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Corporation Law 1

Christine Grace Embay-Zamora

INTRODUCTION

Different forms of business organization


1. Individual proprietorship – the individual, as a rule, operates a small business, usually with the limited capital, and is responsible alone for
its success or failure.
2. Partnership
3. Joint stock company – the joint stock company can be best considered as a combination of the partnership in that it is formed under a
contract and requires no special sanction from the State. The members are liable, jointly and severally, for all the company’s debts. It
resembles the corporation in control and management. The members do not control the company but choose a BOD who were the
authorized agents and managers.
4. Cooperative association
5. Business trust – it is sometimes called the “Massachussets trusts.” The main feature of this form of organization is that it is formed by a
contract and that the title to property and the conduct of business is in the hands of trustees who act for a large group of beneficiaries.
6. Corporation – it is now the dominant form of organization in modern business. The corporation is a creature of law and all its rights,
powers and duties are derived from legislation.
7. Other business forms –
a. Syndicate – it is a temporary alliance of individuals, firms, or corporations, usually for the purpose of financing an enterprise.
After the purpose of organization has been accomplished, the syndicate is dissolved.
b. Combinations – their primary purpose is to secure the savings and other advantages which result from consolidation and large-
scale operation.
c. Holding Company – the practice followed in some cases is to organize a new corporation which buys the individual plants it
wishes to bring into combination and which thus becomes a single owner of all the establishments. In the largest combinations,
however, the stock of the constituent companies is all brought by a unifying company called a holding company.

Theories as to origin of corporations


1. Ethnological theory –
There is authority for the statement that the concept of collective entity antedates that of the individual; that “group of men united by
the reality or fiction of blood relationship” into families, clans or tribes were recognized units of primitive society even before the
individual was so regarded.
Under this theory, the corporate idea, therefore, is the product of no one people and no one country, but, in the contrary,
developed more or less independently, in varying forms among the several ethnological units.

2. Imitative theory –
This theory traces the genesis of the modern corporation to the Greece of Solon, as authority for the assertion that laws fathered by the
great Hellenic jurist permitted the formation of private corporations for certain purposes, upon condition that they do not operate in
violation of the laws of the state.

Rise and development of corporations


1. In Roman times
The corporations, like most other forms of business organization, take their rise in Roman times. Probably the earliest form is that of the
Collegium or college of priests. Besides the Collegium, other Roman organizations such as the municipalities, official societies engaged in
state administration, military groups, and trade and societies took on corporate form.

2. In Medieval times
In medieval times, something akin to the Roman Collegia appeared in the municipal and guilt organizations which were often closely
related. Like the non-stock corporations of the present day, they embodied the idea of the group working as a whole thru chosen
representatives, and so exhibit one of the chief characteristics of a corporation from the legal standpoint.

3. In England
At the later period, the regulated company, such as The Plymouth Company, the Hudson Bay Company, and the East India Company,
became a dominant factor in British trade, particularly in foreign trade. Chartered by the government and granted special privileges by
their charters, these organizations were forerunners of modern corporations.

4. In the United States


In the American colonies before the Revolution, corporations were mostly educational, religious, or military. They had not been
th
introduced into business affairs. It was not until the beginning of the 19 century, with the growth of manufacturers brought about by
the Napoleonic wars and a consequent rise of an investing class, that the corporation really began to make strides.

5. In the Philippines
During the Spanish regime and prior to the enactment of the former Corporation Law (Act No. 1459), there existed in the Philippines
several forms of commercial companies, associations, and partnership –
a. Sociedad en comandita (limited partnership)
b. Sociedad regular colectiva (general partnership) – both were governed by Article 116-150 and 160-174 of the Code of
Commerce.
c. Sociedad anonima – Article 151-159 of the Code of Commerce; remarkably compare to the present day concept of corporate
entity.
d. Sociedad de cuentas en participacion (joint account participation) – Article 239-243 of the Code of Commerce

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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Christine Grace Embay-Zamora

With the passage of the former Corporation Law on March 1, 1906, and the later enactment of the new Civil Code, all these societies and
associations were abolished with the sole exception of the sociedad de cuentas en participacion.
Before the passage of the present Corporation Code of the Philippines on May 1, 1980, numerous statues were enacted
affecting corporations.

6. Corporations in modern business


The merits of the corporation so far overshadow its drawbacks that today it is the representative type of modern business organization.

TITLE I
GENERAL PROVISIONS
Definitions and Classifications

Section 1. Title of the Code. - This Code shall be known as "The Corporation Code of the Philippines".

Historical background of our Corporation


April 1, 1906 – enactment of Act No. 1459, popularly known as the Corporation Law (a general law authorizing the creation of corporations in the
Philippine Islands.)

May 1, 1980 – BP Blg. 68, the present Corporation Code of the Philippines, took effect. It embodied the law governing private corporations in the
Philippines. The new Code supplants Act No. 1459, as amended.

Scope of the Code


The Corporation Code of the Philippines law is an act which:
1. Provides for the incorporation, organization, and regulation of private corporation, both stock and non-stock, including educational and
religious corporations.
2. Defines their powers and provides for their dissolution.
3. Fixes the duties and liabilities of stockholders and members.
4. Declares the rights and liabilities of stockholders and members.
5. Prescribes the conditions under which corporations including foreign corporations may transact business.
6. Provides penalties for violations of the Code.
7. Repeals all laws and parts of laws in conflict and inconsistent with the Code.

Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence.

Statutory definition of corporation – section 2


The above statutory definition refers only to private corporations or to corporations organized under the Corporation Code.

What are the attributes of a corporation?


1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession.
4. It has only the powers, attributes and properties expressly authorized by law or incident to its existence.

Corporation as an artificial personality


A corporation is not in fact and in reality a person but the law treats it as through it were a person by process of fiction. The stockholders or
members who, as natural persons, are merged in the corporate body, compose the corporation but they are not the corporation.

What are the consequences of this legal concept of a corporation?


1. Liability for acts or contracts
GENERAL RULE: Obligations incurred by a corporation, acting through its authorized agents, are its sole liabilities.
- A suit against certain stockholders of a corporation cannot ipso facto be a suit against the unpleaded corporation itself without
violating the fundamental principle that a corporation has a legal personality distinct and separate from its stockholders.
- A corporate officer is not personally and solidarily liable with the corporation for the money claims of discharged or retrenched
employees unless he acted with evident malice or bad faith in terminating their employment.
- The stockholder’s debt or credit is not the debt or credit of the corporation, nor is the debt or credit of the latter that of the former.
- Corporate officers cannot be held personally liable for the consequences of their acts, for as long as they are for and on behalf of the
corporation, within the scope of their authority and in good faith.
- The property of the corporation is not the property of the stockholders or members and may not be sold by the stockholders or
members without express authorization of its board of directors or trustees.
- The separate personality of a corporation is a shield against personal liability of its officers.

2. Liability when exceptional circumstances warrant


- Personal or solidary liability may be incurred by corporate agents acting in behalf of the corporation only when exceptional
circumstances warrant, like –
o When the director/trustee or officer acted maliciously or in bad faith, or with gross negligence.
o He agreed to hold himself personally and solidarily liable with the corporation, or made, by specific provision of law,
personally liable for corporate action.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 3
Christine Grace Embay-Zamora

o It is proven that the officer ahs used the fiction of separate corporate personality to defraud a third party or for wrongful
ends.

3. Right to bring actions


- It may incur obligations and bring civil and criminal actions in its own name in the same manner as a natural person, although it may
not perform certain actions that can be done only by natural persons, such as the practice of law or medicine.
- The right to object to the seizure of papers and documents of the corporation belongs to the corporation as a separate entity and
not to its stockholders as such.
- A juridical person is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety, mental anguish, or moral shock. However, a corporation may have a good
reputation which, if debased or besmirched resulting in social humiliation, may be a ground for recovery of moral damages and
attorney’s fees.
- For purposes of venue, the place of business of the suing corporation is considered as its residence. The residence of the president is
not the residence of the corporation because a corporation has a personality separate and distinct from that of officers and
stockholders.

4. Right to acquire and possess property


- Property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not
that of the stockholders or members as such and vice versa.
- While a share of stock represents a proportionate interest in the property of the corporation, it does not vest the owner thereof
(even assuming that it/he is the controlling shareholder) with any legal right or title to any of the properties of the corporation
owned by the latter as a distinct juridical person. The ownership of that property is in the corporation and not in the holders of
shares of stocks.
- The interest of shareholders in corporate property is purely inchoate and, therefore, does not entitled them to intervene in a
litigation involving corporate property.
- A tax exemption granted to a corporation cannot be extended to include the dividends paid by such corporation to its stockholders.
- The agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself does not constitute a violation of
the constitutional provision limiting land ownership to Filipinos and Filipino corporations. If the foreign shareholders of a
landholding corporation exceeds 40%, it is not the foreign stockholders’ ownership which is adversely affected but the capacity of
the corporation to own the land, i.e., the corporation becomes disqualified to own land.

5. Acquisition by court of jurisdiction


- Where the appearance in court of the president of a corporation was in the capacity of counsel of another corporation and not as
representative or counsel of the first corporation, such appearance cannot be construed as a voluntary submission of said
corporation to the court’s jurisdiction. The personality of the president of a corporation is distinct from that of the corporation itself.

6. Changes in individual membership


- As an entity distinct from its members or stockholders, a corporation remains unchanged and unaffected in its identity by changes in
its individual membership.

Corporation as a person, resident, or citizen


1. As a person
- The term “person” prima facie includes both natural and artificial persons and, therefore, as a general rule, includes corporation but
in a figurative sense only.
- Some rights enjoyed by the corporation as a “person”:
o Section 1 Article 3, Constitution
No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied the
equal protection of the laws.
o Section 3 Article 3, Constitution
Right to be secured in their persons against unreasonable seizures and searches.
- The corporation is not a person within the protection of Section 17, Article III of the Constitution against self-incrimination. Thus,
while an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of
such privileges.

2. As a resident or nonresident
- Since a corporation is a person in law, it is also to be deemed a resident or a nonresident of a particular state or country within the
meaning of a statute, if it is within the purpose and intent of the statute, as in the case of statutes defining the jurisdiction of the
courts, or relating to venue, taxation, etc.
- For taxation purposes, a foreign corporation may be either a resident or nonresident, the former referring to a “foreign corporation
engaged in trade or business within the Philippines,” and the latter, to a “foreign corporation not engaged in trade or business in the
Philippines and not having any office of place of business therein.”

3. As a citizen
- “Citizenship” – the status of a citizen with its rights and privileges and corresponding duties and obligations.
- “Citizen” – implies membership in a political body and, therefore, does not ordinarily include a corporation, unless the general
purpose and import of the statute in which the term is found seem to require it.
- Most often when the term “citizenship” is used in connection with corporations, it is not used in the sense under Political Law, but
more in the sense of indicating the country under whose laws the corporations were organized. In this respect, “citizen,” as used in

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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connection with corporations, is synonymous with domicile or residence. However, when the term “citizenship” is used
synonymously with residence or domicile, said use is for jurisdictional purposes only, for a corporation is subject to the jurisdiction
of the country under whose laws it was organized.

Corporation as a collection of individuals


Although the doctrine that a corporation is an artificial entity and a person in law, distinct from the members who compose it, will always be
recognized and given effect, both at law and in equity, in cases which are within its reason and when there is no controlling reason against it, it is
clear that a corporation is in fact a collection of individuals.

The idea of the corporation as a legal entity or person apart from its members is a mere fiction of the law introduced for convenience in conducting
the business in this privileged way. Courts, as a general rule, disregard this theory of separate entity under certain circumstances, as when the
privilege is misused by the corporation.

Doctrine of piercing the veil of corporate entity (or disregarding the fiction of corporate entity)
♠ When legal fiction to be disregarded?
Being a mere creature of law, a corporation may be allowed to exist solely for lawful purposes but where the fiction of corporate entity is
being used as a cloak or cover for fraud or illegality, or “to defeat public convenience, justify wrong, protect fraud, or defend crime” or for
ends subversive of the policy and purpose behind its creation, especially where the corporation is a closed family corporation, on
equitable considerations, this fiction will be disregarded and the individual composing it or two corporations will be treated as identity.

♠ What is the rationale of this doctrine?


The rationale 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. The doctrine 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.

♠ For the corporate legal entity to be disregarded, the wrongdoing must be clearly and convincingly established; it cannot be presumed.

♠ Who has the burden of proof?


The burden of proving otherwise is on the party seeking to have the court pierce the veil.

♠ What is the effect?


o In any of the cases where the separate corporate identity is disregarded, the corporation will be treated merely as an
association of persons and the stockholders or members will be considered as the corporation, that is, liability will attach
personally or directly to the officers and stockholders or, where there are two corporations, they will be merged into one, the
one being merely regarded as the instrumentality, agency, conduit or adjunct of the other.
o The corporate character, however, is not necessarily abrogated. The corporation continues for other legitimate objectives.
o Even if fraud is established, this fact alone is not sufficient to justify the piercing of the corporate fiction where it is not sought
to hold the officers and stockholders personally liable for corporate debt. Thus, were the petitioners are merely seeking the
declaration of the nullity of a foreclosure sale, piercing the corporate veil is not the proper remedy, for such relief may be
obtained without having to disregard the legal corporate entity, and this is true even if grounds exist to pierce it.

♠ When does this doctrine apply?


The doctrine applies only in three (3) basic areas, namely:
i. Defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation.
ii. Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime.
iii. Alter ego cases.

NOTE: In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer
cannot be made personally liable for corporate liabilities.

♠ What are the instances where this doctrine is applied?


o Xxxx

♠ When is the “instrumentality” or “alter ego” rule applicable?


o Our SC has laid the test in determining the applicability of the doctrine of piercing the corporate veil or corporate fiction if
based on the “instrumentality” or “alter ego” rule. The absence of any of the 3 elements below prevents “piercing the
corporate veil”:
i. Control, not mere majority or compete stock control, but complete dominion, not only to finances but of policy and
business 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.
ii. Such control must have been used by the defendant to commit fraud or wrong, violation of a statutory or other
positive duty, or dishonest and unjust act in contravention of plaintiff’s legal rights.
 The fraud or wrongful or dishonest and unjust act must be clearly and convincingly established.
iii. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

Corporation as a creation of law or by operation of law


It is well established that no corporation can exist without the consent or grant of the sovereign, and that the power to create corporations is one
of the attributes of sovereignty.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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Special authority or grant by the State required –


A corporation is created by law or by operation of law. This means that corporations cannot come into existence by mere agreement of the parties
as in the case of business partnership. They require special authority or grant from the State.

An exception to the rule that legislative grant or authority is necessary for the creation of a corporation obtains with respect to corporations by
prescription.

Compliance with conditions prescribed by law required –


Corporations can only come into existence in the manner prescribed by law. General laws authorizing the formation of corporations are, in effect,
general offers to any persons who may bring themselves within their provisions; and if conditions precedents are prescribed in the statute, or
certain acts are required to be done, they are terms of the offer and must be complied with substantially before legal corporate existence can be
acquired.

Right of succession of a corporation


A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of the individual stockholders
or members and regardless of the transfer of their interest or shares of stock. But the corporation is by no means immortal. Under the Corporation
Code, the life of the corporation is limited to the period of time stated in the articles of incorporation not exceeding 50 years from the date of
incorporation unless sooner dissolved or unless said period is extended.

What are the powers, attributes and properties of a corporation?


Being purely a creation of law, it may exercise only such powers as are granted by law of its creation. An express grant is not necessary. All powers
which may be implied from those expressly provided by law and those which are incidental or essential to the corporation’s existence may also be
exercised.

The test to be applied is whether the act of the corporation is in direct and immediate furtherance of its business, fairly incidental to the express
powers and reasonable necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.

The power to create or establish branch offices is generally provided for in the articles of incorporation or in the by-laws. In the absence, however,
of such a provision, every corporation formed under the law has the implied or incidental power to establish branch offices in the Philippines or
elsewhere as the needs and exigencies of the business of the corporation may require.

Distinction between a partnership and a corporation


PARTNERSHIP CORPORATION
Manner of creation Created by mere agreement of the parties. Created by law or by operation of law.
Number of incorporators Requires only 2 persons. Requires at least 5 incorporators (except a
corporation sole)
Commencement of juridical personality Commences to acquire juridical personality Begins to have corporate existence and juridical
from the moment of the execution of the personality only from the date of the issuance
contract of partnership. of the certificate of incorporation by the SEC
under its official seal.
Powers May exercise any power authorized by the Can exercise only the powers expressly granted
partners provided it is not contrary to law, by law or implied from those granted or
morals, good customs, public order, or public incident to its existence.
policy.
Management When the management is not agreed upon, The power to do business is vested in the BOD
every partner is an agent of the partnership. or BOT.
Effect of mismanagement A partner can sue a co-partners who The suit against a member of the BOD or BOT
mismanages. who mismanages must be in the name of the
corporation.
Right of succession No right of succession. Has right of succession.
Extent of liability to third persons The partners (except limited partners) are liable The stockholders are liable only to the extent of
personally and subsidiarly (sometimes their investment as represented by the shares
solidarily) for partnership debts to third subscribed by them.
persons.
Transferability of interest A partner cannot transfer his interest in the In stock corporation, a stockholder has the right
partnership so as to make the transferee a to transfer his shares without the prior consent
partner without the consent of all the other of the other stockholders because a corporation
existing partners because the partnership is is not based on this principle.
based on the principle of delectus personarum.
Term of existence Any period stipulated by the partners. May not be formed for a term in excess of 50
years extendible to not more than 50 years in
any one instance.
Firm name A limited partnership is required by the law to It may adopt any firm name provided it is not
add the word “Ltd.” to its name. identical or deceptively similar to any registered
firm name or contrary to existing law.
Dissolution May be dissolved at any time by the will of any Can only be dissolved with the consent of the
or all of the partners. State.
Laws which govern Civil Code Corporation Code
Source: The Corporation Code of the Philippines 2010 edition by De Leon
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What are the similarities between a partnership and a corporation?


1. Has a juridical personality separate and distinct from that of the individual composing it.
2. Can act only through agents.
3. Composed of an aggregate of individuals.
4. Distributes its profits to those who contribute capital to the business.
5. Can be organized only where there is a law authorizing its organization.
- To organize a corporation or a partnership that could claim juridical personality of its own and transact business as such is not a
matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose.
6. A partnership, no matter how created or organized, is taxable as a corporation, subject to income tax.

Corporation as a partner
GENERAL RULE:
Corporations cannot ordinarily enter into partnership with other corporations or with individuals.
Reasons:
- A corporation can only act through is duly authorized officers and agents and is not bound by the acts of anyone else, while in a
partnership, each member binds the firm when acting within the scope of the partnership business. In entering into a partnership,
the identity of the corporation is lost or merged with that of another and the direction of its affairs is placed in other hand than
those provided by the law of its creation.
- Furthermore, such an arrangement would permit the corporate assets to be subjected to risks and liabilities not contemplated by
the stockholders at the time of making their investment.

EXCEPTIONS:
1. It can enter into a joint venture with another where the nature of that venture is in line with the business authorized by their charters.
- A joint venture need not be registered with the SEC provided it does not result in the formation of a new corporation or partnership,
and provided further that existing laws governing joint ventures and implementing rules and regulations are complied with.
2. Where the partnership agreement provides that the two partners will manage the partnership so that the management of the corporate
interest is not surrendered, the general rule will not apply.
3. While as a rule, only natural persons are considered legally capable of entering into a contract of partnership, there have been cases
where the SEC has allowed corporations to enter into partnerships with other corporations or with individuals, provided:
a. All the corporation partners must be managing partners and consequently, the articles of partnership must stipulate that all the
partners are and shall be solidarily liable for all the obligations of the partnership.
b. The statute or their respective charters or articles of incorporation must expressly allow the corporations to enter into
partnership agreement and the nature of the business venture to be undertaken by the partnership is in line with the business
authorized by law or the articles of incorporation of the constituent corporations.
c. Where one of the partners is a foreign corporation, it must obtain a license to transact business in the country in accordance
with the Corporation Code and the Foreign Investments Act.

AS A LIMITED PARTNER
A foreign corporation can be a limited partner in a Philippine limited partnership provided there is no existing Philippine law expressly prohibiting a
foreign corporation from becoming a limited partner in a partnership. By being a limited partner, the corporation would not be bound beyond the
amount of its investment by the acts of the other partners who are not its duly appointed and authorized agents and officers.

The foreign corporation still has to obtain a license to do business in the Philippines and must be authorized under its articles of incorporation to
enter into a partnership agreement. It is believed that a license is not required where the participation of the foreign corporation as a limited
partner in a partnership is merely for investment purposes and it shall not take part in the management and control of the partnership as it shall
not be deemed “doing business” in the Philippines.

What are the advantages of a business corporation?


1. The corporation has a legal capacity to act and contract as a distinct unit in its own name.
2. It has continuity of existence because of its non-dependence on the lives of those who compose it.
3. Its credit is strengthened by such continuity of existence.
4. Its management is centralized in the BOD.
5. Its creation, organization, management, and dissolution are standardized as they are governed under one general incorporation law.
6. It makes feasible gigantic financial undertakings since it enables many individuals to invest their separate funds in the enterprise in order
to furnish large amounts of capital upon which big business depends.
7. The shareholders have limited liability.
8. They are not general agents of the business.
9. The shares of stocks can be transferred without the consent of the other stockholders.

What are the disadvantages of a business corporation?


1. The corporation is relatively complicated in formation and management.
2. It entails relatively high cost of formation and operations.
3. Its credit is weakened by the limited liability of the stockholders.
4. There is ordinarily lack of personal element in view of the transferability of shares.
5. There is a greater degree of governmental control and supervision than in any other forms of business organization.
6. In large corporations, management and control are separated from ownership.
7. The stockholders have little voice in the conduct of the business.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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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 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.

What are the classifications of corporation under the Code?


The Corporation Code classifies private corporation into:
1. Stock Corporation
♠ It is the ordinary business corporation created and operated for the purpose of making profit which may be distributed in the form
of dividends to stockholders on the basis of their invested capital.
♠ Two elements must be present:
a. Have capital stock divided into shares.
b. Authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares
held.
2. Non-stock Corporation
♠ Unlike stock corporations, non-stock corporations do not issue stock and distribute dividends to their members; they are created not
for profit but for the public good and welfare.

What are the other classifications of corporations?


1. As to number of persons who compose them
a. Corporation aggregate – a corporation consisting of more than one member or corporator.
b. Corporation sole – it is a religious corporation which consists of one member or corporator only and his successor. (Section 110)
Example: chief archbishop, bishop, priest, rabbi
NOTE:
A corporation aggregate does not become a corporation sole by the mere fact that its shares of stock become vested in one person
because the shares may again be transferred or sold by the holder to others.

2. As to whether they are for religious purposes or not


a. Ecclesiastical corporation – organized for religious purposes.
b. Lay corporation – organized for a purpose other than for religion; it may either by eleemosynary or civil.

3. As to whether they are for charitable purposes or not


a. Eleemosynary corporation – one established for charitable purposes or those supported by charity.
b. Civil corporation – one established for business or profit.

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


a. Domestic corporation – incorporated under Philippine laws.
b. Foreign corporation – formed, organized or existing under any laws other than those of the Philippines.

5. As to their legal right to corporate existence


a. De jure corporation – corporation existing in fact and in law.
b. De facto corporation – corporation existing in fact but not in law.

6. As to whether they are open to the public or not


a. Close corporation – one which is limited to selected persons or members of a family.
b. Open corporation – one which is open to any person who may wish to become a stockholder or member thereto.

7. As to their relation to another corporation


a. Parent or holding corporation – 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 other corporation.
b. Subsidiary corporation – it is one which another corporation owns at least a majority of the shares and thus has control.
c. Affiliated corporation – one related to another by owning or being owned by common management or by a long term lease of
its properties or other control device. An affiliation exists between a holding or parent company and its subsidiary, or between
two corporations owned or controlled by a third.

8. As to whether they are for public (government) or private purpose


a. Public corporations – those formed or organized for the government of a portion of the State for the general good and welfare.
b. Private corporations – those formed for some private purpose, benefit or end; it may either be:
i. Government-owned or controlled corporation – those created or organized by the government or of which the
government is the majority stockholder.
 These corporations are private and not public corporations because they are not established for the
government of a portion of the State. Where the government engaged in a particular business thru the
instrumentality of a corporation, it divests itself pro hac vice of its sovereign character, so as to subject itself
to the rules governing private corporations.
 Ex. GSIS, NPC

ii. Quasi-public corporation – they are private corporations that perform public service.
 These corporations are also known as “public utilities” or “public service corporations.”

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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 They are corporations private in ownership but having an appropriate franchise from the State to provide
for a necessity or convenience of the general public, incapable of private competitive business and
dependent for its exercise upon eminent domain or some agency of the government.
 Ex. Corporations organized as electric, water, telephone and transportation companies.

TEST: Purpose of the corporation


If the corporation is created by the State as its own agency or instrumentality for political or public purpose connected with the
administration of government, then it is a public corporation. If not, it is a private corporation notwithstanding that it is created
to promote public good, interest, or convenience although the whole, or substantially the whole interest in the corporation,
belongs to the State.

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


a. True corporation – one which exists by statutory authority.
b. Quasi-corporation – one which exists without formal legislative grant. It is an exception to the general rule that a corporation
can exist only by authority of law. It may be:
i. Corporation by prescription – one which has exercised corporate powers for an indefinite period without interference
on the part of the sovereign power and which fiction of law is given the status of a corporation.
 The Roman Catholic Church has been recognized as a corporation by prescription, having acted as such and
assumed corporate powers for a long period of time.
ii. Corporation by estoppel – one which in reality is not a corporation, either de jure or de facto, because it is so
defectively formed, but is considered a corporation in relation to those only who, by reason of their acts or
admissions, are precluded from asserting that it is not a corporation.

Distinguish public corporations and private corporations


PUBLIC CORPORATIONS PRIVATE CORPORATIONS
Being mere instrumentalities of the State, are subject to The charter of a private corporation is a contract between the
governmental visitation and control. State and the corporation or incorporators, which, under the
provision of the Constitution prohibiting laws impairing the
obligation of contracts, renders such corporations not subject to
visitation, control, or change by the State, except in the exercise
of the police power.
May be created without the consent of the locality to be affected. The consent of the incorporators is necessary to the creation.

Dual status of public corporations


A public or municipal corporation possesses 2 kinds of power:
1. Governmental or public functions (ex. Maintenance of peace and order)
2. Proprietary or private or corporate function (ex. Operation of a public market)

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.

Incorporation of a private corporation by a special act


This section authorizes the creation of a private corporations by special laws or charters. The enactment of special act creating a private
corporation is subject to the constitutional limitation that such corporation shall be owned or controlled by the government.

A special law creating a private corporation which is neither owned nor controlled by the government is void for being violative of the
constitutional provisions.

Governing law
A corporation created by a special law or charter is primarily governed by such law and suppletorily, by the provision of the Code “insofar as they
are applicable,” either because they are not inconsistent with, or are expressly made applicable by, the special laws.

Under the Constitution, officers and employees of government-owned or controlled corporations with original charters, i.e., created by special law,
are placed under the Civil Service, and thus, subject to Civil Service Law. Those incorporated under the general incorporation law, the Corporation
Code, are governed by the Labor Code.

Government as a member of a corporation


Jurisdiction of SEC –
× SEC has no jurisdiction over corporations with original charter or created by special law.
× SEC has no power to interpret the law creating it.
 SEC can rule on the status of a corporation as to whether it is a government-owned or controlled corporation belonging to this type.

Rights, powers, or privileges –


As a member of a corporation, the government never exercises its sovereignty; it acts merely as a corporator. And the mere fact that the
government happens to be a majority stockholder of a corporation does not make it a public corporation.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 9
Christine Grace Embay-Zamora

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.

What are the components of a corporation?


1. Corporators
♠ Those who compose the corporation, whether stockholders or members. The term includes incorporators and stockholders or
members who become as such after incorporation of the corporation.
2. Incorporators
♠ Those corporators mentioned in the articles of incorporation as originally forming and composing the corporation and who
executed and signed the articles of incorporation and acknowledged the same before a notary public.
♠ Only natural persons can be incorporators.
♠ All incorporators in a stock corporation must now own or at least be a subscriber to at least 1 share of capital stock of such
corporation.
♠ The principal function of the incorporator is to incorporate the corporation and to enable it to become a body politic and
corporate under the law.
♠ While the status of the corporator is temporary because one may cease to be a stockholder or member, an incorporator will
forever retain his status as such, notwithstanding that he has ceased to be a corporator. The articles of incorporation cannot be
amended by deleting his name of substituting it with that of another who is not an incorporator.
3. Stockholders
♠ The owners of shares of stock in a stock corporation.
♠ Stockholders may be natural or juridical persons but only natural persons can be incorporators.
4. Members
♠ The corporators of a non-stock corporation.

Three other classes


5. Promoters
♠ Persons who bring about or cause to bring about the formation and organization of a corporation by bringing together the
incorporators or the persons interested in the enterprise, procuring subscriptions or capital for the corporation and setting in
motion the machinery which leads to the incorporation of the corporation itself.
6. Subscriber
♠ Person who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed.
♠ All incorporators are subscribers but a subscriber need not be an incorporator.
7. Underwriter
♠ A person, usually an investment banker, who:
a. Has agreed, alone or with others, to buy at stated terms an entire issue of securities or a substantial part thereof; or
b. Has guaranteed the sale of an issue by agreement to buy from the issuing party any unsold portion at a stated price; or
c. Has agreed to sue his “best efforts” to market all or part of an issue; or
d. Has offered for sale stock he has purchased from a controlling stockholder.

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 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 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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 10
Christine Grace Embay-Zamora

nevertheless be entitled to vote on the following matters:


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.

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.

Power to classify shares


Unless restricted by law or the provision of its articles of incorporation, a corporation has unrestricted freedom to issue such classes or series of
shares as the prospects and needs of its business may require to attract investors.

When classification of shares may be made


1. By the incorporators
♠ The classes and numbers of shares which a corporation shall issue are first determined by the incorporators as stated in the
articles of incorporation fled with the SEC.
2. By the BOD and the stockholders
♠ After the corporation comes into existence, they may be altered by the BOD and the stockholders by amending the articles of
incorporation pursuant to Section 16.

Classification to comply with constitutional or legal requirements


A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements, such as those
which prescribe the minimum percentage of capital stock ownership of Filipino citizens in corporations engaged in any business or activity reserved
for Filipino citizens, or set the minimum limits for stockholdings in corporations declared by law to be vested with public interest.

Corporations classify shares for reason of expediency, primarily for monitoring purposes. The par value or number of one class of shares may be
more than the others.

Since the Constitution does not distinguish between common and preferred shares, the latter kind of shares should be included in the computation
of the foreign ownership limit for domestic corporations. This gives more room for additional foreign investments.

Share presumed to be equal in all respect


DOCTRINE OF EQUALITY OF SHARES
“Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be in all respect equal to every
other share.” (Section 6 par. 5)
 It means that in the absence of any provision in the articles of incorporations and in the certificate of stock to the contrary, all stocks,
regardless of their class nomenclature, enjoy the same rights and privileges and subject to the same liabilities.

Authority of the BOD to classify others –


The BOD has no authority to classify shares of stock where the article of incorporations are silent on the matter. Hence, a corporation cannot,
without express authority in the articles of incorporation, and without amendment thereof, issue preferred shares with superior rights and
privileges than other shares.

Consent of stockholders to change of terms and preferences of shares –


The articles of incorporation or the charter of a corporation being considered as a contract between the corporations and stockholders, the
corporation is under obligation to observe the provisions thereof and it cannot without the consent of the stockholders, change the terms and
preferences of classes of shares of stock provided therein.

Right to vote of all classes of shares –


If one class of shares has the right to vote, all other classes are presumed to have the same voting power. Section 6 par 5 is construed to mean that
unless denied in the articles of incorporation, all shares regardless of class, enjoy all the rights of a stockholder.

Authority of BOD to fix terms and conditions of preferred shares –


The term and conditions of preferred shares of stock may be fixed by the BOD only when authorized in the articles of incorporation. In such case,
the preference enjoyed by the preferred stock will not appear in the articles of incorporation.

Explain capital stock and capital


CAPITAL STOCK
It is the amount fixed in the articles of incorporation, to be subscribed and paid in or agreed to be paid in by the stockholders of a corporation, in
money, property, services, or other means at the organization of the corporations or afterwards and upon which it is to conduct its business, such
contribution being made either directly through stock subscription or indirectly through the declaration of stock dividends.

It limits the maximum amount or number of each class of shares that may be issued by the corporation without formal amendment of the articles
of incorporation.
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 11
Christine Grace Embay-Zamora

AUTHORIZED CAPITAL STOCK


It refers to the amount of capital stock as specified in the articles of incorporation. Additional shares may not be issued unless the articles
of incorporations are amended by vote of the stockholders. But unissued authorized shares may be issued at a later date without
amendment of the articles of incorporation or approval of the stockholders.

SUBSCRIBED CAPITAL STOCK


It is the amount of the capital stock subscribed, whether fully paid or not. It connotes an original subscription contract for the acquisition
by a subscriber of unissued shares in a corporation and would, therefore, preclude the acquisition of shares by reason of subsequent
transfer from a stockholder or resale of treasury shares.

OUTSTANDING CAPITAL STOCK


The Code defines the terms as “the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as
long as there is a binding subscription agreement), except treasury shares.” It is thus broader than “subscribed capital stock.”

PAID-UP CAPITAL STOCK


It is that portion of the subscribed or outstanding capital stock that is actually paid.

UNISSUED CAPITAL STOCK


That portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends.

LEGAL CAPITAL
It is the amount equal to the aggregate par value and/or issued value of the outstanding capital stock. When par value shares are issued
above par, the premium or excess is not to be considered as part of the legal capital. In the case of no par value shares, the entire
consideration received forms part of legal capital and shall not be available for distribution as dividends.

CAPITAL
It is used broadly to indicate the entire property or assets of the corporation. It includes the amount invested by the stockholders plus the
undistributed earnings less losses and expenses. In the strict sense, the term refers to that portion of the net assets paid by the stockholders as
consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation.

Distinguish Capital Stock and Capital


Capital is the actual corporate property. It is, therefore, a concrete thing.
Capital stock is an amount. It is, therefore, something abstract.

Capital fluctuates or varies from day to day according as there are profits or losses or appreciation or depreciation of corporate assets.
Capital stock is an amount fixed in the articles of incorporation and is unaffected by profits and losses. Thus, capital may be greater or lesser than
the amount of the capital stock

Capital belongs to the corporation.


Capital stock when issued belongs to the stockholders.

Capital may be either real or personal property.


Capital stock is always personal.

Distinguish Capital Stock and Legal Capital


While capital stock limits the maximum amount or number of shares that may be issued without formal amendment of the articles of
incorporation, legal capital sets the minimum amount of the corporate assets which for the protection of corporate creditors, may not be lawfully
distributed to stockholders.

Define stock or share of stock


Stock or share of stock is one of the units into which the capital stock is divided.
It represents the interest or right which the owner has –
1. In the management of the corporation in which he takes part through his right to vote.
2. In a portion of the corporate earnings, if and when segregated in the form of dividends.
3. Upon its dissolution and winding up, in the property and assets of the corporation remaining after the payment of corporate debt and
liabilities to creditors.

Distinguish capital stock and share of stock


Share of stock refer to the stock in the hands of the stockholder and, therefore, belongs to them.
Capital stock signify the whole body of shares of stock in the corporation.

Nature of share of stock


♠ Each share merely represents a distinct undivided share or interest in the common property of the corporation.
♠ Shares of stock constitute property distinct from the capital or tangible property of the corporation and belong to the different owners.
Incorporeal in nature, the share are personal property of the stockholder (except treasury stock which belongs to the corporation).
♠ They are in the nature of choses in action but are not such in a strict sense. They do not constitute an indebtedness of the corporation to
the shareholder and are, therefore, not credits as to make the stockholder a creditor of the corporation. Hence, no action can be
maintained against the corporation for the return of the contributions of the shareholders as long as the corporation need them and is
not under dissolution.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 12
Christine Grace Embay-Zamora

♠ A share of stock only typifies a proportionate or aliquot part of the corporation’s property, or the right to share in its proceeds to that
extent when distributed according to law. It does not represent property of a corporation. The corporation as a juridical person, distinct
from the members composing it, has property of its own which consists chiefly of real estate.

Define certificate of stock


It is a written acknowledgement by the corporation of the interest, right, and participation of a person in the management, profits, and assets of a
corporation. It is a formal written evidence of the holder’s ownership of one or more share and is a convenient instrument for the transfer of title.

Distinguish share of stock and certificate of stock


Share of stock is incorporeal or intangible property.
Certificate of stock is a tangible property.

Share of stock represents the right or interest of a person in a corporation.


Certificate of stock is the written evidence of that right or interest.

Share of stock may be issued even if the subscription is not fully paid.
Certificate of stock, generally, may not be issued unless the subscription is fully paid.

Situs of shares of stock for certain purposes


♠ For purposes of execution, attachment, and garnishment – the domicile or residence of the corporation which is the place where the
principal office of the corporation is located.
♠ For purposes of registration of chattel mortgage on shares of stock – the province or city in which the corporation has its principal office
or place of business.
♠ For purposes of property taxation – generally it is the domicile or residence of the owner.

What are the classes of shares?


1. Par value share
Par value share is one with a specific money value fixed in the articles of incorporation and appearing in the certificate of stock.
♠ The primary purpose of par value is to fix the minimum subscription or issue price of the shares, thus assuring creditors that the
corporation would receive a minimum amount for its stock.
♠ Watered stock – shares issued less than par value.
♠ The par value of a stock remains the same regardless of the market value or book value of the stock, except when there is a
stock split.

2. No par value share


It is one without any stated value appearing on the face of the certificate of stock.
♠ The capital stock of a corporation issuing only no par shares is not set forth by a stated amount of money, but instead is
expressed to be divided into a stated number of shares, such as 1,000 shares.

3. Voting share
Voting share is share with right to vote.
♠ It is generally customary to give the right to vote to the common stock and to withhold it form the preferred.
♠ Only shares classified and issued as “preferred” or “redeemable” may be deprived of voting rights.
♠ Under the Code, whenever a vote is necessary to approve a particular corporate act, such vote refers only to stocks with voting
rights except in certain cases when even non-voting share may also vote.
♠ The rules is NOT “one stockholder, one vote” BUT “one share, one vote” because representation in a corporation is
commensurate to extent of ownership.

4. Non-voting stock
Non-voting share is share without right to vote.
♠ If stock is originally issued as voting stock, it may not thereafter be deprived of the right to vote without the consent of the
holder.
♠ Note that the enumeration in Section 6 does not include the election of directors or trustees (see section 24) as one of the
matter on which non-voting shares may vote.
♠ In non-stock corporations, Section 89 governs the right of the members to vote on corporate matters.
♠ The issuance of common stock with a feature that voting rights thereof shall be exercised by a trustee violates the rule that
common shares cannot be deprived of voting rights.

5. Common stock
It is one which entitles the holder thereof to a pro rata division of the profits, if there are any, and in its assets upon dissolution, without
any preference or advantage in that respect over other stockholders but equally with all other stockholders except preferred
stockholders.
♠ It is so-called because it is the basic class of stock which private corporations generally issue.
♠ It has complete voting rights. It cannot be deprived of the said right except as provided by law.
♠ When only a single class of stock is issued, then all shares are alike and all issues are common stock.
♠ Common stockholders are the residual owners of the corporation. They get only the assets left over in case of liquidation after
all other securities holders are paid.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 13
Christine Grace Embay-Zamora

6. Preferred stock
It is one with a stated par value which entitles the holder thereof to certain preferences over the holder of common stock.
♠ Under the Code, preferred shares of stock may be issued only with a state par value.
♠ The preference are designed to induce persons to subscribe for shares of a corporation. They may consists in the payment of
dividends or the distribution of the assets of a corporation in case of its dissolution ahead of the common stockholders, or such
other preferences as may be stated in the articles of incorporation which are not violative of the provision of the Code.
♠ Unless otherwise so provided, preferred stocks are presumed to be voting although they are rarely given voting privileges.
♠ Guaranteed stock – payment of dividend is guaranteed. It is entitled to arrears in dividends, while ordinary preferred stock is
not.

NOTE: Common and preferred shares are the 2 main classes or forms of stock.

Kinds of preferred shares:


a. Preferred share as to assets
o Share which the holder thereof preference in the distribution of the assets of the corporation in case of liquidation.
o It has been held that preferred stock, standing alone, creates a preference only to dividends and not to assets in case of
liquidation.
b. Preferred share as to dividends
o 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.
o The preference simply means that holders of common stock may receive dividends only after the satisfaction of the prior
claims on dividends of preferred stockholders. There is no guaranty that it will receive any dividends. The corporation is
not bound to pay dividends unless the BOD declare them.
o Kinds:
i. Cumulative preferred share
 Share which entitles the holders thereof not only to the payment of current dividends but also to dividends in
arrears.
ii. Non-cumulative
 Share which entitles the holder thereof to the payment of current dividends only in preference to commons
stockholders.
iii. Participating preferred share
 Share which gives the holder thereof not only the right to receive the stipulated dividends at the preferred rate
but also to participate with the holders of common shares in the remaining profits pro rata (or in the proportion
stated in the articles of incorporation) after the common shares have been paid the amount of the stipulated
dividend at the same preferred rate.
iv. Non-participating
 Share which entitles the holder thereof to receive the stipulated preferred dividends and no more. The balance,
if any, is given entirely to the common stocks.
v. Cumulative-participating
 Share which is a combination of the cumulative share and participating share.
 This means that the holder is entitled not only to dividends in arrears but also, after receiving his preferred share
of dividends, to participation with the holders of common stock in the remaining profits.
NOTE:
In the absence of an agreement, express or implied, dividends should be deemed noncumulative and non-participating in
accordance with the presumption established in Section 6 par.5 that shares are equal in all respects unless otherwise stated in the
articles of incorporation and in the certificate of stock.

Preferred stockholders not creditors of corporations –


o Preferred shares of stock issued by a corporation may be given such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions of the Code. Like common shares, they are part of the corporation’s
stock. Both common and preferred stockholders are no different from ordinary investors willing to share in the profits and
losses of the enterprise.
o Preferences granted to preferred stockholders do not given them a lien over the property of the corporation nor make
them creditors of the corporation, the rights of the former being always subordinate to the latter.
o Stock cannot be issued with a fixed interest instead of dividends inasmuch as this will make the contract of subscription
one of loan and make the corporation a debtor of the subscriber. Shareholders, both common and preferred, are 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.
o The fact that dividends are, in terms, guaranteed, does not make them creditors. They are entitled to dividends only when
there are profits out of which dividends may be declared. Such a guarantee may, however, have the possible effect of
making the dividends cumulative, that is, making the profits of one year make up for the deficiencies of the preceding year
or years.
o It is immaterial how or where the holder obtained his stock since the preference belongs to the stock and not to the
stockholder. Hence, the fact that preferred stockholders were formerly corporate creditors given them no greater right as
against creditors. By abandoning their position as creditors, they lose their rights as such.

Limitations regarding issuance of preferred shares:


1) Preferred shares deprived of voting rights in the articles of incorporation shall still be entitled to vote on matters enumerated in
Section 6 (par.6), although they shall not be entitled to vote on other matters (last par.)

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 14
Christine Grace Embay-Zamora

2) The preference of preferred shares must not be violative of the provisions of the Code.
3) Preferred shares may be issued only with a stated par value.
4) The BOD may fix the terms and conditions of preferred shares of stock or any series thereof only when so authorized by the
articles of incorporation and such terms and conditions shall be effective upon filing a certificate thereof with the SEC.
o It would not need the concurrence of 2/3 of the outstanding capital under Section 16 for the board to fix the terms and
conditions of the preferred shares where authorized by the articles of incorporation; otherwise, it would defeat the very
purpose for which the authority was granted, which is to allow the corporation to respond quickly to the fluctuating
conditions of the market.
o It would be contrary to Section 6 of the Code to give the BOD blanket authority to fix the terms and conditions of the
preferred shares without stating the privileges, preferences, restrictions, or rights of the preferred shares. Unless certain
features, guidelines and standards as to the issue of preferred shares are stated or spelled out in the articles of
incorporation, such authorization becomes a dangerous power which may adversely affect the rights of shares already
issued.
o Thus, as a matter of policy, the SEC does not allow a provision giving the BOD a blanket authority to fix the terms of
preferred shares unless such guidelines (e.g., setting a specific range of dividend rate with minimum and maximum limits)
are followed in the determination thereof.

7. Promotion share
Shares issued to promoters, or those in some way interested in the company, for incorporating the company, or for services rendered in
launching or promoting the welfare of the company, such as advancing the fees for incorporating, advertising, attorney’s fees, surveying,
etc.

8. Shares in escrow
It is a share subject to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be kept
by the depositary until the performance of a certain condition (usually the payment of the full subscription price) or the happening of a
certain event contained in the agreement.
♠ Before the fulfillment of the condition, the grantee or holder is not yet the owner of the shares and consequently, he is not
entitled to the rights belonging to a regular stockholder.

9. Convertible share
Shares which is convertible or changeable by the stockholder from one class to another (such as from preferred to common) at a certain
price and within a certain period.
♠ Although the preferred shares possess the quality of being convertible to common shares per articles of incorporation, such
conversion is not automatic. An amendment of the articles of incorporation is required to formalize the conversion which must
not result in watering of stock (see Section 65), or issuance of stocks in excess of the authorized capital stock of the corporation.

Convertibility of shares –
♠ In the absence of an express provision in the articles of incorporation as to their convertibility feature, preferred shares cannot
be converted into common.
♠ The conversion of no par value shares to par value is allowed by SEC provided there would be no change in the stockholders’
percentage interest in the total assets of the corporation.

10. Founder’s share (section 7)


11. Redeemable share (section 8)
12. Treasury share (section 9)

Nature of par value/book value/market value


♠ Par value – It represents the amount of money or property contributed by the shareholder to the capital stock of the corporation.
♠ Book value
The par value does not always reflect its book value or its actual or true value which may be determined by dividing the total
stockholder’s equity or the net value of the total corporate assets (capital and surplus, if any) by the number of shares issued or
outstanding.
♠ Market value
The price at which a willing seller would sell and a willing buyer would buy, assuming that both have a reasonable knowledge of the facts,
and neither being under abnormal pressure. Market value is affected by the law of supply and demand.

Presumption as to value of corporate stock


Corporate stock is “at par” when it is worth its face value, and is “above par” or at “premium” when it is worth more. According to some authority,
no presumption exists, in the absence of supporting evidence, that corporate stock is worth its par or face value. There is another authority,
however, that in the absence of contrary evidence, there is presumption that corporate stock is worth its par or face value.

Statutory restrictions regarding the issuance of no par value shares


Any or all of the shares or series of shares issued by a stock corporation may have a par value or have no par value as may be stated in the articles
of incorporation. The following are the limitations or restrictions imposed by law regarding the issuance of no par value shares:
1. Banks, trust companies, insurance companies, and building and loan associations shall not be permitted to issue no par value shares of
stock.
2. Preferred shares of stock of any corporation may be issued only with a stated par value.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 15
Christine Grace Embay-Zamora

3. Shares 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. This means that the holder shall not be liable beyond the issued price, notwithstanding
a change in their value.
4. Shares without par value may not be issued for a consideration less than the value of P5.00 per share.
5. The entire consideration received by the corporation for its no par value shares shall be treated as capital, and, therefore, shall not be
available for distribution as dividends.

Consideration for no par value shares


Since the value of the corporate stocks fluctuates and rarely represents the par value, corporations are authorized to issue no par value shares. A
no par value share has no “par value” but it has always an “issued value” based on the consideration for which it is issued. A no par value share
may not be issued for less than P6.000.

While the par value stocks must be issued at a uniform value or price, no par value stocks may be issued from time to time at different prices or
values although the holders of all these shares are entitled to share equally in the distribution of the profits and assets of the corporation.

What are the advantages of a par value share?


1. Par value shares are easily sold as the public is more attracted to buy this kind of share.
2. There is greater protection to creditors.
3. There is unlikelihood of sale of subsequently issued shares at a lower price.
4. There is unlikelihood of the distribution of dividends that are only ostensible profits.

What are the disadvantages of par value shares?


1. The subscribers are liable to corporate creditors for their unpaid subscription.
2. The stated face value of the share is not an accurate criterion of its true value.

What are the advantages of NO par value shares?


1. No par value shares are issued as fully paid and non-assessable.
2. Their price is flexible.
3. Low-priced stocks (most no par shares are low-priced) enjoy wider distribution.
4. They tell no untruth concerning the value of the stockholder’s contribution.
5. Stock dividends are more easily issued, thereby simplifying accounting procedure.

What are the disadvantages of no par value shares?


1. They legalize large issues of stock for property.
2. They conceal the money or property represented by the shares.
3. They promote issuance of watered stock.
4. There is lesser protection to creditors.

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.

What is founder’s share?


Shares issued to the organizers and promoters of a corporation in consideration of some supposed right or property.
NOTE: This is an exception to – “no share may be deprived of voting rights except those classified and issued as ‘preferred’ or ‘redeemable shares,’
unless otherwise provided in this Code.

Special rights and privileges –


Such shares may be given special rights and privileges not enjoyed by the owners of other stock including commons stocks, such as preference in
the payment of dividends and/or distribution of assets in case of liquidation, right to convert the shares into other shares, right to cumulative
dividends, etc. to encourage them to make large investments in the proposed corporation.

Exclusive right to vote and be voted –


Where the exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not exceeding 5
years subject to approval of the SEC, the period to commence from the date of said approval.

The 5-year period limitation and Commission approval requirement are designed to protect the interest of the other stockholders against possible
abuse by a minority holding founder’s shares granted the exclusive right to vote and be voted for in the election of directors, to hold office for an
unlimited term. The limitation is non-extendible. After the expiration of the limitation period, founders shall have equal rights with the holders of
common shares.

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 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.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 16
Christine Grace Embay-Zamora

What is redeemable shares?


Redeemable or callable shares – shares, usually preferred, 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.

What is the meaning of redemption?


It is the repurchase, the reacquisition of stock by a corporation which issued the stock in exchange for cash or property, whether or not the
acquired stock is cancelled, retired or held in the treasure.

When may redeemable share be issued?


Under Section 8, they refer to shares issued by a corporation which said corporation may purchase or take up from their holders upon the
expiration of a fixed period and upon such terms and conditions expressly provided in its articles of incorporation and certificates of stock
representing said shares. They may be issued only when expressly so provided in the articles of incorporation.

Where corporation insolvent –


Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, provided that the corporation has, after such
redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Therefore, redemption may not be made where the
corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature.

Terms and conditions –


Section 8 requires that all the terms and conditions affecting such shares must be stated not only in the articles of incorporation but also in the
certificate of stock representing said shares. Provisions in the articles relating to the redemption of preferred stock are, in effect, a contract
between the issuing corporation and the preferred stockholders and strict compliance thereof is essential.

Redemption optional with corporation –


Except as otherwise provided therein, the redemption rests entirely with the corporation, and the stockholder is without right to either compel or
refuse the redemption of his stock.

Maintenance of a sinking fund –


For the protection of stockholders, all corporations which have issued redeemable share with mandatory redemption features are required by the
SEC to set up and maintain a sinking fund where cash is gradually set aside in order to accumulate the amount necessary to meet the redemption
price of redeemable share at specified date in the future. The fund shall be deposited with a trustee bank and shall not be invested in risky or
speculative ventures.

What is the purpose of redemption?


It is a safeguard to enable a corporation to retire an obligation or a claim on the earnings, usually at a premium when it becomes advisable for
purposes of financing. It is generally held that a corporation may redeem its preferred stock only when it is expressly authorized by law or has
contractually reserved the right to do so, and that it has no inherit power in this respect.

What is the effect of redemption?


A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The retirement of a class of stock destroys all rights
adhering to the shares of that class. Where the reissuance of redeemed shares is prohibited, either expressly or impliedly by silence, the number of
authorized shares of the capital stock of the corporation is reduced accordingly, and the articles of incorporation must be amended to reflect such
reduction.

What is the voting rights of a redeemable share?


Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code.

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.

What are treasury shares?


Treasury shares are shares which have been lawfully issued by the corporation and fully paid for and later reacquired by it either by purchase,
redemption, donation, forfeiture or other lawful means.

What is the status of treasury shares?


♠ Treasury shares are not retired shares. They do not revert to the unissued shares of the corporation but are regarded as property
acquired by the corporation which may be reissued or resold by the corporation at a price to be fixed by the BOD.
♠ Treasure shares are issued shares but being in the treasure (hence, the name), they do not have the status of outstanding shares, in the
sense that they do not constitute a liability of the corporation.
♠ While held in the company’s treasury, the stock earns no dividends and has no vote in company’s affairs.

Only surplus earning may be used for the purchase of treasury shares. Under Section 68 (last par.), the corporation, in the absence of a qualified
bidder, may bid at the public sale of delinquent shares and title to the shares purchased shall be vested in the corporation as treasury shares. The
purchase by the corporation operates, in effect, as a forfeiture of the shares.

Treasury shares must be distinguished from the authorized but unissued shares in that the acquisition of the former does not reduce the number of
issued shares or the amount of stated capital stock and their sale does not increase the number of issued shares or the amount of stated capital.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 17
Christine Grace Embay-Zamora

How treasury shares acquired from stockholders?


Shares may be acquired by the corporation from stockholders by purchase, redemption, or donation, or though some other lawful means.
♠ If the corporation acquires the shares by purchase from stockholders, the transaction is, in effect, a return to them of the value of their
investments in the company, and a reversion of the shares to the corporation.
♠ If the share are donated to the corporation by the stockholders, their act would simply amount by the surrender of their stock without
getting back their investments which are, instead, voluntarily given to the corporation.

Treasury share are recorded at cost.

Dividend restriction on retained earnings


Generally, corporation can acquire its own shares provided it has an adequate amount of unrestricted retained earnings to support the cost of the
said shares. Accordingly, the amount of such earnings equivalent to the cost of the treasury shares being held, cannot be declared and distributed
as dividends. Such restriction shall be lifted only after the treasury shares are reissued or retired in accordance with law.

Declaration as property dividend


Treasury shares being unrealized income, are not considered as part of earned or surplus profits, and, therefore, not distributable as dividends,
either in cash or stock. But if there are retained earnings arising from the business of the corporation, treasury shares, being the property of the
corporation, may properly be distributed as property dividend.

Do treasury shares enjoy voting rights? No.


Treasury shares have no voting rights as they remain in the treasury. Otherwise, equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their control of the corporation.

Do treasury shares have a right to dividends? No.


Neither treasury shares entitled to dividends or assets because dividends cannot be declared by a corporation to itself. Such distribution of
dividends would be like making the corporation debtor and creditor of the same amount at the same time or requiring it to take money or stock
from one of its pockets and putting the same in another, which would be pointless.

What happens if there is a resale of treasury shares?


Treasury shares may be sold by the corporation at any price the BOD sees fit to accept, even at less than par or issued value.
♠ Stockholders may rightfully complain if the price is lower than reasonable.
♠ In case of sale or reissue, the treasury shares again becomes outstanding stock and regain whatever dividends and voting rights they
originally held.
♠ Treasury shares differ from retired or cancelled shares in that while the latter has disappeared altogether, the former may be sold.
♠ Treasury share’s status on resale differs from that of newly created shares which cannot be issued for less than the legal minimum
consideration.
♠ The sale of treasury shares should be treated as a sale of ordinary property of the corporation; hence, the gain therefrom is subject to
tax. The purpose of the sale is to recover the amount paid by the corporation for said shares.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 18
Christine Grace Embay-Zamora

TITLE II
INCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATIONS

Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more 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 a stock corporation must own or be a subscriber to at least one (1) share of the capital
stock of the corporation.

Incorporation of a private corporation a mere privilege


The right to be and act as a corporation does not belong to any person as a natural and civil right, but as a special privilege conferred upon a group
of persons by the sovereign power of the State. Until there is a grant of such right, therefore, whether by special act of the legislature or under
general law, there can be no corporation.

Since a corporation is merely a creation of law, it can be dissolved at any time by legislative enactment subject to certain limitations.

What are the advantages of incorporation?


1. Any number of persons may unite in a single enterprise without using their own names, without difficulty or inconvenicnece.
2. An individual stockholder may invest in the corporate enterprise as much or as little as he sees fit, without risking more, and, in the
absence of statutes to the contrary, this is the limit of his liability, since stockholders are not personally liable for the debts of the
corporation.
3. The rights and obligations of a corporation are not affected by the death or change of the individual members.
4. The modern corporation makes great undertakings feasible since it enables many individuals to cooperate in order to furnish the large
amounts of capital necessary to finance the gigantic enterprises of modern times.

Corporation vs. Association


Concept of association –
A corporation is defined by Section 2 of the Code. The word “association” is one of vague meaning, used to indicate a collection of persons who
have joined together for a certain object.

Possession of juridical personality –


A corporation is a legal entity deriving its existence from franchise, whereas an association, in the narrower sense of the term, is a creature of
contract without a legal entity separate from the individuals composing it.

Governing law –
Private corporations are governed by the Corporation Code, while associations are generally governed by the provisions of the Civil Code or some
other laws.

Capacity to act in its name –


Juridical persons may acquire and possess property of all kinds as well as incur obligations and bring civil or criminal actions in conformity with the
laws and regulations of their organization. Thus, an association cannot sue or be sued, it cannot enter into contracts in the name of the association,
and neither can it acquire properties under its common name.

An association is not competent to act as agent or create agents or confer upon another authority to act on its behalf, and those who act or purport
to act as its representative or agents do so at their own risk.

Validity and enforcement of acts –


The fact, however, that a group of persons adopt a name and operate without first being organized as a legal entity, does not make their acts
necessarily void. Their acts may be valid, although unenforceable under the name they have adopted. If a suit is to be brought to enforce their
rights, they have to sue as individuals and not in the name of the group or association, it not being a legal unit.

Powers, rights and privileges –


A society or association not engaged in business and not desirous of acquiring juridical personality need not be registered with SEC. An
unregistered organization, however, cannot exercise the powers, rights and privileges incident to incorporation and expressly granted to registered
corporations under Section 36 of the Corporation Code.

Policy of judicial non-interference –


The general rule is that courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between he
members on questions of policy, discipline, or internal government.

What is the concept of franchise?


Franchise includes any special privilege or right affected with public interest, conferred by the State on corporations or person sand which does not
belong to the citizens of the country, generally as a matter of common right.

As a privilege, a franchise is not exercised by private individual at their mere will and pleasure only but under such conditions, regulations, and
restrictions as the government may deem necessary to impose in the public interest, security and safety.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 19
Christine Grace Embay-Zamora

Primary franchise vs. Secondary franchise


PRIMARY FRANCHISE “general franchise” SECONDARY FRANCHISE
The right or privilege granted to individuals by the State to be and act as The franchise to exercise powers and privileges granted to such
a corporation after its incorporation. corporation to the business for which it was created, including those
conferred for purposes of public benefit such as the power of eminent
domain and other powers and privileges enjoyed by public utilities.

Only quasi-corporations or those affected with public interest are given


the power to institute condemnation proceedings against owners of
private property.

It is granted to and vests in the individuals who compose the It is conferred upon the corporation after its incorporation and not
corporation and not in the corporation itself. upon the individuals who compose the corporation.

It is in its nature inalienable. It is part of the corporation and cannot be It is vested in the corporation itself, may ordinarily be conveyed or
sold or assigned; otherwise, a corporation would be created without the mortgaged under a general power to grant to a corporation to dispose
consent of the legislature. of its property, except such franchises as are charged with a public use.

What are the steps in the creation of a corporation?


1. Promotion
2. Incorporation (Section 10)
3. Formal organization and commencement of business operations (Section 22)

(looking into each step…)

PROMOTION
The formation and organization of a corporation are brought about generally at the instance and under the supervision of one or more so called
“promoters.” The activity on the part of such persons is not, strictly speaking, a formal part of the organization of a corporation, inasmuch as it
occurs outside the corporate form and theoretically, at least, independent thereof. Upon incorporations, the practice is for the BOD to pass a
resolution ratifying the contract entered into by the incorporators with the promoters.

A corporation, however, may be formed and organized by the incorporators themselves without getting the services of so-called promoters.

♠ What is a promoter of a corporation?


A promoter of a corporation is one who acts in the formation, establishment, and control of a company prior to the incorporation and the
assumption of control by the BOD.

♠ What are the stages in corporate promotion?


a. Discovery – this stage may represent a new product or service, or the promoter may simply organize another company in an
existing line of business.
b. Investigation – involves an analysis of needs – financial, management, plant, material and labor – and a decision whether the
estimated earnings justify the effort.
c. Assembly – consists of bringing together the property, money, and personnel into an organization.

♠ What is the nature of relations of promoters?


a. To corporation
 The promoters of a corporation are not in any sense the agents of the corporation before it comes into existence, for
there cannot be any agency unless there is a principal. But they may, of course, become the agents of the corporation
after it has been formed provided there is assent, express or implied, on the part of the corporation.
b. To subscribers or corporators
 Although promoters of a corporation cannot be agents of the corporation before it is formed, they may be agents of
the subscribers or corporators.
 Since agency is a contract, it is essential that there is an agreement to this effect.
 Stockholders of a corporation cannot be held personally liable for the compensation claimed by promoters for
services performed by them in the organization of the corporation in the absence of any showing that said
stockholders contracted such services. The fact that they benefited from such services is no justification to hold them
personally liable therefor. The corporation should alone be held liable for its corporate acts as duly authorized by its
officers and directors.

♠ What is the liability of corporation for promotion fees?


GENERAL RULE:
A corporation is not liable to its promoters in respect for any payment in services rendered or expenses incurred before its incorporation
in promoting it.
EXCEPTIONS:
1. The corporation expressly agrees to make such payment or from the other facts the court can infer a new contract to
reimburse.
2. Authorization by stockholders – after due organization of the corporation, it may, with the consent of all its stockholders and
where there is no question as to the rights of subsequent stockholders, authorize the payment of compensation to promoters
and the issuance to them unless prohibited by statute.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 20
Christine Grace Embay-Zamora

♠ What is the liability of corporation on promoter’s contracts?


a. Before incorporation and organization
Since a corporation cannot, before its organization, have agents contract for itself, or be contracted with, it is not liable upon
any contract which a promoter attempts to make for it prior to its organization unless the contract is expressly or impliedly
adopted or ratified by it after organization is completed or liability is imposed by statute.

In other words, a promoter’s contract does not, by the incorporation of a contemplated company, ipso fact become the
contract of the corporation.

b. After incorporation and organization


Under the general rule permitting a corporation to assume liability on a promoter’s contract, the contract must, of course, be
one such as the corporation can itself make. A corporation as a legal entity cannot assume the obligation of an ultra vires
contract made by its promoters anymore than it can legally initiative such contract.

♠ What is the liability of the promoters for failure to organize corporation?


a. To subscribers
If money is paid to promoters or provisional directors by a subscriber for shares in a projected corporation preliminary to
organization, and the promoters or provisional directors fail to organize the corporation, it is a case of money paid on
consideration which has failed. The subscriber may, therefore, recover it back from the promoters or directors in an action at
law although the money has been applied in payment of preliminary expenses or otherwise.

Where, however, the subscriber agrees that the amount paid on his subscription may be applied on certain promotional or
development expenses and it is so applied, the promoters are not personally liable for the amount paid on the subscription
where the project to organize the corporation is abandoned.

b. To each other
While it has been held that as between themselves the rights of the stockholder in a defectively incorporated association
should be governed by the laws of the State relating thereto and not by the rules governing partners, it is ordinarily held that
persons who attempt, but fail, to form a corporation and who carry on business under the corporate name, occupy the position
of partners inter se.

What is underwriting and underwriting agreement?


Underwriting is the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. Underwriting
agreements are now resorted to very generally in order to float stock issued of large corporations.

What are the types of underwriting contract?


1. Firm commitment
The members severally but not jointly agree to purchase the whole issue outright at a particular price for resale at a price differential to
the public, or to dealers who well at another differential to the public.
2. All-or-nothing commitment
The members agree to accept liability for the purchase of an issue at a given price only if the entire issue is not sold – usually within a 30-
day period.
3. Standby commitment
The members will purchase and distribute at predetermined price to the public any amount of the issue not taken by stockholders in
exercising their pre-emptive rights.
4. Best efforts commitment
This merely means that the syndicate will use its best efforts to distribute the issue to the public. Under such commitment, the syndicate
does not agree to purchase the issue at predetermined prices. The security is sold for whatever price it will bring, the underwriters take a
predetermined spread, and the issuers take the residual.

Incorporation vs. Creation


Incorporation refers to the performance of conditions, acts, deeds, and writing by incorporators, and the official acts, certifications or records,
which give the corporation its existence.

Creation is understood in its broadest sense, includes all of the acts and doings from the enactment of the general incorporation law by the
legislature through the promotion, underwriting, preparation and execution and filing of the incorporation papers and obtaining the certificate or
charter, to the organization and first meeting and election which set the corporation in motion full-pledged.

Incorporation vs. Corporation


A corporation is a legal or juridical institution while incorporation is the act by which the institution is created.

INCORPORATION

What are the steps in incorporation?


1. Drafting and execution of the articles of incorporation by the incorporators and other documents required for registration of the
corporation. In this connection, the person chosen as temporary treasurer pending incorporation must also execute:
a. An affidavit certifying compliance with subscription and paid-up requirements as to capital stock
2. Filing with the SEC of the articles of incorporation together with the following:

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 21
Christine Grace Embay-Zamora

a. Treasurer’s affidavit showing at least 25% of the entire authorized shares has been subscribed and at least 25% of the
subscription has been paid in cash and/or property to the corporation.
b. In case the corporation is governed by a special law (ex. Educational institution), a favorable recommendation of the
appropriate government agency (ex. DECS) that such articles of incorporation is in accordance with law.
3. Payment of the filing and publication fees.
4. The issuance by the SEC of the certificate of incorporation if all the papers filed after verification and examination are found in order.

What is required in complying with the requirements?


Only SUBSTANTIAL COMPLIANCE. Where the formation or organization of corporations is not governed by special laws (ex. Those engaged in real
estate development), the SEC may accept and approve the articles of incorporation or amendments therein upon mere showing of a substantial
compliance with the Corporation Code and that it meets the guidelines established by the Commission.

Where there is substantial compliance with the legal requirements, the registration of the proposed corporation becomes a matter of right.

Incorporators: number and qualifications


Number: Must not be less than five nor more than 15.
If the number of incorporators is more than 15, the excess will not be considered as incorporators.

Qualifications –
1. All of legal age.
2. Majority of whom are residents of the Philippines.
3. Each of whom must own or be a subscriber to at least one share of the capital stock of the corporation.
4. These five or more persons must be natural persons.
5. The incorporators must have the capacity to enter into a valid contract.

A corporation cannot be an incorporator of another corporation. The rule is premised on the nature of corporations as follows: “Artificial persons,
without brain or body, existing only on paper through legislative command and incapable of thought or action except through natural persons,
cannot create other artificial persons, and those others still, until the line is so extended and the capital stock so duplicated and reduplicated as to
result in confusion and fraud.

A corporation may become a stockholder in another corporation by subscribing to or purchasing the latter’s stock, for the power of one
corporation to own stock in another corporation is entirely different from its power to create or itself become one of the incorporators of another
corporation.

The Code does not define the word “residents” but the term must be construed to mean domiciled residents, as distinguished from temporary
residents with a domicile in another country. The domicile of natural persons is the place of their habitual residence; it is the place where one has
his true, fixed, permanent home and to which he, whenever he is absent, has the intention of returning.

The Code now expressly requires that “each of the incorporators of a stock corporation must own or be a subscriber to at least 1 share of the
capital stock of the corporation.” The presumption is that where an incorporator has a pecuniary interest in the corporation, he will be concerned
with the management of its affairs.

Requirement regarding minimum number of incorporators mandatory


The requirement of the law regarding the minimum number of incorporators is mandatory and a de jure corporation cannot legally formed by less
than the prescribed number except in the case of a corporation sole.

Reduction of stockholders or members to less than minimum –


The number of stockholders (or members) after the corporation is organized may become less than the minimum number required for
incorporation without affecting corporate existence unless valid grounds exists for piercing or lifting the corporate veil.

Beneficial ownership in one individual –


The validity of the incorporation is not affected by the fact that it is formed in the interest of a single individual, and that the other persons under
his control, without any substantial interest, or without individual responsibility who may only be called “qualifying stockholders,” or who are
popularly known as dummies or “men of straw.” Beneficial ownership is not necessary, and a person who holds the legal title to stock is qualified to
become an incorporator.

Subsequent accumulation of shares in one individual –


Nor is the existence of the corporation originally formed by the required number of incorporators affected by the subsequent accumulation of all
the share in the hands of one individual, unless, as previously said, circumstances exist to justify the piercing of the veil of corporate entity.

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.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 22
Christine Grace Embay-Zamora

What is the term of corporate existence?


The corporation shall exist for the term specified in the articles of incorporation not exceeding 50 years, unless sooner legally dissolved or unless its
registration is revoked upon any of the grounds provided by law.

What are the limitations on extension of corporate terms?


1. The term shall not exceed 50 years in any one instance.
2. The amendment is effected before the expiration of the corporate term of existence, for after dissolution by expiration of the corporate
term there is no more corporate life to extend. Hence, the extension cannot be done during the 3-year period of liquidation.
3. The extension cannot be made earlier than 5 years prior to the extension date unless there are justifiable reasons therefore as may be
determined by the SEC.

What is the effect of extension/expiration of term?


The mere extension of the corporate term of existence made before the expiration of the original term constitutes a continuation of the old, and
not the creation of a new, corporation.

Upon the expiration of the period fixed in the articles of incorporation, in the absence of compliance with the legal requisites for the extension of
the period, the corporation ceases to exist and is dissolved ipso facto.

A corporation whose corporate life has expired may be reincorporated only by complying with the registration requirements under the Corporation
Code. A corporation that has been reincorporated after its original terms of existence has expired does not automatically succeed to the assets of
the original corporation which is deemed dissolved in the absence of a corporate liquidation under Section 222.

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.

Capital stock requirement


The Code does not set a minimum authorized capital stock except as otherwise provided by special law as long as the paid-up capital as required by
Section 13 is not less than P5,000.

A minimum capital stock requirement is considered arbitrary and does not assure any practical protection to corporate creditors. Special laws may,
however, require a higher paid-up capital, as in the case of commercial banks, insurance companies, and investment houses.

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.

Minimum subscription and paid-up capital


Pre-incorporation –
Section 13 requires that at least 25% of the amount of the authorized capital stocks has been actually subscribed and that at least 25% of such
subscription paid. In no case shall the paid-up capital be less than P5,000.
♠ The policy of the Commission is to require full payment of subscription by foreigners as it will be difficult to compel them to pay their
unpaid subscriptions when they are outside the country unless they can give sufficient security to guarantee full payment.
♠ The number of shares subscribed, the amount subscribed, and the amount paid by each stockholder must be stated in the articles of
incorporation.

Post incorporation –
The minimum 25% subscription and 25% paid-up capital is required not only during the incorporation period but also in case of increase of the
authorized capital stock.
♠ The requirement is designed to give assurance to the investing public dealing with the corporation that it is financially and actually able to
operate and undertake to do business and meet its obligations as they arise from the start of its operations. Accordingly, the 25%
minimum paid-up capital requirement would not apply to subsequent subscriptions to the unsubscribed shares of the corporation since
the evils or risks of insolvency against which the law intends to safeguard the public no longer exists.
♠ It is not required for purposes of incorporation that each and every subscriber shall pay 25% of his subscription. The paid-up requirement
is met as long as “25% of the total subscription” is paid although some subscribers have paid less than 25%, or even have not paid any
amount.
♠ It would seem that the minimum 25% paid-up requirement applies only to par value shares because a subscriber to no par value shares
must pay in full his subscription since under Section 6 par. 2, “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.”

How do you compute the 25% subscription requirement?


♠ Capital stock consist only of par value shares –
The minimum subscription should be 25% of the amount of the authorized capital stock or 25% of the aggregate value of all the shares of
stock the corporation is authorized to issue.

♠ Capital stock consists only of no par value shares –

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 23
Christine Grace Embay-Zamora

The 25% requirement shall be computed on the basis of the entire number of authorized shares. Corporations whose shares have no par
value have no authorized capital stock. The issued price of no par value shares need not be fixed in the articles of incorporation.

♠ Capital stock is divided into par value shares and no par value shares –
The requirement as to par value shares is as indicated above and for the no par value shares, the 25% is based on the number of said no
par value shares.

Subscription of corporations
It is the policy of the SEC to require corporations to pay their subscriptions in full. This is based upon the fact that while a corporation has an
unlimited capacity to contract obligations, it has only a limited capacity to pay.

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 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 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
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:
NAME NATIONALITY RESIDENCE
..................................... ..................................... .....................................
..................................... ..................................... .....................................

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 24
Christine Grace Embay-Zamora

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


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

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

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:
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.)

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)

TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 25
Christine Grace Embay-Zamora

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
.........................................., 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)

What is articles of incorporations?


Articles of incorporation is the document prepared by the persons establishing a corporation and filed with the SEC containing the matters required
by the Code. It has been described as one that defines the charter of the corporation and the contractual relationship between the State and the
corporation, the stockholders and the State, and between the corporation and the stockholders.
A corporation created by special law has no articles of incorporation.

What are the contents and form of articles of incorporation?


Contents – Section 14; Form – Section 15

The articles of incorporations may provide other matters or items (optional provisions) as long as they are not contrary to any provision of the Code
or special law. The articles of incorporation must be written in any of the official languages, i.e., English or Filipino duly singed and acknowledged
by all the incorporators. It is, therefore, a public instrument.

An incorporator may delegate to an attorney-in-fact the signing of the articles of incorporation in a special power of attorney to such effect.
However, the acknowledgement (see Sec. 15) must reflect this fact so that the same must be prepared in the following tenor: “xxx, that Mr. A
(agent) is signing for and in behalf of B (incorporator) as his attorney-in-fact after due presentation of his power of attorney.”

Filing of the articles of incorporation


Actual filing or registration with SEC required –
The mere recording of the articles of incorporation without the intention or the fact of allowing the same to remain in the office of the SEC is not
sufficient filing to complete the organization of the corporator or vest it with corporate powers.

Rule where corporation created by special law –


A corporation created by special law or charter does not have to file with the SEC its articles of incorporation and by-laws since the grantee of such
a special charter draws its life not from compliance with a general law, but from a direct act of Congress.

Rule with respect to a joint venture –


The Commission has ruled that 2 or more corporations may enter into a joint venture through a contract if the nature of the venture is in line with
the business authorized by their charters, which contract need not be registered with it, provided that the joint venture will not result in the
formation of a new partnership or corporation. However, if the parties to the agreement want the joint venture to be treated as a separate entity
or have a separate personality because they intend to secure the joint venture project a TIN of its own from the BIR, registration with the SEC is
necessary in order to have a legal personality to obtain a separate TIN.

What are the powers of SEC to reject articles of incorporation?


Compliance with statute –
If the articles of incorporation substantially comply with the statute, the Commission has no discretion, but may be compelled by mandamus to file
them. The discretion to be exercised by the Commission does not extend to the merits of an application for incorporation, although it may be
exercised as to matters of form. Stated in another way, the duty of the SEC to file and record incorporation papers exists only when they are in the
form in compliance with the statute. Furthermore, it should refuse to file for record incorporation papers not complying with the statute.

Truthfulness of matters stated –


Generally, the officer concerned has no discretionary power to look beyond the face of the incorporation papers and to determine from matters
outside of such papers whether or not to file the papers. He is not required to make inquiry outside the articles of incorporation filed with him, to
determine whether the matters stated therein are in fact true, or whether all conditions precedent have in fact been performed. Ordinarily, if the
association has complied with all the pre-requisite requirements, and its purpose is a lawful and authorized one, conditions cannot be imposed on
granting the certificate.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 26
Christine Grace Embay-Zamora

Lawfulness of object or purpose –


But simply because the duties of the Commission happen to be ministerial, it does not necessarily follow that it has no authority to pass upon the
lawfulness of the object or purpose of the corporation as expressed in the articles of incorporation. Its duties are ministerial and it has no authority
to exercise discretion in receiving and registering articles of incorporation, but it may exercise judgment, that is, the judicial function, in the
determination of the question of law whether or not the objects of a proposed corporation are lawful.

(looking into the contents of the articles of incorporation…)

NAME OF THE CORPORATION

What is the importance of the name of corporation?


The corporation acquires juridical personality under the name stated in the certificate of incorporation. It is the name of the corporation which
identifies and distinguishes it from other corporations, forms or entities in the same manner as the name of an individual designates the person
and distinguishes him from other persons.

What is the nature of corporate name?


A corporate name is regarded as of the nature of a trademark even though composed of individual names, and its simulation may be restrained. A
corporation’s right to use its corporate and trade name is a property right, a right in rem which it may assert and protect against the whole world in
the same manner as it may protect its tangible property against trespass or conversion.

It is customary to use as part of the name the word “corporation” or “incorporated” or an abbreviation of either of them to distinguish it from
partnership and other business organization.

PURPOSE

The clause in the articles of incorporation which sates the specific purpose or purposes for which the corporation is being incorporated is called the
purpose clause. The statement of the purpose or purposes operates as an authorization to the management to enter into contracts and
transactions which may be considered as included within or incidental to the attainment of said purposes. It also imposes implied limitations on the
powers of the corporation by the exclusion of lines of activity which are not covered.

A non-stock corporation may not include a purpose which would change or contradict its nature as such. Section 88 enumerates the allowable
purposes for which a non-stock corporation may be organized.

Purpose or purposes must be lawful


Effect in case unlawful –
A corporation may be organized only for “any lawful purpose or purposes.” “That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules and regulations” is one of the grounds for the rejection or disapproval by the SEC
of the articles of incorporation.

Where powers merely unauthorized by law –


In authorizing the formation of corporations for “any lawful purpose,” the word “unlawful,” as applied in this connection, is not used by the Code
exclusively in the sense of malum in se or malum prohibitum. It is also used to designate powers which corporations are not authorized to exercise,
or contracts which they are not authorized to make, or acts which they are not authorized to do – in other words, such acts, powers, and contracts
as are ultra vires.

Thus, a corporation cannot be formed for the practice of law, medicine, or other learned professions in the absence of express authority in the
corporation law. In the Philippines, there is no legislation authorizing the formation of professional corporations. In corporations, the profit motive
is the principal factor. Human personal qualifications for such learned professions cannot be possessed by a corporation which ahs a distinct and
separate personality from the individual stockholder or members. Thus, it cannot have the power to obtain a license which only the individual
stockholders or members can obtain.

Determination of question of lawfulness –


As a general rule, the question as to whether the purposes for which a given corporation has been formed are lawful is to be determined by the
description of those purposes as stated in the articles of incorporation.

Where the object of a corporation as expressed in the articles of incorporation is not illegal, the fact that such corporation afterwards entered upon
illegal projects does not make it an illegal corporation and such illegal acts cannot be urged as a defense, in an action to recover unpaid
subscription to the capital stock.

Inquiry into purposes other than those stated –


The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of incorporation must state the primary and
secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purposes. If the corporate purpose as stated in the articles of incorporation is lawful, then the SEC
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.

Purpose or purposes must stated with sufficient clarity


May be stated in broad terms –

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 27
Christine Grace Embay-Zamora

The purpose or purposes stated in the articles of incorporation need not set out with particularity the multitude of activities in which the
corporations may engage. The effect of broad purposes or objects is to confer wide discretionary authority upon the OBD and management of
corporation as to the kinds of business in which it may engage. Dealings which are entirely irrelevant to the purposes are unauthorized and called
ultra vires. It is, therefore, important that the corporation’s purposes be specified in the articles of incorporation with sufficient clarity to define
with certainty the scope of its business.

May not be indefinitely stated –


While the purposes may be stated in broad and general terms, they should not be so stated indefinitely; otherwise, the articles of incorporation
may be rejected.

Primary purpose must be stated


The purposes for which a corporation is organized, where it has more than one stated purpose, shall state which is the primary or main purpose
and which is/are the secondary or subsidiary purpose or purposes. The law allows a corporation to have secondary purposes because the primary
purpose may not turn out to be profitable, and in such case, all it has to do is invest its funds in any such purposes instead of organizing a new
corporation.

Purposes must be capable of being lawfully combined


Although Section 10 allows the formation of corporations “for any lawful purpose or purposes,” the purposes, where there are more than one,
must be capable of being lawfully combined.

What are the reasons for statement or purpose or purposes?


1. A person who intends to invest his money in the business corporation will know where and in what kind of business or activity his money
will be invested.
2. The directors and the officers of the corporation will know within what scope of business they are authorized to act.
3. A third person who has dealings with the corporation may know by perusal of the articles whether the transaction or dealing he has with
the corporation is within the authority of the corporation or not.

What is the effect where primary/secondary purposes unauthorized?


1. If the primary purpose is unauthorized, the corporation has no legal existence even though other secondary lawful purposes are included.
2. If a principal purpose is specified, but the articles assumes for the corporation the existence of powers which it is not permitted to
exercise, then this additional and unauthorized assumption may be treated as surplusage and the corporation regarded as entitled to
exercise the lawful powers only.

What is the effect where corporation engages in its secondary instead of its primary purpose?
Generally, the primary purpose of a corporation as indicated in the articles of incorporation determines its classification. However, where the
corporation actually engages in one of its secondary purposes instead of its primary purpose, the same may be classified in accordance with said
secondary purpose.

PLACE OF THE PRINCIPAL OFFICE

City or municipality within the Philippines –


The purpose of the requirement to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory is for effective
regulation and supervision of the corporation. The place to be designated is the city or municipality (not merely the province) where the principal
office is to be located.

Place where its books and records are ordinarily kept and meetings held –
The “place of the principal office” does not necessarily mean the place where the business of the corporation is transacted but the place where its
books and records are ordinarily kept and its officers usually meet for the purpose of managing the affairs and transacting the business of the
corporation.

Residence at place where its principal office is located –


A corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in its articles of incorporation filed with
the SEC. The place where the principal office of the corporation is located determines its residence and the venue in an action by or against it.

Change of address –
In case of change of address involving a change of city or municipality, an amended articles of incorporation stating the new address must be filed
with the SEC. If the new address is located within the same city or municipality, no corporate document is required to be filed with the SEC except a
notice regarding the change of address.

INCORPORATING DIRECTORS OR TRUSTEES


The incorporating directors or trustees are those chosen by the incorporators and named in the articles of incorporation.

Matters to be specified in articles of incorporation –


The articles of incorporation must specify the names, nationalities, and residences of the incorporators and must show that at least a majority of
the incorporators are residents of the Philippines. The statement of the nationalities of the incorporators will enable the SEC to determine prima
facie compliance with the constitutional or legal requirements regarding ownership by Filipino citizens of certain percentages of the capital stock of
certain corporations.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 28
Christine Grace Embay-Zamora

Number –
The number of the incorporating directors or trustees is determined by the incorporators but such number “shall not be less than 5 nor more than
15.” Section 92, however, provides that the BOT of a non-stock corporation “may be more than 15 in number as may be fixed in their articles of
incorporation or by-laws.”

Term of office –
The incorporating directors or trustees shall hold office until their successors are duly elected and qualified.

CAPITAL STOCK/CAPITAL AND SUBSCRIBERS/CONTRIBUTORS

The articles of incorporation must state the following:


1. If stock corporation –
a. The amount of its authorized capital stock in pesos.
b. The number of shares into which it is divided.
c. The par value in pesos of each share.
d. The names, nationalities, and residences of the original subscribers.
e. The amount of capital stock subscribed and paid by each on his subscription.
f. If some or all of the share are without par value, such fact.
2. If non-stock corporation –
a. The amount of its capital or money contributed or donated by specified persons.
b. The names, nationalities, and residences of the donors or contributors.
c. The respective amount contributed by each.

Where share with par value –


Where the shares issued by a corporation have only one par value, the authorized capital stock would be the number of shares multiplied by the
par value. If a corporation is authorized to issue different classes of shares with different par values, the authorized capital stock would be the total
of the products of the number of shares in each class multiplied by the par value of such class of shares.

Where shares without par value –


The articles of incorporation need only state such fact, together with the number of shares into which said capital stock is divided. If the share have
par value, the amount of the authorized capital stock in pesos is specified in the articles, but if they have no par value, no amount of capital stock is
specified in the articles which need only state the number of shares into which said capital stock is divided. The reason is that the price of no par
value shares vary from time to time and, therefore, the total amount of the capital stock cannot be known until all the shares are issued.

Where business of corporation reserved for Filipino citizens –


Corporations which will engage in any business or activity reserved for Filipino citizens shall provide in their articles of incorporation the restriction
against the “transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital
stock as provided by existing laws.”

Acknowledgement, signature, and verification –


In order to become a corporation de jure, the provisions requiring the incorporation papers to be acknowledged as well as signed must be
complied with. Each of the signatories must acknowledge his signature to the articles and there is no corporation de jure unless acknowledged by
the minimum number required by law. However, unless otherwise provided by the statute, the acknowledgement of the signatures of the
incorporation is not a part of the articles of incorporation.

The purpose of the law in requiring acknowledgment under oath is to secure the State and all concerned against the possibility of any fictitious
names being subscribed to the articles, and to furnish proof of the genuineness of the signatures.

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.

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.

What is a corporate charter?


A charter is an instrument or authority from the sovereign power bestowing the right or privilege to be and act as a corporation.

What are the components of a corporate charter?


A charter represents the complete grant of authority; hence, the complete charter of a corporation does not rest only upon one instrument.
1. As to corporations formed under the general incorporation law, the charter consists of –
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 29
Christine Grace Embay-Zamora

a. The law under which it is organized (BP Bld. 68)


b. Articles of incorporation
c. By-laws
d. All applicable provisions of the Constitution and the general laws of the State in force at the time the corporation is
incorporated.
2. As to corporations created by special laws, the charter consists of –
a. The special law which creates the corporation.
b. E.O. of the President
c. Rules and regulations applicable to such corporation.
d. All laws applicable thereto, including Corporation Code the provisions of which apply suppletorily.

What is the nature of a corporate charter?


A corporate charter is described as a contract of a three-fold nature, that is, a contract between the State and the corporation, a contract between
eh corporation and its stockholders (or members), and a contract between the stockholders inter se.

Reserved power of State to amend corporate charter


The certificate of incorporation is a contract primarily between the State and the corporation. Hence, it can be amended only by or under
constitutional or statutory authority.
♠ Constitutional authority – Section 11, Article XII of the Constitution
♠ Statutory authority – Section 145, Corporation Code (subject to the limitation with respect to vested rights that have accrued at the time
of the enactment of the amendatory law and the prohibition against laws impairing the obligations of contracts.)

Power of stockholders or member to amend articles of incorporation


Powers expressly granted –
♠ Section 16 – to amendments in general.
♠ Section 37 - to the extension or shortening of the corporate term
♠ Section 38 – to increase or decrease of the capital stock
♠ Section 36(4)

The amendment must also be approved by a majority of the BOD or BOT.

What are the matters not subject to amendment?


1. The names of the incorporators and the first set of directors/trustees cannot be amended by substituting for the name of an incorporator
the name of another. (Reason: It states an accomplished fact, just as the place and date of the execution of the articles. Such amendment
would go against the meaning and concept of the word “incorporators.”)
2. The names, etc. of the subscribers, the treasurer of the corporation elected by the subscribers and the witnesses cannot be amended
except to correct mistakes.

Necessity of stockholders’ or members’ meeting for amendment


Any provision or matter stated in the articles of incorporation may be amended by:
1. A majority vote of the BOD or BOT and
2. The vote or “written assent” of the stockholders representing at least 2/3 of the outstanding capital stock or vote or “written assent” of
at least 2/3 of the members if it be a non-stock corporation. (meaning such action need not be taken at a meeting and upon a vote. Even
holders of non-voting shares or non-voting members, as the case may be, are entitled to vote on the amendment.)

What are the limitations on power of corporation to amend?


1. The amendment is not allowed when it will be contrary to any provision or requirement prescribed by the Code or by special law, or
change any provision in the articles of incorporation stating an accomplished fact.
2. It must be for “legitimate purposes.”
3. It must be approved by the required vote of the BOD or BOT and the stockholders or members.
4. The original articles and amended articles together must contain all provisions required by law to be set out in the articles of
incorporation.
5. Such articles, as amended, must be indicated by underscoring the change or changes made, and a copy duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating that the amendment or amendments have been duly approved by
the required vote of the stockholders or members must be submitted to the SEC. Filing fees must be paid.
6. The amendment shall take effect only upon their approval by the SEC.
o They are deemed approved by the Commission from the date of filing if not acted upon within 6 months from said date for a
cause not attributable to the corporation, assuming the amendments are not illegal.
o If the delay is attributable to the corporation, the amendment cannot take effect without approval thereof by the Commission.
7. If the corporation is governed by special law, the amendment must be accompanied by a favorable recommendation of the appropriate
government agency to the effect that such amendments are in accordance with law.

In case of foreign corporations authorized to transact business in the Philippines, they are merely required to file, within 60 days after the
amendment to the articles of incorporation (by-laws) becomes effective, with the SEC and in proper cases, with the appropriate government
agency, a duly authenticated copy of the articles of incorporation (or by-laws) for record purposes.

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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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Christine Grace Embay-Zamora

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.

Grounds for rejection of articles of incorporation or amendment thereto


Section 17 enumerates the grounds.
Any decision of the Commission rejecting the articles of incorporation or disapproving any amendment thereto is appealable by petition for review
in accordance with the pertinent provisions of the Rules of Court.

The action of the Commission in approving or rejecting the articles of incorporation or any amendment thereto is not a ministerial function but
involves the exercise of discretionary power.

Suspension or revocation of certificate of registration of corporations


Grounds –
1. Fraud in procuring its certificate of incorporation.
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 with or defiance of a lawful order of the Commission restraining the commission of acts which would amount to a
grave violation of its franchise.
4. Continuous inoperation for a period of at least 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.

Effectivity –
A SEC order of revocation is immediately effective. Once the revocation order is issued, the subject corporation’s existence is terminated at the
very instant and is deemed terminated until the particular revocation is lifted. It may not continue to operate its business and issue shares. It may,
however, sell its assets pursuant to Section 122 but it may only purchase property if such purchase will be consistent with liquidation.

Lifting of Order of Revocation –


The lifting restores the corporation to its original status as if there was no revocation order issued against it, with the capacity to exercise all the
powers of the duly registered corporation under the Corporation Code.

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.

Limitations upon use of corporate name


Similarity with another trade name –
The incorporators may choose and use any name they may see fit, provided it is one not identical with or prejudicially similar to a name which was
previously adopted and which is being used by another existing corporation or unincorporated association or a natural person as trade name or is
contrary to existing law.

If any corporation could adopt at pleasure the name of another corporation, the practice would cause confusion and unfair and fraudulent
competitions, open the door to frauds upon the public, promote the evasion of legal obligations and duties, and result in difficulties of
administration and supervision over corporations.

Test of infringement –
The right to the exclusive use of a corporate name with freedom from infringement is determined by priority of adoption. In determining the
existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and
discrimination.

It is settled, however, that proof of actual confusion need not be shown. It suffices, however, that proof of actual confusion need not be shown. It
suffices that confusion is probably or likely to occur.

Part of name –
The corporate name shall contain the word “Corporation” or “incorporated,” or the abbreviations “Corp.” or “Inc.,” respectively. The corporate
name of a foundation shall use the word “Foundation.”

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 31
Christine Grace Embay-Zamora

Prohibited use of certain words –


In addition to the limitation provided by Section 18, special laws prohibit the use of certain words as part of the corporate name such as those
which imply that a corporation is engaged in an activity in which it is not allowed by law to engage in.

Use of generic, geographical, and descriptive terms and names –


Certain words, terms, or names are regarded by law as incapable of exclusive appropriation. Of this class are generic terms and geographical names
and terms which are merely descriptive of the goods, services, places where made, the character of the business, or the name of the maker.
(UNLESS such words have acquired a secondary meaning)

Use of trade name of another corporation –


The SEC Guidelines, specifically requires that:
1. A corporate name shall not be identical, misleading or confusingly similar to one already registered by another corporation with the
Commission; and
2. If the name applied for is similar to the name of a registered firm, the applicant shall at least contain one or more distinctive words to the
proposed name to remove the similarity or differentiate it from the registered name.

This guideline does not apply where the questioned word happens to be the valid trademark or trade name of another corporation, in which case,
the latter shall have the exclusive right to its use as registered owner.

Use of a person’s full name or surname –


It may be used in a corporate name if he/she is a stockholder of the corporation and has consented to such use. If the person is already deceased,
the consent shall be given by his/her estate.

Doctrine of secondary meaning –


The doctrine of secondary meaning was elaborated in the following terms: “ x x x a word or phrase originally incapable of exclusive appropriation
with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has
come to mean that the article was his product.”

Where business of junior corporation different or noncompeting –


The protection to which the prior user of a corporate name is entitled is not limited to guarding its goods or business from actual market
competition with identical or similar products of the parties but extends to all cases in which the use by the junior appropriator of the name is likely
to lead to a confusion of source, as where prospective purchasers would be misled into thinking that the complaining corporation has extended his
business into the field, or is in any way connected with the activities of the infringer; or when it forestalls the normal potential expansion of its
business.

What are the remedies of the corporation whose name has been adopted by another?
1. Injunction
- A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that
upon which persons are protected in the use of trademarks and trade names.
- Broadly speaking, the general rule is that the right of one corporation to enjoin the use of eh name of a similar name by another
depends upon whether such use has interfered with the former’s business whatever it may be and without regard to whether it is
commercial, trading or otherwise. Thus, not only are corporations organized for pecuniary profit entitled to protect their names by
injunction, but it has also been held that an injunction may issue to protect the name of a benevolent fraternal society, a patriotic
society, a social club, or a charitable religious society.
2. De-registration
- To restrain the wrongful assumption of a name by a corporation is not to annul the corporation by depriving it of a name. If
restrained from using a name chose, it may choose another name.

Change of corporate name


A corporation can change the name originally selected by it after complying with the formalities prescribed by law, to wit:
1. Amendment of the articles of incorporation.
2. Filing of the amendment with the SEC.

Hence, the mere approval by the stockholders of the amendment of the articles of incorporation changing the corporate name does not
automatically change the name of the corporation as of that date.

Effectivity –
When a change of name is approved, it is required that the Commission must issue an amended certificate of incorporation under the amended
name. The change of name is deemed effective as of the date of the Commission’s approval of the amended articles or from the date of filing with
it if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation. Said change impliedly amends the
corporate name as appearing in the by-laws; hence, the corporation need not amend its by-laws in order to reflect its new corporate name.

Effect –
It is no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name and its charter is in
no respect changed.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 32
Christine Grace Embay-Zamora

Use of changed or abandoned corporate names


Former name of same corporation –
Said previous name cannot be appropriated or used by any other person for a certain period to avoid confusion, not to mention infringement of
goodwill, where said name has continued to be associated with the corporation.

Name(s) of merged or consolidated corporations –


The corporate name(s) or the merged or consolidated corporations may not be used by another corporation, without the consent of the surviving
corporation although there is a dissolution of the absorbed corporation.

Name of dissolved corporation or whose registration has been revoked –


It shall not be used by another corporation within 3 years from the approval of the dissolution or 6 years from the date of revocation unless its use
has been allowed at the time of the dissolution or revocation by the stockholders or members who represent a majority of the outstanding capital
stock or membership of the corporation.

Name of dissolved corporation acquired by new corporation –


A new corporation which has acquired the property and name of a dissolved corporation is in the same position as the original corporation would
have been had it continued to exist and may, therefore, in a proper case, enjoin the use of such name by another.

Name of corporation dissolved through expiration of term –


When the corporate name is abandoned due to the dissolution of the corporation through expiration of its corporate life, such corporate name
may be used by another corporation.

Misnomer of a corporation
The general rule is that the mere misnomer of a corporation in a bond, note, or other deed or contract does not render the same invalid or
inoperative but the corporation may sue or be sued thereon in its true name with proper allegations and proof that it is the corporation intended.

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.

Acquisition of juridical personality


Issuance of certificate of incorporation –
A corporation commences to have juridical personality and legal existence only from the moment the SEC issues to the incorporators a certificate
of incorporation under its official seal.

An entity without the necessary corporate legal personality has the status of an “unregistered” association and the members themselves shall be
held personally liable for their acts or contracts, and not the association.

The issuance of the certificate calls the corporation into being but it is not really ready to do business until it is organized. The corporation must
formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation or,
otherwise, its corporate powers shall cease and it shall be deemed dissolved.

Filing of articles of incorporation –


In the case of religious corporations, the Code does not require the SEC to issue a certificate of incorporation. In fact, Section 112 clearly states that
from and after the filing with the Commission of the articles of incorporation, the chief archbishop, etc. shall become a corporation sole.

Registration of cooperative –
A cooperative acquires juridical personality upon registration with the Cooperatives Development Authority. It need not be registered again with
the SEC.

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, defined –


A de jure corporation is one created in strict or substantial conformity with the mandatory statutory requirements for incorporation and the right
of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the
State.

De fact corporation, defined –


It is one which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State. It is
one which has not complied with all the requirement necessary to be a de jure corporation but has complied sufficiently to be accorded corporate
status as against third parties although not against the State.

Requisites of a de fact corporation


1. A valid law under which a corporation with powers assumed might be incorporated.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 33
Christine Grace Embay-Zamora

♠ In order that there can be a de facto corporation, there must be a law authorizing it to be a corporation de jure for there cannot
be a corporation de fact when there cannot be one de jure, even though there may have been an assumption of corporate
powers.
2. A bona fide attempt to organize a corporation under such law.
♠ When there has been no attempt in good faith to create a corporation de jure, there can be no de facto corporation. Mere
intent is not sufficient. In addition, there must be a bona fide attempt to comply with the requirements of the law, which goes
far enough to amount to “colorable compliance” with the law.
♠ The defects which do not preclude the creation of a de facto corporations are those omissions that may be considered as
inadvertent or minor defects or errors which can be excused to prevent injustice.
♠ Colorable compliance with the law –
o To constitute a corporation de fact, there must be, it is true, a colorable compliance with the statute, but there need
not be a substantial compliance. A substantial compliance makes the body a corporation de jure.
o There is no fixed rule on how far the proceedings must go or what steps are sufficient to amount to this colorable
compliance. It will depend on the situation and knowledge of the parties.
3. Actual user or exercise in good faith of corporate powers conferred upon it by law.
♠ To create a corporation de fact, it is not sufficient to show the existence of a law under which a corporation might be formed
and an honest attempt to comply with the requirements thereof, but it is also necessary to show an actual user or exercise of
corporate powers or franchise.
♠ User contemplated –
User consists in an enjoyment and exercise (although not rightful) of such corporate franchises and powers as would be given
by the law to an association if the attempted organization had been perfected.
♠ Furthermore, it is essential that the corporation must act in good faith in claiming to be a corporation and exercising corporate
powers. Therefore, it after incorporation, the incorporators discovered that they have not complied substantially with the law
and still continued transacting business as a corporation, without doing anything to correct the defect, the privilege of de facto
existence can no longer be invoked.

Stockholders of a de fact corporation enjoy exemption from personal liability for corporate obligations as do stockholders of de jure corporations.

Basis of de facto doctrine


The recognition of de fact existence has been found necessary to promote the security of business transactions and to eliminate quibbling over
irregularities.
1. A third person dealing with a corporation will rarely be prejudiced if the company is recognized as a corporation in spite of minor defects
in its formation.
2. Seldom would it be just to allow a wrongdoer to quibble over such objections to escape liability for wrongdoing.
3. It would be unjust to allow a claimant against a supposed company to assert the individual liability of innocent passive investors on the
ground of flaws in the formal steps of incorporation, when they have attempted in good faith to comply with statutory requirements and
the objecting party is not prejudice.

Questioning validity of corporate existence


Assuming that a de facto corporation actually exists, its existence as a corporation cannot be collaterally attached either by the State or by private
individuals. The State must bring a direct proceeding (quo warranto) against the corporation to oust it from the exercise of corporate powers
usurped by it and to have it dissolved.

Direct attack/collateral attack of corporate existence defined


Direct attack –
It is one whereby the State, in a proceeding brought for that purpose, attacks the existence of an association claiming to be a corporation. It can
only be instituted by the government through the Solicitor General by quo warranto proceedings.

Collateral attack –
It one whereby corporate existence is questioned in some incidental proceedings not provided by law for the express purpose of attacking the
corporate existence.

Rule against collateral attack


Rationale –
The general rule against collateral attack upon corporate existence is based upon the ground of public policy. Individual right is not invaded; it is
the State’s right and authority which are invaded and usurped. If the State, which alone grants the authority to incorporate, remains silent, an
individual would not be allowed and permitted to raise the inquiry.

When rule not applicable –


The rule that collateral attack on the organic entity or existence of a corporation will not be permitted does not apply, however, when the lack of
right or the wrongdoing of the corporation is in issue because in violation of public policy or of express or implied statutory requirement, such as
denial of its right to enforce contracts entered into without compliance with prohibitions or express or implied statutory or public policy.

Thus, the defendant may question the personality of a foreign corporation transacting business in the Philippines to maintain a suit on the ground
that it is not duly licensed to do business in our country.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 34
Christine Grace Embay-Zamora

Where a corporation not even a de facto corporation


If failure to comply with conditions precedent prevents the coming into existence of any corporation either de jure or de facto, then, on principle
and in reason, the question may be raised collaterally as well as directly, and by private individuals as well as by the State, unless there is something
to operate as an estoppels.

Capacity to sue or be sued –


If a party is not either de jure or de facto, it has no legal capacity to sue or be sued. And it follows that where the corporate existence of the
plaintiff suing as a corporation is defined, the burden is on it to prove its corporate existence either de jure or de facto, or at least to show an
estoppels on the part of the defendant to deny such existence.

Liability as partners –
If neither a de jure nor a de facto corporation results, the incorporators should be held liable as partners together with stockholders who
subscribed to stocks knowing the failure of the attempted incorporation of the business. It is the regular courts, not the SEC, that have jurisdiction
over disputes or controversies among them.

Proof of corporate existence


Proof of de jure existence –
It must be made to appear that there is a valid law creating or authorizing such a corporation, that there was a valid organization under it and a
substantial compliance with all conditions precedent.

Proof of de fact existence –


If the question of corporate existence is raised collaterally, it is sufficient if a de fact existence be shown. It is only necessary, in order to prove de
factor corporate existence, to show a law under which the alleged corporation might have been formed, a colorable bona fide compliance with that
law, and an assumption or user of corporate powers.

Proof of facts operating as an estoppel –


Again, there are many cases in which a party may, by his conduct, as by dealing with or holding out a body as a corporation, be estopped to deny its
existence as a corporate body. Here, it is not necessary to prove even a de fact corporate existence. All that is necessary is to show the facts that
will operate as an estoppels.

Where a person has contracted or dealt with an association as a corporation, proof of that fact alone is prima facie evidence of the corporate
existence of the body as against him, as in action by the alleged corporation on a subscription to its stock.

Powers and liabilities of a de facto corporation


So long as the State acquiesces in its existence and its exercise of corporate functions, it is under the protection of the same law and governed by
the same legal principles as de jure corporations, and may legally do and perform every act and thing which the same entity could do or perform
were it a de jure corporation. As to all the world except the paramount authority under which it acts and from which it receives its charter, it
occupies the same position as though in all respects valid, and even as against the State, except in direct proceedings to arrest its usurpation of
power, its acts are to be treated as efficacious.

Liability to taxation –
A de facto corporation is subject to taxation in the same manner as though it were a de jure corporation.

Binding effect of contracts –


A transfer of property to or by a corporation de fact is valid and binding against all persons except the State; bonds, deeds, and mortgage executed
by such corporation are valid, not only as against the corporation itself, but also as against anyone making a claim against its assets, whether as a
creditor directly of the corporation or as a creditor of its creditors or stockholders.

Protection against unauthorized acts –


Whether a corporation is de fact or de jure, it is entitled to protect itself from unauthorized acts.

Liabilities of officers and members of a de facto corporation


The officers and directors (or trustees) of a de facto corporation are subject to all the liabilities and penalties attending to officers and directors
duly chosen by a corporation de jure, including liability under the criminal law, and their acts are biding when such acts would be within the power
of such officers if the corporation were one de jure.

Liability as partners to third persons –


They cannot be held liable as partners by third persons who deal with them in their supposed corporate capacity, merely on account of a technical
defect in the formation of the corporation. This is especially true where the stockholders had no knowledge of the defects and had no intent to
become partners and the ostensible corporation is apparent to third persons. On the other hand, where an attempt to organize a corporation fails
by omission of some substantial step or proceeding required by the law, its members or stockholders are liable as partners.

Liability among themselves –


When persons associate together and do business as a corporation and the latter is defectively organized, their rights, duties, and liabilities, as
between themselves, should be determined and governed by the express or implied terms, conditions, and limitations contemplated by their
agreement.

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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 35
Christine Grace Embay-Zamora

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.

Estoppel to deny corporate existence


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 in good faith on such representation.

Actually, an organization which has not complied with the conditions precedent to even de facto existence is not, for any purpose, a corporation.
Nevertheless, the incidents of a corporate existence may exist as between the parties by virtue of an estoppels. Thus, besides corporation de jure
and de facto, there is sometimes a recognition of a third class known as corporation by estoppels, also known as ostensible corporation.

It is generally conceded that corporations by estoppels are not based upon the same principles as a corporations de facto. The doctrine of de facto
corporation has nothing to do with the principle of estoppels. A corporation de fact cannot be created by estoppels, the only effect of an estoppel
being to prevent the raising of the question as to the existence of a corporation.

Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to
form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third erpson involved
and the conflict arises only among those assuming the form of a corporation who, therefore, know that it has not been registered, there is no
corporation by estoppel.

Corporation by estoppel without de facto existence


The doctrine seems to be that the estoppel prevails, notwithstanding that not all the 3 requisites necessary to constitute as association of persons a
de facto corporation are present. In other words, corporation by estoppels may arise even if no de facto corporation exists.

A corporation by estoppels has no real existence in law. It is neither a de jure nor a de facto corporation. It exists only between the persons who
misrepresented their status and the parties who relied on the misrepresentation. Its existence may be attacked by any third person except where
the attacking party is estopped to treat the entity other than as a corporation.

Illustration:
A group of persons misrepresented themselves as X Co. when it is not to Y who recognized it as such. On this representation, Y entered contract
with them. On the other hand, without assuming to act as a corporation, X Co. entered another contract with Z.
 X Co. is estopped from denying its existence as against Y but not against Z.
 Y is not allowed to question or challenge the validity of the organization or formation of X Co. in an action by the latter against the
former.
 If not all the associates participated or consented to the representation, as to them, the doctrine of estoppel will not apply.

Estoppel of persons dealing with a corporation


Even if the ostensible corporation is proven to be legally non-existent, a party may be estopped from denying its corporate existence.

The stockholder or members of a pretended or ostensible corporation who participated in holding it out as a corporation are generally estopped or
precluded to deny its existence against creditors for the purpose of escaping liability for corporate debts or for unpaid part of a subscription to
stock. A corporation which continues its business instead of liquidating its affairs after the expiration of its corporate term, is a corporation by
estoppels for the purpose of being sued on its contracts, not a corporation de facto because it no longer exists in fact and in law as a body
corporate, except only for purposes of liquidating its affairs.

So, also are the third persons who deal with such a corporation recognizing it as such and the pretended corporation itself, estopped from denying
its corporate existence and raising the defense of its lack of corporate personality for the purpose of defeating a liability growing out of the
contractual relation between them and such entity or any tort committed by it as such or later taking advantage of their non-compliance with the
law, chiefly in cases where such persons have received the benefits of the contract.

In order for one to be estopped to deny the corporate existence of an organization, he must have contracted or dealt with it as a corporation. Thus,
if one deals with the members of a corporation as a partnership, he is not estopped to show this fact or hold such individuals liable as partners. But
one who is induced to deal with an apparent corporation by fraud will not be estopped to deny the corporate existence.

All persons not stockholders or members 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.

Persons liable as general partners


The Code makes liable as general partners “all persons who assume to act as a corporation,” and they include persons who attempt, but fail, to
from a corporation and who carry on business under the corporate name. A de facto partnership among them is created.

Q: Are both active and inactive members of an unsuccessfully attempted corporation, neither de facto nor de jure, liable as partners?
A: In a local case, the SC rules that while “stockholders” of a defectively incorporated association become, in legal effect, partners inter se, such a
relation does not necessarily exist, for ordinarily persons cannot be made to assume the relations of partners, as between themselves, when their
purpose is that no partnership shall exist; it should be implied only when necessary to do justice between the parties. Thus, one who takes no part
except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 36
Christine Grace Embay-Zamora

engage in business under the name of the pretended corporation, as to be liable as such in an action for settlement of the alleged partnership and
contribution.

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.

The rule is that as to provisions of the statute which are mandatory, non-compliance with its terms will prevent the creation of a de jure
corporation but as to those provisions which are merely director, a departure will not have this consequence. Strict compliance with the terms fo
the statute is not required. The law requires only substantial compliance.

Mandatory and directory provisions explained


Generally, mandatory provisions prescribe the formalities for incorporation which are designed to protect the public. When a provision is
construed as directory, it is regarded as relatively inconsequential so that failure to comply with a directory provision will not be fatal to a valid
incorporation.

Mandatory conditions may be either conditions precedent or conditions subsequent.

Conditions precedent explained


Conditions precedent are those conditions non-compliance with which will prevent the legal existence of a corporation.

Conditions subsequent explained


Conditions subsequent are conditions to be complied with after acquiring corporate existence in order that a corporation may legally continue as
such.

Noncompliance with a condition subsequent which is mandatory may not affect corporate existence although it can be a ground for proceedings by
the State for forfeit its charter.

Formal organization and commencement of business


A corporation achieves legal existence from the date the SEC issues a certificate of incorporation under its official seal but formal organization
brings the corporation to life.

Acts constituting formal organization –


Formal organization of a corporation is the process of structuring the corporation so that it can carry out the purposes for which it has been
incorporated. It would include the adoption of by-laws, the filing of the same with the SEC, the election of BOD/BOT and of the officers by the
board pursuant to the by-laws, establishment of the principal office, providing for the subscription and payment of the capital stock, and the taking
of such other steps as are necessary to enable the corporation to transact the legitimate business or accomplish the purpose for which it is created.

Acts constituting commencement of business –


A corporation shall be considered to have commenced the transaction of its business when it has performed preparatory acts geared toward the
fulfillment of the purposes for which it was established such as but not limited to the following: entering into contracts or negotiation for lease or
sale fo the properties to be sued as business or factory site; making plans for and the construction of the factory’ and taking steps to expedite the
construction of the corporation’s working equipment.

Effect of subsequent continuous inoperation –


Where the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least
5 years, such continuous inoperation shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation but
notice and hearing in such case are required. The corporation continues to exist, notwithstanding its non-operational status, until the revocation or
cancellation of its certificate of registration has been lawfully declared by the SEC or it is dissolved in accordance with law.

TITLE III
BOARD OF DIRECTORS/TRUSTEES/OFFICERS

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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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Christine Grace Embay-Zamora

members thereof. a majority of the directors or trustees of all corporations organized under this Code must be resid
residents of the
Philippines.

Structure of the corporate organization


Tri-level structure –
The standard operating procedure for corporations, frequently referred to as a corporate norm, might be described as pyramida
pyramidal in form.

At the base are the shareholders (or members) whose vote is required to elect the BOD/BOT and
Officers
to pass on other major corporate actions.

Board of The next level is represented by directors who constitute the policy
policy-making body of the
Directors corporation and select the officers annually, as a rule.

Finally, at the top of the pyramid are the officers who have some discretion but in general
Shareholders
deemed to execute polices formulated by the board.

Corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws, or by
resolution or other act of the BOD.

Corporate powers exercised by the BOD or BOT


All corporations being invisible, existing only in contemplation of law, can only act and contract through the aid any by mea
means of individuals. Such
individuals may be those holding corporate officers or agents properly appointed by such officers.

Governing body of the corporation –


It is well established in corporation law that the corporation can act only through its BOD in the case of sstock corporations, or BOT in the case of
non-stock
stock corporations. Thus, contracts or acts of a corporation must be made either by the BOD or BOT or by a corporate officer duly authorized
by the board. The general rule is that in the absence of authority or valid delegation from the BOD or BOT, no person, not even its officers, can
validly bind a corporation.

Binding effect of stockholders’ action –


The stockholders or members elect a BOD or BOT to oversee the management and operation of the corporation. TThey are not the agents of the
corporation and cannot bind it by their acts. They have only indirect control of the corporation through their votes. With th
the exception only of
some powers reserved by law to stockholders (or members), the BOD or BOT have sol solee authority to determine policy, enter into contracts, and
conduct the ordinary business of the corporation (in all matters which do not require the consent or approval of the stockhol
stockholders) within the scope
of its charter.

The law is settled that contractss between a corporation and third person must be made by or under the authority of its BOD or BOT and not by its
stockholders (or members). Hence, the action of the stockholder in such matters is only advisory or recommendatory and not in any wise binding
on the corporation.

For the same reason that a corporation can act only through the BOD, a resolution adopted at a meeting of stockholders refusi
refusing to recognize a
corporate contract effected with the approval of the BOD or repudiating it, is without effec
effect.

It is the prerogative and discretion of those BOD or a parent or holding corporation to choose its nominees in the BOD of its subsidiaries. The
stockholders of the parent or holding company cannot demand proportionate representation int eh BOD of its ssubsidiaries.

Extent of judicial review –


As long as the BOD or BOT act honestly and their acts or contracts do not disregard the rights of the minority, the courts wi
will not interfere. They are
not liable for losses if the cause is merely error in business judgement, not amounting to bad faith or negligence.

Any corporate act which does not fall under any of the transactions requiring stockholders’ or members’ approval can be carri
carried out by mere board
resolution although the activities or transactions invo
involved
lved may span beyond the terms of the BOD or BOT and entail obligations to be borne by
succeeding boards as long as the action was done in good faith and for the best interest of the corporation.

“Business judgment” Rule


The courts cannot undertake to control
trol the discretion of the BOD about administrative matters as to which they have the legitimate power of
action, and contracts intra vires entered into by the BOD are binding upon the corporation and courts will not interefere unl
unless such contracts are
so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. As long as it acts in good faith, its orders are
not reviewable by the courts.

RULE: The stockholders shall turn over to the BOD the exclusive authority to manage and control the transactions of its business and the use of its
assets.
Reason:
Stockholders are too numerous and scattered and unfamiliar with the business of a corporation to conduct its business directl
directly. It is
accordingly the plane of corporate organization that the stockholders shall choose the directors who shall control and supervise the
conduct of the corporate business.
Source:
rce: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 38
Christine Grace Embay-Zamora

In a close corporation, however, the articles of incorporation may provide that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a BOD.

Nature of powers of BOD or BOT


The powers of the BOD or BOT are, in a very important sense, original and undelegated. The stockholders or members do not confer, nor can they
revoke, those powers. They are derivative only in the sense of being received from the State in the act of incorporation.

Actually, the powers of the BOD or BOT are directly conferred by statue and, as a general rule, the stockholders or members cannot control their
actions or exercise of judgment vested in them by virtue of their office. Once the BOD or BOT are elected, the stockholders or members relinquish
corporate powers to the board as provided by law. In certain corporate acts, however, the approval or authentication of the stockholders or
members is necessary for their validity.

Limitations on powers of BOD or BOT


1. Limitations or restrictions imposed by the Constitution, statutes, articles of incorporation, or by-laws of the corporation.
2. It cannot perform constituent acts, that is, acts involving fundamental or major changes in the corporation (such as amendment of the
articles of incorporation) which require the approval or ratification of the stockholders or members.
3. It cannot exercise powers not possessed by the corporation.

The corporate powers conferred upon the BOD usually refer only to the ordinary business transactions of the corporation and does not extend
beyond the management of the ordinary corporate affairs nor beyond the limits of its authority.

Powers exercised by BOD or BOT as a board


To exercise their powers, they must meet as BOD or BOT and act “at a meeting at which there is quorum.” (Sec. 25 for requisites for board
meetings) If they act or give their consent separately or if they act at a meeting which is not a legal meeting, their action is not that of the
corporation, although all may consent, and the corporation is not bound.

GENERAL RULE: BOD or BOT can bind the corporation only by action taken at the board meeting.
Reasons:
1. A meeting is necessary in order that any action may be deliberately adopted, after opportunity for discussion and an interchange of
views.
2. As agents of the corporation managing is affairs, BOD or BOT have no power to act other than as a board.
EXCEPTIONS:
1. It has been held that a contract entered into by directors without a meeting of the board is binding upon the corporation where the
directors happen to be the sole stockholders.
2. The corporation is similarly bound by a contract entered into by a corporate officer such as the general manager, authorized by the BOD
either expressly or impliedly, to bind it by contract.
- Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general custom, and policy,
the general manager may bind the company without formal authorization of the BOD.
3. The corporation is also bound by a particular transaction ratified in a subsequent board meeting.
- The ratification may be express by a formal affirmative vote or resolution of the board or it may be implied and if implied, it may
take diverse forms such as by silence or acquiescence, by acts showing approval or adoption of the contract or by acceptance and
retention of benefits flowing therefrom and such ratification relates back to the time of the contract and is equivalent to original
authority.
4. The corporation is likewise bound by the acts of one of its directors or agents held out byt eh corporation to the public as possessing
power to do those acts.
5. Where the stockholders, by acquiescence, invest the executive officers of the corporation with powers of the directors as the usual
method of doing business, the board being inactive, the acts of such officers will bind the corporation according to some courts although
not authorized by any vote either of stockholders or directors.
6. The stockholders may waive the necessity for a meeting of the BOD, and without such meeting may authorize acts to be done by agents
of the corporation or ratify acts already done and bind the corporation. Again, the shareholders are the residuary owners, and the rule
requiring director’s meetings to authorize acts is for their benefit.
7. Under exceptional situations, stockholders’ agreement though it provides for the exercise of management ordinarily delegated to the
board, is valid and enforceable, where no creditors, minority stockholders, or other persons of the public are affected.
8. The by-laws of a corporation may create an executive committee with authority to act on such specific matters within the competence of
the board, as may be delegated to it in the by-laws of the corporation, or on a majority vote of the board, except on certain matters
specified in Section 35.
9. A corporation is expressly allowed, subject to certain limitations provided in Section 44, to enter into a management contract under
which it delegates the management of its affairs to another corporation for a certain period of time.
10. In a close corporation, any action by the directors without a meeting or at a meeting improperly held, shall, unless the by-laws otherwise
provide, be deemed valid or ratified in the cases mentioned in Section 101.

Power of directors or trustees to delegate authority


GENERAL RULE:
In the absence of authority from the BOD, no persons, not even its officers, can validly bind a corporation.

The power to bind the corporation by contracts rests in its BOD or BOT, but the power may be delegated either expressly or impliedly to other
officers or agents of the corporation appointed by it. It is broadly stated that they may delegate to agents of their own appointment the
performance of any act what they themselves can legally perform.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 39
Christine Grace Embay-Zamora

EXCEPTIONS:
1. Discretionary powers which, by provisions of law or the by-laws or by the vote of the stockholders, are vested exclusively in the BOD or
are especially delegated to them, cannot be delegated to subordinate officers and agents.
2. They cannot delegate entire supervision and control of the corporation to others for this is not only unnecessary and contrary to usage,
but it is inconsistent with Section 23, which requires that “the corporate powers shall be exercised, all business conducted and all
property of such corporation controlled and held by its BOD/BOT.”
3. They cannot delegate special powers especially conferred upon it by a resolution of the stockholders or members of the corporation.

Unquestionably, it may delegate purely ministerial duties.

What are the terms of office of directors of trustees?


One year –
It is expressly provided that the BOD/BOT to be elected “shall hold office for one (1) year (i.e. term expires one year after election to the office) and
until their successors are elected and qualified.”

Hold-over –
A hold-over does not change the length of term but results in shortening the period served by his successor.
The failure to elect does not terminate the terms of incumbent officers nor dissolve the corporation.

To “hold over” when applied to an office implies that the office has a fixed term which has expired, and the incumbent is holding the succeeding
term. Although the members of the board are hold over directors or trustees, they still possess the powers of bona fide members until their
successors are duly elected and qualified.

The hold over doctrine has a purpose which is at once legal as it is practical. It accords validity to what would otherwise be deemed as dubious
corporate acts and give continuity to a corporate enterprise in its relation to outsiders. The old hold over officer is a de facto officer and by fiction
of law, his acts as such are considered valid and effective.

Where the reason for hold-over is not for failure to elect but to give the incumbent more time to learn, or for reasons of economy and the
uncertainty that a quorum can be secured, the hold over is in violation of the provisions requiring an annual election of the directors or trustees,
and this is especially true where the hold-over extends beyond the one-year term. The regular election of directors as stated in the by-laws cannot
be dispensed with by the board in order to extend the term of the incumbent.

Modification of term –
Unlike in the case of non-stock corporations and educational corporations, stock corporations under the general provisions are not authorized to
divide the members of its board of directors into groups with each group having a different term of office.

Their term of office being fixed by law, the same cannot be shortened or extended by agreement of the parties or by those interested in the
position.

Number of directors or trustees to be elected


Stock corporation –
Not less than 5 nor more than 15, except as otherwise provided by the Code or by special law.

Ordinary non-stock corporation –


Unless otherwise provided in the articles of incorporation or the by-laws, “may be more than 15 in number,” with the term of office of 1/3 of their
number expiring every year.

Close corporation –
The articles of incorporation may provide that the business of the corporation shall be managed by its stockholders rather than by a BOD in which
case no meeting of stockholders need be held to elect directors.

Non-stock educational corporation –


“Shall not be less than 5 nor more than 15,” provided that the number “shall be in multiples of 5,” with the term of office of 1/5 of their number
expiring every year.

Corporation sole –
There is not BOD or BOT as it consists of one member or corporator only.

Religious societies –
Not less than 5 nor more than 15.

Election of less than the required number


The failure of the stockholders or members to elect the required number of directors or trustees provided for by statute or its articles of
incorporation does not invalidate the title of those elected as long as they constitute a quorum. An election of less number of directors than the
number which the meeting was called to elect is valid. Thus, the stockholders of a corporation may opt to elect only 3 directors instead of 5 at the
annual stockholders’ meeting. Such act would not violate the provisions of the Corporation Code, specifically Section 14(6), for such situation
merely gives rise to vacancies of 2 seats in the board which may be filled up in a subsequent special stockholders’ meeting duly called for the
purpose.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 40
Christine Grace Embay-Zamora

What are the qualifications of directors or trustees?


1. Non-stock corporation
- Trustees must be members in good standing.
- A majority of them must be residents of the Philippines.
- Not convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years, or a violation of this
Code, committed within 5 years prior to the date of his election or appointment.

2. Stock corporation
- Every director (including an incorporating director) must own at least one share of the capital stock.
- The share of stock held by the director must be registered in his name on the books of the corporation.
- Every director must continuously own at least a share of stock during his term; otherwise, he shall automatically cease to be a
director.
- A majority of the directors must be residents of the Philippines.

Natural persons contemplated by law


Only natural persons can be elected as directors or trustees and they must be elected from among the stockholders or members.

However, a corporation which owns shares of stock or is a corporate member in another corporation can designate by board resolution
its officers or representative to sit in the latter’s board and thus qualifying him to be elected as director or trustee. The appointment must
be recorded in the corporate books.

Citizenship requirement
There is no citizenship requirement demanded of the members of the BOD. In corporations NOT organized under the Code, citizenship
requirements are established.

Stock ownership requirement


Holder of legal title –
The general rule is that the person who holds the legal title to the stock as shown by the books of the corporation is qualified although
some other person may be the beneficial owner of the stock recorded in his name. A mere proxy who is not a stockholder cannot be
elected as member of a corporation’s BOD or BOT.

Voting trustee –
A voting trustee may now be considered as the legal owner of the share transferred to him by virtue of a voting trust agreement and,
therefore, eligible to office of director. With the omission of the phrase “in his own right,” the election of trustees and other persons
who, in fact, are not the beneficial owners of the shares registered in their names on the books of the corporations becomes formally
legalized.

Transferee of qualifying share –


A person to whom one share of stock has been transferred for the express purpose of qualifying him as a director is eligible. Ownership of
the qualifying share need only be in a nominal capacity, with the beneficial title remaining in the transferor who or which actually owns
the share. It is sufficient that the title to the stock, as it appears in the books of the corporation, is in the director.

The transfer need not comply with the restrictions in the articles of incorporation such as giving the corporation the right of first refusal
thereon or prohibiting the transfer of founders’ shares. To rule otherwise would create an injustice to corporate stockholders who, under
the law, have the right to be represented in the Board.

Plegee/pledgor of shares –
The legal title is what counts. Hence, a person to whom shares have been transferred on the books of the corporations as pledgee is not
qualified to be a director because he holds the shares merely as security and not as owner. Upon like principle, director is not disqualified
when he merely pledged his shares or entered into an executory contract to sell the same.

Subscriber of shares held in escrow –


A subscriber to shares held in escrow cannot be eligible as a director since the holder does not become the owner of said shares until the
conditions for their release are fully met.

Transferee of share he previously sold –


Where a director makes a valid and effective transfer of all stockholding, he ceases to be a director and the subsequent purchase by him
of share does not reinvest him with title to his former position.

Transferee at time of assumption of office –


It is not essential to the validity of the election of one as a director that he be a legal owner of stock at the time of the election. His
subsequent acquisition of stock before entering the duties of his office has the effect of validating his election as director.

Co-owners of shares –
Where the system of absolute community governs the property relations between husband and wife, the provisions on co-ownership
shall apply to the community of property. Accordingly, the husband and wife who desires to be elected as a member of the board must
secure standing by having their shares recorded in the corporate books as co-owned by them, in which case either of them, not both,

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 41
Christine Grace Embay-Zamora

may be voted for as director for purposes of voting said shares. Section 56 of the Corporation Code shall apply. As co-owners of the
shares, the husband and wife shall be considered as one stockholder.

Requirement: Director must own at least one share of stock.


Reason: A man with a financial interest at stake will devote more attention to the business.

Additional qualifications in the by-laws


The qualifications of directors or trustees of the corporation, i.e. qualifications in addition to those specified in Section 23 may be
prescribed by the by-laws but their qualifications may not be modified if such modification would be in conflict with the requirements
prescribed by the corporation law.

Additional qualifications of directors or trustees cannot be enforced unless approved by the stockholders or members and contained in
the by-laws of the corporation.

Effect of want of eligibility


Votes cast for a person who is not eligible as a director cannot elect him. In any event, one not eligible as director because not owing any stock is
not a de facto director where he never accepted the office, nor performed any act as director, nor ever held himself out as director in any way.

It does not follow, however, that ineligibility of a person who has been elected as an officer will invalidate his acts as such. Persons dealing with a
corporation are not required to ascertain whether the directors or other officers of the corporation have the qualifications prescribed by the by-
laws. Acts of director or other officers are, therefore, valid so far as third persons are concerned, although he may not possess the qualifications
prescribed, if he has been elected or appointed by the corporation and permitted to act for it.

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 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.

Limitations or conditions imposed in the election of directors or trustees


1. At any meeting of stockholders or members called for the election of directors or trustees, there must be present in person or by
representative authorized to act by written proxy, the owners of the majority of the outstanding capital stock, or there be no capital
stock, a majority of the members entitled to vote.
- “the majority of the outstanding capital stock” non-voting stocks are to be taken into account although they are not entitled to vote.
- One share-one vote
- The law prescribes who shall be entitled to vote for directors or trustees of corporation. Hence, creditors of the corporation cannot
be given the right to vote at the meetings for election of directors or trustees, or on other questions either by a by-law of the
corporation or by contract, even with the consent of all the stockholders or members.

2. The election must be by ballot if requested by any voting stockholder or member.


- Voting by ballot is the exception rather than the rule. Hence, voting by viva voce or roll call (raising hands) is valid except when there
is a request that the election be by ballot in which case such voting is mandatory.

3. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of
voting in the election of directors.

4. No stock delinquent for unpaid subscription shall be voted. A delinquent stock is not entitled to vote or be represented for any corporate
purpose whatsoever.

5. If a quorum is present, the candidate receiving the highest number of votes shall be declared elected.
- The law requires only plurality, and not majority of the votes cast at the election.
- Delinquent stock is not included in determining the existence of the required quorum.

6. In case of failure to hold an election for any reason, the meeting may be adjourned from day to day or time to time but it cannot be
adjourned sine die or indefinitely.

7. The requisite notice must be given.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 42
Christine Grace Embay-Zamora

For one to be elected as director/trustee or officer, it is not required that he must be physically present at the meeting at the time of his
nomination and election, unless it is otherwise provided by the by-laws. But a director or trustee cannot attend or vote by proxy at board meetings.

Where directors or trustees merely designated


Mere designation by the stockholders or by a corporate officer empowered by the stockholders without election of the directors in the manner as
provided in the by-laws or applicable provisions of the Corporation Code will not be sufficient. Election of directors cannot be the subject of a
contract or agreement among the stockholders.

Time of annual election


The Code does not provide when the first election of directors or trustees shall be held. It, however, authorizes the corporation to provide in its by-
laws “the time for holding the annual election of directors or trustees.”

Postponement of the election


The BOD cannot change the date of the annual meeting prescribed in the by-laws of the corporation so as to lengthen their terms of office unless
the reason is justifiable (e.g. lack of quorum) and proper notice of the postponement is given to the stockholders or members.

Methods of voting
Every stockholder entitled to vote shall have the right to vote in person or by proxy the numbers of shares of stock standing, at the time fixed int eh
by-laws (e.g. as of 1- days before the election), in his own name of the stock books of the corporation or, where the by-laws are silent, at the time
of the election.
1. Straight voting
By this voting method, every stockholder “may vote such number of shares for an many persons as there are directors” to be elected.

A owns 100 shares. There are 5 directors to be chosen. Therefore, A is entitled to 500 votes (100 sh x 5 directors). He may give to the 5
candidates he wants to be elected 100 votes each. Under this method, the votes are distributed equally among the 5 candidiates without
preference.

2. Cumulative voting for one candidate


By this method, a stockholder is allowed to concentrate his votes and “give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal.”

The privilege of cumulative voting is accorded for the purpose of giving minority stockholders representation in the BOD by electing one
or more directors but such a provision has been held not to insure minority stockholders of proportional representation or of
representation in the BOD under all circumstances. But it is possible for the minority stockholders to obtain greater representation than it
is entitled to if the group controlling the majority of the shares does not cumulate its votes or cumulates them improperly.

If A owns 200 shares of stock and there are 5 directors to be elected, he is entitled to 1,000 votes all of which he may cast in favor of any
one candidate.

3. Cumulative voting by distribution


By this method, a stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be
elected and distribute the same among as many candidates as he shall see fit.

In electing directors by cumulative voting, “the total number of votes cast by a stockholder 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.”

With 100 shares of stock, A is entitle dot 50 votes if there are 5 directors to be elected. A may distribute his votes to candidates W, X and
Y, giving them 100, 150 and 250 votes respectively. A may cast his votes in any combination desired by him provided that the total
number of votes case by him does not exceed 500, which is the number of shares owned by him multiplied by the total number of
directors to be elected.

Voting in a non-stock corporation


Members of a non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one vote for one
candidate. This is the manner of voting in non-stock corporations unless otherwise provided in the articles of incorporation or in the by-laws.

If A is a member of a non-stock corporation and there are 5 directors to be elected, he is entitled only to 5 votes. He may give one vote to each of
the 5 candidates he wants to be elected. If he has only one candidate, he can cast only one vote for said candidate unless cumulative voting is
authorized in the articles of incorporation or in the by-laws.

Separate voting by zones or regions not allowed


It is clear from Section 24 that in election of the trustees of a non-stock corporation, it is necessary that at least “a majority of the members entitled
to vote” must be present at the meeting held for the purpose. It follows that trustees cannot be elected by zones or regions, each zone or region
electing independently and separately a member of the board of trustees of the corporation, such method being vioaltive of Section 24.

For purposes of electing directors or trustees, the by-laws may divide the members into groups, with each group entitled to nominate qualified
members coming from said group, but the nominated members shall be elected not by the group itself but by the entire members of the
corporation in accordance with Section 23 and 24.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 43
Christine Grace Embay-Zamora

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.

Corporate officers
The BOD or BOT formulate the broad policy of the corporation and directs the conduct of its business operations. But the task of actual
management and carrying on the details of business operations and corporate policy are delegated to the officers elected by it and over whom it
exercises supervision.

In most cases the “by-laws may and usually do provide for such other officers” and that where a corporate office is not specifically indicated in the
roster of corporate offices in the by-laws of a corporation, the BOD may also be empowered under the by-laws to create additional officers as may
be necessary.

The scope of the terms “officers” in the phrase “and such other officers as may be provided for in the by-laws” would naturally depend much on
the provisions of the by-laws of the corporation. The president, VP, treasurer and secretary are commonly regarded as the principal or executive
officers of a corporation. However, if the by-laws enumerate the officer to be elected by the board, the provision is conclusive, and the board is
without power to create new offices without amending the by-laws except where it is empowered by the by-laws to create additional officers as
may be necessary.

The board may create appointive positions other than positions of corporate officer but the persons occupying such positions are not considered as
corporate officers within the meaning of Section 25 and are not empowered to exercise the functions of the corporate officers, except those
functions lawfully delegated to them. Their functions and duties are to be determined by the board.

Where the by-laws of the corporation provides “and for such other officers are the BOD may from time to time does fit to provide for” and “said
officers shall be elected by majority vote of the BOD,” a comptroller appointed by the general manager which appointed was subsequently
approved by the BOD, said comptroller is a corporate officer, not an employee, although the position is not expressly mentioned among the
officers of the corporation in the by-laws.

Corporate employees
Actually, all officers of the corporation are its employees, although in common usage the term “officers” is meant to refer to those elected by the
board or stockholders/members, occupying positions involving the exercise of authority and power in the management of corporate affairs, while
the term “employees,” to those whose duties are of a clerical or manual nature.

An “office” has been defined as a creation of the charter of a corporation. An employee is appointed, not elected, unless he is also a corporate
officer. He usually occupies no office and is generally employed not by the action of the directors or stockholders but by the managing officer of
the corporation who also determines the compensation ot be paid to such employee.

Election of officers by the board


The election of the administrative officers, such as the president, treasurer, secretary, and “such other officers as may be provided for in the by-
laws” is, in turn, entrusted to the BOD or BOT. Thus, pursuant to the by-laws, the board by a vote of majority of all or entire number of its members
may elect a VP, a GM, an auditor, and such other officers as the needs and nature of the business may demand.

The articles of incorporation of a close corporation may provide that all officers or employees or that specified officers or employees shall be
elected by the stockholders, instead of the BOD.

In a non-stock corporation, the officers may be directly elected by the members unless otherwise provided for in the articles of incorporation or the
by-laws.

There is no prohibition as to the right of any elected board member who is also a stockholder to participate in the election of president or any
other officer of a corporation. There is no conflict of interest considering that a stockholder has the right to vote and be voted upon in the
corporate election process.

Compensation, terms of office, and removal


Compensation –
It is within the power of the board to fix the salaries of corporate officers whom it appoints, for the power to employ must necessarily include the
power to grant compensation.

Term of office –
The terms of office of these officers may be fixed in the by-laws; otherwise, they shall be deemed for 1 year and until their successors shall have
been elected by the board.
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 44
Christine Grace Embay-Zamora

It would seem that under Section 25 (par.1), the term of the officers of the corporation cannot extend beyond that of the directors which under
Section 23 is only 1 year, since they shall be elected immediately after the election of the BOD. Section 47(7), however, permits a corporation to
provide in its by-laws a term longer than 1 year for its corporate officer, other than directors or trustees.

In the case of the president, since he must also be a director, his term of office as such would necessarily be coterminous with his term as director.

Removal –
The power to remove an officer for cause inheres in every corporation as part of its existence. The power to elect or appoint corporate officers
being vested with the board, the power of removal must necessarily be exercised by it as an incident to its power of appointment. However, in
non-stock corporations, if the officers are elected by the members, as allowed under Section 92, the power to remove them is also vested directly
in the latter.

In instances where the term of an officer is not fixed by contract or in the by-laws, he may be removed at any time with or without cause at the
pleasure of said body. But he power must not be exercised in bad faith or in such a manner as to work injustice.

Where the term of an officer as fixed in the by-laws or in a contract of employment is for more than 1 year, he has to be re-elected by the board
until the expiration of the term; otherwise, the corporation may be held liable for damages.

The election of successors to corporate officers after the expiration of their term does not constitute their dismissal. The matter of whom to elect is
a prerogative that belongs to the board and involves the exercise of deliberate choice and the faculty of discriminate selection.

Positions concurrently held by same persons


The positions of president and secretary or treasurer are considered by law as incompatible with each other due to the very nature appertaining to
each office. The rationale behind the provision is to ensure the effective monitoring of each officer’s separate functions.

There is no prohibition in the law against a stockholder being a director or officer of two or more corporations.

The Corporation Code does not prohibit a corporate officer from occupying the same position in another corporation organized for the same
purpose. However, such situation may be prohibited by special law, the articles of corporation, or the by-laws of the corporation.

Acceptance of office and taking of oath of office


To make one an officer of a corporation, his consent, as well as an appointment or election, is necessary.

No formal acceptance is necessary. If a person enters upon the duties of an office after his election or appointment, it is sufficient acceptance or,
rather, efficient ground for implying acceptance, in the absence of proof to the contrary.

There is no provision in the Corporation Code which requires the taking of an oath of office to qualify the elected directors and officers. Oath of
office constitutes no part of the office itself. Acceptance of the office will suffice unless the taking of an oath is required by the corporate by-laws in
which case they are not de jure but de facto officers until they have taken the oath.

Sources of powers or authority of corporate officers


An officer’s authority to act for the corporation is determined by his actual office and not by the description he may use in acting for the
corporation.

This authority may be derived from:


1. Some provision of statute, or
2. Articles of incorporation, or
3. By-law, or
4. A resolution of the BOD/BOT, provided it does not attempt to delegate non-delegable powers.

Corporate officers shall perform the duties and functions enjoined by them by law and the by-laws of the corporation. However, powers of
corporate officers under the by-laws are always subject to the rule in Section 23 that the BOD/BOT is the governing body of the corporation. By
virtue of Section 23, the board may in its best judgment and for the best interest of the corporation, appoint or authorize the President or another
officer or agent to act for and in behalf of the corporation, but in all cases such officers shall be under the ultimate direction of the board.

Extent of powers or authority of corporate officers


Determination of authority –
The full extent of the powers or authority of any particular officer of a corporation is to be determined by inquiring into:
1. The authority which he has by virtue of his office.
2. The authority which is expressly conferred upon him or is incidental to the effectualness of such express authority.
3. As to third persons dealing with him without notice of any restriction thereof, the authority which the corporation hold the officer out as
possessing or is estopped to deny.
4. The nature of the corporate business must also be taken into consideration.
5. The act of an officer though originally unauthorized, may become binding upon the corporation by a subsequent ratification.

Exemption from liability –


Officers of a corporation who acted for and in behalf of the corporation within the scope of their authority and in good faith do not become liable
with the corporation, whether civilly or otherwise, for the consequences of their acts.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 45
Christine Grace Embay-Zamora

Authority to bind by contract –


The lack of authority of a corporate officer to bind the corporation by contract executed in its name, is a defense which should be especially
pleaded by the corporation. It should first prove by clear evidence that its corporate officer is not in fact authorized to act in its behalf before the
burden of evidence shifts to the other party to prove.

The general rule is that a contract, to be binding on the parties thereto, need not be in writing, unless the law requires that such contract be in
some form in order that it may be valid or enforceable or that it be executed in certain form.

Classification of powers or authority of corporate officers


1. Inherent authority
- Power of an officer or agent is taken to mean that authority to act and bind the corporation which the officer has by reason of his
office, although it may not be sanctioned by express authority.

2. Express authority
- Includes every power or authority expressly conferred upon him by law and the by-laws of the corporation.

3. Implied authority
- Includes all such incidental authority as is necessary, usual, and proper to effectuate the main authority expressly conferred.

4. Apparent or ostensible authority


- When in the usual course of business of the corporation, an officer or agent is held out by such corporation, or has been permitted
to act for it in such way as to justify third persons who deal with him in assuming that he is doing an act or making a contract within
the scope of his authority, the corporation is bound thereby even though such officer or agent does not have the actual authority to
do such act or make such contract.
- Apparent authority is derived not merely from corporae practice (defined as frequent or customary action). Its existence may be
ascertained through:
a. 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
b. The acquiescence in his acts of a particular nature, with actual of constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.
- It is not the quantity of similar acts which establishes apparent authority but the vesting of a corporate officer with the power to
bind the corporation.

5. Authority by estoppels
- A corporation which by its voluntary act, places an officer or agent in such a position or situation that persons of ordinary prudence
are justified in assuming that he has authority to perform the act in question, is estopped as against such persons from denying the
officer’s or agent’s authority.

Extent of authority of particular officers


1. Chairman of the Board
- The concept of board of chairman and his functions as an executive vary so widely in different companies as to be indefinable. There
is no settled practice.
- The typical pattern of executive duties is that the president or the chairman of the board is designated usually by the by-laws but
sometimes, in board resolutions, as the general manager or chief executive officer of the corporation. If the chairman of the board is
so designated, the president is frequently designated the chief administrative or chief operating officer, or may simply be the officer
who succeeds to the chairman’s executive duties in his absence or disability.
- If a vice-chairman is appointed, he presides at the meetings in the absence of the chairman. He shall exercise such powers and
perform such duties and functions as the board may, from time to time, assign to him.

2. President
- The powers of the president of the corporation are such only as are conferred upon him by the BOD or BOT or vested in him by the
by-laws.
- It is the BOD or BOT, not the President that exercises corporate powers.
- Even in the absence of express delegation by the board or implied authority by ratification, unless there is a charter or by-law
provision to the contrary, the President, as such, may, as a general rule, bind the corporation by a contract in the ordinary course of
business, provided that the same is reasonable under the circumstances. Furthermore, a person dealing with the President of a
corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contract that are within the
scope of the powers of the corporation.
- By law, 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 or in the absence of the chairman or vice chairman.
- The president of a corporation, by the authority of his office alone, has no power to delegate the powers and duties of his position
as president to any member of the board of directors or trustees. Should he become incapacitated to perform his functions, what
should be done, in the absence of a VP or any specific provision in the by-laws on the matter, is for the board to temporarily elect an
acting president.

3. Vice President
- An officer next-in-rank to the president.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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Christine Grace Embay-Zamora

- He is commonly referred to as a “fifth wheel,” a conditional officer who acts as president in case of death, absence, or inability of the
president to act.
- He has no authority by virtue of his office alone to enter into contracts in behalf of the corporation. However, it is frequently the
case that the VP of a corporation is given certain executive duties by the BOD or by-laws of the corporation.
- Where the by-laws provided that it shall be the duty of the VP to take the place of the president during the absence of the latter, the
VP should likewise be a director. If the VP is also a secretary or a treasurer, he cannot act as president at the same time. There may
be more than one VP, including an executive VP.

4. Secretary
- The secretary must be a resident and a citizen of the Philippines. The assumption is that the secretary, being the custodian of
corporate records, should at all time be available in the regular conduct and operations of the corporation. He is not allowed to act
as president and secretary at the same time.
- He need not be a director unless required by the by-laws.
- It is generally the duty of the secretary of a corporation to make and keep its records.
- He issues notices of meetings and has custody of the corporate seal which he uses when attesting the signatures of the officers to
important documents.
- A corporate secretary’s certification, when regular on its face, is sufficient for a third party to rely on. It need not investigate the
truth of the fact contained in such certification.
- The secretary is a ministerial officer who cannot bind the corporation unless he is especially authorized to do so. There may be an
assistant secretary.

5. Treasurer
- The law does not require that the treasurer shall be a resident and citizen of the Philippines.
o While the Corporation Code does not impose Philippine residency requirement, nevertheless, considering the nature of his
functions, good corporate practice dictates that the treasurer must be a resident of the Philippines. There is a need to
provide to local investors ample protection from the danger of getting victimized by foreign nationals.
o SEC has adopted as a matter of policy to require the treasurer of a private corporation to be a resident of the Philippines.
This policy would prevent the possibility on the part of a non-resident treasurer to effect the transfer of corporate funds
out of the country, for, in view of his status as a non-resident, he can easily leave the country and escape.
- The proper officer entrusted with the authority to receive and keep the money of the corporation and to disburse them as he may
be authorized.
- The view is that he has no inherent power to bind the corporation by contracts or to borrow money in behalf of the corporation.
- There may be an assistant treasurer.

Requisites for board meeting


1. Meeting of the directors or trustees duly assembles as a board, i.e., as a body in a lawful meeting.
2. Presence of the required quorum.
3. Decision of the majority of the quorum or, in other cases, a majority of the entire board.
4. Meeting at the place, time, and manner provided in the by-laws.

The BOD or BOT may adopt its own internal rules in the conduct of its meetings provided that the same will not run counter with the provisions of
the Code, the articles of incorporation, and by-laws of the corporation. Whether an individual director may have a lawyer, accountant, or adviser
present, a meeting of the board is a matter of internal corporate management upon which the courts properly decline to rule.

Quorum
Quorum is such number of the membership of a collective body as is competent to transact its business or do any other corporate act.

Number required for presence of quorum –


“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.”
- Majority means the number greater than half or more than half of any total. (1/2 + 1 of the number of directors fixed in the articles
of incorporation.) Such quorum remains the same even though there may be vacancies.

Number required for approval of corporate acts –


As a general rule, majority of the quorum of the board will be sufficient to adopt a proposal. But if the majority is used, the number of votes
required to approve such acts shall be at least ½ plus 1 of the entire membership.

Number provided greater than majority –


The Code gives the corporation the power to require a number greater than the majority of the board members to constitute the quorum
necessary to transact business.

Proxy and constructive presence not allowed


On account of their responsibility to the corporation and their being voted into office presumable because of their personal qualifications, directors
or trustees cannot validly act by proxy.

They must attend the meeting of the BOD or BOT and act in person and as a body. Each director or trustee is required by law to exercise his
personal judgment and discretion in running the affairs of the corporation and he cannot delegate his powers or assign his duties to another
director, or to a corporate officer, or to any person.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 47
Christine Grace Embay-Zamora

Constructive or electronic presence (including telephone) is not a substitute for actual presence required under Section 25, which does not
mention the same. Furthermore, participation or voting by electronic presence is quite hard to prove by admissible evidence because electronic
voices and messages can easily be dissimulated.

Another corporation as director or trustee


A corporation is not qualified to occupy the position of director because, being a juridical person, it cannot act by itself but only through its officers
and agents and such being the case, it cannot attend personally board meetings as a director and whosever represents it as a director is oding so in
his capacity as the “proxy” of the director or trustee.

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 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.

The objective sought to be achieved in this Section is to give the public information, under sanction of oath of responsible officers, of the nature of
the business, financial condition, and operational status of the corporation together with information on its key officers or managers so that those
dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporation’s financial
resources and business responsibility.

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.

Disqualification of directors/trustees or officers


The purpose of this section is to avoid the election or appointment of unworthy officers in view of the fiduciary character of their position.

The offense need not involve moral turpitude. The rule applies regardless of the nature or classification of the offense as long as it is punishable by
imprisonment for a period exceeding 6 years. If the disqualification is based on a violation of the Code, the duration of the imprisonment is
immaterial, but the commission (not conviction) of the violation must have taken place within 5 years prior to the date of the election or
appointment.

De facto directors/trustees or officers


A person is an officer or director de fact where he is in possession of the office and is exercising the duties thereof under color or appearance of hi
right, but is not an officer or director de jure on account of irregularity in his election; or ineligibility; or disqualification resulting from a non-
resident or not being a stockholder; or failure to take an oath of office or file a written acceptance of the trust when required by statute or charter
or corporate by-laws.

Powers and rights of de facto officers, in general


All powers of de jure official –
De facto directors and officers may exercise all powers of de jure officials so as to bind all persons who acquiesce in their management and
direction, and they may continue to exercise these powers in such binding manner until they are, through proper legal steps, removed from office
and replace by other legally constituted directors and officers.

Powers or acts within the scope of corporate business –


A de facto BOD may legally perform such acts as are within the scope of the business of the corporation; and a de facto president may do such acts
pending a determination of who are the lawful officers of the company, as are necessary to keep its machinery in motion. Thus, a de facto BOD ma
call a special meeting of the stockholders to consider and act upon any matter pertaining to the corporation, as to which, under the law. The
stockholders may act at a special meeting.

Right to possess office and to salary –


While de facto officers have the same powers as de jure officers, they do not have the same rights since they may be ousted from office in a proper
proceeding and they cannot recover the salary of the office.

Validity of contracts and acts of de facto officers


In general, the contracts and acts of de facto officers, when acting within the scope of their authority, are just as binding as the acts of the officers
de jure, at least so far as third persons are concerned (therefore, the corporation is bound). If a contract between the de facto officers and third
persons are binding on the latter, then, of course, it cannot be attacked by the corporation as the act of de facto officers.

Where de facto officers ousted from office –


Acts of de facto officers cannot be collaterally attacked for it is only through direct attack (quo warranto proceedings) can the election or
appointment of a de facto officer be questioned. And the fact that a de facto officer is subsequently, in a direct attack, ousted from office, cannot
be set up as a defense by a corporation to escape liability for the acts of its ostensible officer.

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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 48
Christine Grace Embay-Zamora

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.
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.

Power of stockholders or members to remove directors or trustees


Generally –
The law does not specify cases for removal of a director or trustee nor even require that removal should be for sufficient cause or reason. The
legislative policy is that the stockholders shall be the ultimate masters, not the directors, “to make the corporate government responsible to the
owners.”

Where director or trustee elected by cumulative voting –


A director or trustee may be removed by the prescribed vote without cause subject to the limitation that a director or trustee cannot be removed
without cause if the effect of such removal is to deprive minority stockholders or members who united in cumulative voting to elect such director,
of right of representation to which they may be entitled under Section 24. This proviso is necessary to protect the minority against any abuse by
the majority since there is no cumulative voting in the removal of directors.

The rule does not apply where the removal is initiated by the minority stockholders or members themselves.

Where removal done by electing replacement –


The incumbent directors or trustees cannot be removed merely by electing a new set of directors or trustees. The reason is that the directors or
trustees can only be removed by at least 2/3 of the outstanding capital stock or of the members entitled to vote, while vacancies in the board,
when they exist, can be filled by mere majority (or plurality) vote. Furthermore, the Code requires that the removal “shall take place either at a
regular or special meeting called for the purpose,” and “after previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting.

Where removal done for disqualification –


A director or trustee can be removed by following the procedure set forth in Sectoin 28. In case of disqualification by operation of law, there is no
need to follow the said procedure. A mere declaration of such disqualification is sufficient to remove him from office.

Where replacement elected not qualified –


It has been held that a director who has been removed by the stockholders who elected another person in his place cannot be compelled to vacate
his office, where it is shown that the successor is not qualified not being the owner of any share in the corporation and because under the by-laws
of said corporation, “directors shall serve until the election and qualification of their duly qualified successors.”

Power of the board to remove a member


The BOD/BOT has no power to remove one of its members as director (or trustee). Neither can it replace the vacancy caused by removal effected
by the stockholders or members of the corporation.
Reason:
As officers deriving their title form the stockholders (or members), they can be removed only by the power that appointed them. Since
the law expressly confers the authority to stockholders or members, the board cannot indirectly usurp or disregard the same.

Power of the court to remove directors or trustees


GENERAL RULE:
The Corporation code does not confer expressly upon the courts the power to remove a director or trustee or any appointed officer of a
corporation on the ground of mismanagement of its affairs, neglect, or other cause. The power of removal is in the corporation itself.

Exception:
If the court has acquired jurisdiction to appoint a receiver because of the mismanagement of the directors (trustees), these may thereafter be
removed and others appointed in their place by the court in the exercise of its equity jurisdiction. But where the properties and assets of the
corporation are amply protected by the appointment of a receiver, such removal is unnecessary and unwarranted in view of the provisions of
Section 28 prescribing the manner of removal of directors or trustees.

Requisites for removal of directors or trustees


1. The removal must take place either at a regular meeting of the corporation or at a special meeting called for the purpose.
2. There must be previous notice to the stockholders or members of the corporation of the intention to propose such removal at the
meeting.
3. The removal must be by a vote of the stockholders holding or representing 2/3 of the outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of 2/3 of the members entitled to vote.

Requirement of notice of meeting


1. For removal
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 49
Christine Grace Embay-Zamora

Section 28 requires that the notice of the meeting called for the removal of any director or trustee must expressly state “the intention to
propose such removal.” “Previous notice xxx of the intention to propose such removal” is not required where the meeting is a regular
annual meeting. There is no removal involved when a director or trustee is re-elected.

2. For choosing replacements


In case of removal on the vote of stockholders or members, as the case may be, the vacancy so created may be filled by election at the
same meeting without further notice, or at any regular or at any special meeting called for the purpose after giving the prescribed notice.

Resignation of directors or trustees


Right to resign at any time –
The fact that the law requires directors or trustees unless removed to continue in office until their successors are elected and qualified does not
prevent a director or trustees from resigning at any time.

Liability for wrongful resignation –


A director cannot resign, as part of fraudulent scheme to prejudice the corporation or its stockholders and make profit to his own advantage or at
an unreasonable time if the immediate consequence would be to leave the interest of the corporation without proper care and protection. If a
director quits under circumstances which occasioned a deprivation of profits to the corporation, it is but right that he should repair and make good
such loss.

Form and report of resignation –


In the absence of express provision, a resignation need not be in any particular form. It may be either oral or in writing, but it must clearly show an
intent to resign. The Code requires the resignation of a director or trustee to be immediately reported to the SEC.

Effectivity of resignation –
As a general rule, unless a future date of acceptance by the corporation is required by the by-laws, the resignation of a corporate official becomes
complete and his office becomes vacant the moment the resignation is made to the proper officer or body, and it is not necessary that the
resignation be accepted, or that someone be elected to take his place, in order to make the resignation effective. This is the rule, notwithstanding a
provision in the statute, charter or by-laws that the officers shall hold office until their successors are duly elected.

Abandonment of office and failure to attend meetings


Acceptance of incompatible office –
Where a director (or trustee) in a corporation accepts a position in which his duties are incompatible with those as such director (or trustee), it is
presumed that he has abandoned his office as director (or trustee) of the corporation.

Absence for an unreasonable length of time –


Abandonment by a director of all his duties for a number of years must be regarded as an implied resignation of his office as director.

Mere absence or continued failure to attend meetings –


However, mere absence of a director from the country, or continued failure to attend meetings, etc. where there has been no resignation, does not
have the effect of vacating his seat or terminating his term of office unless there is some express provision to such effect.

Specified number of unjustified absences as ground for automatic disqualification –


Where the general authority to remove directors or trustees rests with the stockholders or members, a corporation, to protect its interests, is
empowered to prescribe in the by-laws attendance in board meetings as a qualification device, such that a specified number of unjustified
absences may be a ground for automatic disqualification which need not be approved again by the stockholders or members as required in Sec. 28.

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.

Vacancies on the office of director or trustee


Grounds for replacement during term –
A director or trustee can only be replaced during his term upon his resignation or removal (see Section 28) or when his position is otherwise
lawfully vacated.

Tenure of successor – unexpired term of his predecessor.

Prohibition against election of alternate in case of temporary vacancy –


In the absence of a vacancy, no one can be elected, even as an alternate, to take the place of an incumbent director who is temporarily absent
only. To allow such an alternate would be to have two directors for the same position, one permanent and the other temporary, a situation that
finds no sanction in the law and is irregular.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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Christine Grace Embay-Zamora

Filling of vacancies
1. By the stockholders or members
a. If the vacancy results from the removal by the stockholders or members or the expiration of term.
b. If the vacancy occurs other than by removal or by expiration of term, such as death, resignation, abandonment, or
disqualification, if the remaining directors or trustees do not constitute a quorum for the purpose of filling the vacancy.
c. If the vacancy may be filled by the remaining directors or trustees but the board refers the matter to the stockholders or
members.
d. If the vacancy is created by reason of an increase in the number of directors or trustees.

2. By the members of the board


If still constituting a quorum, at least a majority of the members are empowered to fill any vacancy occurring in the board other than by
removal by the stockholders or members or by expiration of term.

The power of the BOD/BOT is not suspended by vacancies in the board unless the number is reduced below a quorum.

The phrase “may be filled” in Section 29 indicates that the filling of vacancies in the board by the remaining directors constituting a
quorum is merely permissive. Corporations may choose how vacancies in their boards may be filled up, either by the remaining directors
or trustees constituting a quorum or by all stockholders or members in a meeting called for the purpose. However, if the by-laws
prescribe the specific mode of filling up existing vacancies, the provisions of the by-laws should be followed. It is well-settled that the by-
laws are part of the fundamental law of the corporation and its directors, officers, and members are bound to comply with them.

The vacancy referred to in Section 29 contemplates a vacancy occurring within the director’s term of office. When a vacancy is created by the
expiration of a term, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who
shall possess the authority to fill a vacancy caused by the expiration of a member’s term.

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.

Compensation of directors or trustees


Under the law, a private corporation is authorized to provide in its by-laws for the compensation of directors or trustees. In the absence of any
provision in the by-laws fixing their compensation, the directors or trustees, as such, shall not receive any compensation, unless authorized by a
vote of the stockholders representing at least a majority of the outstanding capital stock or a majority of the members entitled to vote. Any
compensation to the officers of a corporation without proper authorization in the by-laws or by the vote of the stockholders may be recovered in a
stockholders’ suit.

Directors without authority to grant themselves compensation


1. The directors have no authority to grant compensation to themselves.
a. For usual and ordinary services as such –
They are not entitled to salary or other compensation. (Reason: Directors render services gratuitously and that the return upon
their shares adequately furnishes the motives for services without compensation.)
b. For services outside their regular duties –
Corporate directors presumptively serve without compensation. While they may assign themselves additional duties, they are
without power to vote for themselves compensation for such additional duties.
2. A stockholders’ resolution or agreement for the payment of compensation for such services would be valid. But the stockholders cannot
ratify a board of directors’ action fixing their own salaries. Such action being contrary to law, cannot be ratified. The stockholders
themselves, by the requisite vote, must fix the compensation.

Limit to compensation
The total yearly compensation of directors, as such, shall in no case exceed 10% of the net income before income tax of the corporation during the
preceding year. This limitation seeks to curb the practice particularly of close corporations to grant excessive bonuses to their directors to reduce
the taxable income of such corporations. It is also intended for the protection of the stockholders as well as the corporation creditors and
prospective investors.

The Insurance Code does not contain any prohibition as against the BOD of a corporation securing insurance policy on the life of its members and
making the directors the beneficiaries instead of the corporation. However, the premium paid thereon is analogous to a continuing bonus and gift
and thus falls within the context of additional compensation.

Per diem of directors


The power of the BOD to fixe per diems for themselves is conferred by the law itself.
Whether or not authorized by the by-laws or by the stockholders, directors are entitled to receive reasonable per diems. In view of the real
distinction between per diems and compensation, the per diems granted to directors should not be included in their total yearly compensation for
purposes of the 10% limitation.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 51
Christine Grace Embay-Zamora

Section 30 does not specify, however, who is to set the amount of the per diems and what amounts shall be considered “reasonable” under the
circumstances. If normal corporate practice were to be followed, the matter shall be decided by the directors themselves. Thus, they may easily
circumvent the 10% limitation. The stockholders, however, may review a board resolution fixing or increasing the per diems of its members to
inquire into its reasonableness.

Compensation of corporation officers


1. Corporate officers who are not directors
The reason for the general rule that directors of a corporation are not entitled to compensation does not apply to corporate offices who
are not directors. Such officers, not being directors and having no control over the funds and property of the corporation, even though
they may be stockholders, do not occupy the relation of trustees to the corporation.

2. Corporate offices who are directors


Directors who are also corporate officers are entitled, in addition to reasonable per diems as directors, to compensation as such
corporate officers, and the amount thereof may be fixed by mere board resolution in the absence of provision to the contrary in the by-
laws and subject to the provision of Section 32.

Compensation may take the form of salary and fringe benefits, such as housing, membership in clubs, company cars, stock options, etc. Needless to
say, the compensation must not be excessive.

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 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.

Nature of directors’/trustees’ position


1. Agent or trustees for the corporation
The directors of a corporation are its agents. They also occupy a fiduciary relation to the corporation. By numerous authorities they have
been called “trustees”, with certain powers and subject to certain duties in the management of its property, and each stockholder a
cestui que trust according to his interest and shares. In the performance of their official duties, they are under obligations of trust and
confidence to the corporation and its stockholders and must act in good faith and for the interest of the corporation or its stockholders
with due case and diligence and within the scope of their authority.

2. Agents or trustees for the stockholders or members/creditors


So long as a purely private corporation remain solvent, its directors are agents or trustees for the stockholders or members. But the
moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporatin
or not, and must manage its property and assets with strict regard to their interest and if they are themselves creditors while the
insolvent corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate
property or otherwise acquiring any personal advantage over other creditors.

Cases when directors/trustees or officers liable for damages


GENERAL RULE:
Officers of a corporation are not personally liable for their official acts.
Exceptions:
They exceeded their authority.

The veil of corporate fiction may be piereced, as follows:


1. He willfully and knowingly votes or assents to patently unlawful acts of the corporation.
2. He is guilty of gross negligence (not mere “want of ordinary prudence”) or bad faith in directing the affairs of the corporation.
3. He acquires any personal or pecuniary interest in conflict with his duty as such director or trustee.

In the above instances, the erring board members or officers shall be held jointly and severally (or solidarily) liable for all damages
resulting therefrom suffered by the corporation, its stockholders or members, or other persons.

Liability of directors/trustees or officers for bad faith or gross negligence


1. Directors or trustees are personally liable for any wrongful disposition of corporate assets and for any loss or injury to the corporation
arising from their gross negligence or unauthorized acts or violation of their duties. But they are not liable for business losses incurred
because of honest bad judgement not amounting to bad faith or gross negligence.
2. Corporate directors and officers are solidarily liable with the corporation for the termination of employment of employees if the
termination is done with malice and bad faith.

Bad faith does not simply mean bad judgment or negligence; it imparts a dishonest purpose or some moral obliquity and conscious doing of wrong.
It means breach of known duty through some motive or interest or ill-will; it partakes of the nature of fraud.” It is never presumed. In order to
pierece the veil of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the
corporation, such negligence must be gross.
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 52
Christine Grace Embay-Zamora

Liability of directors/trustees or officers for secret profits


They shall be held accountable for the profits which otherwise would have accrued to the corporation. Private or secret profits obtained must be
accounted for, even though the transaction on which they are made is advantageous or is not harmful to the corporation, or even thought the
director/trustee or officer acted without intent to injure the corporation. The fact that the agreement whereby a person is to receive a secreat
profit is made prior to the time he becomes an officer does not change the rule. And the fact that the profits were derived from transactions ultra
vires does not relieve the director/trustee or officer from liability.

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.

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 directors/trustees or officers


GENERAL RULE:
A contract of a corporation with one or more of its directors/trustees or officers are voidable at the option of the corporation.
Reason:
Being its agents and entrusted with the management of its affairs, the directors or trustees and other officers of a corporation occupy a
fiduciary relation towards it, and cannot be allowed to contract with the corporation, directly or indirectly, or to sell property to it, or
purchase property from it, where they act both for the corporation and for themselves.

EXCEPTIONS: (Therefore valid)


1. All the conditions in Section 32 are present.
2. Not all conditions are present but the corporation (through the board) elects not to question the validity of the contract without
prejudice to the liability of the consenting directors or trustees for damages under Section 31.
3. In the case of a contract with a director or trustee, only the third condition is present, i.e., the contract is fair and reasonable under the
circumstances, if the contract is ratified by the required vote of the stockholders or 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.
Note:
This section fails to specify whether the vote of the self-dealing director or trustee shall be counted in the meeting for the ratification of the
contract.

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 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.

Contracts between corporations with interlocking directors


Section 33 recognizes as valid a contract between two or more corporations which have interlocking directors 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, i.e., his stockholdings do not exceed 20%, the rules of Section 32 on self-dealing directors shall apply insofar
as the latter corporation is concerned.

Evils of interlocking directorates


Validity of interlocking directorates –
By-laws which prohibit a director of a corporation from serving at the same time as a director of a competing corporation, have been upheld as
valid and reasonable.
Example:
Suppose X is a director of both Corporations A and Corporation B. X could hardly vote for a policy by A that would injure B without
violating his duty of loyalty to B; at the same time he could hardly abstain from voting without depriving A of his best judgment.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 53
Christine Grace Embay-Zamora

No absolute prohibition of interlocking directorates –


Contracts between corporations having directors in common are not rendered void or voidable on that ground. The law recognizes that
interlocking directorates are very common in today’s business world and to absolutely prohibit such contracts would be impractical and unwise.
But transactions between such corporations should be “subjected to close judicial scrutiny to determine eh absence or presence of fraud and
unfairness.”

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.

Doctrine of corporate opportunity


Under this doctrine, a director who, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporations, is guilty of disloyalty and should, therefore, account to the latter for all such profits
by refunding the same, notwithstanding that he risked his funds in the venture.

And, if, in such circumstances, the interests of the corporation is betrayed, the corporation may elect to claim all of the benefits of the transaction
for itself and the law will impress a trust in favor of the corporation upon the property interest and profits acquired.

Section 34 applies to directors. If the disloyalty is committed by an officer, he is liable under second paragraph of Section 31.

When doctrine NOT applicable


1. It does not preclude a director from engaging in a distinct enterprise of the same general class of business as that which his corporation is
engaged in, so long as he acts in good faith.
2. It is not applicable where the opportunity is one which is not essential to the corporation’s business, or where the director or officer does
not exploit opportunity by employment of company’s resources, or where the director or officer embracing opportunity personally is not
brought into direct competition with the corporation.
3. Where the corporation is definitely no longer able to avail itself of the opportunity, which may “arise from financial insolvency, or from
legal restrictions, or from any other factor which prevents it from acting upon the opportunity for its own advantage.”

Ratification by stockholders of disloyal act


Under Section 34, the guilty director will only be exempt from liability to the corporation to account for the profits he realized if his disloyal act is
ratified by the vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. There is no similar provision in Section
31.

Section 34 is silent on whether the disloyal director shall be allowed to vote his shares in ratification of his act.

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

Executive Committee
Need for an executive committee –
Section 35 recognizes an already existing corporate practice in the Philippines dictated by necessity owing to the growing complexities of modern
business, whereby the BOD delegates to an executive committee composed of some members of the board corporate powers to assure prompt
and speedy action and solution to important matters without the need for a board meeting, especially where such meetings cannot readily be held.

Express provision in the by-laws –


Under Section 35, the executive committee must be provided for in the by-laws and composed of not less than three (3) members of the board.
Where the by-laws contain an express provision creating an executive committee, the same may be properly vested by resolution of the BOD. The
board cannot create or appoint an “executive committee” to perform some of its functions in the absence of authority in the by-laws.

Committee contemplated –
It is as powerful as the board, as it actually performs certain duties of the board, and, in effect, it is acting for the board itself. And so, because of
the nature of the functions of the executive committee, the authority to appoint such body should be expressly provided in the by-laws, and a
provision in the by-laws which states that “authorizing the board to create such committees as the board may deem necessary,” is not a sufficient
reason for its creation and appointment.

Matter excepted from delegation by board –


The committee may act on specific matters within the competence of the board, as may be delegated to it by the board or in the by-laws, including
those involving the exercise of judgment and discretion, except those matters enumerated with respect to which only the board duly called and
assembled as such can act upon.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 54
Christine Grace Embay-Zamora

The board cannot validly delegate to the executive committee blanket or general authority to act for the board if the delegation constitutes in
effect an abdication of the corporate powers and duties vested in it by law. The board cannot delegate entire supervision and control of the
corporation to an executive committee for this will be violative of Section 23.

Enlargement by board of restrictions –


The restrictions on the power of the executive committee as provided in Section 35 may be enlarged by the board to cover other matters.

Membership –
Non-members of the board may be appointed as members of the executive committee provided that there are at least three (3) members of the
board who are members of the committee.

Ultimate control by the board –


While the executive committee may manage the day to day operation of the business of the corporation, the business affairs thereof shall be
controlled and all corporate powers shall be exercised under the ultimate discretion of the board as provided in Section 32.

Quorum and voting –


The general rule for quorum requirements is the same as that for board of directors. A majority of the committee members constitute a quorum.
To bind the corporation, it is essential that the executive committee acts “by majority vote of all its members.” From this, it can be inferred that the
committee cannot delegate its authority to one of its members.

Membership of a foreigner –
While foreigners are disqualified from being elected/appointed as “corporate officers” in wholly or partially nationalized business activities, they
are allowed representation in the “board of directors” or “governing body” of said entities in proportion to their shareholdings.

An “Executive Committee” is a “governing body” which functions as the board itself. Thus, membership therein shall be governed by the same
law/rules applicable to the BOD as provided in Section 35.

TITLE IV
POWERS OF CORPORATIONS

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

Powers of corporation, defined


Powers of a corporation has reference to the corporation’s capacity or right under its charter and laws to do certain things.

Distinguish from its franchise and objects


Primary franchise – right to exists as an entity for the purpose of doing the things embraced within its powers.
Secondary franchise – the right granted to an existing corporation to use public property for a public use, but with private profit.
Corporate power – a corporation exercises its powers for the purpose of attaining its objects.

Relative powers
Natural person –
An individual has absolute right to fully use, enjoy and dispose of his properties, to perform all acts and to make all contract without any control
except when they are forbidden by law.

Partnership –
Same with natural persons. Since a natural person and an ordinary partnership do not owe their existence to the State, they can perform any act
not prohibited by law.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 55
Christine Grace Embay-Zamora

Corporation –
Under the doctrine of limited capacity, a corporation has only such powers as are expressly granted and those that are necessarily implied from
those expressly granted or those which are incidental to its existence. The enumeration of corporate powers implied the exclusion of all other
powers except when they are incidental or implied in conformity with the generally accepted principles of statutory construction “expression
uniuns est exclusio alterius.” The reason for the doctrine is that a corporation owes its existence to the State and, therefore, it has only such
powers as are expressly and impliedly granted by law. A corporation, as an artificial person, created by or under authority of law, is without natural
rights.

It is therefore not correct to say that a corporation has the power to do all acts not expressly or impliedly prohibited.

Classification of corporate powers


1. Those expressly granted or authorized by law.
2. Those that are necessary to the exercise of the express or incidental powers.
3. Those incidental to its existence.

NOTE:
This section speaks of “every corporation incorporated under this Code.” Acts or contracts of a corporation outside the scope of its express,
implied, and incidental powers are ultra vires. An ordinary association cannot exercise the powers, rights, and privileges granted by the Corporation
Code to organizations registered with the SEC.

Determining whether an act or contract within scope of corporate powers


In determining whether a corporation has power to do an act, it is necessary to:
1. First, refer to its special charter or its articles of incorporation to see whether it is within the express, implied or incidental powers
conferred.
2. Then, to examine the statutes relating to corporations to see if the act is prohibited.
3. Then, in some cases, to consult the general statutes to see if the act is illegal even in case of natural persons.

Express Powers
Express powers are those powers expressly conferred upon the corporation by law.

Implied Powers
Implied powers are those powers which are reasonable necessary to execute the express powers and to accomplish or carry out the purposes for
which the corporation was formed.

Power merely convenient or useful (e.g., giving of interest free loans) are not implied if they are not essential, having the purpose or objects of the
corporation. The purpose or purposes for which the corporation was created, as stated in its articles of incorporation, by defining the scope of
corporate business or enterprise, in effect, delimit its implied powers.

Classification of implied powers –


1. Acts in the usual course of business
- It is evident that all of such acts, under ordinary circumstances, are necessary in order to run a business.
2. Acts to protect debts owing to a corporation
- If a corporation is a creditor, it may do such acts as may be necessary to protect its right as such creditor.
- Thus, a corporation may purchase property, act as a guarantor or sometimes even run a business temporarily to collect a debt,
where otherwise it would have no power to do so.
3. Embarking in different business
- A corporation may not engage in a business different from that for which it was created as a regular and a permanent part of its
business.
- Thus, a corporation not organized for that purpose cannot go into the banking or insurance in connection with some express power.
So, it is generally held that a corporation may temporarily conduct an outside business to collect a debt out of its profits.
4. Act in part or wholly to protect or aid employees
- While the cases are divided, the better view favors such acts as building homes, places of amusement, hospitals, etc. for employees,
as within the corporate powers.
5. Acts to increase business
- Thus, a corporation may conduct contests or sponsor radio or television programs, or promote fairs and other gathering to advertise
and increase it business.

Express powers vs. Implied powers


EXPRESS POWERS IMPLIED POWERS
Have to do largely with the main business, objects and Have to do largely with the means and methods of attaining
purposes of the corporation. those objects and purposes.
Determined by the language of the corporate charter and the May change according to time, place, and surrounding
applicable law. circumstances.
Test: Whether they are found int eh words of the charter of Test: Whether they are fairly incidental to the former and
the law. reasonably necessary to carry them out in furtherance of the
corporation’s business.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 56
Christine Grace Embay-Zamora

Incidental or Inherent Powers


These are powers which a corporation can exercise by the mere fact of its being a corporation or powers which are necessary to corporate
existence and are, therefore, impliedly granted.

Examples: Power of succession; to sue and be sued; to have a corporate name; to purchase and hold real and personal property; to adopt and use a
corporate seal; to contract; to make by-laws; etc.

Construction of powers granted


o They are to be construed strictly. Any ambiguity in the terms of the corporate charter must operate against the corporation and in favor
of the public.
o In determination of what powers have been conferred, the whole instrument is to be taken together.
o Since grants of corporate franchises are intended not only for the purposes of private gain but also to subserve public interest, they
should be so construed as not to defeat the purpose of their creation.
o Charters are also to be construed in view of the circumstances, usages, and practices existing at the time they were granted and it is not
the province of the court to enlarge the powers of a corporation beyond its charter limitations because circumstances have changes.
o If the charter is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction
is to be adopted which works the least harm to the State.
o The provisions of a general incorporation law may apply to corporations operating under special statutes with respect to the conduct or
government of such corporations as to which no specific provisions has been made.

Ratification of corporate acts


1. By stockholders/members
- They may ratify and render valid acts done or authorized by the BOD/BOT but which beyond the powers of the directors, or acts
done or authorized by the directors at an illegal meeting, or unauthorized acts of others than the directors, provided the acts done
are such as may be done or authorized by the stockholders.
2. By BOD/BOT
- Similarly, a transaction, if within the powers of a corporation, may be consented to, ratified, or acquiesced in the BOD/BOT if it could
be authorized by them.

Effect –
General Rule: Omnis ratihabitio retrotrahitur
Ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract
ratified, and is equivalent to original authority.
Exception: If there are intervening rights of strangers.

Modes of exercising powers


1. No particular mode prescribed by charter
- They may be exercised in any mode, provided it is not contrary to law, which the stockholders or officers may deem best.
2. Particular mode prescribed by charter
- They cannot be properly exercised in any other way, for the powers of a corporation are measured by its charter, not only as to the
things which it may lawfully do, but also as to the mode of doing them.
- However, as will be noticed in treating of the effect of ultra vires transactions, the fact that a corporation exercises a power in a
mode different from that prescribed by its charter will not necessarily prevent it from acquiring rights or incurring liabilities by
reason thereof.

POWER TO SUE AND BE SUED


This power is incident to corporate existence.
o Dissolved corporation –
Corporations de fact may sue or be sued but a corporation which has been dissolved after the expiration of the 3-year winding up period
ceases to exist de jure or de fact.
o Unregistered corporation –
It has no legal capacity to sue.
o Foreign corporation –
A foreign corporation which transacts business in the Philippines without the necessarily license from the SEC cannot sue in the Philippine
courts.

Right to claim moral damages –


General Rule:
A corporation cannot claim moral damages because as an artificial corporation, it cannot exercise physical suffering, mental anguish, besmirched
reputation, wounded feelings, moral shock, social humiliation and similar injury.

Exception:
A corporation may have a good reputation or business standing which, if besmirched or debased, may be a ground for the award of moral
damages.

Real party in interest –


The right and power of a corporation to sue in any court must be brought by the BOD/BOT that exercises its corporate powers on behalf of the
corporation or by any of its duly authorized officer or agent.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 57
Christine Grace Embay-Zamora

It is clear that where a corporation is the injured party, its power to sue is lodged with the BOD or BOT. A minority stockholder and member of the
BOD has no such power or authority to sue on the corporations behalf.

General Rule:
The certification against forum shopping must be signed by the person authorized by board resolutions.

Exceptions:
The SC has held that the following officials or employees of the company can sign the verification and certification without need of board
resolutions:
a. Chairperson of the BOD
b. President
c. General Manager or Acting General Managers
d. Personnel Officer
e. Employement Specialties in labor case

Rationale:
They are “in a position to verify the truthfulness and correctness of the allegations in the petition.”

While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it does not follow
from this, however, that the corporation cannot be a real party-in-interest for the purpose of brining a civil action for malicious prosecution.

Right of shareholders to intervene –


Shareholders are, in no legal sense, the owners of corporate property which is owned by the corporation as a distinct legal person, their interest
being inchoate or beneficial in nature, not direct and immediate in character; hence, they have no right to intervene in an action for or against a
corporation.

Service of summons –
The rationally of all rules with respect to service of summons on a corporation is that such service must be to an agent or a representative so
integrated with the corporation sued as to make it, a priori supposable that he will realize his responsibilities and know what he should do with any
legal papers served on him; one who performs vital functions in the corporation that it would be reasonable to presume that he would be able to
discuss the importance of paper delivered to him, and be responsible enough to transmit the same to the corporation.

It does not necessarily connot anofficer of the corporation and may include employees but not those whose duties are not so integrated ot the
business that their absence or presence will nto toll the entire operation of the business.

Thus, service of summons was held property made to a corporation through a bookkeeper or clerk who was not even authorized to receive the
same on behalf of the corporation, since what is of paramount importance is that the purpose of the rules on summons has been attained, thereby,
the interest of speedy justice has been sub-served.

POWER TO ADOPT AND USE A CORPORATE SEAL


Seal – a device (as an emblem, symbol or word) used to identify or replace the signature of an individual or organization and to authenticate (as
under common law) written matter purportedly emanating from such individual or organization. Any seal adopted and used by the corporation
may be altered by it at pleasure.

A seal is not required for the validity of any corporate act. A corporation may exist even without a seal. But although it may not be necessary, the
reason it is desirable to attest all contracts and other acts of the corporation with its seal, when this is possible, is that the presence of such seal
establishes, prima facie, that the instrument to which it is affixed is the act of the corporation.

POWER TO ACQUIRE AND CONVEY PROPERTY


As an incident to every corporation –
This power which is also expressly conferred under the law has always been regarded as an incident to every corporation. A corporation needs
properties or assets to carry on its business.

As necessary to the transaction of its lawful business –


This power is qualified by the phrase “as the transactions of the lawful business of the corporation may reasonable and necessarily required.”
Property obtained by a corporation which is foreign to the purpose for which it was organized is an unlawful acquisition. A corporation may not
validly purchase, sell, mortgage, etc. assets if it is not in the legitimate furtherance of its purposes. Accordingly, the exercise of such power cannot
be validated thru the inclusion of such purpose in the articles of incorporation if the corporation has no interest whatsoever in the subject
transaction.

The transfer or sale of shares owned by a corporation in another corporation requires approval by the BOD of the seller corporation and while a
corporation is expressly empowered by Section 36(7) to dispose corporate assets, such power is subject to the provision of Section 40.

To enable a corporation to engage in any of its secondary purposes, Section 42 must be complied with. Similarly, if the act has the effect of
incurring, creating, or increasing bonded indebtedness under Section 38, or involves the selling or disposition of all or substantially all the property
and assets of the corporation under Section 40, the corporation must comply with the requirements prescribed.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 58
Christine Grace Embay-Zamora

As subject to limitations or restrictions –


The right of power of private corporations to deal in real as well as personal property is also subject to limitations or restrictions prescribed by
special laws and the Constitution.

POWER TO ACQUIRE SHARES OR SECURITIES


Shares of other corporations –
Section 36(7) authorizes a private corporation to acquire shares or securities of other corporations. Such an act does not need the approval of the
stockholders if done in pursuance of the purpose or purposes of the corporation as stated in its articles of incorporation but when the purpose is
done solely for investment, the approval of the stockholders as required by Section 42 is necessary.

The shares must be limited to shares of existing corporations because only natural persons can be incorporators.

When a corporation subscribes to the capital stock of another corporation, it is required, as a rule, to pay its subscription in full. This is based upon
the fact that while a corporation has an unlimited capacity to contract obligations, it has only a limited capacity to pay.

Shares of the acquiring corporation –


The Corporation Code expressly authorizes a corporation subject to limitations stated therein to acquire its own stocks. A corporation may
purchase its own stock, however, only when it has “unrestricted retained earnings” to cover the shares to be purchased or acquired.

Corporation as stockholder or member –


A corporation may become a member of another corporation.
A private corporation may, either by original subscription or by purchase, become a stockholder and member of another corporation with all the
rights and liabilities attaching to such relation, either when it is expressly authorized by statute or its charter to do so, or when such subscription or
purchase is within its implied powers as a necessary or proper means of exercising the other powers conferred on it.

POWER TO CONTRIBUTE TO CHARITY


Basis of power now expressly granted –
Section 36(9) gives recognition to the growing tendency to regard charitable gifts as within the scope of corporate authority. It is based on the
modern view that business corporations are not organized solely as profit-making enterprises but also as economic and social institutions with
corresponding public responsibility to aid in the betterment of economic and social conditions in the community in which such corporations are
doing business.

Limitations on power –
Under the Code, the only limitations imposed on the authority of a corporation to make donations are:
1. The amount thereof must be reasonable.
2. The donations must not be in aid of any political party or candidate or for purposes of partisan political activity.

It is not required by law that the donation should inure to the direct financial benefit of the corporation, nor that the donation be taken from
corporate earnings as long as it is “reasonable” under the circumstances, taking into account the corporation’s financial condition; hence, it may be
paid out of capital, although stockholders and creditors who may feel aggrieved are not denied the right to question the exercise of the power, and
if found excessive, to seek adequate relief therefrom.

The limitation that the donations must be “reasonable” provides a check against scheming directors and officers who may use the authority as a
screen to appropriate corporate funds for personal ends.

POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS


Such plans promote corporate purpose or purposes –
Courts have been liberal in finding as a responsibility of business the comfort, health, and well-being of its employees. Thus, it has been repeatedly
held that the granting of bonus, gratuity, and incentive compensation to employees as a reward for work is within the implied powers of a
corporation.

Such plans promote better relations with corporate employees –


Contributions by a corporation to programs directly benefiting employees apart from the benefits granted under Social Security Act are expressly
permitted by the Code on the theory that such activities promote better relations between the corporation and its employees.

Under the NIRC, such contributions to pension trusts are deductible from gross income and all income of the funds of such trusts are exempt from
income tax, including the retirement benefits granted thereunder.

POWER TO ACT AS GUARANTOR


Power generally withheld –
The general rule is that no corporation has the power, by any form of contract or endorsement, to becomes a guarantor or surety or otherwise lend
its credit to another person or corporation.

Where corporate business will be advanced –


However, the general rule will not apply and the court will not allow an accommodation indorsement under an implied authorization where the
guarantee “tends directly to promote the business authorized by articles” or “is an appropriate means by which it may reasonable be expected that
the business in which the corporation is engaged will be advanced.” Thus, a corporation which acquired the bonds of another corporation in the
legitimate transaction of its business (i.e. payment of debt due it) may sell them, and to make them more readily marketable, guarantee their
payment.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 59
Christine Grace Embay-Zamora

Where risk considerable and benefit remote or disproportionate –


The issue is whether the legitimate business activities of the corporation guarantor were so enhanced as to create an implied power under the
charter. But even where there is a possible benefit to the corporation (e.g., a guarantee to third persons of the raw material commitments of the
corporate guarantor’s supplier), the risk can be considerable and the benefit can be remote, intangible, and difficult to evaluate. Where they have
been sufficiently remote and incidental or disproportionate to the risks, courts have held the guarantee unenforceable.

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

POWER TO EXTEND OR SHORTER CORPORATE TERM


Unlike Section 16 which govern the amendment in general of articles of incorporation, the amendment under this section must be taken at a
meeting of the stockholders or members and upon a vote. “Mere written assent” would not be sufficient. However, the formal requirements int eh
nd
2 paragraph of Section 16 must be complied with.

rd
The provision on the taking effect of the amendment in the 3 par of Section 16 upon its approval by the SEC is not applicable because the date of
approval by the SEC may be before the effectivity date of the extension or reduction of the corporate term.

The extension of the corporate terms as originally stated in the articles of incorporation is subject to the limitations or conditions provided in
Section 11.

Appraisal right of dissenting stockholders


Section 37 grants appraisal right to a dissenting stockholder (right of stockholder in the cases provided by law to demand payment of the fair value
of his shares) “in case of extension of corporate term.” Such right should also be available to a dissenting stockholder if the corporate term is
shortened as it is expressly recognized in Section 81(1).

NOTE: Appraisal right applies only to a stockholder of the stock corporation.

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:
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 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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 60
Christine Grace Embay-Zamora

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.

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.

POWER TO INCREASE OR DECREASE CAPITAL STOCK


An increase or reduction in the capital stock of the corporation is a fundamental change in the corporation. The authority of the corporation to take
such action is not to be implied but exists only when expressly conferred. The power is expressly granted under this Section.

The notice requirement (par.1) is mandatory and is obviously designed to protect the interests of minority stockholders. The Corporation Code
contains no prohibition for a corporation to increase its authorized capital stock even if the same has not yet been fully subscribed.

Limitations on the power


A corporation cannot lawfully decrease its capital stock if such decrease will have the effect of relieving existing subscribers form the obligation of
paying for their unpaid subscriptions without a valuable consideration for such release, as such an act of the corporation constitutes an attempted
withdrawal of so much capital upon which corporate creditors are entitled to rely.

The corporation must submit proof to the SEC that such decrease will not prejudice the rights of creditors.

Necessity for increasing capital stock


Increase of corporate assets –
An increase in the amount of the capital stock may be for the purpose of effecting an increase in the corporate assets by authorizing:
1. The creation of new shares to be offered and issued at a fixed valuation; or
2. The increase of the par value shares authorized to be issued.

Issuance of stock dividends –


The capital stock may also be increased without any corresponding increase int eh corporate assets by the issuance of stock dividends.

Necessity of new subscription for increase


An increase in the authorized capital stock cannot be lawfully accomplished without an actual increase in the assets of the corporation and
additional subscription except when such increase is for the purpose of effecting a stock dividend.

If the actual capital is increased by accumulated profits and such profits are distributed to the stockholders in the form of stock dividends, the
capital stock is increased, for the profits are reinvested in the corporation by transferring the same from surplus account to a capital account.

If the increase of the authorized capital stock is nor for the purpose of making effective stock dividends previously authorized, the law requires to
be stated in the certificate the matters mentioned in paragraph 2(3). It is, therefore, clear that stock dividends once declared and issued are fully
paid, and this rule admits of no exception.

Effectivity of increase or decrease


From and after approval by SEC –
Under Section 38 (par. 4), the capital stock of a corporation stands increased or decreased only from and after approval and the issuance by the
SEC of its certificate of filing of increase or decrease of capital stock. Before the issuance of the certificate of filing of increase of capital stock, the
subscribers to the proposed increase cannot be considered as stockholders and be accorded the rights as such for the shares subscribed by each.

Use of amount of increase during pendency of application –


Where the corporation, however, is already a going concern, “in need of steady supply of funds for its business operations,” it is the policy of the
SEC to allow the use of the amount representing the paid-up capital received on account of the proposed increase of capital stock so as not to
disrupt its operations even during the pendency of the application for increase of the capital stock with the SEC. The funds must be utilized purely
for business operations and duly accounted for or recorded in the books of the corporation, and further, no loans or cash advances must be
extended to any of the subscribers to the proposed increase in the capital stock.

Over-issue of shares
An issue of stock by a corporation in excess of the amount prescribed or limited by its articles of incorporation is ultra vires and the stock so issued
is void even in the hands of a bnoa fide purchaser for value. An over-issued stock is also known as spurious stock.

There is no over-issue where shares have been surrendered and new shares issued in their stead. The new issue in such case merely takes the place
of the share surrendered nor is there an over-issue where the corporate structure provides for conversion of one class of stock into another at the
option of a stockholder, or where stock is issued to replace certificates which have been lost.

Unauthorized increase of capital stock


An attempted unauthorized increase of capital stock amounts to an over-issue and such stock is, therefore, absolutely void and cannot be validated
by application of the doctrine of estoppel.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 61
Christine Grace Embay-Zamora

Subscribers for or purchasers of such shares form the corporation may recover from it money paid to it under their subscription or purchase as
upon a failure of consideration, or breach of warranty of the existence of the thing sold, unless they are precluded from such relief as parties in pari
delicto.

Failure to make a specific offer to return dividends received has no material bearing upon the subscriber’s right of action. Where the corporation
cancels the illegal shares and repays to the subscribers the money paid by them therefore, they are not liable to or for creditors for the amount so
repaid.

Subscription requirement in case of increase of capital stock


Subscriptions and payments based on capital stock increased –
Example:
Authorized capital stock – P20,000; proposed to increase it to P50,000 (an increase of P30,000)
It is to be noted that Section 38 (par. 4) requires “at least 25% of such increased capital stock has been subscribed xxx,” or in other words, “such
capital stock as increased,” and not “such increase in capital stock.” Therefore, at least P12,500 worth or shares must be subscribed and P5,000
(minimum) has been paid.

Subscriptions and payments based on additional amount by which capital stock is increased –
The SEC has construed the phrase to mean the additional amount by which the capital stock is increased. The intention of the Congress is to
require at least 25% of the proposed increase. Subsequently, it opined that the phrase “of such increased capital stock” refers to the total
subscription (not to individual subscription) and regardless of class. Thus, when the corporation has several classes of shares, the 25% subscription
requirement may be applied only to one class of shares or it may distribute it to all classes of shares, equally or unevenly.

No treasurer’s affidavit is required to be attached in case of decrease of capital stock.

Ways of increasing (decreasing) authorized capital stock


1. By increasing (decreasing) the number of shares authorized to be issued without increasing (decreasing) the par value thereof.
2. By increasing (decreasing) the par value of each share without increasing (decreasing) the number thereof.
3. By increasing (decreasing) both the number of shares authorized to be issued and the par value thereof.

Increase by way of stock dividends


Stock dividends are ordinarily declared out of the authorized but unissued shares of the corporation.

A corporation, however, may also increase its capital stock by way of stock dividends without touching its unissued shares as long as there as
sufficient retained earnings to cover the increase. If the proposed stock dividend would result in the issuance of shares of stock in excess of the
corporation’s authorized capital stock, the over-issue is null and void. Such dividend declaration may validly done provided that the corporation
simultaneously increase its capital stock and applies the proposed stock dividends as full payment of the subscriptions to the capital stock increase.

Par value or no par value shares for the authorized increase


The increase in capital stock could belong to any of these 2 classes of shares (par value or no par value) or to both.

Reduction of capital stock


1. By decrease of number of authorized shares
- When a corporation is authorized to reduce its capital stock, it may do so also by redeeming redeemable shares or purchasing its
shares and cancelling or retiring the same, including treasury shares. Or it may accept a surrender of shares and give the holders in
exchange therefore a proportionate amount of its assets, provided no rights of creditors are involved, or issue bonds for that
purpose or exchange another class of stock for that retired, or exchange its outstanding shares for a smaller number of shares. Or it
may do so by cancelling shares which have not yet been issued.

2. By decrease of par value of authorized shares


- When a corporation lawfully reduces its capital stock pursuant to this section, the shares which are retired or reduced no longer
exist for any purpose. If the shares acquired are not retired or cancelled, no decrease in capital stock is effected, for the shares exist
as treasury shares. The capital stock may be decreased, however, without decreasing the number of authorized shares into which it
is divided as indicated in the articles of incorporation by decreasing the par value of such shares. The par value of shares of stock of a
corporation may be reduced for the purpose of eliminating its deficit.

Effect of reduction on liability for unpaid subscriptions


1. As against corporate creditors
- A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares without a
valuable consideration for such release, and as against creditors, a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute.
- No decrease of capital stock shall be approved by the SEC, if its effect shall prejudice the rights of corporate creditors.

2. As between the corporation and the stockholders


- One object of requiring capital stock to be diminished only at corporate meetings formally called is to insure publicity and to warn
the public dealing with the corporation of the intended change.
- But failure to give the prescribed notice will not invalidate the reduction, if it is otherwise valid as between the corporation and the
stockholders where all the stockholders consent, subject to the right of corporate creditors.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 62
Christine Grace Embay-Zamora

Distribution of surplus on reduction


Where there is no impairment of capital –
Upon a reduction of capital stock, if capital has not been impaired by losses, there necessarily occurs a surplus of assets to the extent of the
reduction. Unless the rights of creditors will be affected or the capital impaired, the directors may make an equitable distribution of such surplus or
so much thereof as may not be required in carrying on the business for the best interest of the stockholders.

Where reduction is made to meet impairment –


There can be a distribution of only those assets over and above the amount equal to the par value of the outstanding reduced capital and the
amount necessary to discharge the existing corporate indebtedness. Thus, where capital stock is impaired and a reduction is made merely to meet
that impairment, there will be no distribution of assets among the shareholders.

Distribution not mandatory –


The distribution to stockholders of surplus remaining after a reduction of capital stock is authorized by the Code but cannot be compelled. It must
be borne in mind that the funds resulting from such reduction represent capital and not profits.

Parties entitled to question increase or decrease of capital stock


1. Corporation itself; or by dissenting stockholders in the absence of estoppels; or by creditors of the corporation, or by a receiver or
assignee representing them, insofar as the transaction affects their rights.
2. Subscribers for or purchaser of such stock in avoidance of their subscriptions, or for the purpose of recovering what they have paid,
unless precluded as being in pari delicto.

POWER TO INCUR, CREATE, OR INCREASE BONDED INDEBTEDNESS


Corporate bond – an obligation to pay a definite sum of money at a future time at fixed rate of interest.

The power of a corporation to incur, create, or increase bonded indebtedness or indebtedness secured by its notes or bonds is likewise expressly
conferred by this section. But it is also a power implied from the express power.

Procedure and formalities –


The procedure prescribed in this section for incurring bonded indebtedness is the same as the procedure for increasing (decreasing) the capital
stock except that the certificate need not state the matters set forth in Nos. 2 and 3 and is not required to be accompanied by the sworn statement
of the treasurer of the corporation concerning the amount of the increased capital stock subscribed and paid. The prescription of the formalities
with respect to “bonded indebtedness” only, implies of necessity and distinction between debts which are “bonded” and all other debts.

Corporate bond contract


Parties –
1. Borrowing corporation
2. Bondholders
3. Trustee – a bank or trust company, which is chosen and paid by the corporation but serves mainly to protect the bondholders.

Trustee’s function –
1. Countersigning the bonds to assure authenticity.
2. Collecting interest and principal payments from the debtor-corporation and distributing them to those entitled.
3. Acting as mortgagee or collateral holder if the bonds are secured.
4. Verifying the performance of the debtor corporation’s promises on behalf of the bondholders.
5. Taking legal action on behalf of the bondholders if necessary.

Bond indenture – is a complete, lengthy legal document which constitutes the agreement between the parties. The bonds themselves are
certificate of participation in their contract. In the indenture, the corporation promises to pay and interest, promises to pay the trustee, promise to
pay its taxes and other debts, and promises to maintain its proeprty and conduct its business prudently.

Types of bonds –
1. Common types
a. Mortgage bonds – debt instrument of financing secured by a lien on specifically name property. Land, building, equipment, and
other fixed assets are the kinds of property most commonly pledged as security.
b. Collateral trust bonds – debt instrument secured by a pledge of either stocks or bonds, or both which are deposited with a
trustee.
c. Equipment obligations – debt instrument to secure financing loans on locomotives, railway cars, buses, large trucks and similar
equipment.
2. Special types – have features similar to those characteristics of common stock or preferred stock.
a. Convertible debentures – bonds which may be exchanged for the common stock of the issuing corporation at a fixed price by a
predetermined redemption rate at the option of the bondholder.
b. Income bonds – “adjustment bonds”; debt instrument with a fixed rate of interest payable only if earned and declared by the
BOD.
c. Bonds with warrant or stock purchase warrant – exercisable by its holder, to purchase stock at a stated price during a stipulated
period of time. Bond warrant issues are usually debentures, and the warrants are detachable or non-detachable.
i. Detachable warrants – warrants may be sold or exercised apart from the bond.
ii. Non-detachable warrants – cannot be sold or exercised separately from the bond.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 63
Christine Grace Embay-Zamora

Examples of unsecured bonds:


1. Straight debenture bonds – general credit bonds not secured by any specific property.
2. Guaranteed bonds – one or more individuals or corporations other than the issuer guarantees the payment of interest or principal or
both.
3. Subordinate debenture bonds – debt instrument specifying that the holder’s rights are inferior in the event of liquidation or
reorganization to any existing and future debt defined in the indenture as senior debt.

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.

RIGHT OF PRE-EMPTION OF STOCKHOLDERS (right of pre-emption or pre-emptive right)


Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders
who are such at the time the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original
stocks before subscription are received from the general public.

The right extends only to new issues of shares arising from any increase of capital stock effected under Section 38, but may also be available with
respect to “issues or disposition: of unissued shares belonging to the original stock of the corporation. Hence, it extends to the unsubscribed
portion of the capital stock and even to treasury shares.

When shares of stock are sold by the holder after an increase of the capital stock has been voted, the purchaser acquires, as an incident to the
stock, the same right of preference in subscribing for or purchasing the new stock as was possessed by the transferor. This principle, however, does
not apply to transfers where the assignors have previously exercised their pre-emptive rights to subscribe to new issues. To rule otherwise would
allow the pre-emptive right attached to the original stock to be exercised twice.

The right is not absolute as it admits certain exceptions:


1. Denied by the articles of incorporation or an amendment thereto.
2. Shares to be issued in compliance with laws requiring stock offering or minimum stock ownership by the public.
3. Share to be issued in good faith with the approval of stockholders representing 2/3 of the outstanding capital stock in exchange for
property needed for corporate purposes.
4. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock in payment of
previously contracted debt.

A stockholder whose pre-emptive right is violated may maintain an action to compel the corporation to give that right. If the denial is by an
amendment to the articles of incorporation, he may exercise his appraisal right under Section 81(1).

Reason for the pre-emptive right


To protect from impairment and dilution the basic rights of the existing stockholders in the corporation, i.e., to voting control, to dividend
payments, and to the net assets of the corporation.

However, the stockholder may waive such right. The waiver should be given individually by the stockholder concerned or by another by way of a
SPA. Being a personal right, the waiver cannot be made by the corporation itself through a stockholders’ resolution. A stockholder cannot be forced
to waive the right even if majority of the other stockholders opt to waive it.

Offering of remaining unsubscribed shares


1. To public or any person acceptable to corporation
If the unissued shares, whether from the original or increased capital stock, corresponding to one stockholder are not subscribed or
purchased by him within the period fixed for the exercise of his pre-emptive right, he is deemed to have impliedly waived his right to
subscribe. It does not follow that said shares should against be offered on a pro rata basis to stockholders who took advantage of their
right of pre-emption.

Thus, the remaining unsubscribed shares may be offered to the public on first-come, first-served basis or to any person acceptable to the
corporation without violating the pre-emptive rights of such stockholders.

2. To stockholders of record
As a matter of policy, the SEC considers it a sound corporate practice to offer always the remaining shares to the stockholders of record
whenever practical and feasible before offering them to the public although this “right of first refusal” is not provided for in the articles of
incorporation.

Time within which the right may be exercised


It is generally fixed in the resolution authorizing the increase of capital stock. A majority of the stockholders have a right to fix the time to suit
themselves and the interests of the corporation. The only limitation upon the exercise of the prerogative is that every stockholder shall be treated
alike and shall be afforded a reasonable opportunity to subscribe.

Price of new stock offerings


Interest of the corporation and all stockholders to be considered –
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 64
Christine Grace Embay-Zamora

The concept of pre-emptive rights is given by law to safeguard 2 distinct interest of stockholders – protection against dilution of their equity in the
corporation and protection against dilution of their proportionate voting control. Obviously, the power to determine the price must be exercised
for the benefit of the corporation and in the interest of all stockholders.

Where price far below FMV –


When a new shares are issued at prices below FMV in a corporation with only a limited market for its shares, existing stockholders who do not
want to invest or do not have the capacity to invest additional funds can have their equity interest in the corporation diluted to the vanishing point.

Right of stockholder to insist on legally adequate price –


A corporation is not permitted to dispose its stock for a legally inadequate price at least where there is objection. While a stockholder has no right
to block a disposition of new shares for a fair price merely because he disagreed with the wisdom of the plan, he has the right to insist that the
price be fixed in accordance with legal requirements.

Availability of right to additional issue or originally authorized shares


All originally authorized shares initially offered for subscription –
This presupposes that the corporation at its inception offered all its originally authorized shares, although such should be the presumption. The
subscriber cannot claim dilution of interest in case additional issues of originally authorized shares are purchased by others.

Number of such shares initially offered specified –


Where the number of shares initially offered for subscription was specified, such that the original subscribers could not have insisted on subscribing
for more, the corporation must first offer the additional issue of shares from the unsubscribed portion of the authorized capital stock pre-emptively
to stockholders before the same is offered to third parties.

In this case, the original subscriber is deemed to have taken his shares in relation to the number of shares then initially allotted for subscription
rather than to the total number of authorized shares at the time of his subscription. The subscriber cannot claim a dilution of interest in case
additional issues of originally authorized shares are purchased by others.

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and 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.

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)

POWER TO SELL, LEASE, etc. ALL OR SUBSTANTIALLY ALL CORPORATE ASSETS


Requisites –
1. The sale, etc. must be approved by the BOD or BOT.
2. The action of the BOD/BOT must be authorized by the vote of stockholders representing 2/3 of the outstanding capital stock including
holder of non-voting shares of the members, as the case may be.
3. The authorization must be done at a stockholders’ or members’ meeting duly called for that purpose after written notice.

Other legal limitations –


“Shall be subject to the provisions of existing laws on illegal combinations and monopolies.”
Bulk Sales Law
- The sale, etc. of all or any portion of a stock of goods, merchandise, provisions or materials otherwise than in the ordinary course of
business is declared fraudulent and void as to creditors of the vendor unless specified formalities are observed such as the giving by
the vendor to the vendee of a list of creditors to whom said vendor may be indebted.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 65
Christine Grace Embay-Zamora

Sale of all assets without dissolution –


Subject to the above limitations, a corporation may sell all its assets without necessarily dissolving or terminating its existence. The rights of
creditors must not be overlooked or disregarded when a corporation sells its entire assets and turns over its business to another. The only way the
transfer can proceed without prejudice to the creditor is to make the assignee assume the liabilities of the assignor, unless the creditors who did
not consent to the transfer choose to rescind the transfer on the ground of fraud.

Liability of purchasing corporation –


GENERAL RULE:
Where one corporation sells or otherwise transfers all of tis assets to another corporation, the latter is not liable for the debts and liabilities of the
transferor, provided the latter acted in good faith and paid adequate consideration for such assets.

EXCEPTIONS:
1. Where the purchaser expressly or impliedly agrees to assume such debts.
2. Where the transaction amounts to a consolidation or merger of corporations.
3. Where the purchasing corporation is merely a continuation of the selling corporation.
4. Where the transaction is entered into fraudulently in order to escape liability for such debts.

Authority of the board


1. Stock corporations
a. The BOD is given the right to decide upon the terms and conditions of the transactions including the consideration for the
property disposed of. The transaction is still subject to the approval by the stockholders or members.
b. After such approval, the board may, in its discretion, abandon the transaction, without further action or approval by the
stockholders or members but subject to the rights of third parties under any contract relating thereto.
c. If the property to be sold constitutes merely a part of the assets of the corporation, even if substantial, and the sale thereof will
not render the corporation incapable of continuing its business, the BOD may dispose of the same as it may deem convenient
without need of approval of the stockholders or members of the corporation.
2. Non-stock corporations
- The vote of the majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by Section 40 in the case of non-stock corporations where there are no members with voting rights.

Appraisal right of dissenting stockholder


The exercise of appraisal right of any dissenting stockholder is predicated on the “sale or other disposition of all or substantially all” of the
corporate assets, the phrase being defined as such which would render the corporation “incapable of continuing the business or accomplishing the
purpose for which it was incorporated.” Otherwise, it does not require the approval of the stockholders or members as set forth in Section 40 and
would not entitled any dissenting stockholder to exercise his appraisal right.

To determine if the sale is made in the ordinary course of business, the test is not the amount involved but the nature of the transaction.

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. (n)

POWER TO ACQUIRE OWN SHARES


(not exclusive…)
1. Elimination of fractional shares
Fractional share – share which is less than 1 corporate share.

A stockholder owns 250 shares and the corporation declares 25% stock dividend. His total shares would be 312 ½ shares.
The fractional shares cannot be represented at corporate meetings. The corporation may purchase the same from the stockholder
concerned or issue factional strip certificates to such stockholder who may negotiate for the sale thereof with other stockholders also
owning fractional shares so as to convert them into full shares.

2. Satisfaction of indebtedness to corporations


No. 2 does not authorize a corporation to arbitrarily purchase the shares it issued to any of its stockholders indebted to it, whether at
FMV or at par for the purpose of applying the proceeds thereof to the satisfaction of its claim against them. This is particularly true where
the consent of such stockholders has not been secured.

Even where the consent has been secured, the corporation can buy their shares only if the conditions for the purchase are present.

3. Payment of shares of dissenting or withdrawing stockholders


This refers to instances when a dissenting stockholder is given appraisal right and the right to withdraw from the corporation provided in:
- Section 16: Amendment of articles of incorporation
- Section 37: Power to extend or shorten corporate term
- Section 40: Sale or other disposition of corporate assets
- Section 42: Power to invest corporate funds in another corporation or business or for any other purpose.
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 66
Christine Grace Embay-Zamora

- Section 68: Delinquency Sale


- Section 77: Stockholders’ or members’ approval of plan of merger or consolidation
- Section 105: Withdrawal of stockholder or dissolution of close corporation.

Limitations for the exercise of the power


1. Its capital is not impaired.
2. It is for legitimate and proper corporate purpose.
3. There shall be unrestricted retained earnings.
4. Corporation acts in good faith and without prejudice to the rights of creditors and stockholders.
5. The conditions of corporate affairs warrant it.

Although the existence of legitimate corporate purposes may justify a corporation’s acquisition of its shares under Section 41, such purpose cannot
excuse the stockholder form the effects of taxation arising from the redemption of stocks by the corporation. If the issuance of stock dividends is
part of a tax evasion plan and thus, without legitimate business reasons, the proceeds of the redemption may be deemed as taxable dividends.

Trust fund doctrine


This doctrine holds that the assets of the corporation as represented by its capital stock are “trust funds” to be maintained unimpaired and to be
used to pay corporate creditors in the sense that there can be no distribution of such assets among the stockholders without provision being first
made for the payment of corporate debts and that any such disposition of it is a fraud on the creditors of the corporation who extend credit to the
corporation on the faith of its outstanding capital stock and, therefore, void.

Effect of purchase: On corporate creditors


If at the time of the purchase is made, the corporation does not have an unrestricted RE or has negative earnings, or if the amount paid for the
shares exceeds the surplus, the purchase necessarily operates as a distribution to the selling shareholders of a part of the capital, and to that extent
impairs capital.

These consequences affect creditors. But there may be a difference between current creditors and long-term creditors. If the corporation is
solvent, the former can enforce their claims. But the latter take the risk of future insolvency as they await maturity of their claims.

Effect of purchase: On remaining stockholders


In general –
A reduction of capital must be an all around affair; that is, the same percentage should be reduced in each share. This ratable reduction would
leave each shareholder the same proportionate interest and rights which he had before. Any other scheme would disturb or alter the relative
positions of the members.

The purchase by a corporation of its own shares withdraws part of the original capital from the venture and redistributes and changes the relative
rights of the remaining members. Shareholders should have the right to insist on the preservation of all the contributed capital for the prosecution
of the venture, except in case of legitimate reduction of capital which statutes authorize and which shareholders are presumed to have made part
of their contracts with the corporation.

Share in dividends –
If the shares are purchased at a price above the actual value of the shares, the remaining members’ share in the undivided surplus is impaired and
money is actually being taken from the pockets of the remaining members for the benefit of the retiring shareholders. If the purchase is made at a
price commensurate with the actual value of the shares, the surplus which would ordinarily be devoted to dividends is instead tied up to effect
either an indirect and unauthorized reduction in capital, or else the possibility of dividends is postponed until such time as the treasury stock can be
resold at an adequate price. And even when the price paid is less than their intrinsic value and a profit is later realized when they are reissued at a
higher price, the distribution of the surplus as dividends has still been postponed.

Share in possible losses –


As treasury stock does not share in the profits, it may be contended that the remaining shareholders would as a result get a bigger individual share
therein by way of increased dividends per share. On the other hand, their share of possible losses is increased, inasmuch as part of the working
capital disappears. With this decrease in working capital, the chances are, the profits will be less and, therefore, the proportionate share of the
remaining shareholders would also be decreased.

Others –
o It diminishes the number of shares, so that each shareholder who does not sell has a larger interest in a smaller total of assets.
o By reducing the number of shares, it affects voting control, if the shares purchased are voting shares.

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)

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 67
Christine Grace Embay-Zamora

POWER TO INVEST FUNDS IN OTHER CORPORATIONS OR FOR OTHER PURPOSES


In order that a corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose,
compliance with the requirements of Section 42 is necessary.

When the purpose clause of the articles of incorporation of a company embodies different and related purposes, the corporation may intend to
carry them out simultaneously or to prosecute first the primary business in which it is most interested and then embark later in any one of the
other purposes, as the need for expansion of the enterprise may warrant or the necessity of a change of business may demand.

FUND – it includes any corporate property to be used in furtherance of the business. Thus, idle corporate property may be temporary leased to
make it productive in the absence of express restrictions in the articles of incorporation or by-laws and the leasing is not used as a scheme to
prejudice corporate creditors, subject to the requirements of Section 42.

Purpose other than the primary purpose


A secondary purpose –
The other purposes for which the funds may be invested without amending the articles of incorporation must be among those enumerated in the
articles of incorporation. In order to legally engage in any of its secondary purposes, the corporation must comply with Section 42.

Not among the secondary purpose –


A corporation is not allowed to engage in a business distinct from those enumerated in the articles of incorporation without amending the purpose
clause of said articles to include the desired business activity among its secondary purpose.

Incident to primary purpose –


A corporation may invest its funds in another business which is incident or auxiliary to its primary purpose as stated in the artices of incorporation
without the approval of the stockholders of members as required under Section 42.

Ratification of defective instrument


A corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its
execution the requirement of Section 42 that the investment must be authorized by the affirmative vote of the stockholders (or members), may be
ratified. The requirement is for the benefit of the stockholders who may ratify the investment and its ratification obliterates any defect which it
may have had at the outset.

Mere ultra vires acts or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable when ratified by the stockholders.

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)

Dividends –
o It is that part or portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the
stockholders on demand or at a fixed time.
o Dividends, regardless of the form these are declared, that is, cash, property, or stocks, are valued at the amount of the declared dividend
taken from the unrestricted RE of the corporation.

Profits –
o It is the excess of return over expenditure in a transaction or series of transactions or the excess of an amount received over the amount
paid for goods and services.
o As applied to a corporation, the term has a larger meaning than dividends and covers benefits of any kind, the excess of value over cost,
acquisition beyond expenditures, gains or advance. It is the excess of receipts over expenditures, that is, net earnings.

Dividends vs. Profits


o Dividends comes from profits. It is that portion of the profits which the corporation has set aside for ratable distribution among the
stockholders. Profits are the source of dividends.
o Profits are not dividends until so declared or set aside by the corporation. In the meantime, all profits are a part of the assets of the
corporation and do not belong to the stockholders individually.
o Dividends received by a company which is a stockholder in another corporation are corporate earnings arising from corporate
investment.
o Declared dividends are the absolute property of the stockholders and hence, out of reach by creditors of the corporation.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 68
Christine Grace Embay-Zamora

POWER TO DECLARE DIVIDENDS


The BOD has the power to declare dividends out of the unrestricted RE which shall be payable in cash, in property, or in stock to all stockholders
“on the basis of the outstanding shares held by them.”

Stock dividends –
It shall not be issued without the approval of stockholders representing at least 2/3 of the capital stock then outstanding at a regular meeting of
the corporation or at a special meeting duly called for the purpose.

If the requisite vote has been secured, the opposing stockholder cannot legally refuse to receive their participation in the stock dividends.
However, before stock dividends represented by one class of shares may be given to holders of another class of shares, it is necessary that the
consent of such holders be first secured, they being given a class of shares different form the class they are holding.

Other dividends –
A mere majority of the quorum of the BOD is sufficient to declare other dividends. The board may declare, other dividends other than stock
without need of stockholders’ approval.

NOTE: The dividends are paid to the registered owners of stock as of a record date. The record date determines the time when the stockholders of
record shall be ascertained.

Dividends payable out of unrestricted RE


GENERAL RULE:
Dividends be declared and paid out of the “unrestricted RE” of the corporation.

Reason for the rule


o The outstanding capital stock of a corporation, including unpaid subscriptions, is a trust fund for the security of creditors and cannot be
distributed to their prejudice to the stockholders as dividends, the creditors being precluded from holding the stockholders personally
liable of their claims.
o Each stockholder is entitled as a matter of right to have the capital of the corporation unimpaired in order to carry out the purpose for
which the corporation has been created.

Note:
For purposes of the general rule, the capital or capital stock which may not be impaired or depleted by dividends is not the entire net assets of the
corporation; rather, it is the legal capital of the corporation in the strict sense, referring to that portion of the net assets directly or indirectly
contributed by the stockholders as consideration for the stocks issued to them upon the basis of their par or issued value.

Rule as to no par value stock


The Code makes it clear that with respect to no par value shares, the entire consideration (including paid-in surplus) received from the same shall
be treated as capital and shall not be available for distribution as dividends.

Dividends from property in which capital is invested


1. To engage in “wasting business”
o In the case of corporations engaged in “wasting business,” such as mining or timber-cutting, sometimes capital consumed in the
regular course of operation, is treated as earnings.
o Wasting Assets Doctrine
 Such a “wasting assets” corporation, the capital of which is necessarily exhausted in the carrying on of its operations,
may rightfully declare and pay dividends out of net income without making up for the loss of its capital which is thus
being constantly diminished.
o Dividends may be lawfully declared out of the net proceeds of its operations after deducting expenses and debts and a
reasonable fund for contingencies.

2. To utilize a lease or patent


o The same is true of corporation created for the purpose of utilizing a lease for a term of years, or a patent.

3. To liquidate a business
o Similarly, where a corporation is formed for the purpose of liquidating the business of a partnership, and selling all of its
property and dividing the proceeds among its stockholders such property is, in no proper sense, its capital stock within the
meaning of the rule prohibiting a corporation from distributing its capital in the form of dividends, but is rather to be regarded
as property held by the corporation in trust for the benefit of its stockholders, and which may be distributed by it to them in the
manner prescribed in the articles of incorporation, at least where the rights of creditors are not involved.

Unrestricted RE explained (Retained Earnings = Assets – Liabilities – Outstanding Capital Stock)


Such RE are said to be unrestricted and, therefore, free for dividend distribution to stockholders, if they have not been reserved or set aside by the
BOD for some corporate purpose or for some other purpose in accordance with managerial, legal, or contractual requirements.

Existence of actual profits or earnings


To justify the declaration of dividends, there must be an actual bona fide surplus profits or earned surplus over and above all debts and liabilities of
the corporation. Hence –

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 69
Christine Grace Embay-Zamora

o As a rule, dividends cannot be declared out of borrowed money, for borrowed money is not profit; but money may be borrowed
temporarily for the purpose of paying dividends, if the corporation has used its surplus assets to make improvements for which it might
have borrowed money.
o A corporation may property pay dividends from accumulated surplus out of previous years although realizing no profit from current
years.
o Dividends may not be declared so long as a deficit exists.
o Treasury shares, not being part of earned or surplus profits, are not distributable as dividends but if there are RE previously held to
support their acquisition, they may be declared as property dividend out of said earnings.

Distribution of paid-in surplus as cash dividends


NOTE: There are 2 views here.

FIRST VIEW: Cannot be declared as dividends


Paid-in or premium surplus (higher price for which the stock is sold less the par value) cannot be declared as cash dividends or even a stock
dividends because dividends can be declared only from the unrestricted RE.
Reason:
 The entire proceeds of sales of a corporation of its own stock, even when sold for more than par value, are part of its capital stock
(to be regarded as APIC rather than RE) and, therefore, cannot be profits earned through the conduct of its business out of which
dividends may be paid.
 To permit this capital surplus to be distributed as cash dividend is a “fraud upon creditors who extend credit on the faith of its capital
stock.”

SECOND VIEW: Can be declared as dividends


Dividends from other gains not arising from business –
Unrestricted RE from which dividends may be declared are not limited to the accumulated earned surplus of the corporation but may also include
other gains not “arising from its business.”

Credit of paid-in surplus to profit and loss –


At the start of the operation of a corporation, the actual value of its shares is the same as their par value. The premium on stock issued after the
corporation has accumulated profits is justified by the need to equalize as between the new and the old stockholders their respective rights in such
profits which are distributable in cash dividends. While such premium may be considered as part of the capital contributed or invested by a
stockholder for accounting purposes, it is really, from the legal standpoint, in the nature of profit or surplus realized by the corporation resulting
from the profitable operation of the corporate business. Hence, such premium should be credited to profit and loss and not to capital.

Treatment of paid-in surplus as premium for privilege of subscribing –


The amount which the corporation is authorized to raise by issue of shares should not exceed the authorized capital stock which can only be
increased by complying with Section 38. It follows that when shares are issued above par, the excess is not to be treated as capital, i.e., not as part
of the consideration for the shares but merely as a premium given for the privilege of subscribing to such shares, and hence, not as a part of the
trust fund for the benefit of creditors who have no cause for complaint, provided the corporation is solvent and sufficient assets remain to pay
their claim.

It is significant to note that holders of par value shares participate in dividends and in the corporate assets in case of liquidation on the basis of the
par value of their shares, irrespective of the amount of the consideration paid for by them, indicating that any excess is not to be considered party
of their invested capital for purposes of dividend declarations.

Treatment of capital stock as referring to legal capital –


Under the trust fund doctrine, it is only the assets of the corporation, as represented by the subscribed or outstanding capital stock, that
constitutes a fund to which creditors have a right to look for the satisfaction of their claims and which the corporation is not allowed to impair to
their prejudice. In other words, the capital stock which must not be reduced by the payment of the dividends means the legal capital, i.e., the
portion of the corporate assets equivalent to the total par value of all the outstanding par value shares (or the total consideration received for no
par value shares) of the corporation.

Increase of capital account without issuance of additional shares –


It is the law, not the corporation, that must necessarily determine what assets shall form part of the capital stock which the corporation is not
allowed to impair for the protection of its creditors. However, following the opinion of the Commission, it now depends entirely on the BOD
whether or not to create premium surplus and, therefore, whether or not the increase in the value of the stock is to be treated as part of the
corporation’s capital stock.

Issuance of stock at par value but less than market value –


Section 62 prohibits a corporation from issuing stock for a consideration less than the par value but it is not required by law to issue stock which
has increased in value, at a price above par.

Distribution of revaluation surplus as dividends


A corporation can have its fixed assets revaluated for the purpose of determining its FMV. The excess increment of the property over the stated
cost is credited to an account called revaluation or appraisal surplus to show that such is the result of an estimated increase in the value of the
property.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 70
Christine Grace Embay-Zamora

GENERAL RULE:
An increase in the value of the fixed assets as a result of a mere valuation cannot be counted in the computation of a surplus as basis for a dividend
declaration.
Reason:
 It is subject to market fluctuations, is merely anticipatory of future profits and may never be actually realized as an asset of the
corporation by the sale of the property at the value it was appraised.

EXCEPTION:
Where a fixed asset is being depreciated based on its appraisal value, and the depreciation on the appraisal increment is charged against
operations, the earnings from operations in that period are diminished by the amount of such depreciation which amount, therefore, is actual
income shifted to and lodged in another account. In such event, the portion of increase in the value of the fixed assets as a result of revaluation
thereof may be declared as dividends, provided the following conditions exist:
1. The corporation has sufficient income from operations from which the depreciation on the appraisal increase was charged.
2. It has no deficit at the time the depreciation on the appraisal increase was charged to operations.
3. Such depreciation on appraisal increase previously charged to operations has not been erased or impaired by subsequent losses;
otherwise, only that portion not impaired by subsequent losses is available for dividend.

Conditions in declaring a dividend


1. Existence of unrestricted RE.
2. Board Resolution declaring the payment of a portion or all of such earning to the stockholders.
3. Additional if stock dividend:
a. Approval of the Board Resolution by the stockholders.
b. Sufficient number of authorized unissued shares for distribution to stockholders; otherwise, it must increase its capital stock to
the extent of the corporate earnings to be declared and distributed as stock dividends.

Discretion of the BOD to declare dividends


The BOD has the responsibility to declare dividends and determine the timing as well as their amount. So long as the BOD acts in good faith, it is at
nd
liberty to distribute or not to distribute at all any dividend subject to the prohibition in the 2 par of Section 43.

The stockholder may sue the directors to compel them to declare and pay dividend if they unreasonably accumulate profits of the corporation but
they have the burden of proving the justification of declaring dividends.

Limit on Retained Earnings


o Under the Corporation Code
Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock except when justified by
any of the reasons mentioned.
o Under the NIRC
Section 29 NIRC imposes a 10% surtax on corporations improperly accumulating profits or surplus, in addition to other income taxes
imposed on corporations. The purpose is to prevent individual taxpayers from avoiding the progressive rates of income tax by employing
the corporate form for the accumulation of taxable income.

Action to enforce declaration of dividends


GENERAL RULE:
Prior to the declaration of a dividend, a stockholder cannot maintain an action at law to recover his share of the accumulated profits. Mandamus is
not a proper remedy in such a case.

EXCEPTIONS:
An action at law may be maintained where it is alleged that sufficient net profits have been earned to obligate the corporation to pay the amount
agreed.
o Before an action to compel the declaration and payment of a dividend can be maintained, it must appear that the complaining
stockholder has made application to the directors of the corporation for the relief sought.
o Where, however, it appears that the directors of a corporation have wantonly violated their duty, and that an application by a
stockholder to them for relief would be inefficacious, such application need not be made. In such an action, the corporation is a
necessary party defendant.

Time of declaration of dividends


1. At the end of the year
A corporation has a fiscal year in order to determine the results of its operations during the year – whether it earned profits or incurred
losses. Such results may also be computed monthly, quarterly, or semi-annually, but a summary is always made at the end of the year to
determine the performance of the company for the whole year.

2. Before the end of the year


A corporation should not declare dividends out of profits earned during an interim period or before the end of the fiscal year, considering
that profits earned during say, the first half of the year may be wiped out by losses incurred during the latter part of the same year.
However, a corporation may declare dividends even before the end of the fiscal year, provided it has sufficiently earned surplus for the
purpose which will not be impaired by losses, whether expected or not, during the remaining period of the fiscal year.

Should the corporation sustain losses during the year, cash dividends distributed to the stockholder of record must be correspondingly
refunded to the corporation.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 71
Christine Grace Embay-Zamora

Validity of dividend determined at time of declaration


1. Effect of subsequent insolvency of corporation –
The transaction must be viewed in the light of the time of its occurrence, and if net or surplus profits existed at that time, the payment of
the dividend is not rendered unlawful by the subsequent insolvency of the corporation, and if the assets are valued honestly and fairly in
view of all the facts known at the time of the declaration, a dividend is not declared unlawful by the fact that such assets subsequently
prove to be worthless than the valuation placed upon them.

2. Effect of good faith in making payment out of capital –


However, mere ignorance of facts showing the true condition of the assets which could have been ascertained by reasonable inquiry and
examination is not sufficient to validate a dividend which has been paid out of capital.

Payment of subscription from dividends


1. From dividends to be declared
A stipulation to the effect that the subscription is “payable from the first dividends declared on any and all shares of said company owned
by me at the time dividends are declared until the full amount of the subscription has been paid” is illegal for it “obligates the subscriber
to pay nothing for the shares except as dividends may accrue upon the stock.

2. From cash dividends


The stockholder is still entitled to receive cash dividends due on delinquent stock but the dividends “shall first be applied to the unpaid
balance on the subscription, plus costs and expenses.”

Cash dividends cannot be withheld from the subscribers who have not fully paid their subscriptions unless they are delinquent on their
unpaid subscriptions. The corporation may use the cash dividends to pay off stockholders’ subscriptions but which have not been
declared delinquent only if the stockholders concerned give their consent thereto.

3. From stock dividends


Stock dividends shall be withheld from the delinquent stockholder until his unpaid subscriptions is fully paid. A stockholder’s
indebtedness to a corporation under a subscription agreement cannot be compensated with the amount of his shares in the same
corporation, there being no relation of creditor and debtor with regard to such shares.

Liability of stockholders and directors for illegally received dividends


1. Liability of stockholders to refund
 In case dividends are wrongfully or illegally declared and paid, there is ample authority for the rule that the stockholders who
receive them can be held liable to refund them to the corporation or its creditors. It is immaterial that the dividends were mistakenly
paid out or were received in good faith.
 Since they do not act in a corporate capacity in receiving the dividends, they do not thereby ratify the illegal act of the board as to
preclude a subsequent recovery.

2. Where corporation insolvent at time of wrongful payment


 In view of the trust fund theory adopted in our jurisdiction, the payment of dividends from capital may be considered a wrongful
diversion of a “trust fund” held for the benefit of creditors, so that the fund may accordingly be followed into the hands of
stockholders.
 The innocent stockholders can recover damages from the guilty directors.

3. Liability of directors
 If the directors acted in good faith, and without negligence, they are not liable to the corporation or to creditors for declaring and
paying dividends when they should not have done so, and thereby diminishing the capital stock.
 If they have been guilty of a fraudulent breach of trust, or of gross negligence, in paying dividends when they had no right to pay
them, they are personally liable to creditors.

Remedies of corporate creditors


If dividends are improperly declared and paid when there are no net earnings, they may be reclaimed by the corporate creditors or by a receiver or
assignee acting for the benefit of the creditors.

Persons entitled to dividends


The right of one to receive dividends from a corporation on its stock is, manifestly, justified only on the theory that he is a stockholder.

It is only the stockholder of record as of the date of the declaration of dividends or holders of record on a certain future date, as the case may be,
who are entitled to receive dividends unless the parties have agreed otherwise.

A transfer of shares which is not recorded in the books of the corporation is valid only as between the parties; hence, the transferor has the right to
dividends as against the corporation without notice of the transfer but he is the trustee of the real owner of the dividends subject to the contract
between the transferor and transferee as to who is entitled to receive the dividends.

Share subscriptions not yet recorded in the stock and transfer book on the date of dividend declaration, are not entitled to said dividend. Hence,
subscribers to the increase of capital stock are considered stockholders of record only at the time of the approval of said increase by the SEC and
not at the time of filing of the certificate of increase of the capital stock.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 72
Christine Grace Embay-Zamora

Right of stockholders after declaration of dividends


1. Cash dividends
 As soon as cash dividends are publicly declared, the stockholders have the right to their pro rate shares.
 In the absence of a record date, the dividend belongs to the person who is the owner of the shares of stock at the time of
declaration, and not to the owner of the shares at the time of payment.
Reason:
When a dividend declaration is made, the corporation becomes debtor and the right of the shareholder to distribution, unless a
record date is specified, becomes fixed by the declaration.
 When a cash dividend is duly declared, the amount due a stockholder belongs to him and it cannot, without his consent, be
reverted to the surplus account of the corporation. It is only after the lapse of the prescriptive period for claiming the dividend
may the same be reverted to the surplus account of the corporation.

2. Stock dividends
 The rule on cash dividends does not apply as the declaration of such dividends may be rescinded at any time before the actual
issuance of the stock.
 It gives the shareholder nothing in the way of distribution of assets but merely divides his existing shares into smaller units. There
is no increase in his proportionate claim upon the corporate assets or income by reason of such a paper dividend. There is no
obligation upon the corporation to declare stock dividends, which are not distributions but only a change of the share and capital
structure.
 Unless rescinded, the shareholders have absolute right to their respective shares in the stock dividends so declared and actual
delivery of the corresponding certificate is not essential to make the shareholder the owner of the dividend.

Time for payment of dividends


There is no hard and fast rule describing the interval time between the date for the declaration of dividends, the date of record of stockholders
entitled thereto, and the date of payment, the same being left to the sound and judicious discretion of the directors.

If no time is fixed by the resolution declaring a dividend, it is payable on demand, and if the resolution declares that it shall be payable at such time
as the BOD may direct and the board fixes no time, the law implies that it shall be paid within a reasonable time.

Equal participation in the distribution of dividends


As a rule, dividends among stockholders of the same class must always be pro rate, equal and without discrimination and regardless of the time
when the shares were acquired. Each stockholder is entitled to receive new shares in proportion to the stock held by him and any discrimination is
illegal.

A corporation cannot exclude stockholders owning full shares from equal participation in the distribution of dividends, it cannot deny stockholders
to fractional shares from participation in the dividends to the extent of their respective holdings. Thus, fractional shares resulting from a previous
distribution of dividend by a corporation shall be included in the computation of stock dividend subsequently declared.

Total subscription bases of share in dividends


GENERAL RULE:
The participation of each stockholder in the earnings or profits of the corporation is based on his total subscription and not on the amount paid by
him in account thereof.
Reason:
A stockholder’s entire subscription represents his holdings in the company for which he pays interest on any unpaid portion.

Classes of dividends
1. Cash dividends
 It is dividend payable in cash.
 Dividends on par value shares are made at a stated percentage (e.g. 10%) of the par value although they may also be paid as a
fixed amount per share.
 As to no par shares, dividends are payable in terms of so many pesos or centavos (e.g., P10, P0.10) per share since there is no
basis on which a percentage can be stated.

2. Property dividends
 It is dividend distributed to the stockholders in the form of property, real or personal, such as warehouse receipts, or shares of
stock of another corporation.
 If the property does not form part of the surplus or RE of the corporation, the same cannot be declared as property dividends.
 SEC requires that the property to be distributed as dividends shall consist only of property which are no longer intended to be
used in the operation of the business of the corporation and which are practicable to be distributed as dividends.
 No actual distribution of property dividends shall be made unless approved by the Commission.

3. Stock dividends
 It is dividend payable in unissued or increased or additional shares of the corporation instead of in cash or in property out of
the unrestricted RE of the corporation.
 It may be declared only to the extent of the maximum number of shares authorized in the articles of incorporation.
 Shares of stock may be issued to a non-stockholder or to a person who is not a stockholder but shares of stock coming from
stock dividends are payable only to stockholders of the corporation and not to strangers or non-stockholders because only
shareholders are entitled to dividends.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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 It is in the nature of shares of stock, the consideration for which is the amount of unrestricted RE converted into equity in the
corporation’s books.

4. Optional dividends – It is dividend which gives the stockholder an option to receive cash or stock dividend.

5. Composite dividends – it is dividend which is party in cash and partly in stocks. Here, there is no option involved.

6. Preferred dividends
 It is dividend which is payable, by virtue of contract, to one class of stockholders in priority to that to be paid to another class.

7. Cumulative dividends
 It is dividend which is contracted to be paid at a certain rate at stated times and, if net earnings at any dividend period are
insufficient to pay the contract dividend, it is to be made out of subsequent net earnings.

8. Scrip dividends
 It is in the form of a promissory notes or a promise to pay and may be issued to bear interest.
 It is dividend in the form of a writing or certificate issued to a stockholder entitling him to the payment of money, stock or other
benefit at some future time inasmuch as the corporation at the time such dividends are declares has profits not in cash or has
no sufficient cash, or has the bash but wishes to reserve it for some corporate purposes.

9. Bond dividend
 It is dividend distributed in bonds of the corporation to the stockholders.
 The bondholder becomes a creditor of the corporation to the extent of the amount of the bond.

10. Liquidating dividends


 Dividends which are actually distributions of the assets of the corporation upon dissolution or winding up of the same.
 They are not paid on account of earnings or profits, but as a return of capital invested.
Ordinary and extraordinary dividends
1. Ordinary dividends
Those paid out of current earnings of a corporation according to some fixed plan or scheme, usually at regular intervals and sometimes
limited to a substantially fixed rate of return to the shareholder.

2. Extraordinary dividends
Usually represented an accumulated excess of earnings over normal return on capital invested and constitute a distribution or a
capitalization of surplus profits remaining after distribution of ordinary dividends.

Effect of declaration
1. Of cash dividend
 The assets of the corporation diminishes and the property of the individual stockholder increases.
 The declaration itself of cash dividend is considered effective to create a debt from the corporation to each of its stockholders.

2. Of stock dividend
 A stock dividend converts the surplus or profits of the corporation covered by such dividend into the permanent account,
thereby placing it beyond the power of the BOD to withdraw from corporate use and to distribute to the stockholders.
 It shows that the corporation’s accumulated profits have been capitalized instead of distributed to the stockholders or retained
as surplus available for distribution, in money or kind, should opportunity offer.
 The corporation merely transfers the surplus to capital account and issues shares of stock to represent the same.
 The declaration adds nothing to the interest of the stockholders. After a declaration of stock dividends, the stockholder receives
no greater proportional interest in the assets of the corporation than he had before.
 The declaration of stock dividends is advantageous to existing creditors of the corporation to the extent that corporate earnings
are capitalized, unavailable for distribution to stockholders.
 Stock dividends are not taxable as income because they represents merely an unrealized gain to the stockholder who receives
nothing from the corporation that answers the definition of income under the NIRC.

3. Of bond or scrip dividend


 The declaration of a bond or scrip dividend makes the stockholder a creditor of the corporation for the amount of the bond or
scrip issued as dividends, but the assets of the corporation remain the same as nothing passes out of the corporation to the
stockholder.
 It has the effect of deferring the payment of cash dividends.

Cash dividend vs. Stock dividend


Cash Dividend Stock Dividend
Disbursement to the stockholder of accumulated earnings. No disbursement.

Dividends declared and paid becomes the absolute property of Still party of the corporate property, may be reached by
the stockholder and cannot be reached by the creditors of the corporate creditors.
corporation in the absence of fraud.

Declared by the BOD at its discretion. Declared by the BOD with the concurrence of the stockholders

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 74
Christine Grace Embay-Zamora

representing at least 2/3 of the outstanding capital stock at a


regular or special meeting called for the purpose.

Does not increase the corporate capital. Increases the corporate capital.

Declaration of cash dividend creates a debt form the corporation No debt from the corporation to the stockholders is created by
to each of its stockholders. the declaration of stock dividend, except in the sense that capital
stock constitutes a liability.

Taxable as income to the stockholder. Generally not subject to income tax.

Stock dividend from issue of additional shares


Whenever an increase is made in the capital account of a stock corporation, the increase is valid only when it represents additional shares issued
for which the equivalent consideration is received by the corporation. The increase may be the result of an issue of additional shares or the re-
investment of RE effected by the distribution of shares as stock dividends.

Stock split
A stock split is merely a dividing up of the outstanding shares of a corporation into a greater number of units, without disturbing the stockholder’s
original proportional participating interest in the corporation. A stock split is essential one of form and not of substance.

How accomplished?
1. If the stock is of the par value type, then the original certificate is exchanged and a new certificate substituted, embodying the original
shares, plus the new number of shares authorized by the split.
2. If the stock is no-par value stock to be split, then the stockholder retains his original certificate and receives additional certificates for the
additional shares.

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 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)

POWER TO ENTER INTO MANAGEMENT CONTRACT


1. With another corporation
 A corporation is expressly allowed, without the need of amending its articles of incorporation, to enter into a management
contract with another corporation.
 Management contract – it is an agreement under which a corporation delegates the management of its affairs to another
corporation for a certain period of time. Since the corporation can employ officers and agents to manage its business, there can
be no objection to employing another corporation for the purpose.
 A corporation under management is bound by the acts of the managing corporation and is estopped to deny its authority.

2. With parent corporation


 Absent a finding of fraud or bad faith, contracts entered into by a parent corporation with a subsidiary or affiliate may be held
legal where the purpose is to provide more efficient operation and greater convenience to both.
 However, since this situation may, in effect, place the subsidiary or affiliate to a certain extent within the control of the present
company and the latter, in turn, assume responsibility for such management, the same shall be subject to the provisions of
Section 44 relative to the execution of management contracts.

3. With a natural person


 Section 44 refers only to a management contract with another corporation. Hence, it does not apply to management contracts
entered into by a corporation with natural persons.

Limitations on the power


1. Ratification of the contract

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 75
Christine Grace Embay-Zamora

 GENERAL RULE: The contract must be approved by a majority of the quorum of the BOD or BOT and ratified by the majority
vote of the outstanding capital stock entitled to vote or of the members, as the case may be, of both the managing and the
managed corporations, at a meeting duly called for the purpose.
 EXCEPTIONS: Management contract must be approved by the stockholders of a managed corporation owning at least 2/3 of the
total outstanding stock entitled to vote or 2/3 of the members (in these 2 situations) –
i. Where a stockholder/s representing the same interest of both the managing and managed corporations own or
control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation.
(interlocking stockholders)
Example:
A., B, C stockholders of X Corp and Y Corp; owns more than 1/3 of the total outstanding capital stock of X Corp.
(managing corp)
X Corp. – managing; Y Corp. – managed
• The management contract must be approved by the prescribed 2/3 vote of the stockholders of Y Corp
(managed corp.)
• Only a majority vote is required if more than 1/3 ownership of stockholder/s refers to the capital stock of Y
Corp.
ii. Where a majority of the members of the BOD or the managing corporation also constitute a majority of the members
of the BOD of the managed corporation. (interlocking directors)
 If the interest of the director in both corporations are both nominal or both substantial (stockholdings is
more than 20% of the outstanding capital stock) the contract shall be valid provided there is no fraud and
the contract is fair and reasonable.
 If the interest of the director in once corporation is substantial and in the other merely nominal is voidable
unless the following conditions are present:
• 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.
• That the vote of such director or trustee was not necessary for the approval of the contract.
• That the contract is fair and reasonable under the circumstances.
• That in case of an officer, the contract with the officer has been previously authorized by the BOD.

2. Period of the contract


 GENERAL RULE: The period must not be longer than 5 years for any TERM.
 EXCEPTION: Those contracts which relate to the exploration, development, exploitation or utilization of natural resources that
may be entered into for such periods as may be provided by pertinent laws or regulations.

3. Managerial power under the contract


 The management contract must always be subject to the superior power of the board to give specific directions from time to
time or to recall the delegation of managerial power.
 It cannot delegate the entire supervision and control over the officers and business of a corporation to another as this will
contravene Section 23, which lays down the fundamental rule that the corporate powers of all corporations shall be exercised
by the board.

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 exercise of the
powers so conferred. (n)

Ultra vires vs. intra vires


Ultra vires act – one not within the express, implied, and incidental powers of the corporation conferred by the Corporation code or the articles of
incorporation. It is an act which is not positively forbidden, but impliedly forbidden because not expressly or impliedly authorized or necessary or
incidental in the exercise of the powers so conferred.

Intra vires act – acts or transactions within the legitimate powers of a corporation or are related to its purposes.

Ultra vires act vs. other acts


OTHER ACTS ULTRA VIRES ACT
ILLEGAL ACTS Void and cannot be validated.
An ultra vires act is not necessarily an illegal An illegal corporate act is an act which is
Voidable which may be ratified.
act. contrary to law, morals, good customs, public
order or public policy and therefore, per se
An act which is beyond the conferred powers
illicit.
of a corporation or the purposes or objects for
ACT DONE WITHOUT COMPLYING WITH A corporate transaction or contract which is
which it is created as defined by the law of its
CERTAIN CONDITIONS AND FORMALITIES within the powers of the corporation, which is
organization.
Failure to comply with certain formalities and neither wrong in itself nor against public
conditions does not make the act ultra vires. policy, but which is defective from a failure to
Beyond the powers of the corporation.
observe in its execution a requirement of law
enacted for the benefit or protection of a
Voidable and may be enforced by
certain class, is voidable only and is valid until
performance, ratification, or estoppels or on
voided.
equitable grounds.
ACT BEYOND THE POWERS OF PARTICULAR The stockholders of a corporation, while they
OFFICERS cannot, by ratification, render valid an act
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 76
Christine Grace Embay-Zamora

which is beyond the powers of the


corporation, may ratify an act which is within
its powers, but beyond the powers of the
directors.
ACT INVOLVING INEXISTENT CONTRACT Cannot be ratified.
A contract may not be illegal but inexistent
and, therefore, void, when it lacks one or some
of the essential elements of a contract. Such
contracts are not necessarily ultra vires.
Neither party has a right of action against the
other who can always raise the defense of the
inexistence of the contract to defeat the claim
of the former.

Effects of ultra vires which are not illegal


The following rules are recognized:
1. An ultra vires contract, while executory on both sides, cannot be enforced by either party thereto.
2. When an ultra vires contract has been fully performed on both sides, neither party can maintain an action to set aside the transaction or
to recover what has been parted with. The well-settled doctrine is that the defense of ultra vires cannot be set up or availed of in
completed or consummated transaction. Only the State may challenge the contract on ultra vires grounds. No public interest is involved
here since both parties have already received to their advantage the benefits of the contract voluntarily entered into.
3. When an ultra vires contract has been performed on one side and the other has received benefits by reason of such performance,
recovery is permitted in most courts on behalf of the former on the ground that it would be unjust to sanction retention of benefits
coupled with refusal to perform.

Contracts ultra vires in part only


If the contract is separable, it may be sustained and enforced as to the part not ultra vires, and held invalid as to the part ultra vires.

Ultra vires acts as the acts of the corporation


An act done by the officers of a corporation on its behalf and in its name, but in excess of its powers, even though authorized by the stockholders
(or members) in their corporate capacity, is not the act of the corporation.

Torts and crimes are always ultra vires, and yet it is well settled that a corporation may commit a tort and be liable in damages therefor, and it may
be guilty of misdemeanor, and be indirectly convicted and fined therefore.

Who may invoke ultra vires?


1. State
o When the State creates a corporation, the grant of the charter is on the implied condition that the corporation shall act within the
powers conferred upon it. Ultra vires acts, whether otherwise wrong or not, are a breach of this condition. Such an act does not of
itself put an end to the existence of the corporation, but it is, subject to certain qualifications, a ground for a direct proceeding by
the State to obtain a judgment of forfeiture.
o But when a corporation is guilty of exercising powers not authorized by its charter, the State instead of proceeding against it to
obtain a judgment forfeiting its charter may proceed by quo warranto, to obtain a judgment merely ousting it from further
exercise of the unauthorized power.
o The SEC may suspend or revoke the certificate of registration of a corporation for commission of ultra vires acts.
2. Stockholders
o The stockholders of a corporation have a right to expect and to insist that its funds shall not be diverted by giving them away or by
employing them in an ultra vires business or transaction, and any stockholder, therefore, has such an interest that he may apply
to a court for an injunction to prevent such a diversion, even though all other stockholders may consent to the ultra vires act.
o However, a stockholder may be precluded from attacking an act as ultra vires, by his laches.
o If a stockholder wants protection against the consequences of an ultra vires act, he must ask for it with sufficient promptness to
enable the court to do justice to him without doing injustice to others.
3. Strangers
o GENERAL RULE: A plea of ultra vires cannot be interposed by a stranger not a party to the contract, at least if he is not injured by
such act or contract.
o EXCEPT: Otherwise provided by statute.
4. Competitors in business
o A competitor cannot attack acts of a corporation as ultra vires, merely on the ground of injurious competition, where such acts
are neither public nuisances or trespasses. The only injury of which he can be heard in a judicial tribunal to complain is the
invasion of some legal or equitable right.
5. Creditors
o Judgment creditors may impeach an ultra vires contract as in fraud of creditors, the same as any other contract. But creditors of
the corporation, whose rights are not infringed by the ultra vires contract, cannot attack it. They cannot attack a corporate
transaction as ultra vires unless its intent or effect is fraudulently to divert the corporate assets from their debts.

Estoppel to deny a corporate power to contract


GENERAL RULE:
An association which assumes to exercise corporate powers and enters into a contract as a corporation and persons who contract with it as a
corporation are estopped, in an action on the contract, to deny its corporate existence.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 77
Christine Grace Embay-Zamora

Where power to enter into contract in issue –


The general principle does not apply where the question is whether a contract is within the powers conferred upon a corporation by its charter to
make, and hence, since estoppels must be mutual, the other party to the contract is not estopped to set up that the contract was beyond the
powers of the corporation.

Where contract wholly executory –


The mere act of entering into the contract does not estop either party to show that the contract is ultra vires. If it did, ultra vires could not be set
up as against a contract wholly executory, whereas the rule that wholly executory contract may be attacked as ultra vires is one of the few rules as
to which there is no contention.

Where contract apparently ultra vires –


A corporation may be estopped to deny its power to enter into a particular contract, where the contract is apparently within its powers, and is
rendered ultra vires because of extraneous facts peculiarly within the knowledge of the corporation, and not known to the other party.

Where contract has been performed on one side –


A contract is ultra vies, either against the corporation or against the other party, where the contract has been performed by one of the parties and
the other has received the benefit of such performance, is said to be precluded on the theory of an estoppels.

Corporate liability for torts, crimes and other violations


GENERAL RULE:
A corporation, being a juridical entity, can only act as such through its officers and agents. This being the case, it is responsible for the tortuous acts
of the latter done within the scope of their authority or in the course of employment to the same extent that an unincorporated individual or
association would be.

A corporation cannot, in order to escape liability for damages for the wrongful acts of its agents or employees, assert that such acts were beyond
the scope of its corporate power or that they occurred in connection with a transaction beyond the scope of such power. It is to be kept in mind
that all torts are necessarily ultra vires, since if an act is legally authorized, it is for that reason lawful and not a tort.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 78
Christine Grace Embay-Zamora

TITLE V
BY LAWS
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 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. (20a)

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.

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 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.

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.

TITLE VI
MEETINGS

Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may be regular or special. (n)

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 79
Christine Grace Embay-Zamora

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: 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 Secretaries 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 number 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.

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.

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. (n)

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. (n)

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. (n)

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.

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,

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 80
Christine Grace Embay-Zamora

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.

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

Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies
shall 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.

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 canceled 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.

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 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.

TITLE VII
STOCKS AND STOCKHOLDERS

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. (n)

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.

Sec. 62. Considering for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 81
Christine Grace Embay-Zamora

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 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.

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.

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.

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.

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. 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 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.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 82
Christine Grace Embay-Zamora

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.

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 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 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.

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.

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.

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 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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 83
Christine Grace Embay-Zamora

(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 procedure above-
described. (R. A. 201a)

TITLE VIII
CORPORATE BOOKS AND RECORDS

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 punishable under
Section 144 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 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.)

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. (n)

TITLE IX
Source: The Corporation Code of the Philippines 2010 edition by De Leon
Corporation Law 84
Christine Grace Embay-Zamora

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; ‘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
3. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n)

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 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
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 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.

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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 85
Christine Grace Embay-Zamora

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
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.

TITLE X
APPRAISAL RIGHT

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;
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. 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 (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. (n)

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.

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. (n)

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. (n)

Source: The Corporation Code of the Philippines 2010 edition by De Leon


Corporation Law 86
Christine Grace Embay-Zamora

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.

TITLE XI
NON-STOCK CORPORATIONS

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 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.

Chapter I – MEMBERS

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.

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.

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.

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.

Chapter II - TRUSTEES AND OFFICERS

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 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.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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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. (n)

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 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.

Chapter III - DISTRIBUTION OF ASSETS IN


NON-STOCK CORPORATIONS

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 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
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.

TITLE XII
CLOSE CORPORATIONS

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of 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.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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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.
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.

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.

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 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.

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.

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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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.

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.

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 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.

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 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.

Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and 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

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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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.

TITLE XIII
SPECIAL CORPORATIONS
Chapter I - Educational Corporations

Sec. 106. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code.

Sec. 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of Education and Culture, the
Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational
institution.

Sec. 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5)
nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5).

Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or
other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their
number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall
hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office
for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of
trustees shall be defined in the by-laws.

For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock
corporations.

Chapter II - RELIGIOUS CORPORATIONS

Sec. 109. Classes of religious corporations. - Religious corporations may be incorporated by one or more persons. Such corporations
may be classified into corporations sole and religious societies.

Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may
be applicable.

Sec. 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of
any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi
or other presiding elder of such religious denomination, sect or church.

Sec. 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of
incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or
church and that he desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his
becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within
his territorial jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding
elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church
to which he belongs; and

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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5. The place where the principal office of the corporation sole is to be established and located, which place must be within
the Philippines.

The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation.

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
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.

Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and personal property for
its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation
may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province
where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or
mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is
to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must
be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation
sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole:
Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or
order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate
and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary.

Sec. 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on
the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of
appointment, duly certified by any notary public.

During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination,
sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or
discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and
manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of
the corporation sole during such vacancy.

Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and
Exchange Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.

Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on
its operations except for the purpose of winding up its affairs.

Sec. 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination,
sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting
called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the
management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a
religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly
convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to
incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the
administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located, which place must be within the
Philippines; and
6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese,
synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the
religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less
than five (5) nor more than fifteen (15).

TITLE XIV
DISSOLUTION

Sec. 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code may be dissolved voluntarily
or involuntarily.

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.

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 such disposition of its
assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, RCa)

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 dissolved without any

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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further proceedings, subject to the provisions of this Code on liquidation.

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.

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 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. (77a, 89a, 16a)

TITLE XV
FOREIGN CORPORATIONS

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.

Sec. 124. Application to existing foreign corporations. - Every foreign corporation which on the date of the effectivity of this Code is
authorized to do business in the Philippines under a license therefore issued to it, shall continue to have such authority under the
terms and condition of its license, subject to the provisions of this Code and other special laws. (n)

Sec. 125. Application for a license. - A foreign corporation applying for a license to transact business in the Philippines shall submit to
the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and
their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated
in its articles of incorporation, shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and,
pending the establishment of a local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the
Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by
the appropriate government agency;
6. The names and addresses of the present directors and officers of the corporation;
7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to
issue, itemized by classes, par value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued,
itemized by classes, par value of shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange
Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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determine and assess the fees payable.

Attached to the application for license shall be 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. If such certificate is in a
foreign language, a translation thereof in English under oath of the translator shall be attached thereto.

The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the
president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission
and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth
the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the
application.

Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of
existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the
Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate
government agency, whenever required by law.

Sec. 126. Issuance of a license. - If the Securities and Exchange Commission is satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to
transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign
corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act
as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked,
suspended or annulled in accordance with this Code or other special laws.

Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or
insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors of
the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other
evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-
owned or controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in Republic Act No.
5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies
and banks, or any combination of these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.)
pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission
shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange
Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by
at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and Exchange Commission
may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if
the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of
the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee
to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect
the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities
deposited as aforesaid shall be returned, upon the licensee's application therefor and upon proof to the satisfaction of the Securities
and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the
Philippines.

Sec. 127. Who may be a resident agent. - A resident agent may be either an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he must be of good moral
character and of sound financial standing.

Sec. 128. Resident agent; service of process. - The Securities and Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney designating some person who must be a resident of the Philippines, on whom
any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of
the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the Securities and
Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as
follows:

"The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and
Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes
may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service
of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have
the same force and effect as if made upon the duly-authorized officers of the corporation at its home office."

Whenever such service of summons or other process shall be made upon the Securities and Exchange Commission, the Commission
shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home
or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All
expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and
Exchange Commission of the new address. (72a; and n)

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,
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. 131. Amended license. - A foreign corporation authorized to transact business in the Philippines shall obtain an amended license
in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an
application therefor to the Securities and Exchange Commission, favorably endorsed by the appropriate government agency in the
proper cases.

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 the Philippines shall be a party to a merger or consolidation in its
home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such
merger or consolidation becomes effective, file with the Securities and Exchange Commission, and in proper cases with the
appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials
of the country or state under the laws of which merger or consolidation was effected: Provided, however, That if the absorbed
corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal
of it license in accordance with this Title.

Sec. 133. Doing business without a license. - No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under Philippine laws.

Sec. 134. Revocation of license. - Without prejudice to other grounds provided by special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the
following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a
statement of such change as required by this Title;
4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such
corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under
its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly
licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines.

Sec. 135. Issuance of certificate of revocation. - Upon the revocation of any such license to transact business in the Philippines, the
Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the
appropriate government agency in the proper cases.

The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such
revocation accompanied by a copy of the certificate of revocation.

Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws and regulations, a foreign corporation licensed to transact
business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No
certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met;
1. All claims which have accrued in the Philippines have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or
political subdivisions have been paid; and
3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of
general circulation in the Philippines.

TITLE XVI
MISCELLANEOUS PROVISIONS

Sec. 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of
stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.

Sec. 138. Designation of governing boards. - The provisions of specific provisions of this Code to the contrary notwithstanding, non-
stock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any
name other than as board of trustees.

Sec. 139. Incorporation and other fees. - The Securities and Exchange Commission is hereby authorized to collect and receive fees as
authorized by law or by rules and regulations promulgated by the Commission.

Sec. 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the Constitution, the National
Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been
used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the
Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or
correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public
interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by
consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations
designed to promote the general welfare and foster economic development.

In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in
formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type
and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino
ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and
promotion of business and industry.

Sec. 141. Annual report or corporations. - Every corporation, domestic or foreign, lawfully doing business in the Philippines shall
submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its
assets and liabilities, certified by any independent certified public accountant in appropriate cases, covering the preceding fiscal year
and such other requirements as the Securities and Exchange Commission may require. Such report shall be submitted within such
period as may be prescribed by the Securities and Exchange Commission.

Sec. 142. Confidential nature of examination results. - All interrogatories propounded by the Securities and Exchange Commission
and the answers thereto, as well as the results of any examination made by the Commission or by any other official authorized by
law to make an examination of the operations, books and records of any corporation, shall be kept strictly confidential, except
insofar as the law may require the same to be made public or where such interrogatories, answers or results are necessary to be
presented as evidence before any court.

Sec. 143. Rule-making power of the Securities and Exchange Commission. - The Securities and Exchange Commission shall have the
power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to
enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers.

Sec. 144. 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.

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.

Sec. 146. Repealing clause. - Except as expressly provided by this Code, all laws or parts thereof inconsistent with any provision of
this Code shall be deemed repealed.

Sec. 147. Separability of provisions. - Should any provision of this Code or any part thereof be declared invalid or unconstitutional,
the other provisions, so far as they are separable, shall remain in force.

Sec. 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in the Philippines on the date
of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be

Source: The Corporation Code of the Philippines 2010 edition by De Leon


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deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its
license, and shall be governed by the provisions hereof: Provided, That if any such corporation is affected by the new requirements
of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the
effectivity of this Code within which to comply with the same.

Sec. 149. Effectivity. - This Code shall take effect immediately upon its approval.

Source: The Corporation Code of the Philippines 2010 edition by De Leon