Notes in Corporation Law by Villanueva Bulacan Sate University

By: Mary Grace Lumidao Salvador, MSCJ College of Law

CHAPTER 6
ARTICLES OF INCORPORATION

Contractual Significance of the Articles of Incoporation

 Represents the highest form of contract in corproate law, defining the charter of the corporation.
 Charter of the corporation - contract between the State and grantee of the charter “ equally bound by its
provisions”.
A. State and Corporation
B. Stockholders and the State; and
C. Corporation and its Stockholders. (Government of the P.I v. Manila RailRoad CO.)
 Mutuality in Contract Law.
 Obligatory force binding on the articles of incorporation.

Articles of Incorporation Constituting the Corporate Charter

 “Juridical capacity to act”
 Best proof of the purpose - articles of incorporation and by-laws (Gala v. Ellice Agro-Inductrial Corp.).

Registration of the Articles of Incorporation

1. Examination and Approval by SEC
 SEC shall give the incorporators reasonable time within which to modify or corrrect the objectionable portions.
 Power to refuse or deny application for registration, if its establishment, organization or operation will not be
consistent with the declared national economic policies (PD 902-A, Sec.6[k])
 In Palting v. San Jose Petroleum, Inc. - allows the directors and its officers immunity from any claims as being against
Philippine Corporate Policies.
 However, the approval of the AOI and the issuance of certificate do not preclude SEC, from revoking the same
subject to proper hearing, if it later finds that the corporation were guilty of fraud in procuring the certificate.
2. Special Rule for Banks
 Certificate of authority issued by the Monetary Board, under its seal (Sec. 14, General banking Law of 2000).
 Certificate of authority issued by the BSP (Sec. 81).
3. Grounds for Disapproval of the Articles of Incorporation
Provided that SEC shall give the Incorporators reasonable time within which to correct or modify the
objectionable portions of the articles or amendments.
a) Not substantially in accordance with the form prescribed by law;
b) Purposes of the Corporation are patently unconstitutional, illegal, immoral, or contrary to government rules
and regulations;
c) The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; and
d) The percentage of ownership of the capital stock to be owned by the Citizens of the Philippines has not been
complied with as required by existing laws or the Constitution (Sec. 17)
Contents of the AOI
See. 13, RA 11232
1. Treasurer’s Affidavit
a) At least 25 % of the total capital stock authorized is subscribed and at least 25 % of such have been fully paid in
cash or property - fair valuation of which is equal to at least 25 % of the said subscription. Paid-up capital shall
not be less than 5,000.
2. Other Documentary Requirements
a) Certificate Deposit
b) Letter of Authority to Examine Bank Deposit - including book of accounts
c) Written undertaking to change Corporate name
Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

CHAPTER 7
BY-LAWS

Contractual significance of By-Laws

By-Laws
 an intramural document, to govern the relationship between and among corporate family.
 Merely intended for the protection of the corporation and prescribe regulation, not restrictions;
always subject to the charter of the corporation.
 cannot create rights or be used to restrict rights (Fleischer v. Botica).
 For an orderly governance and management of a corporation (Loyola Grand villas Association v. CA).
 For its internal government, and to regulate conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its affairs (Bernas v.
Cinco).
 Mandatory for every member.

A. Non-Binding Effect of By-Laws to “Outsiders”

 Take note of the case of Pena v. CA (1991), the SC negate this proposition. Board of Resolution void, as it
as it was adopted in a manner contrary to the process outlined in the corporation’s by-laws for special
meetings. Between the highest bidder and the buyer of the right of redemeption.
 In the case of China Banking v CA (1997),it was held the non-bimding effect of By-laws except when they
have knowledge of the provisions either actually or constructively.
 Similarly in the case of PMI Colleges v. NLRC (1997), where by-laws cannot affect or prejudice third
persons unless they have knowledge of the same.
B. Waiver Applicable to By-Laws
 When there is failure to invoke the relevant by-laws provision and allowed to be decided by the
general membership.
 If the corporation acts or contracts with the consent or acquiescence of the stockholders or members.

Legal Basis of Power to Adopt By-Laws

 Gokongwei, Jr. v. SEC (1979), discussed the prevailing doctrine on the power of a corporation’s to adopt and amend
by-laws.
1. It cannot contravene the Law
See Sec. 36 of the Corporation Code.
2. It cannot contravene the Charter
 Sec. 47 states that “subject to the provisions of the Constitution, this Code, other special laws
and the articles of incorporation.” The rule the the by-laws of a corporation must be always
within the charter limit.
3. It must be reasonable and non-discriminatory
 However, the validity or reasonableness of a by-law provision is a question of law and the issue
must be resolved the by-laws conflict with a provision of law; charter; or unreasonable and therefore
unlawful.
Note: The effect of by-laws which contravene the above enumerated, would render the offending provision invalid and of no
force and effect.
Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

Procedure for Adoption of By-Laws

 The doctrine laid down in Loyola Grand Villas has been deleted in the New Corporation Law1.
 Can be adopted and filed prior to incorporation.
 Signed by the stockholders or members voting for them and shall be kept in the Principal office of the
corporation, subject to the inspection of the stockholders or members during office hours. 2

 Failure to adopt by-laws - do not automatically operate to dissolve a corproation but considered
grounds for which the SEC may seek Corporation’s dissolution.
 Note the Rules on the Bank under Sec. 14 of the General Banking Law of 2000, “accompanied by
a certificate of authority from the BSP”.

Basic Contents of By-Laws (Sec. 46 of the New Corpo)

Matters usually found in BY-Laws
a. Time, place and manner of calling and conducting regular and special meetings of directors
and trustees; places for meetings of directors or trustees may be outside the Philippines if it
so provided in the by-laws;
b. Time and manner of calling and conducting regular and special meetings of the
stockholders or members;
c. Required quorum in meetings of stockholders and the manner of voting;
d. Form for proxies and stockholders and members and manner of voting;
e. Qualification, duties and compensation of Directors/trustees, officers and employees;
f. Time for holding annual election of directors or trustees, mode and manner of giving notice
thereto;
g. Manner of election or appointent and the term of office of all officers except directors or
trustees;
h. Penalties for violation of by-laws;
i. Manner of issuing stock certificates; and
j. Such other matters necessary for the proper means of corporate business and affairs.3
k. Such other matters as may be necessary for the proper or convenient transaction of its
corporate affairs for the promotion of good governance and anti-graft and corruption
measures. 4

Other Matters that May Be Included in the By-Laws

a. Designation of time when voting rights may be exercised by stockholders of record.
b. Providing for an additional officers for the corporation.
c. Provision for the compensation of the Directiors.
d. Creation of an Executive Committee.
e. Date of Annual meeting p or provisions of special meetings of stockholders or members.
f. Quorum on meetings of stockholders or members
g. Providing for the presiding officer at meetings of the directors or trustees, as well as the
stockholders or members.
h. Procedure for the issuance of certificates of shares of stock.
i. Providing interests on unpaid subscription.
j. Entries to be made in the stock and transfer book.

1
RA 11232
2
Sec. 161 of the New Corporation Code provides a criminal offense.
3
Sec. 47 of the Corporation Code
4
Added provision
Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

k. Providing for meetings of members in a non-stock corporation outside of the corporation’s

principal office.

Matters that may be found in both the AOI and the By-laws
a. Providing for the cumulative meeting in a non-stock corporation;
b. Providing for a higher quorum requirement for a valid board meeting;
c. Limiting, broadening or denial of the right to vote, including voting by proxy, for members
in a non-stock corporation.
d. Tranferability of membership in a non-stock corporation;
e. Termination of membership in a non-stock corporation;
f. Manner of election and term of office of trustees and officers in non-stock corporation;
g. Manner of distribution of assets in a non-stock corporation upon dissolution;
h. Providing for staggered board in educational institutions.

 The Code allows certain matters to be provided for either in the AOI or By-Laws (Pena v. Court
of Appeals).

Matters that Cannot Be Provided in the By-Laws

a. Classification of shares of stock and preferences granted to preferred shares;
b. Provisions on founded shares;
c. Providing for redeemable shares;
d. Purposes of the corporation;
e. Corporate term of existence;
f. Capitalization of stock corporation;
g. Corporate name; and
h. Denial of Pre-emptive rights.

Amendment to and Revisions of the By-Laws

 See Sec. 47 of the New Corporation Code
Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

CHAPTER VIII
CORPORATE POWERS AND AUTHORITIES

Underlying Theories on Corporate Powers

A. Doctrine of Creature of Limited Powers
 Theory of Concession
 Intra vires
a. Express
b. Implied or
c. Incidental powers

B. Doctrine of Centralized Management (See Chapter IX for further discussion)

 The Board of Directors or trustees shall exercise corporate powers, conduct all business
and control all properties of the corporation. 5

 There are instances where the particular power byt he order in order to be binding and
effective requires consent or ratification of the stockhlders or members.
 Either majority vote or qualified two-thirds vote
 Right of appraisal - caan be exercise only if contractual expectation has either been
frustrated or altered by the decision of the majority.

Corporate Powers and Capacity

1. Express Powers
 See Sec. 35 which enumerates powers which every corporation may exercise.6
 Provided in the Articles of Incorporation.
 Law and enumerated in its Charter
Note: The Board of Directors or person should act with authority to bind the corporation.
a) Power to Sue and be Sued
 Business discretion
 GR: This power is lodged with the Board of Directors.
EXPT: FIling by a relator-stockholder of a derivative suit in behalf of the corporation
without prior approval of the Board of Directors or Trustees .(See Chapter X)
 Board Resolution authorizing a corporate officer to execute the certification against
forum shopping is necessary -- a certification not signed renders the petition subject to
dismissal.
 Failure to attach a certified copy of the board resolution - deemed fatal.

Service of Summons on a Corporation

5
Sec. 22, RA 11232
6
RA 11232
Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

- can be made on the president, managing partner, general manager, coporate secretary, treasurer
or in-house counsel. 7

It must be restricted, limited and exclusive.

Note: In South Cotobato Communication Corp. . Sto. Tomas, President is among enumerated corporate
officers who can receive summons, then he can sign the verfication and certification against
forum shopping without the benefit of board resolution.
b) Power to sell, lease, dispose, or incumber assets
 Exercise by Board of Directors/ Trustees.
 Corporate land, the applicable law must Law on Agency on sale of land.
c) Power to borrow or enter into loans
 Falls within the business discretion of the Board of Director/Trustees of every corporation.
 Except: To incur or increase a bonded indebtedness (Section 37).
 Special Power of attorney is need to validly borrow in behalf of the corporation. (Yasuma v.
Heirs of Cecilio, 2006)
 The board must explicitly authorize an officer to contract loans in behalf of the corporation.
d) Power to make donations
 “Maximization shareholder value” or “Stockholder Theory” (Dodge v. Ford Motor Co.
[1919]) - maximize profits
 “Doctrine of Corporate Social Responsibility”
- corporation must bear certain non-profit and social responsibility towards society.
- donations and other contributions not ultra vires.
- to maintain the corporation as a “good corporate citizen”.
 “reasonable donations” only.
 Test: promote the best interest of the corporation and stockholders to build the name
of the company as a good corporate citizen.
 “Stakeholders Theory” - adopted by the BSP, SEC and IC.
e) Power to grant Pensions, Retirement and Gratuities
1. Exercise of the Power to Favor Officers and Employees
- engender loyalty; grants them motivation; increase their productivity and avoid
wastage occuring through unnecessary high-turn-over of personnel.
- does not require ratification of the stockholders.
2. Exercise of the Power to Favor Directors or Trustees
- not entitled to compensation except reasonable per diem for attendance of meetings.
Quite controversial:
A. Cosntitutes serious case of conflict of interests.
B. Directorship and trusteeship is issentially a honorarya nd non-remunerative
position.
C. No employer-employee relationship between the corporation
D. No security of tenure (1 year term and there should be no stipualtion giving
them a permanent tenure.

7
Sec.11, Rule 14 of the 1997 Rules of Civil Procedure
Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

2.Incidental Powers
 Found in Sec. 2;
 Attach to the corporation at the moment of its creation without regard to its express
powers or particular purpose and must necessarily arise from its being a juridical
person engaged in business.
3.Implied or Necessary Powers
 Section 35 (11)

Ultra Vires Acts of the First Types

- referred to as the “Classic ultra vires”
1. Ultra Vires Test
The case of Montelibano v. Bacolod-Murcial Milling Co., Inc. clarified the extent by the ultra vires
doctrine may be applied on the implied or neccesary powers of a corporation.
The test uses stringer terms “direct and immediate” only with reference to the business of a
corporation; whereas it uses liberal terms of “fairly incident” and “reasonably necessary” with reference
to the powers.

2. Supervening Policies
 Public would be forced to engage upon costly and time-consuming verification and
contractual safeguards;
 “Business Judgment Rule”
- it states that the courts will not sit in judgment to substitute their buiness judgment for that
of the Directors. Directors should be given leeway to adopt corporate policies and to engage in
transactions as they deem best for the corporation , the same cannot be claimed beyond their
powers of ultra vires.
- Courts cannot undertake to control the discretion of the board of directors about
administrative matters as to which they have the legitimate power of action, and contractsintra
vires entered into by the board of directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority. 8

Consequences:
1. Resolutions and transactions entered into by the Board within the powers of the corporation
cannot be reversed by the courts not even on the behest of the stockholders.
2. Directors and officers acting within such business judgment cannot be held personally liable
9
for such acts.
 The case of Carlos v. Mindoro Sugar Co., held that transactions are binding under the estoppel
doctrine. “When the contract not on its face fac enecessarily beyond the scope of the power of the
corporation, in the absence of proof to the contrary, presumed to be valid.”

8
Gamboa vs. Victoriano, 90 SCRA 40
9
Philippine Corporate Law, Cesar Villanueva, 2001 ed.
Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

3. Doctrine of Estoppel or Ratification

Per se illegal = void

Not per se illegal = Test = intra or ultra = can be ratified

 Pirovano v. Dela Rama Steamship Co. , it was held that ratification of the stockholders on an ultra
vires which is not illegal , cures the infirmity and makes it valid.
 Ultra vires may be enforced by performance, ratification or estoppel (Acoje Mining Co. Inc. ).
4. Illegal Acts
GR: Illegal acts void, but in the case of Harden provides a rule.
Corporate contracts which are illegal per se, when only public or government policy is at stake
and no private wrong is committed, the courts will leave the parties as they are, in accordance
with their original contractual expectations (Harden v. Benguet Consolidated Mining Corp.)10

Reportorial Requirements When Exercising Specific Corporate Powers

1. Increase or decreases its capital stock;
2. Changes its line of business;
3. Creates bonded indebtedness;
4. Merges or consolidated with other corporations;
5. Extends or shortens its term of existence;
6. Increases or deceases the number of its directors;
7. Ceases business operations; or
8. Dissolves
It must filed with the SEC, the reasons or causes for said action in the resolution of the stockholders or board of directors approving the
same which must be isgned

10
3 SCRA 361, 365 (1963)
 Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

Power to Extend or Power to Power to Increase Power to Incure, Power to Sell, Power to Invest Power to ENter
Shorten Corporate Temporary Cease or Decrease Create, or Dispose or Lease
Corporate Funds into Management
Term Corporate Capital Stock Increase Bonded or Encumber
Operations Indebtedness Assets (SDLE) in Another Contract
(ICI)
Corporation or
Business
Basis Sec. 36 SEC Opinion No. Sec. 37 Sec. 37 - bonded Sec. 39 Sec. 41 Sec. 43
04-43, dated 2 indebtedness
October 2004 Sec. 39 -
encumberance of all
or substantially all
of the assets

Important to determine
since they have diferent
Procedures
 Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

How Approved by the Approved by the Approved by the Approved by the Approved by the Approved by the Approved by the
Exercised majority vote of the majority vote of the majority vote of the majority vote of the majority vote of the majority vote of the majority vote of the
Board of Directors or Board of Directors Board of Directors Board of Directors Board of Directors Board of Directors Board of Directors
Trustees; or Trustees; or Trustees; or Trustees; or Trustees; or Trustees; or Trustees;

Ratified at a meeting Ratified at a Ratified at a Ratified at a Ratified at a Ratified at a Ratified at a

by the stockholders meeting by the meeting by the meeting by the meeting by the meeting by the meeting by the
or members stockholders or stockholders or stockholders or stockholders or stockholders or stockholders or
representing members members members members members members
tho-thirds (2/3) of representing representing representing representing representing representing
the outstanding tho-thirds (2/3) of tho-thirds (2/3) of tho-thirds (2/3) of tho-thirds (2/3) of tho-thirds (2/3) of tho-thirds (2/3) of
capital stock or 2/3 the outstanding the outstanding the outstanding the outstanding the outstanding the outstanding
of members capital stock or 2/3 capital stock or 2/3 capital stock or 2/3 capital stock or 2/3 capital stock or 2/3 capital stock or 2/3
(non-stock of members of members of members of members of members of members
corporation); (non-stock (non-stock (non-stock (non-stock (non-stock (non-stock
corporation); corporation); corporation); corporation); corporation); corporation);
Written notice of
the proposed action Written notice of Written notice of Written notice of Written notice of Written notice of Written notice of
and of the time and the proposed action the proposed action the proposed action the proposed action the proposed the proposed
place of the meeting, and of the time and and of the time and and of the time and and of the time and action and of the action and of the
Shall be place of the place of the place of the place of the time and place of time and place of
A. addressed to each meeting, meeting, meeting, meeting, the meeting, the meeting,
stockholder or member Shall be Shall be Shall be Shall be Shall be Shall be
at his place of residence A. addressed to each A. addressed to each A. addressed to each A. addressed to each A.addressed to each A.addressed to each
(as shown in the books stockholder or member stockholder or member stockholder or member stockholder or member stockholder or member stockholder or member
of the corporation) and at his place of residence at his place of residence at his place of residence at his place of residence at his place of residence at his place of residence
deposited to the (as shown in the (as shown in the (as shown in the (as shown in the (as shown in the (as shown in the
addressee in the post books of the books of the books of the books of the books of the books of the
office with postage corporation) and corporation) and corporation) and corporation) and corporation) and corporation) and
prepaid, deposited to the deposited to the deposited to the deposited to the deposited to the deposited to the
B. or served personally; addressee in the post addressee in the post addressee in the post addressee in the post addressee in the post addressee in the post
or office with postage office with postage office with postage office with postage office with postage office with postage
C. Sent prepaid, prepaid, prepaid, prepaid, prepaid, prepaid,
electronically (when B. or served B. or served B. or served B. or served B. or served personally; B. or served personally;
allowed in the personally personally; personally; personally; C. Sent C. Sent
by-laws or done C. Sent C. Sent C. Sent electronically electronically
with the consent of electronically electronically electronically (when allowed in (when allowed in
the stockholders, in (when allowed in (when allowed in (when allowed in the by-laws or done the by-laws or done
accordance with the the by-laws or done the by-laws or done the by-laws or done with the consent of with the consent of
rules and regualtions with the consent of with the consent of with the consent of the stockholders, in the stockholders, in
of electronic data the stockholders, in the stockholders, in the stockholders, in accordance with accordance with
messages. 11 accordance with accordance with accordance with the rules and the rules and
the rules and the rules and the rules and regualtions of regualtions of
regualtions of regualtions of regualtions of electronic data electronic data
electronic data electronic data electronic data messages. 15 messages. 16
messages. 12 messages. 13 messages. 14
D. Certificate in
duplicate signed by No approval of the Ratification
the majority of the No ratification if: stockholders or Requirements
Directors and Specific 1. It is neccesary in members when when there is
countersigned by Requirements of the usual and investment is Common Control
the Chairman and SEC: regular course of reasonably of Involved
Secretary of the 1. Can only be filed business of such necessary to Corporation :
said meeting, by a corporation corporation; and accomplish its
setting foth that: which has a 2. If the proceeds “Primary purpose” Own or control 1/3 of
Requirements of minimum networth of the sale or other as stated in the the total outstanding
the law; amount of of P 25 Million at disposition of such AOI. capital stock -
the I or D, names, the time of the property be entitled to vote of the
antionalities and filing of the appropriated for Note: Also managing corporation.
residences of the application ; the conduct of its included are the
subscribers; actual 2. Operation for remaining business. incidental powers
Ratification not
indebtedness three years ( by virtue of the
Sale or disposition essence of the needed with a
(removed in the
new law); amount of All of the coporation as a partnership or
of stock It covers only Corproate Assets = business individual.
represented at the “bonded indebtedness” quantitative test enterprise)
meeting and vote as distinguished
authorizing the I or from “debentures” “Substantially All” Effect of the
D of the capital (does not require If it would NOn-ratificatory
stock. stockholders approval). rendered vote: ultra vires
E. Require aproval incapabale of (a) under the secodn
of the SEC and continuing business; type
where appripriate and (b) accomplishing
the Philippine the purpose for which it
Competition was incorporated.
Commission.
F. 25 % “Substantial” =

11
Provided only in RA 11232
12
Ibid
13
Ibid
14
Ibid
15
Ibid
16
Ibid
 Notes in Corporation Law by Villanueva Bulacan Sate University
By: Mary Grace Lumidao Salvador, MSCJ College of Law

shall be allowed if Take note of the

its affect shall Bulk Sales Law.
prejudice the rights
of the corporation’s Legal Effects
creditors. without the
Requisite
Stockholders
Approval: Void
(Pena v. CA)

Nature of Not an inherent Not provided Not inherent Inherent as part of Affects the business
Power power the normal enterprise level ofc
Shorten - inherent operations of the corporate set-up
business

Appraisal In extension only (to No appraisal right No appraisal right There is appraisal
Right have his shares either in Increase right.
brought back at a or Decrease
fair value by the
corporation)