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ALPHA PHI BETA

CORPORATION LAW REVIEWER AΦB

SAN BEDA LAW SCHOOL


SCHOOL
CORPORATION LAW
I. INTRODUCTION

A. HISTORICAL BACKGROUND OF PHILIPPINE CORPORATE LAW

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! When the Philippines was still under Spain, business organizations were governed by the Code of Commerce. The
business organization under the Spanish regime that is an approximation but is not exactly the same as a corporation is
sociedad anonima. For example, the limited liability rule was, to a certain extent, applicable to sociedad anonima.

! The provisions on sociedad anonima were then repealed by Sec. 191 of the old Corporation Law or Act No. 1459. Those
that were already in existence at the time of the enactment of the Corporation Law were allowed to formally organize into
corporations or to continue as such.

! The first general law on corporations in the Philippines as the Corporation Law (Act No. 1459) which took effect on April 1,
1906. It is practically a codification of the American law on corporations.

! Batas Pambansa Blg. 68 otherwise known as “The Corporation Code of the Philippines” repealed Act No. 1459. The
Corporation Code took effect on May 1, 1980.

! CONTENTS OF CORPORATION CODE, IN GENERAL. The present corporation law and the general law that it repealed
provide for the:
1. Formation and organization of corporations; ALPHA PHI BETA
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2. Define their powers;


3. Fix the duties of directors and other officers thereof;
4. Declare the rights and liabilities of shareholders and members; and
5. Prescribe the conditions under which corporations may transact business.

II. CONCEPT AND ATTRIBUTES OF A CORPORATION

A. STATUTORY DEFINITION OF A CORPORATION (Sec. 2, CC)

Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of

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succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

! A corporation is an artificial being invested by law with a personality separate and distinct from those of the persons
composing it, as well as from that of any other entity to which it may be related. It was evolved to make possible the
aggregation and assembling of huge amounts of capital upon which big business depends. It also has the advantage of
non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural
persons.

B. ATTRIBUTES OF A CORPORATION

1. ARTIFICIAL BEING (a juridical person capable of having rights and obligations with a personality separate and distinct
from its members/stockholders)

! CONCESSION THEORY. A corporation being a creature of the law “owes its life to the state, its birth being purely
dependent on its will,” it is “a creature without any existence until it has received the imprimatur of the state acting
according to law.” A corporation will have no rights and privileges of a higher priority than that of its creator and cannot

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 1


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

legitimately refuse to yield obedience to acts of its state organs. (also known as FIAT THEORY, GOVERNMENT
PATERNITY THEORY OR FRANCHISE THEORY)

" A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of
fiction, or by regarding it as an artificial person distinct and separate from its stockholders. It owes its existence to
law. It is an artificial person created by law for certain specific purposes, the extent of whose existence, powers
and liberties is fixed by its charter.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


a. DOCTRINE OF CORPORATE ENTITY (DOCTRINE OF SEPARATE PERSONALITY)

! 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. It also has separate personality from
that of any other entity to which it may be related.

! This separate juridical personality is recognized under the New Civil Code because Article 44 specifies
corporation as one those considered as juridical person with juridical personality, separate and distinct from that of
each shareholder or member. The New Civil Code provides that the personality of juridical entities begin as soon
as they have been constituted according to law.

! GENERAL RULE: Separate personality is vested to a corporate entity when it is issued the certificate of
incorporation by the SEC. The exceptions are:
a. de facto corporation
b. corporation by estoppel
c. corporation sole
d. corporation created through special law

IMPLICATION OF DOCTRINE OF SEPARATE PERSONALITY ON PROPERTY. Since corporate property is


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!
owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely
an expectancy or inchoate right to the same should any of it remain upon dissolution of the corporation after all
corporate creditors have been paid. Such right is limited only to their equity interest. Similarly, properties owned
by the members of the corporation are not owned by the corporation. A stockholder cannot sell, transfer,
mortgage or encumber the properties corporation without proper authority. He cannot use any such property to
pay for his personal debts. ALPHA PHI BETA

NOTES:
1. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not in itself sufficient ground for disregarding the separate corporate personality.

EXCLUSIVELY FOR
2. A corporation cannot file an action to recover the properties of its shareholders or members. An action filed
by a corporation to recover the properties of its shareholders or members should be dismissed for failure to
state a cause of action because the corporation is not the real party in interest. (Sulo ng Bayan, Inc. vs.
Gregorio Araneta, Inc.)

! IMPLICATION OF DOCTRINE OF SEPARATE PERSONALITY ON OBLIGATIONS. The obligations of the


corporation are not the obligations of its shareholders and members and vice-versa. Hence, stockholders or
officers are not liable for the contractual obligations of the corporation. Nevertheless, there are instances where
the officers or stockholders make themselves personally liable. The corporate cannot likewise be made to answer
for the personal obligations of the stockholders, directors or officers. A stockholder cannot condone an obligation
of a third person to the corporation. The right pertains to the corporation alone.

! SEPARATE ACTS. The acts of the stockholders do not bind the corporation unless they are properly authorized.
Similarly, the acts of officers and directors in their personal capacity cannot be imputed to the corporation. Their
powers and duties pertain to them respectively and not to each other.

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 2


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to
be considered as separate and apart from the individual stockholders or members who compose it, and is not
affected by the personal rights, obligations and transactions of its stockholders or members. The property of the
corporation is its property and not that of the stockholders, as owners, although they have equities in it.
Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its
members. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless
transferred to the corporation, "even in the case of a one-man corporation." The mere fact that one is
president of a corporation does not render the property which he owns or possesses the property of the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


corporation, since the president, as individual, and the corporation are separate similarities. Similarly,
stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled the
holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock
certificates were considered not to have such legal or equitable title or interest in the land, as would support a suit
for title, especially against parties other than the corporation.

It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the
persons composing it, is but a legal fiction introduced for the purpose of convenience and to subserve the ends of
justice. This separate personality of the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or
where necessary to achieve equity.

It has not been claimed that the members have assigned or transferred whatever rights they may have on the land
in question to the corporation. Absent any showing of interest, therefore, a corporation has no personality to bring
an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to
said stockholders or members in their personal capacities. (Sulo ng Bayan, Inc. vs. Araneta)

i. RESIDENCE AND NATIONALITY


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! RESIDENCE. A corporation may be considered a resident of a particular country or place for different
purposes:
1) Residence may be important for tax purposes;
2) Determination of venue in cases;
3) Determining if proper summons and notices were served.
4) Place where chattel mortgage over shares of stocks in the corporation should be registered.
5) Meetings of stockholders or members shall be conducted in the place where the principal place of
business is located. (Sec. 51, Corporation Code)
6) Corporate books and records shall be kept at its principal office. (Sec. 74, Corporation Code)

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7) Application of certain doctrines like the doctrine of forum non conveniens.

! NATIONALITY. There are instances when it is important to determine the nationality of a corporation for
certain purposes. The 2 principal tests in determining whether a corporation is foreign or domestic are:
1. Aggregate Test (Control Test), which requires looking into the nationality, domicile, or residence of the
individuals who control the corporation.
2. Entity Test (Place of Incorporation or Incorporation Test), which looks to the nation where the
corporation was incorporated.

" GEN. RULE: A corporation is considered a national of the country where it was incorporated.

EXCEPTIONS:
1. Public enemy, in times of war; determined by nationality of controlling stockholders.
2. Investment purposes, as defined in RA 7042 or Foreign Investments Act of 1991.

! The norm that is expressed in the Corporation Code is the Entity or Place of Incorporation Test.
Thus, Section 123 of the Corporation Code provides that a foreign corporation is one 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.

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 3


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! However, the Securities and Exchange Commission has applied the Control Test in order to
determine the nationality of the corporation for investment purposes. “Shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Filipino nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted
as of Philippine Nationality.” This test can be applied, for instance, when a law makes an activity partly
nationalized.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! The Control Test contemplated by the SEC is said to have been adopted under Sec. 3 of Rep. Act No, 7042 or the
Foreign Investment Act of 1991 which provides that a person shall be considered a “Philippine National” if it is:
1. A corporation organized under Philippine laws of which 60% of the capital stock outstanding and entitled to vote is
owned and held by Filipino citizens; or
2. A corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of
which 100% of the capital stocks entitled to vote belong to Filipinos.

ii. CONSTITUTIONAL RIGHTS

! DUE PROCESS. No person shall be deprived of life, liberty and property without due process of law. A
corporation cannot be deprived of its life and property without due process of law. However, a corporation
cannot claim protection that it is entitled to protection of “liberty” as such right is inconsistent with
its nature as a mere artificial being and its rights are restricted because its life is just a concession of
the State. ALPHA PHI BETA

! EQUAL PROTECTION CLAUSE. All persons, including corporations, similarly situated shall be treated
alike. Note: Discrimination may be applied for as long as there exists substantial differences.
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! RIGHT AGAINST UNREASONABLE SEARCHES AND SEIZURE. A corporation is entitled to the right
against unreasonable searches and seizure. The right pertains to the corporation as a separate entity hence
only the corporation, and not its officers in their personal capacity, is the real party in interest to question an
alleged unreasonable search and seizure.

" Nevertheless, even if the corporation is entitled to the right against unreasonable searches and seizure,
the same result that is sought to be achieved by public authorities may be achieved in a lawful way.
Thus, an officer of a corporation cannot refuse to produce the books and papers of such corporation if
lawfully required by the appropriate government agency. For example, the Securities and Exchange
Commission may require a corporation to present its books in the exercise of its regulatory function.

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! NON-IMPAIRMENT OF CONTRACTS. Incorporation is deemed to involve contracts among the members,
between the members of the corporation, and between the members or the corporation and the State. Thus,
because of the contract between the corporation and the State, the corporation is entitled to the right against
impairment of contracts.

! RIGHT AGAINST SELF-INCRIMINATION. Right against self-incrimination has NO application to


corporations. Rationale: There is a reserved right on the part of the legislature to inquire if the corporation
has abused its privileges. In making such an inquiry, proper government agencies may require the
corporation to produce books. (Bataan Shipyard & Engineering Co., Inc. vs. PCGG)

iii. CRIMINAL LIABILITY. No criminal action can lie against a corporation. Certainly, a corporation cannot commit
felonies described under the Revised Penal Code because artificial beings are incapable of intent. Neither can a
corporation perform any overt act.

! Nevertheless, the officers of the corporation may be held liable. It is settled that an officer of the corporation
can be held criminally liable for acts or omissions done in behalf of the corporation only where the law
directly requires the corporation to do an act in a given manner and the same law makes the person who fails
to perform the act in the prescribed manner expressly liable criminally. Although the performance of an act is

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 4


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

an obligation directly imposed on a corporation, the responsible officer who actually performed the act must
of necessity be the one to assume criminal liability; otherwise this liability as created by the law would be
illusory, and the deterrent effect of the law, negated.

! TORT LIABILTY. A corporation is civilly liable in the same manner as a natural person for torts, because generally
speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the
same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural
or artificial person.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


iv. RIGHT TO RECOVER MORAL DAMAGES. As a rule, a corporation is not entitled to moral damages because,
not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. The only exception to this rule is when the corporation has a good
reputation that is debased, resulting in its humiliation in the business realm. (Coastal Pacific Trading, Inc. vs.
Southern Rolling Mills, Inc., 28 July 2006)

! A corporation can be an offended party in a defamation case and it can recover moral damages under Article
2219 [7] of the New Civil Code. (Filipinas Broadcasting Networks, Inc. vs. Ago Medical and Educational
Center-Bicol Christian College of Medicine, et. al)

b. DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

1. NATURE OF THE PIERCING DOCTRINE

! Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily they could be subject to, or distinguishes one corporation from a
seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure
that the corporate fiction was misused, to such an extent that injustice, fraud or crime was committed upon
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another, disregarding, their, his, her or its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law seeks to protect by this doctrine.

! Whether the existence of the corporation should be pierced depends on questions of facts, appropriately
pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The
presumption is that the stockholders or officers are distinct entities. The burden of proving otherwise is on
the party seeking to have the court pierce the veil of corporate entity. ALPHA PHI BETA

! Piercing the veil of corporate entity is merely an equitable remedy, and may be awarded only in cases when
the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or
where the corporation is a mere alter ego or business conduit of a person.

EXCLUSIVELY FOR
! The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability
of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine
has been turned upside down because of its erroneous invocation. (Francisco Motors vs. CA)

! The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders
who compose it is recognized and respected in all cases which are within reason and the law. When the
fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally
the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation
of individuals. (Villa Rey Transit vs. Ferrer)

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 5


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! In the exercise of this judicial function to determine if the corporate fiction will be disregarded, courts should
be concerned with reality and not form, with how the corporation was operated and the individual
components’ relationship to that operation. The question involved is one of fact.

! When the veil of corporate fiction is pierced in proper cases, the corporate character is not necessarily
abrogated. It continues for legitimate objectives.

2. EXTENT OF THE LEGAL EFFECTS OF PIERCING

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! The application of the piercing doctrine to a particular case does not deny the corporation of legal personality
for any and all purposes, but only for the particular transaction or instance for which the doctrine was
applied.

! NOTE: Piercing the corporate veil does not result in the abrogation of the other corporation
(instrumentality) but is for liability purposes only. Afterwards, the instrumentality-corporation shall
continue its corporate existence.

! Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily
liable for corporate debts.

3. ILLUSTRATIVE CASES WHERE PIERCING THE VEIL IS ALLOWED


a. If done to defraud the government of taxes due it.
b. If done to evade payment of civil liability.
c. If done by a corporation which is merely a conduit or alter ego of another corporation.
d. If done to evade compliance with contractual obligations.
e. If done to evade financial obligation to its employees.
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4. PARENT-SUBSIDIARY RELATIONSHIP

! 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. If used to perform legitimate functions, the
subsidiary’s separate existence may be respected. However, to prevent abuses of the separate entity
privilege, the court will pierce the veil of corporate entity and regard the two corporations as one.

! The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and
circumstances of each case. The following are some of the probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil:

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1. Stock ownership by one or common ownership of both corporations;
2. Identity of directors and officers;
3. Manner of keeping corporate books and records;
4. Methods of conducting business.

! PROBATIVE FACTORS OF IDENTITY. Circumstances which if present in the proper combination renders
the subsidiary and instrumentality:
a) The parent corporation owns all or most of the subsidiary’s capital stock
b) The parent and subsidiary corporations have common directors or officers
c) The parent corporation finances the subsidiary
d) The parent corporation subscribes to all the capital stock of the subsidiary of otherwise causes its
incorporation
e) The subsidiary has grossly inadequate capital
f) The parent corporation pays the salaries and other expenses or losses of the subsidiary
g) The subsidiary has substantially no business except with parent corporation or no assets except those
conveyed to or by the parent corporation
h) 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 corporation’s own

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 6


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

i) The parent corporation uses the property of the subsidiary as its own
j) 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 latter’s interest
k) The formal ledger requirements of the subsidiary are not observed.

! The subsidiary cannot be considered a mere instrumentality of the parent corporation just by the combination
of the 11 signs listed above. For the veil of corporate entity of the subsidiary to be pierced so that it is
considered just an instrumentality, the act questioned must have an illegal or unfair purpose which results to

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


prejudice to third persons who may seek redress from the corporate entity.

5. ALTER EGO PRINCIPLE AND INSTRUMENTALITY RULE. There are 2 basic types of cases when the doctrine
of piercing the veil of corporate fiction may be used to disregard the personality of the corporation:

a. FRAUD CASES – are cases when the corporate identity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime. There is an intent to commit a wrong in this type of cases and the corporation
is the tool that is being used to accomplish such purpose.

b. ALTER EGO OR CONDUIT CASES – are situations where the corporation is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of another person. Fraud is not an
element in these cases. What is being considered is that the stockholders or those who compose the
corporation did not treat the corporation as such and considered and operated the same not as a separate
entity but only as part of the property or business of an individual or group of individuals or another
corporation.

" One of the instances when the Alter Ego doctrine is invoked is when there is a parent company-
subsidiary company relationship. There are instances when piercing the veil of corporate fiction is
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justified to make the parent company liable for obligations of the subsidiary. However, the general rule
is to the effect that if used for legitimate functions, a subsidiary’s separate existence shall be respected,
and the liability of the parent corporation as well as the subsidiary will be confined to those arising in
their respective business.

" INSTRUMENTALITY RULE – Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction
of the corporate entity of the ‘instrumentality’ may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of finances,
policies and practices that the controlled corporation has, so to speak, no separate mind, will or

EXCLUSIVELY FOR
existence of its own, and is but a conduit for its principal. It must be kept in mind that the control
must be shown to have been exercised at the time the acts complained of took place. Moreover,
the control and breach of duty must proximately cause the injury or unjust loss for which the
complaint is made.

" The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:

1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own; ALPHA PHI BETA

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act
in contravention of plaintiff’s legal rights; and

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 7


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

NOTE: Even if the second requisite is not present, there may still be a ground to pierce the
veil of corporate fiction under the Alter Ego Doctrine. It is not necessary in Alter Ego cases
that the corporation was organized or operated to commit fraud or wrong. (T. Aquino,
Corporate Law Compendium, 2006)

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


The absence of any one of these elements prevents ‘piercing the corporate veil.’ In applying
the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form,
with how the corporation operated and the individual defendant’s relationship to that
operation. (Concept Builders vs. NLRC)

2. CREATURE OF LAW (mere consent of the parties to form a corporation is not sufficient. State must give consent through
(a) special law, (b) general enabling act)

Art. XII, Section 16, 1987 Constitution. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of economic viability.

Sec. 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by
the provisions of this Code, insofar as they are applicable.

! CONCESSION THEORY. A corporation being a creature of the law “owes its life to the state, its birth being purely
AΦB

dependent on its will,” it is “a creature without any existence until it has received the imprimatur of the state acting
according to law.” A corporation will have no rights and privileges of a higher priority than that of its creator and cannot
legitimately refuse to yield obedience to acts of its state organs. (also known as Fiat Theory, Government Paternity
Theory or Franchise Theory)

! FRANCHISES. A corporation is granted by the State the right to exist by virtue of a primary franchise. A franchise is a
special privilege conferred by governmental authority, and which does not belong to citizens of the country generally as
a matter of common right.

" A corporation is granted a franchise either through a special law or it may also organize under a general law. The
general law under which a corporation can be organized in the Philippines is the Corporation Code.

EXCLUSIVELY FOR
" The Constitution provides that only government owned and controlled corporation may be created by special law.
Special laws may also recognize that certain entities may acquire juridical personality without directly conferring
corporate status automatically by the mere passage of law.

" No private corporation other than GOCCs may be created under a special law.

Rationale: To prevent bribery in trying to influence legislators in granting unfair concessions to influential
individuals or groups to the detriment of the public.)

! GOVERNMENT OWNED AND CONTROLLED CORPORATION. Government owned and controlled corporation may
either be (1) with original charter or created by special law, or (2) incorporated under a general law (the Corporation
Code). However, only GOCCs can be created through special laws.

" GOVERNMENT OWNED AND CONTROLLED CORPORATION – any agency organized as a stock or nonstick
corporation vested with functions relating to public needs whether governmental or proprietary in nature, and
owned by the Government directly or through its instrumentalities either wholly or where applicable as in the case

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 8


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

of stock corporations to the extent of at least 51% of its capital stock. (Par. 13, Sec. 2, Administrative Code of
1987)

" Despite common misconceptions, GOCCs are regarded as private corporations.

! CONSTITUTIONAL LIMITATIONS ON CREATION OF GOVERNMENT OWNED AND CONTROLLED


CORPORATION
1. Special charter

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


2. Interest of common good
3. Subject to the test of viability

3. RIGHT OF SUCCESSION (existence cannot be affected by change in members/stockholders)

! A corporation continues to exist even if there is a change in those who compose it. Death of a shareholder or transfer
of his shares will not affect the continued existence of the corporation. ALPHA PHI BETA

! Perpetual succession does not imply corporate immortality but rather a continuity of existence irrespective of that of its
components. Under the Corporation Code, the term of a corporation is 50 years but is subject to renewal. (Sec. 11,
Corporation Code)

4. CREATURE OF ENUMERATED POWERS, ATTRIBUTES AND PROPERTIES (Has the powers, attributes, and properties
as expressly authorized by law or incident to its existence)

a. DOCTRINE OF LIMITED CAPACITIES AS COMPARED TO THE DOCTRINE OF GENERAL CAPACITIES

! The fourth attribute of the corporation that it has the powers, attributes expressly authorized by law or incident to
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its existence is a recognition of what is known as the Theory of Special or Limited Capacities. The powers of the
corporation are given by law and it cannot exercise powers that are not so given. In fine, the powers of the
corporation are only those that are expressly provided for, implied or incidental powers. Otherwise, such
is ultra vires.

! The Theory of Special Capacities should be distinguished from the Theory of General Capacities under which a
corporation may exercise any and all powers that may be exercised by persons except those that are expressly
prohibited or withheld from it by general laws.

! Statutory basis of Doctrine of Limited Capacity: Sec. 2 and Sec. 45, Corporation Code

EXCLUSIVELY FOR
b. ULTRA VIRES DOCTRINE

" ULTRA VIRES ACTS – are acts which a corporation is not empowered to do or perform because they are not
based on the powers conferred by its Articles of Incorporation or by the Corporation Code on corporations in
general, or because they are not necessary or incidental to the exercise of the powers so conferred.

" RULE ON ULTRA VIRES ACTS OF CORPORATIONS – No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of the powers so conferred. (Sec. 45, Corporation Code)

C. CLASSIFICATION OF PRIVATE CORPORATIONS

1. STOCK AND NON-STOCK

Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All
other corporations are non-stock corporations.

! STOCK CORPORATION – a corporation with capital stock that is divided into shares and is authorized to distribute to
holders thereof of such shares dividends or allotments of the surplus profits on the basis of the shares held.

" For a stock corporation to exist, 2 requisites must be complied with:


1. A capital stock divided into shares, and

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


2. An authority to distribute to the holders of such shares, dividends or allotments of surplus profits on the basis
of the shares held.

" Even if there is a statement of capital stock, the corporation is still not a stock corporation if dividends are not
supposed to be declared, that is, there is no distribution of retained earnings.

" Note: Shares by itself is an investment.

! NON-STOCK CORPORATION – a corporation that does not issue stocks and does not distribute dividends to their
members. (Note: Can be profit earning, but cannot distribute dividends.)

Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution:
Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized,
subject to the provisions of this Title.

The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as
AΦB

may be covered by specific provisions of this Title.

2. PUBLIC AND PRIVATE

! PUBLIC CORPORATION – a corporation organized for the government of a portion of a State (like cities and
municipalities) for the purpose of serving general good and welfare.

! PRIVATE CORPORATION – a corporation formed for some private purpose, benefit, aim or end. They may be stock
or non-stock corporation, GOCC or a quasi-public corporation.

EXCLUSIVELY FOR
3. DOMESTIC AND FOREIGN

! DOMESTIC CORPORATION – a corporation formed, organized or existing under Philippine laws.

! FOREIGN CORPORATION – a corporation formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state.

4. DE JURE AND DE FACTO (Sec. 20)

Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

! DE JURE CORPORATION – a corporation organized in accordance with the requirements of law.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! DE FACTO CORPORATION – a corporation which is formed where there exists a flaw in its incorporation but there is
colorable compliance with the requirements of law.

" RULES IN DETERMINING DE JURE STATUS OF A CORPORATION


1. Non-compliance with directory provisions of law or regulations will not affect the de jure existence of a
corporation.
2. Non-compliance with mandatory provisions will affect the de jure existence. However, only substantial
compliance is required and mere colorable compliance may result in a de facto corporation.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


3. Non-compliance with conditions precedent to incorporation may affect the de jure existence of the
corporation. For example, issuance of a Certificate of Incorporation is a condition precedent and there can
be no de jure corporation without it.
4. Non-compliance with conditions subsequent to incorporation may not affect the existence of a corporation
but may be a ground for revocation of the certificate of incorporation.
5. Condition precedent to carry on the business will not affect the corporation’s de jure status but non-
compliance may be a ground to revoke the certificate of incorporation.

" REQUISITES OF DE FACTO CORPORATION


1. A valid law under which the corporation is organized;
2. An attempt in good faith to incorporate (there must be colorable compliance with the law); and
3. An assumption of corporate powers.

" DISTINGUISHED FROM DE JURE CORPORATION. A de jure corporation has a right to corporate existence
even against the State. In a de facto corporation, it has a right to corporate existence even against the State if the
attack is collateral but not if the attack is direct. ALPHA PHI BETA

" NATURE AND STATUS OF DE FACTO CORPORATIONS. The personality of a de facto corporation is subject
to attack by the State in a proper proceeding. However, so long as it exists, a de facto is a reality and has
AΦB

substantial legal existence and independent status recognized by law as distinct from that of its members
or shareholders. A de facto corporation enjoys the attributes of a corporation until the State questions its
existence.

The only difference between the powers, rights and liabilities of a de jure and de facto corporation is that the latter
may have its existence inquired into and forfeited by the State.

5. DOCTRINE OF CORPORATION BY ESTOPPEL

EXCLUSIVELY FOR
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that
there was in fact no corporation.

! CORPORATION BY ESTOPPEL – a group of persons which holds itself out as a corporation and enters into a
contract with a third person on the strength of such appearance cannot be permitted to deny its existence in an action
under said contract.

! Note: A corporation by estoppel is not a de jure nor a de facto corporation, but is considered as a corporation in
relation only to those who cannot deny its corporate existence due to its agreement, admission or conduct.

! One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground
that there was in fact no corporation. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc.) Those who
assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

debts, liabilities and damages incurred or arising as a result thereof. Therefore, they are liable even beyond their
investment; in other words, their personal properties may be made to answer for what is purportedly a corporation debt
of the non-existent corporation.

! This also means that those without knowledge of the non-existence of the corporation are liable as if they are regular
stockholders of the corporation. However, they are not liable beyond their investments.

! Even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


corporate existence.

" REASON: An unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on
another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without
authority and at their own risk. It is an elementary principle of law that a person who acts as an agent without
authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all
the liabilities of a principal. A person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for
other acts performed as such agent. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc.)

! The doctrine of corporate estoppel may apply to the alleged corporate and to a third party. In the first instance,
an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied on good faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits. (Ibid.)

! On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from denying its corporate existence in a suit
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brought against the alleged corporation. In such case, all those who benefited from the transaction made by the
ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented
to or took advantage of. (Ibid.) ALPHA PHI BETA

! In one case, a contract was sought to be enforced against an officer of an unincorporated association. It was argued
however that the officer cannot be made personally liable because the other contracting party is estopped from
claiming that the association which whom he contracted with is not in fact a corporation. The Supreme Court rejected
the argument explaining that the “application of the doctrine applies to a third party only when he tries to escape liability
on a contract from which he has benefited on the irrelevant ground of defective incorporation.” It is not applicable if the
party “is not trying to escape liability from the contract but rather is the one claiming from the contract.” (International

EXCLUSIVELY FOR
Express Travel & Tour Services, Inc. vs. Court of Appeals)

! The doctrine of corporate estoppel cannot be advanced to override jurisdictional requirements under the law.
Jurisdiction is fixed by law and is not subject to the agreement of the parties. It cannot be acquired through or waived,
enlarged or diminished by, any act or omission of the parties; neither can it be conferred by the acquiescence of the
court. Thus, if law will be passed granting an administrative tribunal jurisdiction to hear cases involving corporations,
the same tribunal cannot assume jurisdiction over a case filed against a non-existent corporation just because one
party is allegedly estopped from claiming that the corporation is non-existent.

! Remedies available against corporation by estoppel as to transactions:


1. File suit against ostensible corporation to recover from the corporate properties;
2. File case directly against associates personally who held out the association as a corporation; and
3. File against both the ostensible corporation and persons forming it, jointly and severally.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

6. HOLDING, AFFILIATE AND SUBSIDIARY

! HOLDING (PARENT) CORPORATION

" One which confined its activities to owning stock in, and supervising management of other companies. It owns a
controlling interest in the companies whose stocks it holds. It has a passive portfolio and holds the securities
merely for purposes of control and management.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" One which is so related to another corporation that it has the power, either directly or indirectly, to elect the
majority of the directors of such corporation, or control or substantially influence the policies and management of
such corporation.

! AFFILIATE CORPORATION

" One which is subject to common control and operated as part of a system.

" One related to another by owning or being owned by common management or by a long term lease of its
properties or other corporate device. An affiliation exists between as holding/parent company and its subsidiary,
or between 2 corporations owned or controlled by a third.

! SUBSIDIARY CORPORATION

" One which another corporation (parent) owns at least a majority of the shares; and thus is a corporation under the
control of another corporation (the holding company).

" One which is so related to another corporation that the majority of its directors can be elected by such other
corporation; or one which another corporation owns at least a majority of the shares and thus has control.
AΦB

7. OPEN AND CLOSE

! OPEN CORPORATION – one formed to openly accept outsiders or stockholders or investors. It is authorized and
empowered to list in the stock exchange and to offer its shares to the public such that stock ownership can be widely
dispersed.

! CLOSE CORPORATION – a corporation whose Articles of Incorporation provide that:


1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding twenty (20);

EXCLUSIVELY FOR
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.
Notwithstanding the foregoing, 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. ALPHA PHI BETA

" 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 in accordance with the provisions of this Code. (Sec. 96, Corporation Code)

" A close corporation is one whose shares of stock are held by limited number of persons like the family or other
closely-knit group.

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 13


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

III. FORMATION AND ORGANIZATION OF A PRIVATE CORPORATION

A. SUBMISSION OF ARTICLES OF INCORPORATION; CONTRACTUAL SIGNIFICANCE

! INCORPORATION is the formal and procedural requisite of drafting the Articles of Incorporation and preparing other
necessary supporting documents and their subsequent filing with and finally approval of the Securities and Exchange

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Commission by the issuance of the Certificate of Incorporation.

! CONTRACT THEORY. Incorporation is deemed to involve contracts among the members, between the members of the
corporation, and between the members or the corporation and the State. Thus, because of the contract between the
corporation and the State, the corporation is entitled to the right against impairment of contracts. The State cannot likewise
take the life of the corporation without due process.

" Incorporation is a contract between those who compose the corporation and their contract is governed and evidenced
by the Articles of Incorporation. Therefore, stockholders and members cannot disregard the provisions of the Articles
of Incorporation and the by-laws of the corporation. The corporation, in turn, cannot disregard the rights of the
shareholders or members provided for in the Articles of Incorporation and by-laws.

" The articles of incorporation has been described as one that defines the charter of the corporation and the
contractual relationships between the State and the corporation, the stockholders and the State, and between
the corporation and its stockholders. Thus, the contents of the articles of incorporation are binding, not only on the
corporation, but also on its shareholders.

! Corporations are creatures of law and can only come into existence in the manner prescribed therein. The corporation
should have a full and complete organization and existence as an entity before it can enter into any kind of contract or
AΦB

transact business.

! Despite this, however, the corporation may make the contracts (made by promoters) its own after its due incorporation, and
may become bound by such contracts by adopting or ratifying them or by accepting its benefits with knowledge of the terms
thereof. Such adoption or ratification need not be expressed as it may be implied from the acts of the responsible officers of
the corporation. Where the promoter’s contract has been adopted or ratified by the corporation, the latter becomes liable
thereon and likewise acquires all the rights pertaining thereunder.

! Failure to file Articles of Incorporation will prevent due incorporation of the proposed corporation and will not give
rise to its juridical personality. It will not even be a de facto corporation.

EXCLUSIVELY FOR
! PROMOTIONAL STAGE

1. PROMOTER – a person who, acting alone or with others, takes initiative in founding and organizing the business or
enterprise.
" Person who brings together persons who become interested in the enterprise.
" Aids in procuring subscription and sets in motion the machinery which leads to the formation of the corporation
itself.
" Formulates the necessary initial business and financial plans.

2. CONTRACTS ENTERED INTO BY PROMOTERS


" These are prior to existence of corporation thus the corporation could not have been a party to it.
" However, the corporation may make the contracts its own and may become bound on such contracts if after
incorporation, it accepts or ratifies the same, or accepts its benefits with knowledge of the terms thereof.
" Ratification may be express by board resolution or implied by acts of the board.

3. PERSONAL LIABILITY OF PROMOTER ON PRE-INCORPORATION CONTRACTS


a) May make a continuing offer on behalf of the corporation which if accepted will become a contract. The promoter
does not assume any liability.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

b) May make a contract at the time binding himself with the understanding that if the corporation, once formed,
accepts or adopts the contract, he will be relieved of all responsibilities.
c) May bind himself personally and assume responsibility of looking to the proposed corporation when formed for
reimbursement.

" In the absence of any express or implied agreement to the contrary, a promoter is personally liable for contracts
made by him on behalf of the proposed corporation and the fact that the corporation when formed has adopted or
ratified the contract does not release him from liability unless a novation was intended.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


4. COMPENSATION
GEN. RULE: The corporation is not liable to pay compensation because this would be an imposition on innocent
investors. ALPHA PHI BETA

EXCEPTIONS:
a. If after it is formed, the corporation expressly promises to do so.
b. Services done partly before and partly after incorporation and the corporation takes the benefits thereof.

5. Securities Act authorizes a promotion fee if it is provided for in the registration statement of the securities involved.

6. Fiduciary relationship between corporation and promoter. – Promoters are under the duty to exercise good faith
and fairness in all their acts and transactions. Hence, any benefit derived by promoter that properly pertains to the
corporation should be given to the corporation.

7. UNDERWRITERS. Promoters must be distinguished from underwriters. An underwriter is a person who guarantees
on firm commitment and/or declared best effort basis the distribution and sale of securities of any kind by another
company.
AΦB

B. CONTENTS AND FORM OF THE ARTICLES OF INCORPORATIONS (Sec. 14 & 15, CC)

SEC. 14. CONTENTS OF THE ARTICLES OF INCORPORATION. - All corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by
all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special
law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one
stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or

EXCLUSIVELY FOR
purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as
such;
3. The place where the principal office of the corporation is to be located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares
into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and
residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the
shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the
amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.

The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has
been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of
the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos.

SEC. 15. FORMS OF ARTICLES OF INCORPORATION. - Unless otherwise prescribed by special law, articles of incorporation
of all domestic corporations shall comply substantially with the following form:

ARTICLES OF INCORPORATION

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed
to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";

SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate
primary and secondary purposes);

THIRD: That the principal office of the corporation is located in the City/Municipality of ............................................., Province of
.................................................., Philippines;

FOURTH: That the term for which said corporation is to exist is ................ years from and after the date of issuance of the certificate of
incorporation;

FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows:
AΦB

NAME NATIONALITY RESIDENCE


..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................

SIXTH: That the number of directors or trustees of the corporation shall be .............; and the names, nationalities and residences of
the first directors or trustees of the corporation are as follows:
NAME NATIONALITY RESIDENCE
..................................... ..................................... .....................................
..................................... ..................................... .....................................

EXCLUSIVELY FOR
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................

SEVENTH: That the authorized capital stock of the corporation is ................................................. (P......................) PESOS in lawful
money of the Philippines, divided into ............... shares with the par value of ................................... (P.......................) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ........................... shares without par value. (In case some shares have par value and some
are without par value): That the capital stock of said corporation consists of ........................ shares of which ....................... shares are of
the par value of .............................. (P.....................) PESOS each, and of which ................................ shares are without par value.

EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................

NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows:

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Name of Subscriber Amount Subscribed Total Paid-In


................................... ...................................... ...............................
................................... ...................................... ...............................
................................... ...................................... ...............................
................................... ...................................... ...............................
................................... ...................................... ...............................
(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be
modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons,
stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


TENTH: That ....................................... has been elected by the subscribers as Treasurer of the Corporation to act as such until his
successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive
for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the
subscribers or members.

ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following):
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital
stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the corporation and this restriction
shall be indicated in all stock certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this ................... day of .............................., 19
........... in the City/Municipality of ........................................, Province of ................................................., Republic of the Philippines.
............................................ .............................................
............................................ .............................................
................................................
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
............................................ .............................................
(Notarial Acknowledgment)
AΦB

TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I, ...................................., being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly
elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at
least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been
paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code.
.......................................
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of .................................. Province of

EXCLUSIVELY FOR
.........................................., this ............. day of ........................., 19 ........; by ............................................ with Res. Cert. No.
..................... issued at ................. on ......................, 19 ..........

NOTARY PUBLIC
My commission expires on ..........................., 19 ........

Doc. No. ...............;


Page No. ...............;
Book No. ..............;

Series of 19..... (7a)

1. CORPORATE NAME

! The corporate name is the principal means of distinguishing the corporation not only from its stockholders or
members but also from other firms and entities. The corporate name is one of the corporation’s attributes, an
element of its existence and essential to its identity. Each corporation must have a name by which it is to sue and be
sued and do all legal acts.

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CORPORATION LAW REVIEWER AΦB

! SEC may allow incorporators to reserve the name for a particular period.

! To distinguish from partnerships and other business orgs, the law requires corporations to append the word
“Corporation” or “Inc.” to its chosen name.

! A corporation should transact business only through its chosen name which it may amend in accordance with
requirements of the law and SEC.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


a. STATUTORY LIMITATIONS ON THE USE OF CORPORATE NAME (Sec. 18, CC)

Sec. 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended
name.

! A corporation seeking to prevent another corporation from using its name under Sec. 18 must prove that:
1. The corporation has acquired a prior right over the use of such corporate name;
2. It is any of the cases mentioned under Sec. 18 of the Corporation Code, that is:
a. The name is IDENTICAL, or deceptively or confusingly SIMILAR to that of any existing
corporation including internationally known foreign corporation though not used in the Philippines;
b. The name is already protected by law; or
c. The name is contrary to law, morals, or public policy or is patently deceptive, or confusing.

! The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by
AΦB

priority of adoption. On the other hand, with respect to the second requisite, the test is whether the similarity is
such as to mislead a person using ordinary care and discrimination and the Court must look to the record as well
as the name themselves. (Industrial Refractories Corporation of the Philippines vs. CA)

! Under the dominancy test which is incorporated in the Intellectual Property Code, there will be infringement if the
mark contains the dominant feature of the mark of a trademark belonging to another. (Sec. 151.1, Intellectual
Property Code) This rule applies to corporate names. Thus, the name cannot be used if the name indicated in
the Articles of Incorporation adopts the dominant feature of an existing corporate name or even a trademark
belonging to another.

! A corporation may likewise be directed to change its corporate name in accordance with the undertaking which it

EXCLUSIVELY FOR
submitted to the SEC together with its Articles of Incorporation. (Ang mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, HSK sa Bansang Pilipinas Inc. vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng
Katotohanan)

! The corporate name is a property right which cannot be impaired or defeated if another corporation will
appropriate the same. It is in the nature of a right in rem which can be asserted against the whole world.

! Even a foreign corporation may sue a domestic corporation to prevent the latter from using its name. The foreign
corporation has a legal right to restrain an officer of the Government “from issuing a certificate of incorporation to
residents of the Philippines who are attempting to organize a corporation for the purpose of pirating the corporate
name of a foreign corporation and of engaging in the same business, for the purpose of making the public believe
that the goods it proposes to sell are the goods of the foreign corporation and of defrauding it and its local dealers
of their legitimate trade. ALPHA PHI BETA

! A corporation cannot use any other corporate name other than what is reflected in the Articles of
Incorporation. However, a corporation may use a trade name or business name that is different from its
corporate name. Under the Business Name Law (Act No. 3883), juridical persons need not register the corporate

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

or partnership name that they registered with the SEC. These juridical persons are required to register only if they
are using business names that are different from their corporate or partnership names.

! PURPOSES OF THE PROHIBITIONS UNDER SEC. 18:


1. Avoidance of fraud upon the public which would have occasion to deal with the entity concerned;
2. Evasion of legal obligations and duties; and
3. Reduction of difficulties of administration and supervision of corporations. (Lyceum of the Philippines, Inc.
vs. CA)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


b. SEC GUIDELINES ON THE USE OF CORPORATE NAME

1) The corporate name shall contain the word “Corporation” or its abbreviation “Corporation,” or “Incorporated,” or
“Inc.”;
2) In order to prevent confusion and difficulties of administration, supervision and control, if the proposed name t a
word already used as part of the name or style of a registered entity, the proposed name must contain 2 other
words different and distinct from the name of the company already registered or protected by law;
3) If the name or surname of a person is used as part of a corporate name, there must be a basis for the use of
such name such as it is the name of one of the incorporators or that of his child;
4) If the name used is that of another person, the consent of the latter or his heirs, if already deceased, should be
secured and submitted to the SEC.
5) If the corporate name contains initials such as “ABC Corp.,” the meaning thereof must be indicated in the
verification slip or an explanation to the effect that it is merely a coinage with no meaning at all.
6) If the corporation being formed is a subsidiary of a foreign entity, the word “Philippines” or “Phils.” in parenthesis
should be affixed in the corporate name.

c. DOCTRINE OF SECONDARY MEANING


AΦB

! DOCTRINE OF SECONDARY MEANING. – A word or phrase originally incapable of exclusive appropriation with
reference to an article in the market, because geographically or otherwise descriptive, might nevertheless have
been used for so long and so exclusively by one producer with reference to that article, in that trade and to that
branch of the purchasing public, the word of phrase has come to mean that the article is his product.

! This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through
the substantial and exclusive use of the same for a considerable period of time.

! Thus, if a corporate name, though descriptive, has been used for so long and exclusively by one corporation alone
in the mind of the public, another corporation cannot register said name as a corporate name.

EXCLUSIVELY FOR
! SOURCE. The Doctrine of Secondary Meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names since the right to use a corporate name to the exclusion of others is
based upon the same principle which underlies the right to use a particular trademark or tradename.

d. CHANGE OF CORPORATE NAME

! A corporation may change its corporate name. The corporation, upon the change of its name is in no sense
a new corporation nor the successor of the original corporation. It is the same corporation with a different
name, and its character is in no respect changed.

! A corporation may validly change its name. However, the corporation must comply with the procedure for
amendment of the Articles of Incorporation.

2. PURPOSE CLAUSE

! EFFECT. The statement of the objects or purposes or powers in the charter/Articles of Incorporation results practically
in defining the scope of authority of the corporate enterprise or undertaking. The purpose clause both confers and

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

limits the actual authority of the corporate representatives. However, not all powers need to be described in the
Articles of Incorporation. Other powers are either implied or inherent.

NOTES:
1. A corporation only has such powers as are expressly granted to it by law and by its articles of incorporation, those
which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes, and
those which may be incident to its existence.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


2. PD 902-A gives SEC, after consultation with Board of Investments, NEDA, or other appropriate government
agency, the power to refuse or deny the application for registration of any corporation if its establishment,
organization, operation will not be consistent with the declared national economic policies.

! PRIMARY AND SECONDARY PURPOSES. The purpose or purposes for which the corporation is to be formed must
be grouped into primary and secondary purposes. The Primary Purpose must be only one, but the Secondary
Purposes may be several. Other purposes not allied or incidental to the Primary Purpose should be classified as
Secondary Purposes. It is necessary to specify the two kinds of purposes in order to determine which investment of
corporate funds would require the authority of both the Board and stockholders under Sec. 42 of the Corporation Code.

" As a general rule, the primary purpose determines the classification of a corporation. However, where the
corporation actually engages in one of its secondary purposes, it may also be classified in accordance with the
secondary purposes. Thus, a corporation is a mining corporation if mining is its primary purpose. Where mining
is its secondary purpose, it may be considered a mining corporation only when it undertakes its mining purpose
and is actually engaged in it.

! REASON. The purpose clause is included in the Articles of Incorporation in order that:
1. The person who intends to invest his money in the business will know where and in what kind of business or
activity his money will be invested; ALPHA PHI BETA
AΦB

2. The directors and officers will be informed regarding the scope of business they are authorized to act; and
3. A third person will be aware if the transaction he has with the corporation is within the authority of the corporation.

! NUMBER OF PURPOSES: There is no limit. However, Sec. 14 requires that if there is more than 1 purpose, the
primary purpose as well as the secondary ones must be indicated therein. Likewise, corporations for which special
provisions are made can only have the purpose peculiar to them.

! GENERAL LIMITATIONS IMPOSED ON THE PURPOSE CLAUSE:


1. It cannot be created or formed for a purpose that is contrary to law, morals or public policy.
2. It cannot be created or formed for a purpose of function which an incorporate body is incapable.
3. It cannot be organized for 2 or more incompatible purposes. There may be non-allied purposes but they must not be

EXCLUSIVELY FOR
incompatible. For example, the General Banking Law expressly prohibits banks from being engaged in insurance business.
4. It cannot be organized for a purpose that is contrary to its nature. In this connection, Sec. 88 provides that a non-stock
corporation may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing particular classes of non-stock corporations.
5. There should be a specification of the corporate purpose with sufficient clearness to define with certainty the scope of the
business or undertaking prescribed and to enable one to see that the purpose specified is one provided for by the statute. A
statement that the object of the corporation is to carry on any business which it may deem profitable or in other vague terms is
not sufficient.

! The best proof of the purpose of a corporation is its Articles of Incorporation. If the purpose stated therein is
lawful, then the Securities and Exchange Corporation has no authority to inquire whether the corporation has purposes
other than those stated and mandamus will lie to compel it to issue the certificate of incorporation.

! A collateral attack on the legality of the purpose of the corporation is not allowed in this jurisdiction. Thus, a
party in a case cannot impugn the legality of the purpose of a corporation. A case should be filed to directly attack the
purpose of the corporation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

3. PRINCIPAL OFFICE

! The Articles of Incorporation must state the City or Municipality where the principal office is to be established, which
must be within the Philippines.

! The principal office of the corporation is considered its place of residence. There may rules of law that are focused on
the residence of corporations. For example:
1. Residence may be important for tax purposes;

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


2. Determination of venue in cases;
3. Determining if proper summons and notices were served.
4. Place where chattel mortgage over shares of stocks in the corporation should be registered.
5. Meetings of stockholders or members shall be conducted in the place where the principal place of business is
located. (Sec. 50, Corporation Code)
6. Corporate books and records shall be kept at its principal office. (Sec. 74, Corporation Code)

! It is not however, necessary that all the businesses of the corporation be conducted in the principal place of business.
For instance, the principal place of business of a corporation manufacturing goods may be different from the place of
the factory.

! Sec. 51 of the Corporation Code provides that for purposes of stockholders’ or members’ meeting, Metro Manila shall
be considered a city or municipality. However, under SEC Circular No. 3, Series of 2006, “Metro Manila” shall no
longer be allowed as address of principal office; a corporation must state in its articles of incorporation the specific
address of its principal office, which shall include, if feasible, the street number, street name, barangay, city or
municipality.
AΦB

4. TERM OF EXISTENCE

Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the
articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Securities and Exchange Commission.

! The term of existence must not exceed 50 years from and after the date of incorporation. However, a corporation may
in fact exist for more than 50 years if proper extension of the term is made within the time and in the manner prescribed

EXCLUSIVELY FOR
under Sections 11 and 37 of the Corporation Code.

! The 50 year corporate term may be shortened or extended. The corporation may be dissolved thereby by
shortening the term. The 50 year period may be extended for another 50 years in any single instance. There is no
limit to the number of extensions that can be secured so long as the term at a single instance is 50 years.

! If the corporation will not be able to extend its corporate term, the remedy is to file new Articles of Incorporation and
secure a new term. Extension cannot be sought after the expiration of the term. There is no more to extend in
such a case. ALPHA PHI BETA

! It has been explained that where the term of the corporation expires but instead of liquidating its affairs it continues the
business in good faith, not knowing that the term has expired, some courts hold that it may be deemed a corporation
de facto. It may also be regarded as a corporation by estoppel under certain circumstances.

! STEPS IN EXTENDING CORPORATE TERM


1) Amendment of the Articles of Incorporation stating the term extension and the amendment must be approved by
the majority vote of:

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

a. The board of directors or trustees; and


b. The stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members,
in case of non-stock corporation.

2) Approved amendment of the Articles of Incorporation shall be submitted to the SEC for approval.

" Note: The amendment is deemed approved upon the inaction of the SEC for 6 months after submission due

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


not to the fault of the corporation or upon its approval. The effectivity of the amendment relates back to the
date of its filing with the commission.

a. DOCTRINE OF RELATION

! The filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of
the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relation or
relating back doctrine applies if the failure to file the application for extension within the term of the
corporation is due to the neglect of the officer with whom the certificate is required to be filed or to a
wrongful refusal on his part to receive it. The SEC qualified that the doctrine does not apply if there was
fault or negligence on the part of the corporation.

! GEN. RULE: An application for extension of the term cannot be filed earlier than 5 years prior to the expiration of
the original or subsequent term.

EXCEPTION: Justifiable reasons for an earlier extension as may be determined by the SEC. (Example: influx of
investments; to encourage prospective investors to place their investments in the corporation.)
AΦB

5. INCORPORATORS

Sec. 5. Corporators and incorporators, stockholders and members. - 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.

Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more

EXCLUSIVELY FOR
than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for
any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one
(1) share of the capital stock of the corporation.

! INCORPORATORS are those stockholders or members mentioned in the Articles of Incorporation as originally
forming and composing the corporation and who are signatories thereof. There is only one set of incorporators.
The incorporators appearing as such in the Articles of Incorporation will remain to be incorporators up to the
termination of the life of the corporation. The Articles of Incorporation cannot be amended to change the names of the
incorporators because the fact that the persons named therein are incorporators is an accomplished fact that can no
longer be undone.

" An incorporator remains to be an incorporator even if he will later on cease to be a corporators or shareholder.
Thus, he will still be an incorporator even if he already transferred all his shares to another. Being an incorporator
is an accomplished fact.

! CORPORATORS. Corporators are those who compose a corporation, whether as stockholders or as members.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation
are called members.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The term “corporators” is applied to all persons who compose the corporation at any given time and need not be
among those who execute the articles of incorporation at the start of its formation and organization.

! QUALIFICATIONS OF INCORPORATORS
1. They must be natural persons;
2. There must be not less than 5 but not more than 15;
3. They must all be of legal age;

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


4. The majority must be residents of the Philippines; and
5. If the corporation is a stock corporation, each incorporator must own or be a subscriber to at least 1 share.

! JURIDICAL PERSONS. Corporations and other juridical persons cannot be incorporators because of the express
provision in Sec. 10 that the incorporators must be natural persons.

" By way of exception, Sec. 4 of RA 7353 or the Rural Banks Act of 1992 provides that upon consultation with the
rural banks in the area, duly established cooperatives and corporations primarily organized to hold equities in rural
banks may organize a rural bank.

" Nevertheless, corporations can be original subscribers. The Corporation Code does not bar corporations from
being subscribers who appear as such in the Articles of Incorporation to be filed with the SEC. In fact, the
incorporators or original directors of a corporation to be organized can even be nominees of an existing
corporation or a single individual.

! It is not correct to assume that the incorporators are always the only original subscribers. They may be so but
not in all cases. While the law limits the number of directors, the law does not limit the number of original subscribers.
Hence, theoretically, the incorporators may each own 1 share and the rest of the shares may be subscribed originally
by other persons.
AΦB

! The intention of the legislature when the requirement of ownership of at least 1 share by incorporators was imposed
was to indicate who really represents the corporation at its inception. The public used to be misled under the old law
as to who had authority to act because there were incorporators who were not stockholders. ALPHA PHI BETA

! Non-residents may be incorporators because the law only requires the majority to be residents of the Philippines. A
person is a resident under the Corporation Code if he is in the Philippines with an intention to remain present therein.

! There is no requirement that the majority must be citizens of the Philippines. The rule however is subject to the
requirements of pertinent nationalization laws. For instance, if the law requires all stockholders to be Filipino

EXCLUSIVELY FOR
citizens, then it follows that all incorporators must be Filipino citizens.

6. DIRECTORS AND TRUSTEES

! Sec. 14 requires a statement of the number of directors or trustees, which shall not be less than 5 nor more
than 15. The number of directors cannot exceed 15 even after the incorporation.

" The Articles of Incorporation states the names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and qualified in accordance with the
Corporation Code. This means that the original directors originally appearing in the Articles of
Incorporation will be replaced by regular directors after the issuance of the certificate of incorporation.

7. CAPITALIZATION

Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall
not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law,
and subject to the provisions of the following section.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five
percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance
to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or
dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less
than five Thousand (P5,000.00) pesos.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! It is mandatory to state the authorized capital stock, the number of shares into which it is divided and the par
value of such share, in lawful money of the Philippines if the shares have par value. If the shares have no par value,
only the number of shares need be stated.

! AUTHORIZED CAPITAL STOCK – the amount fixed in the Articles of Incorporation to be subscribed and paid by the
stockholders of the corporation.

! SUBSCRIBED CAPITAL – that portion of the authorized capital stock that is covered by subscription agreements
whether fully paid or not.

! PAID-UP CAPITAL – that portion of the authorized capital stock which has been subscribed and actually paid.

! OUTSTANDING CAPITAL STOCK – the total shares of stock issued to subscribers or stockholders, whether or not
fully or partially paid except treasury shares so long as there is a binding subscription agreement.

! CAPITAL – includes properties and assets of the corporation that are used for its business or operation.

! If all the shares do not have par value, the total amount paid for the said no par value shares is sometimes referred to
as STATED CAPITAL.
AΦB

! With respect to capital stock, the shares may be divided into classes or series of shares or both, any of which
classes or series of shares may have such rights, privileges or restrictions, as may be provided for in the
Articles of Incorporation. This is subject to the limitation that no share may be deprived of voting rights except
preferred or redeemable shares and that there shall always be a class or series of shares which have complete
voting rights. Any or all of the shares may have a par value or have no par value, as provided in the articles of
incorporation. Shares of stock without par value may not be issued for a consideration less than P5.00 per share.

! The amount subscribed by the subscribers must be at least 25% of the authorized capital stock. The names,
addresses, and the respective amounts subscribed and paid by them must also be stated. The total amount on
account of subscriptions shall be stated except where the capital stock consists of no par value shares, in which case

EXCLUSIVELY FOR
the subscriptions must be fully paid.

! It is not necessary that 25% of each subscribed share must be paid. It is only required that at least 25% of the
subscribed capital must be paid. It is also not necessary that each of the subscriber must pay 25% of each subscribed
share. It may happen that some of the subscribers paid less than 25% of the subscription so long as the amount paid
is less than 25% of the subscribed capital.

! It is also necessary that there is a treasurer elected by the subscribers authorized to receive for and in the name and
for the benefit of the corporation all subscriptions paid or given by the subscribers.

! The law requires a minimum subscribed capital and paid-up capital for the following reasons:
1. To serve as an assurance that there will be successful prosecution of the business of the corporation; and
2. To assure the creditors that they have means of obtaining satisfaction of their claims to the extent of the
subscription.

! Special laws may also impose initial capitalization requirements.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! PAID-UP CAPITAL. Paid-up capital is that portion of the authorized capital stock which has been subscribed and
paid.

" Illustration: Where the authorized capital stock of the corporation is worth P1 Million and the total subscription
amounts to P250,000.00, at least 25% of this amount, namely, P62,500.00 must be paid up per Sec. 13 of the
Corporation Code. The latter amount, P62,500.00, is the paid-up capital or what should accurately be termed as
“paid-up capital stock.” Thus, not all funds or assets received by the corporation can be considered paid-up
capital. Such must form part of the authorized capital stock of the corporation, subscribed and then actually paid

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


up.

" The Guidelines issued by the SEC provides that as regards the paid-up capital which must not be less than P5,000.00, if the
same is in cash, the sum must be deposited with a bank in the name of the proposed corporation, or in the name of the
treasurer-in-trust for the corporation, and a bank certificate, in accordance with the prescribed form, executed under oath by a
responsible officer of the bank must be submitted to the Commission. Likewise to be submitted is a letter of authority, also in
accordance with the prescribed form, executed by the treasurer of the corporation authorizing the Commission to examine not
only the bank deposit, but also its books of accounts and supporting records to determine the existence and utilization of the
paid-up capital. This letter of authority shall be binding upon the corporation even if there is a change of corporate officers.

" If the paid-up capital consists of property, verification of its ownership, physical existence, and reasonableness of the valuation
at which it is being transferred to the corporation is made by the Commission. Documents to support ownership are required
to be submitted. If any of the properties used as paid-up capital is mortgaged or otherwise encumbered, written consent of the
mortgagee is necessary. If the transfer value of the property is higher than the cost or assessed value, an appraisal report
prepared by a licensed appraiser is required.

8. SHARES OF STOCK (Sec. 6, CC)

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in
AΦB

the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par
value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may

EXCLUSIVELY FOR
be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value
may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the 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.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal
in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

2. Adoption and amendment of by-laws;


3. Sale, lease, exchange, mortgage, pledge or 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 or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as
provided in this Code shall be deemed to refer only to stocks with voting rights.

a. DOCTRINE OF EQUALITY OF SHARES

! Under the Doctrine of Equality of Shares, all stocks issued by the corporation are presumed to be equal with
the same privileges and liabilities provided that the Articles of Incorporation is silent on such differences.
This doctrine is now expressly provided for in the fifth paragraph of Sec. 6 of the Corporation Code. In addition,
Sec. 6 requires that the distinguishing features of the shares must be stated also in the Certificate of Stock.

b. CLASSES OF SHARES

! KINDS OF SHARES – Shares of stock in a corporation represent the interest of the shareholder in a stock
corporation. Shares may be classified into: (a) common or preferred shares, (b) voting or non-voting shares,
(c) par value or no par value shares, (d) treasury shares, (e) redeemable shares, and (f) founder’s shares.
Preferred shares may either be: (a) cumulative or non-cumulative, (b) participating or non-participating, and (c)
preferred as to dividends and/or preferred as to assets upon distribution.
AΦB

! NATIONALIZATION REQUIREMENTS. The shares may be classified to facilitate the requirements of


nationalization laws. For instance, in a realty company where foreign equity is only up to 40%, the Articles of
Incorporation may classify 60% of the shares as Class A shares that can be acquired only by Filipinos and 40%
as Class B shares that can be acquired by foreigners and Filipinos. In such case, there will be an assurance that
excess foreign participation will be prevented. ALPHA PHI BETA

! PAR AND NO PAR

" PAR VALUE SHARES are those with fixed value stated in the Articles of Incorporation and the share
certificate. Par value is an arbitrary amount assigned to the share and is expressed in the certificate covering
the share.

EXCLUSIVELY FOR
" NO PAR VALUE SHARES refer to shares without such arbitrary amount.

" The use of par value may sometimes result in confusion on the part of the investors who might be misled
because the par value does not reflect the market value. Thus no par value shares may be issued to avoid
such confusion. Par value prevents the issuance of shares at a discount which may be desirable for
business purposes in some cases.

" The issued value or stated value of the shares may be higher than the par value. The Board of
Directors is authorized to fix the amount for which the shares shall be subscribed. This is subject to the
condition that the value fixed cannot be below par. With respect to no par value shares, the stated or
issued value cannot be less than five pesos (P5.00).

" The issued price or value of no par value shares may be fixed in the Articles of Incorporation, or by the board
of directors pursuant to the authority conferred upon it by the Articles of Incorporation or the by-laws, or in the
absence thereof, by the stockholders at a meeting duly called for the purpose representing at least a majority
of the outstanding capital of the corporation. (Sec. 62, Corporation Code)

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The issuance of no par value shares is subject to the following conditions:
1. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto;
2. Shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos
per share;
3. The 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.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" While corporations are allowed to issue no par value shares, the following cannot be without par value:
1. Preferred shares;
2. Shares in banks;
3. Shares in trust companies;
4. Shares in insurance companies;
5. Shares in public utilities; and
6. Shares in building and loan associations.

" Other values that are commonly associated with shares of stock are as follows:

1. MARKET VALUE – the price at which shares of capital stock are bought and sold by investors in the
market. It is directly affected by all the factors that influence general economic conditions, investor’s
expectations concerning the corporation, and the corporation’s earnings.

2. BOOK VALUE – the amount per share that each shareholder would receive if the corporation were
liquidated without incurring any further expenses and if assets were sold and liabilities liquidated at their
recorded amounts.

3. LIQUIDATION VALUE – the amount a stockholder would receive upon the dissolution and liquidation of
AΦB

the corporation.

4. REDEMPTION VALUE – the price per share at which the corporation may redeem it share.

5. ISSUED (STATED) VALUE – the selling price of the share fixed by the Board or in the Articles of
Incorporation.

! VOTING AND NON-VOTING

EXCLUSIVELY FOR
" In the absence of a provision in the Articles of Incorporation, and consistent with the Doctrine of Equality of
Shares, the shares in a stock corporation are considered voting shares. Under the present law, all
shareholders regardless of classification, other than holders of preferred or redeemable shares, are
entitled to vote.

" Sec. 6, however, contains protective provisions for the benefit of nonvoting shares. For instance, non-voting
shares are not totally deprived of the right to vote. Thus, holder of non-voting shares may still vote on the
following matters: ALPHA PHI BETA

1. Amendment of the articles of incorporation;


2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or 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 or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The issuance of non-voting shares is subject to the following conditions:


1. Only preferred or redeemable shares may be made non-voting shares.
2. There must remain other shares with full voting rights.
3. The non-voting shares may still vote in the matters enumerated above.

" Even if the Articles of Incorporation provides for classification of shares, certain classes of shares are entitled
to vote for as directors or officers if they are not classified as preferred or redeemable shares.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Sec. 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares
remain in the Treasury.

! COMMON AND PREFERRED

" COMMON SHARES – Common shares or stocks represent the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rata division of profits.

" PREFERRED SHARES – Preferred stocks are those which entitle the shareholder to some priority on
dividends and asset distribution. Preferred shareholders are not creditors of the corporation by virtue of
the preferred shares. The holder obtains neither the enforceable claim to interest and repayment of principal
that is provided by debt nor the rights of residual owner that is provided by common shares.

" However, it has been explained that in a sense, the issue of a preferred share is itself an attempt to reconcile two forms
of property rights that are fundamentally not reconcilable. One cannot be a creditor and an owner by virtue of the same
instrument. A person as principal cannot create a contract between himself as owner and himself as creditor. Yet all
preferred stock contracts are fundamentally attempts to endow certain owners with rights analogous to creditor rights and
AΦB

statutes and court decisions on this matter have been concerned primarily with the length to which the preferred stock
contract can go in extending creditor rights to stockholders. The reason why there is an effort to extend such right is to
make preferred shares attractive to investors. The investors can remain as such and at the same time enjoy certain
advantages that are available to creditors.

" A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over
the holders of common stock. The preferences are designed to induce persons to subscribe for shares
of a corporation. Preferred shares take a multiplicity of forms.

" Corporations issue preferred stock for the following reasons:


1. To avoid the use of bonds that have fixed interest charges that must be paid regardless of the amount of
net income;

EXCLUSIVELY FOR
2. To avoid issuing so many additional common shares that earnings per share will be less in the current
year than in prior years;
3. To avoid diluting the common shareholders control of the corporation since preferred shares usually
have no voting rights.

" The most common forms may be classified into two:


1. PREFERRED SHARES AS TO ASSETS – a share which gives the holder thereof preference in the
distribution of the assets of the corporation in case of liquidation
2. PREFERRED SHARES AS TO DIVIDENDS – a share the holder of which is entitled to receive
dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of
common stock.

If the preference is as to dividends, the amount that will be received by the shareholder may be a fixed
amount (for example, “P20.00 preferred”) or it may be a fixed percentage of the par value of the share (for
example, “5% preferred”).

" There is no guaranty, however, that the share will receive any dividends. Under the old Corporation Law, it was
provided that “no corporation shall make or declare any dividend except from the surplus profits arising from its business,

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

or distribute its capital stock or property other than actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by limitation or lawful dissolution. Similarly, the present
Corporation Code provides that the board of directors of a stock corporation may declare dividends only out of
unrestricted retained earnings. The Code, in Section 43, adopting the change made in accounting terminology,
substituted the phrase, “unrestricted retained earnings”, which may be a more precise term, in place of “surplus profits
arising from its business” in the former law. Thus, the declaration of dividends is dependent upon the availability of
surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders,
moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the
right of the former beings always being subordinate to the latter. Dividends are, thus payable only when there are profits

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be declared. Shareholders, both common and preferred, are
considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and
liabilities are fully paid.

" Preferred shares may be: (a) cumulative or (b) non-cumulative and they may also be (a) participating or
(b) non- participating.

NOTES:
1. In case the preferred shares are CUMULATIVE, if a dividend is omitted in any year, it must be made up
in a later year before any dividend may be paid on the common in the later year. The declaration of
dividends is still generally subject to the discretion of the board but once dividends are declared, the
cumulative preferred shareholders are entitled to receive the dividends for the years when no
declaration was made. When dividends are declared, cumulative dividends must be paid regardless of
the year in which they are earned.

2. If the preferred shares are NON-CUMULATIVE, there is no need to make up for undeclared dividends.
No right survives as to the undeclared dividends and the directors do not even have discretion to
declare those past dividends subsequently. The non-cumulative nature of the preference given to the
AΦB

share serves to restrict the dividend source to earning of the participating year.

3. PARTICIPATING PREFERRED SHARES are entitled to participate with the common shares in excess
distribution. Typically, a participating preferred is entitled to a fixed cumulative dividend; the common is
then entitled to receive a fixed amount; and excess distribution over those two amounts in any year is
shared by common and preferred in some predetermined ratio. Nevertheless, it may be also stipulated
that the preferred shares shall receive a fixed dividend and the balance shall be shared by common and
preferred shareholders. ALPHA PHI BETA

! REDEEMABLE, TREASURY AND FOUNDER’S SHARES

EXCLUSIVELY FOR
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given
certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed
five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the Securities and Exchange Commission.

" FOUNDERS’ SHARES are shares that are given to those who helped organize the corporation. This may be
a form of reward to the “founders.” (Note: These shares may be preferred shares as well.)

" To prevent abuse, the special rights granted to founders’ shares are subject to the approval of the SEC.

" The 5-year limitation imposed by Sec. 7 refers only to the exclusive right to vote and be voted for in
the election of directors, a right normally enjoyed by holders of common shares, the class of shares which
are supposed to have complete voting rights. After the expiration of the limitation period, founders’ shares
shall have equal rights with the holders of common shares.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" Note: There are cases where common shares may be deprived of voting rights, to wit: where there are
founders’ shares; and in case of delinquency of subscription payment. However, the mere fact of presence
of founders’ shares does not ipso facto deprive common stockholders of their voting rights. Such special
rights accorded to founders’ shares still require SEC’s approval.

Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation when expressly so
provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which
terms and conditions must also be stated in the certificate of stock representing said shares.

" REDEEMABLE SHARES – are shares of stock issued by a corporation which said corporation can purchase
or take up from their holders as expressly provided for in the Articles of Incorporation and certificates of stock
representing said shares.

" REDEMPTION. Redemption is repurchase or reacquisition of stock by a corporation which issued the stock
in exchange for property, whether or not the acquired share is cancelled, retired or held in the treasury.
Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in
payment of the stock and continues in business as before.

" LIMITATIONS. Redeemable shares are also usually preferred shares, which by their terms are redeemable
at a fixed date, or at the option of either the issuing corporation, or the stockholder, or both at a certain
redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for
cancellation. The present Code allows redemption of shares even if there is no unrestricted retained
earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule
under Sec. 41 of the Corporation Code that the corporation cannot purchase its own shares except out of
AΦB

current retained earnings.

1. While redeemable shares may be redeemed regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the corporation has, after such redemption, assets
in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may
not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of
the corporation to meet its debts as they mature.

2. When the redeemable shares are reacquired, the same shall be considered retired and no longer
issuable unless otherwise provided for in the Articles of Incorporation.

EXCLUSIVELY FOR
UNRESTRICTED RETAINED EARNINGS – the undistributed earnings of the corporation which have
not been allocated for any managerial, contractual, or legal purposes and which are free for distribution
to stockholders as dividends.

3. All corporations which have issued redeemable shares with mandatory redemption features are required
to set up and maintain a sinking fund. The fund shall be deposited with a trustee bank and is not
supposed to be invested in risky or speculative ventures.

SINKING FUND – a fund set up by the corporation where cash is gradually set aside in order to
accumulate the amount necessary to meet the redemption price of redeemable shares at specified
dates in the future.

Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but
subsequently reacquired 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 board of directors.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" TREASURY SHARES – are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful
means.

" Treasury shares are issued shares but being in the treasury, they do not have the status of outstanding
shares. However, they still represent paid-for interest in the property of the corporation.

" LIMITATIONS. Treasury shares, not having been retired by the corporation reacquiring it, are subject to the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


following rules:

1. They may be re-issued or sold again as long as they are being held by the corporation as treasury
shares.

2. Treasury shares cannot participate in dividends because dividends cannot be declared by the
corporation to itself. ALPHA PHI BETA

3. Treasury shares cannot be represented during stockholders’ meetings.


Reason: Equal distribution of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation.

4. The amount of unrestricted retained earnings equivalent to the cost of treasury shares being held shall
be restricted from being declared and issued as dividends. The dividend restriction on retained
earnings on account of treasury shares being held shall be lifted only after the treasury shares causing
the restriction are reissued.

" The corporation has the option to retire the treasury shares. Retirement of treasury shares shall be
effected by decreasing the capital stock of the corporation in accordance with Sec. 38 of the
AΦB

Corporation Code for the purpose of eliminating treasury shares.

" Treasury shares may be declared as property dividend to be issued out of the retained earnings previously
used to support their acquisition provided that the amount of the retained earnings has not been
subsequently impaired by losses. Any declaration and issuance of treasury shares as property dividend shall
be disclosed and properly designated as property dividend in the books of the corporation and its financial
statements.

" Inasmuch as treasury shares are not considered as outstanding capital stock, the corporation is not entitled
to any right or privilege of a shareholder. Reason: When the corporation reacquires its own shares, it does

EXCLUSIVELY FOR
not become a subscriber thereof.

" While in the possession of the corporation, treasury shares have no dividend or voting rights since, in all
instances, voting and dividend rights are granted only to outstanding shares of stock. Treasury shares may
be declared as dividends. Treasury shares may again be issued for a price even for less than par, and
the purchasers will not be liable to creditors of the corporation for the difference between the purchase price
and its par value since the full value had previously been paid in full.

" Note: When are shares retired? When there is nothing provided for in the Articles of Incorporation for their
reissuance.

9. TREASURER’S AFFIDAVIT

! A Treasurer’s Affidavit certifies that 25% of the total authorized capital stock has been subscribed and at least 25% of
such have been fully paid in cash or property.

! The Treasurer’s Affidavit that accompanies the Articles of Incorporation relates to the minimum subscribed capital and
the minimum paid-up capital. Thus, the treasurer may be made liable if the corporation did not comply with the
requirements of the law. He may even be prosecuted for perjury.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

10. OTHER PROVISIONS. Other provisions may be inserted in the Articles of Incorporation so long as they are not contrary to
law, morals, good customs, public order and public policy. For example, a provision giving the right of first refusal to the
shareholders may be inserted in the Articles of Incorporation.

C. GROUNDS FOR REJECTION OF THE ARTICLES OF INCORPORATIONS (Sec. 17, CC)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and
Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable
time within which to correct or modify the objectionable portions of the articles or amendment. The following are
grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed
herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government
rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with
as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building
and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational
institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless
accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or
amendment is in accordance with law.
AΦB

! All the grounds for rejecting the Articles of Incorporation enumerated in Sec. 17 can be determined on the basis of the
Articles of Incorporation itself and other required documents. Generally, if the Articles of Incorporation and its supporting
documents are in order, the SEC has no recourse but to issue the Certificate of Incorporation.

! NOTE: Outright rejection is not encouraged. The incorporators are given the time to correct any irregularities.

! Nevertheless, PD 902-A provides that the SEC may reject the Articles of Incorporation after consultation with the Board of
Investments, DTI, NEDA or any appropriate agency, the application for registration or the establishment, organization or
operation of the corporation will not be consistent with declared national policies. For this purpose, it may be necessary
to go beyond the Articles of Incorporation and the supporting papers in order to determine inconsistency with

EXCLUSIVELY FOR
declared national policies.

! GROUNDS FOR REJECTION


1. The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed
in Sec. 15 of the Corporation Code;
2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. The Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false;
Note: What may happen is that the irregularity cannot be determined just by looking at the Treasurer’s Affidavit but
only after later investigation. In such a case, there is also a ground to revoke the registration under Sec. 6 (1) of PD
902-A because there is fraud in procuring the certificate of registration.
4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution.

! The Securities and Exchange Commission enumerates businesses requiring endorsements from different government
agencies in the formation of corporation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

D. COMMENCEMENT OF CORPORATE EXISTENCE (Sec. 19, CC)

Sec. 19. Commencement of corporate existence. - 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 Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members
and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! CERTIFICATE OF INCORPORATION INDISPENSABLE. The issuance of the certificate of incorporation by the SEC
marks the commencement of the corporate term. It is only then that the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period
of time mentioned therein.

" SIGNIFICANCE. The issuance of the certificate of incorporation signifies the moment by which the State manifests its consent, the
life of a corporation being merely a concession of the State.

" A certificate of incorporation from the SEC is not necessary if the corporation is created through special law. If the
corporation is created by a special law without imposing a condition precedent, corporate existence commences as soon as the law
takes effect and is expressly or impliedly accepted. If the act requires organization or the performance of conditions precedent,
corporate existence commences only when there has been substantial compliance.

" GENERAL RULE: Separate personality is vested to a corporate entity when it is issued the certificate of incorporation
by the SEC. The exceptions are:
a. de facto corporation
b. corporation by estoppel
c. corporation sole
AΦB

d. corporation created through special law

" CORPORATION SOLE.

Sec. 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a
copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or
affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious

EXCLUSIVELY FOR
denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi
or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious
denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.

! CONTRACT LAW UNDER THE CORPORATION CODE. It is a peculiarity of corporate law that certain contracts may bind
a corporation even if the same are entered into before incorporation. For example, the Corporation Code makes irrevocable
a pre-incorporation agreement even if the same are entered into before incorporation. (Sec. 60, Corporation Code) Hence,
the law makes the pre-incorporation subscription agreement binding even if one of the parties – the corporation – is still
legally non-existent.

E. AMENDMENT OF THE ARTICLES OF INCORPORATION (Sec. 16, CC)

Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the
board of directors or trustees 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 in accordance with the provisions of
this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

The original and amended articles together shall contain all provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof
duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted
to the Securities and Exchange Commission.

The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

! REQUIREMENTS
1) The amendment must be for legitimate purposes and must not be contrary to the other provisions of the Corporation
Code and special laws;
2) The amendment must be approved by a majority vote of the board of directors or trustees;
3) There must be a vote or written assent of the stockholders representing at least 2/3 of the outstanding capital
stock, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation;
4) The original and amended articles together shall contain all the provisions required by law to be set out in the Articles
of Incorporation. Such articles, as amended shall be indicated by underscoring the changes made;
5) A copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees
stating the fact that said amendment/s have been duly approved by the required vote of the stockholders or members,
shall be submitted to the SEC.
6) The amendment must be approved by the SEC.

! EXPRESS AND IMPLIED APPROVAL. The amendments shall take effect upon their approval by the SEC. However,
express approval is not indispensable; the amendments shall take effect from the date of filing with the said Commission if
not acted upon within 6 months from the date of filing for a cause not attributable to the corporation.
AΦB

! DOCUMENTARY REQUIREMENTS
1) Amended Articles of Incorporation
2) Directors/Trustees Certificate – a notarized document signed by majority of the directors and corporate secretary certifying the
amendment of the Articles of Incorporation, indicating the amended provisions, the vote of the directors and stockholders or
members thereto, the date and place of the stockholders’ or members’ meeting. The TIN of the signatories should be indicated
below their names.
3) Company Data Maintenance Form

! ADDITIONAL REQUIREMENTS. Indorsement/ clearance from other government agencies, if applicable is necessary in
certain cases. For example, amendment of the Articles of Incorporation of a bank requires indorsement from BSP.

EXCLUSIVELY FOR
! PROVISIONS TO BE AMENDED. The amendment may involve amendment of the corporate name, increase in the
authorized capital stock, and other similar changes.

" However, certain provisions of the Articles of Incorporation cannot be amended because they are
accomplished facts. For example, the names of the incorporators cannot be changed and their number cannot be
increased because these are accomplished facts. Similarly, there can be no change in the names of the original
directors for the same reason; also, witnesses to the notarized document; date; notary public.

" Note: The test to determine whether or not a content of the Articles of Incorporation may be amended is whether or
not the item is an accomplished fact. ALPHA PHI BETA

" Amendments cannot likewise be allowed if it goes against the nature of the corporation.

" Sec. 145 of the Corporation Code provides 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.”

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The implication of this provision is that the Corporation Code may be amended which may have the effect of amending
the provisions of the Articles of Incorporation. The only reservation is that the amendment of the governing law must
not have the following effects:
1) It must not remove or impair the right or remedy in favor of or against any corporation, its stockholders, members,
directors, trustees, or officers; and
2) It must not remove any liability incurred by any such corporation, its stockholders, members, directors, trustees, or
officers.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


F. EFFECTS OF NON-USE OF CORPORATE CHARTER (Sec. 22, CC)

Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - 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.

! Sec. 22 involves conditions subsequent to incorporation. It involves 2 violations of conditions subsequent:


1) Failure to organize and commence business within 2 years from incorporation.
2) Becoming continuously inoperative for a period of at least 5 years.
AΦB

! While the 2-year period is counted from incorporation, the 5-year period may commence thereafter. Thus, even if the
corporation has been operating for 10 years, there is a ground to revoke the franchise if it ceased to operate continuously
thereafter for at least 5 years.

! The latter ground seems to indicate that the corporation is automatically dissolved. However, the Supreme Court stressed
in one case that substantial compliance with conditions subsequent will suffice to perfect corporate personality.
Organization and commencement of transaction of corporate business are but conditions subsequent and not
prerequisites for acquisition of corporate personality.

" The SEC is also of the opinion that the effect of failure to organize and commence business is not automatic. Citing
Sec. 6 (1) of PD 902-A, the SEC opined that proper proceedings for revocation of the Articles of Incorporation must be

EXCLUSIVELY FOR
initiated.

" Note: A casual reading of Sec. 22 would seem to suggest that automatic dissolution is contemplated. However,
should this be the proper interpretation? A literal interpretation of Section 22 would be contrary to the constitutional
requirement of due process of notice and hearing, there might be reasons which are beyond the corporation's control
for its failure to organize or transact business. PD 902-A provides that before the SEC could issue decree of dissolution
there must be notice and hearing. Thus, pursuant to the rule in statutory construction of in pari materia, this statute
must be read with the Corporation Code.

! Organize or organization as used in reference to corporations means the election of officers, providing for the subscription
and payment of the capital stock, the adoption of by-laws, and such other similar steps. Organization simply means the
process of forming and arranging into suitable disposition the parties who are to act together in, and defining the objects of,
the compound body.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

IV. CONTROL AND MANAGEMENT OF A CORPORATION

A. LEVELS OF CORPORATE CONTROL

! SHAREHOLDERS OR MEMBERS. Shareholders are the holders of shares in a corporation with interest over the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


management (control), income (dividends) and assets (share upon liquidation) of the corporation.

" The shareholders participate in controlling the affairs of the corporation by exercising their right to vote. They can elect
the directors who will actually govern the corporation and they can also vote in important matters that are still reserved
to them by the Corporation Code.

" Concurrence of the stockholders representing 2/3 of the outstanding capital stock (or 2/3 of the members whenever
applicable) is necessary in the exercise of the following powers:
a. Power to extend or shorten the corporate term (Sec. 37)
b. Increase/Decrease Corporate Stock (Sec. 38)
c. Incur, Create Bonded Indebtedness (Sec. 38)
d. To deny pre-emptive right (Sec. 39)
e. Sell, dispose, lease, encumber all or substantially all of corporate assets (Sec. 40)
f. To Invest in another corporation, business other than primary purpose (Sec. 42)
g. To declare stock dividends (Sec. 43)
h. To enter into management contracts (Sec. 44)
i. To amend the Articles of Incorporation (Sec. 16)
j. Delegate the power to the board to amend the by-laws.
AΦB

" Concurrence of the stockholders representing majority of the outstanding capital is necessary in the following
instances:
a. To enter into management contract if any of the 2 instances required in Sec. 44 are absent;
b. To adopt, amend or repeal the by-laws (Secs. 46 & 48)
c. To fix the issued value of price of shares in the situation contemplated under Sec. 62 of the Corporation Code;
d. The power to revoke the power of the board to amend the by-laws which was previously delegated by the
stockholders.

! CORPORATE OFFICERS. Corporate officers are officers who are designated as such in the law, the Articles of
Incorporation and the by-laws of the corporation.

EXCLUSIVELY FOR
! BOARD OF DIRECTORS OR TRUSTEES. A corporation, being an artificial being, can act only through its authorized
agents comprising of natural persons, as a rule, e.g. its directors and officers. The Board is the central power which
authorizes the executive agents to enter into contracts and to embark on a business.

B. BOARD OF DIRECTORS/TRUSTEES

1. GENERAL POWERS OF THE BOARD (SEC. 23, CC)

Sec. 23. The board of directors or trustees. - 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.

Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share
shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code
must be residents of the Philippines.

! Sec. 23 expresses the basic rule on corporate management that all business of the corporation shall be conducted
and all its properties shall be controlled and held by the Board of Directors or Trustees. The directors or
trustees are the executive representatives of the corporation, charged with the administration of its internal affairs and
management and use of its assets.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" A corporation can act only through its directors and officers. The Board is the central power which authorizes the
executive agents to enter into contracts and to embark on a business.
" Note: The corporation contemplated here is a corporation acting as a body. The grant of corporate power is to
the Board as a body, and not to the individual members thereof, and that the corporation can be bound only by the
collective act of the Board. The rationale for this rule is the public policy, that it makes better management
practice for the Board to sit down, to discuss corporate affairs, and decide on the basis of their consensus. It must
be noted however, that the principle that the corporation can be bound only by the collective act or will of the
Board sets only the general rule. A corporation can be bound even by the act of its officers, but always because
of the act or default of the Board. (Villanueva, Philippine Corporate Law, 2001) Thus, mutual agency principle,
as in partnerships, does not apply to private corporations.

" BASIC FUNCTIONS/ POWERS OF THE BOARD:


1. Exercise of corporate powers;
2. Conduct or management of the business affairs of the corporation;
3. Control of assets and properties.

! INDEPENDENCE. The independence of directors is reflected in Sec. 23 which expressly states that all businesses of
AΦB

the corporation shall be controlled by them. In the management of affairs of the corporation, the directors are
dependent solely upon their own knowledge of its business and their own judgment as to what the corporation’s
interests require. The stockholders do not control the directors and the concurrence of the stockholders is not
necessary for their actions unless the Corporation Code, the Articles of Incorporation or the by-laws provide otherwise.

" Stockholders cannot reverse the decisions of the Board. The theory of a corporation is that the stockholders
may have all the profits but shall turn over the management of the enterprise to the directors. Consistently, any
contract with third persons must be made by the board of directors and not the shareholders.

! RESOLUTION. The actions of the board are expressed in resolutions passed in its meetings. The board of directors
or trustees acts as a body and the directors are not agents individually.

EXCLUSIVELY FOR
" The action of one director or trustee does not bind the corporation. Absent any valid delegation or authorization
from the board, the declarations of an individual director relating to the affairs of the corporation are not binding on
the corporation. Consistently, a director cannot sell the property of the corporation without authority from the
board itself.

! What do you mean by the said limiting clause “unless otherwise provided in this Code” in Sec. 23? What are
these exceptions?
1. Because in the Corporation Code, there are corporate matters where the Board of Directors (BOD) cannot decide
on it, but instead, the stockholders exercise them. (In short, the BOD cannot decide at all.)
2. Certain corporate matters where the Board alone cannot decide. (Meaning, the decision of the stockholders is
also necessary. Example: In case of amendment which requires both approval BOD and ratification or written
assent of stockholders) ALPHA PHI BETA

2. BUSINESS JUDGMENT RULE

! Under this rule, the will of the majority controls in corporate affairs, and contracts intra vires entered into by the
board of directors are binding on the corporation and courts will not interfere unless such contracts are so

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

unconscionable and oppressive as to amount to wanton destruction of rights of the minority. Similarly, courts
cannot undertake to control the discretion of the board of directors about administrative matters as to which they have
legitimate powers of action.

! Stated differently, questions of policy or management are left solely to the honest decision of officers and
directors of a corporation and the courts are without authority to substitute their judgment for the judgment of
the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its
orders are not reviewable by the courts or the SEC.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


3. QUALIFICATIONS OF THE BOARD MEMBERS (SEC. 23 & 27, CC)

Sec. 23. The board of directors or trustees. - 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.

Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share
shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of
the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code
must be residents of the Philippines.

Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years
prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.
AΦB

! QUALIFICATIONS. The Corporation Code prescribes the following qualifications for directors or trustees:

1. He must own at least one (1) share of the capital stock of the corporation in his own name; if the corporation is a
non-stock corporation, he must be a member thereof;
2. A majority of the directors or trustees must be residents of the Philippines.
3. He must not have been convicted by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election
or appointment;
4. He must be of legal age; and
5. He must possess other qualifications as may be prescribed in special laws or regulations or in the by-laws of the

EXCLUSIVELY FOR
corporation.

" Note: Should the directors be natural persons? Under the Code, whenever there are board meetings, the
directors cannot attend by proxies. On account of their responsibility to the corporation, directors or trustees
cannot validly act by proxy. They must attend meetings of the Board and act in person and as a body. Each
director or trustee is required by law to exercise personal judgment and he cannot delegate his powers or assign
his duties. (Villanueva, Philippine Corporate Law, 2001)

The reason or rationale behind this is the principle that a private corporation being a juridical or artificial person
can only act through proxies or agents. Allowing a private corporation to be a director will give us the absurd
possibility of double proxy or violation of the principle that a delegated power cannot be further delegated.

" Take note also that in stockholders’ meeting, proxies are allowed, whereas in directors’ meeting, proxies are not
allowed.

" RULE ON CORPORATE STOCKHOLDERS. In cases of corporate stockholders or corporate members of a


corporation, such entities cannot be qualified to be elected as such to the Board of the corporation. A corporation
cannot act by itself but only through its officers and agents, and as such a corporation cannot attend personally

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

board meetings wherein it is elected as a director, but only through representative or a proxy, which would
contravene the established rule that a director may not be represented by a proxy at a meeting of the board. In
addition such corporate stockholders or members of the corporation cannot also designate an individual
representative to be voted into the Board since the representative would not be a stockholder of record nor a
member himself, which is a minimum requirement to be qualified to be voted into the board of the corporation.
(Villanueva, Philippine Corporate Law, 2001)

" SHARES. Sec. 23 requires that the share must stand in the director’s name in the books of the corporation.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Thus, one cannot be a director if he is the assignee of share and the assignment in his favor is not yet registered
in the book of the corporation. Similarly, a mere proxy who is not a stockholder himself cannot be elected as
director. ALPHA PHI BETA

" It is sufficient that legal title as it appears in the books is in the director since the legal title is what counts. What is
material is the legal title to, not beneficial ownership of, the stock as appearing in the books of the corporation. Thus, a
person to whom one share of stock has been transferred for the express purpose of qualifying him as director is qualified.
For instance, a shareholder corporation may have representation in the board by giving one of its officers or any
representative one qualifying share which the said person holds as nominee. Likewise, the trustee in a voting trust
agreement is also qualified to run as a director.

" RESIDENCE. Residence or resident as used in corporate statute is equivalent to domicile, the pertinent elements
of which are physical presence in the State and an intention to remain therein.

" AGE. There is no express statement in Sec. 23 requiring directors to be of legal age. Nevertheless, minority
restricts an individual’s capacity to act. Hence, the SEC opined that the election of minors to the Board or as a
corporate officer is not sound corporate practice. Since their capacity to act is restricted, they will not be able to
participate in all corporate acts. In addition, it is likewise submitted that the requirement for incorporators to be of
legal age under Sec. 14 of the Corporation Code should also be applied to subsequent directors. (Aquino,
AΦB

Philippine Corporate Law Compendium)

" SPECIAL LAWS. Special laws may also impose qualifications of directors in certain corporations. For example,
in nationalized activities, the rule under Commonwealth Act No. 108 as amended by PD No. 715 otherwise known
as the Anti-Dummy Law is that foreigners can be elected as directors only in proportion to their allowable equity
participation in the capital of the said activities. Those who are to be elected as directors of banks are also
subject to the other requirements of the General Banking Law and circulars issued by the Bangko Sentral ng
Pilipinas.

" The board of directors of a bank shall have at least 2 independent directors, which shall be persons other
than an officer or employee of the bank, its subsidiaries or affiliates or related interests. (Sec. 15, General

EXCLUSIVELY FOR
Banking Law of 2000)

" Listed and public companies and those with registered securities shall have at least 2 independent directors
or they shall constitute at least 20% of such Board, whichever is lesser, which shall mean a person other
than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a
relationship with the corporation, which would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director. (Sec. 38, The Securities Regulation Code)

" BY-LAWS. Sec. 47 (5) of the Corporation Code provides that a corporation is empowered to provide in its by-
laws the qualifications and disqualifications of members of the board. These provisions prescribing qualifications
and disqualifications are devices to protect the interest of the corporation.

! ADDITIONAL QUALIFICATIONS AND DISQUALIFICATIONS. The by-laws of the corporation can provide other
qualifications in addition to those provided in the Corporation Code, but it may not diminish the minimum
qualifications set forth therein.

" Gokongwei vs. SEC, held that a stockholder has no vested right to be elected to the Board of Directors. The
Court held that any person “who buys stock in a corporation does so with the knowledge that its affairs are

ALPHA PHI BETA FRATERNITY –SAN BEDA COLLEGE OF LAW 39


Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall
govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by
law.” To this extent, therefore, the stockholder may be considered to have “parted with his personal right or
privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation
and surrendered it to the will of the majority or his fellow incorporators. It cannot therefore be justly said that the
contract, express or implied, between the corporation and the stockholders is infringed by any act of the
corporation which is authorized by a majority.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! EFFECT OF DISQUALIFICATION. A disqualified stockholder cannot run for election as director. However, if he was
not initially barred from running as director, the subsequent disqualification of directors would not render the Board
incapable of transacting business for as long as the remaining directors still constitute a quorum. Such situation
merely gives rise to a vacancy in the Board.

! TERM. Sec. 23 provides that directors shall hold office for one (1) year until their successors are elected and
qualified. The officers have the same term as the directors.

" The one year term does not apply to the incorporating directors who shall act only as such until the first regular
directors are duly elected and qualified. The regular directors shall be elected during the first organizational
meeting of the corporation which shall be called immediately after registration with the SEC.

! HOLD-OVER PRINCIPLE. If no election is held, the directors and officers shall hold over until their successors are
elected. This rule applies to a going concern where there is no break in the exercise of the duties of the officers and
directors. ALPHA PHI BETA

! CORPORATE GOVERNANCE (Page 54, Aquino, Corporate Law Compendium, 2006)


AΦB

4. ELECTION OF THE BOARD MEMBERS (SEC. 24 & 26, CC); CUMULATIVE VOTING PROCEDURE

Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person
or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting
stockholder or member.

In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of
shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where
the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many

EXCLUSIVELY FOR
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: Provided, however, That no delinquent stock shall be voted.

Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no
capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for
one candidate.

Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members
called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no
election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member entitled to vote.

Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the election of the directors,
trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or
any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission.

! A corporation cannot adopt a procedure other than what is prescribed in Sec. 24. For instance, the requirement
that quorum must be present cannot be dispensed with. A provision that allows mere designation of directors without
election is also contrary to Sec. 24 of the Corporation Code. Execution of an agreement between stockholders that the
directors will be designated is not acceptable.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! Automatic membership in the Board is also not allowed. There must be an election in the manner prescribed under
Sec. 24 of the Corporation Code. (Grace Christian High School vs. CA)

! An agreement by which selection of corporate directors is reposed in any body except the stockholders is in violation of
public policy and is unenforceable.

! Note: Would it be possible for some of the directors are elected and some are not? A: Yes, in case of ex-officio
directors.

! Majority vote is not necessary for the election of each director or trustee. The candidates who will receive the
highest number of votes shall be declared as duly elected. However, it is necessary that there is a quorum in order for
the election to be valid. It is not necessary however that the candidate stockholder be present during the meeting
before he can be elected as director.

! In determining the quorum, all the stockholders at the time of the election should be considered. However, it is
also proper for the by-laws to provide a record date. For instance, the by-laws of the corporation may provide that only
stockholders of record 2 days before the election are entitled to vote.
AΦB

! CUMULATIVE VOTING. It is defined as a method of concentrating votes devised to give sufficient opportunity
to minority shareholders to secure representation in the board.

" Cumulative voting is allowed in the election of directors of stock corporations. Cumulative voting is allowed in
non-stock corporations only if the same is provided for in the Articles of Incorporation. The basic effect of
cumulative voting is to increase the chances of the minority shareholders to secure representation in the board.

" It is not required that the total votes a shareholder is entitled to cast under the cumulative voting be evenly or
proportionately distributed among his candidates. He can give such number of votes to each of his candidates at
his own discretion without any limitation except that the total votes cast by him shall not exceed the number of

EXCLUSIVELY FOR
shares owned by him multiplied by the number of directors to be elected. For example, if Mr. A has 10 shares and
there are 5 directors to be elected, he can cast 50 votes which he can give to one candidate or distribute in the
proportion he may deem fit.

" ADVANTAGES OF CUMULATIVE VOTING


1. It is democratic in that persons with large (but minority) holdings would have a voice in the conduct of the
corporation.
2. It is desirable to have as many viewpoints as possible represented on the Board of Directors.
3. The presence of minority director may discourage conflicts of interest by management since discovery is
considerably more likely.

" DISTINGUISHED FROM STRAIGHT VOTING. Under straight voting, a stockholder can cast one vote per share
for each director. For example, if a stockholder has 10 shares and 5 directors are supposed to be elected, the
said stockholder can give 10 votes to each of the 5 candidates he wants to elect. In cumulative voting, he can
cumulate all his votes and give to 1 candidate all his votes or he may divide the votes among 2 or more
candidates.

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CORPORATION LAW REVIEWER AΦB

" FORMULA. With cumulative voting in place, the formula prescribed in order to determine the number of shares
needed to elect a single director is as follows:

(S / [D+1]) + 1

S is the total number of outstanding shares and D is the number of the directors to be elected. For
example, there are 1,000 outstanding shares in the corporation and 5 directors will be elected and the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


stockholders representing all the shares are present are going to vote. In this case, 168 voting shares
([1,000/5+1] +1 = 167.67) are necessary to elect one director.

The suggested formula to determine the number of shares necessary to elect a desired number of directors is:

(S x [Desired Number of Directors] / [D + 1]) + 1

Any fractional part of 1 in the result should be dropped in using this formula. Thus, if there are 1,000 voting
shares, 5 directors will be elected, and the desired number of directors is 2, the number of shares necessary to
elect the desired number of directors is 334 shares. ([1,000 x 2] / [5+1]) + 1 = 334

5. TERM OF OFFICE

! The term of office of the members of the Board in a stock corporation shall be one (1) year and until their successors
are elected and qualified. (Sec. 23, Corporation Code)

! In the event no new Board is elected and qualified after the original one-year term of the board of directors, then under
the hold-over principle, the existing Board, if still constituting a quorum, is still a legitimate Board with full authority to
AΦB

bind the corporation.

! Ponce vs. Encarnacion, held that where no meeting is called by the Board for the stockholders to elect a new set of
directors, one may be called by the stockholders by a petition filed in the courts and the remedy for calling a
stockholders’ meeting is similar to a preliminary injunction – it is possible for the courts to set it as an ex-parte hearing
for granting it and there is no denial of due process. ALPHA PHI BETA

6. QUORUM REQUIREMENT IN BOARD MEETINGS (SEC. 25, CC)

EXCLUSIVELY FOR
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two
(2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary
or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the
corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number
of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is
a quorum shall be valid as a corporate act, EXCEPT for the election of officers which shall require the vote of a majority
of all the members of the board.

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

! GEN. RULE: A majority of the number of directors or trustees as fixed in the Articles of Incorporation shall
constitute a quorum for the transaction of corporate business, and every decision at least a majority of the directors
or trustees present at a meeting at which there is a quorum shall be valid as a corporate act.

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CORPORATION LAW REVIEWER AΦB

EXCEPTIONS:
1. Where the Articles of Incorporation or the by-laws provide for a greater majority (and not as otherwise
provided).
2. Election of officers which shall require for the quorum the majority of all members of the board.

! Directors or trustees cannot attend or vote by proxy at board meetings. He cannot even delegate his powers as
director to another person.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! Note: Shares of stock is not relevant in computing quorum, directors are counted by head.

7. REMOVAL OF BOARD MEMBERS (SEC. 28, CC)

Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation 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, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the
meeting.

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

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

Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.

! RIGHT TO REMOVE. At common law, stockholders have the traditional inherent power to remove a director for cause
which is known as “amotion.” Under the Corporation Code, the authority to remove the directors is the
prerogative of the stockholders or members of the corporation. Hence, they cannot indirectly usurp or disregard

EXCLUSIVELY FOR
the said power of the stockholders.

! REQUISITES FOR REMOVAL


1. It must take place either at a regular or special meeting of stockholders or members called for the purpose.
2. There must be a previous notice to the stockholders or members of the intention to remove a director.
3. The removal must be by a vote of the stockholders representing 2/3 of outstanding capital stock OR 2/3 of
members.
4. If the director was elected by the minority, there must be cause for removal.

! A director who was elected by the majority may actually be removed with or without cause. The requirement that there
must be cause for removal is limited to a director who was elected by the minority.

! There is no need to follow the procedure of removal required under Sec. 28 if the director is disqualified. By
operation of law, such director is disqualified to act as director thereby creating vacancy in the Board. Mere declaration
of disqualification as the cause of vacancy is sufficient.

! KINDS OF BOARD MEETINGS. The president shall preside at all meetings of the board. There are 2 types of
meeting of the Board:

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

1. REGULAR MEETING – held by the board monthly, unless the by-laws provide otherwise;

2. SPECIAL MEETING – held by the board at any time upon the call of the president, or as provided in the by-laws.
Special meetings may be held at any time upon call to be held anywhere in and outside the Philippines, unless the
by-laws provide otherwise. (Sec. 54, Corporation Code)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


8. VACANCIES IN THE BOARD (SEC. 29, CC)

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other
than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders
in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only
or the unexpired term of his predecessor in office.

A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by
an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same
meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.

! FILLING UP OF VACANCIES IN THE BOARD. Vacancies may be filled either by the stockholders (or members) or
by the remaining directors (or trustees) constituting a quorum depending on the reason for the vacancy.

! Stockholders or members shall replace/elect the director is the vacancy is due to:
1. Removal
2. Expiration of term
AΦB

3. A ground other than removal or expiration of term (e.g. death, resignation, abandonment) where the remaining
directors do not constitute a quorum
4. Increase in the number of directors

! The Board (without the concurrence of the stockholders or members) when constituting a quorum can fill the
vacancy if such is due to causes other than those enumerated above. Allowing the remaining directors or
trustees to fill up vacancies avoids the expenses and inconveniences attending the calling of stockholders’ or
members’ meeting, especially when there are many of them. The remaining directors who can elect the replacement
include hold-over directors.

! Filling up of vacancies by the remaining board members, if proper, is NOT MANDATORY. The remaining

EXCLUSIVELY FOR
directors may choose not to fill up the vacancy and leave the matter to the stockholders.

! ABANDONMENT. Vacancy may occur if the director abandoned his position. A director is deemed to have
abandoned his position where a director accepts a position in which his duties are incompatible with and which will
render him physically incapable of performing his duties as director.

! EFFECT OF VACANCY. The board may continue to function even if there is a vacancy so long as there is a quorum.
Any act, transaction or resolution of the board shall be considered valid even if there is a vacancy so long as there is a
quorum to do business. ALPHA PHI BETA

! BY-LAWS. The by-laws may provide for the procedure for filling up the vacancy provided that such is not inconsistent
with the other provisions of the Corporation Code. Thus, the by-laws may provide that the vacancy must be filled by
the stockholders instead of the remaining directors.

! TERM. The replacement director will serve only for the remaining period of the original term of the director that he
replaced.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

9. COMPENSATION OF BOARD MEMBERS (Sec. 30, CC)

Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the
directors shall not receive any compensation, as such directors, except for reasonable pre diems: Provided, however, That
any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the
corporation during the preceding year.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! RULES ON COMPENSATION
1. The by-laws may provide for a fixed compensation of the members of the board of directors.
2. If the by-laws does not provide for compensation, compensation may be granted to the directors by the vote of
the stockholders representing at least a majority of the outstanding capital stock.
3. Even if the by-laws does not provide for compensation, the directors are entitled to reasonable per diems. In
the absence of provisions in the by-laws, the board may fix the amount of their per diems.
4. The total compensation of directors shall not exceed 10% of the net income before income tax of the
corporation during the preceding year.

• The 10% limit means that the compensation can be given only if there are profits. The intent of the
legislators is that of the corporation did not earn profits, the directors may not be given salaries except
reasonable per diems.

• The limitation is intended for the protection not only of the stockholders but also of the corporate creditors
and prospective investors. Hence, the same should be strictly observed.

• The term “net income of the preceding year” refers to the net income of the year during which the director
AΦB

served.

• A bonus may be provided for by the board subject to ratification of the stockholders. However, the total
compensation, inclusive of bonus, shall be subject to the 10% threshold.

! Therefore, directors or trustees are not entitled to salary or other compensation when they perform nothing
more than the usual and ordinary duties of their office. This rule is founded on the presumption that
directors/trustees render services gratuitously, and that the return upon their shares adequately furnishes the motives
for service, without compensation.

EXCLUSIVELY FOR
• A director is entitled to receive salaries if he is performing functions as an officer. In such a case, the
salaries that he receives as an officer is not subject to the restrictions on the compensation of directors under Sec.
30. (Western Institute of Technology, Inc. vs. Salas)

! PER DIEM VS. COMPENSATION. The term “per diem” is limited to pay for a day’s services. They are
allowances of money for expenses each day. “Compensation” does not imply immediate payment. It does not
imply an immediate or direct return nor the payment of cash fare or its equivalent. As intended by the legislators who
enacted the Corporation Code, the term “compensation” is treated synonymously with “salary.” Compensation
therefore includes salaries, remunerations, bonuses, gifts or any incentive for services rendered for the corporation.

! The rules provided for under Sec. 30 apply to the members of the board of trustees. While members of non-
stock non-profit corporations are not supposed to receive part of the income of corporation, they may be given
compensation if they actually render services to the corporation as when they are acting as officers or employees of
the corporation.

! COMPENSATION OF OFFICERS. Their compensation may be fixed by the board by way of a resolution. However,
resolutions of the board fixing the compensation of officers are prospective in application.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

• The salaries of officers are not covered by the 10% limit under Sec. 30. If a resolution of the board fixing the
salaries of officers is not tainted with irregularity and is not for the purpose of disposing of the profits of the
corporation, the only question to be determined is whether the salary is reasonable. Compensation is dealt with
as an issue of business judgment to be questioned only in case of clear abuse.

! REMEDY IN CASE OF ABUSE. The remedies in case of clear abuse of discretion to give salaries or in case of
compensations and per diems that are contrary to the provisions of the Corporation Code include a derivative suit.
Thus, a per diem given without proper authorization or unreasonably excessive may ordinarily be recovered in a

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


stockholder/member’s suit.

C. CORPORATE OFFICERS

1. CONCEPT OF CORPORATE OFFICERS

! CORPORATE OFFICERS are officers who are designated as such in the law, the Articles of Incorporation and the by-
laws of the corporation.

! Sec. 25 of the Corporation Code names only 3 officers: President, Treasurer and Secretary. In addition, Sec. 63
recognizes the existence of a Vice President and Assistant Secretary.

! The by-laws may create other corporate offices, e.g. Chairman of the Board, General Manager, Auditor, Comptroller, or
such other officers as may be necessary for a particular corporation.

• If the board is not expressly authorized by the by-laws to create corporate offices, the board may still create
appointive positions but the persons occupying such positions are not considered corporate officers. (SEC
AΦB

Opinion, November 25, 1993) ALPHA PHI BETA

! The board of directors may also be empowered under the by-laws to create additional offices. The by-laws may
give authority to the board to create such corporate office as the board may deem necessary for corporate business.
In such cases, the officer who is appointed pursuant to such authority is considered a corporate officer. (Nacpil
vs. Intercontinental Broadcasting Corporation)

! An “office” has been defined as a creation of the charter of a corporation, while an “officer” is the person elected by
the directors or stockholders. On the other hand, an “employee” occupies no office and is generally employed not by
action of the directors and stockholders but by the managing officer of the corporation and who also determines the
compensation to be paid to such employee. (Nacpil vs. Intercontinental Broadcasting Corporation)

EXCLUSIVELY FOR
! If one is a corporate officer, jurisdiction over his election or appointment is vested with the Regional Trial
Court pursuant to Sec. 5.2 of the Securities Regulation Code (RA No. 8799) which transferred jurisdiction of the
Securities and Exchange Commission to regular courts over cases enumerated in Sec. 5 of PD No. 902-A. If one is a
regular employee, jurisdiction is vested in the Labor Arbiter/National Labor Relations Commission (NLRC).

! QUALIFICATIONS AND FUNCTIONS. Minimum qualifications and duties of the corporate officers are provided for in
the Corporation Code and the by-laws. Sec. 47 states that the by-laws may provide for the qualifications, duties and
compensation of directors or trustees, officers and employees. With respect to officers, their duties may likewise be
delegated by the Board.

• PRESIDENT
1. Must be a director (and consequently must be a stockholder).
2. May not be concurrently the treasurer and secretary.

" The president shall preside at all meetings of the directors or trustees as well as of the stockholders or
members, unless the by-laws provide otherwise. (Sec. 54, Corporation Code)

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" Certificates of stock shall be signed by the president. (Sec. 63, Corporation Code)

" A corporate president is often given general supervision and control over corporate operations. In
the absence of a charter or by-law provision to the contrary, the president is presumed to have the authority
to act within the domain of the general objectives of the corporation’s business and within the scope of his
usual duties. (People’s Aircargo & Warehousing Co., Inc. vs. CA)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" The president of a corporation possesses the power to enter into a contract for the corporation, when
“the conduct on the part of both the president and the corporation [shows] that he had been in the habit of
acting in similar matters on behalf of the company and that the company had authorized him so to act and
had recognized, approved and ratified his former and similar actions.” Furthermore, a party dealing with the
president of a corporation is entitled to assume that he has the authority to enter, on behalf of the
corporation, into contracts that are within the scope of the powers of said corporation and that do
not violate any statute or rule on public policy. (People’s Aircargo & Warehousing Co., Inc. vs. CA)

• VICE PRESIDENT. Sec. 63 of the Corporation Code recognizes that there may be a Vice President in a
corporation. As a general rule, in the absence of the president or if the office of the president becomes vacant,
the vice president, if one has been elected or appointed, has the authority to act in his stead, or to perform any
duty of the office. Likewise, the by-laws ordinarily assign to the vice president the duty of succession to the chief
executive officership in the absence or disability of the president or the chairman of the board and such other
duties as the board may assign.

• SECRETARY. The secretary must be a resident and citizen of the Philippines. Primarily, the secretary is duty
bound to keep the corporate records and to make proper entries thereto.
AΦB

" He is the officer who maintains the stock and transfer book.
" Certificates of stocks of a corporation must be signed by the corporate secretary. (Sec. 63, Corporation
Code)
" The notices of the stockholder’s meetings are also sent by the secretary. He likewise prepares the minutes
of the meetings.
" He must not concurrently be the president.

• TREASURER. He normally takes care of the funds of the corporation. He is ordinarily the custodian of the funds
of the corporation with authority to disburse them in proper cases. In the absence of provisions in the by-laws to
the contrary, the treasurer is authorized to receive funds, issue receipts, and keep the money of the corporation.

EXCLUSIVELY FOR
" The Corporation Code does not require the treasurer to be a resident or a citizen of the Philippines.
However, the residence requirement for treasurers has been adopted by the Securities and Exchange
Commission as a matter of policy in view of the nature of the functions of a treasurer.

• CHAIRMAN. The concept of board chairman and his functions as executive vary so widely in different
companies. The chairman may be concurrently the president and he may be designated as the chief executive
officer of the corporation. In other corporations, there may be a president who shall be the chief executive officer
and chairman whose function relate to presiding at meetings of the board and of committees of which he is a
member. In such latter case, the duty of the chairman as presiding officer is not an executive one.

! CONCURRENCE. Any two or more positions may be held concurrently by the same person. However, Sec. 25
provides that no one shall act as president and secretary or as president and treasurer at the same time. The law
therefore deems the two positions as inconsistent with the position of a president.

No incompatible positions may be held even if the Corporation Code allows concurrent positions. For example, the
internal auditor may not be the external auditor of the company. A person cannot be a chairman and vice chairman at
the same time.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

2. VALIDITY AND BINDING EFFECT OF ACTS OF CORPORATE OFFICERS

! In some cases, corporate officers like the President can also bind the corporation. The authority of such
individuals to bind the corporation is generally derived from:
1. Law
2. Corporate by-laws
3. Authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course
of business. (People’s Aircargo and warehousing Co., Inc. vs. CA; Inter-asia Investment Industries, Inc. vs.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


CA)

! A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that
the authority to do so has been conferred upon him, and these include:
1. Powers that, in the usual course of particular business, are incidental to those expressly provided.
2. Powers that may be implied from the powers intentionally conferred.
3. Powers added by custom and usage, as usually pertaining to the particular officer or agent; and
4. Apparent powers as the corporation has caused a person dealing with the officer or agent to believe that it has
conferred.

! With respect to service of summons, Sec. 11 of Rule 14 of the Rules of Civil Procedure provides that when the
defendant in a case is a corporation organized under the laws of the Philippines, service may be made on the
president, general manager, corporate secretary, treasurer or in-house counsel. Service on officers not specified
under Sec. 11 is invalid and does not bind the corporation.

3. DOCTRINE OF APPARENT AUTHORITY. A corporation that knowingly permits its officers or any other agent, to do
acts within the scope of an apparent authority, and thus holds himself out to the public as possessing power to do those
acts, the corporation will, as against anyone who has in good faith dealt with the corporation through such agent, be
AΦB

estopped from denying his authority.

! Apparent authority of an officer may be ascertained through:


1. The general manner in which the corporation holds out an officer or agent as having the power to act or, in other
words the apparent authority to act in general, with which it clothes him; or
2. The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within
or beyond the scope of his ordinary powers.

! Anybody who alleges that the corporate officer has apparent authority is required to present evidence of similar act or
acts executed either in his favor or in the favor of other parties. It is not the quantity of similar acts which establishes

EXCLUSIVELY FOR
apparent authority, but the vesting of a corporate officer with power to bind the corporation. (People’s Aircargo and
Warehousing Co., Inc. vs. CA; Inter-Asia Investment Industries, Inc. vs. CA)

! DE FACTO OFFICERS. A person is a de facto officer if he acts as such, under color of authority, through election
or appointment. By color of authority is meant authority derived from an election or appointment, although irregular or
informal, so that the incumbent must be more than a volunteer.

" The de facto doctrine was introduced as a matter of public policy and necessity, to protect the interests of the
public and individuals where those interests were involved in the acts of the officers without being lawful officers.
The official dealings of officers or directors de facto with third persons are sustained as rightful and valid, on the
ground of continuous acquiescence by the corporation and suffering them to hold themselves out as having such
authority, thereby inducing others to deal with them in such capacity.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

D. LIABILITY OF DIRECTORS, TRUSTEES AND OFFICERS

1. INSTANCES WHEN CORPORATE OFFICERS/DIRECTORS ARE HELD SOLIDARILY LIABLE (SEC. 31, CC)

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross negligence or 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

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and
other persons.

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.

! DUTIES. In a broad sense, management has threefold duties namely, (1) Obedience, (2) Diligence, and (3) Loyalty.

! OBEDIENCE. Obedience requires compliance with law and rules. In relation to this duty, directors and officers have
the duty to act intra vires and within authority.

! DILIGENCE. The directors and officers are required to exercise due care in the performance of their functions.
Negligence on their part proximately causing damage to the corporation will make them liable as when they directed
the affairs of the corporation in bad faith or with gross negligence. (Sec. 31, Corporation Code)

" Directors and officers are not liable for simple mistakes. They are not insurers and are not liable for errors of
AΦB

judgment or mistakes while acting with reasonable diligence, care and skill. Nevertheless, honesty or good faith
alone does not suffice if there was gross negligence.

" The standard of care to be applied in the exercise of diligence is of a reasonably prudent person. The same
standard is also sometimes referred to as the standard of an ordinarily prudent director under similar
circumstances. ALPHA PHI BETA

" Determination of exercise of due care entails examination of the facts and circumstances of a particular case.
Court should consider such circumstances such as the kind of corporation involved, its size and financial
resources, the magnitude of the transaction, and the immediacy of the problem presented.

EXCLUSIVELY FOR
! LOYALTY. The director or officer owes loyalty and allegiance to the corporation – a loyalty that is undivided and an
allegiance that is influenced by no consideration other than the welfare of the corporation. Any adverse interest
of a director will be subject to a rigid and uncompromising scrutiny.

" Directors and officers owe fiduciary duty to the corporation and to a certain extent to the shareholders. Hence, the
Corporation Code provides for rules on:
1. Self-dealing directors
2. Contracts between corporation with inter-locking directorship
3. Usurpation of the corporation’s business opportunity
4. Oppression of the minority stockholders
5. Conflict of interest

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! LIABILITY OF DIRECTORS/OFFICERS
GEN. RULE: Directors and officers are not solidarily liable with the corporation. Obligations incurred by them, acting
as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. This is in
consonance with the Doctrine of Corporate Entity.

EXCEPTIONS: Personal liability may be incurred by directors and officers in the following cases (as an exception to
the Doctrine of Corporate Entity):
1. When directors and trustees or, in appropriate cases, the officers of the corporation:

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


a. Vote for or assent to patently unlawful acts of the corporation;
b. Act in bad faith or with gross negligence in directing the affairs of the corporation
c. Are guilty of conflicts of interest to the prejudice of the corporation, its stockholders or members, and
other persons.
2. When the director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation. (Example: when he signs as co-maker in a promissory note/ guaranty)
3. When the director, trustee or officer is made, by specific provisions of law, personally liable for his corporate
actions. (Example: BP 221; RA 7832, Anti Pilferage Law2)
4. When a director has consented to the issuance of watered stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written objection thereto.

" PATENTLY UNLAWFUL ACTS. For a wrongdoing to make a director personally liable for debts of the
corporation, the wrongdoing approved or assented to by the director must be a patently unlawful act. Mere
failure to comply with the notice requirement of labor laws on company closure or dismissal of employees
does not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law
which imposes penalties for commission of such unlawful acts. There must be a law declaring the act
unlawful and penalizing the act. (Carag vs. NLRC, G.R. No. 147590, April 2, 2007) ALPHA PHI BETA
AΦB

2. SELF-DEALING DIRECTORS/OFFICERS (SEC. 32, CC)

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the option of such corporation, unless all 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 nor 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.

EXCLUSIVELY FOR
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director
or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That
the contract is fair and reasonable under the circumstances.

! SELF-DEALING. Self-dealing directors, trustees or officers are those who personally contract with the
corporation in which they are directors, trustees or officers. It is not prohibited but is discouraged because the
directors, trustees or officers have fiduciary relationship with the corporation and there can be no real bargaining where
the same is acting on both sides of the trade.

1 Section 1, BP 22. Checks without sufficient funds. “ x x x Where the check is drawn by a corporation, company or entity, the
person or persons who actually signed the check in behalf of such drawer shall be liable under this Act.”
2 Sec. 7. RA 7832. If the violation (of Anti-electricity and Electric Transmission Lines/Materials Pilferage Act of 1994) is committed

by a partnership, firm, corporation, association or any other legal entity, including a government-owned or -controlled corporation, the penalty
shall be imposed on the president, manager and each of the officers thereof who shall have knowingly permitted, failed to prevent or was
otherwise responsible for the commission of the offense.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! STATUS OF CONTRACT
GEN. RULE: The contract between the corporation and the self-dealing director, trustee or officer is voidable.
EXCEPTION: The contract is valid of the following requirements for its validity are present:
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. The vote of such director or trustee was not necessary for the approval of the contract.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


3. The contract is fair and reasonable under the circumstances.
4. In case of an officer, the contract with the officer has been previously authorized by the Board of Directors.

! RATIFICATION. Even if not all the requirements are met, the contract with the self-dealing directors, trustees or
officers may still be ratified by a vote of stockholders representing at least 2/3 of outstanding capital stock or a
vote of at least 2/3 of the members in a meeting called for the purpose.

" In order that ratification may be considered valid and effective, it is however necessary that the following
conditions are present:
a) Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting;
b) The contract is fair and reasonable under the circumstances.

3. CONTRACTS INVOLVING INTER-LOCKING DIRECTORS (SEC. 33, CC)

Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one
AΦB

corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to
the provisions of the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes
of interlocking directors.

! EFFECT OF INTERLOCKING DIRECTORSHIP. Interlocking directorship by itself is not prohibited under the
Corporation Code. However, the by-laws may contain provisions that disallow interlocking directorship in
certain cases.

EXCLUSIVELY FOR
" Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any
doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As
agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." "The ordinary trust relationship of directors of a
corporation and stockholders is not a matter of statutory or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof." A
director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve himself first and his
cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of
common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters.
He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by
doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous
he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. The
doctrine of "corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be
upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit
when the interest of the corporation justly calls for protection. It is not denied that a member of the Board of Directors of the
San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and

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pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an
opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation,
from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the
performance of his corporation duties above his personal concerns. The offer and assurance of Gokongwei that to avoid
any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the
by-laws involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with
Gokongwei's primary motive in running for board membership — which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's
duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management.
(Gokongwei vs. Securities and Exchange Commission)

! Sec. 33 recognizes as valid a contract between 2 or more corporations which have interlocking directors (one,
some, or all of the directors in one corporation is/are also director/s in another corporation) as long as there is no fraud
and the contract is fair and reasonable under the circumstances.

! However, if the interest of the interlocking director in one corporation is substantial, i.e., his stockholdings exceed 20%
of the outstanding capital stock and in the other merely nominal, the rules of Sec. 32 on self-dealing directors shall
apply insofar as the latter corporation is concerned.

" If the interest of the interlocking director in one of the corporations is nominal in one and substantial in the other, a
contract between the 2 corporations shall be valid, if the following conditions are present:
1. The presence of the interlocking director or trustee in the board meeting (of the corporation where his
interest is merely nominal) in which the contract was approved was not necessary to constitute a quorum
AΦB

for such meeting.


2. The vote of such director or trustee was not necessary for the approval of the contract.
3. The contract is fair and reasonable under the circumstances.

" RATIFICATION. Contract between corporations with interlocking directors/trustees must always meet the third
condition cited above, that is, said contracts must be fair and reasonable under the circumstances. If the contract
is fair and reasonable, the absence of the first or second condition makes the contract voidable and capable of
ratification. ALPHA PHI BETA

! A contract between two or more corporations having interlocking directors shall not be invalidated on that ground
alone, except cases of fraud, provided the contract is fair and reasonable under the circumstances.

EXCLUSIVELY FOR
! Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for
purposes of interlocking directors.

! Sec. 33 does not apply if the corporation allegedly prejudiced is a third party, not one of the corporations with
interlocking directors.

4. DOCTRINE OF CORPORATE OPPORTUNITY (SEC. 34, CC)

Sec. 34. Disloyalty of a director. - 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. This provision shall be applicable, notwithstanding
the fact that the director risked his own funds in the venture.

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! A director has a duty to refrain from usurping a business opportunity rightly belonging to the corporation.
Reason: He holds a position of utmost trust and confidence, and therefore owes the corporation his undivided loyalty.
Sec. 34 applies if the corporate business opportunity:
(1) is one which the corporation is financially able to undertake;
(2) from its nature, is in line with the corporation’s business and is of practical advantage to it; and
(3) is one in which the corporation has an interest or a reasonable expectancy.

! DOCTRINE OF CORPORATE OPPORTUNITY - When a director, trustee or officer attempts to acquire or acquires,

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


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 liability 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.

" The doctrine of corporate opportunity is precisely a recognition by the courts that the fiduciary standards could not
be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the corporation justly calls for protection. (Gokongwei
vs. SEC)

! The last paragraph of Section 31 and Section 34 contain the doctrine of corporate opportunity. In case of such conflict
of interests, and the director acts against the good of the corporation, he shall be accountable for the profits he
obtained, even if he had risked his own funds.

! TESTS
1. Interest or Expectancy Test which precludes acquisition by corporate officers of the property of a business
opportunity in which the corporation has a “beachhead” in the sense of a legal or equitable interest or expectancy
growing out of a pre-existing right or relationship.
AΦB

2. Line of Business Test which characterizes an opportunity as corporate whenever a managing officer becomes
involved in an activity intimately or closely associated with the existing or prospective activities of the corporation.
3. Fairness Test which determines the existence of a corporate business opportunity by applying ethical standards
of what is fair and equitable under the circumstances.
4. Mixed Test. Another approach is to apply any two or all the tests.

! BURDEN OF PROOF. The burden of proof on the questions of good faith, fair dealing and loyalty of the officer to the
corporation should rest upon the officer who appropriated the business opportunity for his own advantage because a
fiduciary with a conflict of interest should be required to justify his actions and because of the practical reality that the
facts with regard to such questions are more apt to be within his knowledge.

EXCLUSIVELY FOR
! RATIFICATION. The guilty director will only be exempted from liability to the corporation if his disloyal act is ratified
by the vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. Note that
there is no similar provision in Sec. 31.

! FINANCIAL CAPABILITY. Property or business opportunity ceases to be a corporate opportunity and is transformed
into personal opportunity where the corporation is definitely no longer able to avail itself of the opportunity. The
inability to avail itself of a business opportunity may arise from financial insolvency or legal restrictions or any other
factor which prevents the corporation from acting upon the opportunity for its own advantage.

! Note: If the corporate opportunity was taken by an officer, Sec. 34 does not apply. The 2nd paragraph of Sec. 31
should apply. Under the latter provision, there is no ratification.

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CORPORATION LAW REVIEWER AΦB

E. EXECUTIVE COMMITTEE (SEC. 35, CC)

Sec. 35. Executive committee. - The by-laws of a corporation may create an executive committee, composed of not less than
three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board,
except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in
the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the
shareholders.

! Sec. 35 recognizes an already existing corporate practice in the Philippines whereby the board of directors delegates to an
executive committee composed some members of the board corporate powers to expedite action on important matters
without the need for a board meeting especially when such meeting cannot be readily held. Thus, the committee directly
manages the operations of the corporation between meetings of the board thereby reducing the workload of the latter.

! PURPOSE. The Corporation Code allows the creation of an executive committee because the board may not readily face
the contingency of confronting urgent matters which requires its attention.

! BY-LAWS. The executive committee can only be created by virtue of a provision in the by-laws. The board, by itself,
cannot create an executive committee if nothing is stated in the by-laws.

! COMPOSITION. Sec. 35 provides that an executive committee must be composed of not less than 3 members of the
board, to be appointed by the board. This means that there can be members of the executive committee who are not
directors provided at least 3 members are directors.

! AUTHORITY. The executive committee has all the authority of the board to the extent provided in the resolution of the
AΦB

board or in the by-laws. The resolutions passed and approved by the executive committee are as valid as the resolutions of
the board provided the resolutions have been made at the time the committee is constituted. Thus, the executive committee
is, within the limits of its authority, as powerful as the board as it actually performs certain duties of the board and in effect, it
is acting as the Board itself.

" Said committee may act, by majority vote of all its members, on such specific matters within the competence of the
board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to:
1. approval of any action for which shareholders' approval is also required;
2. the filling of vacancies in the board;
3. the amendment or repeal of by-laws or the adoption of new by-laws;

EXCLUSIVELY FOR
4. the amendment or repeal of any resolution of the board which by its express terms is not so amendable or
repealable; and
5. a distribution of cash dividends to the shareholders. (Note: Distribution of stock dividends may not be declared
by an executive committee as it falls under the first exception: when approval of any action for which
shareholders' approval is also required. See Sec. 43, Corporation Code.)

" The decision of the executive committee is not subject to appeal to the board. They are valid and unappealable.
However, if the resolution of the executive committee is invalid (as for instance it is not one of the powers conferred
thereto) it may be ratified by the board.

" If the executive committee was not validly constituted, the members thereof may be considered de facto officers.

! QUORUM. The general rule for quorum requirements for the executive committee is the same as that for directors. A
majority of the group constitutes the quorum.

! REQUIRED VOTE. The majority vote requirement for an executive committee shall be interpreted to mean majority of all
the committee members regardless of the classification of the membership into director/members or non-director/members.
This is basically premised on the cardinal rule of statutory construction that if the law does not qualify, no further
qualification should be made thereon.

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CORPORATION LAW REVIEWER AΦB

V. CORPORATE POWERS

A. DOCTRINE OF LIMITED CAPACITY; CONCEPT OF ULTRA VIRES ACT (Sec. 45, CC)

Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers
except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


exercise of the powers so conferred.

! DOCTRINE OF LIMITED CAPACITIES. The powers of the corporation are given by law and it cannot exercise powers that
are not so given. In fine, the powers of the corporation are only those that are expressly provided for, implied or
incidental powers.

! CONCEPT OF ULTRA VIRES. Ultra vires acts are those powers that are not conferred to the corporation by law, by its
Articles of Incorporation or those that are not implied or necessary or incidental to the exercise of powers so conferred.

! An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by law.

! The concept of ultra vires can also include those acts that may ostensibly be within such powers but are, by general or
special laws, either proscribed or declared illegal.

! In determining whether or not a corporation may perform an act, one considers the logical and necessary relation between the act
assailed and the corporate purpose expressed by the law or in the charter. For if the act were one which is lawful in itself or not otherwise
prohibited and done for the purpose of serving corporate ends or reasonably contributes to the promotion of those ends in a substantial
and not merely in a remote and fanciful sense, it may be fairly considered within corporate powers.
AΦB

! DISTINGUISHED FROM OTHER ACTS

" ILLEGAL ACTS. Corporate transactions which are illegal because prohibited by statute or against public policy are
ordinarily void and unenforceable regardless or performance, ratification, or estoppel.

" INTRA VIRES BUT IRREGUARLY EXECUTED ACTS. Generally, a transaction within corporate powers but executed
in an irregular or unauthorized manner is voidable only, and may become enforceable by reason of ratification or
express or implied assent by the stockholders or by reason of estoppel of the corporation or the other party to the
transaction to raise the objection, particularly where the benefits are retained.

EXCLUSIVELY FOR
" In addition, the general rule is that a corporation must act in the manner and with the formalities, if any, prescribed by
its charter or by the general law. However, a corporate transaction or contract which is within the corporation powers,
which is neither wrong in itself nor against public policy, but which is defective from a failure to observe in its
execution a requirement of law enacted for the benefit or protection of a certain class, is voidable only, and is
valid until avoided, not void until invalidated; the parties for whose benefit the requirement was enacted may ratify or
may be estopped to asserts its invalidity, and third persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its granted powers.

" LEGAL BUT ULTRA VIRES ACTS. Where an act is legal but is outside the powers of the corporation, there can
be no ratification (since under the Civil Code, one requisite of ratification is that the infirmity must have already ceased
at the time of such ratification) but estoppel may be availing, as when one has benefited from the contract.

" ULTRA VIRES ACTS OF OFFICERS. Section 23 of the Corporation Code states that the corporate powers are to be exercised, all
business conducted, and all property of corporations controlled and held, by the Board of Directors. When the act of the board is
within corporate powers but it is done without the concurrence of the shareholders as and when such approval is required by law or
when the act is beyond its competence to do, the act has been described as void or, as unenforceable, or as ineffective and not
legally binding. These holdings notwithstanding, the act cannot accurately be likened to an ultra vires act of the corporation itself
defined in Section 45 of the Code. Where the act is within corporate powers but the board has acted without being competent to
independently do so, the action is not necessarily and totally devoid of effects, and it may generally be ratified expressly or impliedly.

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Thus, an acceptance of benefits derived by the shareholders from an outside investment made by the board without the required
concurrence of the stockholders may, nonetheless, be so considered as an effective investment. It may be said, however, that when
the board resolution is yet executory, the act should aptly be deemed inoperative and specific performance cannot be validly
demanded but, if for any reason, the contemplated action is carried out, such principles as ratification or prescription when
applicable, normally unknown in void contracts, can serve to negate a claim for the total nullity thereof. (J. Vitug, Concurring
Opinion, Rural Bank of Milaor vs. Ocfemia)

" Corporate officers, in their case, may act on such matters as may be authorized either expressly by the By-laws or Board
Resolutions or impliedly such as by general practice or policy or as are implied by express powers. When officers are allowed to act

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


in certain particular cases, their acts conformably therewith can bind the company. Hence, a corporate officer entrusted with general
management and control of the business has the implied authority to act or contract for the corporation which may be necessary or
appropriate to conduct the ordinary business. If the act of corporate officers comes within corporate powers but it is done without
any express or implied authority therefor from the by-laws, board resolutions or corporate practices, such an act does not bind the
corporation. The Board, however, acting within its competence, may ratify the unauthorized act of the corporate officer. So, too, a
corporation may be held in estoppel from denying as against innocent third persons the authority of its officers or agents who have
been clothed by it with ostensible or apparent authority. (J. Vitug, Concurring Opinion, Rural Bank of Milaor vs. Ocfemia)

! EFFECTS OF ULTRA VIRES ACTS. If the act is ultra vires not because it is illegal but because it is not an express, implied
or incidental power, the same may in certain cases be enforced. General prohibitions against exceeding corporate powers
and prohibitions intended to protect a particular class or specifying the consequences of violation may not preclude
enforcement of the transaction and an action may be had for the part unaffected by the illegality or for equitable restitution.
Senator Salonga summarized the rules in this wise:

1. A corporation that is engaged in ultra vires business is liable for torts committed by its agents within their authority in
the course of that business.
2. If a corporation acted outside its authority in taking or holding title to property, the validity of the Torrens Certificate of
Title cannot be questioned on the ground that the corporation was without authority or exceeded its authority in taking
or holding the property.
AΦB

3. When the contract is fully executed on both sides, the contract is effective and will stand as a foundation of rights
acquired under it.
4. When the contract is executory on one side and has been fully performed on the other, the party who has received
benefits from the performance is estopped in claiming that the contract is ultra vires.
5. When the contracts are wholly executory on both sides, neither party can maintain an action. The rule is justified since
the only injustice that will be caused is the loss of prospective profits but the protection of the stockholders may be a
sufficient ground to enjoin the performance of the act.

! It was observed that an ultra vires act can be ratified or parties may be estopped from raising such defense. However, it is
believed that an ultra vires act cannot be ratified because it is required that at the time of the ratification, the cause of the
nullity has already ceased to exist. In ultra vires act, the act is not within the power of the corporation, hence, the ground for

EXCLUSIVELY FOR
being ultra vires cannot cease. Nevertheless, the effect of ultra vires contracts for both partially and wholly executed
contracts can still be maintained on the basis of estoppel. Thus, without saying that the contracts were ratified,
the parties can be estopped from citing the ultra vires nature of the acts.

B. CLASSES OF CORPORATE POWERS (EXPRESS, IMPLIED, INCIDENTAL)

! EXPRESS POWERS are powers expressly provided by the Corporation Code, applicable special laws, administrative
regulations, and the Articles of Incorporation of the corporation. The express powers under the Corporation Code include
(1) the general powers under Sec. 36 and (2) the specific powers under Sections 11, 16, and 37 to 44.

" GENERAL POWERS. The general powers of the corporation are exercised by the board unless other specific
provisions provide otherwise. Generally, mere resolution by the board is enough for the exercise of such powers.

1. POWER TO SUE AND BE SUED. This power is exercised by the corporation through the board. Hence, the SC
now requires corporations to attach a copy of the Board Resolution authorizing the filing of the complaint or
petition. ALPHA PHI BETA

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2. POWER OF SUCCESSION. Sec. 36 is explicit that the power of succession of a corporation by its corporate
name is only for the period of time stated in the Articles of Incorporation and the certificate of incorporation. Thus,
without proper extension of the term, the right of the corporation to exist continues only up to the end of the term.

3. POWER TO ADOPT AND USE A CORPORATE SEAL. The power to adopt and use a seal of corporations can
be traced in ancient common law where all actions of the corporation were required to be under seal. Under the
Corporation Code, a seal is not indispensable for the transactions or contracts of the corporation. A document
may be considered valid and binding even in the absence of a seal. However, one instance when a seal is

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


necessary is with respect to the certificate of stock as provided for under Sec. 63.

4. POWER TO AMEND THE ARTICLES OF INCORPORATION. This must be in accordance with the provisions of
the Corporation Code, particularly Sec. 16.

5. POWER TO ADOPT BY-LAWS. It is implicit from Sec. 36 that a corporation may exist even without the by-laws.
The existence of the power of the corporation to adopt by-laws does not ordinarily and of necessity make the
exercise of such power essential to its corporate life or to the validity of its acts. By-laws are for the benefit of the
stockholders or members to regulate the manner of conducting the internal affairs of the corporation.

" The power to adopt, amend or repeal is subject to the condition that the by-laws must not be contrary to law,
morals, or public policy.

6. POWER REGARDING SHARES AND MEMBERSHIP. The subscribers, and not the stock corporation, are the
owners of the shares therein. However, the corporation has certain powers relating to shares, including:

a. The power to issue previously unsubscribed shares;


b. The power to sell treasury stocks;
c. The power to sell delinquent shares;
AΦB

d. The power to acquire its own shares in proper cases;


e. The power to redeem redeemable shares;
f. The power to increase or decrease the par value of shares; and
g. To resort to stock split.

" A non-stock corporation has the power to admit members to the corporation. The corporation may prescribe
the qualifications of members and may provide for grounds for their disqualification.

7. POWER TO DEAL WITH REAL OR PERSONAL PROPERTY. A corporation has the power to purchase,
receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal

EXCLUSIVELY FOR
property, including securities and bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution.

" The power under this provision can be exercised by the Board without concurrence of the stockholders.
Stockholder’s approval is necessary only in cases covered by Sections 40 and 42. Thus, in the absence of
an express restriction in the Articles of Incorporation and by-laws, a corporation may, through a board
resolution, validly lease or acquire real property from another person if it does so in good faith and in the
legitimate furtherance of its corporate purposes to further the interest of the corporation without securing the
consent of the stockholders.

" There are 2 basic requirements in order that a corporation can deal with real or personal property:
a. It must be reasonably and necessarily required by the transaction of the lawful business of the
corporation; and
b. It is subject to the limitations prescribed by law and the Constitution.

8. TO ENTER INTO MERGER OR CONSOLIDATION. Merger occurs when 2 or more corporations merge into a
single corporation which shall be one of the constituent corporations. There is consolidation when 2 or more

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corporations for a new single corporation. The rules on merger and consolidation are provided for in Sections 76
to 80 of the Corporation Code.

9. TO MAKE REASONABLE DONATIONS. The Corporation Code now allows corporations to make donation so
long as the following are complied with:
a. The donation must be reasonable;
b. It must be for valid purposes including public welfare or for hospital, charitable, cultural, scientific, civic or
similar purposes;

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


c. It must not be in aid of any political party or candidate or for purposes of partisan political activity.

10. TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS. Sec. 36 (10) provides that a corporation has
the power to establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees. The power of the corporation to grant gratuity pay to employees is covered by such provision.

" SPECIFIC POWERS. The specific powers of corporation are provided for in the Corporation Code including the
specific requirements and/or procedure for their exercise. These include the following powers:

1. To extend or shorten the corporate term under Sections 11 and 37;


2. To amend the Articles of Incorporation under Sec. 16;
3. To increase or decrease capital stock under Sec. 38;
4. To deny pre-emptive right under Sec. 39;
5. To sell or dispose all or substantially all of the assets of the corporation under Sec. 40;
6. To acquire its own shares under Sec. 41;
7. To invest corporate funds in another corporation, business or for any other purpose under Sec. 42;
8. To declare dividends under Sec. 43; and
9. To enter into a management contract under Sec. 44.
AΦB

! IMPLIED POWERS include all powers that are reasonably necessary or proper for the execution of the powers expressly
granted and are not expressly or impliedly excluded. The existence of implied power is recognized under paragraph 11
of Sec. 36. They are those that may be reasonably inferred from those expressly conferred; in consonance with the
Doctrine of Necessary Implication)

" WHEN IMPLIED. The corporation only has the powers expressly granted in its charter or in the statutes under which it is created or
such powers as re necessary for the purpose of carrying out its express powers. Only such powers as are reasonably necessary to
enable corporations to carry out the express powers granted and the purposes of the corporation are implied. Powers merely
convenient or useful are not implied if they are not essential, having in view the nature and object of the corporation.

EXCLUSIVELY FOR
" Thus, in the determination of what businesses may be carried on by the corporation, reference must be made to its Articles of
Incorporation and unless the power to carry a particular business is either expressly or impliedly conferred thereby, it does not exist.
There should be a specification of the corporation’s intended purpose with sufficient clarity and elucidation in the Articles of
Incorporation to define with more certainty the scope of its business.

" It is a general rule that when the charter of a corporation confers certain enumerated powers, it is to be construed as including
powers reasonably necessary to the proper exercise of the enumerated powers and excluding all other non-enumerated powers.

! INCIDENTAL POWERS are powers that are deemed conferred on the corporation because they are incidental to the
existence of the corporation. Corporations are deemed given such powers because they are the consequences of the fact
that they exist as juridical persons. Note that some incidental powers are also express powers.

" Incidental powers include:


1. Right to succession;
2. Right to have a corporate name;
3. Right to make by-laws for its government;
4. Right to sue and be sued; and
5. Right to acquire and hold properties for the purposes authorized by the charter.

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! OTHER POWERS. Sec. 36 provides that the corporation is empowered to exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated in the Articles of Incorporation. Thus, the corporation has the
power to hire employees, engage the services of contactors, open bank accounts, and other matters that are necessary for
its operations.

1. TO ENTER INTO A PARTNERSHIP. A corporation cannot enter into a contract of partnership. This limitation is
based on public policy since in a partnership, the corporation would be bound by the acts of the persons who are not

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


its duly appointed and authorized agents and officers, which would be entirely inconsistent with the policy of the law
that the corporation shall manage its own affairs separately and exclusively. By way of exception, the SEC allows a
corporation to be a partner if the following conditions are present.
a. The authority to enter into a partnership relation is expressly conferred by the charter or Articles of Incorporation
of the corporation.
b. The nature of the business venture to be undertaken by the partnership is in line with the business authorized by
the charter or Articles of Incorporation of the corporation involved.
c. The partnership must be a limited partnership and the corporation must be a limited partner. (SEC Opinion,
August 17, 1995)
d. If it is a foreign corporation, it must obtain a license to transact business in the country.

2. TO ENTER INTO A JOINT VENTURE. A corporation can enter into a joint venture agreement. A joint venture is an
organization formed for a temporary purpose.

3. TO ACT AS SURETY OR GUARANTOR. The general rule is that a corporation may not ordinarily be bound by a
contract of guarantee or surety for the benefit of third persons. However, such guaranty may be given in the
accomplishment of any object for which the corporation was created, or when the particular transaction is reasonably
necessary or proper in the conduct of its business.
AΦB

" A corporation cannot act as an accommodation party in a negotiable instrument. The corporation shall not be
bound by a signature that will make it an accommodation maker, drawer or indorser of the instrument. Issue or
indorsement of a negotiable instrument without consideration and for the accommodation of another is ultra vires.
(Crisologo-Jose vs. CA)

C. STATUTORY POWERS OF A CORPORATION AND THE LIMITATIONS ON THEIR EXERCISE (SEC. 36, CC)

Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity:

EXCLUSIVELY FOR
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks
in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and
personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate
or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles
of incorporation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

1. AMENDMENT OF ARTICLES OF INCORPORATION (SEC. 16, CC)

Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the
board of directors or trustees 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 in accordance with the
provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


corporation.

The original and amended articles together shall contain all provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that
said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be
submitted to the Securities and Exchange Commission.

The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing
with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the
corporation.

! REQUIREMENTS
1) The amendment must be for legitimate purposes and must not be contrary to the other provisions of the
Corporation Code and special laws;
2) The amendment must be approved by a majority vote of the board of directors or trustees;
3) There must be a vote or written assent of the stockholders representing at least 2/3 of the outstanding capital
stock, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation;
AΦB

4) The original and amended articles together shall contain all the provisions required by law to be set out in the
Articles of Incorporation. Such articles, as amended shall be indicated by underscoring the changes made;
5) A copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees
stating the fact that said amendment/s have been duly approved by the required vote of the stockholders or
members, shall be submitted to the SEC.
6) The amendment must be approved by the SEC.

! EXPRESS AND IMPLIED APPROVAL. The amendments shall take effect upon their approval by the SEC. However,
express approval is not indispensable; the amendments shall take effect from the date of filing with the said
Commission if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation.

EXCLUSIVELY FOR
! DOCUMENTARY REQUIREMENTS
1) Amended Articles of Incorporation
2) Directors/Trustees Certificate – a notarized document signed by majority of the directors and corporate secretary certifying the
amendment of the Articles of Incorporation, indicating the amended provisions, the vote of the directors and stockholders or
members thereto, the date and place of the stockholders’ or members’ meeting. The TIN of the signatories should be
indicated below their names.
3) Company Data Maintenance Form

! ADDITIONAL REQUIREMENTS. Indorsement/ clearance from other government agencies, if applicable is necessary
in certain cases. For example, amendment of the Articles of Incorporation of a bank requires indorsement from BSP.

! PROVISIONS TO BE AMENDED. The amendment may involve amendment of the corporate name, increase in the
authorized capital stock, and other similar changes.

" However, certain provisions of the Articles of Incorporation cannot be amended because they are
accomplished facts. For example, the names of the incorporators cannot be changed and their number cannot
be increased because these are accomplished facts. Similarly, there can be no change in the names of the
original directors for the same reason.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" Amendments cannot likewise be allowed if it goes against the nature of the corporation.

" Sec. 145 of the Corporation Code provides 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.”

" The implication of this provision is that the Corporation Code may be amended which may have the effect of

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


amending the provisions of the Articles of Incorporation. The only reservation is that the amendment of the
governing law must not have the following effects:

1) It must not remove or impair the right or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers; and

2) It must not remove any liability incurred by any such corporation, its stockholders, members, directors,
trustees, or officers.

2. EXTENSION/SHORTENING OF CORPORATE TERM (Sec. 37, CC)

Sec. 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in
the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting
by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension
AΦB

of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.

! Since the life of the corporation is just a concession of the State, the power to extend the corporate term is not an
inherent right. On the other hand, shortening of corporate term can actually be done at the discretion of the
corporation under Sections 117 to 120.

" Section 120 provides that “voluntary dissolution may be effected by amending the articles of incorporation to
shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon
approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the
corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on

EXCLUSIVELY FOR
liquidation.”

! REQUIREMENTS. Extension and shortening of the term of the corporation are subject to the following requirements:
1. They must be approved by a majority vote of the board of directors or trustees;
2. They must be ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock
or by at least 2/3 of the members in case of non-stock corporations.
3. For purposes of such stockholder’s meeting, written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books
of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.
4. A copy of the amended Articles of Incorporation shall be submitted to the SEC for its approval.
(If there is no express approval, the amendment is deemed approved upon the inaction of the SEC for 6 months
after submission due not to the fault of the corporation.)

NOTE: Mere written assent by the stockholders is not allowed. Sec. 37 is explicit that ratification must be done in
a stockholders’ meeting. This is because this is a matter of public interest or concern. However, there seems to
be a conflict or inconsistency between Section 16 of Corporation Code (which allows a mere written assent in lieu
of a board meeting of stockholders) and Section 37. The extension of term involves Section 37 (which is also a

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

provision involving actually an amendment of term) and amendment involves Section 16. In statutory construction,
when two or more provisions in one and the same statute are conflicting, as to the cases falling under the
special provision, the special provision will prevail over the general provision. Therefore, Section 37, being
a special provision, any case falling under Section 37, the stringent rule in Section 37 must be applied instead of
the general provision in Section 16 of the same Code. Stating that "the special provision prevails over the general
provision' is an INSUFFICIENT statement of the rule on Statutory Construction.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! APPRAISAL RIGHT. Sec. 37 provides that in case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in the Code. However, Section 81 provides that an appraisal
right is available even in the shortening of the corporate term.

3. INCREASE OR DECREASE OF CAPITAL STOCK (SEC. 38, CC)

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No
corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds
(2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at
which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman
and the secretary of the stockholders' meeting, setting forth:
AΦB

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;

EXCLUSIVELY FOR
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall
require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the
Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall
stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall
be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority
vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.

! INCREASE OR DECREASE OF CAPITAL STOCK. The exercise of the power to increase or decrease the authorized

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


capital stock of the corporation results in the amendment of the Articles of Incorporation. This should be distinguished
from mere increase of subscribed capital stock or paid-up capital which does not necessarily require amendment of the
Articles of Incorporation.

" The capital stock may be increased by doing any of the following:
1. By increasing the number of shares and retaining the par value;
2. By increasing the par value of existing shares without changing the number of shares; or
3. By increasing the number of shares and increasing the par value.

" The capital stock may be decreased by doing any of the following:
1. By decreasing the number of shares and retaining the par value;
2. By decreasing the par value of existing shares without changing the number of shares; or
3. By decreasing the number of shares and decreasing the par value.

" There will be no increase or decrease of capital in case of a stock split. In stock split, a share is divided or
converted into two or more shares but the amount of the outstanding capital remains the same because the par
value is also divided in as many shares.

! INCREASE OF SUBSCRIBED CAPITAL. Increase in the capital stock of the corporation is necessary when additional
AΦB

funds are required by the operation and the corporation opted to raise funds through additional investments. Additional
investment may be infused initially by increasing the subscribed capital. Increase in the subscribed capital need not go
through the process provided for under Sec. 38 and mere approval of the board of directors is sufficient. However, an
increase in the authorized capital stock is required if the additional subscription cannot be covered by the original
authorized capital or if the original authorized capital is already exhausted.

! REQUIREMENTS. Sec. 38 prescribes the following requirements:


1. It must be approved by a majority vote of the board of directors;
2. At a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding capital stock must favor the increase
or diminution of the capital stock;
3. In connection with the stockholder’s meeting, written notice of the proposed increase or diminution of the capital

EXCLUSIVELY FOR
stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.
4. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the
chairman and the secretary of the stockholder’s meeting, setting forth:
a. That the requirements of this section have been complied with;
b. The amount of the increase or diminution of the capital stock;
c. If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock actually
subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock
or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or
property, 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 therefor authorized;
d. The amount of stock represented at the meeting; and
e. The vote authorizing the increase or diminution of the capital stock.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The increase or decrease in the capital stock or the incurring, creating or increasing any bonded indebtedness
shall require prior approval of the SEC.

" With respect to the increase of capital stock, the application to be filed with the SEC shall be accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate,
showing that at least 25% of such increased capital stock has been subscribed and that at least twenty-five (25%)
percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


subscription.

" The required 25% subscription under Sec. 38 shall be based on the additional amount by which the capital stock
is increased and not on the total capital stock as increased.

! SEC APPROVAL. Sec. 38 provides that it is only from and after approval by the SEC and the issuance by the SEC of
a certificate of filing that the capital stock shall stand increased or decreased. Thus, there is no increase in the
authorized capital stock even if the stockholders already paid the additional subscription if there is no approval of the
SEC. Any payment by the shareholder of the subscription price before the filing of the application with the SEC shall
be considered as deposits only on future subscriptions and the corporation will hold the same in trust until it files a
petition to increase its capitalization and a certificate of filing of the increase of capital stock is approved and issued by
the SEC. ALPHA PHI BETA

4. INCURRENCE, CREATION OR INCREASE OF BONDED INDEBTEDNESS (SEC. 38, CC)

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No
corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless
AΦB

approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds
(2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at
which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman
and the secretary of the stockholders' meeting, setting forth:

EXCLUSIVELY FOR
1. That the requirements of this section have been complied with;
2. The amount of the increase or diminution of the capital stock;
3. If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
4. Any bonded indebtedness to be incurred, created or increased;
5. The actual indebtedness of the corporation on the day of the meeting;
6. The amount of stock represented at the meeting; and
7. The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall
require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall
stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority
vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.

! BONDED INDEBTEDNESS. Sec. 38 does not cover all kinds of indebtedness because a corporation has an implied
power to borrow money when necessary to carry out the purposes of its organization. In the exercise of such implied
power, a corporation may execute notes or other customary evidences of indebtedness.

! Bonded indebtedness refers to secured indebtedness or those secured by real or personal property.

! The requirements are basically the same as the requirements for increase and decrease of capital stock as it likewise
requires the same approvals by the directors and the stockholders.
AΦB

5. DENIAL OF PRE-EMPTIVE RIGHT (SEC. 39, CC)

Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right
is denied by the articles of incorporation or an amendment thereto: Provided, That 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; or 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.

! PRE-EMPTIVE RIGHT. Pre-emptive right is the right of shareholders to subscribe to all issues or disposition of shares
of any class in proportion to their shareholdings.

EXCLUSIVELY FOR
" Purpose: To maintain the relative and proportionate voting strength and control of existing shareholders. It is
aimed to maintain the existing ratio of the shareholder’s interest and voting power in the corporation.

! ISSUES OR DISPOSITION. The pre-emptive right covers all issues and disposition. This includes issuance of the
unsubscribed shares which are part of the original capital stock and the increase of capital stock.

" The pre-emptive right is available in case the corporation decides to dispose its treasury shares. The broad phrase “all issues
or disposition of shares of any class” is construed to include new shares issued in pursuance of an increase of capital stock or
shares from the unissued shares. Treasury shares likewise come under the term “disposition.”

" It was held that if the shares are offered and are not subscribed or purchased by shareholders and the shares are being
offered again, there is no pre-emptive right with respect to the latter offer of shares. The theory is that when a corporation at
its inception offers its first shares, it is presumed to have offered all those which it is authorized to issue. A subscriber is
deemed to have taken his shares knowing they form a definite proportionate part of the whole number of authorized shares.
When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of interest. However, there is an
opinion to the effect that this rule is no longer controlling under Sec. 39 because the same provision covers all issues and
disposition of shares.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The pre-emptive right is not available when shares are issued in exchange for shares in another corporation if the same is a
result of a merger to which the corporations are parties.

! WAIVER. A stockholder who neither desires nor intends to buy any of the stocks being offered may waive such right.
In which event, the shares may be offered to any interested persons acceptable to the corporation.

" The right to waive pre-emptive right is a personal right, hence, such waiver should be given individually by the
stockholders concerned or he can authorize somebody to execute the same for and in his behalf by way of a

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


special power of attorney.

! TRANSFER. The right to subscribe to new issues and disposition may be transferred by the shareholder. Unless
there is an express restriction in the Articles of Incorporation, the pre-emptive right is transferrable.

! WHEN NOT AVAILABLE. Pre-emptive right is not available in the following instances even if there is an issuance or
disposition of shares:
1. When the right is denied in the Articles of Incorporation;
2. When shares are issued in compliance with laws requiring stock offerings or minimum stock ownership by
the public;
3. When shares are issued in good faith with the approval of the stockholders representing 2/3 of the outstanding
capital stock, in exchange for property needed for corporate purposes or in payment of a previously
contracted debt.

6. SALE OR DISPOSITION OF ASSETS (SEC. 40, CC)

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and
AΦB

monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money
or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation,
by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.

EXCLUSIVELY FOR
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was
incorporated.

After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless,
in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject
to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or
members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is
necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in
office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. (28 1/2a)

! REQUISITES. A sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all the properties
and assets of the corporation, including its goodwill requires the following,:

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CORPORATION LAW REVIEWER AΦB

1. It must be approved by the majority of board of directors or trustees;


2. There must be assent of stockholders representing 2/3 of outstanding capital stock or 2/3 of members in a
meeting duly called for the purpose after written notice. The sale is void if these requirements are not complied
with. (Islamic Directorate of the Philippines vs. CA)

" If the transaction does not cover all or substantially all of the assets, the decision of the board is sufficient and it is not
necessary to get the approval of the stockholders. For instance, lease of a portion of the property of the corporation for
legitimate business purpose does not require approval of the stockholders if it does not constitute substantially all of the assets

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


of the corporation.

! SUBSTANTIALLY ALL. A sale or other disposition shall be deemed to cover substantially all corporate property and
assets if the corporation would thereby be rendered incapable of continuing the business or accomplishing the purpose
for which it was incorporated.

! RATIONALE. Stringent requirements are imposed if the conveyance involves all or substantially all of the properties of
the corporation because there is an implied contract among the stockholders to pursue the business for which the
corporation was created for the specified period of its existence and therefore, as a general rule, there should be no
disposition of the property used by the corporation in its business until its dissolution.

" However, disposition of all or substantially all of the assets is not absolutely prohibited and may be made under
Sec. 40 because there may be pressing business necessity which requires transfer or sale of property to avoid
loss or inability of the corporation to make further profits. The power to dispose corporate assets may be
exercised where a just and reasonable cause exists, provided the transaction is not in fraud of the rights of
creditors, is made for adequate consideration and for the best interest of the corporation.

! EFFECT ON CREDITORS. The transferee-corporation of all or substantially all of the assets (or even shares) of the
transferor-corporation will not be liable for the debts of said transferor-corporation.
AΦB

" However, by way of exception, the transferee-corporation is liable:


1. If there is an express or implied assumption of liabilities;
2. There is a consolidation or merger or a de facto merger;
3. If the purchase was in fraud of creditors; and
4. If the purchaser becomes a continuation of the seller.

! BULK SALES LAW. The sale of all or substantially all of the assets of the corporation is likewise not binding on the
creditors if there is violation of the Bulk Sales Law. There is a sale in bulk within the meaning of the Bulk Sales Law if
there is any sale, transfer, mortgage or assignment of:

EXCLUSIVELY FOR
1. Stock of goods, wares, merchandise, provisions, or materials otherwise in the ordinary course of trade and the
regular prosecution of business of the vendor, mortgagor, transferor or assignor;
2. The trade or business conducted by the vendor, mortgagor, transferor or assignor; and
3. All or substantially all of the fixtures and equipment used in and about the business of the vendor, mortgagor,
transferor or assignor. ALPHA PHI BETA

7. ACQUISITION OF CORPORATE SHARES (SEC. 41, CC) (SEE TRUST FUND DOCTRINE)

Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares
for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. 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
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.

! Sec. 41 authorizes corporations to acquire their own shares provided that:

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CORPORATION LAW REVIEWER AΦB

1. The acquisition is for a legitimate corporate purpose or purposes; and


2. The corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired.

" Note: A corporation may acquire its own shares even in the absence of unrestricted retained earnings when such
share is a redeemable share, subject only to the limitation that the redemption or repurchase would not render the
corporation insolvent. The redemption of redeemable shares in the absence of unrestricted retained
earnings does not prejudice corporate creditors.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! Sec. 41 provides a non-exclusive list of examples of cases when the corporation can acquire its own shares. However,
it is still necessary under any of the 3 purposes enumerated that there are unrestricted retained earnings.

! The general rule is that in the absence of statutory authority, the corporation cannot acquire its own shares based on
the following reasons: (1) the corporation cannot increase or diminish its capital without the sanction of the legislature;
(2) the transaction is a fraud upon creditors; and (3) it is foreign to the purposes for which the corporation is created.
Moreover, there is a view that purchase of shares can be considered a violation of the trust fund doctrine because of
the portion of the capital is taken to the prejudice of the creditors.

! The power to acquire its own shares is now an express power. However, in order to avoid the dangers that
accompany the exercise of this power, the SEC has always imposed the following conditions on its exercise:
1. The capital of the corporation must not be impaired;
2. A legitimate and proper corporate objective is advanced;
3. The corporate affairs warrants it; and
4. The transaction is designed and carried out in good faith.

! TRUST FUND DOCTRINE. It refers to the principle that the capital stock, property and other assets of the
corporation are regarded as equity in trust for payment of corporate creditors. “The doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in Corporation Code, which allows the
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distribution of corporate capital only in three instances: (1) amendment of Articles of Incorporation to reduce the
authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and (3) dissolution and eventual liquidation of corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of corporation to acquire its own shares and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent requirement therefore are complied with”
(Ong Yong vs. Tiu, G.R. No. 144476, 8 April 2003) ALPHA PHI BETA

8. INVESTMENT OF CORPORATE FUNDS (SEC. 42, CC)

EXCLUSIVELY FOR
Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to
the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or
trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal
right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall
not be necessary. (17 1/2a)

! PURSUING PRIMARY PURPOSE. Investment of a corporation in a business which is in line with its primary purpose
requires only the approval of the board. Sec. 42 expressly provides that where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the Articles of Incorporation, the approval of the
stockholders or members shall not be necessary.

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CORPORATION LAW REVIEWER AΦB

! PURSUING SECONDARY PURPOSE. If the corporation will pursue its secondary purpose, it is required that the
following must concur:
1. There must be approval by a majority of the board of directors or trustees;
2. The approval of the board must be ratified by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a
stockholder's or member's meeting duly called for the purpose; and
3. In calling the stockholder’s meeting, written notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

! APPRAISAL RIGHT. The dissenting stockholder is given the right of appraisal whenever the corporation decides to
pursue its secondary corporate business. Appraisal right is granted because the stockholder will be exposed to a line
of business which is not being pursued when he invested in the company. His investment will be exposed to additional
risks which was not contemplated when he made the investment.

! MEANING OF INVESTMENT. Investment of funds includes not only investment of money but also investment of
property of the corporation. If the business of the corporation is such as to render it necessary for it to own a certain
kind of property, and at times such property is not necessary to its business, it may employ the property in a business
or for a purpose which is not strictly within the primary purpose in order to prevent the same from remaining idle and
unprofitable.

" For example, a corporation which is incorporated to engage in a trading business may be allowed to lease its properties to
interested parties. Lease of the property is included in the term “investment of funds.” However, the SEC imposes the
following requirements:
1. That the property is not presently used by the company and the leasing thereof is not made on a regular basis;
2. That by leasing the property, it will make it productive instead of allowing it to remain idle;
3. That there are no express restrictions in the articles of incorporation or by-laws;
AΦB

4. That the leasing is not used as a scheme to prejudice corporate creditors or result in the infringement of the Trust Fund
Doctrine; and
5. That there must be compliance with the requirements of Sec. 42.

! INVESTMENT IN SHARES. It is believed that passive investment in shares is not covered by Sec. 42. The same way
may be justified in the exercise of general power to purchase securities in other corporations as provided for under
paragraph 7 of Sec. 36 of the Corporation Code. Thus, a corporation with idle funds may invest in shares for the
purpose of generating income.

EXCLUSIVELY FOR
9. DECLARATION OF DIVIDENDS (SEC. 43, CC)

Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable contingencies. (n)

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CORPORATION LAW REVIEWER AΦB

! The Board of Directors has the discretion to declare dividends. The decision of the board alone is necessary to
declare cash and property dividends. In the case of stock dividends, the decision of the Board is subject to the
approval of stockholders representing 2/3 of the Outstanding Capital of the corporation.

" Nevertheless, the director’s discretion is maintained even if the dividends to be declared are stock dividends. Once they
decide to declare stock dividends, however, they must ask for the approval of the stockholders. If the board does not want to
declare stock dividends, then the stockholders cannot compel them to do so.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" By way of exception, stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital.
Thus, in such case, declaration of dividends is no longer purely discretionary on the Board.

" However, even if the retained surplus profits are in excess of 100% of the paid-in capital, the board may still refuse to declare
dividends based on any of the following grounds:
1. It is justified by definite corporate expansion projects/programs approved by the Board; or
2. The corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet been secured; or
3. It can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation as for
example, when there is a need for special reserve for probable contingencies.

! REQUIREMENTS. The following are required for dividend declaration:


1. Unrestricted retained earnings;
2. Resolution of the Board; and
3. If stock dividends are declared, there must be resolution of the board with the concurrence of 2/3 outstanding
capital.

UNRESTRICTED RETAINED EARNINGS – the undistributed earnings of the corporation which have not been
allocated for any managerial, contractual, or legal purposes and which are free for distribution to stockholders as
dividends.
AΦB

" PROPERTY DIVIDENDS. Property dividends are those that are paid in property instead of cash where the
surplus is in that form and it is practicable to so distribute them among the shareholders.

• When a corporation has retained earnings arising out of its operations, properties which represent
investments in the capital stock of the corporation may be declared as property dividends out of such
retained earnings, provided said properties constitute assets in excess of other assets which are adequate to
support the issued and outstanding capital stock of the corporation.

" STOCK DIVIDENDS. When stock dividends are declared, the earnings are distributed to the stockholders in the
form of shares of stock. It involves the conversion of surplus or undivided profits into capital. They may be

EXCLUSIVELY FOR
declared for the following reasons:
1. The corporation simply desires a larger permanent capitalization;
2. The market price may have increased above a desirable trading range and stock dividend will generally
reduce the per share market value of the company’s stocks;
3. The corporation may wish to have more stockholders (who might then buy its products) and expects to
eventually increase their number by increasing the number of shares outstanding. Some of the shareholders
receiving the stock dividend are likely to sell the shares to other persons; and
4. Stock dividends may be used to satisfy stockholder’s demands for cash dividends when the corporation may
not be willing to pay cash dividends but have enough unrestricted retained earnings.

! UNRESTRICTED RETAINED EARNINGS. Retained earnings mean the accumulated profits realized out of normal
and continuous operations of the business after deducting therefrom distribution of stockholders or transfers to capital
stock or other accounts. Unrestricted retained earnings is defined as the undistributed earnings of the corporation
which have not been allocated for any managerial, contractual, or legal purposes and which are free for distribution to
the stockholders as dividends.

" Dividends cannot be declared out of capital. The exception is with respect to “wasting assets corporations”
which are corporations solely or principally engaged in the exploitation of “wasting assets.” They are allowed to

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distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and
leaseholds, without allowance or deduction for depletion.

" The trust fund doctrine will be violated if dividends are declared out of capital except only in 2 instances:
1. Liquidating dividends; and
2. Dividends from investments in Wasting Assets Corporation.

! WHAT IS INCLUDED IN RETAINED EARNINGS

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


1. PAID-IN SURPLUS. Paid-in surplus cannot be declared as dividends because they are part of capital. Paid-in
surplus is the difference between the par value and the issued value or selling price of the shares and are not
therefore considered profits earned in the conduct of the business of the corporation.

" By way of exception, the SEC allows the distribution of paid-in surplus in exceptional cases when the
following are present:
1. That they be declared only as stock dividends and not as cash dividends;
2. No creditor shall be prejudiced therefrom; and
3. There is no resulting impairment of capital.

2. REVALUATION SURPLUS. There is revaluation surplus if there is an increase in the value of assets. Generally,
they cannot be declared as dividend because they cannot be considered earnings of the corporation. They are by
nature subject to fluctuations.

" By way of exception, the SEC allows distribution of the portion of the increase in the value of fixed assets as
a result of revaluation thereof after the assets are depreciated and the depreciation is charged against the
operation provided the following conditions are complied with:
1. The company has sufficient income from the operations from which the depreciation on the appraisal
AΦB

increase is charged;
2. The company has no deficit at the time the depreciation on the reappraisal increase was charged to
operations; and
3. Such depreciation on the appraisal increase previously charged to operations is not erased or impaired
by subsequent losses, otherwise, only that portion not impaired by subsequent losses is available for
dividend.

3. REDUCTION SURPLUS. There is reduction surplus where surplus arises from the reduction of the par value of
the issued shares of stocks. They are available for dividend declaration provided the following are met:
a. They are declared only as stock dividends;

EXCLUSIVELY FOR
b. No creditor is prejudiced; and
c. There is no resulting impairment of capital after declaration of dividends.

4. GAIN FROM SALE OF REAL PROPERTY. Gains from sale of the corporation’s real properties are available for
dividend declaration because they are part of retained earnings. Retained earnings include not only earnings
realized from the ordinary course of business but also those arising from transactions not associated with but
incidental to or necessary in keeping the business for which the corporation was organized (other examples of the
latter are earnings from rent, royalties, fees and interests for the use by others of corporate assets and resources).
However, there must be surplus profits. Hence, the corporation cannot distribute gains from sale of real
properties as dividends if the remaining assets after distribution are less than the amount of legal or stated capital
and liabilities.

5. TREASURY SHARES. Treasury shares cannot be declared as stock dividends or cash dividends because they
are not considered part of earned or surplus profits. Otherwise, it will lead to the absurd situation where the
corporation would be converted into both a debtor and creditor for the same amount at the same time, thus, it will
take money or stock from one of its pockets and put it in another.

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CORPORATION LAW REVIEWER AΦB

Treasury shares may be declared as property dividend to be issued out of the retained earnings previously used
to support their acquisition provided that the amount of the said retained earnings has not been subsequently
impaired by losses.

6. INTERIM INCOME. The presence of unrestricted retained earnings can be determined only at the end of the
fiscal year. Thus:

Gen. Rule: There can be no dividend declaration for profits in a fiscal year that has not yet expired.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Exception: SEC allows dividends to be declared out of interim profits so long as the following are present:
a. The amount of dividends involved would not be impaired by losses during the remaining period of the year;
b. The projected income for the remaining period shall be submitted to the SEC; and
c. Should the company sustain losses during the remaining period, the dividends should be refunded.

! WHO IS ENTITLED. Stockholders are entitled to dividends pro rata based on the total number of shares and not on
the amount paid for the shares. However, only stockholders at the time of declaration are entitled to dividends.
Dividends declared before the transfer of shares belong to the transferor, and those declared after the transfer belong
to the transferee. In other words, dividends belong to the person who owns the stock when the dividend is declared.

" However, a record date may be provided for. A record date is a future date specified in the resolution declaring dividend that
the dividend shall be payable to those who are stockholders of record on such specified future date or as of the date of the
meeting declaring said dividends.

" Even unpaid subscribers are entitled to dividends. Sec. 72 provides that holders of shares not fully paid which are not
delinquent shall have all the rights of a stockholder. As a matter of fact, under Sec. 71, even if the shares are delinquent, the
delinquent shareholders shall also be entitled to dividends except that under Sec. 43, any cash dividends shall first be applied
to the unpaid balance on the subscription plus cost and expenses.
AΦB

! VESTING. The right of the stockholders to be paid dividends accrues as soon as the declaration is made in
accordance with Sec. 43 of the Corporation Code. From that time, the stockholder can already demand payment
thereof.

" Gen. Rule: Legally declared dividends cannot be revoked by the Board without the stockholders’ consent.

" Exception: Declaration of stock dividends can be revoked before the issuance of the dividend declaration. In case of cash
dividend, the amount to be distributed is severed from the general fund and becomes the property of the stockholders pro rata
as soon as the dividend is voted, while in the case of stock dividend, all formalities necessary to a valid increase of stock must
be complied with before the stockholders are entitled to anything, and the mere declaration of the dividend does not, therefore,
give them vested right.

EXCLUSIVELY FOR
" Note: With respect to cash dividends, the funds are actually set apart from the general mass of the company’s funds and are
not appropriated for the payment of dividend which has been declared. Hence, the stockholders are not entitled to any
preference over the general creditors; they stand also as general creditors of the corporation who can come in only together
with such other general creditors looking to the general estate for liquidation of their dividend debt.

! AMOUNT. The amount to be declared as dividends depends upon the amount of the unrestricted retained earnings.
After determining the available amount, dividends shall be declared pro rata unless there are preferred shares which
are entitled to a fixed percentage.

" When it comes to stock dividends, the corporation is not required to pay dividend according to their par values.
Stock dividends can be declared at a premium (at value higher than par). Considering that selling shares of stock
at a premium is not prohibited, it follows that stock dividends indirectly take the nature of sales of shares of stock
at a premium. When the amount of earned surplus capitalized per share of dividend stock exceeds it par or stated
value, the excess should be credited to capital surplus.

! SEC APPLICATION. The right to dividend accrues even if there is no SEC approval. However, paragraph 4 of the
Rules Governing the Distribution of Excess Profits of Corporations provides that a declaration of dividend whether cash
or stock shall be reported to the SEC within 15 days from date of declaration.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

10. MANAGEMENT CONTRACT (SEC. 44, CC)

Sec. 44. Power to enter into management contract. - No corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least
the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation,
of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of both the managing and the managed corporations own or

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


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 board of directors of the managing corporation also constitute a majority of the
members of the board of directors of the managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to
vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be
entered into for a period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate
to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may
be provided by the pertinent laws or regulations. (n)

! MANAGEMENT CONTRACT. A management contract is an agreement whereby a corporation undertakes to manage


or operate all or substantially all of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise.

" Sec. 44 applies to situations where the contract is between 2 corporations. It does not normally apply to a contract with natural
AΦB

person who will be appointed as manager because the same is covered by general powers of the corporation. The contract
with the natural person is more appropriately called employment contract.

" The legislators who drafted the law did not actually rule out the possibility that there might be a management contract between
a partnership or a natural person and a corporation. Nevertheless, since partnership and private individuals are not mentioned
in Sec. 44, any management contract between them shall not be subject to the requirements thereof.

! The maximum term prescribed under Sec. 44 is five (5) years. However, it was intended that this period may be
subject to renewal.

! APPROVING AUTHORITY. The contract shall be subject to the approval of the board of directors and by stockholders
owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of

EXCLUSIVELY FOR
non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose.

" The management contract must be approved by the stockholders of the manage corporation owning at least 2/3
of the total outstanding capital stock entitled to vote, or by at least 2/3 of the members in the case of a non-stock
corporation in any of the following circumstances:

1. Where a stockholder or stockholders representing the same interest of both the managing and the managed
corporations own or control more than 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 board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed corporation.

11. OTHER CORPORATE POWERS

! Sec. 36 provides that the corporation is empowered to exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the Articles of Incorporation. Thus, the corporation has the power to hire

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employees, engage the services of contactors, open bank accounts, and other matters that are necessary for its
operations. ALPHA PHI BETA

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


“We shall not be saved without Wisdom,
for though Knowledge is Power,
only Wisdom is Liberty!”

ALPHA PHI BETA


SAN BEDA LAW SCHOOL
CORPORATION LAW
AΦB

VI. CORPORATE BY-LAWS

A. CONCEPT, USE AND NATURE OF BY-LAWS

! The by-laws of a corporation are the rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and of its stockholders or members and directors and
officers in relation thereto and among themselves in their relation to it.

EXCLUSIVELY FOR
! The by-laws are relatively permanent and continuing rules of action adopted by the corporation for its own government and
that of the individuals composing it and those having the direction, management and control, in whole or in part, of its affair
and activities.

! The by-laws are in effect written into the charter and in this sense, they become part of the fundamental law of the
corporation, and the corporation, its directors, officers and members are bound by and must comply with them.

! BY-LAWS VS. BOARD RESOLUTIONS. A provision in the by-laws is a permanent rule of action and mode of conduct
of corporate affairs while a resolution ordinarily applies only to a single act of a corporation. Thus, internal
government of a corporation should be in the by-laws not in a mere resolution. For example, additional qualifications of
directors can be provided for in the by-laws and they cannot be in a mere resolution.

! NATURE OF POWER. Every corporation has the inherent power to adopt by-laws for its internal government and to
regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference
to the management of its affairs. At common law, the rule was that the power to make and adopt by-laws was inherent
in every corporation as one of its necessary and legal incidents (Incidental Power). Such power of self-government is
essential to enable the corporation to accomplish the purpose of its creation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

B. BY-LAWS IN RELATION TO ARTICLES OF INCORPORATION

! The Articles of Incorporation should be given more weight than the by-laws. This is reflected in Sec. 47 which provides that
the contents of the by-laws are subject to the provisions of the Articles of Incorporation. Hence, in case of conflict,
the provisions of the Articles of Incorporation shall prevail. For example, the number of directors in the Articles of
Incorporation shall be controlling and the by-laws cannot provide for a different number. ALPHA PHI BETA

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


C. ADOPTION OF BY-LAWS (Sec. 46); EFFECT OF NON-FILING WITHIN THE PRESCRIPTIVE PERIOD

Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official
notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of
non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and
shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office
hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation,
shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that
AΦB

the by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect
that such by-laws or amendments are in accordance with law.

! PROCEDURE. The by-laws may be adopted before or after incorporation. In all cases, the by-laws shall be effective only
upon the issuance by the SEC of a certification that the by-laws are not inconsistent with the Corporation Code.

" PRE-INCORPORATION. The by-laws shall be approved and signed by all the incorporators and submitted to the

EXCLUSIVELY FOR
SEC, together with the Articles of Incorporation.

" POST-INCORPORATION. After incorporation, the by-laws shall be adopted by the corporation by the affirmative vote
of the stockholders representing at least a majority of the outstanding capital stock. In a non-stock corporation, the
affirmative vote of at least a majority of the members shall be necessary.

1. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal
office of the corporation, subject to the inspection of the stockholders or members during office hours.

2. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the
corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original
articles of incorporation.

! EFFECT OF NON-ADOPTION. Every corporation must, within one (1) month after receipt of official notice of the issuance
of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government
not inconsistent with this Code. The corporation is not automatically dissolved if no by-laws are adopted within such period.

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CORPORATION LAW REVIEWER AΦB

" The Supreme Court explained that Sec. 46 of the Corporation Code itself reflects the intent to attach a directory, and
not mandatory, meaning for the word “must” in the first sentence thereof. Note should be taken of the second
paragraph of the law which allows the filing of the by-laws even prior to incorporation.

" By-laws may be necessary for the “government” of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes.

" There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


corporate powers, thus: “In the absence of charter or statutory provisions to the contrary, by-laws are not
necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it,
certainly in all cases where the charter sufficiently provides for the government of the body; and even where the
governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to
exercise the power will be ascribed to mere nonaction which will not render void any acts of the
corporation which would otherwise be valid.” (Loyola Grand Villas Homeowners (South) Association,
Inc., vs. CA)

" As Fletcher aptly puts it: “It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have
been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important
duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by-
laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a
close corporation organized for specific purposes. And the statute or general laws from which the corporation derives its
corporate existence may expressly require it to make and adopt by-laws and specify to some extent what they shall contain
and the manner of their adoption. The mere fact, however, of the existence of power in the corporation to adopt by-
laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the
validity of any of its acts.” ALPHA PHI BETA

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences
AΦB

"
of the non-filing of the same within the period provided for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state
that the SEC has the power to suspend, or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations for failure to file by-laws within the required period.

" Substantial compliance with conditions subsequent will suffice to perfect corporate personality. Organization and
commencement of transaction of corporate business are but conditions subsequent and not prerequisites for
acquisition of corporate personality. The adoption and filing of by-laws are also conditions subsequent.

EXCLUSIVELY FOR
D. CONTENTS OF BY-LAWS; REQUISITES OF A VALID BY-LAW PROVISION

Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.

! REQUISITES OF A VALID BY-LAW PROVISION


1. It must be consistent with the Corporation Code, other pertinent laws and regulations;

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

2. It must be consistent with the Articles of Incorporation;


3. It must not be contrary to morals or public policy;
4. It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations not
sanctioned by law.
5. It must be reasonable.

" The by-laws must not be contrary to the provisions of the Corporation Code. Thus, a provision in the by-laws
creating a permanent seat in the board of directors is contrary to the provisions of the Corporation Code because the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Code requires election of directors. Also, the by-laws cannot transfer executive responsibility to the managing
directors or executive vice presidents as a means of evading the director’s liability. Otherwise, it will undermine or
neutralize the rationale for including provisions on director’s liability in the Corporation Code.

" The provisions of the by-laws must not be contrary to morals or public policy. Consequently, the provisions
must be reasonable and must not be discriminatory, arbitrary, or oppressive upon the shareholders. For example,
while additional qualifications can be provided for in the by-laws, the same should be applicable to all shareholders and
not merely on one or a group of shareholders.

" The provisions of the by-laws must not disturb vested rights. For example, the SC disallowed the absolute
restriction imposed on the right to transfer shares of stock or proprietary membership in a corporation. Also, amended
by-laws should not undermine the security of tenure of an employee by declaring non-existent an employee’s position.
The same cannot affect the rights of a regular employee who is entitled to security of tenure.

! CONTENTS
1. Time, place and manner of calling and conducting regular or special meetings of the directors or trustees; (In
default of provisions in the by-laws, the rules provided for in Sections 50 and 51 shall govern.)
2. Time and manner of calling and conducting regular or special meetings of the stockholders or members;
3. Required quorum in meetings of stockholders or members and the manner of voting therein; (In the absence
AΦB

thereof, the quorum shall consist of the stockholders representing a majority of the outstanding capital stock or majority
of the members in case of non-stock corporations.)
4. Form for proxies of stockholders and members and the manner of voting them; (Certain mandatory formalities
for proxies are provided for under Sec. 58 of the Corporation Code and Sections 20 to 20.5 of the Securities
Regulation Code. However, the by-laws may still provide for the form of proxies of stockholders and members and the
manner of voting them so long as the same are not inconsistent with the provisions of law.)
5. Qualifications, duties and compensation of directors or trustees, officers and employees;
6. Time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; (In
the absence thereof, the rules provided for in Sec. 53 shall apply.)
7. Manner of election or appointment and the term of office of all officers other than directors or trustees; (Note:

EXCLUSIVELY FOR
The manner of election of directors may not be provided for because the provision on election of directors is
mandatory. For instance, the by-laws of a stock corporation cannot dispense with cumulative voting. Neither can it
provide certain shareholders with 2 votes per share.)
8. Penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business
and affairs.

E. AMENDMENT TO BY-LAWS (Sec. 48)

Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of
the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors
or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever

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CORPORATION LAW REVIEWER AΦB

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.

Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-
laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles
of incorporation and original by-laws.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of
a certification that the same are not inconsistent with this Code.

! 2 WAYS OF AMENDING THE BY-LAWS:


1. By the stockholders together with the Board; or
2. By the Board only after due delegation by the stockholders. ALPHA PHI BETA

" GEN. RULE: Amendments must be done by the board of directors or trustees, by a majority vote thereof, AND the
owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock
corporation, at a regular or special meeting duly called for the purpose.

EXCEPTION: The Board alone can amend the by-laws if there was prior delegation of such power by the
stockholders. The owners of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation may
delegate to the board of directors or trustees the power to amend or repeal the by-laws or to adopt new by-laws.

Note: Any power delegated to the board of directors or trustees to amend or repeal any by-laws 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
AΦB

meeting.

Senator Salonga observed that the evident intent of the legislature is to make delegation of the power in favor of the
directors to amend, repeal or adopt a new set of by-laws rather difficult and the revocation of the authority easy. The
legislative intent is to distribute on a wider level, within the corporate structure, the power to exercise effective
control.

! Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original
by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be
attached to the original articles of incorporation and original by-laws.

EXCLUSIVELY FOR
F. BY-LAWS IN RELATION TO THIRD PARTIES

! BINDING EFFECT. The provisions of the by-laws are binding not only upon the corporation but also on its stockholders,
members, and those having direction, management and control of its affairs.

" However, the provisions of the by-laws are not binding on subordinate employees having no actual knowledge of the
provisions thereof.

! AS TO THIRD PERSONS, the by-laws are also not binding unless there is actual knowledge. Third persons are not
even bound to investigate the contents of the by-laws because they are not bound to know the by-laws that are merely
provisions for the government of a corporation. Notice to third persons will not be presumed. Since the by-laws operate
merely as internal rules among the stockholders, directors and officers, they cannot affect or prejudice third
persons who dealt with the corporation.

" For example, provisions of the by-laws on delinquency sale shall not be binding on a pledge who was not aware of
such provisions. It was alleged in one case that under the by-laws, the corporation has the right to sell the shares that

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

were subject of the pledge for failure to settle the delinquent accounts of the shareholders. However, it was ruled that
this provision cannot prejudice the rights of the pledgee who was without notice. (China Banking Corporation. vs.
CA)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


VII. CORPORATE MEETINGS
AΦB

A. KINDS OF CORPORATE MEETINGS

Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may be regular or special.

Sec. 50. Regular and special meetings of stockholders or members. - Regular meetings of stockholders or members shall
be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of
directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at
least two (2) weeks prior to the meeting, unless a different period is required by the by-laws.

Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws:

EXCLUSIVELY FOR
Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise
provided in the by-laws.

Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon
petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or
member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have
been chosen one of their members as presiding officer.

Sec. 51. Place and time of meetings of stockholders or members. - Stockholders' or members' meetings, whether regular or
special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the
principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or
municipality.

Notice of meetings shall be in writing, and the time and place thereof stated therein.

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CORPORATION LAW REVIEWER AΦB

All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or
authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or
members of the corporation are present or duly represented at the meeting.

KIND OF
DATE OF MEETING REQUIRED NOTICE
MEETING
REGULAR 1. The date in the by-laws; or
1. Within the period provided for in the by-laws; or

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Stockholders’ 2. If there is no date in the by-laws, any date in April
2. In the absence thereof, 2 weeks prior to the meeting.
Meeting as determined by the Board.
SPECIAL 1. Within the period provided in the by-laws; or
1. Any time deemed necessary; or
Stockholders’ 2. If there is no provision in the by-laws, 1 week prior to
2. As provided in the by-laws.
Meeting the meeting.

! DATE AND TIME. The general rule is that when the by-laws provide for the time of holding an annual meeting, the same
should be held at such regular appointed time. Exception: When the annual meeting cannot be held on the appointed time
for some valid reasons. It is the duty of the board of directors to determine the date and time to hold it earlier or postpone it
taking into consideration the surrounding circumstances.

! NOTICE. The provisions of the corporate by-laws govern the procedure of sending notices of meetings. If there is no
provision in the by-laws, the manner prescribed in Sec. 50 shall be followed. The rule is that, where the law expressly
requires notice of meeting of a particular transaction, no meeting can be validly held unless the notice of such
meeting specifies the corporate transaction to be resolved, except if all the stockholders are present or duly
represented during the meeting and do not object. ALPHA PHI BETA

" Written notice is mandatory and therefor essential to the validity of the stockholder’s meeting. Accordingly,
notice in writing to each of the stockholders of record cannot be dispensed with. In the absence of information from the
AΦB

stockholders concerned of the transfer of their post office address, the corporation is duty bound to send them written
notices of all meetings to their last known post office address as shown in the Stock and Transfer Book of the
Corporation. Published notice is insufficient because the law requires written notice.

" The law requires that the following purpose or purposes to be taken up in meetings, regular or special, of
stockholders and/or members should be specified in the notice thereof:
1. Increase or decrease of capital stock;
2. Incurring, creating or increasing bonded indebtedness;
3. Investment of corporate funds in another corporation or business or for any other purpose;
4. Issuance of stock dividends;
5. Entering into management contract;

EXCLUSIVELY FOR
6. Sale or other disposition of all or substantially all of corporate assets;
7. Removal of director or trustee;
8. Election of directors or trustees to fill vacancies created by reason of the increase of the number thereof effected
by the amendment of its Articles of Incorporation;
9. Amendment to by-laws;
10. Delegation of the power to amend by-laws to the board of directors or trustees;
11. Extending or shortening corporate term
12. Fixing issued price of no-par value shares;
13. Merger or consolidation of constituent corporations; and
14. Voluntary dissolution of a corporation.

! WAIVER. Sec. 50 provides that notice of any meeting may be waived, expressly or impliedly, by any stockholder or
member. Thus, there is waiver if all the stockholders or members are present or duly represented during the meeting and
do not object to the absence of notice. Otherwise, the validity of the proceedings or business transacted at any meeting
held or called may be questioned by any stockholder or member of the corporation.

! CALL Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission,
upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning

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stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by
the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders
or members present have been chosen one of their members as presiding officer.

" Note that under Sec. 50, the SEC may only direct the calling of the meeting if there is no person authorized to do so or
in the event the person authorized in the by-laws refuses to call for a meeting in the date fixed in the by-laws.

! ONE SHARE – ONE VOTE POLICY. The Corporation Code incorporates a “one share-one vote” policy. This policy was

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


reiterated in memorandum Circular No. 4 Series of 2004 which states:

" Pursuant to Sec. 24 of the Corporation Code, one share is entitled to one vote. Voting shall always be on the basis
of the number of shares and not on the number of stockholders present in the stockholder’s meeting.

" Common shares shall have complete voting rights and such shares cannot be deprived of such rights except as
provided by law.

" Each Common Share shall be equal in all respects to every other common share. Corporations are hereby prohibited
from issuing multiple voting and non-voting common shares nor can they limit the maximum number of votes per
stockholder irrespective of the number of shares he holds.

Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock
corporations.

! QUORUM FOR STOCKHOLDER’S MEETING. Quorum means the number of members of the corporation, board or
committee who must be present in order to take action. The quorum for stockholder’s meeting generally consists of
AΦB

the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case
of non-stock corporations. ALPHA PHI BETA

" A different quorum may also be provided for in the by-laws.

" The Corporation Code provides for certain resolutions that must be approved by at least 2/3 of the outstanding
capital. Hence, the presence of stockholders representing majority of the outstanding capital is insufficient to act on
the resolution.

" All stockholders have the right to attend the stockholder’s meeting. They cannot be barred from attending the
meeting by imposing restrictions. Imposition of registration fees as a precondition for the exercise of the right to attend

EXCLUSIVELY FOR
the meeting unduly restricts such right.

Sec. 53. Regular and special meetings of directors or trustees. - Regular meetings of the board of directors or trustees of
every corporation shall be held monthly, unless the by-laws provide otherwise.

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.

Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws
provide otherwise. 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.

! KINDS OF BOARD MEETINGS. The president shall preside at all meetings of the board. There are 2 types of
meeting of the Board:

1. REGULAR MEETING – held by the board monthly, unless the by-laws provide otherwise;

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CORPORATION LAW REVIEWER AΦB

2. SPECIAL MEETING – held by the board at any time upon the call of the president, or as provided in the by-laws.
Special meetings may be held at any time upon call to be held anywhere in and outside the Philippines, unless the by-
laws provide otherwise. (Sec. 53, Corporation Code)

! QUORUM OF THE BOARD. The majority of the directors constitute the quorum to do business. However, the by-laws
may require more than the majority. In the absence of a different quorum in the by-laws, the quorum is one-half plus one of
the total number of members of the board as fixed in the Articles of Incorporation.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" The quorum is the same even if there is a vacancy in the board. If the required quorum cannot be satisfied because of the
vacancy, the remedy is for the stockholder to fill the vacancy.

" A director cannot participate in a meeting by proxy or any representative or alternate. While voting by proxy is allowed in all
meetings of stockholders, the same is explicitly prohibited under Sec. 25 with respect to directors.

! 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.

! PLACE. Unlike the meeting of stockholders, meetings of directors or trustees of corporations may be held anywhere in or
outside the Philippines, unless the by-laws provide otherwise. Thus, in the absence of a provision in the by-laws fixing the
place of the board meeting, a board meeting in another country is valid.

! TELECONFERENCE OR VIDEO CONFERENCE. In the Philippines, teleconferencing and videoconferencing of members


of the board of directors of private corporations is a reality, in light of Rep. Act No. 8792. The SEC issued SEC
Memorandum Circular No. 15 providing the guidelines to be complied with related to such conferences.
AΦB

" Justice Callejo observed in Expertravel & Tours Inc. vs. Court of Appeals that in this age of modern technology, the
courts may take judicial notice that business transactions may be made by individuals through
teleconferencing. Teleconferencing is interactive group communication through an electronic medium. In general
terms, teleconferencing can bring people together under one roof even though they are separated by hundreds of
miles. This type of group communication may be used in a number of ways, and have 3 basic types: (1) Video
Conferencing; (2) Computer Conferencing; and (3) Audio Conferencing. ALPHA PHI BETA

" Note that Memorandum Circular No. 15 imposes electronic or tape recording of the proceedings as a mandatory
requirement. In this connection, there will be no violation of the Anti-Wire Tapping Act (R.A. 4200) because all the parties to the
board meeting are aware that all the communications are recorded. Hence, there is implied consent on the part of the participants
who do not object. Moreover, if the recording is in existence, it can be produced and can serve as prima facie evidence of the

EXCLUSIVELY FOR
events that transpired. Mere reliance in the minutes may give room to abuse, manipulation and/ or alteration of the electronic data.
Thus, electronic or tape recording of the proceedings enhances the transparency, authenticity and reliability of the video-
teleconferencing.

Sec. 54. Who shall preside at meetings. - The president shall preside at all meetings of the directors or trustee as well as of
the stockholders or members, unless the by-laws provide otherwise.

! The office of the Chairman of the Board is NOT expressly provided for in the Corporation Code. However, the by-
laws may create the office of the Chairman who may be designated as the presiding officer of the Board. In such case, the
President may no longer serve such function and is usually the designated Chief Operating Officer.

! The presiding officer is also a member of the Board. Hence, it cannot be provided in the by-laws or a Board Resolution
that he can vote only in case of a tie in a board meeting. The resolution is not deemed approved in case of a tie
because the required number of votes is not met.

B. REQUIREMENTS OF A MEETING

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! REQUISITES FOR A VALID BOARD MEETING:


1. Meeting of the Directors or Trustees duly assembled as a Board, at a place, time and manner provided in the by-laws;
2. Presence of the required quorum; and
3. Decision of the majority of the quorum or, in other cases, a majority of the entire Board.

" In case of abstention during a board meeting on a vote taken on any issue, the general rule is that an abstention is
counted in favor of the issue that won the majority vote; since by their act of abstention, the abstaining directors are

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


deemed to abide by the rule of the majority. ALPHA PHI BETA

! REQUIREMENTS OF A STOCKHOLDERS/MEMBER’S MEETING:


1. It must be held at the proper place. Stock corporations hold stockholder’s meetings in the city/municipality where the
principal office is located, while non-stock corporations may hold stockholder’s meetings at any place in the
Philippines. Metro Manila is considered one city.
2. It must be held at the stated date and at the appointed time or at a reasonable time thereafter.
3. It must be called by the proper person.
a. The person authorized under a by-laws provision;
b. The president, in the absence of a by-laws provision;
c. The secretary, on order of the president or on written demand of the stockholders representing or holding at least
a majority of the outstanding capital stock or majority of the members entitled to vote in a non-stock corporation.
d. The stockholder/member making the demand, if there is no secretary or if the secretary refuses to do so.
e. On order of the SEC.
4. There must be previous notice, 2 weeks prior to the regular meeting; 1 week prior to the special meeting. By-laws
may shorten or extend time for sending out of notice.
5. There must be quorum.
AΦB

C. RIGHT TO VOTE OF STOCKHOLDERS

! Price vs. Martin, held that until challenged in a proper proceeding, a stockholder of record has a right to participate in any
meeting of the stockholders of the corporation, and in the absence of fraud, the action of the stockholders at that meeting
cannot be collaterally attacked on account of such participation. A person who has purchased stock and who desired to be
recognized as a stockholder, for the purpose of voting, must secure such a standing by having the transfer recorded upon
the books of the corporation; and if the transfer is not duly made upon request he has, as his remedy, to compel it to be
made. (Villanueva, Philippine Corporate Law, 2001)

1. INSTANCES WHEN VOTING RIGHT NOT AVAILABLE

EXCLUSIVELY FOR
a. Where the Articles of Incorporation provides for classification of shares pursuant to Sec. 6, non-voting shares
are not entitled to vote except as provided for in the last paragraph of Sec. 6. (ABS BC MID)
b. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the Code.
c. Fractional shares of stock cannot be voted unless they constitute at least one full share.
d. Treasury shares have no voting rights as long as they remain in the treasury.
e. Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled to vote or a
representation at any stockholder’s meeting.
f. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.
g. A stockholder is still entitled to vote even if the shares are mortgaged or pledged unless he authorizes the creditor in
writing to vote. (Sundiang, Commercial Law Reviewer, 2006)
h. Holders of escrow shares or sequestered shares are not entitled to vote, as a rule.

2. RULES ON:

a. DELINQUENT SHARES; (Sec. 71)

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to vote or to representation at
any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right
to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his
subscription with accrued interest, and the costs and expenses of advertisement, if any.

! The delinquent stockholder is NOT entitled to any right of a stockholder. Thus, Sec. 71 provides that he
cannot vote for and he is not entitled to representation during meetings. The delinquent shareholder cannot be

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


elected as a director and he cannot continue serving as such. It is only upon full payment that the stockholder will
be restored to his full rights.

" The only exception is the right to dividends. A delinquent shareholder is still entitled to dividends, however, if
cash dividends are declared, the dividends shall be applied to the subscription price that is due to the
corporation.

! Delinquent stockholders shall not be included in the determination of existence of the required quorum.
With respect to election of directors, it is clear from Sec. 24 that the required quorum is the majority of those
entitled to vote. Thus, stockholders who are not entitled to vote because of delinquency should not be included in
the determination of the quorum.

b. ESCROW SHARES

! ESCROW SHARES are those subject to an agreement by virtue of which the shares are deposited by the grantor
or his agent with a third person to be held by the latter until the performance of a certain condition or the
AΦB

happening of a certain event contained in the agreement.

! When shares of stock are held in escrow, they are deemed to be subject to an agreement by virtue of which the
shares are deposited by the grantor or his agent with a third person to be held by the latter until the performance
of a certain condition or the happening of a certain event contained in the agreement. An escrow deposit makes
the depository a trustee under an express trust. Title to the stock does not pass under such an agreement
until the performance of a certain condition, and does not relate back to the time when the stock was
deposited. For this reason, the holder of escrow shares does not become entitled to the rights pertaining to
a stockholder until the conditions for the release of such shares are fully met. He cannot thus be entitled
to vote in a stockholder’s meeting. (Agpalo, Comments on the Corporation Code of the Philippines, 2001)

EXCLUSIVELY FOR
c. UNPAID SHARES; (Sec. 72)

Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all
the rights of a stockholder

! ACCRUAL OF RIGHTS OF SHAREHOLDERS. A pre-incorporation subscriber becomes a shareholder from


the moment the Certificate of Incorporation is issued. He is a shareholder from the inception of the corporation.
Unless certain terms and conditions are required, a post-incorporation subscriber becomes a shareholder from
the perfection of the subscription contract. He is a shareholder the moment he holds the shares by virtue of a
subscription contract.

" Whether the subscription is pre-incorporation or post-incorporation, the subscriber is entitled to all the
rights of a shareholder from the moment he becomes such shareholder. It is not necessary that the
subscription price has been fully paid. It is also not necessary that a certificate of stock is issued.

" One right which is NOT available is the right to secure a stock certificate or to have any subsequent
transfer registered in the books of the corporation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" There is no cause of action for mandamus to compel the corporation to register the transfer if the
corporation has an unpaid claim on the share and no certificate has been issued. The transfer is effective
only between the parties. (Nava vs. Peers Marketing Corp.)

! GEN. RULE: Full payment of the subscription price is not necessary to render a subscriber a stockholder
and to entitle him to all the rights of a stockholder. A subscription to shares of stock is a contract between a
subscriber and a corporation, which, once accepted by the latter, becomes a binding contract rendering him a

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


stockholder and imposing upon the stockholder the obligation to pay the price thereof, even if the contract
contains no express promise to pay the amount subscribed.

EXCEPTIONS:
1. When the subscription contract contains suspensive or conditional obligations, in which case,
fulfillment of such condition or conditions is necessary to render a subscriber a stockholder with all the rights
of one. Thus, if full payment is made a condition for his becoming a stockholder, the subscriber’s failure to
pay does not render him a stockholder, precluding him from enjoying the rights of a stockholder and
rendering him liable for the unpaid subscription. ALPHA PHI BETA

2. When the consideration for the shares is other than cash, in which case approval by the SEC pursuant to
Sec. 62 of the Corporation Code is necessary to render the subscriber a stockholder. (Agpalo, Comments
on the Corporation Code of the Philippines, 2001)

! BASIC RIGHTS. A shareholder has certain rights which include proprietary rights, right to participate directly or
indirectly in the management of the corporation and certain remedial rights. The shareholder has the following
rights even if he has not yet fully paid his shares.
1. Voting rights; (Sec. 6)
2. Right to remove directors; (Sec. 28)
AΦB

3. Right to dividends; (Sec. 43)


4. Appraisal right; (Sec. 81)
5. Right to issuance of stock certificate for fully paid shares; (Sec. 64)
6. Proportionate participation in the distribution of the assets in liquidation; (Sec. 118-119)
7. Right to transfer of stocks in corporate books; (Sec. 63)
8. Pre-emptive right; (Sec. 39)
9. Right to inspect books and records; (Sec. 74)
10. Right to be furnished of the most recent financial statement/financial report; (Sec. 74 and 75)
11. Right to recover stocks unlawfully sold for delinquent payment of subscription; (Sec. 69) and
12. Right to file individual suit, representative suit, and derivative suits.

EXCLUSIVELY FOR
! OBLIGATIONS. The obligations of a stockholder include the following:
1. Liability to the corporation for unpaid subscription; (Sec. 67-70)
2. Liability to the corporation for interest on unpaid subscription if so required by the by-laws (Sec. 66)
3. Liability to the creditors of the corporation for unpaid subscription (Sec. 60);
4. Liability for watered stock (Sec. 65);
5. Liability for dividends unlawfully paid. (Sec. 43)

! RIGHT TO FILE AN ACTION. A shareholder has the right to file 3 types of actions:

1. DERIVATIVE ACTIONS – are suits brought by one or more stockholders/members in the name and on
behalf of the corporation to redress wrongs committed against it, or to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or the ones to be sued, or has control of the
corporation. Derivative actions are not expressly provided for in the Corporation Code although the same is
implicit from the rights of shareholders.

2. INDIVIDUAL ACTIONS – are actions brought by the shareholder in his own name against the corporation
when a wrong is directly inflicted against him. The cause of action pertains to him and the action is meant
directly to protect his interest.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

3. REPRESENTATIVE ACTIONS – are actions brought by the stockholder in behalf of himself and all other
stockholders similarly situated when a wrong is committed against a group of stockholders.

" These actions are not only meant to directly protect his interest but also the corporation as well. The cause
of action need not pertain to him as in the case of a derivative action.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


d. SEQUESTERED SHARES

! The sequestration of shares does not entitle the government to exercise acts of ownership over the shares;
consequently, even sequestered shares may be voted upon by the registered stockholder of record.
(Cojuangco vs. Roxas)

! In Cojuangco vs. Roxas, the Supreme Court ruled that the PCGG, not being the owner, cannot perform acts of
strict ownership of sequestered property. It is a mere conservator. The sequestration of shares does not import
or cause a divestment of title of their registered owners. Hence, it may not vote the shares in a corporation and
elect the members of the board of directors. Only the owners of the sequestered shares, duly authorized
representatives or proxies may vote said shares. And the only conceivable exception when PCGG may vote
sequestered shares is where there is evident dissipation of said shares or in case of a takeover of a business by
the government or of a corporation belonging to the government or whose capitalization comes from public funds.

! However, in its resolution of February 16, 1993 in Republic vs. Sandiganbayan,, the Supreme Court ruled that
coconut levy funds used to purchase shares of stock from the UCPB, which PCGG sequestered are “affected
with public interest” and, accordingly, pending final resolution of the question as to who are the owners of the
sequestered shares PCGG can vote said shares in any corporate meeting of the bank stockholders.
AΦB

! GEN. RULE: The right to vote sequestered shares of stock registered in the names of private individuals
or entitles and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the
registered owner. ALPHA PHI BETA

EXCEPTION: The PCGG may, however, be granted such voting right provided in can:
1. show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and
2. demonstrate imminent danger of dissipation of the assets, thus necessitating their continued
sequestration and voting by the government until a decision, ruling with finality on their ownership, is
promulgated by the proper court. (Republic vs. Cocofed)

EXCLUSIVELY FOR
! However, the foregoing "TWO-TIERED" TEST DOES NOT APPLY when the sequestered stocks are acquired
with funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch
as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public
in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character" test,
not the "two-tiered" one, applies in the instant controversy. (Republic vs. Cocofed)

! From the foregoing general principle, the Court in Baseco v. PCGG and Cojuangco Jr. v. Roxas has provided two
clear "public character" exceptions under which the government is granted the authority to vote the shares:
1. Where government shares are taken over by private persons or entities who/which registered them in
their own names, and
2. Where the capitalization or shares that were acquired with public funds somehow landed in private
hands.

" The exceptions are based on the common-sense principle that legal fiction must yield to truth; that public
property registered in the names of non-owners is affected with trust relations; and that the prima facie
beneficial owner should be given the privilege of enjoying the rights flowing from the prima facie fact of
ownership. (Republic vs. Cocofed)

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

e. TREASURY SHARES (Sec. 57)

Sec. 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares remain
in the Treasury.

! Treasury shares are NOT part of the outstanding capital. Hence, they shall have no voting rights. Shares
that are not part of the outstanding capital are not entitled to any right or privilege of a stockholder. When a

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


corporation reacquires its own shares, it does not become a subscriber thereof and the only right which a
corporation has over the treasury shares is to reissue the same for valuable consideration. Rationale: To
prevent abuse, since the directors may effectively perpetuate their control of the corporation.

! It was also observed that whenever the general corporation law disqualifies shares from voting on any
matter, they are not considered outstanding for the determination of the quorum at any meeting to act
upon any matter. They are not required in the determination of the number of votes that are necessary to
approve any action upon any matter under any other provision of law or articles of incorporation or by-laws.

f. PLEDGOR, MORTGAGOR, OR ADMINISTRATOR OF SHARES; (Sec. 55)

Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of pledged or mortgaged shares in
stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless
the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the
appropriate corporate books.

Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote
in behalf of the stockholders or members without need of any written proxy.
AΦB

! The stockholders whose stock certificates were used as collaterals for a loan have the right to vote UNLESS
said stockholders authorized the bank in writing to vote the pledged or mortgaged shares. A stockholder
whose shares are pledged or mortgaged shall be entitled to vote such shares until the shares have been
transferred in the name of the pledgees or mortgagees.

! Executors, administrators, receivers, and other legal representatives duly appointed by the court may
attend and vote in behalf of the stockholders or members without need of any written proxy.

" REASON: Such representatives become vested with legal title over the shares upon their appointment by
the court. However, it is indispensable that the representative is appointed by the court; otherwise, a proxy is
necessary.

EXCLUSIVELY FOR
! Where a stock certificate is deposited in escrow as security for a promissory note with instructions to the holder to
deliver the certificate to the payee of the note, the stock is so delivered and is transferred to the payee in the
books of the corporation, the payee-transferee has the right to vote the same. The rule is that stocks deposited in
trust or in escrow can vote as other trust stocks, whenever a votable title and ownership vest in some proper and
certain persons.

g. SHARES JOINTLY OWNED (Sec. 56)

Sec. 56. Voting in case of joint ownership of stock. - In case of shares of stock owned jointly by two or more
persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy,
signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares:
Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners
can vote said shares or appoint a proxy therefor.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! In civil law, acts of ownership require unanimity among the co-owners. The general rule under Sec. 56
follows this rule by requiring the consent of all co-owners in order to vote a share that is owned jointly by 2 or
more persons.

! Even if the shares are co-owned, unanimity is not required in the following instances:
1. If there is a written proxy signed by all the co-owners authorizing any or some to vote; and
2. If the shares are owned in an “and/or” capacity.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


D. CONCEPT OF PROXY AND VOTING TRUST AGREEMENT (Sec. 58 & 59)

Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members.
Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5) years at any one time.

! RIGHT TO VOTE. The right to vote at a stockholder’s meeting depends upon the ownership of the stock as disclosed by
the stock and transfer book of the corporation and a registered stockholder must be allowed to vote irrespective of any
question of bona fides.

" Nevertheless, the by-laws may provide for a record date. For example, the by-laws may provide that the Stock and
Transfer Book shall be closed five days before each meeting of the stockholders. In which case, only stockholders of
record before the closing of the book shall have the right to vote.

! PROXY. It is not required that the shareholder must vote in person as he may do so by proxy.
AΦB

" A PROXY is a written authorization given by one person to another so that the second person can act for the first
such as that given by the shareholder to someone else to represent him and vote his shares at a shareholder’s
meeting. In another sense, a proxy may also refer to the person who was so authorized.

" REQUIREMENTS OF PROXY:


1. Proxies shall be in writing;
2. The proxy shall be signed by the stockholder or member;
3. The proxy shall be filed before the scheduled meeting with the corporate secretary;
4. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended; and
5. No proxy shall be valid and effective for a period longer than 5 years at any time

EXCLUSIVELY FOR
" The formalities of a proxy may be provided for in the by-laws. In the absence of any provision in the by-laws, the proxy
need only comply with the minimum requirements provided for in Sec. 58. For example, in the absence of provisions in
the by-laws, the proxy need not be notarized because all that is required by Sec. 58 is that it be in writing.

" The formalities must be required by the by-laws. The Board cannot prescribe the form of the proxies other than what is
provided for in Sec. 58.

! DURATION OF PROXY. A proxy may be a specific proxy or a continuing proxy. Unless otherwise stated, the proxy is
deemed to be a specific proxy. ALPHA PHI BETA

1. SPECIFIC PROXY – one where the authority granted the proxy holder is merely for a particular meeting on a specific
date, such as when said proxy speaks of “annual meeting of stockholder on January 5, 2005 or any adjournment,
communications or postponements thereof.” A specific proxy can only be used on the date and purpose specified in
the proxy.

2. CONTINUING PROXY – is not limited to a specific meeting and it continues for a certain period. Under Sec. 58, the
period for a continuing proxy is not more than 5 years at any one time. The 5-year period can be extended provided
that the extension period is not more than 5 years.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The by-laws may provide for a shorter duration of a continuing proxy. Thus, the by-laws may provide for a
restriction of 60 days. This restriction is a reasonable restriction that is not in conflict with existing laws.

! PERSONAL RIGHT. The power to appoint a proxy is purely personal. The right to vote is inseparable from the right of
ownership of stock. Therefore, to be valid, a proxy must have been given by the person who is the legal owner of the
stock and is entitled to vote.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! NUMBER. The by-laws may impose restrictions as to the person who can be proxies and the manner of voting them. In
the absence of such provision, anybody can be appointed a proxy without limitation as to the number of members to be
represented.

" A proxy can be given to 2 or more persons jointly. It is customary to authorize the majority of those appointed but if
only one attends, he will be deemed authorized to exercise the powers of a proxy. Thus, if three persons are
appointed and all of them attended, the three of them must agree upon the vote and in case of conflict, the rule of
majority governs.

! QUORUM. The proxy should be filed or registered with the Corporate Secretary before the meeting. After proper
registration of the proxy, the same shall be counted in determining the existence of the quorum.

! REVOCATION. As a general rule, one who has given a proxy the right to vote may revoke the same at anytime UNLESS
said proxy is coupled with interest even if though it may appear by its terms to be irrevocable. It may be revoked in
writing, orally, or by conduct.

" Where 2 or more persons are given separate proxies but they are not intended to be joint proxies, the giving of the last
proxy is to be deemed a revocation of all former proxies. The last proxy given revokes all previous proxies.
AΦB

" If both proxies are undated and are both mailed to the Corporate Secretary, the one bearing the latest time of day of
postmark is counted. If the undated proxies are not mailed, then the time of their actual presentation is considered.

! DOCUMENTARY STAMP. Documentary stamps should, as a rule, be affixed on proxies of corporations. However, failure
to affix the same cannot affect the validity of the proxy. The only adverse effect is that the same cannot be recorded
as a public document and cannot be admitted and used evidence in court until the required documentary stamp is
affixed and cancelled.

! VOTING BY MAIL. SEC Memorandum Circular No. 4 Series of 2004 now expressly allows voting by mail.

EXCLUSIVELY FOR
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust 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: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust
may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled
and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the
same manner and with the same effect as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the
same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise
the right of inspection of all corporate books and records in accordance with the provisions of this Code.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting
trust agreement, and thereupon shall be bound by all the provisions of said agreement.

No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


deemed canceled and new certificates of stock shall be reissued in the name of the transferors.

The voting trustee or trustees may vote by proxy UNLESS the agreement provides otherwise.

! VOTING TRUST – is an agreement whereby a stockholder of a stock corporation confers upon a trustee or trustees the
right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any time.

" A voting trust is created by the transfer of voting shares by shareholders to a voting trustee or trustees, to hold and
vote them, until the purpose is fulfilled or for a specified period, usually pursuant to a voting trust agreement.

! EFFECT OF VOTING TRUST. The most immediate effect of a voting trust agreement on the status of stockholder who is
party to its execution – from legal title holder or owner of the shares subject of the voting trust agreement, he becomes the
equitable or beneficial owner. He thus becomes ineligible to continue being a director or to be elected director,
unless he holds at least one qualifying share in his name in the corporate books. Thus, service of summons upon him
intended for the corporation made after the execution of a voting trust agreement and its recordal in the corporate
books is invalid because he had already ceased to be a director. (Lee vs. Court of Appeals)

! PURPOSES. A voting trust agreement may be used for disparate purposes including:
AΦB

1. It is a device to concentrate shareholder control in one or few persons who, primarily through election of directors, can
control corporate affairs.
2. It is also used in corporate reorganization where it may be used to give control to former creditors reduced to
stockholder’s status;
3. It may also be used by founder or incorporators to retain control; and
4. It may be used to distribute voting power disproportionately to share ownership.

! LIMITATIONS. Specific limitations on voting trust agreements imposed by Sec. 59 are as follows:
1. It must not exceed the period of 5 years at any time;
2. In the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a
period exceeding five (5) years but shall automatically expire upon full payment of the loan;

EXCLUSIVELY FOR
3. It must be in writing and notarized; and
4. It shall specify the terms and conditions thereof.

! PROCEDURAL REQUIREMENTS. The voting trust agreement undergoes the following stages:
1. Execution and notarization of the voting trust agreement stating the terms and conditions thereof;
2. A certified copy of such agreement shall be filed with the corporation and with the SEC; otherwise, said agreement is
ineffective and unenforceable;
3. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled;
4. A new certificate shall be issued in the name of the trustee or trustees stating that they are issued pursuant to the
voting trust agreement;
5. The transfer shall be noted in the books of the corporation, that it is made pursuant to said voting trust agreement;
6. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable
in the same manner and with the same effect as certificates of stock;
7. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud.

! RIGHTS OF TRUSTEE. The trustee in a voting trust agreement acquires the right to vote and other rights pertaining to the
shares. The transferor and the trustee or trustees may also exercise the right of inspection of all corporate books and

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CORPORATION LAW REVIEWER AΦB

records in accordance with the provisions of the Corporation Code. The voting trustee or trustees may likewise vote by
proxy unless the agreement provides otherwise.

" Legal title is acquired by the trustee; hence, he can be elected as a director of the company. The trustor does not
have such right during the life of the voting trust agreement.

! TERM. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the
agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


thereby be deemed canceled and new certificates of stock shall be reissued in the name of the transferors.

! DISTINGUISHED FROM PROXY


VOTING TRUST AGREEMENT PROXY
Irrevocable Generally revocable (unless coupled with interest)
Legal title is transferred to the trustee No transfer of title
The share certificate shall be cancelled and transferred to the No cancellation of the certificate shall be made
trustee
It must be notarized It need not be notarized
The trustor-shareholder cannot vote The shareholder retains his right to vote
It cannot be for a specific meeting It can be specific or continuing
The trustee can vote by proxy The proxy cannot further delegate his authority
The trustee votes in his own right as holder of legal title The proxy is the agent of the shareholder

! DISTINGUISHED FROM SHAREHOLDER’S VOTING AGREEMENT. A group of shareholders may actually agree and
vote in a certain manner. For instance, a number of shareholders may form a certain block in order to elect a director.

" In such a case, voting agreement can be verbal. It may be quite informal and may vary depending upon the
discretion of the parties. The agreement may even be secret, if that is desirable, since no evidence of the agreement
AΦB

need be deposited with the corporation.

" “The statute does not purport to deal with agreements whereby shareholders attempt to bind each other as to how they shall vote
their shares. Various forms of such pooling agreements, as they are sometimes called, have been held valid and have been
distinguished from voting trusts.” They need not comply with the requirements prescribed by law to voting trust agreements.
“Generally speaking, a shareholder may exercise wide liberality of judgment in the matter of voting, and it is not objectionable that
his motives may be for personal profit, or determined by whims or caprice, so long as he violates no duty owed his fellow
shareholders.” ALPHA PHI BETA

E. DERIVATIVE SUIT; CONCEPT AND REQUISITES

EXCLUSIVELY FOR
! DERIVATIVE SUIT – is one which is instituted by a shareholder or a member of a corporation, for and in behalf of the
corporation for its protection from acts committed by directors, trustees, corporate officers, and even third persons.

" A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs
committed against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the
principal defense of the minority shareholders against abuses by the majority. (Western Institute of Technology, Inc.
vs. Salas)

" The stockholder is only a nominal party in a derivative action. The real party in interest is the corporation.
Consequently, the corporation is an indispensable party who must be impleaded in the derivative action.

" A stockholder can initiate a derivative action only if he is a stockholder at the time of the transaction in question and at
the time of the filing of the action. A transferee who was not yet a stockholder at the time of the transaction cannot
initiate the action on the theory that a transferee ought to take things as he found them when he acquired his shares. If
the party himself who is the victim of fraud chooses to waive his remedy, the remedy does not belong to the
subsequent purchaser. (Pascual vs. Del Saz Orozco) The exception to the rule that the person who will file the

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case must be a shareholder at the time the transaction entered into, is a situation where the transactions continue
and are injurious to the stockholder or affect him especially and specifically in some other way. (Ibid.)

! The legal standing of stockholders to bring derivative suits for and in behalf of their corporation is not a civil law right; in fact,
the Corporation Code contains no provision recognizing or regulating the filing of derivative suits. It is a common law right
of stockholders and members; it exists by virtue of Philippine jurisprudence adopted from Anglo-American jurisprudence.
(Villanueva, Philippine Corporate Law, 2001)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! BASIS OF THE RIGHT OF A STOCKHOLDER TO BRING DERIVATIVE SUIT. The board of directors of a corporation is a creation
of the stockholders and controls and directs the affairs of the corporation by allegation of the stockholders. But the board of
directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a position of trusteeship in relation to
the minority of the stock in the sense that the board should exercise good faith, care and diligence in the administration of the affairs of
the corporation and should protect not only the interest of the majority but also those of the minority of the stock. Where a majority of the
board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra
vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a
suit filed by the minority members of the board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the
commission of illegal acts and otherwise redress the injuries of the minority stockholders against the wrongdoing of the majority. The
action in such a case is said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholders
thereof. (Angeles vs. Santos)

! REQUISITES FOR A DERIVATIVE SUIT:

1. The party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number
of his shares not being material;
AΦB

2. The party 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. (Evangelista vs. Santos)

4. The suit is not a nuisance or harassment suit.

5. No appraisal rights are available for the acts or acts complained of.

EXCLUSIVELY FOR
" The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his
own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against
him, individually, but in behalf and for the benefit of the corporation.

! Some of the grounds for derivative suit include wastage and diversion of corporate funds, and violation of laws.

! NATURE OF RELIEFS PRAYED FOR. The action must be brought for the benefit of the corporation. In Evangelista vs.
Santos, the plaintiffs were minority stockholders, who brought a derivative suit against the principal officer for damages
resulting from the mismanagement of corporate affairs and misuse of corporate assets. The complaint prayed for judgment
requiring defendant, among others, to pay the plaintiffs the value of their respective participation in said assets on the basis
of the value of the stocks held by each of them.

" The Court held that the suit would not prosper. The stockholders brought the action not for the benefit of the corporation but
for their own benefit since they asked that the defendant make good the losses occasioned by his mismanagement and pay them
the value of their respective participation in the corporate assets on the basis of their respective participation in the corporate assets
on the basis of their respective holdings. The Court held that the relief sought could not be done until all corporate debts, if there be
any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution.

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CORPORATION LAW REVIEWER AΦB

" Since it is the corporate which is the real party in interest, then the reliefs prayed for must be for the benefit or interest of
the corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit.
(Evangelista vs. Santos)

! PROPER FORUM FOR DERIVATIVE SUIT. The proper forum for a derivative suit used to be with SEC under PD 902-A.
However, pursuant to Sec. 5.2 of the Securities Regulation Code, all intra-corporate disputes under Sec. 5 of PD 902-A
have been transferred to the jurisdiction of the Regional Trial Courts (RTC).

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! NUISANCE SUITS. Under Sec. 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, one
of the conditions for filing a derivative suit is that the “suit is not a nuisance or harassment suit;” otherwise, the courts are
authorized to “forthwith dismiss the case.”

" Under Sec. 1 (b) (4), Rule 1 of the said Interim Rules, the availability of appraisal right for the act or acts complained of,
is an important factor in intra-corporate suits for the courts to determine whether the suit is a nuisance suit or one
brought for harassment. ALPHA PHI BETA

INTERIM RULES OF PROCEDURE GOVERNING


INTRA-CORPORATE CONTROVERSIES UNDER R.A. NO. 8799
Rule 8
DERIVATIVE SUITS
AΦB

Section 1. Derivative action. — A stockholder or member may bring an action in the name of a corporation or association, as the case may
be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed;
(2) He 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) No appraisal rights are available for the acts or acts complained of; and
(4) The suits is not a nuisance or harassment suit.
In case of nuisance of harassment suit, the court shall forthwith dismiss the case.

Sec. 2. Discontinuance. - A derivative action shall not be discontinued, compromised or settled without approval of the court. During the
pendency of the action, any sale of shares of the complaining stockholders shall be approved by the court. If the court determines that the

EXCLUSIVELY FOR
interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct
that notice, by publication or otherwise, be given to the stockholders or members whose interest it determines will be so affected.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


VIII. SUBSCRIPTION CONTRACT
AΦB

A. WAYS TO BECOME A STOCKHOLDER OF A CORPORATION

! ACQUISITION OF SHARE. A person may become a stockholder in a corporation by acquiring a share. Acquisition of
share can be done by (1) purchase or (2) through subscription. Purchase may be from the corporation itself or from other
stockholders.

" The difference between the 2 modes of becoming a stockholder are the following:
1. As to the time when they are entered into, subscription can be made before or after incorporation while purchase
is made only after incorporation;

2. Generally, the subscriber in a subscription agreement need not pay unless there is a call while in purchase, the

EXCLUSIVELY FOR
purchaser under a deed of absolute assignment or sale must fully pay the purchase price at the time the shares
are transferred;

3. The subscriber cannot be released from his obligation to pay the subscription price while a stockholder who sells
his shares can condone the obligation to pay;

4. The Statute of Frauds does not apply to subscription contracts while the same apply to purchase if the price is not
less than P500.00

SUBSCRIPTION PURCHASE
Period Can be made before or after incorporation Can only be made after incorporation
Generally, the subscriber need not pay The purchaser under a deed of
unless there is a call assignment or sale must fully pay the
Payment
purchase price at the time the shares are
transferred
Release from obligation to Subscriber cannot be released from his The stockholder who sells his shares can
pay obligation to pay the subscription price condone the obligation to pay the

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CORPORATION LAW REVIEWER AΦB

purchase price
Does not apply to subscription contracts Applies if the purchase price is not less
Stature of Frauds
than P500.00

! As a rule, only persons whose ownership are registered in the stock and transfer book are considered stockholders
of record. The rights of a shareholder accrue only upon entry of his name in the books of the corporation. If a person
wants to be recognized as stockholder, he must secure his standing by having his ownership of shares recorded on the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


corporate books. Consequently, a person cannot be recognized as a stockholder by mere presentation of dividend coupons
if his ownership is not recorded.

! After incorporation, a person becomes a stockholder of a corporation:


1. By subscribing to the unsubscribed and unissued shares either from the original capital stock or from the increase in
capital stock; (SUBCRIPTION) ALPHA PHI BETA
2. By purchasing treasury shares from the corporation; (PURCHASE)
3. By buying shares of stock from another stockholder of the same corporation. (PURCHASE)

" The last 2 modes of acquiring shares of stock and becoming a stockholder do not involve subscription but purchase of
shares.

" Note: If the subject matter of the contract is the unissued shares of stock of a corporation, the contract for their
acquisition by another is a subscription contract, regardless of whether the contract is called a contract of sale or
purchase of shares. It falls under Sec. 60 of the Corporation Code and subject to the conditions and limitations
prescribed in other provisions thereof.

If the subject matter of the contract is previously unissued shares which the corporation subsequently
AΦB

reacquired, such as treasury shares, the contract is not a subscription but a sale or purchase, and the legal
consequences of a subscription contract do not obtain. Accordingly, in a contract of purchase or sale or treasury
shares, the purchaser does not become a stockholder until the terms and conditions of the sale shall have been
performed; the corporation can rescind the contract for non-payment of the purchase price; and the corporate creditors
cannot hold the buyer liable for the unpaid price, the creditors not being privy thereto. (Agpalo, Comments on the
Corporation Code of the Philippines, 2001)

! A person may become a stockholder even without having been issued a certificate of stock, as when he is an incorporator
and listed as a stockholder in the Articles of Incorporation.

EXCLUSIVELY FOR
B. CONCEPT OF SUBSCRIPTION CONTRACT (Sec. 60)

Sec. 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to
it as a purchase or some other contract.

! SUBSCRIPTION CONTRACT – a contract by which the subscriber agrees to take a certain number of shares of the capital
stock corporation, paying the consideration therefor or expressly or impliedly promising to pay the same.

" A subscription contract is formed by an offer by one of the parties, the corporation or the subscriber, as the case may
be, and an acceptance of this offer by the other. As soon as the offer to take shares made by a person to a
corporation is accepted by the corporation, or as soon as an offer of shares by a corporation is accepted by the person
to whom it is made, there is binding contract of subscription.

! PARTIES. The parties in a subscription contract are the subscriber and the corporation itself. A subscription contract
necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is owned by
the corporation – its shares of stock. It is not a mere contract between the subscribers even if the other subscribers entered

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into an agreement prior to incorporation. Consequently, the subscribers are not real parties in interest in a case for
rescission of the subscription contract of another subscriber because they are not parties thereto. (Ong Yong vs. David
Tiu, et. al.)

" However, in a sense, the subscription contract is also a contract among subscribers. Consequently, an original
subscriber cannot withdraw from the pre-incorporation subscription agreement without the consent of all shareholders.
(Sec. 61)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" The subscription contract should therefore be distinguished from agreements between individuals as such. Thus, an
agreement to form a corporation embodied in a Joint venture Agreement may be an agreement only between the
parties in the Joint Venture Agreement. While the terms and conditions may involve the corporation (i.e. the number of
shares each party may own, the officers each can nominate, etc.), the corporation is not a party thereto.

! FORM. There is no law requiring a form of subscription to capital stock as a requisite for its validity; hence, the
same need not be in writing. Thus, if a person accepts a certificate of stock in his name or if he exercises the rights of
shareholders, he is liable for the unpaid subscription even if there was no express contract.

! KINDS. A subscription contract may be a PRE-INCORPORATION CONTRACT (entered into before incorporation) or a
POST-INCORPORATION (entered into after the issuance of the certificate of incorporation) contract.

" A subscription contract may also be those pertaining to shares that are part of the Authorized Capital Stock
appearing the articles and those that involve shares in the increase of capital.

" Subscription contracts may be CONDITIONAL OR UNCONDITIONAL. A subscription upon a condition precedent or a
conditional subscription is a subscription which does not take effect so as to make the subscriber a stockholder, or
confer rights until the condition is satisfied.
AΦB

" SUBSCRIPTION WITH A SPECIAL TERM – one where the corporation agrees to do something, the fulfillment of
which not being a condition precedent to the accrual of a liability of the subscriber or the acquisition of the rights of a
stockholder. ALPHA PHI BETA

! TRUST FUND DOCTRINE. Under the Trust Fund Doctrine, the capital stock, property and other assets of the corporation
are regarded as equity in trust for the payment of corporate creditors. The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits.
Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription.

" Money received for subscription of increase of authorized capital is not covered by the trust fund doctrine prior to the

EXCLUSIVELY FOR
approval of such increase by the SEC.

" The Trust Fund Doctrine is violated in the following instances:


1. When the corporation releases or condones payment of the unpaid subscription and the stockholder has no right
to demand the refund of his investment;
2. When there us payment of dividends without unrestricted retained earnings;
3. When properties are transferred in fraud of creditors; and
4. When properties are disposed or undue preference is given to some creditors even if the corporation is insolvent.

" The Trust Fund Doctrine provides that subscriptions to capital stock of a corporation constitute a fund to which
the creditors have the right to look for the satisfaction of their claims.

" Consistent with the doctrine, a stockholder has no right to demand for the return of his investment. A stockholder
cannot, without violating the Trust Fund Doctrine, compel the corporation to return his investments without the consent
of all the stockholders. Neither does he have the right to withdraw even when all the stockholders assent thereto if
there is prejudice to creditors.

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! TREASURY SHARES. Treasury shares are not subject to subscription contracts because Sec. 60 of the Corporation Code
covers only acquisition of unissued shares. However, when treasury shares are re-issued, the shareholders are entitled to
exercise their pre-emptive right.

! SOURCES OF CAPITAL. Capital includes all properties and assets of the corporation that are used for its business or
operation. This should be distinguished from Authorized Capital Stock which is the amount fixed in the Articles of
Incorporation to be subscribed and paid by the stockholders of the corporation. On the other hand, Subscribed Capital is
that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not while Paid-

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Up Capital is that portion of the authorized capital stock which has been subscribed and actually paid.

" Subscription is not the only source of corporate funds after incorporation. As an ongoing concern, the corporation may
get funds not only from the shareholders but also from creditors in the form of debts. Additionally, funds may also
come from the income of the corporation as a result of its operation.

! BALANCING OF INTERESTS. It cannot be overemphasized however that subscription or investment of shareholders is


not the only source of corporate capital. A large part of funds of a corporation may come from creditors of the company.
The Trust Fund Doctrine and other rules relating to the legal capital of the corporation are, in fact, directly concerned with
the balancing the interest of the shareholders and the creditors of the company.

! CREDITORS. With respect to creditors who supply additional funds to the corporation, they fall under 2 categories, namely,
(1) commercial creditors and (2) investment creditors.

" Commercial creditors are normally short-term creditors including banks and other institutional lenders who extent
revolving lines of short term credit.

" Investment creditors are those who acquire bonds or debentures issued by the corporation.
AΦB

" The considerations for bonds are also limited to the considerations that the Corporation Code allows for subscription
agreements.

! STOCK OPTION AND WARRANT. A subscription contract should be distinguished from a stock option and a warrant.

" STOCK OPTION is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a
corporation within a specified period and under the terms and conditions of the grant, exercisable by the grantee at any
time within the period granted.

The corporation must first secure the approval of the SEC. The application for authority to issue any stock option shall

EXCLUSIVELY FOR
be in the form of a petition under oath signed by the President of the corporation or any other official authorized by the
board of directors.

" WARRANT is a type of security which entitles the holder to the right to subscribe to the unissued capital stock of a
corporation or to purchase issued shares in the future, evidenced by a warrant certificate, whether detachable or not,
which may be sold or offered for sale to the public but does not apply to a right granted under an option plan duly
approved by the SEC for the benefit if employees, officers and/or directors of the issuing corporation. The period to
subscribe is not less than 1 year bout not more than 5 years.

! The different types of warrants and other related terms are defined in the regulations issued by the SEC:

1. Subscription Warrant – it entitled the holder to the right to subscribe to a predetermined number of shares out of the unissued
capital stock of the issuer;

2. Covered Warrant – it entitles the holder to the right to purchase from the Issuer a pre-determined number of shares that are already
issued.

3. Warrant Certificate – means the certificate representing the right to a Warrant, which may be detachable or not, duly issued by the
Issuer to the Warrantholder.

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4. Warrant Instrument – means the written document or deed containing the terms and conditions of the issue and exercise of a
Warrant, which terms and conditions shall include: (a) the maximum underlying shares that can be purchased upon exercise; (b) the
exercise period; and (c) such other terms and conditions as the SEC may require;

5. Detachable Warrant – mean a Warrant that may be sold, transferred or assigned to any person by the Warrantholder separate
from, and independent of, the corresponding Beneficiary Securities.

6. Nondetachable Warrant – means a Warrant that may not be sold, transferred or assigned to any person by the Warrantholder

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


separate from, and independent of, the Beneficiary Securities.

7. Beneficiary Securities – means the shares of stock and other securities of the Issuer which form the basis of the entitlement in a
Warrant.

8. Underlying Shares – means the unissued shares of a corporation which may be purchase by the Warrantholder upon the exercise
of the right granted under the Warrant.

! UNDERWRITING AGREEMENT – an agreement between the corporation and a third person, termed as the “underwriter”,
by which the latter agrees, for a certain compensation, to purchase a stipulated amount of stocks or bonds, specified in the
underwriting agreement, if such securities are not purchased by those to whom they are first offered.

C. KINDS OF SUBSCRIPTION (PRE AND POST INCORPORATION SUBSCRIPTION) SEC. 61


AΦB

Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may
be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the Securities and Exchange Commission.

! The concept of a pre-incorporation is a departure from basic civil law precept on obligations and contracts. The
indispensable elements of a valid contract under the New Civil Code are consent, object and consideration. Thus, it is
required that there is meeting of the minds on the part of the parties with respect to the object and cause or consideration of
the contract. In a pre-incorporation subscription, not all the parties can give their consent because one of the

EXCLUSIVELY FOR
parties – the corporation – is still non-existent.

! Despite the non-existence of the corporation, the subscription contract before incorporation is valid and binding.
Sec. 62 provides that it is valid, binding and irrevocable for a period of 6 months. In addition, even if the 6 month period had
already expired, the pre-incorporation subscription contract is also irrevocable after the filing of the Articles of Incorporation
with the SEC. ALPHA PHI BETA

" The pre-incorporation subscription is irrevocable for a limited period to prevent injustice that may be inflicted on
subscribers who already exerted efforts to organize the corporation and who already committed financial resources
therefor.

" The irrevocable nature of the subscription after the filing of the Articles of Incorporation with the SEC is also similarly
justified. In addition, the subscription agreement can no longer be revoked the moment the Certificate of Incorporation
had already been issued by the SEC. Subscription agreements are already covered by the Trust Fund Doctrine
after incorporation.

! The pre-incorporation subscription agreement can be revoked only in the following instances:
1. If all of the other subscribers consent to the revocation before the expiration of the 6-month period; or

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2. If the incorporation of said corporation fails to materialize within said period or within a longer period as may be
stipulated in the contract of subscription (even without the consent of the other subscribers).

D. CONSIDERATION FOR THE ISSUANCE OF SHARES (SEC. 62)

Sec. 62. Considering for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Consideration for the issuance of stock may be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service.

The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds
by the corporation.

The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to
AΦB

authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.

! WATERED STOCKS – are stocks that are issued for a consideration less than the par or issued price thereof.

! ISSUED PRICE. It is necessary to fix the issued price of no par value shares. Sec. 62 provides that the issued value may
be fixed in either of the following:
1. Articles of Incorporation; or
2. Resolution issued by the board of directors pursuant to authority conferred upon it by the Articles of Incorporation or
the by-laws; or
3. In the absence of provisions in the Articles of Incorporation or if the power is not delegated to the board, the

EXCLUSIVELY FOR
stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose
will fix the issued value.

" It is not correct to say, however, that par value shares may not have issued value. A share is a property which may
also appreciate in value. Hence, it may happen that the fair market value or the book value may be greater than the
par value. The Board can therefore fix a selling/subscription price which is greater than the par value.

" A stock certificate represents an interest in the corporation which is based on the number of shares owned by a
stockholder regardless of the amount paid for such shares. The capital paid in excess of the par value cannot be again
issued a stock certificate if the shares to which the paid-up surplus was applied as payment had already been
previously issued a stock certificate.

" The authorized capital stock is present only if the shares of a corporation have par value. It is possible to calculate and
state the subscribed capital by multiplying the number of subscribed share with the par value. If the shares have no
par value, no authorized capital stock is stated and the Stated Capital is fixed by the issuance of the no-par value
shares with fixed issued value. In those cases, the responsibility for making that statement of the issued value, and the
power to make is placed by law on the board of directors. The total peso value declared by them is considered the
Stated Capital.

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CORPORATION LAW REVIEWER AΦB

! CONSIDERATION. Sec. 62 enumerates the consideration that the law allows to be exchanged for shares in the
subscription agreements. The consideration for the issuance of stock is not limited to only one of them because the law
states that the consideration may be any or a combination of any two or more of those enumerated. However, Sec. 62
imposes the following conditions:
1. Stocks shall not be issued for a consideration less than the par or issued price thereof;
2. Shares of stock shall not be issued in exchange for promissory notes or future service; and
3. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights,

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to
approval by the Securities and Exchange Commission.

" Actual cash paid to the corporation is acceptable. With respect to pre-incorporation subscription involving cash
payments, the SEC requires the submission of a Bank Certificate of deposit of paid up capital notarized in the place
where it is executed. Proof of inward remittance is required but only with respect to those corporations with foreign
subscribers who want to register their investments with the BSP.

" Tangible or intangible property is also acceptable. However, if the property will be used as consideration, it is
required that:
1. The property is actually received by the corporation;
2. The property is necessary or convenient for its use and lawful purposes;
3. It must be subject to fair valuation equal to the par or issued value of the stock issued;
4. The valuation thereof shall be initially be determined by the incorporators or the board of directors; and
5. The valuation is subject to the approval by the SEC.

" Intangible properties that may be used as consideration include patents or copyrights. If intellectual property will serve as the
consideration, the corporation must submit to the SEC a copy of the Certificate of Registration of the intellectual property right
together with an appraisal report by an accredited appraisal company which is not more than 6 months old and a Deed of
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Assignment in favor of the corporation.

" Labor performed for or services actually rendered to the corporation are acceptable. For example, shares can
be issued as a bonus which is formally given out as additional compensation for satisfactory service rendered. Under
this concept, the bonus takes the form of additional expenses on the part of the paying corporation for services
rendered by the grantee. However, future services are not acceptable.

" Previously incurred indebtedness of the corporation may also be used as a consideration. The indebtedness
involved is one that is acknowledged by the board. Moreover, even indebtedness is subject to the conformation of the
SEC regarding valuation.

EXCLUSIVELY FOR
" Amounts transferred from unrestricted retained earnings to stated capital are also acceptable consideration.
This is present whenever there is a declaration of stock dividends.

" The corporation may accept as consideration the outstanding shares exchanged for stocks in the event of
reclassification or conversion.

" Conversion also includes conversion of a single proprietorship or partnership into a corporation or a spin-off
of one or more division of the company. The consideration in these cases is actually the net assets of those
enterprises or units.

" The corporation cannot agree that the subscription price shall be paid only through dividends that will be
declared later. In effect, this stipulation obligates the subscriber to pay nothing for the shares in the contingency that
dividends will not be declared later. This is illegal and in fraud of other subscribers. It is settled that a corporation has
no power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers by subjecting
the particular subscriber to lighter burdens or by giving him greater rights and privileges.

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Sec. 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks
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, 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 between
the fair value received at the time of issuance of the stock and the par or issued value of the same.

! WATERED STOCKS. Watered stocks are stocks that are issued for a consideration less than the par or issued price

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


thereof. Strictly speaking, watered stocks should be distinguished from bonus stocks. Bonus stocks are stocks which are
issued without an valuable consideration. However, bonus stocks are also covered by the prohibition under the first
sentence of Sec. 62.

! Watered Stock – stock issued not in exchange for its equivalent in cash, property, share, stock dividends, or services.
" It includes:
1. Issued without consideration (bonus share)
2. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value
(discount share)
3. Issued for a consideration other than actual cash such as property or services the fair valuation of which is less
than its par or issued value; and
4. Issued as stock dividend when there are no sufficient retained earnings or surplus to justify it.

Note: refers only to original issue of stocks but not to a subsequent transfer of such stocks by the corporation.

! The prohibition against watered stocks is consistent with the general rule that an agreement between a corporation and a
particular subscriber by which the subscription is not to be payable or is to be payable in part only cannot be either enforced
by the subscriber or interposed as a defense in an action on the subscription. The rule applies whether the purpose of the
agreement is to pretend that the stock is really greater than it is, or for the purpose of preventing the predominance of
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certain stockholders, or for any other purpose that is illegal and void, or in fraud of other stockholders or creditors or both.

E. PAYMENT OF SUBSCRIPTION

1. REMEDIES TO ENFORCE PAYMENT OF SUBSCRIPTION (SEC. 68, 69 & 70)

Sec. 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.

EXCLUSIVELY FOR
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by
registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the principal office of the corporation is located.

Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent
stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless
the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to
pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses
of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares,
if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of
stock covering such shares.

Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together
with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share,
the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as

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CORPORATION LAW REVIEWER AΦB

paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.

Sec. 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of
irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain
such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the
date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


within six (6) months from the date of sale.

Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting
by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and
expenses.

! AVAILABLE REMEDIES. The first and most special remedy given by the statute is a shareholder is in default in
paying the subscription consists in permitting the corporation to put up the unpaid shares for sale and dispose of it in a
delinquency sale for the account of the delinquent subscriber. The second remedy is a court action recognized under
Sec. 70. It is generally accepted doctrine that the statutory right to sell the subscriber’s stock is merely a remedy in
addition to that which proceeds by action in court and it has been held that the ordinary legal remedy exists even
though no express mention thereof is made in the statute.

" The offsetting of the debt of a stockholder against his shareholdings is not permissible. While the
corporation may be a creditor to the stockholder, a stockholder’s indebtedness to a corporation cannot be
compensated with the amount of his shares in the same institution, there being no relation of creditor and
debtor with regard to such shares.
AΦB

! DELINQUENCY SALE. The steps to be taken in a delinquency sale may be outlined in this wise:
1. RESOLUTION. The board of directors shall issue resolution ordering the sale of the delinquent stock.
2. NOTICE. Notice of sale, with a copy of the resolution, shall be sent to every delinquent stockholder either
personally or by registered mail;
3. PUBLICATION. The notice shall furthermore be published once a week for 2 consecutive weeks in a newspaper
of general circulation in the province or city where the principal office of the corporation is located;
4. SALE. The delinquent stock shall be sold at public auction to be held not less than 30 days nor more than 60
days from the date the stocks become delinquent;
5. TRANSFER. The stock so purchased shall be transferred to such purchaser in the books of the corporation and
certificate for such stock shall be issued in his favor; and
6. CREDIT OF REMAINDER. The remaining shares, if any, shall be credited in favor of the delinquent stockholder

EXCLUSIVELY FOR
who shall likewise be entitled to the issuance of a certificate of stock covering the same.

" CONTENTS OF RESOLUTION. It is required that the resolution shall state the following:
1. The amount due on each subscription;
2. All accrued interest; and
3. The date, time and place of the sale. The delinquent shareholder is entitled to a copy of this resolution.

" WINNING BIDDER. The winning bidder is such bidder who shall:
1. Offer to pay the full amount of the balance on the subscription together with the accrued interest, costs of
advertisement and expenses of sale;
2. For the smallest number of shares or fraction of a share.

" The board is not bound to accept the highest bid unless the contrary appears. Reason: In a public sale, the
corporation is not making the offer to sell. In reality, the bidder is the one making the offer to purchase which the
corporation is free to accept or reject.

" Should there be no bidder at the public auction who offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number
of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same,

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CORPORATION LAW REVIEWER AΦB

and the total amount due shall be credited as paid in full in the books of the corporation. Such shares shall
be considered as treasury shares.

" CANCELLATION OF SALE. The delinquent shareholder may actually stop the delinquency sale if he pays to
the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of advertisement and expenses of sale. Payment made by the
delinquent shareholder automatically stops the sale. However, the sale may also be stayed upon the order
of the board of directors.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! ACTION TO RECOVER. After the delinquent sale, the delinquent shareholder may file an action to recover the
delinquent stock which were sold if the following requirements are complied with:
1. The action is filed on the ground of irregularity or defect in the notice of sale, or in the sale itself of the
delinquent stock; ALPHA PHI BETA
2. The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for
which the same was sold, with interest from the date of sale at the legal rate; and
3. The action shall be maintained by the filing of a complaint within six (6) months from the date of sale.

2. WHEN SHARES ARE CONSIDERED DELINQUENT (SEC. 67)

Sec. 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the
capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may
deem necessary.

Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on
AΦB

the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such
date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If
within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise.

! LIABILITY. A stock subscription is a subsisting liability from the time the subscription is made. The subscription is as
much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand
payment is no less incontestable. (Nava vs. Peers Marketing Corporation)

! CALL. Sec. 67 provides that the board of directors of any stock corporation may at any time declare due and payable

EXCLUSIVELY FOR
to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in
either case with accrued interest, if any, as it may deem necessary.

" CALL – is the resolution or formal declaration of the board that the unpaid subscriptions are due and
payable. The unpaid subscription is not due and payable without the call. A corporation cannot file an action to
recover the unpaid price if the action is not preceded by a call; until a call is made, no cause of action accrues.

" A call is NOT necessary in 2 cases:


1. When the date of payment is specified in the subscription agreement; and
2. When the corporation becomes insolvent.

" An exception to the rule that a call is necessary to make the unpaid subscription price due and payable is in case
of insolvency. When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up,
all unpaid stock subscription become payable on demand and are at once recoverable in action instituted
by the assignee or receiver appointed by the court.

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CORPORATION LAW REVIEWER AΦB

" A corporation cannot deduct from any amount due to an employee, the latter’s unpaid subscription of shares.
There can be no set-off if there is no notice or call for the payment of unpaid subscription. In the absence of a
notice or call for payment, the subscription price is not demandable.

! COLLECTION OF UNPAID SUBSCRIPTION


1. VOLUNTARY PAYMENT
a. Upon the date specified in the subscription contract; or
b. Upon call by the Board of Directors.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


2. INVOLUNTARY PAYMENT
a. Extrajudicial
i. Delinquency Sale
ii. Application of dividends
b. Judicial Action

Note: The prescriptive period in case of subscription of shares begins to run only from the time the board of directors
declare that the balance is due and payable. It does not begin to run from the date of the subscription.

Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of
interest is fixed in the by-laws, such rate shall be deemed to be the legal rate.

Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be entitled to vote or to representation at any
stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of advertisement, if any.
AΦB

! EFFECTS OF DELINQUENCY
1) Upon the stockholder
a. Accelerates the entire amount of the unpaid subscription;
b. Subjects the shares to interest, expenses and costs;
c. Disenfranchises the shares from any right that inheres to a shareholder, except the right to dividends (but
which shall be applied to any amount due on said shares or, in case of stock dividends, to be withheld by the
corporation until full payment of the delinquent shares) (Sec. 43)

2) Upon the director owning delinquent shares


a. The director shall continue to be a director but he cannot run for reelection.

EXCLUSIVELY FOR
b. A delinquent stockholder seeking to be elected as director may not be a candidate for, nor be duly elected, to
the board.

! Delinquent stock may not be included in determining the existence of quorum.

! Quo warranto proceedings may be instituted against directors elected by delinquent stockholders.

Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the
rights of a stockholder.

F. CERTIFICATE OF STOCK

Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until the full amount of his
subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.

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! STOCK CERTIFICATE – the paper representation or tangible evidence of the stock itself and of the various interests
therein. The certificate is not the stock in the corporation but is merely evidence of the holder’s interest and status in the
corporation. It is the evidence of the shareholder’s ownership of the share represented thereby but it is not in the law
equivalent of that ownership. It expresses the contract between the corporation and the stockholder, but it is not essential
to the existence of a share or the creation of the relation of shareholder to the corporation.

! The stock certificate is not validly issued if it does not comply with the prescribed form and other conditions imposed by

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


Sections 63 and 64. Thus, a certificate of stock can be issued only upon compliance with these requisites:
1. The certificate must be signed by the president or vice president, countersigned by the secretary or assistant
secretary;
2. The certificate must be sealed with the seal of the corporation;
3. The certificate must be delivered;
4. The par value, as to par value shares or full subscription as to no par value shares must first be fully paid; and
5. The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee
from a stockholder.

" A mere typewritten statement advising a stockholder of the extent of his ownership in a corporation without qualification
and/or authentication cannot be considered as a formal stock certificate. ALPHA PHI BETA

" A certificate of stock may be issued with the conjunctive “and/or” placed between the names of the parties who are co-
owners of said shares and it is understood that the shares covered by the certificate may be transferred upon the
endorsement of both or either of the stockholders and the right to vote the share may also be exercised by both or any
of them.

" The stock certificate itself once issued is a continuing affirmation or representation that the stock described there is
valid and genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the
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contrary.

! AUTHORITY TO ISSUE. The corporation must be authorized to issue stocks. For instance, a corporation cannot issue a
stock certificate if there are no unissued shares in the company. It is a basic principle that a stock issued without authority
and in violation of law is void and confers no rights on the person to whom it is issued and subjects him to no liabilities.
Where there is an inherent lack of power in the corporation to issue the shares, neither the corporation nor the person to
whom the stock is issued can invoke estoppel when its validity is being questioned since an estoppel cannot operate to
create a stock which under the law cannot have existence.

! RIGHT TO STOCK CERTIFICATE. While the issuance of a stock certificate is not a condition precedent to render one a

EXCLUSIVELY FOR
stockholder, every stockholder has a tight to have a proper certificate issued to him by a corporation, upon demand, as soon
as he has complied with the conditions which entitle him to said certificate. Under Sec. 64, the corporation is duty bound to
issue stock certificates to their stockholders as soon as their subscription prices are fully paid.

" The stocks may issue to the owner or even directly to his nominee. The shares may also be placed in the name of a
trustee in accordance with a trust agreement entered into by the parties.

1. DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION CONTRACT

! No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and
expenses (in case of delinquent shares), if any is due, has been paid. Sec. 64 implicitly sets for the doctrine that a
subscription contract is one, entire, and indivisible contract. It cannot be divided into portions so that the
stockholder shall not be entitled to a certificate of stock until he has remitted the full payment of his subscription
together with the interests and expenses, if any is due. All partial payments on one subscription shall be deemed
applied proportionately among the number of shares. To permit the issuance of stock certificate for payment of a
subscription that does not cover the entire number and value of the shares subscribed would be in violation of Sec. 64.

! While ownership of shares are transferable, it cannot be transferred to several transferees if the selling stockholder
has not paid the full amount of the subscription contract. If the stockholder has not paid the full amount of his

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subscription, he cannot transfer part of it in view of the indivisible nature of a subscription contract. It is only upon full
payment of the whole subscription that a stockholder can transfer the same to several transferees. However, the entire
subscription, although not fully paid, may be transferred to a single transferee, who as a result of the transfer, must
assume the unpaid balance. It is necessary, however, to secure the consent of the corporation since the transfer of
subscription right constitutes a novation of contract which under Art. 1293 of the New Civil Code, cannot be made
without the consent of the creditor. (SEC Opinion, July 1, 1994) ALPHA PHI BETA

! A subscription agreement may cover one or more shares. But even if it covers 2 or more shares, the subscription

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


agreement is considered an indivisible contract. Nevertheless, a subscriber need not enter into only one subscription
agreement if he will take 2 or more shares. He may subscribe to the capital stock under several subscription contracts.

2. CERTIFICATE OF STOCK, QUASI NEGOTIABLE

! Stock certificates are non-negotiable instruments under the Negotiable Instruments Law. The requirements of Sec. 1
of the NIL are not present because there is no promise or order to pay money. However, it has been said that stock
certificates are quasi-negotiable because they can be transferred by indorsement coupled with delivery.

! The endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally
authorized to make the transfer, shall be sufficient to effect the transfer of shares if coupled with delivery. The
delivery is the operative act of transfer of shares from the lawful owner to the new transferee. ALPHA PHI BETA

G. TRANSFER OF SHARES
AΦB

Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number
of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

MODES OF ISSUANCE OF SHARES

EXCLUSIVELY FOR
!
1. By subscription before or after incorporation to original, unissued stock;
2. By sale of treasury stock after incorporation for money, property or service;
3. By subscription to new issues of stock in case of an increase in the capital stock;
4. By declaring stock dividend. ALPHA PHI BETA

! HOW TRANSFER IS MADE. Transfer of a share that is REPRESENTED BY A CERTIFICATE must strictly comply with
the following conditions:
1. There must be delivery of the certificate;
2. The share must be indorsed by the owner or his agent; and
3. To be valid to the corporation and third parties, the transfer must be recorded in the books of the corporation. (Rural
Bank of Lipa vs. CA)

! IF THERE IS NO CERTIFICATE. The Supreme Court ruled in Vicente C. Ponce vs. Alsons Cement Corporation that if
certificates were never issued by the corporation, the transferee cannot demand for the issuance of certificates of stock in
his name. The Court explained that it is a basic rule that a transfer of shares of stock not recorded in the stock and transfer
book of the corporation is non-existent as far as the corporation is concerned. Without such recording, the transferee may
not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of
stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64of

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the Corporation Code. In other words, the stock and transfer book is the basis for ascertaining the persons entitled to
the rights of a stockholder. Where a transferee is not yet recognized as a stockholder, the corporation is under no
specific legal duty to issue stock certificates in the transferee’s name.

" It cannot be argued that it is the duty of the corporate secretary, when presented with the document (whereby the
registered stockholder acknowledges the transfer of fully paid shares) to effect the transfer by recording the transfer in
the stock and transfer book of the corporation and to issue stock certificates in the name of the transferee. Mandamus
should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company,

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose
name the stock is registered, or of some person holding a power attorney for that purpose from the registered owner of
the stock. (Vicente C. Ponce vs. Alsons Cement Corporation)

" Consequently, if the shares are not represented by the certificate (such as when the certificate has not yet been
issued or where for some reason it is not in the possession of the stockholder), transfer can be made by means of a
deed of assignment but the same must be duly recorded in the books of the corporation.

However, as required in Vicente C. Ponce vs. Alsons Cement Corporation there must be a special power of
attorney executed by the registered owner of the share authorizing the transferor to demand the transfer in the
stock and transfer books. It is believed however that this authority may be included in the deed of assignment or
document of transfer itself. ALPHA PHI BETA

" It is true that there are cases where there is strict application of the requirements for transfer enumerated above. It is
believed however that this rule should not be applied with pedantic rigor. There have been exceptional cases
decided by the Supreme Court where the requisites were not required. For instance, in one case, the Court ruled
that there was no necessity to indorse the certificate because all the acts required for the transferee to exercise its
rights over the acquired shares were attendant and even the corporation was protected from other parties considering
AΦB

that said transfer was earlier registered in the stock and transfer books. In another case, delivery was not considered
essential where it appears that the persons who were sought to be held as stockholders are officers of the corporation
and have custody of the stock book.

" If there is no indorsement in favor of the transferee, the transferee may file an action to compel the transferor
to make such indorsement. However, the same cannot be considered as an intra-corporate controversy because the
transferee is not yet a shareholder.

! MODES OF STOCK TRANSFER ALPHA PHI BETA


1. Indorsement and delivery of stock certificate and to issue a new certificate unless the original certificate is
surrendered for cancellation or is clearly shown to have been lost, stolen or destroyed

EXCLUSIVELY FOR
2. Transfer made in a separate instrument – while an assignment may be valid and binding between the parties
despite noncompliance with the requisite if indorsement and delivery, it does not necessarily make the transfer
effective for the assignee cannot enjoy the status of a stockholder until and unless the issue of ownership is resolved
with finality.
3. Judicial or extrajudicial settlement of estate – upon the death of the stockholder, his administrator or executor
becomes vested with the legal title of the stock until the settlement and division of the estate is made.

! REGISTRATION ON THE BOOKS. The law requires registration of the transfer in the books of the corporation in order to
be valid to third persons and the corporation itself. In addition, registration served important functions, as follows:
1. To enable the corporation to know at all times who its actual stockholders are, because mutual rights and obligations
exists between the corporation and its stockholders;
2. To afford to the corporation the opportunity to object or refuse its consent to the transfer in case it has any claim
against the stock sought to be transferred or for any other valid reasons; and
3. To avoid fictitious or fraudulent transfers.

" EFFECTS OF UNREGISTERED TRANSFER OF SHARES


1. It is a valid and binding as between the transferor and the transferee.
2. It is invalid as to the corporation EXCEPT when notice is given to the corporation for purposes of registration.

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3. It is invalid as against corporate creditors and the transferor is still liable to the corporation.
4. It is invalid as to the attaching or executing creditors of the transferor, as well as subsequent purchasers in good
faith without notice of the transfer.

" The rights of a registered shareholder who has been exercising his rights are entitled to respect. It is
presumed that the registered shareholder is still the owner of the shares. A person who claims ownership over the
shares of stock must show that the same were transferred to him by proving that all the requirements for effective
transfer of shares were followed.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" Third persons will not be affected by an unregistered transfer. For instance, an attachment lien prevails over a
prior unregistered stock transfer.

" What should be registered in the stock and transfer book are transfers. Transfer means any act by which property of
person is vested in another and “transfer of shares” implies any means whereby one may be divested of and
another acquire ownership of stock.

• Only absolute transfers need be registered. Consequently, registration in the stock and transfer book is not
necessary if the conveyance is by way of chattel mortgage. However, there must be due registration with the
Register of Deeds. Inasmuch as a chattel mortgage is not a complete and absolute alienation of the
dominion and ownership of the shares, its entry and notation upon the books of the corporation is not a
necessary requisite to its validity.

• Similarly, registration in the books of the corporation of attachment of shares of stock is also not
necessary for the validity thereof as such is not transfer within the contemplation of the Corporation Code.

! UNPAID CLAIM. Sec. 63 provides that no shares of stock against which the corporation holds any unpaid claim shall be
AΦB

transferable in the books of the corporation. The term “unpaid claim” refers to any unpaid claim arising from unpaid
subscription and not to any indebtedness which a subscriber may owe the corporation arising from any other
transactions.

! REGULATION. Shares of corporate stock being regarded as property may be disposed by the owner as he sees fit unless
the corporation is dissolved, or unless the right to do so is properly restricted or the owner’s privilege is hampered by his
actions. ALPHA PHI BETA

" The corporation may regulate the transfer of its stocks by providing certain formalities and procedure in the
by-laws. However, the authority granted to a corporation to regulate the transfer of its stock does not empower it to
restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as

EXCLUSIVELY FOR
to the formalities and procedure to be followed in effecting transfer.

" Any restriction on right to transfer must be construed strictly. For instance, the corporation may not out a stamp
on the certificates that the same are non-transferable. The stamp constitutes unreasonable limitation on the right of
ownership and is in restraint of trade.

" The restriction may be embodied in a separate agreement between the parties. For instance, the transferor and
the transferee of the share may stipulate a right of first refusal in favor of the transferor. However, the private
agreement is not binding on a subsequent transferee who has no knowledge of the right of first refusal.

! REMEDIES. The right of a transferee or assignee to have the stocks transferred to his name is an inherent right flowing
from his ownership of the stocks. Mandamus will lie against the corporate officers who unduly bar the registration of
the transfer. If the transfer in the books is not duly made upon request, he has, as his remedy, to compel it to be made.

" Mandamus will not lie against the corporation where the shares of stock in question are not indorsed by the
registered owner who is resisting registration thereof in the stock and transfer book.

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" It is the corporate secretary’s obligation to register a valid transfer of stocks and if the said corporate officer refuses to
comply, the transferor-shareholder may rightfully bring suit to compel the performance. The transferee, even if he is a
corporate officer, cannot take the law into his own hands by making the entries himself in the stock and transfer book
instead of availing of the proper remedy.

" PRESCRIPTION. Considering that the law does not prescribe a period within which the registration of the transfer of
shares should be effected, the action to enforce the right does not accrue until there has been a demand and a
refusal concerning the transfer. Hence, the action can be filed even 24 years after the transfer.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


H. LOST AND DESTROYED CERTIFICATE OF STOCK

Sec. 73. Lost or destroyed certificates. - The following procedure shall be followed for the issuance by a corporation of new
certificates of stock in lieu of those which have been lost, stolen or destroyed:

1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number
of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the
same. He shall also submit such other information and evidence which he may deem necessary;

2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish
a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week
for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or
destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said
certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of
the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make
AΦB

such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu
thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as
may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one
(1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in
court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the

EXCLUSIVELY FOR
procedure above-described.

! RATIONALE. The provision is designed to protect not only the real owner but the corporation as well. The real owner is
protected against improvident issuance of another certificate and the same time, Sec. 73 provides some sort of a shield to
the corporation and its officers to prevent them from being made liable. Under Sec. 73, except in case of fraud, bad faith, or
negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.

! WHEN APPLICABLE. Sec. 73 applies only if the certificates are lost, stolen or destroyed. If the certificates are available
but are just worn out, Sec. 73 does not apply and it is up to the corporation to decide if it will replace the certificates. The
provision is not also applicable if the certificate was never issued to the shareholder because it was not delivered by the
corporation. Sec. 73 does not apply if the certificates are lost by the corporation itself before delivery.

! OUTLINE OF PROCEDURE. The procedure under Sec. 73 may be summarized in this wise:

1. Affidavit. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the
corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen

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or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of
the corporation which issued the same.

2. Verification. The corporation shall verify the affidavit and other information and evidence with the books of the
corporation.

3. Publication. The corporation shall publish a notice in a newspaper of general circulation published in the place where
the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


owner of the certificate of stock which has been lost, stolen or destroyed.

4. One Year Waiting Period. There shall be a waiting period of 1 year from the date of the last publication during which
a contest can be interposed.

5. Contest. If a contest has been presented to said corporation or if an action is pending in court regarding the
ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate
of stock which has been lost, stolen or destroyed.

6. Replacement. If there is no contest within the 1-year period, the corporation shall then replace the certificate. The
replacement of share can only be made before the expiration of the 1-year period if a bond is posted.

! CONTENTS OF NOTICE. The notice shall state the name of said corporation, the name of the registered owner and the
serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of
one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said
certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the
certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for
AΦB

such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the one (1) year period.

" The requirements of Sec. 73 are mandatory in nature. For instance, all the facts indicated in Sec. 73 should be stated
in the notice. However, substantial compliance is also acceptable.

" In an opinion, the SEC held that the requirements under Sec. 73 are not mandatory for the same admits of exceptions.
The corporation may voluntarily issue new certificates in lieu of the originals provided that the corporation is
certain as to the real owner of the shares. This is because of the fact that, unless proven otherwise, the stock and
transfer book of the corporation is the best evidence to establish stock ownership. (Villanueva, Philippine Corporate

EXCLUSIVELY FOR
Law, 2001) ALPHA PHI BETA

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AΦB

IX. CORPORATE BOOKS AND RECORDS

A. BOOKS REQUIRED TO BE KEPT BY A CORPORATION (SEC. 74)

EXCLUSIVELY FOR
Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a
record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or
trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether
the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the
meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on
any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member
on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any
director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing,
for a copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation
to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to
such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be

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punishable under Section 1443 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of
the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or
trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the
person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any
information secured through any prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer
book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; B. P.
No. 268.)

! CORPORATE BOOKS. The books that are required to be maintained by the corporation under Sec. 74 are the following:
1. Books of minutes if stockholders meetings
2. Books of minutes of board meetings
3. Record or Book of all business transactions
4. Stock and Transfer Book
AΦB

" Books of minutes of meetings of the stockholders and directors must set forth the following:
1. Date and time of the meeting;
2. Place of holding the meeting;
3. How the meeting was authorized;
4. The fact that notice was given;
5. Whether the meeting was regular or special;
6. If the meeting is special, its object must be stated;
7. Those present and absent; and
8. Every act done or ordered done at the meeting.

" The Minutes need not be a word for word transcription of the proceedings. However, the following may be stated in the

EXCLUSIVELY FOR
Book of Minutes only upon the demand of any director, trustee, stockholder, or member:
1. The time when any director, trustee, stockholder or member entered or left the meeting;
2. A carefully made record of yeas and nays on any motion or proposition; and
3. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his
demand.

! STOCK AND TRANSFER BOOK. The stock and transfer book contains the following:
1. All stocks in the names of the stockholders alphabetically arranged;
2. Installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any
installment;
3. Alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and

3 Sec. 144, Corporation Code. Violations of the Code. - Violations of any of the provisions of this Code or its amendments 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. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before
the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the
director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to
repeal the other causes for dissolution of a corporation provided in this Code.

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4. Other entries as the by-laws may prescribe.

" Only the corporate secretary is duly authorized to make entries on the stock and transfer book. Hence, entries
made by the Chairman or President are invalid. Any officer other than the secretary cannot cause the registration of a
transfer of shares in the stock and transfer book.

" The stock and transfer book is the best evidence of the transactions that must be entered or stated therein.
However, the entries are considered prima facie evidence only and may be subject to proof to the contrary.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" As between the Articles of Incorporation and the stock and transfer book, the Articles of Incorporation prevail.
For instance, the number of original subscribers appearing in the Articles of Incorporation is controlling if less is
entered in the stock and transfer book.

Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a written request of any stockholder or member,
the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the
last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the
result of its operations.

At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or
members 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 certified public accountant.

However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by
the treasurer or any responsible officer of the corporation.

! The stockholder or member is also entitled to the financial statements of the corporation. The same must be furnished
AΦB

within 10 days from receipt of the written request. Under Sec. 141, the corporation must also submit to the SEC a
report of its operations together with audited financial statements covering the preceding fiscal year.

B. RIGHT TO INSPECT CORPORATE BOOKS

1. BASIS AND EXTENT OF THE RIGHT OF INSPECTION

EXCLUSIVELY FOR
! STOCKHOLDER’S RIGHT TO INSPECT. A stockholder can inspect the books of the corporation under Sec. 74
provided the following are present:
1. It must be exercised at reasonable hours on business days;
2. The stockholder has not improperly used any information he secured through any previous examination; and
3. Demand is made in good faith or for a legitimate purpose.

! RATIONALE. The stockholder’s right of inspection is based on his interest over the assets and properties of the
corporation. It is an incident of such interest though the interest is only inchoate in character.

" The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether
this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This
right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him
with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has

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to be proper and lawful in character and not inimical to the interest of the corporation. (Gokongwei, Jr., v.
Securities and Exchange Commission)

! EXTENT. According to the SEC, the right to inspect covers all the books of the corporation including the journal,
ledger, financial statements, income tax returns, vouchers, receipts, contracts and all papers pertaining to the
operation of the corporation which are of interest to its stockholders.

1. The right to inspect the books and records of the corporation includes, as an INCIDENT thereof, the right to make

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


copies, abstracts and memoranda of their contents.

2. The right of inspection is PERSONAL in the sense that it may be exercised by the director, etc. himself but the
inspection and examination may be made by any proper representative or attorney-in-fact and either with or
without the attendance of the director, etc.

3. The right extends in consonance with good faith, equity and fair-dealing, to a foreign subsidiary wholly-owned by
the corporation.

! Persons given the right to inspect corporate books:


1. Any director, trustee, stockholder or member;
2. Voting trust certificate holder;
3. Stockholder of a sequestered company; and
4. Beneficial owner of shares.

! RIGHTS OF STOCKHOLDERS TO CORPORATE BOOKS AND RECORDS


1. Right of inspection;
2. Right to demand a list of stockholders;
3. Right to demand a detailed auditing of business expenditures;
AΦB

4. To examine books of the corporation’s subsidiary;


5. Right to financial statements.

2. LIMITATIONS ON THE RIGHT OF INSPECTION

! TIME AND PLACE. Inspection may be undertaken only at reasonable hours on business days throughout the year at
the principal office of the corporation.

! PURPOSE. The inspection must be for proper or legitimate purpose. This means that it should be germane to the
stockholder’s interest as where the purpose is to find out how his investment is being used or to determine the actual

EXCLUSIVELY FOR
condition of the company. It should not be made merely to gratify the curiosity of the stockholder. Thus, a stockholder
is entitled to inspect the books and to full information as to the management of the corporation and the manner of
expenditure of its funds if it appears that the company is being mismanaged or that it is being managed for the
personal benefit of officers or directors or certain stockholders to the exclusion of others.

" The SC ruled in one case that a stockholder who wants to avail of his right to inspect must set forth in his request
for inspection the reasons or purpose of his inspection. (Gonzalez vs. PNB)

! MANNER. The stockholder is not only entitled to go over the records but he can also make copies, extracts and
memoranda of pertinent records. However, the stockholder cannot demand that he be allowed to take corporate books
out of the principal office of the corporation for the purpose of inspecting them.

" The right to inspect may be exercised by the stockholder himself or he may ask the assistance of an accountant
or lawyer who may be appointed as his representative.

! The right is not limited to the corporation where one owns shares but also extends to books or records of wholly
owned subsidiary of the corporation.

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! There are matters that are not covered by the right to inspect. For instance, a corporation engaged in manufacturing
goods can keep secret the formula or process which is not generally well known.

3. REMEDIES TO ENFORCE RIGHT OF INSPECTION

! REMEDIES IF INSPECTION DENIED:


1. Mandamus

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


2. Damages
3. Criminal Suit

! DEFENSES AVAILABLE TO DIRECTOR, TRUSTEE OR OFFICER HELD LIABLE:


1. The person demanding to examine has improperly used any information secured through any prior examination of
the records or minutes of such corporation or for any other corporation; or
2. The one requesting to inspect was not acting in good faith or the demand is not for a legitimate purpose.

! The proper remedy if the stockholder is being improperly deprived of his right to inspect is to file a complaint under
Rule 7 of the Interim Rule for Intra-Corporate Controversies which states:

Rule 7
INSPECTION OF CORPORATE BOOKS AND RECORDS

Section 1. Cases covered. - The provisions of this Rule shall apply to disputes exclusively involving the rights of stockholders or
members to inspect the books and records and/or to be furnished with the financial statements of a corporation, under Sections 74
and 75 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines.

Sec. 2. Complaint. - In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the following:
AΦB

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be furnished with financial
statements under Sections 74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff
upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and
jurisprudence in support thereof.

Sec. 3. Duty of the court upon the filing of the complaint. - Within two (2) days from the filing of the complaint, the court, upon a
consideration of the allegations thereof, may dismiss the complaint outright if it is not sufficient in form and substance, or, if it is
sufficient, order the issuance of summons which shall be served, together with a copy of the complaint, on the defendant within two
(2) days from its issuance.

EXCLUSIVELY FOR
Sec. 4. Answer. - The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within ten (10) days
from the service of summons and the complaint. In addition to the requirements in Section 6, Rule 2 of these Rules, the answer
must state the following:
(1) The grounds for the refusal of defendant to grant the demands of the plaintiff, stating the law and jurisprudence in support
thereof;
(2) The conditions or limitations on the exercise of the right to inspect which should be imposed by the court; and
(3) The cost of inspection, including manpower and photocopying expenses, if the right to inspect is granted.

Sec. 5. Affidavits, documentary and other evidence. - The parties shall attach to the complaint and answer the affidavits of
witnesses, documentary and other evidence in support thereof, if any.

Sec. 6. Effect of failure to answer. - If the defendants fails to file an answer within the period above provided, the court, within ten
(10) days from the lapse of the said period, motu proprio or upon motion, shall render judgment as warranted by the allegations of
the complaint, as well as the affidavits, documentary and other evidence on record. In no case shall the court award a relief beyond
or different from that prayed for. ALPHA PHI BETA

Sec. 7. Decision. - The court shall render a decision based on the pleadings, affidavits and documentary and other evidence
attached thereto within fifteen (15) days from receipt of the last pleading. A decision ordering defendants to allow the inspection of
books and records and/or to furnish copies thereof shall also order the plaintiff to deposit the estimated cost of the manpower

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necessary to produce the books and records and the cost of copying, and state, in clear and categorical terms, the limitations and
conditions to the exercise of the right allowed or enforced.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


AΦB

X. MERGER AND CONSOLIDATION

EXCLUSIVELY FOR
A. CONCEPT OF MERGER AND CONSOLIDATION

Sec. 76. Plan or merger of consolidation. - Two or more corporations may merge into a single corporation which shall be one
of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation.

The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with
respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of
incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

! CONCEPT OF MERGER OR CONSOLIDATION. MERGER is one where a corporation absorbs another corporation and
remains in existence while the other is dissolved. CONSOLIDATION is one where a new corporation is created, and
consolidating corporations are extinguished.

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CONSOLIDATION signifies a union that necessarily results in the creation of a new corporation and the termination of
constituent ones, whereas a MERGER signifies the absorption of one corporation by another which retains its name and
corporate identity with the added capital, franchises and powers of a merged corporation.

" Merger or consolidation does not become effective by mere agreement of the constituent corporations. For a
valid merger or consolidation, the approval of the SEC is required. Sec. 79 provides that the merger or consolidation
shall be effective upon the issuance by the SEC of a certificate of merger or consolidation.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! DISTINGUISHED FROM TRANSFERS. A simple sale of property by one corporation to another has no effect that
accompanies a merger or consolidation. Unless there is an evident intention, a mere purchase or acquisition of another
corporation’s assets or property does not constitute merger or consolidation even though it is advertised as such
by the parties or there is an assumption of liability on the part of the purchasing corporation especially where the
selling corporation still retains its franchise.

! DISTINGUISHED FROM COMBINATIONS. Combination is used to designate an alliance or confederation or sale or


other transaction between two or more corporations by virtue of which will not necessarily result in the loss of
separate existence of the corporations. This may include the execution of voting trust agreement, formation of a holding
company, or even transfer of the assets from one corporation to another. In a broad sense, however, combinations include
merger and consolidation.

" A partnership can enter into a combination with a corporation but a partnership cannot merge or consolidate
with a corporation. A partnership may not be involved because Sec. 76 distinctly requires the presence of 2 or more
corporations. However, combination is allowed in the sense that a partnership may be allowed by the SEC to transfer
all its assets and liabilities to a corporation. The corporation will in turn issue its shares of stocks to the partners for the
net assets that are transferred.
AΦB

" COMMON FORMS OF CORPORATE COMBINATIONS


1. Sale of Assets
2. Lease of Assets
3. Sale of Stock
4. Merger
5. Consolidation

MERGER AND CONSOLIDATION SALE OF ASSETS


Sale of assets is always involved Merger/ consolidation is not always
Acts Involved

EXCLUSIVELY FOR
involved
Title to the assets are transferred by Transfer of title is by virtue of contract
Transfer of Title
operation of law
There is automatic assumption of liabilities Purchasing corporation is not generally
Assumption of Liabilities liable for the debts and liabilities of the
selling corporation
The constituent corporations are The selling corporation is not dissolved by
Dissolution
automatically dissolved the mere transfer of all its property
There is continuance of the enterprise and The selling corporation ordinarily
Liquidation
of the stockholders contemplates a liquidation of the enterprise

B. REQUISITES OF AND PROCEDURE FOR MERGER AND CONSOLIDATION (SEC. 77)

Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the board of directors or trustees of
the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders
or members of each of such corporations at separate corporate meetings duly called for the purpose. 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

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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. 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. Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such
plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished.

Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


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 any amendment, shall be considered as the agreement of merger or
consolidation.

Sec. 78. Articles of merger or consolidation. - After the approval by the stockholders or members as required by the
preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be
signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members;
and
3. As to each corporation, the number of shares or members voting for and against such plan, respectively.

Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein
above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That
in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies,
insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the
favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the
AΦB

merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it
shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective.

If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation
is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent
corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code.

! OUTLINE OF PROCEDURE. The procedure for merger and consolidation prescribed under the Code may be
summarized in this wise:

EXCLUSIVELY FOR
1. PLANNING STAGE – The Board of each corporation shall draw up a plan of merger or consolidation;
2. APPROVAL OF PLAN – The plan of merger or consolidation shall be approved by a majority vote of each of the
board of the concerned corporations at separate meetings;
3. SUBMISSION TO STOCKHOLDERS OR MEMBERS FOR APPROVAL – The plan of merger or consolidation shall be
approved by at least 2/3 outstanding capital stock or members for non-stock corporations;
4. EXECUTION OF FORMAL CONTRACT – Articles of Merger or Articles of Consolidation shall be executed by
each of the constituent corporations, signed by the President or Vice President and certified by the Secretary or
Assistant Secretary;
5. SUBMISSION TO SEC FOR APPROVAL – Four copies of the Articles of Merger or Consolidation (together with
favorable recommendation of a pertinent government agency in certain cases) shall be submitted to SEC for
approval; and
6. CONDUCT OF HEARING BY SEC – If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or
existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of
the date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said
hearing. ALPHA PHI BETA
7. ISSUANCE OF CERTIFICATE BY SEC – The SEC shall issue a certificate of merger or consolidation if it is
satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of the
Code and exiting laws;

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" NOTE: The plan may still be amended before the same is filed before the SEC. However, 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 members.

" The Articles of Merger or Consolidation to be filed with the SEC shall be accompanied by a favorable
recommendation of government agency concerned if the corporations involved are banks or banking institutions,
building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


special corporations governed by special laws.

! RELIGIOUS CORPORATIONS. A religious corporation may be merged with another religious corporation. This may
involve a religious society and a corporation sole. However, for practical reasons, the merged corporations must belong to
the same religious denomination, sect or church.

! REORGANIZATION

! QUASI-REORGANIZATION. Reorganization is different in the sense that quasi-reorganization refers to the accounting
procedure or principle whereby:
1. Reappraisal surplus is used to wipe out the deficit or
2. The Articles of Incorporation is amended reducing the capital and the reduction of the capital stock is used to wipe out
the deficit. Under SEC rules, only companies which are financially in distress nay be allowed to undergo quasi-
reorganization.

! DE FACTO MERGER AND CONSOLIDATION. In other jurisdictions, de facto merger or consolidation is taken to mean
reorganization involving at least 2 corporations which has the effect of merger or consolidation and which entitles
the dissenting stockholders to an appraisal right. Thus, in one case, a transaction between 2 corporations has the
following effect: one corporation dissolves, its liabilities are assumed by the survivor, its executives and directors take over
AΦB

the management and control of the survivor and, as consideration for the transfer, and its stockholders acquire a majority of
the shares of stock of the survivor. The transaction is no longer a mere purchase of shares of stocks of the survivor but it
amounts to merger.

" In this jurisdiction, there have been cases where the transactions involved amounted to a de facto merger. In those
cases, liability was imposed under the rubric of piercing the veil of corporate fiction. The said cases involve
corporations which stopped its operations and all the businesses and assets were assumed or transferred to a new or
an existing corporation. Hence, the Supreme Court ruled that the “surviving” corporation is a mere continuation of the
life of the corporation which stopped its operation. This situation is referred to by Dean Villanueva as a business
entity transfer (as distinguished from asset-only transfer and equity transfer).

EXCLUSIVELY FOR
C. EFFECTS OF MERGER OR CONSOLIDATION (SEC. 80)

Sec. 80. Effects or merger or consolidation. - The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation
designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of
consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated
corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be
subject to all the duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and
franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever
account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due
to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without
further act or deed; and

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5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the
constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of
such constituent corporations shall not be impaired by such merger or consolidation.

! EFFECTS. The effects of merger and consolidation provided for in Sec. 80 may be summarized as follows:

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


1. The constituent corporations shall become a single corporation.
2. The separate existence of the constituent corporations shall cease, except that of the surviving (in merger) or the
consolidated corporation (in consolidation);
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall
be subject to all the duties and liabilities of a corporation;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent corporations; and properties shall be deemed transferred to the
surviving or consolidated corporation; and
5. All the liabilities and obligations of each of the constituent corporations shall pertain to the surviving or the consolidated
corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be
impaired by such merger or consolidation. ALPHA PHI BETA

! Although there is dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their
assets because the surviving corporation automatically acquires all their rights, privileges and powers as well as their
liabilities. Upon the effectivity date, the merged or absorbed corporation ceases to exist and its rights, privileges,
properties as well as liabilities pass on to the surviving corporation. (Associated Bank vs. CA)

! In merger, the receivables of the dissolved corporation are transferred to the surviving corporation. Thus, the surviving
corporation has the power to file an action to recover any debt that pertains to the other corporation. (Babst vs. CA)
AΦB

! The employees of the dissolved corporation shall be assumed by the surviving corporation in the case of merger and
the employees of the constituent corporation shall be pertaining to the new corporation. The tenure of such employees
should be treated as having started when they started with the dissolved or the constituent corporation as the case
may be. Hence, any retirement benefit should be computed on the basis of their employment starting from their
employment with the dissolved or constituent corporations as the case may be. By the fact of merger, a succession of
employment rights and obligations has occurred.

! GEN. RULE: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other
corporation and as the two corporations still maintaining their separate corporate entities, one will not answer for the debts
of the other.

EXCLUSIVELY FOR
EXCEPTIONS AS TO NON-ASSUMPTION OF LIABILITIES:
1. If there is an express assumption of liabilities;
2. If there is a consolidation or merger;
3. If the purchase was in fraud of creditors; and
4. If the purchaser is merely a continuation of the seller.

! DE FACTO MERGER. One corporation acquiring all or substantially all of the properties of another corporation in exchange
for shares of stock of the acquiring corporation. The acquiring corporation would end up with the business enterprise of the
selling corporation whereas the latter would end up with basically its remaining assets being the shares of stock of the
acquiring corporation and may then distribute it as liquidating dividend to its stockholders. (Villanueva, Philippine
Corporate Law, 2001)

! TYPES OF ACQUISITIONS (Villanueva, Philippine Corporate Law, 2001)

1. “ASSETS-ONLY” LEVEL (Property Only Purchase)


The purchaser is interested only in the raw assets and properties of the business. He is not interested in the entity of
the corporate owner of the assets or on the goodwill and other factors relating to the business itself.

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The transferee would not be liable for the debts and liabilities his transferor since there is no privity of contract over
debt obligations between the transferee and the transferor’s creditors.

2. “BUSINESS-ENTERPRISE LEVEL (Purchase as an Ongoing Concern)


The transferee merely continues the same business of the transferor since he obtains the earning capacity of the
venture. The transferee is liable for the debts and liabilities of the transferor. ALPHA PHI BETA

3. “EQUITY” LEVEL (Share Purchase)

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


The purchaser takes control and ownership of the business by purchasing the shareholdings of the corporate owner,
What the purchaser actually purchased is the ability to elect the members of the board of the corporation who run the
business.

! LEGAL EFFECTS OF MERGER AND CONSOLIDATION (San Beda Commercial Law Memory Aid, 2008)
1. There is automatic assumption of the liabilities of the absorbed corporation or constituent corporations which are
dissolved.
2. The absorbed or constituent corporations are ipso facto dissolved by operation of law without necessity of any
further act or deed but there is no winding up or liquidation of their assets for the surviving corporation automatically
acquires all the liabilities of the constituent corporation.
3. Permits the transfer of the assets to the purchaser and the distribution of the consideration received in a single
operation.
4. Involves exchanges of properties, a transfer of the assets of the constituent corporations in exchange for securities in
the new or surviving corporation but neither involves winding up of the affairs of the constituent corporations in the
sense that their assets are distributed to the stockholders.
5. Dissolution of the constituent corporations cannot be made to retroact to a date prior to the ratification of the
stockholders but the transfer of the assets and liabilities of the constituent corporations could be made effective
retroactively as of the date the said board of directors so resolved.
6. Consent of the creditors not necessary.
AΦB

XI. RIGHT OF APPRAISAL

EXCLUSIVELY FOR
A. CONCEPT OF APPRAISAL RIGHT

! APPRAISAL RIGHT – the right of a shareholder to dissent and demand payment of the fair value of his shares in the
instances provided for under the Corporation Code.

! The appraisal right is more extensive when it comes to close corporations. Sec. 105 allows the exercise of the appraisal
right for any reason provided only that the corporation has sufficient assets to cover its debts and liabilities, exclusive of
capital. ALPHA PHI BETA

B. INSTANCES OF APPRAISAL RIGHT (Sec. 81, Sec. 77, Sec. 42, Corporation Code)

Sec. 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of
the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending
or shortening the term of corporate existence;

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2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation.

Sec. 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.

Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the
provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the
members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code:
Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary.

Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the board of directors or trustees of
the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders
AΦB

or members of each of such corporations at separate corporate meetings duly called for the purpose. 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. 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. Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such
plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished.

Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of
the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders

EXCLUSIVELY FOR
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 any amendment, shall be considered as the agreement of merger or
consolidation.

! WHEN AVAILABLE. Appraisal right is available in the following instances:


1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any
stockholder or class of shares,
2. In case any amendment to the articles of incorporation has the effect of authorizing preferences in any respect superior
to those of outstanding shares of any class,
3. In case of amendment to the Articles of Incorporation extending the term of corporate existence;
4. In case of amendment to the Articles of Incorporation shortening the term of corporate existence;
5. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the
corporate property and assets as provided in the Code; and
6. In case of merger or consolidation.
7. If the corporation will invest its funds in another corporation or business or for any purpose other than its primary
purpose; and ALPHA PHI BETA
8. In a close corporation under Sec. 105 of the Corporation Code.

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! The right of appraisal is available only in the cases expressly provided for under the Corporation Code and there is no
appraisal right in the absence of an express provision because there may be a violation of the Trust Fund Doctrine.
As explained by the SEC, an appraisal right is neither an inherent right of a stockholder nor a matter of absolute right,
otherwise a stockholder can easily withdraw from the corporation at anytime he desires by returning his shares and getting
back his capital. Such would constitute a violation of the trust fund doctrine. Appraisal is allowed only under the instances
provided in the Corporation Code, particularly Sections 42, 81 and 105 thereof, the exercise of which is subject to the
conditions prescribed therein. As a remedy however in case appraisal right is not allowed, a stockholder may avail of
Sec. 63 of the Corporation Code which allows transfer of ownership of shares.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! It is true that the enumeration in Sec. 81 is not exclusive because there are other provisions in the Corporation Code that
provide for appraisal right.

C. REQUIREMENTS FOR A VALID EXERCISE OF APPRAISAL RIGHT (Sec. 82, Corporation Code)

Sec. 82. How right is exercised. - The appraisal right may be exercised by any stockholder who shall have voted against the
proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote
was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be
deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to
such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the
day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate
action.

If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing
stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3)
disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus
chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty
AΦB

(30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by
the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.

! CONDITIONS FOR EXERCISE. The following enumeration of the conditions for the valid exercise of stockholder’s right of
appraisal was adopted by the SEC.
1. Any of the instances set forth by law for the exercise of the appraisal right by a dissenting stockholder must be present;
2. The dissenting stockholder must have voted against the proposed corporate action;
3. The demand for payment must be made by the stockholder within 30 days from the date a vote is taken thereon.
Failure to make such demand within such period shall be deemed waiver of the appraisal right;
4. The price of the shares must be based on the fair value as of the day prior to the date on which the vote was taken as

EXCLUSIVELY FOR
determined in accordance with Sec. 82;
5. Submission by the withdrawing stockholder of his shares to the corporation for notation of being a dissenting
stockholder within 10 days from written demand;
6. Payment of shares must be made only when the corporation has unrestricted retained earnings in its books to cover
such payment; and
7. The stockholder must transfer his shares to the corporation upon such payment by the corporation.

D. EFFECTS OF EXERCISING APPRAISAL RIGHT (Sec. 83, Corporation Code)

Sec. 83. Effect of demand and termination of right. - From the time of demand for payment of the fair value of a stockholder's
shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all
rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this
Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be
restored.

! EFFECT OF DEMAND AND TERMINATION OF RIGHT

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1. All rights accruing to such shares, including voting and dividend rights, shall be suspended from the time of demand for
payment of the fair value of a stockholder's shares until either the abandonment of the corporate action or the purchase
of the said shares by the corporation.

2. The dissenting stockholder shall be entitled to receive payment of the fair value of his shares as agreed upon between
him and the corporation or as determined by the appraisers chosen by them.

" If not paid within 30 days after the award, his voting and dividend rights shall be immediately restored.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! PAYMENT – made only if the corporation has unrestricted retained earnings in its books to cover the same.

Sec. 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn unless the corporation
consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed
corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission
where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not
entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to
him.

! GEN. RULE: A dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his
decision.

EXCEPTIONS:
1. The corporation consents to the withdrawal;
2. The proposed corporate action is abandoned or rescinded by the corporation;
3. The proposed corporate action is disapproved by the SEC where its approval is necessary; and
AΦB

4. The Commission determines that such stockholder is not entitled to appraisal right.

! VALUATION DATE. The fair value of the shares of the dissenting stockholder is determined as of the day PRIOR to the
date on which the vote was taken notwithstanding any appreciation or depreciation in the value of shares in anticipation of
such corporate action.

Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne by the corporation, unless the fair
value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the
stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified.

EXCLUSIVELY FOR
Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a
dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that
such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title.
If shares represented by the certificates bearing such notation are transferred, and the certificates consequently canceled, the
rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a
regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee.

! REMEDY. If the corporation unjustifiably refuses to pay the dissenting stockholder despite the full compliance with all the
requirements for the valid exercise of appraisal right and despite the fact that the corporation has sufficient unrestricted
retained earnings, the aggrieved stockholder may file the appropriate action before the proper Regional Trial Court to
compel the corporation to allow him to exercise his appraisal right. ALPHA PHI BETA

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ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


AΦB

EXCLUSIVELY FOR

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

XII. NON-STOCK CORPORATIONS

A. DEFINITION AND PURPOSES OF A NON-STOCK CORPORATION (SEC. 87 & 88, Corporation Code)

Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable
as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be
covered by specific provisions of this Title.

Sec. 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers,
or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations.

! NON-STOCK CORPORATION. Section 87 defines a non-stock corporation as one where no part of its income is
distributable as dividends to its members. In Collector of Internal Revenue vs. Club Filipino de Cebu, the Supreme Court
ruled that even if there is a statement of capital stock, the corporation is still not a stock corporation if dividends are
not supposed to be declared, that is, there is no distribution of retained earnings. Thus, a non-stock corporation has
the following essential requisites:
1. It does NOT have a capital stock divided into shares;
2. NO part of its income is distributable as dividends to its members, and
3. Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like
AΦB

chambers, or any combination thereof.

! FOUNDATION. A foundation is non-stock, non-profit corporation with funds established to maintain or aid charitable,
religious, educational, professional, cultural, fraternal, literary, scientific, social welfare or similar activities primarily
through extending grants or endowments.

" The SEC Guidelines on Foundations require the following for the incorporation of foundations:
1. Modus Operandi or Plan of Operation, executed, under oath, by the President of such Foundation, setting forth
the mode of its operation, source of funds, the proposed application of said funds, and the prospective
beneficiaries of grants or endowments;
2. Certificate of Bank Deposit in the amount of not less than P1,000,000.00 representing the funds to be used for

EXCLUSIVELY FOR
extending grants or endowments; and
3. The corporate name shall contain the word “Foundation.”

" In addition to the reportorial requirements for ordinary non-stock non-profit corporations, the registered Foundation
shall submit to SEC together with the Financial Statements, a Statement of Funds Application, executed, under oath,
by the President of the Foundation, setting forth in detail the sources and amount of funds established and the names
of the beneficiaries and the corresponding amounts of funds granted or endowed thereto by the Foundation.

! CAPITAL. Section 14 [9] of the Corporation Code provides that the Articles of Incorporation of a Non-Stock Corporation
must state the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed
by each. The capital involved is to be used for the operation of the corporation. The capital may be increased if there will
be additional contributions but in such case, there is no need to amend the Articles of Incorporation.

! NATIONALITY. The nationality of a non-stock corporation is computed on the basis of the nationality of its members
and not premised on the membership contribution. Thus, if there are five (5) members and two (2) of whom are
foreigners and three (3) are Filipinos, the non-stock corporation is 40% Foreign and 60% Filipino.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" The Anti-Dummy Law does not allow foreigners to hold management or executive positions in a corporation
engaged in partly nationalized activity. In one Opinion, however, the SEC observed that a non-stock corporation
which was organized to undertake social, cultural and educational non-profit activities cannot be read in the context of
the term “partly nationalized activity” which would justify the banning of foreign nationals who are members of the
corporation from holding management or executive positions.

! PURPOSE. A non-stock corporation can be organized for (1) charitable, (2)religious, (3)educational, (4) professional,
(5)cultural, (6)fraternal, (7) literary, (8)scientific, (9) social, (10) civic service, or (11) similar purposes, like trade, industry,

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


agricultural and like chambers, or (12) any combination thereof.

" Recreational purpose was not included by the legislators in the enumeration. Sports clubs which are meant
primarily for income generation cannot organize as a non-stock corporation. However, the deliberations of the
legislators indicate that the sports clubs may still be organized as non-stock corporations for fraternal purposes.

" An ordinary non-stock corporation cannot at the same time be a cooperative. Cooperatives are now organized
through the Cooperative Development Authority.

! PROFITABLE BUSINESS. Section 88 limits the purposes for which the corporation is organized. Consistently, Section 87
provides that any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was
organized.

" It is clear from the foregoing provisions that non-stock corporations, as a general rule, are not empowered to
venture in profitable business. It cannot be permitted to engage in business with the object of making income or
profit directly or indirectly. It is allowed to do so only as an incident to its operations, whenever necessary or
proper for the furtherance of the purpose or purposes for which the corporation was organized.
AΦB

" For instance, a non-stock corporation that is organized for social purpose may operate a restaurant to cater to its
members if revenues will be used to defray the overhead expenses of the corporation.

! DISTRIBUTION OF INCOME. The corporation is not a non-stock corporation if its charter allows distribution if income. In
one case, the Supreme Court clarified that distribution need not be case. In the subject corporation, the Court pointed out
that while it is true that the members do not receive dividends in the form of cash, nevertheless, they do receive benefits in
the form of commissary privileges, such as the importation of goods duty-free, purchase of food and other items at minimum
or reduced prices, and return or refund of the capital at the end of membership or upon dissolution of the corporation. The
Court therefore concluded that the subject corporation was one that was organized for profit.

EXCLUSIVELY FOR
! RULES ON CONVERSION

" NON-STOCK TO STOCK. A non-stock corporation cannot be converted into a stock corporation by mere
amendment of the Articles of Incorporation. The amendment would be inconsistent with the nature of a non-stock
corporation because the same will have the effect of distributing the assets of the non-stock corporation to its members
so that the latter can become its shareholders. This scheme might defraud the public who may have contributed
donations, gift, or grants to the corporation since after conversion, the donated corporate assets would in effect be
treated as paid-in capital or subscription payments. What the non-stock corporation should do is to dissolve itself and
the members may decide to organize a stock corporation thereafter. ALPHA PHI BETA

" STOCK TO NON-STOCK. A stock corporation can be converted into a non-stock corporation by mere
amendment of the Articles of Incorporation. The effect of this is that after the conversion, the stockholders who now
become the members of the non-stock corporation will no longer have any pecuniary interest in the corporate assets.
Neither are they entitled to any share in any profit that may be obtained out of the operations or activities of the non-
stock corporation.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! APPLICABLE PROVISIONS. Sections 87 to 95 or Title XI of the Corporation Code primarily governs non-stock
corporations. Section 87 provides that the provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by specific provisions of Title XI. In other words, in
case of conflict, Title XI prevails.

" For instance, the provisions on merger apply to non-stock corporations. Merger with another non-stock corporation is
legally feasible if the other is also registered subject to the requirements for mergers under Section 76 to 80.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


B. DISTINGUISHED FROM STOCK CORPORATION

! STOCK CORPORATION – corporation with a capital stock is divided into shares and is authorized to distribute to holders
thereof of such shares dividends or allotments of the surplus profits on the basis of the shares held.

! NON-STOCK CORPORATION – corporation that does not issue stocks and does not distribute dividends to their members.

STOCK NONSTOCK
Has capital stock divided into shares and Does not have shares and may not distribute
Nature with authority to distribute dividends to its profits to its members.
stockholder.
Stockholders and directors must act in a Members may be allowed by the by-laws to
Meeting/Voting of meeting, except where a mere written assent vote by mail or other similar means
members/stockholders is sufficient or a formal meeting unnecessary.

Cumulative voting is available in the election Cumulative voting not available unless
Manner of Voting of directors otherwise provided in the articles or by-laws.
AΦB

Stockholder may vote by proxy Members may be deprived of the right to vote
by proxy in the Articles of Incorporation and
Proxy
By-laws

Stockholder may transfer their shares Members cannot transfer their members
Non-transferability of unless allowed by the Articles of
membership Incorporation and By-laws.

Directors cannot exceed 15 in number Trustees may exceed 15 in number


Directors/ Trustees
The term of a director is 1 year The term of a trustee is 3 years; 1/3 of the

EXCLUSIVELY FOR
Term of Director/ Trustee Board shall be elected annually.

Officers are elected by Board of Directors Officers may be directly elected by the
members unless otherwise provided in
Election of Officers
Articles of Incorporation and By-laws

Stockholder's meeting shall be held in the The by-laws may provide that members of a
city or municipality where principal office of non stock corporation may hold their
Place of Meeting
corporation is located, and if practicable in meetings at any place within the Philippines
the principal office.

C. MEMBERSHIP IN A NON-STOCK CORPORATION

Sec. 89. Right to vote. - The right of the 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. Unless so limited, broadened or denied, each member, regardless
of class, shall be entitled to one vote.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the
provisions of this Code.

Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange
Commission.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! VOTING RIGHTS. Section 89 provides that the right to vote may be limited, broadened or denied. However, the same must
be done expressly in the Articles of Incorporation or the By-laws. Without any limiting provision, the rule is still the same,
one member, one vote.

" The voting rights may be broadened in the Articles of Incorporation or By-laws of a non-stock corporation by
providing for a formula in determining the number of votes to which a member is entitled. Without any express
stipulation members may cast as many votes as there are trustees to be elected but they may not cast more than one
vote for one candidate unless otherwise provided for in the Articles of Incorporation or By-laws. However if a formula is
prescribed, a member may therefore have more than one vote. For instance, the formula may be based on the amount
of contribution of each member.

" Voting rights may be denied by stating in the By-laws that members who are delinquent in the payment of dues
may not be allowed to vote. ALPHA PHI BETA

Sec. 90. Non-transferability of membership. - Membership in a non-stock corporation and all rights arising therefrom are
personal and non-transferable, unless the articles of incorporation or the by-laws otherwise provide.

! GEN. RULE: Membership in a non-stock corporation and the rights arising therefrom are not transferable. REASON:
AΦB

membership in a stock corporation has personal elements which require qualification by social and other ties.

EXCEPTION: when the Articles of Incorporation or By-laws provide for its transferability. If transferable, the terms and
conditions under which transfer of membership in the non-stock corporation may be effected may be spelled out in the
Article of Incorporation and By-laws. For the transfer to be valid, such terms and conditions must be strictly complied with,
the transfer being the exception and not the general rule.

! The word “transfer” includes all transactions whereby the property of one person becomes that of another, whether
by descent and purchase. Hence, the prohibition expressed in Section 90 includes transfer by inheritance.

EXCLUSIVELY FOR
Sec. 91. Termination of membership. - Membership shall be terminated in the manner and for the causes provided in the
articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in
the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws.

! Non-stock and non-profit corporations may usually accept or refuse members as they choose, subject to the
provisions of its Articles of Incorporation or By-laws. In the absence of charter or statutory restrictions, a non-stock
corporation may determine who shall be admitted to membership and how they shall be admitted. It may exclude any
person whom it deems unfit for membership. In other words, the corporation is free to fix the qualifications for membership
and in the absence of restrictions, the courts may not intervene.

! Corollary to the same rule, a non-stock corporation is free to fix the qualification for membership and to provide for
termination which does not meet the standards fixed by the association. To be valid, there should be reasonable
notice to the member concerned and he must be given a fair opportunity to be heard in his defense.

! Section 91 provides that membership shall be terminated in the manner and for the causes provided in the Articles
of Incorporation or By-laws. Hence, while the non-stock corporation is authorized to terminate the membership in

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

accordance with the standards which it fixed, these standards must be fixed in the Articles of Incorporation or By-laws.

" The moment the standards are provided for in the Articles of Incorporation or By-laws, the members are duty bound to
comply. For the members to enjoy their rights as members, they should first comply with the provisions of the
Articles of Incorporation or By-laws relative to membership qualifications. Disqualification in the manner and for causes
provided therein should be imposed to erring members in accordance with its provisions. For example, provisions on
suspension or termination for non-payment of dues may be provided for.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! Non-payment of dues may be a ground for termination or suspension of membership. It should be pointed out that a
non-stock corporation may collect from its members reasonable fees or dues which are necessary to accomplish the
purpose of the corporation. The approval of the Commission is not necessary for such purpose and the dues may be
collected even in the absence of a provision in the By-laws.

! The power to expel members may be exercised in the following situations: ALPHA PHI BETA
1. When an offense is committed which, although it has no immediate relation to a member's duty as such is of so
infamous a nature as to render him unfit for the society of honest man, and which is indictable;
2. When the offense is a violation if his duty as a member of the corporation; and
3. Violation of a mixed nature, being both against his duty as a member and indictable.

" The non-stock corporation may also suspend, expel or otherwise terminate the membership if the member
is guilty if acts of disloyalty, for making or reporting fictitious or false matters, or acting in any way bad faith,
dishonesty or dishonorably.

Sec. 92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-laws, the board of
trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their
AΦB

number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be
held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring
before the expiration of a particular term shall hold office only for the unexpired period.

No person shall be elected as trustee unless he is a member of the corporation.

Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly
elected by the members.

Sec. 93. Place of meetings. - The by-laws may provide that the members of a non-stock corporation may hold their regular or
special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That

EXCLUSIVELY FOR
proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of
meeting shall be within the Philippines.

! NUMBER OF TRUSTEES. A non-stock corporation may have more than fifteen (15) trustees under Section 92. This is to
give more representation to the Board of Trustees of nationwide membership associations. However, while there appears to
be no maximum limit, the number should not exceed the number of members of the corporation.

" Moreover, the SEC has adopted the policy f requiring registrant corporation to submit an explanation/justification if its
Articles of Incorporation provide for more than fifteen (15) members in the Board. Thus, while the Code expressly
allows more than fifteen (15), the SEC may question the propriety of a large number if it feels that the number is
unreasonable under the surrounding circumstances.

" With respect to election of officers, it is clear from Section 92 that the provisions of the Articles of Incorporation and By-
laws shall be followed. Hence, the By-laws may provide than the officers shall be elected by the Board. If the Articles of
Incorporation and By-laws are silent on the matter, the officers may be elected to Section 25 which requires that the
corporate officers shall be elected by the board.

! QUALIFICATIONS. The only qualification of a trustee under Section 92 is membership in the corporation. Section 92

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

provides that no person shall be elected as trustee unless he is a member of the corporation.

" Nevertheless, the member who may be elected a trustee may be just a nominee. This principle applies to a non-stock
corporation whose members consist of corporation or juridical persons.

! TERM. The phrase “unless otherwise provided in the Articles of Incorporation and By-laws” in the first paragraph of Section
92 makes it clear that non-stock corporations may provide for a desired term of office of the trustees in the By-laws.
Thus, instead for a staggered term, the Articles of Incorporation and By-laws may provide for a (2) year term of office.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" However, while the term may vary under the Articles of Incorporation and By-laws, lifetime or unlimited term of the
trustees is not allowable.

D. RULE ON DISTRIBUTION OF ASSETS (SEC. 94, Corporation Code)

Sec. 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code,
its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made
therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by
reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this
Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions
AΦB

of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the
distributive rights of members, or any class or classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not
organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter.

Sec. 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not inconsistent with the provisions of
this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner:

The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of

EXCLUSIVELY FOR
distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote,
within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution
shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy
at such meeting.

! It is basic that non-stock corporations do not contemplate distribution of gains, profits or dividends to their
members on invested capital. However, in other jurisdictions, the distribution of its assets to the members on dissolution is
not forbidden unless it holds its assets upon some trust, public or private, in which case the claims of the State or the
beneficiaries may be considered. ALPHA PHI BETA

" Under the Corporation Code, distribution of assets to members upon dissolution is allowed if expressly
provided for in the Articles of Incorporation or By-laws. In the absence of any provision, the assets may be
distributed to persons, societies, organizations or corporations whether or not organized for profit as specified in the
said plan.

" However, even distribution of the assets to the members are allowed, the assets that should be distributed to
the members do not include the assets that is included in or will answer for the following:
1. All liabilities and obligations of the corporation;

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition
occurs by reason of the dissolution, they shall be returned, transferred or conveyed in such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance
by reason of the dissolution. They shall be transferred or conveyed to one or more corporations, societies or
organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation
according to a plan of distribution. ALPHA PHI BETA

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


AΦB

EXCLUSIVELY FOR

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

XIII. CLOSE CORPORATIONS

A. CONCEPT; DISTINGUISHED FROM OPEN CORPORATIONS (Sec. 96, 97, 101 & 102, Corporation Code)

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
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. Notwithstanding the foregoing, 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 in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code
shall apply suppletorily except insofar as this Title otherwise provides.

! REQUISITES. A corporation cannot be considered a close corporation within the meaning of the Corporation Code if any of
the following requisites is absent in the Articles of Incorporation:
1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of 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
AΦB

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.

! A narrow distribution of ownership does not, by itself, male a close corporation. Mere ownership by a single stockholder of
all or nearly all of the capital stock of a corporation does not make one a close corporation if the above-specified
requirements are not stated in the Articles of Incorporation. In San Juan Structural and Steel fabricators, Inc. vs. CA,
98.866% of the capital stock of the subject corporation belonged to the spouses involved in the case. However, the
corporation was not considered as close corporation because the requisites specified under Sec. 96 are not stated
in the Articles of Incorporation. ALPHA PHI BETA

! CHARACTERISTICS

EXCLUSIVELY FOR
1. Stockholders may act as directors without the need of election and therefore are liable as directors;
2. Stockholders who are involved in the management of the corporation are liable in the same manner as directors are;
3. Quorum may be greater than mere majority;
4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are invalid;
5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified
the informal action of the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board are settled by the SEC, on the written petition of any stockholder; and
8. Stockholder may withdraw and avail of his right of appraisal.

NOTE: Special rules are provided for a close corporation because it is essentially an incorporated partnership. (The
Corporation Code of the Philippines, De Leon & De Leon, 2006)

! DISTINGUISHED FROM ORDINARY CORPORATION. The main distinction of a close corporation from other corporations
is that the identity of stock ownership and active management. This type of corporation is ideal for a small, closely-knit
group who wants exclusivity.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

CLOSE CORPORATION ORDINARY CORPORATION


There is a limitation on the number of stockholders to a maximum There is no limit as to the number of shareholder.
of 20. (Sec. 96)
There must be a restriction on the transfer of shares. (Sec. 96) A restriction need not be provided for.
Specific qualifications to be eligible as stockholder are usually Qualifications of stockholders are normally prescribed.
provided for (Sec. 97)
Public offering of shares is prohibited. (Sec. 96) Public offering of shares is not prohibited.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


May be managed directly by stockholders. (Sec. 97) It is managed by the board of directors and not the stockholders.

ORDINARY CORPORATION CLOSE CORPORATION


Its Articles of Incorporation need only Its articles must contain the special matters
contain the general matters enumerated in prescribed in Sec. 97, aside from the
Articles of Incorporation Sec. 14 general matters in Sec. 14. Failure to do
so precludes a de jure close corporation
status.
Its status as an ordinary stock corporation 2/3 of its voting stock or voting rights must
Ownership of Stocks is not affected by the ownership of its not be owned or controlled by another
voting stock or voting rights corporation which is not a close corporation
Classification of directors Its articles cannot classify its directors Its articles mat classify its directors
The corporate officers and employees are Its articles may provide that any or all of
Election/appointment of officers elected by a majority vote of all the the corporate officers or employees may be
members elected or appointed by the stockholders
Business of the corporation is managed by Business of the corporation may be
Management the board of directors managed by the stockholders if the articles
do provide, but they are liable as directors
The pre-emptive right is subject to the The pre-emptive right is subject to no
AΦB

Pre-emptive right
exceptions found in Sec. 39 exceptions unless denied in the articles
The appraisal right may be exercised by a The appraisal right may be exercised and
Appraisal right stockholder only in the cases provided in compelled against the corporation by a
Secs. 81 and 42 of the Code. stockholder for any reason
Except as regards redeemable shares, the In case of an arbitration of intra-corporate
purchase by the corporation of its own deadlock by the SEC, the corporation may
Purchase of its own shares stock must always be made from the be ordered to purchase its own shares
unrestricted retained earnings from the stockholders regardless of the
availability of unrestricted retained earnings
Arbitration of intra-corporate deadlock by Arbitration of intra-corporate deadlock by
the Sec is not a remedy in case the the Sec is an available remedy in case the
Remedy of arbitration directors or stockholders are so divided directors or stockholders are so divided

EXCLUSIVELY FOR
respecting the management of the respecting the management of the
corporation corporation

! The following corporations CANNOT be close corporation:


1. When at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation;
2. Mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest

! NUMERICAL LIMIT. The requirement that the stockholders must not exceed 20 is mandatory. In fact, under Sec. 99,
the close corporation may refuse to register any transfer that does not comply with the condition.

" In the case of death of one of the shareholders, the close corporation is still subject to the same restriction even if
the deceased has 2 or more heirs whose presence will result in the presence of more than 20 shareholders. In which
case, the heirs have 2 options, namely:
1. The shares of the deceased may be placed in the name of one of the heirs who will be the nominee or
representative of the heirs; or
2. A corporation can be organized to hold all shares. ALPHA PHI BETA

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! CLOSED CORPORATION AND CLOSELY HELD CORPORATION. The term “closed” emphasizes a determination on
the part of the participants in the enterprise to keep outsiders from acquiring any interest in the business and may indicate
that they have taken steps to accomplish that objective by shareholders’ agreement or provision in the Articles of
Incorporation or by-laws. In a “closed corporation”, the shares are transferable but by agreement, the provisions of the
Articles of Incorporation or by-laws, the components thereof opted to close its doors on other persons and effectively bar
such other persons from becoming stockholders.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" “Closely held” focuses more on the number of shareholders in the corporation at that particular time, indicating that
they are few in numbers. Thus, a “closely held corporation” has been defined as a corporation the shares of which
are owned by a relatively limited number of stockholders.

Sec. 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers
as may be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular
class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.

The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the
purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
AΦB

The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be
elected or appointed by the stockholders, instead of by the board of directors.

! The Articles of Incorporation of a close corporation must still comply with the requirements of Sec. 14 of the Corporation
Code. In other words, the contents of the Articles of Incorporation as enumerated in Sec. 14 must also be present in
the Articles of Incorporation of a close corporation. This is consistent with the rule that the provisions that govern ordinary
corporations apply suppletorily to close corporation.

! However, unlike the Articles of Incorporation of an ordinary corporation, the Articles of Incorporation of a close corporation
must contain the 3 requisites of a close corporation expressed in Sec. 96.

EXCLUSIVELY FOR
! In addition, Sec. 97 provides that the Articles of Incorporation may also contain the following:
1. Classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers
as may be stated therein,
2. Classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular
class of stock; and
3. A greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.
4. The business of the corporation shall be managed by the stockholders of the corporation rather than by a board of
directors.

Sec. 100. Agreements by stockholders. -


1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders,
shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be
their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of
such agreements are contained, except those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting
rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure
agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as
between the parties on the ground that its effect is to make them partners among themselves.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to
the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this
Code on directors.
5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation,
the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for
corporate torts unless the corporation has obtained reasonably adequate liability insurance.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! AGREEMENTS. The Corporation Code allows the following agreement among shareholders:
1. Pre-incorporation agreement under par. 1 of Sec. 100;
2. Voting agreement under par. 2 of Sec. 100; and
3. Agreement on the conduct of corporate business and affairs under pars. 3, 4 and 5 of Sec. 100.

Sec. 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide otherwise, 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.
If a director's 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.

! The board is the governing body in an ordinary corporation. The directors cannot act separately for the corporation and the
board must act as a body. In acting for the corporation, what is normally required is a meeting whereby resolutions will be
approved by the board. Although physical presence of all is no longer absolutely necessary with the advent of rules on
teleconferencing and videoconferencing, there is still a need for a board meeting.
AΦB

! The general rule requiring board meetings is still applicable to close corporation with the exception of cases provided for
under Sec. 101. In any of the situations contemplated under Sec. 101, a meeting of the board is not necessary to approve
corporate transactions.

Sec. 102. Pre-emptive right in close corporations. - 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. 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or

EXCLUSIVELY FOR
remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting
requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at
least two-thirds (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 articles of incorporation for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.

Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of
stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the
corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that
the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the
Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In
the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order:
(1) canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2)
canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the
action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6)
dissolving the corporation; or (7) granting such other relief as the circumstances may warrant.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of
any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the
Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a
custodian or receiver.

A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice
of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the
Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the
provisional director and the corporation.

! DEADLOCK. There is deadlock when the directors or stockholders are so divided respecting the management of the
corporation’s business and affairs that the votes required for any corporate action cannot be obtained, with the
consequence that the business affairs of the corporation can no longer be conducted to the advantage of the stockholders
generally. This covers not only cases where the 2 contending groups are equal but also cases when the required vote
cannot be obtained because of the division in the corporation. For instance, if any decision requires the approval of 75% of
the outstanding capital and the minority group own 40% of the outstanding capital, decisions cannot be made by the board
or the stockholders if the minority will oppose any proposal of the majority.

" In such cases, the SEC upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the
exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an
order:
1. canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's
agreement;
2. canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or
AΦB

officers; ALPHA PHI BETA


3. directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons
party to the action;
4. requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books, or by the other stockholders;
5. appointing a provisional director;
6. dissolving the corporation; or
7. granting such other relief as the circumstances may warrant. ALPHA PHI BETA

Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and

EXCLUSIVELY FOR
remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation
has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a
close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such
corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being
misapplied or wasted.

! REMEDIES OF STOCKHOLDERS. The remedies available to a stockholder under Sec. 105 are as follows:

1. He may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be
less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock;

2. He may, by written petition to the Securities and Exchange Commission, compel the dissolution of such
corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent,
or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, OR whenever corporate assets
are being misapplied or wasted.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

B. PERMISSIVE PROVISIONS IN THE ARTICLES OF INCORPORATION (Sec. 97, Corporation Code)

Sec. 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers
as may be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.

The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the
purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.

The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees
shall be elected or appointed by the stockholders, instead of by the board of directors.

! STOCKHOLDERS AS MANAGERS. Sections 97 and 100 recognize the right of the stockholders to manage the business
and affairs of the corporation. In other jurisdictions, this attribute distinguishes close corporation from other types of
corporations. In fact, the emphasis on the integration of ownership and managements captures an idea that justifies
regulation of a close corporation.

" The unity of decision-making function and the risk-bearing function in one group “can avoid the sometimes costly agency problem of
AΦB

protecting passive shareholders who need some method of monitoring the performance of the corporation’s managers and insuring
that management’s decisions are aligned with the shareholder’s interests.

" Full advantage may be derived from the unity of management and investor functions if the corporation is ideally composed of
persons who all have the time, ability, and training necessary to make sound business decisions and sufficient wealth to bear the
risks of the enterprise. ALPHA PHI BETA

" EFFECTS. The effects of a situation where the stockholders are managers include: ALPHA PHI BETA
1. It is no longer necessary to elect directors;
2. The stockholder shall be deemed the directors;
3. The stockholder shall have the same liabilities as directors;

EXCLUSIVELY FOR
4. To the extent that the stockholders are actively engaged in the management or operation of the business and
affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among
themselves; and
5. The stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance.

C. RESTRICTIONS ON TRANSFER OF SHARES (Sec. 98 & 99, Corporation Code)

Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares 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. Said 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. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell his shares to any third person.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

Sec. 99. Effects of issuance or transfer of stock in breach of qualifying conditions. -


1. 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.
2. 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

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


such stock is issued or transferred is conclusively presumed to have notice of this fact.
3. 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.
4. 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.
5. 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.
6. The term "transfer", as used in this section, is not limited to a transfer for value.
7. 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.

! RESTRICTIONS ON TRANSFER. It is mandatory under Sec. 96 for the Articles of Incorporation of a close corporation to
provide that all of the issued stocks of all classes shall be subject to one or more restriction. Under Sec. 98, the restriction
AΦB

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.

" Thus, the restriction on transfer is in the nature of a right of first refusal in favor of the stockholders. This right
can be waived because under Sec. 98, If upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

! GOOD FAITH. Actual absence of knowledge on the transferee will not free him from the mandatory restriction. It is clear
from Sec. 99 that good faith is not a defense because there is a conclusive presumption of knowledge of the
restrictions. ALPHA PHI BETA

EXCLUSIVELY FOR
! WAIVER. Sec. 99 provides that the transfer in violation of the restrictions may still be registered in the books of the
corporation in the following cases:
1. If all the shareholders consent; and
2. The Articles of Incorporation were duly amended.

" However, in both cases, the corporation will no longer be a close corporation if the conditions for its existence are not present as in
the case where the transfer results in the presence of more than 20 shareholders.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

XIV. CORPORATE DISSOLUTION/LIQUIDATION/REHABILITATION

Sec. 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code may be dissolved
voluntarily or involuntarily.

! DISSOLUTION – is the extinguishment of the franchise of a corporation and the termination of its corporate existence.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" The complete destruction of the corporation and within contemplation of the law, is equivalent to its death, being
sometimes likened to the death of a natural person. (The Corporation Code of the Philippines Annotated, De Leon &
De Leon, 2006)

! MODES OF DISSOLUTION:

1. VOLUNTARY DISSOLUTION
a. Application for dissolution with the SEC;
i. Where no creditors are affected;
ii. Where creditors are affected;
b. Shortening of the corporate term by amending the Articles of Incorporation.

2. INVOLUNTARY DISSOLUTION
a. Expiration of the corporate term;
b. Failure to organize and commence business within 2 years from the date of the issuance of the certificate of
incorporation. (Note: SEC has opined that the dissolution in this case is not automatic. The corporation continues
to operate as such, notwithstanding its non-operational status until the SEC orders its dissolution after notice and
hearing.)
AΦB

c. Legislative dissolution;
d. Quo warranto suit against a de facto corporation;
e. Minority stockholders’ suit for dissolution on justifiable grounds; or
f. SEC dissolution upon complaint and after notice and hearing, on the following grounds:
i. The corporation was illegally organized;
ii. Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least
5 years;
iii. Serious dissension in the corporation; or
iv. Commission by the corporation of illegal or ultra vires acts or violations of the Code.

! DE JURE AND DE FACTO DISSOLUTION. Dissolution may be used in a broad sense so as to include what is dissolution

EXCLUSIVELY FOR
in fact as well as what constitutes a legal dissolution. ALPHA PHI BETA

" DE JURE DISSOLUTION – one that is adjudged and determined by judicial sentence, or brought about by an act of or
with the consent of the sovereign power, or which results from expiration of the charter period of corporate life.

" DE FACTO DISSOLUTION – one which takes place in substance and in fact when the corporation by reason of
insolvency, cessation of business or otherwise, suspends all operations and, it may be, goes into liquidation still
retaining its primary franchise to be a corporation.

! POWER TO DISSOLVE. What the law has granted, the law may take away. A corporation can come to an end and its life
extinguished only by the act or with consent of the sovereign power by which it was established. This also means that the
dissolution of the corporation must be in accordance with the procedure prescribed by law.

" The dissolution of a corporation is not an unconstitutional impairment of the obligation of contracts made by it with
other parties during its existence for they may still assert their rights against the property of the corporation in the mode
prescribed by statute.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

" Where a statute prescribes certain conditions that must be performed before a voluntary dissolution will be allowed,
nonperformance of those conditions will be a bar to such dissolution under the statute.

! EFFECTS OF DISSOLUTION. The corporation ceases as a body corporate to continue the business for which it was
established. The assets of the corporation will then be liquidated and legal title to remaining corporate properties are
transferred to the stockholders who become co-owners thereof. The corporation continues as a body corporate for 3 years
from purposes of winding up or liquidation; upon the expiration of the 3-year winding up period the corporation ceases to
exist for all purposes.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" A dissolved corporation can no longer continue its operations. The board of directors is not normally permitted to
undertake any activity outside the usual liquidation of the business of the corporation. Winding up is the sole
business of the dissolved corporation. However, the stockholders are not prevented from conveying their
respective shareholdings toward the creation of a new corporation to continue the business of the old.

" EFFECTS:
1. Transfer of legal title to corporate property to stockholders who become co-owners thereof;
2. Continuation of corporate business merely as an association without juridical personality;
3. Conveyance by the stockholders of their respective shareholdings toward creation of a new corporation to
continue the business of the old;
4. Reincorporation of the dissolved corporation by re-filing new Articles of Incorporation and by-laws;
5. The corporation continues as a body corporate for 3 years for purposes of winding up; and
6. Cessation of corporate existence for all purposes upon the expiration of the winding up period of 3 years.

A. METHODS OF VOLUNTARY CORPORATE DISSOLUTION AND THE REQUIREMENTS THEREFOR


AΦB

Sec. 118. Voluntary dissolution where no creditors are affected. - If dissolution of a corporation does not prejudice the rights
of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and
by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after publication
of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of
general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by
personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be
certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities
and Exchange Commission shall thereupon issue the certificate of dissolution.

EXCLUSIVELY FOR
Sec. 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may prejudice the
rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall
be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its
president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date
on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than
sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three
(3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the
corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a
similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city.

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

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

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. 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


dissolved without any further proceedings, subject to the provisions of this Code on liquidation.

! VOLUNTARY DISSOLUTION. Voluntary dissolution may involve cases when no creditors are affected and cases when
creditors are affected. The procedures prescribed by the Corporation Code for both types of voluntary dissolution are
outlined hereunder. ALPHA PHI BETA

! VOLUNTARY DISSOLUTION WHERE NO CREDITORS ARE AFFECTED (SEC. 118)


1. A meeting must be held on the call of the directors or trustees;
2. Notice of the meeting should be given to the stockholders by personal delivery or registered mail at least 30 days prior
to the meeting;
3. The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place;
4. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders
representing at least 2/3 of the outstanding capital stock or 2/3 of members;
5. A copy of the resolution shall be certified by the majority of the board of directors or trustees and countersigned by the
secretary; and
6. The signed and countersigned copy will be filed with the SEC and the latter will issue a certificate of dissolution.

! VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED (SEC. 119)


1. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members in a meeting
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called for that purpose;


2. Filing of a Petition with the SEC signed by a majority of its board of directors or trustees or other officers having the
management of its affairs, verified by its president or secretary or one of its directors or trustees. Claims and
demands must be stated in the petition.
3. If the petition is sufficient in form and substance, SEC shall issue an Order fixing a hearing date for objections which
date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order.
4. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality or city where the principal office of the corporation is
situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar
copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city.
5. 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

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Commission shall proceed to hear the petition and try any issue made by the objections filed; and
6. 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.

! SHORTENING OF TERM. Shortening of term may also be a form of voluntary dissolution if no period will remain after the
dissolution shortening of the corporate term. The procedure for shortening of the corporate term is provided for in Sec. 37
of the Corporation Code.

B. CONCEPT OF INVOLUNTARY DISSOLUTION AND THE GROUNDS THEREFOR

Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and Exchange Commission upon filing of
a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

! INVOLUNTARY DISSOLUTION. The sovereignty from which a corporation derives its existence has a vital interest in the
continued exercise of the corporate franchise, and may undoubtedly inquire civilly in the propriety of such exercise. The fact
that the State issued a franchise does not estop it to forfeit the franchise for non-use or misuse thereof.

! MODES
1. Filing of a verified complaint under Sec. 121;
2. Revocation of the Articles of Incorporation by the SEC under PD 902-A;
3. Quo Warranto proceedings

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


! GROUNDS
1. Failure to organize and commence business within 2 years from incorporation;
2. Continuous non-operation for 5 years; ALPHA PHI BETA
3. Failure to file by-laws within 30 days from issue of certificate of incorporation;
4. Management Committee or Rehabilitation Receiver found the continuation of the business is no longer feasible.

! Sec. 6 of Presidential Decree No. 902-A which states that the SEC is empowered: To suspend, or revoke,
after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the following:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation can do 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 of acts which would
amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5) 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;
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! The dissolution of a corporation is an extreme remedy, and should be ordered only where the facts clearly warrant it. It is
authorized only where there is evidence of conduct which fair-minded people would find objectionable.

C. CORPORATE LIQUIDATION (Sec. 122, Corporation Code)

Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued
as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to

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distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for
the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its stockholders, 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.

Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or
cannot be found shall be escheated to the city or municipality where such assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its debts and liabilities.

! LIQUIDATION – 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
stockholders. ALPHA PHI BETA

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CORPORATION LAW REVIEWER AΦB

" Liquidation means winding up of the affairs of the corporation by reducing its assets, paying its debts, and apportioning
the profit or loss.

! MODES OF LIQUIDATION. The normal method of procedure is for the directors and executive officers to have charge of
the winding up operations though there is the alternative method of assigning the properties of the corporation to the
trustees for the benefit of its creditors and stockholders. However, receivers can likewise be appointed. The appointment of
receiver rests with the sound discretion of the court. Such discretion must, however, always be exercised with caution and
governed by legal and equitable principles, the violation of which may amount to its abuse. In making such appointment,

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a
receiver to wind up the corporate business, the court should only act on the facts that have been proved by competent legal
evidence,

! PERIOD. Liquidation is supposed to be made within 3 years. However, 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. Even the lawyers who are handling cases for the corporation can be considered the
trustees of the assets of the dissolved corporation after the 3-year period. If no trustee is appointed, the corporation cannot
be permitted to take advantage of such non-appointment thereby allowing unjust enrichment at the expense of the creditors.

" To the same effect is the rule if the court will appoint a receiver to liquidate assets of the corporation. The 3-year
period does not apply and actions may even be instituted even after the same period.

" Consistently, there is also nothing that bars recovery of the debts of the corporation after the 3-year liquidation period.
The claim of the creditors follows the assets of the corporation. Corporate creditors may follow its assets as in the
nature of trust fund into the hands of the stockholders.

! The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities
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of such entity nor those of its owners and creditors alike.

Sec. 145. Amendment or repeal. - 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.

D. METHODS OF LIQUIDATION AND WINDING UP

1. By the corporation itself through its board of directors/trustees;

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2. By a trustee to whom the corporate assets have been conveyed; and
3. By a management committee or rehabilitation receiver appointed by the RTC.

Note: The 3-year period does not apply to Methods 2 and 3 as long as the trustee or the receiver is appointed within the said
period. ALPHA PHI BETA

! The word “trustee” as used in the corporation statute must be understood in its general concept which could include the
counsel to whom was entrusted the prosecution of the suit filed by the corporation. (Spouses Gelano vs. CA) The board of
trustees may also be permitted to complete the corporate liquidation by continuing as “trustees” by legal implication.

! Indeed, if the trustee may commence a suit which can proceeds to final judgment beyond the 3-year period, there is no
reason why a suit commenced by the corporation itself during its existence should not be afforded similar treatment and
allowed to proceed to final judgment and execution thereof.

! The question as to the right of priority of a claimant against the assets of the corporation that is being dissolved and
liquidated becomes of importance only when the assets of the corporation are not sufficient to pay all claims.

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

LIQUIDATION REHABILITATION
Connotes a winding up or settling with
Nature Connotes a reopening or reorganization
creditors and debtors
Contemplates a continuance of corporate
Winding up process so that assets may be
Continuity of Corporate Life life in an effort to restore the corporation to
distributed to those entitled
its former successful operation

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


E. CONCEPT OF REHABILITATION; EFFECTS OF APPOINTMENT OF MANAGEMENT COMMITTEE OR RECEIVER

! REHABILITATION. If a corporation is in distress but the directors and shareholders believe that it can still continue, the
corporation may consider rehabilitation rather than outright dissolution.

" Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency.

" The law on the matter is Sec. 6 of PD 902-A which provides among others:

Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:

c) To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before the
Commission in accordance with the pertinent provisions of the Rules of Court in such other cases whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing public and creditors: Provided, however, That
the Commission may, in appropriate cases, appoint a rehabilitation receiver of corporations, partnerships or other associations not
supervised or regulated by other government agencies who shall have, in addition to the powers of a regular receiver under the
provisions of the Rules of Court, such functions and powers as are provided for in the succeeding paragraph d) hereof: Provided,
further, That the Commission may appoint a rehabilitation receiver of corporations, partnerships or other associations supervised or
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regulated by other government agencies, such as banks and insurance companies, upon request of the government agency
concerned: Provided, finally, That upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to
this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending
before any court, tribunal, board or body shall be suspended accordingly.

d) To create and appoint a management committee, board, or body upon petition or motu propio to undertake the management of
corporations, partnerships or other associations not supervised or regulated by other government agencies in appropriate cases
when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties of paralyzation of business
operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or the
general public: Provided, further, That the Commission may create or appoint a management committee, board or body to
undertake the management of corporations, partnerships or other associations supervised or regulated by other government
agencies, such as banks and insurance companies, upon request of the government agency concerned.

EXCLUSIVELY FOR
The management committee or rehabilitation receiver, board or body shall have the power to take custody of, and control over, all
the existing assets and property of such entities under management; to evaluate the existing assets and liabilities, earnings and
operations of such corporations, partnerships or other associations; to determine the best way to salvage and protect the interest of
the investors and creditors; to study, review and evaluate the feasibility of continuing operations and restructure and rehabilitate
such entities if determined to be feasible by the Commission. It shall report and be responsible to the Commission until dissolved by
order of the Commission: Provided, however, That the Commission may, on the basis of the findings and recommendation of the
management committee, or rehabilitation receiver, board or body, or on its own findings, determine that the continuance in business
of such corporation or entity would not be feasible or profitable nor work to the best interest of the stockholders, parties-litigants,
creditors, or the general public, order the dissolution of such corporation entity and its remaining assets liquidated accordingly. The
management committee or rehabilitation receiver, board or body may overrule or revoke the actions of the previous management
and board of directors of the entity or entities under management notwithstanding any provision of law, articles of incorporation or
by-laws to the contrary.

The management committee, or rehabilitation receiver, board or body shall not be subject to any action, claim or demand for, or in
connection with, any act done or omitted to be done by it in good faith in the exercise of its functions, or in connection with the
exercise of its power herein conferred.

h) To issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate
cases order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of

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CORPORATION LAW REVIEWER AΦB

any entity or person under investigation as may be necessary for the proper disposition of the cases before it, notwithstanding the
provisions of any law to the contrary. (as amended by PD 1799)

! GROUNDS FOR APPOINTMENT OF MANAGEMENT COMMITTEE. Under paragraph (d), Sec. 6 of PD 902-A, certain
situations must be shown to exist before a management committee may be created or appointed, such as:

1. When there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties; or
2. When there is paralization of business operations of such corporations or entities that may be prejudicial to the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


interest of minority stockholders, parties-litigants or to the general public.

! GROUNDS FOR APPOINTMENT OF MANAGEMENT COMMITTEE. Receivers may be appointed whenever:


1. It is necessary in order to preserve the rights of the parties-litigants; and/ or
2. To protect the interest of the investing public and creditors.

! JURISDICTION AND PROCEDURE. Under PD 902-A, jurisdiction over petition for rehabilitation used to be within the SEC.
On December 15, 2000, the Supreme Court, in A.M. No. 00-8-10-SC, adopted the Interim Rules of Procedure in Corporate
Rehabilitation and directed to be transferred from the SEC to Regional Trial Courts, all petitions for rehabilitation filed by
corporations, partnerships and associations under PD 902-A in accordance with the amendatory provisions of Republic Act
No. 8799. ALPHA PHI BETA

NOTE: The Interim Rules merely provides that the petition shall be filed in the Regional Trial Court (RTC) which has
jurisdiction over the principal office of the debtor. The new Rules now explicitly provides (Rule 3, Sec. 2):
1. It should be the office specified in its articles of incorporation or partnership.
2. Where the principal office of the corporation, partnership or association is registered in the SEC as “Metro Manila”,
the action must be filed in the RTC of the city or municipality where the head office is located.
3. A joint petition by a group of companies shall be filed in the RTC which has jurisdiction over the principal office of
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the parent company, as specified in its Articles of Incorporation.

! STAY ORDER. The new Rules retain the language in the Interim Rules that the “stay order shall be effective from the date
of its issuance until the approval of the rehabilitation plan or the dismissal of the petition” (Rule 3, Sec. 9), but deleted the
proviso in the second paragraph of Rule 4, Sec. 11 of the Interim Rules that the petition shall be dismissed if no
rehabilitation plan is approved after 180 days from the date of the initial hearing.

! Specifically, under A.M. NO. 00-8-10-SC or the RULES OF PROCEDURE ON CORPORATE REHABILITATION, effective
January 16, 2009, Sec 7 thereof provides:

SEC. 7. Stay Order.—If the court finds the petition to be sufficient in form and substance, it shall, not later than five (5) working days from

EXCLUSIVELY FOR
the filing of the petition, issue an order:
(a) appointing a rehabilitation receiver and fixing his bond;
(b) staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise,
against the debtor, its guarantors and persons not solidarily liable with the debtor; provided, that the stay order shall not cover claims
against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor’s obligations;
provided, further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate
rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not
solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor;
(c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary
course of business;
(d) prohibiting the debtor from making any payment of its liabilities except as provided in items (e), (f) and (g) of this Section or when
ordered by the court pursuant to Section 10 of Rule 3;
(e) prohibiting the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order;
(f) directing the payment in full of all administrative expenses incurred after the issuance of the stay order;
(g) directing the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior
court approval;
(h) fixing the dates of the initial hearing on the petition not earlier than forty-five (45) days but not later than sixty (60) days from the filing
thereof;
(i) directing the petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week for two (2) consecutive
weeks;

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CORPORATION LAW REVIEWER AΦB

(j) directing the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the creditors named in the petition
and the appropriate regulatory agencies such as, but not limited to, the Securities and Exchange Commission, the Bangko Sentral ng
Pilipinas, the Insurance Commission, the National Telecommunications Commission, the Housing and Land Use Regulatory Board and
the Energy Regulatory Commission;
(k) directing the petitioner that foreign creditors with no known addresses in the Philippines be individually given a copy of the stay order
at their foreign addresses;
(l) directing all creditors and all interested parties (including the regulatory agencies concerned) to file and serve on the debtor a verified
comment on or opposition to the petition, with supporting affidavits and documents, not later than fifteen (15) days before the date of the

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


first initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings; and
(m) directing the creditors and interested parties to secure from the court copies of the petition and its annexes within such time as to
enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition.

The issuance of a stay order does not affect the right to commence actions or proceedings insofar as it is necessary to
preserve a claim against the debtor.

! CLAIM. A “claim” is said to be “a right to payment, whether or not it is reduced to judgment, liquidated or
unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured
or unsecured.” The Supreme Court defined the word “claim” contemplated in Section 6 (c) of PD 902-A, as referring to
debts or demands of a pecuniary nature and the assertion of a right to have money paid as well.

" Thus, a money claim for missing luggage is also a financial demand that the law requires to be suspended pending the
rehabilitation proceedings.

" The Order will stay all action for claims against the debtor including claims by secured and unsecured creditors.

" In MWSS vs. Daway, the Supreme Court ruled that the claims that are enjoined do not cover claims against the
solidary guarantors or sureties of the debtor who is under rehabilitation. Solidary claims can be pursued separately
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from and independent of the rehabilitation case. Thus, claims against the bank that issued a letter of credit can be
pursued because in the absence of any stipulation to the contrary, the obligation of banks issuing letters of credit is
solidary with the person who applied for its issuance.

" Even labor claims are included in the claims that are suspended upon the issuance of the stay order. No exception is
mentioned in the law, hence, labor claims are deemed included. (Rubberworld Phils. Inc. vs. NLRC; Clarion
Printing House vs. NLRC) ALPHA PHI BETA

" The rules on concurrence and preference of credits under the New Civil Code and Article 110 of the Labor
Code do not apply in rehabilitation proceedings. Said rules apply only if there is an insolvency or liquidation
proceeding. It does not apply to rehabilitation proceeding because the purpose of rehabilitation is precisely to gain

EXCLUSIVELY FOR
new lease of life and thereby allow creditors to be paid theirs from its earnings.

! RIGHT OF MINORITY TO FILE. The general rule is that the minority has no authority to sue for the dissolution of the
corporation. However, jurisprudence acknowledges cases where even the minority can ask for the dissolution of the
corporation under the theory that such minority members if unable to obtain redress in the corporation itself should not be
left without a remedy.

" The statutory rule however is clear with respect to rehabilitation. Sec. 6 (c) of PD 902-A provides that when there is
imminent danger of dissipation, loss, wastage or destruction of assets or other properties or paralization of business
operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-
litigants or the general public.

The said legal provision reveals that for a stockholder to obtain the appointment of an interim management committee,
he must do more than merely make a prima facie showing of a denial of his right to share in the concerns of the
corporation. It is only in a strong case where there is a showing that the majority are clearly violating the chartered
rights of the minority and putting their interests in imminent danger that a management committee may be created. It is
required that:
1. He must show that the corporate property is in danger of being wasted and destroyed;
2. The business of the corporation is being diverted from the purpose for which it has been organized; and

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CORPORATION LAW REVIEWER AΦB

3. There is serious paralization of operations all to his detriment.

! In Rizal Commercial Banking Corporation vs. Intermediate Appellate Court, the Supreme Court laid down for the
guidance of the Bench and the Bar, the following rules of thumb:

" All claims against corporations, partnerships, or associations that are pending before any court, tribunal, or board, without
distinction as to whether or not a creditor is secured or unsecured, shall be suspended effective upon the appointment of a
management committee, rehabilitation receiver, board, or body in accordance with the provisions of Presidential Decree No. 902-A.

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


" Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally
suspended upon the appointment of a management committee, rehabilitation receiver, board, or body. In the event that the
assets of the corporation, partnership, or association are finally liquidated, however, secured and preferred credits under the
applicable provisions of the Civil Code will definitely have preference over unsecured ones.

" In other words, once a management committee, rehabilitation receiver, board or body is appointed pursuant to P.D. 902-A, all
actions for claims against a distressed corporation pending before any court, tribunal, board or body shall be suspended
accordingly.

" This suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a totally unsecured creditor.
P.D. 902-A does not state anything to this effect. What it merely provides is that all actions for claims against the corporation,
partnership or association shall be suspended. This should give the receiver a chance to rehabilitate the corporation if there should
still be a possibility for doing so. (This will be in consonance with Alemar’s, BF Homes, Araneta, and RCBC insofar as enforcing
liens by preferred creditors are concerned.)

" However, in the event that rehabilitation is no longer feasible and claims against the distressed corporation would eventually have to
be settled, the secured creditors shall enjoy preference over the unsecured creditors (still maintaining PCIB ruling), subject only to
the provisions of the Civil Code on Concurrence and Preferences of Credit (our ruling in State Investment House, Inc. vs. Court of
Appeals, 277 SCRA 209 [1997]). ALPHA PHI BETA
AΦB

" The majority ruling in our 1992 decision that preferred creditors of distressed corporations shall, in a way, stand on equal footing
with all other creditors, must be read and understood in the light of the foregoing rulings. All claims of both a secured or unsecured
creditor, without distinction on this score, are suspended once a management committee is appointed. Secured creditors, in the
meantime, shall not be allowed to assert such preference before the Securities and Exchange Commission. It may be stressed,
however, that this shall only take effect upon the appointment of a management committee, rehabilitation receiver, board, or body,
as opined in the dissent.

EXCLUSIVELY FOR

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Contributed by: Ivin Ronald D.M. Alzona (2009) Based on the course outline of Atty. Maria Zarah Villanueva-Castro
CORPORATION LAW REVIEWER AΦB

XV. FOREIGN CORPORATIONS

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


A. CONCEPT OF FOREIGN CORPORATION

Sec. 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign corporation is one 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. It shall have the right to transact business in the Philippines after it shall have obtained
a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate
government agency.

! CONCEPT. Section 123 provides that a foreign corporation is one formed, organized or existing under any law other than
those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state.
Thus, two requisites must be present:
1. The corporation must be formed, organized or existing under any laws other than those of the Philippines; and
2. The laws of the country where the corporation was organized allow Filipino citizen and corporations to do
business in its own country or state. (Comment: This reciprocity requirement should be interpreted to mean as a
requisite merely for purposes of obtaining a license to do business in the Philippines and/or enforcing its rights within
Philippine jurisdiction, and not as a requisite for one to be regarded as a foreign corporation. For as long as a
corporation is formed, organized or existing under any laws other than those of the Philippines, such is aptly regarded
as a foreign corporation. This view finds its support in Sec. 125 of the Corporation Code requiring applicants of license
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to transact business in the Philippines to attach in its application with the SEC a duly executed certificate under oath by
the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country
or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an
existing corporation in good standing.)

" INCORPORATION TEST AND RECIPROCITY RULE. Section 123 incorporates what is known as the Incorporation
Test under which a corporation is determined to be foreign based on the place of incorporation. However, there is a
restrictive provision imposed by Section 123 in so far as it requires reciprocity. If Philippines corporations are
not recognized in the country where the foreign corporation was organized, the latter will likewise not be recognized in
the Philippines. ALPHA PHI BETA

EXCLUSIVELY FOR
! The rule that requires reciprocity before a foreign corporation can be recognized is a reflection of the basic rule that a
foreign corporation is one which owes its existence to the laws of another State and generally, it has no existence within the
State in which it is foreign. A corporation has no legal status beyond the bounds of the sovereignty by which they are
created. Nevertheless, it is widely accepted that foreign corporation are, by reason of state comity, allowed to transact
business in other States and to sue in the courts of such fora. In the Philippines, foreign corporations are allowed such
privilege subject to certain restrictions arising from the State's sovereign right of regulation. ALPHA PHI BETA

! A foreign corporation has several options if it wants to be involved in business in the Philippines or to be having an office for
a limited purpose. A foreign corporation can use any of the following forms: (1) Subsidiary, (2) Branch Office, (3)
Representative Office, or (4) Regional Headquarters/Regional Operating Headquarters.

(1) A subsidiary is a corporation that will be organized in the Philippines through the SEC. A branch office of a foreign
company carries out the business activities of the head office and derives income from the host country.

(2) A representative or liaison office deals directly, with the clients of the parent company but does not derive income
from the host country and is fully subsidized by its head office. It undertakes activities such as but not limited to
information dissemination and promotion of the company’s products as well as quality control of products.

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CORPORATION LAW REVIEWER AΦB

(3) A regional or area headquarters of multinational companies may be organized under Presidential Decree No. 218. A
multinational company is a foreign firm or entity engaged in international trade with affiliates, subsidiaries or branches
in the Asia-Pacific Region. Asia-Pacific Region means all countries bordering the Pacific Ocean on the side of Asia,
including Australia and New Zealand.

Sec. 129. Law applicable. - Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules
and regulations applicable to domestic corporations of the same class, except such only as provide for the creation, formation,
organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders,

ALPHA PHI BETA FRATERNITY – SAN BEDA LAW


members, or officers of corporations to each other or to the corporation.

Sec. 130. Amendments to articles of incorporation or by-laws of foreign corporations. - Whenever the articles of
incorporation or by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign
corporation shall, within sixty (60) days after the amendment becomes effective, file with the Securities and Exchange
Commission, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles
of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made,
duly certified by the authorized official or officials of the country or state of incorporation. The filing thereof shall not of itself
enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines.

Sec. 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. - One or more foreign
corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or
corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on
merger or consolidation as provided in this Code are followed.

Whenever a foreign corporation authorized to transact business in t