporation is insolvent. (Steinberg v.
Velasco, 1929)
MEETINGS
REGULAR OR SPECIAL
Who may attend? The members of the Board
themselves; directors in Board meetings cannot be
represented or voted by proxies.
In the Philippines, teleconferencing and
videoconferencing of members of board of directors
of private corporations is a reality, in light of
Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular
No. 15, on November 30, 2001, providing the
guidelines to be complied with related to such
conferences. (Expertravel&Tours, Inc. v.CA, May
26, 2005)
When and Where
When? (Sec.53)
(1) Regular meetings of directors or trustees shall
be held monthly, unless the by-laws provide
otherwise.
(2) Special meetings of the board of directors or
trustees may be held at any time upon the call of
the president or as provided in the by-laws.
Where? (Sec. 53)
Meetings of directors or trustees of corporations
may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.
Notice
Notice of regular or special meetings stating the
date, time and place of the meeting must be sent
to every director or trustee at least one (1) day
prior to the scheduled meeting, unless otherwise
provided by the by-laws.
A director or trustee may waive this requirement,
either expressly or impliedly
WHO PRESIDES
The president presides, unless the by-laws provide
otherwise. (Sec. 54)
QUORUM
General rule: Majority of the number of directors
or trustees as fixed in the articles of incorporation.
(Sec. 25)
Exceptions:
(1) Unless the articles of incorporation or the by-
laws provide for a greater majority, or
(2) In case of election of officers where a vote of a
majority of all the members of the board is needed.
RULE ON ABSTENTION
A vote of abstention is considered to be a vote
in itself.
Abstentions will not be counted towards the
affirmative and such refusal to vote does not
indicate acquiescence in the action of those who
vote.
Stockholders and Members
RIGHTS OF STOCKHOLDER AND MEMBERS
(1) Direct or indirect participation in management
(Sec. 6)
(2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 28)
(4) Proprietary rights
(a) Right to dividends (Secs. 43 and 71)
(b) Appraisal right (Sec. 81)
(c) Right to issuance of stock certificate for fully
paid shares (Sec. 64)
(d) Proportionate participation in the
distribution of assets in liquidation (Sec. 122)
(e) Right to transfer of stocks in corporate
books (Sec. 63)
(f) Pre-emptive right (Sec. 39)
(5) Right to inspect books and records (Sec. 74)
(6) Right to be furnished with the most recent
financial statements/reports (Sec. 75)
(7) Right to recover stocks unlawfully sold for
delinquent payment of subscription (Sec. 69)
(8) Right to file individual suit, representative
suit and derivative suits
23
DOCTRINE OF EQUALITY OF SHARES
All stocks issued by the corporation are
presumed equal with the same privileges and
liabilities, provided that the Articles of
Incorporation is silent on such differences. (CIR v.
CA, CTA, and A. Soriano Corporation, 1999)
Doctrine of Equality of Shares provides that
where the Articles of Incorporation do not provide
for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be
equal and enjoy the same rights and privileges
and are also subject to the same liabilities.
(Sundiang and Aquino)
The default rule is that all stockholders have equal
right and obligations, expressed in the last
paragraph of Section 6 of the Corporation Code
which provides, each share shall be equal in all
respects to every other share. (Villanueva)
Note: However, when preferences or restrictions
are made to apply to a class of shares, then
such preferences on restrictions shall exist and
be valid only when provided in the articles of
incorporation and stated in the certificate of stock.
(Villanueva)
Section 6 of the Corporation Code also contains a
Boardenabling clause that although the default
rule is that all shareholders have equal rights
and obligations, nevertheless, when authorized
by the articles of incorporation, the Board of
Directors, may fix the terms and conditions of
preferred shares of stock or any series thereof, or
to classify its shares for the purpose of insuring
compliance with constitutional or legal
requirements; but such terms and conditions shall
be effective upon filing of a certificate thereof with
the SEC. Thus, a preference or restriction on
shares may be valid and effective only if the
same has formally been registered with the SEC
and thereby becomes public records binding on
the public. (Villanueva)
Nature of the Rights of Members: The
eleemosynary nature of every non-stock
corporation defines the characteristic of
membership therein as being essentially personal
in character and therefore essentially non-
transferable in nature.
Section 89 of the Corporation Code specifically
provides that in a non-stock corporation, the right
of members of any class or classes to vote may
be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-
laws.
The SEC has opined that the rule in Section 6
allowing nonvoting shares to vote on specified
fundamental matters does not apply to non-
voting members of a non-stock corporation; that
insofar as members of a non-stock corporation,
the applicable provision is Section 89, which
specifically provides that members may be
denied entirely their voting rights in the articles of
incorporation or by-laws of the corporation
(Villanueva, citing SEC Opinion, 4 September
1995)
PARTICIPATION IN MANAGEMENT PROXY
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members
(Sec. 58).
The right to issue a proxy is vested with public
interest when it comes to stock corporations;
although it may be regulated under the by-laws, it
cannot be denied, since it is an aspect of ownership
interest of stockholders.
However, the right of members to vote by
proxy may be denied under the articles of
incorporation or by-laws of a non-stock
corporation (Sec. 89)
when stockholders vote on matters other than
the election of directors. (GSIS v. CA, 2009)
VOTING TRUST
An arrangement created by one or more
stockholders for the purpose of conferring upon
a trustee or trustees the right to vote and other
rights pertaining to the shares for a period not
exceeding five (5) years at any time (Sec. 59).
Under a voting trust arrangement, a stockholder of
a stock corporation parts with the naked or legal
title, including the power to vote, of the shares and
only retains the beneficial ownership of the stock.
A voting trustee is a share owner vested with
colorable and naked title of the shares covered for
the primary purpose of voting upon stocks that he
does not own.
A voting trust agreement shall be ineffective and
unreasonable unless:
(1) It is in writing and notarized;
(2) Specify the terms and conditions thereof; and
(3) A certified copy of such agreement shall be
filed with the corporation and with the SEC.

Requisites for a valid and enforceable proxy

(1) It must be in writing
(2) Signed by the stockholder or member of record;
and
(3) Filed with the corporation before the scheduled
meeting with the Corporate Secretary

Procedural matters relating to proxies

(1) Proxy solicitation involves the securing and
submission of proxies, while proxy validation
concerns the validation of such secured and
submitted proxies;
(2) The SECs power to pass upon the validity of
proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its
abrogated quasi-judicial powers, and has been
transferred to the RTC Special Commercial Courts
pursuant to the terms of Section 5.2 of the
Securities Regulation Code;
(3) Nevertheless, although an intra-corporate
controversy may animate a disgruntled shareholder
to complain to the SEC a corporations violations
of SEC rules and regulations, but that motive
alone should not be sufficient to deprive the
SEC of its investigatory and regulatory powers,
especially so since such powers are exercisable
on a motu proprio basis.

The fact that the jurisdiction of the RTC Special

Commercial Courts is confined to the voting on
election of officers, and not all matter which may
be voted upon by stockholders, elucidates that
the power of the SEC to regulate proxies
remains extant and could very well be exercised
24

CASES WHEN STOCKHOLDERS ACTION IS
REQUIRED
By a majority vote
(a) Power to enter into management contracts
(Sec. 44)
General rule: Requires approval by majority of
the BOD/BOT and approval by stockholders
owning at least the majority of the outstanding
capital stock/majority of members of both the
managing and the managed corporation
Exceptions:
(1) Where a stockholder/s representing the same
interest of both the managing and the managed
corporations own or control more than one-
third (1/3) of the total outstanding capital stock
entitled to vote of the managing corporation; or
(2) Where a majority of the members of the
managing corporations BOD also constitute a
majority of the managed corporations BOD
Requires at least 2/3 votes of the outstanding
capital stock/membership of the managed
corporation.
BUT only majority vote is required for the
managing corporation.
(b) Amendments to by-laws (Sec. 48) Requires
approval by majority of the BOD/BOT and approval
by stockholders owning at least the majority of the
outstanding capital stock/majority of members
Includes all stockholders/members with or
without voting rights
(c) Revocation of delegation to the BOD of the
power to amend or repeal or adopt by-laws (Sec.
48)
Requires approval by majority of the BOD/BOT
and approval by stockholders owning at least the
majority of the outstanding capital stock/majority
of members
(d) Calling a meeting to remove directors (Sec. 28)
Meeting for the removal of directors or trustees,
or any of them, must be called by the secretary
on order of the president or on the written
demand of the stockholders representing or
holding at least a majority of the outstanding
capital stock/majority of members
(e) Granting compensation other than per diems to
directors (Sec. 30)
Compensation other than per diems may be
granted to directors by the vote of the
25
stockholders representing at least a majority of the
outstanding capital stock
(f) Consideration for no-par shares (Sec. 62)
When the AOI or the BOD does not provide for the
value of no-par shares, the value of such shares
shall be determined by the stockholders
representing at least a majority of the
outstanding capital stock
By a two-thirds vote
(a) Amendment of Articles of Incorporation (Sec.
16)
Amendment of the AOI may be made by a
majority vote of the BOD/BOT and the vote
or written assent of the stockholders
representing at least two-thirds 2/3 of the
outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholders.
Includes all stockholders/members with or
without voting rights
(b) Amendment of AOI of close corporations (Sec
103)
Amendment to the AOI which seeks to delete or
remove any provision required to be contained
in the AOI of Close Corporations or to reduce
a quorum or voting requirement stated in said
AOI requires the affirmative vote of at least
2/3 of the outstanding capital stock, whether with
or without voting rights, or of such greater
proportion of shares as may be specifically
provided in the AOI at a meeting duly called.
(c) Delegating the power to amend or repeal
by-laws or adopt new by-laws (Sec. 48)
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-laws
requires approval by at least two-thirds (2/3) of
the outstanding capital stock/membership.
Revocation of the delegation requires only
majority vote of the outstanding capital
stock/membership.
(d) Extending/shortening corporate term (Sec. 37)
Requires approval by a majority vote of the
BOD/BOT and approval by at least two-thirds
(2/3) of the outstanding capital stock/membership.
Includes all stockholders/members with or
without voting rights
(e) Increasing/decreasing capital stock (Sec. 38)
Requires approval by a majority vote of the
BOD and approval by at least two-thirds (2/3)
of the outstanding capital stock.
Includes all stockholders/members with or
without voting rights
(f) Incurring, creating, increasing bonded
indebtedness (Sec. 38)
Requires approval by a majority vote of the
BOD and approval by at least two-thirds (2/3)
of the outstanding capital stock.
Includes all stockholders/members with or
without voting rights
(g) Issuance of shares not subject to pre-
emptive right (Sec. 39)
Shares issued in good faith in exchange for
property or previously incurred indebtedness
with the approval of the stockholders
representing two-thirds (2/3) of the
outstanding capital stock are not subject to
pre-emptive rights.
(h) Sale/disposition of all or substantially all of
corporate assets(Sec. 40)
Requires approval by a majority vote of the
BOD/BOT and approval by at least two-thirds
(2/3) of the outstanding capital
stock/membership.
Includes all stockholders/members with or
without voting rights
Note: In non-stock corporations where there are
NO members with voting rights, the vote of at least
the majority of the BOT will be sufficient
authorization for any sale or disposition of all
or substantially all of corporate assets.
(Sec. 40)
(i) Investment of funds in another business (Sec.
42)
Requires approval by a majority vote of the
BOD/BOT and approval by at least two-thirds
(2/3) of the outstanding capital stock/membership.
Includes all stockholders/members with or without
voting rights
(j) Dividend declaration (Sec. 43)
No stock dividend shall be issued without the
approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock.
(k) Power to enter into management contracts
(Sec. 44)
Please see discussion under By a Majority Vote
(l) Removal of directors or trustees (Sec. 28)
Any director or trustee may be removed from office
by a vote of the stockholders holding or
representing at least two thirds (2/3) of the
outstanding capital stock/membership.
(m) Ratifying contracts with respect to dealings
with directors/ trustees (Sec. 32)
26
A contract of the corporation with one or
more of its directors is voidable, at the option
of such corporation, unless all the following
conditions are present:
(1) The directors presence in the BOD meeting
in which the contract was approved was not
necessary to constitute a quorum
(2) The vote of such director was not
necessary for the approval of the contract
(3) The contract is fair and reasonable under
the circumstances
(4) In case of an officer, the contract has
been previously authorized by the BOD.
Where any of the first two conditions is
absent, but necessary that the contract be fair
and reasonable, in the case of a contract with
a director, such contract may be ratified by
the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock.
(n) Ratifying acts of disloyalty of a director (Sec.
34)
General rule: Where a director, by virtue of
his office, acquires for himself a business
opportunity which should belong to the
corporation, thereby obtaining profits, he must
account to the corporation for all such profits
by refunding it.
Exception: His act may be ratified by a vote
of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital
stock.
(o) Stockholders approval of the plan of merger
or consolidation (Sec. 77)
Requires approval by majority of each of the
BOD/BOT of the constituent corporations of
the plan of merger or consolidation and
approval by at least two-thirds (2/3) of the
outstanding capital stock/membership of each
corporation at separate corporate meetings duly
called.
Amendments to the plan of merger or
consolidation also requires approval by majority
vote of each of the BOD and two-thirds (2/3)
vote of the outstanding capital
stock/membership of each corporation voting
separately.
Includes all stockholders/members with or
without voting rights
(p) Distribution of assets in non-stock corporations
(Sec. 96)
The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution
which shall be approved by at least two-thirds
(2/3) of the members with voting rights.
(q) Incorporation of a religious society (Sec. 116)
Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations,
or discipline of the religious denomination, sect
or church of which it is a part, or by
competent authority, may, upon written consent
and/or by an affirmative vote at a meeting called
for the purpose of at least two-thirds (2/3) of its
membership, incorporate for the administration
of its temporalities or for the management of
its affairs, properties and estate.
(r) Voluntary dissolution of a corporation (Sec. 118-
119)
Requires a resolution adopted by a majority
vote of the BOD/BOT, and by a resolution
duly adopted by the affirmative vote of the
stockholders owning at least twothirds (2/3) of
the outstanding capital stock/membership of a
meeting to be held upon call for such purpose.
By cumulative voting
Election of Directors or Trustees (Sec. 24) - A
stockholder may vote such number of shares for
as many persons as there are directors to be
elected or he may cumulate said shares and give
one candidate as many votes as the number
of directors to be elected multiplied by the
number of his shares shall equal, or he may
distribute them on the same principle among as
many candidates as he shall see fit:
Provided, That the total number of votes cast by
him shall not exceed the number of shares owned
by him as shown in the books of the corporation
multiplied by the whole number of directors to be
elected.
PROPRIETARY RIGHTS
RIGHT TO DIVIDENDS
General rule: The right to dividends vests upon
lawful declaration by the BOD. From that time,
dividends become a debt owing to the SH. No
revocation can be made.
Exceptions:
(1) Dividends are revocable if NOT yet announced
or communicated to the stockholders.
(2) Stock dividends, even if already declared,
may be revoked prior to actual issuance since
these are not distributions but merely
representations of changes in the capital structure.
Note: Right to dividends vests upon declaration so
whoever owns the stock at such time also owns
the dividends.
27
Subsequent transfer of stock would not carry with
it right to dividends UNLESS agreed upon by the
parties.
RIGHT OF APPRAISAL
Right to withdraw from the corporation and
demand payment of the fair value of the shares
after dissenting from certain corporate acts
involving fundamental changes in corporate
structure (Sec. 81).
Instances of appraisal right
(1) Extension or reduction or corporate term (Sec.
81)
(2) Amendment to AOI - Change in the rights of
stockholders, authorize preferences superior to
those stockholders, or restrict the right of any
stockholder (Sec. 81)
(3) Investment of corporate funds in another
business or purpose (Sec. 42)
(4) Sale or disposal of all or substantially all assets
of the corporation (Sec. 81)
(5) Merger or consolidation (Sec. 81)
Requirements for exercise of appraisal right
(Secs. 82, 86)
(1) Stockholder must have voted against the
corporate act.
(2) Stockholder must make a written demand
on the corporation within 30 days after the vote
was taken for payment of the fair value of his shares
on the said date.
(3) Stockholder must submit the certificates to
the corporation for notation within ten (10) days
after demand for payment. Otherwise, right to
appraisal may be terminated at the option of
corporation.
Effect of demand (Sec. 83)
ALL rights accruing to such shares, including
voting and dividend rights, shall be suspended
EXCEPT the right of such stockholder to receive
payment of the fair value thereof
Immediate RESTORATION of voting and dividend
rights if the dissenting stockholder is not paid the
value of his shares within 30 days after the award.
Extinguishment of appraisal right (Sec. 84)
(1) Withdrawal of demand by the stockholder
WITH CONSENT of the corporation
(2) Abandonment of the proposed action
(3) Disapproval by SEC of the proposed action
RIGHT TO INSPECT
Basis of right
As the beneficial owners of the business, the
stockholders have the right to know the financial
condition and management of corporate affairs.
A stockholders right of inspection is based on his
ownership of the assets and property of the
corporation. Therefore, it is an incident of
ownership of the corporate property, whether this
ownership or interest is termed an equitable
ownership, a beneficial ownership, or quasi-
ownership. Such right is predicated upon the
necessity of self-protection. (Gokongwei Jr. v.
SEC, 1979)
Records/books to be kept (Sec. 74)
(1) Books that record all business transactions of
the corporation which shall include contract,
memoranda, journals, ledgers, etc;
(2) Minute book for meetings of the
stockholders/members;
(3) Minute book for meetings of the
board/trustees;
(4) Stock and transfer book
Stock transfer agent One engaged principally
in the business of registering transfers of stocks
in behalf of a stock corporation (licensed by the
SEC).
The corporate secretary is the one duly authorized
to make entries in the stock and transfer book.
It is the corporate secretary's duty and obligation to
register valid transfers of stocks and if said
corporate officer refuses to comply, the
transferor-stockholder may rightfully bring suit to
compel performance. (Torres et al. v. CA , 1997)
Financial statements (Sec. 75)
Within 10 days from written request, the
corporation shall furnish its most recent financial
statement (balance sheet and profit or loss
statement as of last taxable year)
At a regular meeting, the Board shall present
a financial report of the operations of the
corporation for the preceding year, which shall
include financial statements duly signed and
certified by an independent CPA.
Exception: If the paid-up capital is less than
P50,000 the financial statements may be
certified under oath by the treasurer or any
responsible officer of the corporation (instead of
an independent CPA).
Requirements for the exercise of the right of
inspection (Sec. 74)
(1) It must be exercised at reasonable hours
on business days and in the place where the
corporation keeps all its records (i.e., principal
office).
(2) The stockholder has not improperly used
any information he secured through any previous
examination.
28
(3) Demand is made in good faith or for a
legitimate purpose. If the corporation or its
officers contest such purpose or contend that
there is evil motive behind the inspection, the
burden of proof is with the corporation or such
officer to show the same.
Test to determine whether the purpose is
legitimate A legitimate purpose is one which is
germane to the interests of the stockholder as such
and not contrary to the interests of the corporation
(Gokongwei v. SEC, 1979)
Remedies when inspection is refused
(1) Mandamus
(2) Injunction
(3) Action for damages
(4) File an action under Sec. 144 to impose a penal
offense by fine and/or imprisonment
PRE-EMPTIVE RIGHT
Definition and distinguished from right of
first refusal
Pre-emptive right is an option privilege of an
existing stockholder to subscribe to a
proportionate part of shares subsequently issued
by the corporation before the same can be
disposed of in favor of others; this right
includes all issues and disposition of shares of any
class. It is a common law right and may be
exercised by stockholders even without legal
provision. On the other hand, a right of first
refusal arises only by virtue of contract
stipulations, by which the right is strictly
construed against the right of person to dispose
or deal with their property.
Stockholders of a corporation shall enjoy pre-
emptive right to subscribe to ALL ISSUES OR
DISPOSITIONS OF SHARES OF ANY CLASS, in
proportion to their respective shareholdings. The
purpose is to enable the shareholder to retain his
proportionate control in the corporation and to
retain his equity in the surplus.
Note: The broad phrase all issues or disposition of
shares of any class is construed to include not only
new shares issued in pursuance of an increase
in capital stock or from the unissued shares
which form part of the ACS, but also covers
treasury shares. Treasury shares would come
under the term disposition. Likewise considering
that it is not included among the exceptions
enumerated therein, where pre-emptive right shall
not extend, the intention is to include it in its
application. (SEC Opinion, 14 January 1993)
A pre-emptive right is a right claimed against
the corporation on unissued shares of its capital
stock, and likewise on treasury shares held by
the corporation; while
the right of first refusal is a right exercisable
against another stockholder on his shares of stock.
(Villanueva)
Basis of Preemptive Right: to preserve the
existing proportional rights of the stockholders
(Campos)
Limitations to exercise of pre-emptive right
(Sec. 39)
(1) Such pre-emptive right shall NOT extend to
shares to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
(2) It shall also NOT extend to shares to be issued
in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for
corporate purposes or in payment of a previously
contracted debt
(3) It shall not take effect if denied in the
AOI or an amendment thereto.
(4) If one shareholder does not want to exercise
his preemptive right, the other shareholders are
not entitled to purchase the corresponding shares
of the shareholder who declined. But if nobody
purchased the same and later on the board re-
issued the shares, the pre-emptive right applies.
(Sundiang and Aquino)
Remedies in case of unwarranted denial
(1) Injunction
(2) Mandamus
(3) The suit should be individual and not derivative
because the wrong done is to the stockholders
individually
(4) SEC can cancel shares if the third party is not
innocent
Waiver/ denial of preemptive right
(1) Allowed by the Code provided that it is made in
the AOI
(a) Waiver made through AOI would bind
present and subsequent SH
(b) 2/3 vote of the outstanding capital stock
is necessary before waiver is binding
(c) Result of Non-placement of waiver clause in
AOI: waiver shall not bind future stockholders
but only those who agreed to it
(2) The SH must be given reasonable time within
which to exercise their pre-emptive rights. Upon
expiration of such period, any SH who did not
exercise such will be deemed to have waived it
(3) May be necessary so as to not hinder
future financing plans of the corporation
(4) Because some new investors may be willing
only to invest ONLY if all the new shares will be
issued to them
(Campos)
29
RIGHT TO VOTE
(1) Non-voting shares are not entitled to vote
except as provided for in the last paragraph of Sec.
6.
(2) Preferred or redeemable shares may be
deprived of the right to vote
(3) Fractional shares of stock cannot be voted
(4) Treasury shares have no voting rights as
long as they remain in the treasury.
(5) No delinquent stock shall be voted (Sec. 71)
(6) A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
RIGHT OF FIRST REFUSAL
The right of first refusal provides that a
stockholder who may wish to sell or assign his
shares must first offer the shares to the
corporation or to the other existing stockholders
under terms and conditions which are
reasonable; and that only when the corporation or
the other stockholders do not or fail to exercise
their option, is the offering stockholder at liberty
to dispose of his shares to third parties.
An agreement entered into between the two
majority stockholders of a corporation whereby
they mutually agreed not to sell, transfer, or
otherwise dispose of any part of their shareholdings
till after one year from the date of the
agreement. (Lambert v. Fox, 1914)
The right of first refusal is primarily an attribute
of ownership, and consequently can be effected
only through a contractual commitment by the
owner of the shares; consequently, the waiver of
a right of first refusal when duly constituted can be
effected only by the registered owner (PCGG v.
SEC, unreported, 1988)
REMEDIAL RIGHTS
INDIVIDUAL SUIT
A suit brought by the shareholder in his own name
against the corporation when a wrong is directly
inflicted against him.
REPRESENTATIVE SUIT
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a wrong is committed against a
group of stockholders.
DERIVATIVE SUIT
It is a suit by a shareholder to enforce a corporate
cause of action. The corporation is a necessary
party to the suit, and the relief which is granted
is a judgment against a third person in favor of
the corporation (Chua v. CA, 2004)
It is a suit brought by one or more
stockholders/members in the name and on behalf
of the corporation to redress wrongs committed
against it, or protect/vindicate corporate rights
whenever the officials of the corporation refuse
to sue, or the ones to be sued, or has control
of the corporation. (Sundiang and Aquino)
Suits of stockholders based on wrongful or
fraudulent acts of directors or other persons.
Requisites of derivative actions
(1) That the person instituting the action be a
stockholder or member at the time the acts or
transactions subject of the action occurred and the
time the action was filed;
(2) That the stockholder or member exerted all
reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all
remedies available under the Articles of
Incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the
relief he desires.
(3) That there is no appraisal right available
for the act(s) complained of; and
(4) That the suit is not a nuisance or harassment
suit. (Rule 8, Interim Rules of Procedure for
Intra-Corporate Controversies)
Requisites of a derivative suit according to
jurisprudence
(1) the party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of, the number of his
shares not being material;
(2) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
board of directors for the appropriate relief but
the latter has failed or refused to heed his plea; and
(3) the cause of action actually devolves on the
corporation, the wrongdoing or harm having
been, or being caused to the corporation and not
to the particular stockholder bringing the suit.
(Lisam Enterprises, Inc., represented by Lolita
A. Soriano and Lolita A. Soriano v. Banco de
Oro Unibank, Inc., et al., 2012)
Note: The wrong contemplated in a derivative
suit is on in which the injury alleged be indirect
as far as the stockholders are concerned and
direct only insofar as the corporation is
concerned. (De Leon)
BUT the personal injury suffered by the stockholder
cannot disqualify him from filing a derivative suit
in behalf of the corporation. It mere gives rise
to an additional cause of action for damages
against the erring corporate officers. (Gochan v.
Young)
Requisites based on jurisprudence
30
(1) The cause of action actually devolves on the
corporation, the wrong or harm having been, or
being caused to it and not the shareholder filing
the suit. (Evangelista vs. Santos, 1950; SMC v.
Kahn, 1989).
(2) The reliefs sought pertain to the
corporation. (Symaco Trading Corp. v. Santos,
2005).
Recent rulings on the matter
(1) Status of heirs as co-owners of shares before
partition of estate does not make them
shareholders until there is compliance with Sec.
63 on the manner of transferring shares, thus the
heirs are not automatically registered
shareholders of the corporation. (Reyes v. RTC of
Makati, 2008)
(2) Stockholder may commence a derivative suit
for mismanagement, waste or dissipation of
corporate assets because of a special injury to him
for which he is otherwise without redress. In effect,
the suit is an action for specific performance of
an obligation owed by thecorporation to the
stockholders to assist its right of action when
the corporation is put on default by the wrongful
refusal of the directors or management to make
suitable measures for its protection. (Yu v.
Yukayguan, June 18, 2009)
The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the
BOD that exercises its corporate powers and not in
the president or officer thereof.
But where corporate directors are guilty of a breach
of trust, not of mere error of judgment or abuse
of discretion, and intra-corporate remedy is futile
or useless, a SH may institute a derivative suit
in behalf of himself and other stockholders and
for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders.
(Bitong v. CA, 1998)
Jurisdiction over derivative suits lies with the RTC
(Sec. 5.2, Securities Regulation Code)
OBLIGATIONS OF A STOCKHOLDER
LIABILITY TO THE CORPORATION FOR
UNPAID SUBSCRIPTION (SEC. 67)
A subscription contract is unconditional (i.e.,
obligation to pay is not be subject to any
contingency) and indivisible (as to the amount and
transferability FuaCun v. Summers, 1923).
Hence, if the subscriber paid 20% of his
subscription, he is not entitled to the issuance
of certificates corresponding to 20% of the shares.
Unpaid claim refers to any unpaid subscription
and not to any indebtedness which a subscriber
may owe the corporation rising from any other
transaction (China Banking Corp. v. CA, 1997)
LIABILITY TO THE CORPORATION FOR
INTEREST ON UNPAIDSUBSCRIPTION IF SO
REQUIRED BY THE BY-LAWS (SEC. 66)
General rule: Subscribers for stock are NOT
liable to pay interest on his unpaid subscription
Exception: If so required in the by-laws at the
rate fixed in the by-laws. If no rate is fixed in the
by-laws, such rate shall be deemed to be the legal
rate (Sec. 66)
Notes:
(1) Transfer for consideration of treasury shares is
a sale (or disposition) by the corporation (not
subscription). A transfer of previously issued
shares by a stockholder to a third person is a sale
(or disposition). Transfer of unissued shares is
subscription.
(2) Shareholders are not creditors of the
corporation with respect to their shareholdings
thereto and the principle of compensation or set-off
has no application.
(3) Subscription contract is NOT required to be in
writing.
LIABILITY FOR WATERED STOCKS (SEC. 65)
Definition
These are shares issued as fully paid when in
truth no consideration is paid, or the consideration
received is known to be less than the par value or
issued value of the shares.
(Sec. 65)
These include the following:
(1) Issued without consideration (bonus share)
(2) Issued as fully paid when the corporation
has received less sum of money than its par
or issued value (discounted share)
(3) Issued for consideration other than actual
cash (i.e., property or services), the fair
valuation of which is less than its par or issued
value
(4) Issue stock dividend when there are no
sufficient retained earnings or surplus to justify it.
Note: Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks. Subsequent
increase in the value of the property used in
paying the stock does not cure the defect in
issuance. The existence of watered stocks is
determined at the time of issuance of the stock.
Liability of directors or officers
Any director or officer of a corporation consenting
to the issuance of stocks or who, having knowledge
thereof, does not forthwith express his objection
31
in writing and file the same with the corporate
secretary shall be SOLIDARILY liable with the
stockholder concerned to the corporation and its
creditors for the difference in value (Sec. 65).
LIABILITY FOR DIVIDENDS UNLAWFULLY
PAID
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must
account for the profits which otherwise would
have accrued to the corporation (Sec. 31).
Violations of any of the provisions of the
Corporation Code not otherwise specifically
penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos
but not more than ten thousand (P10,000.00)
pesos or by imprisonment for not less than
thirty (30) days but not more than five (5) years, or
both, in the discretion of the court (Sec. 144).
LIABILITY FOR ASSUMING TO ACT AS A
CORPORATION KNOWING IT TO BE
WITHOUT AUTHORITY
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.
When any such ostensible corporation is sued
on any transaction entered or on any tort
committed by it as a corporation, it shall not
be allowed to use as a defense its lack of
corporate personality.
On who assumes an obligation to an ostensible
corporation cannot resist performance thereof on
the ground that there was in fact no corporation
(Sec. 21).
Mergers and Consolidations
DEFINITION AND CONCEPT
Merger a corporation absorbs the other and
remains in existence while the others are dissolved.
(Sec.76)
One of the constituent corporations remains as an
existing juridical person, whereas the other
corporation shall cease to exist. Merger is the
disappearance of one of the corporations
[generally by amending the articles of
incorporation and shortening its term of existence
(Sec.40)] with the other corporation acquiring all
the assets, rights of action, and assuming all the
liabilities of the disappearing corporation.
Consolidation a new corporation is created,
and consolidating corporations are extinguished
(Sec.76)
If there is consolidation, there will be disappearance
of both the constituent corporations with the
emergence of a new corporate entity which shall
obtain all the assets of the disappearing
corporations, and likewise shall assume all their
liabilities.
CONSTITUENT VS. CONSOLIDATED
CORPORATION
Constituent corporations the parties to
merger or consolidation
Consolidated corporation the new single
corporation created through consolidation.
Surviving corporation one of the constituent
corporations which remain in existence after the
merger
PLAN OF MERGER OR CONSOLIDATION (Sec.
76)
Each of the constituent corporations must draw up
a Plan of Merger or Consolidation which shall set
forth:
(1) Names of the corporation involved;
(2) Terms and mode of carrying it;
(3) Statement of changes, if any, in the present
articles of the surviving corporation to be formed
in the case of merger; and with respect to the
consolidated corporation in case of consolidation
ARTICLES OF MERGER OR CONSOLIDATION
Each of the constituent corporation shall execute
Articles of Merger or Consolidation signed by the
president/vicepresident, and certified by the
secretary/assistant secretary setting forth:
(1) Plan of merger or consolidation;
(2) For stock corporation, the number of shares
outstanding; for non-stock, the number of
members;
(3) As to each corporation, number of shares
or members voting for and against such plan
respectively.
The Articles of Merger or Consolidation:
(1) take the place of the Articles of Incorporation
of the consolidated corporation; or
(2) amend the Articles of Incorporation of the
surviving corporation.
PROCEDURE
(1) The board of each corporation shall draw
up a plan of merger or consolidation.
(2) The plan of merger or consolidation shall be
approved by majority vote of each of the board
of the concerned corporations at separate
meetings, and a vote of 2/3 of the members or of
stockholders representing 2/3 of the outstanding
capital stock. Holders of non-voting shares or
non-voting members are entitled to vote on the
plan (Sec. 6, par. 6(6))
Any amendment to the plan must be approved
by the majority vote of the board members or
trustees of the constituent corporations and
affirmative vote of 2/3 of the outstanding capital
stock or members.
(3) Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
(4) Submission of Four (4) copies of the Articles
of Merger or Articles of Consolidation to the
a SEC for approval.
Mergers and consolidations of corporations
governed by special laws requires a
recommendation from the appropriate
government agency (Sec. 79 (1))
(5) If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least two (2)
weeks before.
(6) Issuance of certificate of merger or
consolidation.
Procedure under Sec. 77:
(1) Approval by majority vote of each of the
board of directors or trustees of the constituent
corporations of the plan of merger or consolidation.
(2) Approval by the stockholders or members of
each of such corporations. The affirmative vote of
stockholders representing at least two-thirds (2/3)
of the outstanding capital stock of each
corporation in the case of stock corporations or
at least two-thirds (2/3) of the members in the case
of non-stock corporations shall be necessary for the
approval of such plan
(3) Notice of such meetings shall be given to
all stockholders or members of the respective
corporations, at least two (2) weeks prior to the
date of the meeting, either personally or by
registered mail. Said notice shall state the purpose
of the meeting and shall include a copy or a
summary of the plan of merger or consolidation.
(4) Any dissenting stockholder in stock
corporations may exercise his appraisal right in
accordance with the Code.
Provided, that if after the approval by the
stockholdersof such plan, the board of directors
decides to abandon the plan, the appraisal right
shall be extinguished.
(5) Amendment to the plan of merger or
consolidation may be made by approved of the
majority vote of the respective boards of
directors or trustees of all the constituent
corporations and ratified by the affirmative vote
of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of two-
thirds (2/3) of the members of each of the
constituent corporations. Such plan, together with
32
any amendment, shall be considered as the One where no part of its income is distributable
agreement of merger or consolidation. as dividends to its members, trustees, or officers,
subject to the provisions of this Code on dissolution.
EFFECTIVITY (Sec.87)
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation shall PURPOSES
become effective (Sec. 79). (1) Charitable
Merger or consolidation does not become effective (2) Religious
by mere agreement of the constituent corporations. (3) Educational
The approval of the SEC is required. (PNB v. (4) Professional
Andrada Electric & Engr. Co., Inc., 2002) (5) Cultural
NothwithstandingSection79, parties may stipulate a (6) Fraternal
specific effective date of merger (or (7) Literary
consolidation) where no third party will be (8) Scientific
prejudiced (SEC Opinion No. 09-13, July 1, (9) Social
2009). (10) Civic services
(11) Similar purposes, such as chambers or
LIMITATIONSIn the case of merger or combinations trade, industry or agriculture
consolidation of banks or banking institutions,
building and loan associations, trust companies, TREATMENT OF PROFITS
insurance companies, public utilities, educational Any profit which a non-stock corporation may
institutions and other special corporations obtain as an incident to its operations shall,
governed by special laws, the favorable whenever necessary or proper, be used for the
recommendation of the appropriate government furtherance of the purpose or purposes for
agency shall first be obtained (Sec. 79) which the corporation was organized. (Sec.
87,2nd sentence)
EFFECTS (Sec. 80)
(1) The constituent corporations shall become a DISTRIBUTION OF ASSETS UPON
single corporation. DISSOLUTION
(2) The separate existence of the constituents
shall cease, except that of the surviving or the Order of distribution
consolidated corporation. The absorbed or (1) All its creditors shall be paid.
constituent corporations are ipso facto dissolved (2) Assets held subject to return on dissolution
by operation of law (SEC Opinion, July 16, shall be delivered back to the givers.
1981); there is no liquidation of the assets of (3) Assets held for charitable, religious
the dissolved corporations (Campos). purposes, etc., without a condition for their return
(3) The surviving or the consolidated corporation on dissolution, shall be conveyed to one or more
shall possess all the rights, privileges, immunities organizations engaged in similar activities as
and powers and shall be subject to all the duties dissolved corporation
and liabilities of a corporation. (4) All other assets shall be distributed to
(4) The surviving or the consolidated corporation members, as provided in the AOI or by-laws (Sec.
shall possess all rights, privileges, immunities and 94)
franchises of each constituent corporation and the
properties shall be deemed transferred to and Procedure for the plan for distribution
vested in the surviving or consolidated corporation (1) Board of Trustees, by majority vote in a
without further act or deed. resolution, shall adopt a plan for distribution of
(5) All liabilities of the constituents shall pertain the assets of the corporation
to the surviving or the consolidated corporation (2) Written notice for a meeting must be sent
[assumption of liability is automatic (De Leon; to all members entitled to vote, stating the time
Campos)]. and place of such meeting and the purpose thereof
(6) Any claim, action or proceeding pending by (3) At such meeting, the plan must be approved
or against any of the constituent corporations by 2/3 votes of the members having the right to
may be prosecuted by or against the surviving or vote, who are present or represented by proxy
consolidated corporation; and (Villanueva)
(7) The rights of the creditors or lien upon the
property of any of each constituent corporation RELIGIOUS CORPORATIONS CORPORATION
shall not be impaired by such merger or SOLE (SEC. 110)
consolidation. A special form of corporation, usually associated
with clergy and consists of one person only and his
NON-STOCK CORPORATIONS successors, who are incorporated by law to give
DEFINITION some legal capacities and advantages.
33
A registered corporation sole can acquire land
if its members constitute at least 60% Filipinos
(SEC Opinion, 8 August 1994).
NATIONALITY
A corporation sole does not have any nationality
but for purposes of applying our nationalizations
laws, nationality is determined by the nationality
of the members (Roman Catholic Apostolic
Church v. Land Registration Commission, 1957).
RELIGIOUS SOCIETIES
Non-stock corporation formed by a religious society,
group, diocese, synod, or district of any religious
denomination, sect, or church after getting the
approval of 2/3 of its members.
FOREIGN CORPORATIONS
Foreign corporations are those formed,
organized, or existing under any laws 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).
BASES OF AUTHORITY OVER FOREIGN
CORPORATIONS
Consent
As a rule, a foreign corporation can have no legal
existence or status beyond the bounds of the State
or sovereignty by which it is created or incorporated
and organized. It exists only in contemplation of
law and by force of the law and where that law
ceases to operate, the corporation can have no
existence. This principle, however, does not
prevent a corporation from acting in another State
or country with the latters express or implied
consent. This is the consent doctrine which is
provided in Sections 125 and 126. But every
power which a corporation exercises as such in
another State depends for its validity upon the laws
of the sovereignty in which it is exercised. A
corporation can exercise none of the functions and
privileges conferred by its charter in another State
or country except by the comity and consent of such
State or country. (De Leon)
Doctrine of Doing Business (relate to
definition under the Foreign Investments
Act, R.A. No. 7042)
Tests of Doing Business in the Philippines
(Asked in 98 and 02)
(1) Twin Characterization Test
(a) Under the Continuity Test, doing business
implies a continuity of commercial dealings and
arrangements, or performance of acts normally
incidental to the purpose and object of the
organization.
(b) Under the Substance Test, a foreign
corporation is doing business in the country if it
34
is continuing the body or substance of the
enterprise of business for which it was organized
(Mentholatum v. Mangaliman, 1941)
(2) Contract test A foreign corporation is doing
business in the Philippines if the contracts entered
into by the foreign corporation or by an agent
acting under the control and direction of the
foreign corporation are consummated in the
Philippines (Pacific Vegetable Oil v. Singson, 1955).
Doing Business Under the Foreign
investment Act of 1991 (Sec. 3(d), RA 7042)
(Asked in 98 and 02)
Doing Business
(1) Soliciting orders, service contracts, or opening
offices;
(2) Appointing representatives, distributors
domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more;
(3) Participating in the management, supervision,
or control of any domestic business, firm, entity, or
corporation in the Philippines;
(4) Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of
acts or works or the exercise of some functions,
normally incident to and in progressive
prosecution of the purpose and object of its
organization.
Not Doing Business
(1) Mere investment as shareholder and exercise
of rights as investor;
(2) Having a nominee director or officer to
represent its interest in the corporation;
(3) Appointing a representative or distributor
which transacts business in its own name and
for its own account.
Jurisprudential Rules on Not Doing Business
in the Philippines
(1) Products manufactured off-shore and
returned back to foreign corporation (Agilent
Tech. Singapore Ltd. v. Integrated Silicon Tech.
Phils. Corp., 2004)
(2) Single isolated transaction (Marshall-Wells Co.
v. Henry Eiser& Co, 1924). Multiple transactions
are still considered a single transaction where
there are constantly failed attempts in complying
with the contract by one of the contracting
parties (Antam Consolidated v. CA, 1986).
(3) Trademark protection; foreign corporations
not doing business are merely protecting their
property rights (General Garments v. Director of
Patents, 1971).
(4) A foreign firm which does business through
middlemen acting on their own names shall not
be deemed doing business in the Philippines.(Le
Chemise Lacoste v. Fernandez, 1984).
NECESSITY OF A LICENSE TO DO BUSINESS
Requisites for issuance of a license
(1) The foreign corporation should file a copy of its
articles of incorporation and by-laws, and a verified
application (See Sec. 125) accompanied by the
following:
(a) Name and address of its designated resident
agent who will receive summons and notices for the
corporation; a special power of attorney should also
be submitted for such purpose
(b) An agreement that if it ceases to transact
business or if there is no more resident agent,
summons shall then be served through the SEC
(c) Oath of Reciprocity stating that the foreign
corporations country allows Filipino citizens and
corporations to do business in said country
(2) Within 60 days from issuance of license, the
corporation should deposit at least P100,000 (cash,
property, bond) for the benefit of creditors subject
to further deposit every six months (See Sec. 126).
Resident agent
Resident agent is an individual, who must be of
good moral character and of sound financial
standing, residing in the Philippines, or a
domestic corporation lawfully transacting business
in the Philippines, designated in a written power of
attorney by a foreign corporation authorized to do
business in the Philippines, on whom any summons
and other legal processes may be served in all
actions or other legal proceedings against the
foreign corporation (Sec. 127-128).
PERSONALITY TO SUE
A foreign corporation transacting business in the
Philippines is required to secure a license to
have the personality to sue before, or intervene
in, any court or administrative proceeding.
(Campos; Sec. 133)
The principles regarding the right of a foreign
corporation to bring suit in Philippine courts may
thus be condensed in four statements:
(1) if a foreign corporation does business in the
Philippines without a license, it cannot sue
before the Philippine courts (Sec. 133, Corporation
Code);
(2) if a foreign corporation is not doing business
in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a
cause of action entirely independent of any
business transaction (Eastboard Navigation, Ltd.
v. Juan Ysmael & Company, Inc., 102 Phil. 1,
1957);
(3) if a foreign corporation does business in the
Philippines courts on any transaction. (Agilent
Technologies Singapore v. Integrated Silicon
Technologies, 2004)
35
SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation whether or not doing
business in the Philippines may be sued for acts
done against persons in the Philippines.
Indeed if a foreign corporation, not engaged in
business in the Philippines, is not barred from
seeking redress from courts in the Philippines,
a fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts
for acts done against a person or persons in
the Philippines. (Facilities Management Corporation
v. De La Osa, 1979)
INSTANCES WHEN UNLICENSED FOREIGN
CORPORATIONSMAY BE ALLOWED TO SUE
ISOLATED TRANSACTIONS
(1) Isolated transactions, i.e. not doing
business in the Philippines, (Sec. 133, Corporation
Code);
(2) Action to protect good name, goodwill, and
reputation of a foreign corporation;
(3) The subject contracts provide that Philippine
courts will be the venue to controversies;
(4) A license subsequently granted enables the
foreign corporation to sue on contracts executed
before the grant of the license;
(5) Recovery of misdelivered property;
(6) Where the unlicensed foreign corporation
has a domestic corporation.
(7) When the Philippine citizen or entity is
estopped from challenging the foreign corporations
personality to sue (Merrill Lynch Futures v. Court of
Appeals, G.R. No. 97816, 24 July 1992, 211 SCRA
824) without a license, a Philippine citizen or entity
which has contracted with said corporation may be
estopped from challenging the foreign
corporations corporate personality in a suit
brought before Philippine courts (Merrill Lynch
Futures v. Court of Appeals, G.R. No. 97816,
24 July 1992, 211 SCRA 824); and
(4) if a foreign corporation does business in the
Philippines with the required license, it can sue
before Philippine
Status Consequence
Doing Business in the May be sued an can be
PH, WITH a license sued
Doing Business in the Cannot sue, but may
PH, WITHOUT a be sued in the PH
license
NOT doing business May sue;may be sued
in the PH, on isolated (Facilities Management
transactions v. Dela Osa 89
SCRA 131)
GROUNDS FOR REVOCATION OF LICENSE
Under the Corporation Code
(1) Failure to file its annual report or pay any
fees as required by this Code;
(2) Failure to appoint and maintain a resident agent
in the Philippines as required by this Title;
(3) Failure, after change of its resident agent
or of his address, to submit to the Securities
and Exchange Commission a statement of such
change as required by this Title;
(4) Failure to submit to the Securities and
Exchange Commission an authenticated copy of
any amendment to its articles of incorporation
or by laws or of any articles of merger or
consolidation within the time prescribed by this
Title;
(5) A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted by such corporation pursuant
to this Title;
(6) Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
or political subdivisions;
(7) Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its license;
(8) Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or
entity not duly licensed to do business in the
Philippines; or
(9) Any other ground as would render it unfit
to transact business in the Philippines (Sec. 134)
Under special laws
Insurance Code
The Insurance Commissioner is authorized to
suspend or revoke all certificates of authority
granted to an insurance company, whether
domestic or foreign, when:
(1) it is in unsound condition; or
(2) it has failed to comply with the provisions
of law or regulations obligatory upon it; or
(3) its condition or method of business is such as
to render its proceedings hazardous to the public
or to its policyholders; or
(4) its paid-up capital stock, in the case of a
foreign company, is impaired or deficient, or that
the margin of solvency required of such company is
deficient (Sec. 247, Insurance Code)
General Banking Act
The Monetary Board may revoke the license to
transact business in the Philippines of any
foreign bank, if it finds that:
(1) the foreign bank is insolvent; or
(2) in imminent danger thereof; or
(3) its continuance in business will involve probable
loss to those transacting business with it.
Other Corporations
CLOSE CORPORATIONS
A close corporation is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of
36
record by not more than a specified number of
persons, not exceeding twenty (20);
(2) All the issued stock of all classes shall be subject
to one or more specified restrictions on transfer
permitted by this Title; and
(3) The corporation shall not list in any stock
exchange or make any public offering of any of its
stock of any class (Sec. 96).
Notes: A corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or
controlled by another corporation which is not
a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a close
corporation, except mining or oil companies,
stock exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with public
interest.
The AOI must state that the number of
stockholders shall not exceed 20.
The AOI must contain restriction on the transfer
of issued stocks (which must appear in the AOI,
by-laws and certificate of stock)
General rule: Free transferability of shares -
Shares of stock so issued are personal property and
may be transferred
Exception: In close corporations: Considering
the special circumstances attending a close
corporation (e.g. formed by persons who know
each other well, thus they would want to choose
the persons who will be allowed in their group), it
is justifiable and even imperative for its
stockholders to protect themselves from future
conflicts by placing restrictions on the right of each
one of them to transfer his shares to an outsider.
Restriction on the transfer must NOT be more
onerous than granting the existing SH or
corporation the option to purchase the shares
(Right of First Refusal).
The stocks cannot be listed in the stock
exchange nor be publicly offered.
CHARACTERISTICS OF A CLOSE
CORPORATION
The stockholders themselves can directly
manage the corporation and perform the
functions of directors without need of election
(Sec. 97):
(1) When they manage, stockholders are liable as
directors;
(2) There is no need to call a meeting to elect
directors;
(3) The stockholders are liable for tort.
VALIDITY OF RESTRICTIONS ON TRANSFER
OF SHARES
Validity of Restrictions (Sec. 98)
Restrictions must appear in the articles of
incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not
be binding on any purchaser thereof in good faith.
Restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated
therein.
After expiration of said period and upon failure
of the existing stockholders or the corporation
to purchase said shares, the transferring
stockholder may sell his shares to any third
person.
Presumptions (Sec. 99)
(1) If the stock certificate CONSPICUOUSLY
shows the restriction, the purchaser or
transferee is CONCLUSIVELY presumed to have
notice of the restriction, provided this appears in
the AOI.
(2) Where a conclusive presumption of notice
arises, the corporation may, at its option, refuse
to register the transfer, unless
(a) all the stockholders have consented to the
transfer, or
(b) the AOI has been properly amended to
remove the restriction.
(3) If it appears in the certificate, but NOT
CONSPICUOUSLY, then although he may be
presumed to have notice of the restriction, he
can prove the contrary.
ISSUANCE OR TRANSFER OF STOCK
IN BREACH OF QUALIFYING CONDITIONS
If stock of a close corporation is issued or
transferred to any person who is not entitled under
any provision of the articles of incorporation to be
a holder of record of its stock, and if the certificate
for such stock conspicuously shows the
qualifications of the persons entitled to be holders
of record thereof, such person is conclusively
presumed to have notice of the fact of his
ineligibility to be a stockholder.
If the articles of incorporation of a close corporation
states the number of persons, not exceeding twenty
(20), who are entitled to be holders of record of
its stock, and if the certificate for such stock
conspicuously states such number, and if the
issuance or transfer of stock to any person would
cause the stock to be held by more than such
number of persons, the person to whom such
stock is issued or transferred is conclusively
presumed to have notice of this fact.
37
If a stock certificate of any close corporation
conspicuously shows a restriction on transfer of
stock of the corporation, the transferee of the
stock is conclusively presumed to have notice of
the fact that he has acquired stock in violation of
the restriction, if such acquisition violates the
restriction.
Whenever any person to whom stock of a close
corporation has been issued or transferred has,
or is conclusively presumed under this section
to have, notice either
(a) that he is a person not eligible to be a
holder of stock of the corporation, or
(b) that transfer of stock to him would cause the
stock of the corporation to be held by more
than the number of persons permitted by its
articles of incorporation to hold stock of the
corporation, or
(c) that the transfer of stock is in violation of a
restriction on transfer of stock, the corporation
may, at its option, refuse to register the transfer of
stock in the name of the transferee.
The provisions of subsection (4) shall not
applicable if the transfer of stock, though
contrary to subsections (1), (2) of (3), has
been consented to by all the stockholders of
the close corporation, or if the close corporation
has amended its articles of incorporation in
accordance with this Title.
The term "transfer", as used in this section, is not
limited to a transfer for value.
The provisions of this section shall not impair
any right which the transferee may have to rescind
the transfer or to recover under any applicable
warranty, express or implied (Sec. 99)
WHEN BOARD MEETING IS UNNECESSARY
OR IMPROPERLY HELD
When unnecessary
Any action by the directors of a close corporation
without a meeting shall nevertheless be deemed
valid if:
(1) Before or after such action is taken, written
consent thereto is signed by all the directors; or
(2) All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
(3) The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders; or
(4) All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing
(Sec. 101)
When improperly held
When a directors meeting is held without
proper call or notice, an action taken therein within
the corporate powers is deemed ratified by a
director who failed to attend.UNLESS he promptly
files his written objection with the secretary of
the corporation after having knowledge thereof
(Sec. 101)
PRE-EMPTIVE RIGHT
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether
for money, property or personal services, or in
payment of corporate debts, UNLESS the articles
of incorporation provide otherwise (Sec. 102).
AMENDMENT OF ARTICLES OF
INCORPORATION
Amendment to the AOI which seeks to:
(1) delete or remove any provision required to be
contained in the AOI of Close Corporations
(under the Title on Close Corporations); or
(2) reduce a quorum or voting requirement
stated in said AOI Requires the affirmative vote
of at least 2/3 of the outstanding capital stock,
whether with or without voting rights, or of
such greater proportion of shares as may be
specifically provided in the AOI at a meeting duly
called.
DEADLOCKS
Requisites
(1) The directors or stockholders are so divided
respecting the management of the corporation's
business and affairs
(2) The votes required for any corporate action
cannot be obtained that the business and affairs of
the corporation can no longer be conducted to the
advantage of the stockholders generally
Powers of the SEC in case of deadlock in close
corporations
(1) Cancel or alter any provision in the articles
of incorporation or by-laws
(2) Cancel, alter or enjoin any resolution of the
corporation
(3) Direct or prohibit any act of the corporation
(4) Require the purchase at their fair value of
shares of any stockholder either by
stockholder or by the corporation regardless of
the availability of unrestricted retained earnings.
(5) Appoint a provisional director
(6) Dissolve the corporation
Granting such other relief as the circumstances
may warrant.
Dissolution and Liquidation
Dissolution of a corporation is the
extinguishment of its franchise and the
termination of its corporate existence or business
purpose.
MODES OF DISSOLUTION
According to some decisions, the method of
effecting dissolution as prescribed by law are
exclusive, and a corporation cannot be dissolved
except in the manner prescribed by law (De Leon)
VOLUNTARY
Note: If no dissolution papers are filed with
the SEC by a corporation claiming dissolution
voluntarily, such corporation is still deemed legally
existing, notwithstanding the fact that it has ceased
to operate (De Leon)
Where no creditors are affected (Sec. 118)
Notice of the meeting should be given to the
stockholders or members by personal delivery or
registered mail at least 30 days prior to the
meeting.
The notice of meeting should also be published
for 3 consecutive weeks in a newspaper
published in the place where the principal office
of said corporation is located. If no newspaper
is published in such place, then in a newspaper
of general circulation in the Philippines.
The resolution to dissolve must be approved by the
majority of the directors/trustees and approved by
the stockholders representing at least 2/3s of the
OCS or 2/3 of members.
Non-voting shares are entitled to vote in this matter
(Sec. 6. Par 6(8))
A copy of the resolution shall be certified by the
majority of the directors or trustees and
countersigned by the secretary.
The signed and countersigned copy will be filed
any with the SEC and the latter will issue the certificate
of dissolution.
Note: Thus, except for the expiration of its
term, no dissolution can be effective without
some act of the State (Daguhoy Enterprises v.
Ponce, 1954)
Where creditors are affected
A petition shall be signed by a majority of its
board of directors or trustees or other officers
having management of its affairs.
38
The petition must be verified by its president, or
secretary or one of its director or trustees.
Approval of the stockholders representing at
least 2/3 of the OCS or 2/3 of members in a
meeting called for that purpose.
Filing of a petition with the SEC signed by
majority of directors or trustees or other officers
having the management of its affairs verified by
the President or Secretary or Director. Claims and
demands must be stated in the petition.
If the petition is sufficient in form and
substance, the SEC shall issue an order fixing a
hearing date for objections.
A copy of the order shall be published at least once
a week for 3 consecutive weeks in a newspaper
of general circulation, or if there is no
newspaper in the city or municipality of the
principal office, posting for 3 consecutive weeks in
3 public places is sufficient.
Objections must be filed no less than 30 days
nor more than 60 days after the entry of the Order.
After the expiration of the time to file objections, a
hearing shall be conducted upon prior 5 day
notice to hear the objections.
Judgment shall be rendered dissolving the
corporation and directing the disposition of assets.
The judgment may include appointment of a
receiver.
As long as 2/3 vote is obtained, no member/
stockholder can prevent such dissolution unless
the majority stockholders acted in bad faith. The
latter may be held liable for damages. (Campos)
By shortening of corporate term
A voluntary dissolution may be effected by
amending the AOI. Upon approval of the amended
AOI or the expiration of the shortened term, as
the case may be, the corporation shall be
deemed dissolved without any further proceedings.
A publication of notice of dissolution is required
and cannot be dispensed with by alleging that
it was not required in Section 120 and that no
creditors will be prejudiced by its dissolution
(SEC Opinion, August 30, 1988)
SEC Opinion No. 06-20, March 13, 2006:
(1) If the shortened term expires before the
SEC approvalthe corporation will be dissolved upon
the SEC approval
39
(2) If the shortened term expires after the SEC
approval -the corporation will be dissolved upon
the expiration of the shortened term
According to Campos:
(1) If SEC fails to act within 6 months from
filing of the amended AOI and shortened term
expires after the 6-month period - the
corporation will be dissolved upon the expiration
of the shortened term.
(2) If SEC fails to act within 6 months from
filing of the amended AOI and shortened term
expires before the 6-month period- the
corporation will be dissolved at the end of the
6-month period.
INVOLUNTARY
By expiration of corporate term
Once the period expires, the corporation is
automatically dissolved without any other
proceeding and it cannot thereafter be considered
a de facto corporation.
Failure to organize and commence business within
2 years from incorporation
Failure to formally organize and commence the
transaction of its business or construction of its
works within two years its corporate powers
shall cease and the corporation shall be deemed
dissolved (Sec. 22).
According to Campos, dissolution in this case is
automatic. However, a contrary view states:
Since there is a defense available to the
corporation, that is, if its failure to organize and
commence its business is due to causes beyond
the control of the corporation as may be
determined by the SEC, therefore, the dissolution
is not automatic.
Transacting business implies a continuity of acts or
dealings in the accomplishment of the purpose
for which the corporation was formed
(Mentholatum v. Mangaliman, 1946)
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will administer
the affairs of the corporation and exercise its
powers.
By-laws should be adopted within one month of
receipt of official notice of the issuance of the
certificate of incorporation, otherwise the
certificate may be suspended or revoked (PD 902-
A, Sec. 6 (i)(5))
Failure to operate for at least 5 consecutive
years after commencement of business - ground
for suspension or revocation of its corporate
franchise or certificate of incorporation.
Note: Dissolution in this case is not automatic.
(Campos)
The corporation may show that the failure to
commence its business or to continuously operate
is due to causes beyond its control (Sec. 22).
Legislative dissolution
The inherent power of Congress to make laws
carries with it the power to amend or repeal them.
Involuntary corporate dissolution may be effected
through the amendment or repeal of the Code.
(implied from Section 145, De Leon)
The limitations on the power to dissolve
corporations by legislative enactment are as
follows:
(1) Under the Constitution, the amendment,
alteration, or repeal of the corporate franchise of a
public utility shall be made only when the common
good so requires;
(2) Under Section 145 of the Code, it is
provided that: No right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers, nor any
liability incurred by any such corporation,
stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the
subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this
Code or of any part thereof;
(3) While Congress may provide for the
dissolution of a corporation, it cannot impair the
obligation of existing contracts between the
corporation and third persons, or take away the
vested rights of its creditors. (De Leon)
Dissolution by the SEC on grounds under
existing laws
A corporation may be dissolved by the SEC, upon a
verified complaint and after proper notice and
hearing, on the following grounds (Sec. 6, par. i,
PD 902-A):
(1) Fraud in procuring its certificate of registration
(2) Serious misrepresentation as to what the
corporation can or is doing to the great
prejudice of or damage to the general public
(3) Refusal to comply or defiance of any lawful
order of the Commission restraining commission
40
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 the Commission within
the prescribed period
(7) Other grounds
(a) Violation by the corporation of any provision
of the Corporation Code (Sec. 144 BP 68)
(b) In case of a deadlock in a close corporation,
and the SEC deems it proper to order the
dissolution of the corporation as the only practical
solution to the dispute (Sec. 104 BP 68)
METHODS OF LIQUIDATION
Liquidation is the process by which all the
assets of the corporation are converted into
liquid assets (cash) in order to facilitate the
payment of obligations to creditors, and the
remaining balance if any is to be distributed to
the stockholders. It is a proceeding in rem.
BY THE CORPORATION ITSELF
Under Section 122 of the Corporation Code, a
corporation whose corporate existence is
terminated in any manner continues to be a body
corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and
against it and to enable it to settle and close
its affairs, culminating in the disposition and
distribution of its remaining assets. It may, during
the three-year term, appoint a trustee or a
receiver who may act beyond that period.
The termination of the life of a corporate entity does
not by itself cause the extinction or diminution
of the rights and liabilities of such entity. If the
three-year extended life has expired without a
trustee or receiver having been expressly
designated by the corporation, within that period,
the board of directors (or trustees) itself, may
be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation.
(Pepsi-Cola Products Philippines, Inc. v. Court of
Appeals, G.R. No. 145855, November 24, 2004)
CONVEYANCE TO A TRUSTEE WITHIN A 3-
YEAR PERIOD
From and after any such conveyance by the
corporation of its property in trust for the
benefit of its SH/members/creditors and others
in interest, all interest which the corporation had
in the property terminates, the legal interest
vests in the trustees, and the beneficial interest
in the stockholders, members, creditors or other
persons in interest.
The trustee (of a dissolved corporation) may
commence a suit which can proceed to final
judgment even beyond the three-year period (of
liquidation) . . . , no reason can beconceived
why a suit already commenced by the corporation
itself during its existence, not by a mere trustee
who, by fiction, merely continues the legal
personality of the dissolved corporation, should
not be accorded similar treatment to proceed
to final judgment and execution thereof.
(Reburiano v. Court of Appeals, G.R. No.
102965, January 21, 1999)
Unless the trusteeship is limited in its duration by
the deed of trust, there is no time limit within
which the trustee must finish liquidation. (Board
of Liquidators v Kalaw G.R. No. L-18805, August
14, 1967)
successful operation and solvency. Both cannot be
undertaken at the same time.(Phil. Veterans Bank
v. Employees Union, 2001)
If full liquidation can only be effected after the 3-
year period and there is no trustee, the directors
may be permitted to complete the liquidation by
continuing as trustees by legal implication
(Rebuirano v CA, 301 SCRA 342, January 21,
1999)
A corporations board of directors is not
rendered functus officio by its dissolution. Since
Section 122 allows a corporation to continue its
existence for a limited purpose, necessarily there
must be a board that will continue acting for and
on behalf of the dissolved corporation for that
purpose. (Aguirre vs. FQB+, Inc. G.R. No.
170770. January 9, 2013)

BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER

However, the mere appointment of a receiver,

without anything more does not result in the
dissolution of the corporation nor bar it from
the existence of its corporate rights (Leyte
Asphalt & Mineral Oil Co. Ltd., v. Block Johnston
&Breenbrawn, 1928)

Upon five (5) day's notice, given after the date on

which the right to file objections as fixed in the
order has expired, the Commission shall proceed
to hear the petition and try any issue made by
the objections filed; and if no such objection is
sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving
the corporation and directing such disposition of
its assets as justice requires, and may appoint
a receiver to collect such assets and pay the
debts of the corporation (Sec. 119)

LIQUIDATION AFTER THREE YEARS

Q: What is the difference between liquidation

and Rehabilitation?

A: Liquidation is the winding up of a corporation

so that assets are distributed to those entitled to
receive them. It is the process of reducing assets
to cash, discharging liabilities and dividing
surplus or loss. On the other hand, rehabilitation
contemplates a continuance of corporate life and
activities in an effort to restore and reinstate
the corporation to its former position of
41