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Mercantile Law Codal Doctrine of Entity/Doctrine Personality -

A corporation is a legal or juridical person

CORPO - A corporation is an artificial being with a personality separate and apart from
created by operation of law, having the right its individual stockholders or members and
of succession and the powers, attributes from any other legal entities to which it may
properties expressly authorized by law or be connected
incident to its existence.”

1) entitled to own properties in its own

name; 2) It can incur obligations

3) rights belonging to the corporation cannot

GOCC private corporation with regard to be invoked by the stockholders, directors
function and in the meantime a public and officers and vice versa.
corporation with regard to ownership;
created by special charter. 4) entitled to certain constitutional rights

5) It is liable for tort. - the act was committed

by the officer or agent under express
Twin Conditions must be present in direction or authority from the stockholders
forming a GOCC: 1) Interest in the common or members acting as a body or generally
good from the directors as the governing body.

2) Subject to the test of economic viability 6) the corporation is considered a national

of the country where it was incorporated
(Place of incorporation test

Attributes of a Corporation Exceptions: 1. In times of war, the

nationality of a corporation is determined by
1) Artificial Being - It exist by fiction of law the nationality of the controlling
only stockholders; 2. Under the Foreign
Investment Act of 1991
2) Right of Succession
7) Corporations are incapable of intent,
3) Creature of enumerated powers,
attributes and properties *Criminal liability falls upon to responsible
officers. *Responsible officers cannot invoke
Doctrine of Limited Capacity – No the doctrine of separate personality.
corporation under the Corporation Code, *Corporations cannot be incarcerated.
shall possess or exercise any corporate
powers, except those conferred by law, its 8) Moral damages cannot be awarded in
Articles of Incorporation, those implied from favor of corporations because they do not
express powers and those as are necessary have feelings and mental state. Exception:
or incidental to the exercise of the powers If the corporation has a good reputation and
so conferred. such reputation was destroyed.

-can claim damages such as actual,

compensatory, exemplary, loss of earning
Effects: 1. Stockholders, officers and corporation is a concession made by the
corporation are in effect jointly liable; 2. In State.
case of two corporations, they will be
treated as one wherein they will be both
solidarily liable. (Instrumentality rule)
Instrumentality Rule – When one
corporation is so organized and controlled Stock Corporation – Corporations which
and its affairs are conducted so that it is in have capital stock divided into shares and
fact a mere instrumentality or adjunct of the are authorized to distribute to the holders of
other, the fiction of the corporate entity to such shares dividends or allotments of the
the instrumentality may be disregarded; surplus profits on the basis of the shares
complete dominion not only of finances but held. (Sec. 3)
of policy and business
Non-stock Corporation – A corporation
where no part of its income is distributable
as dividends to its members, trustees, or
Three cases of piercing the veil: officers, subject to the provisions of this
Code on dissolution. (Sec. 87)
1. Fraud Cases – when a corporation is
used as a cloak to cover fraud, or to do Public Corporation – for public purpose
wrong; and organized by the State.
2. Alter Ego Cases – when the corporate
entity is merely a farce since the corporation
is an alter ego, business conduit or Private Corporation – for profit making
instrumentality of a person or another functions and organized by private persons
corporation; alone or with the State
3. Equity cases – when piercing the
corporate fiction is necessary to achieve
justice or equity.
Domestic Corporation – corporation
Probative Factors of Identity: formed, organized or existing under the
1. Identical shareholders; Philippine Laws.
2. Same set of officers, directors, or
3. Use of same premises, properties, tools Foreign Corporation – corporation formed,
and equipments; organized or existing under any laws other
4. Engage practically in the same business; than those of the Philippines and whose
5. The same manner of keeping books and laws allow Filipino citizens and corporations
records. to do business in its own country or state.
(Sec. 123)

Concession Theory – It is a principle in the

creation of corporations, under which a De Jure Corporation – corporation created
corporation is an artificial creature without in strict or substantial compliance with the
any existence until it has received the mandatory requirements for incorporation
imprimatur of the State acting according to and the right of which to exist as a
law, through the SEC. The life of the corporation cannot be successfully attacked
or questioned by any party even in a direct
proceeding for that purpose by the state.
Lim Tong Lim v CA
De Facto Corporation – the due *Lim is stopped because he benefited from
incorporation of any corporation claiming in the transaction.
good faith to be a corporation under the Remedy: To ran after those persons
Corporation Code, and its right to exercise responsible for the representations
corporate powers, shall not be inquired into Essence: They are precluded from denying
collaterally in any private suit to which such their existence by their previous act or
corporation may be a party. Such inquiry conduct
may be made by Solicitor General in a quo
warranto proceeding. (Sec. 20)

- organized with a colourable compliance

with the requirements of a valid law and its
existence cannot be inquired collaterally. Holding Corporation – it is one which
controls another as a subsidiary by the
- There is an irregularity or defect in the power to elect management. It is one that
constitution or organization. holds stocks in other companies for
purposes of control rather than for mere
Can be compared to a voidable contract, investment.
i.e., valid until annulled.
*Can be challenged by the State later on. Affiliate – one related to another by owning
Cases: Hall v Piccio; Seventh Adventist v or being owned by common management or
Northeastern Mindanao Mission *The filing by a long-term lease of its properties or
of the Articles of Incorporation and the other control device. It may be the
issuance of the certificate of registration are controlled or controlling corporation, or
the essential requisites for the existence of under common control.
a de facto corporation.
Subsidiary Corporation – one which is so
Requisites: 1. The existence of a valid law related to another corporation that the
under which it may be incorporated; majority of its directors can be elected either
2. An attempt in good faith to incorporate; 3. directly or indirectly by such other
Use of corporate powers; 4. Filing of the corporation. It is always controlled.
Articles of Incorporation; 5. Subsequent
compliance with the requirement of law. Open Corporation – one which is open to
any person who may wish to become a
*In both corporations, there must be a stockholder or member thereto.
certificate of registration issued.
Close Corporation – those whose shares
of stock are held by limited number of
persons like the family or other closely knit
group. (Sec. 96)

Doctrine of 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 FORMATION AND ORGANIZATION OF A
arising as an result PRIVATE CORPORATION:
A. Submission of Articles of Incorporation; deceptively or confusingly similar to that of
contractual significance any existing corporation or to any other
*The life of a corporation commences from name already protected by law or is patently
the issuance of the Certificate of deceptive, confusing or contrary to existing
Registration by the SEC upon filing of the laws.
Articles of Incorporation and other

Article of Incorporation – is the charter of Ang Mga Kaanib Ni Jesus Cristo

the corporation, and the contractual
relationships between the State and the *The phrase “Ang Mga Kaanib” are words
corporation, the stockholder and the State, merely descriptive of membership while the
and between the corporation and its phrase “Sa Bansang Pilipinas” are merely
stockholders. descriptive of the place.

Contractual Significance: 1. The issuance *Both parties are religious institutions *Both
of a certificate of incorporation signals the use the acronym H.S.K.
birth of the corporation’s juridical As a rule, generic name or descriptive word
personality; may be used as a corporate name. Reason:
2. It is an essential requirement for the public domain; can be used by anyone;
existence of a corporation, even a de facto public use.

Doctrine of Secondary Meaning – a word

B. Contents and Form of the Articles of or phrase originally incapable of exclusive
Incorporation (Secs. 14 and 15) appropriation with reference to an article on
Contents of Articles of Incorporation: the market, because geographically or
1. Corporate Name; otherwise descriptive, might nevertheless
have been used so long and so exclusively
2. Purpose Clause; 3. Principal office; by one producer with reference to his article
4. Term of existence; 5. Incorporators; that in that trade and to that branch of the
purchasing public, the word or phrase has
6. Directors or trustees; 7. Capitalization; come to mean that the article was his
8. Shares of stock; product.

9. Treasurer’s Affidavit. Requisites: 1. Period of use;

2. The use must be exclusive.

Lyceum of the Philippines

*The exclusivity requirement was not
Corporate Name satisfied by Lyceum of the Philippines. *In
Purpose: Identification case of change of name, the corporation is
*Corporation can not adopt any name or not dissolve nor create a new corporation; it
group of words at its pleasure because of also does not extinguish the corporate
statutory limitation, viz., Sec. 18 of the liability.
Corporation Code which provides that: “No
corporate name may be allowed by the SEC *Change of name can be done by
if the proposed name is identical or amending the Articles of Incorporation.
Procedure: term.
1. Obtain approval of majority of the Board
and 2/3 stockholders;
2. Submission to the SEC for approval. *No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
meet the corporation’s term.

Purpose Clause
*Only one primary purpose. Primary Exception: If for compelling reasons, earlier
purpose defines the business activities of extension will be allowed. *During the three
the corporation. It is the ordinary course of year winding up period, the corporation still
business of the corporation has personality but activities are limited to
the liquidation of the corporation affairs and
*Secondary Purpose is for future not to transact further business.
expansion. There is no limit on the As a rule, after the term has expired, no
secondary purpose. more extensions be allowed or entertained
*In case the primary purpose is not viable by the SEC.
then secondary purpose may be used.

Reason: No more period to extend.

Exception: Doctrine of Relation – The
filing and recording of a certificate of
extension after the term cannot relate back
Principal Office *The principal place of to the date of the passage of the resolution
business may determine the venue of court of the stockholders to extend the life of the
cases involving corporations. It may also corporation. However, the doctrine of
determine if service of summons and relations applies if the failure to file the
notices was properly made. It is also application for existence within the term of
important for tax purposes (local taxation). the corporation is due to neglect of the
*The SEC requires the exact address to be officer with whom the certificate is required
indicated in the Articles of Incorporation. to be filed or to wrongful refusal on is part to
*It is the residence of the corporation. It is receive it. *The delay in submitting the
where the corporation maintains its books application for extension is justifiable.
and records and where normally the bulk of
its business is being conducted or Keywords: 1. Excusable delay;
undertaken. 2. Beyond the control of the corporation
*For personal action, venue is the (insuperable intervening causes)

*Once an incorporator always an
Term of Existence incorporator. (Fait accompli – an
*A corporation has a maximum term of 50 accomplished fact which cannot be altered)
years. It may be extended for a period not *They are the signatories to the Articles of
exceeding 50 years in any single instance. Incorporation.
As a rule, no extension can be made earlier *They are originally forming the corporation
than 5 years prior to the expiration of the
- not necessary to own a share unlike as a stated.”
- limited to 5 to 15.
-They must have a contractual capacity. *It is required that at least 25% of the
Juridical person cannot create another subscribed capital must be paid and in no
juridical person. case may be paid-up capital be less than
-There is no citizen requirement but special P5,000.
laws may require otherwise. *Majority must
be a resident of the Philippines.
Authorized Capital Stock – the amount
Directors and trustees fixed in the articles of incorporation to be
*The Board of Directors is the governing subscribed and paid by the stockholders of
body in a stock corporation while Board of the corporation.
Trustees is the governing body in a non- Shows the total number of shares
stock corporation.
Subscribed Capital – that portion of the
-They exercise the powers of the authorized capital stock that is covered by
corporation. subscription agreements whether fully paid
Qualifications: or not.
1. Every director must own at least one (1)
share of the capital stock;
2. Majority of the directors or trustees must Paid-Up Capital – the portion of the
be residents of the Philippines. authorized capital stock which has been
subscribed and actually paid. Outstanding
*Any director who ceases to be the owner of
at least one share of the capital stock of the Capital Stock – the total shares of stock
corporation of which he is a director shall issued to subscribers or stockholders,
thereby cease to be a director. whether or not fully or partially paid except
treasury shares so long as there is a binding
*Trustees of non-stock corporations must be subscription agreement.
members thereof.
*Initial directors/trustees shall hold office for
one year until their successors are elected Shares of stock
and qualified. Q: Why shares of stock?
A: Because there is a share on the

Section 14(8) states that: “If it be a stock
corporation, the amount of its authorized Economic Value: 1. expectancy on the
capital stock in lawful money of the share in the profits 2. expectancy on the
Philippines, the number of shares into which share of assets in case of
it is divided, and in case the share are par dissolution/liquidation.
value shares, the par value of each, the Political Value: 1. vote
names, nationalities and residences of the 2. control in the management of the
original subscribers, and the amount corporation.
subscribed and paid by each on his
subscription, and if some or all of the shares
are without par value, such fact must be Doctrine of Equality of Shares – “Except
as otherwise provided in the articles of
incorporation and stated in the certificate of Non-voting Shares – shares without the
stock, each share shall be equal in all right to vote.
respects to every other share.” *Has only a limited right to vote. General
Rule: Shareholder owning non-voting
shares has no right to vote.
- Provides that where the Article of Exceptions:
Incorporation do not provide for any 1. Amendment of the articles of
distinction of the shares of stock, all shares incorporation;
issued by the corporation are presumed to 2. Adoption and amendment of by- laws;
be equal and enjoy the same rights and 3. Sale, lease, exchange, mortgage, pledge
privileges and are also subject to the same or other disposition of all or substantially all
liabilities. of the corporate property;
Classes of Shares: 1) Par Value Share – 4. Incurring, creating or increasing bonded
shares that have a nominal value in the indebtedness;
certificate of stock. 5. Increase or decrease of capital stock; 6.
Contractual Significance: The minimum Merger or consolidation of the corporation
price at which the shares are to be issued. with another corporation or other
*The price is fixed. It is stated in the Articles 7. Investment of corporate funds in another
of Incorporation. corporation or business in accordance with
the Corporation Code; 8. Dissolution of the
2) No Par Value Share – those shares corporation.
which do not have nominal value. However, *The exceptions are exclusive; the list is a
they have issued value stated in the closed list
certificate or articles of incorporation. Statutory Constraint: Sec. 6 of the
Corporation Code
*There is flexibility in the price. *The corporation cannot provide for shares
*The price is determined by the Board. with no voting right
Limitations: General Rule: Only redeemable and
1. No par value shares cannot have an preferred shares are deprived of voting
issued price of less than P5.00; right.
2. The entire consideration for its issuance
constitutes capital so that no part of it Exception: Common shares may be denied
should be distributed as dividends; of its voting right in the following instances:
3. They cannot be used as preferred stocks; 1. Delinquent in paying the subscription; 2.
4. They cannot be issued by banks, trust If there was a founder’s share where it was
companies, insurance companies, public given the right to vote exclusively for 5
utilities and building and loan association years (Sec. 7).
(Reason: imbued with public interest);
5. The articles of incorporation must state 5. Common Shares – the most common
the fact that it issued no par value shares as type of shares which enjoy no preference.
well as the number of said shares; 6. Once *The basic class of stock ordinarily and
issued, they are deemed fully paid and non- usually issued without extraordinary rights
assessable. and privileges, and the owners thereof are
entitled to a pro rata share in the profits of
the corporation and in its assets upon
3. Voting Shares – shares with the right to dissolution and, likewise, in the
vote. They have the right to participate in management of its affairs without
the management of the corporation through preference or advantage whatsoever.
the exercise of such right.
6. Preferred Shares- shares which enjoy shares must be stated both in the certificate
preference as to dividends or assets upon of stock representing such share;
dissolution as stated in the Articles of
Incorporation. Reason: To attract investors. 3. Redeemable shares may be deprived of
*Preference does not give them a lien upon voting rights in the Articles of Incorporation,
the property nor make them creditors of the unless otherwise provided in the
corporation. *Characterized as redeemable Corporation Code;
4. The corporation is required to maintain a
Kinds: sinking fund to answer for redemption price
1. Preferred shares as to assets – share if the corporation is required to redeem;
which gives the holder thereof preference in
the distribution of the assets of the 5. The redeemable shares are deemed
corporation in case of liquidation; retired upon redemption unless otherwise
provided in the Articles of Incorporation;

2. Preferred shares as to dividends – 6. Unrestricted retained earnings is not

share which gives the holder thereof necessary before shares can be redeemed
preference in the distribution of the but there must be sufficient assets to pay
dividends to the extent agreed upon before the creditors and to answer for operations.
any dividends at all are paid to the holders Treasury Shares – shares which have been
of common shares; earlier issued as fully paid and have
3. Participating preferred shares – the thereafter been acquired by the corporation
holders thereof are still given the right to by purchase, donation, redemption or
participate with the common stockholders in through some lawful means.
dividends beyond their stated preference;
- Shares which are previously issued by the
corporation but subsequently reacquired by
4. Non-participating preferred shares – the corporation. *Retired thus can no longer
where there is no such participation; be re- issued.

5. Cumulative preferred shares – the *They are not entitled to dividends. *They
shareholder is entitled to recover dividends are not entitled to voting rights. Rationale: to
in arrears. While dividend declaration may prevent abuse by the management.
not be compelled, once it is declared, the
shareholder is entitled to the said arrears; *These shares may again be disposed of for
a reasonable price fixed by the Board of
6. Non-cumulative preferred shares – not Directors.
entitled to arrears only to present dividends.

9. Founders’ Shares – classified as such in

7. Redeemable Shares – are those which the articles of incorporation may be given
permit the issuing corporation to redeem or certain rights and privileges not enjoyed by
purchase its own shares. the owners of other stocks, provided that
where the exclusive right to vote and be
Limitations: 1. Redeemable shares may be voted for in the election of directors is
issued only when expressly provided for in granted, it must be for the limited period not
the Articles of Incorporation; to exceed 5 years subject to the approval of
2. The terms and conditions affecting said
the SEC. The 5 year period shall commence Philippines has not been complied with as
from the date of the approval by the SEC. required by existing laws or the Constitution.

 Treasurer’s affidavit Dual Franchise Requirement: No articles of

*The SEC shall not accept the Articles of incorporation or amendment to articles of
Incorporation of any stock corporation incorporation of banks, banking and quasi-
unless accompanied by a sworn statement banking institutions, building and loan
of the Treasurer elected by the subscribers associations, trust companies and other
showing that at least 25% of the authorized financial intermediaries, insurance
capital stock of the corporation has been companies, public utilities, educational
subscribed, and at least 25% of the total institutions, and other corporations
subscription has been fully paid to him in governed by special laws shall be accepted
actual cash and/or in property the fair or approved by the Commission unless
valuation of which is equal to at least 25% accompanied by a favourable
of the said subscription, such paid up capital recommendation of the appropriate
being not less than P5,000. government agency to the effect that such
*If the Treasurer’s affidavit is false such act articles or amendment is in accordance with
is tantamount to fraud. (PD 902-A) *Fraud law.
on the part of the corporation is a ground for
revocation or suspension of license Commencement of Corporate Existence
depending upon the extent of the violation Sec. 19 of the Corporation Code states that
committed. “ A private corporation formed or organized
*If there’s no Treasurer’s Affidavit, the first under this Code commences to have
ground shall apply, i. e., noncompliance with corporate existence and juridical personality
the minimum requirement. and is deemed incorporated from the date
General Rule: 25% must be subscribed and the SEC issues a certificate of incorporation
25% must be paid. under its official seal; and thereupon the
Exception: If the law provides otherwise, incorporators, stockholders/members and
i.e., special laws. 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
C. Grounds for rejection of the Articles period is extended or the corporation is
of Incorporation sooner dissolved in accordance with law.”

1) The articles of incorporation or any

amendment thereto is not substantially in
accordance with the form prescribed herein; *For purposes of determining whether a
corporation enjoys the status of a de facto
2. The purpose or purposes of the corporation, it must have been at least
corporation are patently unconstitutional, issued a certificate of registration.
illegal, immoral, or contrary to government
rules and regulations; E. Amendment of the Articles of
Incorporation Sec. 16 of the Corporation
3. The Treasurer’s Affidavit concerning the Code states that: “Unless otherwise
amount of capital stock subscribed and/or prescribed by this Code or by special law,
paid is false; and for legitimate purposes, any provision
or matter stated in the articles of
4. The percentage of ownership of the incorporation may be amended by a
capital stock to be owned by citizens of the majority vote of the board of directors or
trustees and the vote or written assent of the requirement of due process before the
the stockholders representing at least 2/3 of revocation of its license.
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 2/3 of the CONTROL AND MANAGEMENT OF A
members if it be a non-stock corporation.” CORPORATION:
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction. Levels of Corporate Control
Amendment by Inaction – Upon filing with 1. By Stockholders/Shareholders; 2. By
the SEC of the amendment and the Corporate Officers;
Commission failed to act on it within 6 3. By Directors/Trustees
months from the date of filing for a cause
not attributable to the corporation.

Effects of Non-Use of Corporate Charter 1)Board of Directors/Trustees

Sec. 22 of the Corporation Code states that:
“If a corporation does not formally organize
and commence the transaction of its  General Powers of the Board
business or the construction of its work
within 2 years from the date of its Sec. 23 of the Corporation Code states that:
incorporation, its corporate powers cease “Unless otherwise provided in this Code, the
and the corporation shall be deemed corporate powers of all corporations formed
dissolved. However, if the corporation has under this Code shall be exercised, all
commenced the transaction of its business business conducted and all property of such
but subsequently becomes continuously corporations controlled and held by the
inoperative for a period of at least 5 years, board of directors or trustees to be elected
the same shall be a ground for the from among the holders of stocks, or where
suspension or revocation of its corporate there is no stock, from among the members
franchise or certificate of incorporation. This of the corporation, who shall hold office for
provision shall not apply if the failure to one year until their successors are elected
organize, commence the transaction of its and qualified.”
businesses or the construction of its works,
or to continuously operate is due to causes Powers of the Board of Directors:
beyond the control of the corporation as
may be determined by the SEC.” 1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties of
the Corporation.
*The period must be counted from the *Board of Directors/Trustees is the statutory
issuance of the Certificate of Incorporation. representative of the corporation.
*Automatic dissolution is not contemplated General Rule: All corporate powers
under Section 22. (SEC Opinion). emanate from the Board of
*Section 22 must be read in conjunction Exception: Unless otherwise provided in this
with Sec 6(1) of PD 902-A which requires Code. (Limiting Clause)
that the corporation must be given the The limiting clause means that there are
opportunity to be heard in compliance with certain corporate matters that cannot be
done by the Board by reason that such
matters fall upon the shareholders; or
corporate matters that cannot be resolved *In order to be eligible as director, what is
by the Board alone, i.e., it must be done material is the legal title to and not
with the approval of the shareholders. beneficial title or ownership of the stocks
appearing on the books of the corporation.

*The directors/trustees must be natural

Business Judgment Rule – questions of persons.
policy or management are left solely to the *They must also be of legal age.
honest decision of officers and directors of a *He must possess other qualifications as
corporation and the courts are without may be prescribed in the by-laws of the
authority to substitute their judgment for the corporation.
judgment of the board of directors; the
board is the business manager of the *Under Sec. 27 of the Corporation Code:
corporation and so long as it acts in good “No person convicted by final judgment of
faith its orders are not reviewable by the an offense punishable by imprisonment for
courts or the SEC. a period exceeding 6 years, or a violation of
- A resolution or transaction pursued within this Code committed within 5 years prior to
the corporate powers and business the date of his election or appointment, shall
operations of the corporation, and passed in qualify as a director, trustee or officer of any
good faith by the board of directors/trustee, corporation.”
is valid and binding, and generally the
courts have no authority to review the same Reason: The position is based on trust and
and substitute their own judgment, even confidence.
when the exercise of such power may *No citizenship requirement.
cause losses to the corporation or decrease *The By-Laws may provide additional
the profits of a department. *Great respect qualifications/disqualifications.
is accorded to the decisions of the Board of
Directors/Trustees. Election of the Board Members
*The directors are not liable to the
stockholders in performing such acts *It is the stockholders or corporators who
elect members of the Board of Directors.
*The only procedure required by the Code is
through Election. There can be no other
Qualifications of the Board Members modes.
Sec. 23 of the Corporation Code states that:
“Every director must have at least one share *The election must be by ballot if requested
of the capital stock of the corporation of by any voting member or stockholder.
which he is a director, which share shall *A stockholder cannot be deprived in the
stand in his name on the books of the articles of incorporation or in the by- laws of
corporation. Any director who ceases to be his statutory right to use any of the methods
the owner of at least one share of the of voting in the election of directors.
capital stock of the corporation of which he
is a director shall thereby cease to be a *No delinquent stock shall be voted.
director. Trustees of non-stock corporations *It is not required that the candidate
must be members thereof. A majority of the received the majority vote, what the law
directors or trustees of all corporations provides is only plurality of votes. *Majority
organized under this Code must be number is required only for the existence of
residents of the Philippines.” a quorum.
directors initially elected for purposes of

Not included in outstanding capital

stocks: 1. Unissued stocks; Quorum Requirement in Board Meetings
2. Non-voting stocks;
3. Treasury Shares. Sec. 25 of the Corporation Code states that:
“Unless the articles of incorporation or the
Methods of Voting: by-laws provide for a greater majority, a
1. Straight Voting – every stockholder may majority of the number of directors or
vote such number of shares for as many trustees as fixed in the articles of
persons as there are directors to be elected. incorporation shall constitute a quorum for
the transaction of corporate business, and
every decision of at least a majority of the
2. Cumulative Voting for One Candidate directors or trustees present at a meeting at
– a stockholder is allowed to concentrate his which there is a quorum shall be valid as a
votes and give one candidate as many corporate act, except for the election of
votes as the number of directors to be officers which shall require the vote of a
elected multiplied by the number of his majority of all the members of the board.”
shares shall equal. *Example: X has 10
shares in his name; there are 5 numbers of *Quorum requirement should always be
directors to be elected. X has 50 votes computed based on the number specified in
(10x5) available to him. X may opt to the Articles of Incorporation regardless of
concentrate all his 50 votes to a particular ensuing vacancies.

3. Cumulative Voting by Distribution – a *The basis is always the number specified

stockholder may cumulate his shares by in the Articles of Incorporation.
multiplying also the number of his shares by
the number of directors to be elected and
distribute the same among as many *The corporation can modify the number by
candidates as he shall see fit. *Example: X providing a different provision in the articles
has 10 shares in his name; there are 5 of incorporation, however, the law provides
numbers of directors to be elected. X has 50 that the modification must be for a number
votes available to him. X may opt to greater than that provided in the law. It
distribute the votes to as many candidates cannot provide for a number less than the
as there are provided that the total number general requirement of the code.
of votes does not exceed 50.

*For voting purposes, majority of the

Term of Office *The directors or trustees member present constituting a quorum.
shall hold office for one (1) year subject to Except: election of directors.
the “hold over” principle, i.e., they continue
in office until their successors are elected
and qualified.
*The one year period does not apply to
Removal of Board Members Requisites:
1. It must take place either at a regular directors or trustees shall be filled only by
meeting or special meeting of the an election at a regular or at a special
stockholders or members called for the meeting of stockholders or members duly
purpose; called for the purpose, or in the same
meeting authorizing the increase of
2. There must be previous notice to the directors or trustees if so stated in the notice
stockholders or member of the intention to of the meeting.”
3. The removal must be by a vote of the
stockholders representing 2/3 outstanding
capital stock or 2/3 of members; General Rule: Power to elect directors is
vested in the stockholders
4. The director may be removed with or
without cause unless he was elected by the Exception: Vacancy occurring in the board
minority, in which case, it is required that of directors or trustees other than by
there is cause for removal. Reason: The removal by the stockholders or members or
functions of directors are fiduciary in nature. by expiration of term may be filled by the
vote of at least a majority of the remaining
Requisites for the removal of minority directors or trustees if still constituting a
directors are: quorum.
1. Justifiable cause;
2. Satisfaction of the voting requirements,
i.e., 2/3 of OCS or members.
Compensation of Board Members
*It is the secretary of the corporation upon General Rule: Directors are not entitled to
order of the president or in case there is no receive compensation
secretary, stockholder representing majority Exceptions:
of the outstanding capital stocks or member 1. When their compensation is fixed in the
signing the demand who may call a meeting by-laws;
for the purpose of removal. 2. If compensation is 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’
Vacancies in the Board meeting. Limitation: In no case shall the
total yearly compensation of directors
Sec. 29 of the Corporation Code provides exceed 10% of the net income before
that: “Any vacancy occurring in the board of income tax of the corporation during the
directors or trustees other than by removal preceding year.
by the stockholders or members or by
expiration of term, may be filled by the vote Reason: In order to avoid temptation on the
of at least a majority of the remaining part of directors to abuse powers by
directors or trustees, if still constituting a appropriating compensation packages since
quorum; otherwise, said vacancies must be they are in control of corporate assets.
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 Corporate Officers
unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by Concept of Corporate Officers - Corporate
reason of an increase in the number of powers reside on the Board of Directors;
decision/policymaking resides on them. Liability of Directors, Trustees and
Implementation of rules/policy lies on the Officers
corporate officers
Instances when Corporate
Officers/Directors are held Solidarily
1. Statutory Corporate Officers – President General Rule: Directors/Trustees/Officers
(must be a stockholder); Secretary (must be are not solidarily liable with the corporation.
a resident and citizen of the Philippines); Exceptions:
Treasurer (must be a resident and citizen of
the Philippines). 1) Wilfully and knowingly vote for and
assent to patently unlawful acts of the
2. As provided by the By-Laws – must be corporation (Sec. 31). Case: Carag v NLRC
clearly stated in the By-Laws that such
office is a corporate office. 2) Guilty of gross negligence or bad faith in
directing the affairs of the corporation (Sec.
3. Those designated by the Board of 31).
Directors provided the Board of Directors is Case: David v Construction Industry
authorized to do so by the By-Laws.

 Validity and Binding Effect of Acts of

Corporate Officers 3) Acquire any personal or pecuniary
General Rule: No one, even corporate interest in conflict of their duty (Sec.31).
officers can bind the corporation. It is only
the Board of Directors who has the authority 4) Consent to the issuance of watered
to bind the corporation. Exceptions: stocks or having knowledge thereof, fails to
file objections with the secretary (Sec. 65).
1. If the By-Laws provides that such act is
part of the function of such office; 5) Agree or stipulate in a contract to hold
2. If authorized by the Board of Directors himself personally liable with the
 Doctrine of Apparent Authority
Doctrine of Apparent Authority/Doctrine 6) By virtue of a specific provision of law
of Estoppel –If a corporation, knowingly such as BP 22; Trust receipts Law; RA 7832
permits one of its officers, or any other (Anti- Electricity Pilferage Act of 1997);
agent, to act within the scope of an Securities Regulation Code
apparent authority, it holds him out to the
public as possessing the power to do those
acts; and thus, the corporation will, as
against anyone who has in good faith dealt Carag v NLRC, the Supreme Court held
with it through such agent, be stopped from that not any violative of law, the Code
denying the agent’s authority. means that violation must have a
Cases: People’s Aircargo; Inter-Asia; corresponding penalty. Patently unlawful act
Lapu-Lapu means that a law declares an act unlawful
and that such law provides penalty for that
*Requires good faith on the part of third unlawful act.
General Rule: Contracts between two or
more corporations having interlocking
Self-Dealing directors are valid
Directors/Officersdirectors/officers who
transact business with their own
- This is not prohibited by law. Exceptions: 1) Contracts are void if
contracts are fraudulent or if contracts are
unfair and unreasonable.

General Rule: The contract is voidable. 2) If the By-Laws prohibits interlocking

Exception: If the requisites provided in Sec. director.
32 are present.

Exception to the Exception: If requirement

number 1 or 2 is absent, in the case of a *The interest is nominal if his interest is
contract with a director or trustee, such 20% or less of the outstanding capital stock.
contract may be considered valid by the The interest is substantial if his interest is
ratification of at least 2/3 of the outstanding more than 20% of the outstanding capital
capital stock or 2/3 of the members. stock.

Requisites: 1. The presence of such *If the interlocking director has a substantial
director or trustee in the board meeting in interest in one corporation and has a
which the contract was approved was not nominal interest in the other corporation, the
necessary to constitute a quorum for such director must comply with the requisites
meeting; provided in Sec. 32 on self-dealing
2. The vote of such director or trustee was
not necessary for the approval of the Reason: The case is analogous to that of
contract; transactions involving self-dealing directors
3. The contract is fair and reasonable under because such director holds substantial
the circumstances; interest with the other company.

4. In case of an officer, the contract has

been previously authorized by the board of
directors. Doctrine of Corporate Opportunity
Reason: A’s presence in the board meeting Sec. 34 of the Corporation Code states that:
might affect the status of the contract. “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
Interlocking Directors – those who have such corporation, he must account to the
been elected as directors in 2 or more latter for all such profits by refunding the
different corporations. same, unless his act has been ratified by a
- May be prohibited by the By-Laws vote of the stockholders owning or
(Gokongwei case). representing at least 2/3 of the outstanding
capital stock. This provision shall be
-Not prohibited by law however there are applicable notwithstanding the fact that the
consequences. director risked his own funds in the venture.”
General Rule: A director shall refund to the *The corporation may create other
corporation all the profits he realizes on a committees.
business opportunity which: 1. the Distinction: In executive committee, there is
corporation is financially able to undertake; a statutory restriction on members whereas
2. from its nature, is in line with corporations in other committee there is no such
business and is of practical advantage to it; restriction.
and 3. the corporation has an interest or a General Rule: The executive committee
reasonable expectancy. may act on specific matters within the
Exception: His act has been ratified by a competence of the board as may be
vote of the stockholders owning or delegated to it in the by-laws or on a
representing at least 2/3 of the outstanding majority vote of the board.
capital stock. Exceptions:

1. Approval of any action for which

shareholders’ approval is also required;
Executive Committee
2. The filing of vacancies in the board;
Sec. 35 of the Corporation Code states that: 3. The amendment or repeal of by-laws or
“The by-laws of a corporation may create an
executive committee composed of not less the adoption of new by-laws;
than 3 members of the board to be 4. The amendment or repeal of any
appointed by the board. Said committee
may act, by majority vote of all its members, resolution of the board which by its express
on such specific matters within the terms is not so amendable or repealable;
competence of the board, as may be
delegated to it in the by-laws or on a 5. A distribution of cash dividends to the
majority vote of the board, except with shareholders.
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- Doctrine of Limited Capacity; Concept of
laws or the adoption of new by-laws; (4) the Ultra Vires Act
amendment or repeal of any resolution of Sec. 45 of the Corporation Code states that:
the board which by its express terms is not “No corporation under this Code shall
so amendable or repealable; and (5) a possess or exercise any corporate powers
distribution of cash dividends to the except those conferred by this Code or by
shareholders.” its articles of incorporation and except such
Keyword: BY-LAWS as are necessary or incidental to the
*It must be stated in the By-Laws. exercise of powers so conferred.”
*Board Resolution is not sufficient if there is
no provision in the By-Laws.
Ultra Vires Acts – an act committed
*The decision of the executive committee is
outside the object for which a corporation is
considered a Board Resolution.
created as defined by the law of its
*The decision of the executive committee is
organization and therefore beyond the
not subject to appeal to the board. However,
power conferred upon it by law.
if the resolution of the Executive Committee
is invalid it may be ratified by the Board.
*The decision of the executive committee Effects of Ultra Vires Acts:
needs no confirmation from the Board.
Case: Filipinas Port, Inc. 1) Executed Contract – courts will not set
aside or interfere with such contracts.
2) Executory Contract – no enforcement and to admit members to the corporation if it
even at the suit of either party. be a non-stock corporation; 7. To purchase,
receive, take or grant, hold, convey, sell,
3) Partly executed and Partly executory lease, pledge, mortgage and otherwise deal
contract – principle against unjust with such real and personal property,
enrichment shall apply. 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
Classes of Corporate Powers  Express – limitations prescribed by law and the
those expressly authorized by the Constitution; 8. To enter into merger or
Corporation Code and other laws, and its consolidation with other corporations as
Articles of Incorporation or Charter. provided in this Code; 9. To make
reasonable donations,
 Implied – those that can be inferred from
or necessary for the exercise of the express
Amendment of Articles of Incorporation
 Incidental – those that are incidental to
the existence of the corporation. *The following are excluded in counting the
outstanding capital stock: 1. Treasury stock;
2. Unissued shares. *Aside from the votes
of majority of the board and assent of the
2/3 of the OCS, the approval of the SEC is
Doctrine of Necessary Implication – necessary for the amendment of the AOI.
those which can be reasonably inferred
from the express powers given since they
*There is an implied approval of the SEC,
are necessary for the corporation to perform
i.e., failure to act on the application filed by
a particular act are deemed part of such
the corporation within 6 mos.
Q: How to get the approval of the
Statutory Powers of a Corporation and
the Limitations on their Exercise
A: 1. Call for a meeting; 2. Obtain the
Sec. 36 of the Corporation Code states that:
written assent of the stockholders.
“Every corporation incorporated under this
*In Tan v Sycip, the Supreme Court held
Code has the power and capacity: 1. To sue
that in case of a non-stock corporation,
and be sued in its corporate name; 2. Of
membership is personal and non-
succession by its corporate name for the
transferrable unless the by-laws provides
period of time stated in the articles of
otherwise. The deceased member is not
incorporation and the certificate of
entitled to vote.
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 Four changes in Articles of Incorporation
policy, and to amend or repeal the same in that require the approval of the
accordance with this Code; 6. In case of stockholders.1. Extension of corporate
stock corporations, to issue or sell stocks to term;
subscribers and to sell treasury stocks in 2. Shortening of corporate term; 3. Increase
accordance with the provisions of this Code; or Decrease of Capital Stock;
4. Increase or Decrease of Bonded Corpo-Doctrines:
Magsaysay-Labrador v CA; Sulo ng
*Approval of Stockholders is necessary in Bayan v Araneta The interest of the
these changes because they are necessary stockholders over the properties of the
for the corporation’s existence. corporation is merely inchoate. *Merely
inchoate because there are still condition
precedents before the shareholders get
their share,

Francisco v CA can incur obligations and

its obligations are not the obligations of its
stockholders, directors and officers.

Coastal Pacific Trading v Southern

Rolling Mills, Co. In Filipinas Broadcasting
Network Inc. v. Ago Medical and
Educational Center, the SC ruled that a
corporation can recover moral damages
under Article 2219(7) if it was the victim of

Doctrine of Piercing the Veil of Corporate

Entity – used as a shield to perpetuate
fraud, to defeat public convenience, justify
wrong, or defend crime, this fiction shall be
disregarded and the individuals composing
it will be treated identically.

Times Transportation Co. v Santos

Sotelo; Concept Builders v NLRC - The
doctrine of piercing the veil of corporate
entity is the exception to the doctrine of
corporate entity.

*The users of this doctrine are: 1.

Stockholder; 2. Group of stockholders; 3.
Another corporation.

Effects: 1. Stockholders, officers and

corporation are in effect jointly liable; 2. In
case of two corporations, they will be
treated as one wherein they will be both
solidarily liable. (Instrumentality rule)

Mercantile Law Doctrines

Hall v Piccio; Seventh Adventist v also does not extinguish the corporate
Northeastern Mindanao Mission *The filing liability.
of the Articles of Incorporation and the
issuance of the certificate of registration are
the essential requisites for the existence of
a de facto corporation.


1. The existence of a valid law under which

it may be incorporated;
2. An attempt in good faith to incorporate; 3.
Use of corporate powers; 4. Filing of the
Articles of Incorporation; 5. Subsequent
compliance with the requirement of law.

*In both corporations, there must be a

certificate of registration issued.

Lim Tong Lim v CA

*Lim is stopped because he benefited from
the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from denying
their existence by their previous act or

Ang Mga Kaanib Ni Jesus Cristo

*The phrase “Ang Mga Kaanib” are words

merely descriptive of membership while the
phrase “Sa Bansang Pilipinas” are merely
descriptive of the place.

*Both parties are religious institutions *Both

use the acronym H.S.K.
As a rule, generic name or descriptive word
may be used as a corporate name. Reason:
public domain; can be used by anyone;
public use.

Lyceum of the Philippines

*The exclusivity requirement was not
satisfied by Lyceum of the Philippines. *In
case of change of name, the corporation is
not dissolve nor create a new corporation; it