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Revised

 Corporation  Code  of  


the  Philippines  
Republic  ACT  11232
Highlights
• 17  Titles
• 188  sections
• Major  provisions  introduced  to  harmonize  with  other  commercial  
laws
• Major  reforms  introduced
• Signed  on  February  20  and  Published  on  February  21,  2019
Definition  of  Corporation
• Section  2.  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  incidental  to  its  existence.

• By  operation  of  law  – note  section  4  (Corporations  created  by  Special  


Laws  or  Charters)

• Powers  – refer  to  Title  IV  sections  35  – 44.  Note  section  44  on  ultra  
vires  acts
Classes  of  Corporations
• Stock  and  Non-­‐Stock  (section  3)

• In  relation  to  Non-­‐Stock  Corporation,  refer  to  Title  XI  (sections  86-­‐94)

• Refer  as  well  to  section  19  (De  Facto  Corporation),  section  20  
(Corporation  by  Estoppel),  and  Title  XII  (Close  Corporation),  Title  XIII  
(Special  Corporations  – Educational/Religious/  One  Person  
Corporation)
Test  to  determine  whether  a    corporation  is  public  or  private

The  true  criterion,  therefore,  to determine whether a


corporation is public or private is found in the totality of the
relation of the corporation to the State.
If the corporation is created by the State as the latter's own agency
or instrumentality to help it in carrying out its governmental
functions, then that corporation is considered public; otherwise, it is
private. Applying the above test, provinces, chartered cities, and
barangays can best exemplify public corporations. They are created
by the State as its own device and agency for the accomplishment of
parts of its own public works.
Corporators,  Incorporators,  Stockholders  and  
Members
• Note  section  5  -­‐ Definition  and  distinction  between  Corporators,  
Incorporators,  Members

• Relate  to  Title  III  (Board  of  Directors);  Title  VII  (Stocks  and  
stockholders)

• Articles  of  Incorporation  – defined  in  section  13


Classification  of  Shares
• Covered  by  section  6  -­‐ Classification,  corresponding  rights,  privilges,  
restrictions  and  stated  par  value  must  be  stated  in  the  Articles

• Each  share  shall  be  equal  in  all  respects  to  every  other  share,  except  as  
otherwise  provided  in  the  Articles  and  in  the  Certificate  of  Stock.

• NO  share  may  be  deprived  of  voting  rights  except  those  classified  and  
issued  as   preferred  or  redeemable  shares.

• Provided  that  there  shall  always  be  a   class  or  series  of  shares  with  
complete  voting  rights.
Exceptions:  Where  non-­‐voting  shares  may  still  
vote  on  
• Where  the  articles  of  incorporation  provide  for  non-­‐voting  shares  in  
the  cases  allowed  by  this  Code,  the  holders  of  such  shares  shall  
nevertheless  be  entitled  to  vote  on  the  following  matters:  
• 1.  Amendment  of  the  articles  of  incorporation;  
• 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;  
Exceptions:  Where  non-­‐voting  shares  may  still  
vote  on  
• 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.
• Share  or  series  of  shares  may  or  may  not  have    a  par  value

• The  following  are  NOT  allowed  to  issue  no  par  value  shares:
1. Banks
2. Trust
3. Insurance
4. Pre  need  companies
5. Public  Utilities
6. Building  and  Loan  Associations
7. Other  corporations  authorized  to  obtain  or  access  funds  from  the  public,  
whether  publicly  listed  or  not
Preferred  Shares
• Shares  of  stock  issued  by  a  corporation  may  be  given  preference  in:

1. Distribution  of  Dividends


2. Distribution  of  Corporate  Assets  in  case  of  liquidation,  or
3. Such  other  preferences
Rules  on  Preferred  Shares
• May  be  issued  only  with  stated  par  value
• Board  may  fix  the  terms  and  conditions  in  the  preferred  shares
• Such  terms  and  conditions  shall  take  effect  upon  filing  of  a  certificate  
thereof  with  SEC
Rules  on  No  Par
• It  shall  be  deemed  fully  paid  and  nonassessable and  the  holder  of  
such  shares  shall  not  be  liable  to  the  corporation  or  to  its  creditors  in  
respect  thereto
• No  Par  Value  shares  must  be  issued  for  a  consideration  of  at  least  
P5.00  per  share
• 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.
Founder’s  Shares  (sec.7)
• Different  from  other  shares
• Not  necessarily  Incorporators
• Granted  certain  rights  and  privileges  not  enjoyed  by  the  owners  of  
other  stocks
• May  be  granted  exclusive  right  to  vote  and  be  voted  for  as  Director,  
provided  that  it  must  be  for  a  period  not  to  exceed  5  years  from  the  
date  of  incorporation
• Such  exclusive  right  shall  not  be  allowed  if  it  will  violate  the  Anti-­‐
Dummy  Law  and  the  Foreign  Investments  Law,  and  other  pertinent  
laws
Redeemable  Shares  (Sec.8)
• Shares  which  may  be  purchased  by  the  corporation  from  the  holders  
of  such  shares  upon  the  expiration  of  a  fixed  period,  regardless  of  the  
existence  of  unrestricted  retained  earnings  in  the  books  of  the  
corporations;
• Subject  to  other  terms  and  conditions  to  be  stated  in  the  articles  and  
the  certificate  of  stock
Treasury  Shares  (sec.  9)
• Classes  of  shares  which  have  been  issued  and  fully  paid
• But  subsequently  reacquired  by  the  issuing  corporation  through  
purchase,  redemption,  donation  or  some  other  lawful  means
• Such  shares  may  be  disposed  of  at  a  reasonable  price  to  be  fixed  by  
the  Board
Difference  between  Treasury  and  
Redeemable  Shares
Redeemable  Shares Treasury  Shares
Shares which may be purchased by the corporation Classes  of  shares  which  have  been  issued  and  fully  
from the holders of such shares upon the expiration paid
of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the But  subsequently   reacquired  by  the  issuing  
corporations; corporation   through   purchase,   redemption,   donation  
Subject to other terms and conditions to be stated in or  some  other  lawful  means
the articles and the certificate of stock.
Such  shares  may  be  disposed   of  at  a  reasonable  price  
to  be  fixed  by  the  Board
Nationality  of  Corporations

INCORPORATION  TEST
The  sovereignty  by  which  a  corporation  was  created,  under  
whose  laws  it  was  organised,  determines  its  national  character,  
and  the  fact  that  some  of  its  incorporators  were  residents  and  
citizens  of  a  foreign  country  does  not  change  this  rule.
Note  section  140,  Definition  of  a  Foreign  Corporation
Section  176  – Stock  Ownership  in  corporations
Rule  in  this  jurisdiction

Control  Test  under  section  3  of  RA  7042  as  amended  by  RA  8179  otherwise  
known  as  the  Foreign  Investment  Act  of  1991
Also  referred  to  as  the  “aggregate  test”
Shares  belonging  to  60%  of  the  capital  of  which  is  owned  is  Filipino  citizens  
shall  be  considered  as  of  Philippine  nationality,  but  if  the  percentage  of  
Filipino  ownership  is  less  than  60%,  only    the  number  of  shares  
corresponding  to  such  percentage  shall  be  counted  as  of  Philippine  
nationality.  
Application  of  control  test

What  is  the  nationality  of  a  corporation  organized  and  


incorporated  under  the  laws  of  a  foreign  country  but  owned  
100%  by  Filipinos?
FILIPINO  Corporation,  but  not  a  domestic  corporation.
What  shares  are  considered  in  computation

Common  shareholdings,not  preferred  or  


redeemable  shares.  
Section  6  of  the  Corporation  Code  of  the  
Philippines  explicitly  provides  that  “no  share  
may  be  deprived  of  voting  rights  except  those  
classified  as  ‘preferred’  or  ‘redeemable’  
shares.”  
Grandfather  rule

Exception  to  the  Control  Test,  but  can  be  applied  cumulatively  as  
well.
Note  the  case  of  Narra  Nickel  Mining  Corporation  (2015)  
Resort  to  the  Grandfather  Rule  is  necessary  if  doubt  exists  as  to  
the  locus  of  the  “beneficial  ownership”  and  “control,”  particularly  
n  cases  of  corporate  web  layering.
Application  of  the    rules

“Doubt”  refers  to  various  indicia  that  the  “beneficial  ownership”  and  “control”  of  the  
corporation  do  not  in  fact  reside  in  Filipino  shareholders  but  in  foreign  stakeholders.    
When  is  there  doubt:
1.  That  the  foreign  investors  provide  practically  all  the  funds  for  the  joint  investment  
undertaken  by  these  Filipino  businessmen  and  their  foreign  partner;  
2.    That  the  foreign  investors  undertake  to  provide  practically  all  the  technological  
support  for  the  joint  venture;  
3.      That  the  foreign  investors,  while  being  minority  stockholders,  manage  the  company  
and  prepare  all  economic  viability  studies.
Nationality  Requirement  provisions  under  
new  law
Names  and  Nationalities  of  Incorporators  must  be  stated  in  Articles  of  
Incorporation  (section  13  ),  Section  14  paragraph  11  (No  transfer  of  stock  
or  interest  shall  reduce  ownership  of  Filipino  citizens…)
When  required  percentage  of  Filipino  ownership  of  the  capital  stock  
under  existing  laws  or  the  Constitution  has  not  been  complied  with,  the  
Articles  of  Incorporation  or  Amendment  may  be  disapproved  (section  16  
[d.]
Section  176.  Stock  ownership  in  corporations.  NEDA  to  submit  report  to  
congress  for  the  prevention  or  correction  of  errors  on  stock  ownership  
requirements  if  the  corporate  vehicle  has  been  used  to  frustrate  the  law.
Power  of  Congress

Section  176.  Congress  may  set  maximum  limits  for  stock  ownership    to  
prevent  anti-­‐competitive  practices  as  provided  in  RA  10667  otherwise  
known  as  the  “Philippine  Competition  Law”
Separate juridical personality

As  a  general  rule,  a  corporation  will  be  deemed  a  separate  legal  entity  until  
sufficient  reason  to  the  contrary  appears.  But  the  rule  is  not  absolute.  A  
corporation's  separate  and  distinct  legal  personality  may  be  disregarded  
and  the  veil  of  corporate  fiction  pierced  when  the  notion  of  legal  entity  is  
used  to  defeat  public  convenience,  justify  wrong,  protect  fraud,  or  defend  
crime.  
Siain Enterprises vs. Cupertino Realty Corp., et al., G.R. No. 170782, June 22, 2009
Separate  personality

It  is  elementary  that  a  corporation  has  a  


personality  distinct  and  separate  from  its  
individual  stockholders  or  members.  
Being  an  officer  or  stockholder  of  a  
corporation  does  not  make  one's  property  the  
property  also  of  the  corporation,  for  they  are  
separate  entities.
[G.R. No. 180036.
July 25, 2012.],SITUS DEVELOPMENT CORPORATION, DAILY SUPERMARKET,
INC. and COLOR LITHOGRAPHIC PRESS, INC., petitioners, vs. ASIATRUST BANK, ALLIED
BANKING CORPORATION, METROPOLITAN BANK AND TRUST COMPANY, and CAMERON
GRANVILLE II ASSET MANAGEMENT, INC. (CAMERON), respondents.

Hence,  the  rule  is  that  assets  of  stockholders  may  


not  be  considered  as  assets  of  the  corporation,  
and  vice-­‐versa.  The  mere  fact  that  one  is  a  
majority  stockholder  of  a  corporation  does  not  
make  one's  property  that  of  the  corporation,  
since  the  stockholder  and  the  corporation  are  
separate  entities.
While  a  share  of  stock  represents  a  proportionate  or  aliquot  interest  in  the  
property  of  the  corporation,  it  does  not  vest  the  owner  thereof  with  any  
legal  right  or  title  to  any  of  the  property,  his  interest  in  the  corporate  
property  being  equitable  or  beneficial  in  nature.  Shareholders  are  in  no  
legal  sense  the  owners  of  corporate  property,  which  is  owned  by  the  
corporation  as  a  distinct  legal  person.
Concepcion  Magsaysay-­‐Labrador  vs.  Court  of  Appeals,  G.R.  No.  58168,  
December  19,  1989;Good  Earth  Emporium,  Inc.  vs.  Court  of  Appeals,  G.R.  
No.  82797,  February  27,  1991
Civil  Code  Provisions

Article  45  – private  corporations  are  


regulated  by  laws  of  general  application  
Article  46  – juridical  persons  may  acquire  
and  possess  property  of  all  kinds  as  well  as  
incur  obligations  and  bring  civil  or  criminal  
actions
Piercing  the  veil

The doctrine of piercing the veil of corporate entity applies when the
corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime or where a corporation is the mere alter
ego or business conduit of a person (Indophil Textile Mill Workers
Union-PTGWO vs.
Teodorico  P.  Calica,   G.R.  No.  96490,  February  3,  1992).  
To disregard the separate juridical personality of a corporation, the
wrong-doing must be clearly and convincingly established. It cannot be
presumed
Del  Rosario   vs.  NLRC,  G.R.  No.  85416,  July   24,  1990;  James  Yu  vs.  National  
Labor    Relations  Commission,  G.R.  Nos.  111810-­‐11,  June  16,  1995
Nature

Piercing  the  veil  of  corporate  entity  is  an  


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

1. Control,  not  mere  majority  or  complete  control,  but   complete  domination,  not  only  of  finances  
but  of  policy  and  business  practice  in  respect  to  the  transaction  attacked  so  that  the  corporate  entity  as  
to  this  transaction  had  at  the  time  no  separate  mind,  will  or  existence  of  its  own.
2. Such  control  must  have  been  used  by  the  defendant  to  commit   fraud  
or  wrong,   to  perpetuate  the  violation  of  a  statutory  or   other  positive  legal  
duty,  or   dishonest  and,unjust  act  in   contravention  of  plaintiffs   legal  rights;  
and,
3. The  aforesaid  control  and  breach  of  duty  must  proximately  cause   the  
injury  or  unjust  loss  complained  of.
The  doctrine  of  piercing  the  corporate  veil  applies  only  
in  three  (3)  basic  areas,  namely:  1)  defeat of public
convenience as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation;
2)  fraud cases or when the corporate entity is used
to justify a wrong, protect fraud, or defend a crime;
or 3) alter ego cases, where  a  corporation  is  merely  a  
farce  since  it  is  a  mere  alter  ego  or  business  conduit  of  
a  person,  or  where  the  corporation  is  so  organized  and  
controlled  and  its  affairs  are  so  conducted  as  to  make  it  
merely  an  instrumentality,  agency,  conduit  or  adjunct  of  
another  corporation.
Three  variants  to  the  doctrine

Identity  Doctrine  -­‐ Unity  of  Interest  and  Ownership  that  independence  of  
corporation  has  ceased  to  exist,  adherence  to  doctrine  will  defeat  justice  
and  equity
Instrumentality  Rule  (Control  Test)
Alter  Ego  Doctrine    -­‐ Corporation  is  a  mere  dummy,  unreal  or  a  sham,  
serves  no  other  business  purpose
Totality  of  circumstances  test

Consider  all  circumstances  and  each  case  must  be  decided  on  its  
own  set  of  facts.
Does  the  group  of  companies  have  a  personality  separate  and  distinct  from  its  
component  corporations?

Group  of  Companies  refer  to  those  that  are  financially  related  to  one  
another  as  parent  corporation,  subsidiaries  and  affiliates.
NO  separate  personality  distinct  from  each  of  the  aggregate  corporations,  
except  in  cases  of  rehabilitation.
Note  RA  10142  “FRIA  Law”
Will the fact that a person acting as
President, Chairman and Treasurer of
the corporation justify already the
piercing of the veil of corporate
fiction based on the alter-ego
theory?
May the doctrine of piercing the veil
of corporate fiction apply to a
corporation not impleaded in the
suit?
Liability  FOR  TORT

A  corporation  is  liable  whenever  a  tortious  


act  is  committed  by  an  officer  or  agent  
under  express  direction  or  authority  from  
the  stockholders  or  members  acting  as  a  
body,  or,  generally,  from  the  directors   as  the  
governing  body.
Piercing  the  veil  of  Corporate  Fiction  under  
the  New  Code
• Section  17  – SEC  may  hold  the  corporation  and  its  responsible  directors  or  
officers  in  contempt  and/or  hold  them  administratively  liable,  civilly  and/or  
criminally  liable  for  failure  to  comply  with  the  Commission’s  order  to  cease  
and  desist  from  using  a  corporate  name  that  has  been  determined  as  not  
distinguishable.  Note  section  159  – Penalty  for  the  unauthorized  use  of  a  
corporate  name

• Section  30  – Liability  of  Directors,  Trustees  or  Officers  shall  be  jointly  and  
severally  for  all  damages  resulting  therefrom  suffered  by  the  corporation,  
its  stockholders  or  members  and  other  persons

• Section  32  -­‐ Contracts  between  Corporations  with  interlocking  directors  


where  there  is  fraud   may  be  invalidated
Piercing  the  veil  of  Corporate  Fiction  under  
the  New  Code
• Section  33  – Disloyalty  of  a  Director  where  the  latter  acquires  a  
business  opportunity  which  should  belong  to  the  corporation,  
Director  must  account  and  refund  to  the  latter  all  such  profits,  unless  
ratified  by  2/3  vote  of  the  outstanding  capital  stock.

• Section  130  – Liability  of  a  single  shareholder  shall  be  jointly  and  
severally  for  the  debts  and  other  liabilities  of  the  OPC  should  the  said  
stockholder  cannot  prove  that  the  property  of  the  OPC    is  
independent  of  the  stockholder’s  property
Piercing  the  veil  of  Corporate  Fiction  under  
the  New  Code
• Section  166  – Liability  of  Directors,  Officers,  Employees,  agents  or  
representatives  are  engaged  in  graft  and  corrupt  practices.

• Section  168  – Tolerating  graft  and  corrupt  practices  act

• Section  170  – Separate  liability  of  Director,  Trustee  and  Oficer

• Section  171  – Liability  of  Directors,  Trustee,  Officers  or  other  


Employees
Incorporating  and  Organizing  a  Corporation
• Covered  by  Title  II  
• Who
• Requirements
• Corporate  Name
• Capital  Stock  
• Certificate  of  Incorporation
• Articles  of  Incorporation  and  By-­‐ Laws
Who  are  incorporators
• Any  person,  partnership,  association  or  corporation,  singly  or  jointly  
with  others  may  organize  a  corporation  for  any  lawful  purpose  or  
purposes.

• Natural  or  Juridical  persons.  Natural  persons  must  be  of  legal  age.

• For  One  Person  Corporations  (OPC),  is  a  corporation  with  single  


stockholder;  Provided,  That  only  a  natural  person,  trust,  or  an  estate  
may  form  a  One  Person  Corporation.  (section  116,  Chapter  III,  Title  
XIII)
Exception
• 1.  Natural  persons  who  are  licensed  to  practice  a  profession
• 2.  Partnerships  or  associations  organized  for  the  purpose  of  practicing  
a  profession

Shall  not  be  allowed  to  organize  a  corporation.  (section  10,  Title  II)
Not  allowed  to  organize  a  OPC  (sec.  116)
• 1.  Banks,  
• 2.  Quasi-­‐ Banks,  
• 3.  Pre-­‐Need,  
• 4.  Trust,  
• 5.  Insurance,  
• 6.  Public  and  Publicly  listed  Companies
• 7.  Non-­‐Chartered  GOCCs
• 8.  A  natural  person  who  is  licensed  to  exercise  a  profession  may  not  
organize  a  OPC  for  the  purpose  of  exercising  such  a  profession
Number  and  Qualifications  (Private  
Corporations)
• Section  10  – Not  more  than  15  may  organize.  
• Qualifications

• 1.  Each  incorporator  of  a  stock  corporation  must  own  OR  be  a  


subscriber  to  at  least  1  share  of  the  capital  stock
• 2.  Note  rules  on  special  corporations
Special  Corporations
• Religious  Corporations  may  be  incorporated  by  one  or  more  person.  
Such  corporations  may  be  classified  into  corporation  sole  and  
religious  societies.  (section  107,  Chapter  I,  Title  XIII)

• One  Person  Corporation  organized  by  a  natural  person,  trust  or  estate  
only  (section  116,  Chapter  III,  Title  XIII)
Corporate  Name;  Rules  and  Limitations
• Must  be  DISTINGUISHABLE  from  that  already  reserved  or  registered  
for  the  use  of  another  corporation,  or  if  such  name  is  already  
protected  by  law,  or  when  its  use  is  contrary  to  existing  law,  rules  and  
regulations.  
• No  corporate  name  shall  be  allowed  by  the  Commission  if  it  NOT  
distinguishable  (section  17)
Corporate  Name

Parties   organizing  a  corporation  must  choose  a  name  at  their  peril;  


and  the  use  of  a  name  similar  to  one  adopted  by  another  
corporation,  whether  a  business  or  a  nonprofit  organization,  if  
misleading  or  likely  to  injure  in  the  exercise  of  its  corporate  functions,  
regardless  of  intent,  may  be  prevented  by  the  corporation  having  a  
prior  right,  by  a   suit  for  injunction  against  the  new  corporation  to  
prevent  the  use  of  the  name.

Ang  Mga  Kaanib  Sa  Iglesia  Ng   Dios  Kay  Kristo  Hesus  vs.  Iglesia  Ng   Dios  
Kay  Cristo  Jesus,  G.R.  No.  137592,  December  12,   2001
Change  of  name

The  corporation,  upon  such  change  in  its  name,   is  in  no  sense  a  new  
corporation,  nor  the  successor  of  the  original  corporation.  It  is  the  
same  corporation  with  a  different  name,   and  its  character  is  in  no  
respect  changed.  A  change  in  the  corporate  name  does  not  make  a  
new  corporation,  and  whether  effected  by  special  act  or   under  a  
general  law,  has  no  effect  on  the  identity  of  the  corporation,  or  on  its  
property,  rights,  or   liabilities.  The  corporation  continues,  as  before,  
responsible  in  its  new  name  for   all  debts  or  other  liabilities  which  it  
had  previously  contracted  or  incurred.
Republic  Planters  Bank  vs.  Court  of  Appeals,  G.R.  No.  93073,  
December  21,   1992
Property  right

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  world  in  the  same  manner  as  it  may  protect  its  
tangible  property,  real  or  personal,  against  trespass  or  
conversion.  It  is  regarded,  to  a  certain  extent,  as  a  property  right  
and  one  which  cannot  be  impaired  or  defeated  by  subsequent  
appropriation  by  another  corporation  in  the  same  field.
The  name  of  a  corporation  is  essential  to  its  existence.  It  cannot  change  
its  name  except  in  the  manner  provided  by  the  statute.  By  that  name  
alone  is  it  authorized  to  transact  business.  The  law  gives  a  corporation  
no  express  or  implied  authority  to  assume  another  name  that  is  
unappropriated;  still  less  that  of  another  corporation,  which  is  expressly  
set  apart  for  it  and  protected  by  the  law.  If  any  corporation  could  
assume  at  pleasure  as  an  unregistered  trade  name  the  name  of  another  
corporation,  this  practice  would  result  in  confusion  and  open  the  door  
to  frauds  and  evasions  and  difficulties  of  administration  and  supervision.
Statutory  prohibition

To  come  within  the  scope  of  the  statutory  prohibition,  two  


requisites  must  be  proven,  namely:  (1)  that  the  complainant  
corporation  acquired  a  prior  right  over  the  use  of  such  corporate  
name;  and  (2)  the  proposed  name  is  either:  (a)  identical  or  (b)  
deceptively  or  confusingly  similar  to  that  of  any  existing  
corporation  or  to  any  other  name  already  protected  by  law;  or  (c)  
patently  deceptive,  confusing  or  contrary  to  existing  law.
Philips  Export  B.V.  Court  of  Appeals,  G.R.  No.  96161,  February  21,  
1992
STILL  NOT  DISTINGUISHABLE

EVEN    IF  IT  CONTAINS  ONE  OR  MORE  OF  THE  FOLLOWING:

1.  The  word  “corporation,”  “company,”,  “incorporated,”  “limited”,  “limited  


liability,”  or  an  abbreviation  of  one  of  such  words;  and

2.  Punctuations,  articles,  conjunctions,  contractions,  prepositions,  


abbreviations,  different  tenses,  spacing  or  number  of  the  same  word  or  
phrase
WHAT  MAY  HAPPEN

SEC  ,  upon  determination  may  summarily  order  the  corporation  to  


immediately  cease  and  desist  from  using  name  and  require  the  
corporation  to  register  a  new  one.

SEC,  shall  cause  the  removal  of  all  visible  signages,  marks,  advertisements,  
labels,  prints  and  other  effects  bearing  such  corporate  name.

Upon  approval  of  new  corporate  name,  the  SEC  shall  cause  a  to  issue  a  
new  certificate  of  incorporation  under  the  new  amended  name.
Consequences  of  non-­‐compliance

Section 17 – SEC may hold the corporation and its responsible directors
or officers in contempt and/or hold them administratively liable, civilly
and/or criminally liable for failure to comply with the Commission’s order
to cease and desist from using a corporate name that has been
determined as not distinguishable.

Note  section  159  – Penalty  for  the  unauthorized  use  of  a  corporate  name.  
Fine  ranging  from  P10,000.00  to  P200,000.00  
Notes  on  Cease  and  Desist  Order

May  be  done  ex-­‐parte  


Ex-­‐parte  Order  shall  be  valid  for  a  maximum  of  20  days  without  prejudice  
to  the  order  being  made  permanent  after  due  notice  and  hearing
Commission  may  proceed  administratively  against  such  person  in  
accordance  with  section  158  of  the  Code,  and/or  transmit  evidence  to  the  
DOJ  for  preliminary  investigation  or  criminal  prosecution  and/or  initiate  
criminal  prosecution  (section  156,  Title  XVI)
Capital  stock;  Minimum  Capital  Stock;  
Subscription  Requirements
Section  173  defines  Outstanding  Capital  Stock  (OCS)

The  term  OCS  shall  mean  the  total  shares  of  stock  issued  under  binding  
subscription  contracts  to  subscribers  or  stockholders,  whether  fully  or  
partially  paid,  except  Treasury  Shares*

Treasury  shares  under  sec  9  are  reacquired  by  the  corporation  


Minimum  Capital  Stock  Requirement

NO  minimum  capital  stock  requirement,  except  as  otherwise  specifically  provided  by  law  
(section  12)

NO  more  requirement  on  25%  subscription,  NO  more  more  requirement  on  25%  paid-­‐ in  
capital

Note,  however  Section  16  (c.)  when  the  SEC  may  disapprove  an  Article  of  Incorporation  or  its  
Amendment  – certification  concerning  the  amount  of  capital  stock  subscribed  and/or  paid  is  
false.  

Section  16  (c.)  must  be  read  in  relation  to  Section  37  (4th paragraph)  on  25%    of  the  increase  in  
capital  stock  has  been  subscribed  and  that  at  least  25%  of  the  amount  subscribed  has  been  
paid  in  actual  cash  or  that  the  property  valuation  is  is  equal  to  25%  of  their  subscription.
Subscription  Contract  (section  59,  Title  VII)

Any  contract  for  the  acquisition  of  unissued  stock  in  an  existing  
corporation  or  a  corporation  still  to  be  formed  shall  be  deemed  a  
subscription  contract,  notwithstanding  the  fact  the  parties  refer  to  it  as  a  
purchase  or  some  other  contract.  (section  59)
Pre-­‐Incorporation  Subscription  (section  60,  
Title  VII)
Subscription  of  shares  in  a  corporation  still  to  be  formed  shall  be  
irrevocable  for  a  period  of  at  least  6  months  from  the  date  of  subscription  .

Unless  all  the  other  subscribers  consent  to  the  revocation  or  the  
corporation  fails  to  incorporate  within  the  same  period  or  within  a  longer  
period  stipulated  in  the  contract  of  subscription.

NO  pre-­‐incorporation  subscription  may  be  revoked  after  the  articles  of  


incorporation  is  submitted  to  the  SEC.
Capital  Structure

The term  "capital"  and  other  terms  used  to  


describe  the  capital  structure  of  a  corporation  
are  of  universal  acceptance,  and  their  usages  
have  long  been  established  in  jurisprudence.  
Briefly,  capital  refers  to  the  value  of  the  
property  or  assets  of  a  corporation.
The term "capital" in Section 11, Article XII of the
1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and
thus in the present case only to common shares,
and not to the total outstanding capital stock
(common and non-voting preferred shares.
Gamboa vs. Teves (2011)
Importance  of  Articles of  Incorporation

The  charter  of  a  corporation  is  a  contract   between  three  


parties:  (a)  It  is  a  contract  between  the  state  and  the  
corporation  to  which  the  charter  is  granted;  (b)  it  is  a  contract  
between  the  stockholders  and  the  state  and  (c)   it  is  also  a  
contract   between  the  corporation  and  its  stockholders.  (Cook  
on  Corporations,  vol.  2,   sec.  494   and  cases   cited.)
Government  of  the  Phil.  vs.  Manila  Railroad  Company,   G.R.  No.  
30646,   January   30,  1929
Content  of  the  Articles  

Form  and  Substance  Requirement


In  any  of  the  official  languages,  duly  signed  and  acknowledged  or  
authenticated
Note  section  13  and  14  of  the  law
Amendment  of  the  Articles  (section  15)

What  may  be  amended?  


Unless  otherwise  provided  by  the  Code  or  special  laws,  ANY  provision  or  
matter  stated  in  the  Articles  may  be  amended.
Voting  Requirement  for  Stock  Corporations:
Majority  of  the  Members  of  the  Board  AND  the  vote  OR  written  assent  of  
the  stockholders  representing  at  least  2/3  of  the  outstanding  capital  stock,  
without  prejudice  to  the  appraisal  right  [section  80,  Title  X]  of  dissenting  
stockholders  in  accordance  with  the  Code.
Amendment  of  the  Articles  for  Non-­‐Stock

The  articles  may  be  amended  by  the  vote  OR  written  assent  of  majority  of  
the  Trustees  AND  at  least  2/3  of  the  members.
When  do  amendments  take  effect

The  amendments  shall  take  effect  upon  their  approval  by  the  Commission  
OR  from  the  date  of  filing  with  the  said  Commission  if  not  acted  upon  
within  6  months  from  the  date  of  filing  for  a  cause  not  attributable  to  the  
corporation.
Grounds  for  disapproval  of  amendment  
(sec.16)
If  the  same  is  not  compliant  with  the  requirements
PROVIDED:  That  the  Commission  shall  give  the  incorporators,  directors,  
trustees  or  officers  a  reasonable  time  from  receipt  of  the  disapproval  
within  which  to  modify  the  objectionable  portions  of  the  articles  or  
amendment.
Grounds  for  Disapproval

1.  Not  substantially  in  accordance  with  the  form  requirement


2.  Purpose  or  purposes  are  patently  unconstitutional,  illegal,  immoral  or  
contrary  to  government  rules  and  regulations
3.  The  certification  concerning  the  amount  of  capital  stock  subscribed  
and/or  paid  is  false  (note  :  section  37,  5th paragraph)
4.  Required  percentage  of  Filipino  ownership  of  the  capital  stock  under  
existing  laws  or  the  Constitution  has  not  been  complied  with.
By-­‐Laws  of  the  Corporation  (Title  V,  sec.45-­‐
47)
In  the  corporate  hierarchy,  there  are  three  levels  of  control:  (1)  the  board  of  
directors,  which  is  responsible  for  corporate  policies  and  the  general  
management  of  the  business  affairs  of  the  corporation;  (2)  the  officers,  who  in  
theory  execute  the  policies  laid  down  by  the  board,  but  in  practice  often  have  
wide  latitude  in  determining  the  course  of  business  operations;  and  (3)  the  
stockholders  who  have  the  residual  power  over  fundamental  corporate  changes,  
like  amendments  of  the  articles  of  incorporation.  
However,  just  as   a  natural  person  may  authorize  another  to  do  certain  acts  in  his  
behalf,  so  may  the  board  of  directors  of  a  corporation  validly  delegate  some  of  
its  functions  to  individual  officers  or  agents  appointed  by  it.
The  levels  of  control  and  authority  are  all  defined  in  the  by-­‐laws  of  the  
corporation.
By  Laws

The  by  laws  are  subordinate  to  the  Articles  and  the  Corporation  Code,  and  
other  statutes.  Otherwise,  they  will  have  no  binding  effect.

In  case  of  conflict  between  the  by-­‐laws  and  the  Code,  the  latter  shall  
prevail.
Every  corporation  has  the  inherent  power  to  adopt  by-­‐laws  'for  its  internal  
government,  and  to  regulate  the  conduct  and  prescribe  the  rights  and  
duties  of  its  members  towards  itself  and  among  themselves  in  reference  to  
the  management  of  its  affairs.  Under  section  21  of  the  Corporation  Law,  a  
corporation  may  prescribe  in  its  by-­‐ laws  the  qualifications,  duties  and  
compensation  of  directors,  officers  and  employees.  (John  Gokongwei,  Jr.  
vs.  Securities  and  Exchange  Commission,  et  al.,  G.R.  No.  L-­‐45911,  April  11,  
1979  
Vote  Requirement  for  valid  by-­‐laws  and  
Effectivity
Affirmative  vote  of  the  stockholders  representing  at  least  a  majority  of  the  
OCS

Affirmative  vote  of  the  majority  of  the  members  in  a  Non-­‐Stock  
Corporation

Effective  only  upon  issuance  by  the  Commission  of  a  certification  that  the  
bylaws  are  in  accordance  with  the  code.  This  applies  as  well  to  
amendments  of  by  laws.
Note

SEC  shall  not  accept  for  filing  the  by  laws  or  any  amendment  thereto  of  
corporations  with  public  interest,  unless  accompanied  by  a  certificate  of  
the  appropriate  government  agency  to  the  effect  that  such  by  –laws  or  
amendments  thereto  are  in  accordance  with  law.
Contents  and  Amendments

Section  46

An  arbitration  agreement  may  be  provided  in  the  by-­‐laws  pursuant  to  section  181  of  the  code.

Section  47  on  Amendment  and  Repeal  of  By-­‐Laws,  and  Adopt  New  One

May  be  delegated  to  the  Board  by  the  owners  of  2/3  of  the  OCS  or  2/3  of  the  members  in  a  
non-­‐stock

Any  power  delegated  may  be  revoked  whenever  stockholders  representing  a  majority  of  the  
members  of  the  OCS  or  members  shall  vote  at  a  regular  or  special  meeting.
Commencement  of  Corporate  Existence

From  the  date  the  SEC  issues  the  certificate  of  incorporation  under  its  
official  seal.

The  incorporators,  stockholders/members  shall  constitute  the  body  


corporate  for  the  period  of  time  mentioned  in  the  articles,  unless  it  is  
extended  or  sooner  dissolved
Corporate  Term  of  Existence  (sec.11)

Perpetual,  unless  provided  in  the  Articles

Existing  corporations  shall  have  perpetual  existence,  unless  the  majority  


of  the  OCS  elects  to  retain  its  current  term

Provided,  any  change  in  corporate  term  shall  not  prejudice  the  right  of  
appraisal  of  dissenting  stockholders.
Corporate  Term

Corporate  term  for  a  specific  period  may  be  extended  or  shortened  by  
amending  the  articles.

NO  extension  may  be  made  earlier  than  3  years  prior  to  the  date  of  
original  or  subsequent  expiry  date,  unless  there  is  justifiable  reasons

Such  extension  shall  take  effect  only  on  the  day  following  the  original  or  
subsequent  expiry  dates.
Revival

Yes,  upon  approval  by  the  SEC  and  upon  issuance  of  a  certificate  of  revival  
giving  It  perpetual  existence.

Note  applications  for  revival  by  corporations  with  public  interest  must  be  
accompanied  by  appropriate  regulatory  body.
Theory of General vs.Specific Capacity

Theory  of  Specific  Capacity  -­‐ the  


corporation  cannot  exercise  powers  except  
those  expressly/impliedly  given.
Theory  of  General  Capacity  -­‐ a  corporation  
is  said  to  hold  such  powers  as  are  not  
prohibited/withheld  from  it  by  general  law
General  Capacity

A  corporation  is  not  restricted  to  the  exercise  of  powers  expressly  
conferred  upon  it  by  its  charter,  but  has  the  power  to  do  what  is  
reasonably  necessary  or  proper  to  promote  the  interest  or  welfare  of  the  
corporation.  (National  Power  Corporation  vs.  Honorable  Abraham  P.  Vera,  
Presiding  Judge,  Regional  Trial  Court,  National  Capital  Judicial  Region,  
Branch  90,  Quezon  City  and  Sea  Lion  International  Port  Terminal  Services,  
Inc.,  G.R.  No.  83558,  February  27,  1989)  
General  Capacity

Providing  gratuity  pay  is  one  of  the  express  powers  of  the  corporation  
under  the  Corporation  Code  and  therefore,  resolutions  passed  by  the  
board  approving  the  grant  of  gratuity  pay  to  the  employees  of  the  
corporation  during  a  meeting  where  one  of  the  directors  was  not  notified  
thereof  are  not  ultra  vires.  The  grant  of  gratuity  pay  does  not  require  
shareholders’  approval  as  it  is  not  tantamount  to  the  sale,  lease,  exchange  
or  disposition  of  all  or  substantially  all  of  the  corporation's  assets.(Lopez  
Realty,  Inc.,  and  Asuncion  Lopez  Gonzales  vs.  FlorentinaFontecha,  et  al.,  
and  the  National  Labor  Relations  Commission,  G.R.  No.  76801  August  11,  
1995)  
General  Capacity

The  power  of  a  corporation  to  sue  and  be  sued  is  exercised  by  the  board  of  
directors.  The  physical  acts  of  the  corporation,  like  the  signing  of  
documents,  can  be  performed  only  by  natural  persons  duly  authorized  for  
the  purpose  by  corporate  bylaws  or  by  a  specific  act  of  the  board.  Absent  
the  said  board  resolution,  a  petition  may  not  be  given  due  
course.(LigayaEsguerra,  et  al.  vs.  Holcim Philippines,  Inc.,  G.R.  No.  182571,  
September  2,  2013)  
General  Capacity

The  general  rule  is  that  a  corporation  can  only  exercise  its  powers  and  
transact  its  business  through  its  board  of  directors  and  through  its  officers  
and  agents  when  authorized  by  a  board  resolution  or  its  bylaws.  The  
power  of  a  corporation  to  sue  and  be  sued  is  exercised  by  the  board  of  
directors.  The  physical  acts  of  the  corporation,  like  the  signing  of  
documents,  can  be  performed  only  by  natural  persons  duly  authorized  for  
the  purpose  by  corporate  bylaws  or  by  a  specific  act  of  the  board.  Absent  
the  said  board  resolution,  a  petition  may  not  be  given  due  course.  
Esguerra  vs.  Holcim Philippines  G.R.  No.  182571,  September  2,  2013  
Business  Judgment  Rule

the  SEC  and  the  courts  are  barred  from  


intruding  into  business  judgments  of  
corporations,  when  the  same  are  made  in  good  
faith.  The  said  rule  precludes  the  reversal  of  
the  decision  of  the  PSE  to  deny  PALI's  listing  
application,  absent  a  showing  of  bad  faith  on  
the  part  of  the  PSE.
Doctrine of apparent authority

The   authority   of  a   corporate  officer   in  dealing  with   third  persons   may  be   actual  or  
apparent.  The   doctrine   of   "apparent  authority,"   with   special   reference  to  banks,   was  laid  
out  in   Prudential   Bank  vs.   Court  of  Appeals,  G.R.  No.  108957,  June   14,  1993,  where  it  was  
held   that:  "Conformably,  we   have   declared   in  countless   decisions   that  the   principal   is  liable  
for  obligations  contracted  by   the   agent.  The   agent's  apparent  representation   yields  to  the  
principal's   true   representation   and  the   contract  is   considered   as  entered   into   between   the  
principal   and   the  third  person   (citing  National   Food  Authority   vs.  Intermediate   Appellate  
Court,  G.R.  No.  75640,  April   5,  1990).”

First  Philippine  International  Bank  vs.  Court  of  Appeals,  G.R.  


No.  115849,  January  24,  1996
apparent  authority

Apparent  authority  is  derived  not  merely  from  practice.  Its  existence  may  be  
ascertained  through  (1)  the  general  manner  in  which  the  corporation  holds  out  
an  officer  or  agent  as  having  the  power  to  act  or,  in  other  words,  the  apparent  
authority  to  act  in  general,  with  which  it  clothes  him;  or  (2)  the  acquiescence  in  
his  acts  of  a   particular  nature,  with  actual  or  constructive  knowledge  thereof,  
whether  within  or  beyond  the  scope  of  his  ordinary  powers.    It  requires  
presentation  of  evidence  of  similar  act(s)  executed  either  in  its  favor  or  in  favor  
of  other  parties.    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.
People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals, G.R. No. 117847,
October 7, 1998;Inter-Asia Investments Industries, Inc. vs. Court of Appeals, G.R. No.
125778, June 10, 2003
source  of  power  and  authority  is  with  the  
board
Whatever  authority  the  officers  or  agents  of  a  corporation  may  have  is  derived  
from  the  board  of  directors  or  other  governing  body,  unless  conferred  by  the  
charter  of  the  corporation.  A  corporate  officer's  power  as   an  agent  of  the  
corporation  must  therefore  be  sought  from  the  statute,  the  charter,  the  by-­‐laws,  
or  in  a   delegation  of  authority  to  such  officer,  from  the  acts  of  the  board  of  
directors,  formally  expressed  or  implied  from  a  habit  or  custom  of  doing  
business.
Ignacio  Vicente  vs  Ambrosio  M.  Geraldez,   G.R.  No.  L-­‐32473,   July  31,   1973
board  as  trustees  of  the  stockholders  -­‐
fiduciary
The  board  of  directors  of  a  corporation  is  a  creation  of  the  stockholders.  The  board  of  directors,  or  
the  majority  thereof,  controls  and  directs  the  affairs  of  the  corporation;  but  in  drawing  to  itself  the  
power  of  the  corporation,  it  occupies  a  position  of  trusteeship  in  relation  to  the  minority  of  the  
stock.  
The  board  shall  exercise   good  faith,  care,  and  diligence  in  the  administration  of  the  affairs  of  the  
corporation,  and  protect  not  only  the  interest  of  the  majority  but  also  that  of  the  minority  of  the  
stock.  Where  the  majority  of  the  board  of  directors  wastes  or  dissipates  the  funds  of  the  
corporation  or  fraudulently  disposes  of  its  properties,   or  performs  ultra  vires  acts,  the  court,  in  the  
exercise   of  its  equity  jurisdiction,  and  upon  showing  that  intracorporate  remedy  is  unavailing,  will  
entertain  a  suit  filed  by  the  minority  members  of  the  board  of  directors,  for  and  in  behalf  of  the  
corporation,  to  prevent  waste  and  dissipation  and  the  commission  of  illegal  acts  and  otherwise  
redress  the  injuries  of  the  minority  stockholders  against  the  wrongdoing  of  the  majority.  The  action  
in  such  a  case  is  said  to  be  brought  derivatively  in  behalf  of  the  corporation  to  protect  the  rights  of  
the  minority  stockholders  thereof.
Santiago  Cua,  Jr.,  et  al.  vs.  Miguel  Ocampo  Tan,  et  al.,  G.R.  Nos.  181455-­‐56  &  182008,  December  4,  
2009
corporate  powers  with  the  board

The  power  and  the  responsibility  to  decide  whether  the  corporation  
should  enter  into  a  contract  that  will  bind  the  corporation  are  lodged  in  the  
board  of  directors,  subject  to  the  articles  of  incorporation,  by-­‐laws,  or  
relevant  provisions  of  law.  However,  just  as  a  natural  person  may  authorize  
another  to  do  certain  acts  for  and  on  his  behalf,  the  board  of  directors  may  
validly  delegate  some  of  its  functions  and  powers  to  officers,  committees  
or  agents.  The  authority  of  such  individuals  to  bind  the  corporation  is  
generally  derived  from  law,  corporate  by-­‐laws  or  authorization  from  the  
board,  either  expressly  or  impliedly  by  habit,  custom  or  acquiescence  in  
the  general  course  of  business.
Cebu  Mactan  Members  Center,  Inc.  vs.  Masahiro  Tsukahara,  G.R.  No.  
159624,  July  17,  2009
delegation  to  be  valid

A  corporation,  like  a  natural  person  who  may   authorize  


another  to  do  certain  acts   for  and  in  his  behalf,   through  its  
board  of  directors,  may   legally  delegate  some  of  its  functions  
and  powers  to  its  officers,   committees  or  agents  appointed  
by  it.  In  the  absence  of  an  authority   from  the  board  of  
directors,  no  person,  not  even  the  officers   of  the  corporation,  
can  validly  bind  the  corporation.  
Luzviminda  Visayan   vs.  NLRC,   G.R.  No.  69999,   April  30,  1991
all  business  conduct  with  the  board

all  corporate  powers  are  exercised,  all  business  conducted,  and  all   properties  
controlled  by  the  board  of  directors.  A  corporation  has  a   separate  and  distinct  
personality  from  its  directors  and  officers  and  can  only  exercise  its  corporate  
powers  through  the  board  of  directors.  Thus,  it  is  clear   that  an  individual  
corporate  officer  cannot  solely  exercise  any  corporate  power  pertaining  to  the  
corporation  without  authority  from  the  board  of  directors.  This  has  been  our  
constant  holding  in  cases   instituted  by  a  corporation.
Cagayan  Valley  Drug  Corp.  vs.  Commissioner  of  Internal  Revenue,  G.R.  No.  
151413,   February  13,   2008
Heirs of Fausto C. Ignacio vs. Home Bankers Savings and Trust Co., et al., January 2013

Just  as  a   natural  person  may  authorize  another  to  do  certain  acts  in  
his  behalf,  so  may  the  board  of  directors  of  a  corporation  validly  
delegate  some  of  its  functions  to  individual  officers  or  agents  
appointed  by  it.  Thus,  contracts  or  acts  of  a  corporation  must  be  
made  either  by  the  board  of  directors  or   by  a  corporate  agent  duly  
authorized  by  the  board.  Absent  such  
valid   delegation/authorization,  the  rule  is  that  the  declarations  of  an  
individual  director  relating  to  the  affairs  of  the  corporation,  but  not  
in  the  course  of,   or  connected  with,  the  performance  of  authorized  
duties  of  such  director,  are  held  not  binding  on  the  corporation.
Absent  such  valid   delegation  or  authorization,  the  rule  is  that  the  
declarations  of  an  individual  director  relating  to  the  affairs  of  the  
corporation,  but  not  in  the  course  of,  or  connected  with,  the  performance  
of  authorized  duties  of  such  director,  are  held  not  binding  on  the  
corporation.
Theory  of  Specific  Capacity;  Specific  Powers

Power  to  extend  or  decrease  corporate  term


Power  to  Increase  or  Decrease  Capital  Stock  or  Incur,  Create,  Increase  Bonded  Indebtedness  
Power  to  Deny  Pre-­‐Emptive  Rights
Power  to  Sell  or  Dispose  of  Corporate  Assets  
Power  to  Acquire  Own  Shares  
Power  to  Invest  Corporate  Funds  in  Another  Corporation  or  Business  
Power  to  Declare  Dividends  
Power  to  Enter  Into  Management  Contract  
Ultra  Vires  Acts  
NOTE:  VOTING  REQUIREMENTS  (section  36,  37,  38,  39,  40  ,  41  42,  43)
Ultra  Vires  Acts

While  as  a  rule  an  ultra  vires  act  is  one  committed  outside  the  object  for  which  a  
corporation  is  created  as  defined  by  the  law  of  its  organization  and  therefore  
beyond  the  powers  conferred  upon  it  by  law,  there  are  however  certain  
corporate  acts  that  may  be  performed  outside  of  the  scope  of  the  powers  
expressly  conferred  if  they  are  necessary  to  promote  the  interest  or  welfare  of  
the  corporation  such  as   the  establishment  of  the  local  post  office  which  is  a  vital  
improvement  in  the  living  condition  of  the  employees  and  laborers  who  came  to  
settle  in  a  mining  camp  which  is  far  removed  from  the  postal  facilities.  The  term  
ultra  vires  should  be  distinguished  from  an  illegal  act  for  the  former  is  merely  
voidable  which  may  be  enforced  by  performance,  ratification,  or  estoppel,  while  
the  latter  is  void  and  cannot  be  validated.  (Republic  of  the  Philippines  vs.  Acoje
Mining  Company,  Inc.,  G.R.  No.  L-­‐18062,   February  28,  1963)  
Unlike  illegal  acts  which  contemplate  the  doing  of  an  act  that  is  contrary  to  
law,  morals,  or  public  policy  or  public  duty,  and  are  void,  ultra  vires  acts  are  
those  which  are  not  illegal  but  are  merely  not  within  the  scope  of  the  
articles  of  incorporation  and  by-­‐ laws.  They  are  merely  voidable  and  may  
become  binding  and  enforceable  when  ratified  by  the  stockholders.  (Maria  
Clara  Pirovana,  et  al.vs.the De  La  Rama  Steamship  Co.,  G.R.  No.  L-­‐5377,  
December  29,  1954)  
Section  44

No  corporation  shall  possess  or  exercise  corporate  powers  other  than  


those  conferred  by  this  Code  or  by  its  articles  of  incorporation  and  except  
as  necessary  or  incidental  to  the  exercise  of  the  powers  conferred.
Effect  of  ratification  (University  of  Mindano
vs.  BSP  [2016])
Authorities, great in number, are one in the idea that "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;;" and that "[t]he corporation and the other party to the
transaction are in precisely the same position as if the act or contract had
been authorized at the time." The language of one case is expressive:
"The adoption or ratification of a contract by a corporation is nothing more
nor less than the making of an original contract. The theory of corporate
ratification is predicated on the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior authority.”
(
Implied  Ratification,  (University  of  Mindano
vs.  BSP  [2016])
Implied  ratification  may  take  the  form  of  silence,  acquiescence,  acts  
consistent  with  approval  of  the  act,,  or  acceptance  or  retention  of  benefits.
However,  silence,  acquiescence,  retention  of  benefits,  and  acts  that  may  
be  interpreted  as  approval  of  the  act  do  not  by  themselves  constitute  
implied  ratification.  For  an  act  to  constitute  an  implied  ratification,  there  
must  be  no  acceptable  explanation  for  the  act-­‐other  than  that  there  is  an  
intention  to  adopt  the  act  as  his  or  her  own. "[It]  cannot  be  inferred  from  
acts  that  a  principal  has  a  right  to  do  independently  of  the  unauthorized  
act  of  the  agent."134
Voting  Requirements
Item Voting Requirement Note
Power  to  extend  or  shorten corporate   Majority  vote  of  the  BOD/Trustees to  be   Requires written  notice  
term  (sec.  36) ratified  at  a  meeting  by  2/3  of  the  
outstanding  capital  stock  of  the   In  case  of  extension  of  corporate  term,  a  
Stockholders  or  members dissenting  stockholder  may  exercise  the  
right  of  appraisal

Power  to  increase  or  decrease  capital Majority  vote  of  the  BOD/Trustees to  be   SEC shall  not  accept  for  filing  any  
stock;  create  or  increase  bonded   ratified  at  a  meeting  by  2/3  of  the   certificate  of  increase  of  capital  stock  
indebtedness   (sec.  37) outstanding  capital  stock  of  the   unless  accompanied  by  a  sworn  statement  
Stockholders  or  members of  the  Treasurer  of  the  25%-­‐25%  
requirement

Requires  prior  approval  and  in  some  cases  


by  the  Philippine  C ompetition  
Commission.  It  should  be  made  within  6  
months  from  the  date  of  the  approval  by  
BOD.
power  to  deny  pre-­‐emptive right   Approval of  2/3  of  the  outstanding   Power to  deny  must  be  stated  in  the  
(sec.38) capital  stock articles  of  incorporation
Simple   Sale  or  disposition   of other   Majority  vote  by  BOD   Subject to  compliance  with  Philippine  
assets  (sec.39) Competition   Law
Sale of  all  or  substantially  all  of  the   Vote  of  at  least  2/3  of the  outstanding   Same
corporation’s   properties   and  assets capital  stock

*  In  case  of   non-­‐stock  where  there  


are  no  members Majority  of   the  members

I
Power  to  invest corporate  fund  in   Majority  of  the  BOD and  ratified  by  
another    corporation  (sec.41) 2/3  of  Stockholder  representing  the  
2/3  of  the  OCs
Power to  declare  dividends   (sec.42) BOD  may  declare  dividends There  must  be  unrestricted  
earnings.

Subject to  special  rules  on  


delinquent   stock;  stock  dividend

Power to  enter  into  management   Majority of   the  BOD  and  the   Subject  to  special  rule on  
contracts  (sec.43) stockholders   owning   majority  of  the   interlocking   interest  and  directors  
outstanding   capital  stock (sec.43)

No  management   contract  shall  be  


entered  into  for  period   longer   than  
5  years  for  any  one  term.
Unrestricted  Earnings  (sec.42)

Retained  unrestricted  earnings is  a  term  used  to  refer  to profits a  business  
has  accumulated  since  its  creation  that  it  has  not  distributed  to  
stockholders  as  dividends.
The  amount  of  retained  earnings  determines  the  ability  of  a  company  to  
declare  dividends,  which,  of  course,  is  subject  to  the  decision  of  the  board.
But  said  declaration  of  dividend  does  not  happen  often  because  listed  
companies  prefer  to  keep  most  of  their  profits  intact  to  finance  their  
expansion.
Prohibition

Said  declaration  of  retained  earnings  “in  excess  of  100  percent  of  its  paid-­‐up  capital  
stock,”  according  to  the  rule,  is  not  applicable  compulsory  in  instances  as  follows:
“a)  when  justified  by  definite  corporate  expansion  projects  or  programs  approved  by  
the  Board”  
“b)  when  the  corporation  is  prohibited  under  any  loan  agreement  with  any  financial  
institution  or  creditor,  whether  local  or  foreign,  from  declaring  dividends  without  its  
consent,  and  such  consent  has  not  been  secured.”
“or  c)  when  it  can  be  clearly  shown  that  such  retention  is  necessary  under  special  
circumstances  obtaining  in  the  corporation,  such  as  when  there  is  a  need  for  special  
reserve  for  probable  contingencies.”
Trust  Fund  Doctrine

The trust fund doctrine backstops the requirement of unrestricted retained


earnings to fund the payment of the shares of stocks of the withdrawing
stockholders. Under the doctrine, the capital stock, property, and other assets of
a corporation are regarded as equity in trust for the payment of corporate
creditors, who are preferred in the distribution of corporate assets.
The creditors of a corporation have the right to assume that the board of
directors will not use the assets of the corporation to purchase its own stock for
as long as the corporation has outstanding debts and liabilities.There can be no
distribution of assets among the stockholders without first paying corporate
debts.
Thus, any disposition of corporate funds and assets to the prejudice of creditors
is null and void. (Turner vs. Lorenzo Shipping [2010])
Trust  Fund  Doctrine

The  Trust  Fund  Doctrine,  first  enunciated  by  this  Court  in  the  1923  case  of Philippine  
Trust  Co.  vs.  Rivera,  provides  that  subscriptions  to  the  capital  stock  of  a  corporation  
constitute  a  fund  to  which  the  creditors  have  a  right  to  look  for  the  satisfaction  of  their  
claims.
This  doctrine  is  the  underlying  principle  in  the  procedure  for  the  distribution  of  capital  
assets,  embodied  in  the  Corporation  Code,  which  allows  the  distribution  of  corporate  
capital  only  in  three  instances:  (1)  amendment  of  the  Articles  of  Incorporation  to  
reduce  the  authorized  capital  stock, (2)  purchase  of  redeemable  shares  by  the  
corporation,  regardless  of  the  existence  of  unrestricted  retained  earnings,and (3)  
dissolution  and  eventual  liquidation  of  the  corporation.  Furthermore,  the  doctrine  is  
articulated  on  the  power  of  a  corporation  to  acquire  its  own  shares and  on  the  
prohibition  against  the  distribution  of  corporate  assets  and  property  unless  the  
stringent  requirements  therefor  are  complied  with.
trust  fund  doctrine

The  "Trust  Fund"  doctrine  considers  this  subscribed  capital  as  a  


trust  fund  for  the  payment  of  the  debts  of  the  corporation,  to  
which  the  creditors  may  look  for  satisfaction.  
Until  the  liquidation  of  the  corporation,  no  part  of  the  subscribed  
capital  may  be  returned  or  released  to  the  stockholder  (except  in  
the  redemption  of  redeemable  shares)  without  violating  this  
principle.  Thus,  dividends  must  never  impair  the  subscribed  
capital;  subscription  commitments  cannot  be  condoned  or  
remitted;  nor  can  the  corporation  buy  its  own  shares  using  the  
subscribed  capital  as  the  consideration  therefor.      
Judicial  Review  Mechanism  Over  Conflict-­‐of-­‐Interests  Situations  of  the  
Board  and  Management
The  CC  provides  the  following  checks  on  conflict-­‐of-­‐interest  situations  that  
allow  for  judicial  review  as  a  means  to  overcome  corporate  opportunism  
on  the  part  of  directors/trustees  and  officers  of  the  company.  The  main  
mechanism  of  minority  shareholders  would  be  the  common-­‐law  right  of  
filing  a  derivative  suit  in  behalf  of  the  corporation  against  the  self-­‐dealing  
directors/trustees,  officers  and/or  controlling  stockholders.
Duty   of  Loyalty
The  duty  of  loyalty  that  is  imposed  upon  directors/trustees  and  officers  requires  
that  whenever  they  find  themselves  in  a  conflict-­‐of-­‐interest  situation  in  pursuing  
the  corporate  affairs,  then  they  must  choose  the  interest  of  the  corporation  over  
their  own  interest,  otherwise  they  become  liable  for  breach  of  their  fiduciary  
duty.
The  CC  provides  that  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  liability  upon  him  to  deal  in  his  own  behalf,  he  shall  be  liable  as  
a  trustee  for  the  corporation  and  must  account  for  the  profits  which  otherwise  
would  have  accrued  to  the  corporation.
Our  SC  in Gokongwei,  Jr.  v.  SEC,  referred  to  the  breach  of  the  duty  of  
loyalty  as  the  “Doctrine  of  corporate  opportunity,”  thus:  “ The  doctrine  of  
‘corporate  opportunity’  is  precisely  a  recognition  by  the  courts  that  the  
fiduciary  standards  could  not  be  upheld  where  the  fiduciary  was  acting  for  
two  entities  with  competing  interests.  This  doctrine  rest  fundamentally  on  
the  unfairness,  in  particular  circumstances,  of  an  officer  or  director  taking  
advantage  of  an  opportunity  for  his  own  personal  profit  when  the  interest  
of  the  corporation  justly  calls  for  protection.”
Gokongwei,  Jr.  used  the  “Doctrine  of  corporate  opportunity”  as  the  legal  basis  to  
uphold  a   provision  in  the  by-­‐laws  of  San  Miguel  Corporation  (SMC)  disqualifying  
from  membership  in  the  Board  of  Directors  of  stockholders  who  owned  
competing  businesses,  thus:  “It  is  obviously  to  prevent  the  creation  of  an  
opportunity  for  an  officer  or  director  of  SMC,  who  is  also  the  officer  or  owner  of  
a  competing  corporation,  from  taking  advantage  of  the  information  which  he  
acquires  as   director  to  promote  his  individual  or  corporate  interests  to  the  
prejudice  of  SMC  and  its  stockholders,  that  the  questioned  amendment  of  the  
by-­‐laws  was  made.  Certainly,  where  the  two  corporations  are  competitive  in  a  
substantial  sense,  it  would  seem  improbable,  if  not  impossible,  for  the  director,  
if  he  were  to  discharge  effectively  his  duty,  to  satisfy  his  loyalty  to  both  
corporations  and  place  the  performance  of  his  corporation  duties  above  his  
personal  concerns.”
Self-­‐Dealing  Safeguards
A contract  of  a  company  with  one  or  more  of  its  directors/trustees  or  officers is  
voidable  at  the  option  of  the  company  acting  through  its  Board,  unless  all  the  following  
conditions  are  present,  thus:
(a)  Presence  of  such  director/trustee  was  not  necessary  to  constitute  a  quorum  in  the  
board  meeting  approving  such  contract;
(b)  Vote  of  such  director  or  trustee  was  not  necessary  for  the  approval  of  the  contract;
(c)  Contract  is  fair  and  reasonable  under  the  circumstances;
(d)  In  the  case  of  an  officer,  contract  had  been  previously  authorized  by  the  Board.
The  Corporate  Structure

Board  of  Directors


Corporate  Officers
Stockholders
The  Corporate  Structure

Title  III  – BOD


Title  XI  – Chapter  II  (  Board  of  Trustees)
Note  section  22  on  Independent  Director  for  corporations  with  public  
interest
Who  is  an  independent  director

Independent  of  management


Free  from  any  business  or  other  relationship  which  could  or  could  
reasonably  be  perceived  to  materially  interfere  with  the  exercise  of  
independent  judgment  in  carrying  out  the  responsibilities  as  a  director
Must  be  a  shareholder,  but  can  receive  fees  from  a  corporation
How  are  Independent  Directors  elected

Elected  by  the  shareholders  


Subject  to  a  fit  and  proper  rule  
On  Corporate  Officers  (sec.  24)

To  be  elected  by  the  BOD

President Must  be  a  Director


Treasurer Must  be  a  resident

Secretary Must  be  a  citizen and  a  resident


legal  title  not  beneficial  ownership

To   be  eligible  as  director,  legal   title   to  stocks,   not   beneficial  


ownership  thereto,   is  material.
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  
corporation   becomes  formally  legalized.  Hence,  this  is   a  clear  
indication   that   in  order  to   be   eligible   as  a  director,  what  is   material  
is  the   legal   title   to,   not   beneficial  ownership  of,  the   stock   as  
appearing  on   the   books   of   the   corporation.
Ramon  C.  Lee  Court   of  Appeals,   G.R.  No.   93695,  February  4,  1992
importance  of  articles  on  majority  and  
quorum  requirements
The   articles  of  incorporation  or   by-­‐laws  of  the  corporation  
may  fix  a  greater  number  than  the  majority   of  the  number  
of  board   members   to  constitute  the   quorum   necessary   for  
the  valid  transaction  of  business.  Any   number  less  than   the  
number  provided  in  the  articles  or   by-­‐laws  therein  cannot  
constitute  a  quorum  and  any  act  therein   would   not   bind   the  
corporation;  all  that  the  attending  directors   could  do   is  to  
adjourn.    
Rosita  Peña  vs.  Court   of  Appeals,  G.R.  No.  91478,  February   7,  
1991
Rules  on  Corporate  Officers  

The  same  person  may  hold  2  or  more  positions  except  that  no  one  shall  
act  as  President,  and  Secretary  or  as  President  and  Treasurer  at  the  same  
time  unless  otherwise  allowed  in  the  code.
Rule

Conformably  with  Section  24,  a  position  must  be  expressly  mentioned  in  
the  By-­‐Laws  in  order  to  be  considered  as  a  corporate  office.  Thus,  the  
creation  of  an  office  pursuant  to  or  under  a  By-­‐Law  enabling  provision  is  
not  enough  to  make  a  position  a  corporate  office.
In  Guerrea v.  Lezama,  the  first  ruling  on  the  matter,  held  that  the  only  
officers  of  a  corporation  were  those  given  that  character  either  by  
the Corporation  Code or  by  the  By-­‐Laws;  the  rest  of  the  corporate  officers  
could  be  considered  only  as  employees  or  subordinate  officials.  (Matling
vs.  Coros [2010])
Voting  Trust  Agreements

A  voting  trust  agreement  may  confer  upon  a  trustee  not  only  the  stockholder's  voting  
rights  but  also  other  rights  pertaining  to  his  shares  as  long  as  the  voting  trust  
agreement  is  not  entered  "for  the  purpose  of  circumventing  the  law  against  monopolies  
and  illegal  combinations  in  restraint  of  trade  or  used  for  purposes  of  fraud."  
Thus,  the  traditional  concept  of  a  voting  trust  agreement  primarily  intended  to  single  
out  a  stockholder's  right  to  vote  from  his  other  rights  as  such  and  made  irrevocable  for  
a  limited  duration  may  in  practice  become  a  legal  device  whereby  a  transfer  of  the  
stockholders  shares  is  effected  subject  to  the  specific  provision  of  the  voting  trust  
agreement.  The  execution  of  a  voting  trust  agreement,  therefore,  may  create  a  
dichotomy  between  the  equitable  or  beneficial  ownership  of  the  corporate  shares  of  a  
stockholder,  on  the  one  hand,  and  the  legal  title  thereto  on  the  other  hand.
Ramon  C.  Lee  vs.  Court  of  Appeals,  G.R.  No.  93695,  February  4,  1992
Cumulative  Voting

Cumulative  voting  is  mandatory  under  Philippine  law.  This  means  that  a  
stockholder  may  either  vote  such  number  of  shares  in  favor  of  specific  
directors  or  he  may  cumulate  said  shares  and  give  one  or  more  candidates  
a  total  of  votes  equal  to  the  number  of  directors  to  be  elected  multiplied  
by  the  number  of  his  shares
Straight  Voting  vs.  Cumulative

There  are  1,000  outstanding  shares.  


You  have  300  shares,  and  there  are  five  open  seats.  
In  a  straight  voting  system,  you  can  only  vote  300  times  per  open  seat,  and  
therefore  you  cannot  ensure  that  a  single  director  you  want  on  the  board  
will  be  guaranteed  a  seat.
In  a  cumulative  voting  system,  you  have  1,500  shares  to  vote  whichever  
way  you  wish.  You  can  divide  these  up  among  the  five  open  seats,  and  can  
give  three  candidates  500  votes  each,  or  just  one  mere  vote  short  of  being  
given  a  position.  At  this  point,  you  are  almost  guaranteed  you  can  vote  in  
three  candidates  of  your  choosing.
Example

If  the  election  is  for  five  directors  and  you  hold  500  shares  (with  one  vote  
per  share),  under  the  regular  method  you  could  vote  a  maximum  of  500  
shares  for  any  one  candidate  (giving  you  2,500  votes  total  -­‐ 500  votes  per  
each  of  the  five  candidates).  With  cumulative  voting,  you  could  choose  to  
vote  all  2,000  votes  for  one  candidate,  1,000  each  to  two  candidates,  or  
otherwise  divide  your  votes  whichever  way  you  wanted.