MERCANTILE LAW REVIEW 1

CORPORATION LAW
Sec. 1 Title of the Code
This Code shall be known as "The Corporation Code
of the Philippines."
Sec. 2 Corporation defined
Definition
A corporation is an artificial being created by
operation of law, having the right to succession and
powers, attributes and properties expressly authorized
by law or incident to its existence.
Having the right to succession
This phrase means that when one or more
corporators die, leaves or otherwise incapacitated, the
corporation is not dissolved unlike in a partnership.
Doctrine of Separate Personality
A corporation has a separate personality from its
stockholders or members.
Principle of Limited Liability
By virtue of the separate juridical personality of a
corporation, the corporate debt or credit is not the debt
or credit of the stockholder.
Doctrine of Piercing the Veil of Corporate Entity
The veil of corporate fiction may be pierced if it
used
1. To defeat public convenience as when the
corporate fiction is used as a vehicle for the
evasion of an existing obligation;
2. To justify a wrong, protect fraud, or defend a
crime; or
3. In alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or
business conduit of a person or when the
corporation is so organized and controlled and
its affairs are conducted as to make it merely
an instrumentality, agency, conduit or adjunct
of another corporation.
Elements:
a)
Control
of
majority/complete
stock
control, finances, policy and
business
practice
of
the
corporation.
(Mere
majority/complete stock control
insufficient)
b)
Such control must have
been
used
by
the
defendants to commit fraud
or wrong, to perpetuate the
violation of a legal duty in
contravention of plaintiffs legal
rights; and
c)The aforesaid control and
breach of duty must be the
proximate cause of the injury
or unjust loss complained of.

Trust Fund Doctrine

The capital stock, property and other assets of a
corporation are regarded as equity in trust for the
payment of corporate creditors.
Also, creditors may sue stockholders for their
unpaid subscriptions pursuant to the trust fund
doctrine.
It is an established doctrine that subscriptions to
the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts.
Sec. 3 Classes of corporations (Stock and NonStock)
Requisites of a stock corporation:
1. Its capital stock divided into shares; AND
2. It is authorized to distribute dividends.
This authority need not be stated in the
articles of incorporation or by-laws,
because the power to distribute
dividends is inherent in a stock
corporation.
Note: Both elements must be present. If one or more is
absent, it is considered non-stock.
Sec. 4 Corporations created by special laws or
charters
Congress cannot create a private corporation by
special law.
Private corporations may only be formed under
general law, which is the Corporation Code.
Sec.
5

Corporators
and
stockholders and members.

incorporators,

Incorporator
Stockholder or member mentioned in the articles of
incorporation as originally forming and composing the
corporation and who are signatories thereof.
Once an incorporator always an incorporator.
Corporators
Those who compose a corporation, whether as
stockholders or as members.
While incorporators will forever be incorporators,
corporators may cease to be as such.
Stockholders vs Members
Stockholders are the corporators of a stock
corporation, while members are the corporators of a
non-stock corporation.
Sec. 6 Classification of shares
Definition of Terms:
1. Share of Stock
Unit into which the proprietary interests in
a corporation are divided

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Units of participation in a corporation,

representing the breakdown of the
authorized capital stock to determine the
extent of contribution
2. Capital stock
Consists of all classes of shares issued to
stockholders, that is, common shares and
preferred shares, which may have different
rights, privileges or restrictions as stated
in the articles of incorporation
Classes of Shares
3. Common Shares
Represent the residual ownership interest
in the corporation.
Usually issued without extraordinary rights
and privileges.
Entitles the shareholder to a pro rata
division of profits.
4. Preferred Shares
Shares that are given preference either as
to dividends or as to assets (in case of
dissolution).
Used to attract investors.
Usually deprived of voting rights kasi pera
lang kailangan sa kanila.
Types of Preferred Shares:
a.
Cumulative
If a dividend is omitted in
any year, it must be made
up in a later year before
any dividend may be paid
on the common in the
later year.
b.
Non-Cumulative
No need to make up for
undeclared dividends.
c.Participating
Entitled to participate with
the common shares in
excess distribution.
d.
Convertible
Preferred
Shares
Preferred shares that may
be converted into common
shares
If
not
authorized
by
articles of incorporation,
the corporation is not
allowed
to
issue
convertible shares.
5. Voting Shares
Shares with voting rights.
6. Non-Voting Shares
Shares without voting rights.
7. Par Value Shares
Those with fixed value stated in the
articles of incorporation and the share
certificate.
8. No Par Value Shares
Those without a fixed value.
Conditions:
a.Shall be deemed fully paid and
non-assessable and the holder of
such shares shall not be liable to
the corporation or to its creditors
in respect thereto;

b.The shares without par value may

not be issued for a consideration
less than P5.00 per share;
c. 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.
9. Escrow Shares
Result by virtue of a transaction to place
shares in escrow until the happening of an
event or fulfillment of a specified
condition.
10. Treasury Shares
Treasury shares are shares of stock which
have been issued and fully paid for, but
subsequently reacquired by the issuing
corporation by purchase, redemption,
donation or through some other lawful
means.
11. Redeemable Shares
Shares of stocks issued by a corporation
which the latter can redeem later on.
12. Founders Shares
Shares that are given to those who helped
organize the corporation.
13. Surplus Profits1
Net profits after income tax, there being
no diminution or impairment of the paidup capital.
14. Stock Split
Number of shares increase but value
remains the same.
The converse of this is Reverse Stock
Split wherein multiple shares are merged
into one.
15. Subscription Agreement
Contract whereby a person subscribe to
shares of stock.
a.Cash on hand What you pay
upon subscription;
b.Subscription Receivable The
difference of what you subscribed
to and what you must pay.
16. Outstanding Capital Stock
Total shares of stock issued to subscribers
or stockholders, whether or not fully or
partially paid (as long as there is a binding
subscription agreement), except treasury
shares.
Once a share is subscribed, whether paid
or not, it is already considered issued and
outstanding.
17. Paid-up Capital
That portion of the authorized capital
stock that has been subscribed and paid.
Doctrine of Equality of Shares
Except as otherwise provided in the articles of
incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other
share.

1 Unrestricted retained earnings and surplus profits mean the

same thing, but Dean Abella prefers using surplus profits.

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Preferred and Redeemable shares may be

deprived of voting rights (the right to vote and
be voted for as directors and other corporate
acts
requiring
stockholders
ratification).
Nevertheless, they are still entitled to vote on
the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchanged, mortgage, pledge or
other disposition of all or substantially all of the
corporate property;
4. Incurring, created or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with the
Corporation Code; and
8. Dissolution of the corporation.
Rationale: These 8 directly affects their rights as
stockholders, thus, they are given the right to voice out
their concerned, even if they have no voting rights.
Corporations engaged in nationalized/partly
nationalized
activities
(Gamboa
v.
Teves
Doctrine)
The term capital stock should refer only to common
shares outstanding and entitled to vote and not to the
total outstanding capital stock which includes the
common and non-voting preferred shares.
Sec. 7 Founders shares
What are Founders Shares?
Shares that are given to those who helped organize
the corporation. It may have special rights and
privileges not enjoyed by others.
Requirement where founders shares grant
exclusive right to vote and be voted for as
directors:
It must be for a limited period not exceeding 5
years subject to the approval of the SEC. The 5-year
period commences from the date of approval.
Sec. 8 Redeemable shares
A corporation is allowed to redeem shares even
without unrestricted retained earnings or
surplus profits.
However, a corporation cannot redeem shares if it
would result into its insolvency or inability to carry out
its business.
Compulsory/mandatory redemption
Compulsory redeemable share is one that requires
the issuing corporation to redeem or repurchase its
preferred shares at a fixed date or at the option of the
holder thereby giving the shareholder the right to the
return of the investment.
However, even if a stockholder is holding
mandatory redeemable shares, redemption is still
subject to the requirement that enough assets are left
to cover debts and liabilities.

Sec. 9 Treasury shares

Definition
Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful
means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors.
Treasury shares have no voting rights and cannot
participate in dividends.
Instances where a share becomes a treasury
share:
1. When a corporation acquires its own shares for
the following purposes:
a. To eliminate fractional shares arising
out of stock dividends;
b. To
collect
or
compromise
an
indebtedness
to
the
corporation,
arising out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said sale;
c. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of this
Corporation Code; and
2. When a corporation redeems its redeemable
preferred shares; and
3. When a corporation buys its shares from the
open market, provided it has sufficient surplus
profits.
Sec. 10 Number
incorporators

and

qualifications

of

Number
Not less than 5 nor more than 15.
Qualifications of incorporators:
1. Natural person;
2. Legal age and have capacity to contract;
3. Each must own or be a subscriber to at least 1
share of the capital stock of the corporation;
4. Majority must be Philippine residents.
From the aforesaid qualifications, the following can be
deduced:
Aliens may be incorporators or coporators,
subject to requirements of special laws
regarding nationalized or partly nationalized
activities.
Non-residents may also be incorporators. The
Corporation Code only requires majority must
be residents.
Sec. 11 Corporate term
50 years. May be shorted or extended, provided
that no extension may be made earlier than 5 years
prior to the expiry date, unless there are justifiable
reasons for an earlier extension as may be determined
by the SEC.

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Sec. 12 Minimum capital stock required of

stock corporations
There may be no minimum authorized capital stock
(unless otherwise provided by special laws), but the
minimum paid up capital is P5,000, which is 25% of the
subscribed capital stock, which in turn is 25% of the
authorized capital stock. So, if we look at it that way,
technically, the minimum authorized capital stock is
P5,000.
Sec. 13 Amount of capital
subscribed and paid for the
incorporation

stock to be
purposes of

Definition of Terms
1. Authorized Capital Stock
Amount fixed in the articles of
incorporation to be subscribed and paid
by the stockholders of the corporation.
Maximum
amount
that
can
be
capitalized.
2. Subscribed Capital
That portion of the authorized capital
stock that is covered by subscription
agreements whether fully paid or not.
3. Paid-Up Capital
The amount of outstanding capital
stock and additional paid-in capital or
premium paid over the par value of the
shares.
4. Outstanding Capital Stock
The total shares of stock issued
whether or not fully or partially paid
except treasury shares so long as there
is a binding subscription agreement.
5. Capital
Includes properties and assets of the
corporation that are used for its
business or operation.
6. Stated Capital
Sum of the par value of all issued par
value shares, the entire amount
received for no-par value shares and
any amount transferred by a stock
dividend or other corporate action from
surplus to state capital.
Initial subscribed and paid-up capital
1. Minimum Subscribed Capital 25% of the
authorized capital stock;
2. Minimum Paid-up Capital 25% of Subscribed
Capital but must not be less than P5,000
Shortcut: To determine paid-up capital, multiply the
authorized capital stock with 0.0625.
It is not necessary that 25% of each subscribed
share must be paid. It is only required that at least 25%
of the subscribed capital must be paid. In other words,
we consider the total paid-up amount.
Example:
Corpo X has an ACS of P1 million divided into
100,000 shares. A, B, C, D and E subscribed to 25%
(P250,000 corresponding to 25,000 shares) of the
authorized capital stock.
In such case, A, B, C, D and E would each be
subscribers to P50,000 for 5,000 shares of stocks.

Now, 25% of P250,000 is P62,500. It is not

necessary that all of them must each pay P12,500
(62,000/5). It is enough that the totality of their
payments reach P62,500. So if A, B and C pay P50,000,
P12,000, P500, respectively, while D and E pays
nothing, the requirements of the Corporation Code are
satisfied.
Sec. 14
incorporation

Contents

of

the

articles

of

1.
2.

Name of the corporation;

Primary purpose and secondary purposes;
A
corporation
may
have
many
secondary purposes, but it has only
one primary purpose.
This clause is significant to determine
whether an act is ultra vires.
There are also corporate acts that have
different
treatments
depending
whether they were done in pursuit of a
primary or secondary purpose.
While a corporation may have many
secondary purposes, they must be
compatible with each other and with
the primary purpose. For example, an
insurance company cannot at the same
time be engaged secondarily in
banking.
3. Place where the principal office is located;
The SEC requires EXACT address to be
stated in the articles of incorporation.
4. Corporate term;
5. Names, nationalities and residences of the
incorporators;
6. Number of directors/trustees;
7. Names, nationalities and residences of persons
who shall act as directors or trustees until
the first regular directors or trustees are duly
elected and qualified.
This actually refers to Incorporating
Directors whose purpose to facilitate
the organization of the corporation
during its initial stages, because
remember that there must be an
election of the Board of Directors.
8. In case of stock corporation:
Amount of authorized capital stock
(must be in Philippine currency);
Number of shares into which it is
divided;
In case of par value shares, the par
value of each;
Names, nationalities and residences of
the original subscribers, and the
amount subscribed and paid by each
on his subscription;
If some or all of shares are without par
value, such fact must be stated;
9. In case of non-stock corporation, the amount
of its capital, the names, nationalities and
residences of the contributors and the amount
contributed by each; and
10. Such other matters as are not inconsistent
with law and which the incorporators may
deem necessary and convenient.

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There are items that must be stated in

the articles of incorporation, otherwise,
certain corporate acts would not be
permitted.

Contents of Treasurers Affidavit:

Sworn statement that at least 25% of the ACS has
been subscribed, and at least 25% of the total
subscription has been fully paid to him in actual cash
and/or in property the fair valuation of which is equal
to at least twenty-five (25%) percent of the said
subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos.
Basic documents needed to incorporate
According to Dean Abella (6):
1. Name Verification Slip
To verify whether the proposed
corporate name is still available.
2. Articles of Incorporation
3. Treasurers Affidavit
4. Registration Data Sheet
5. By-laws
6. Modus Operandi
A brief write up describing how the
corporation plans to operate.
According to Dimaampao & Escalante Reviewer (5):
1. Articles of incorporation;
2. Treasurers Affidavit;
3. Bank certificate of deposit covering the paid-up
capital;
4. Letter of authority to allow SEC to examine the
bank deposit and other corporate books and
records to determine the existence of paid-up
capital;
5. Certificate
of
Authority
from
proper
government agency when appropriate; and
6. Letter undertaking to change the proposed
name
if
already
adopted
by
another
corporation, partnership or association.
When to file By-laws
1. By-laws may be filed along with the articles of
incorporation, in which case they must be
signed by all the incorporators; or
2. By-laws may be filed within 30 days from the
issuance of the certificate of incorporation, in
which case it must be ratified by majority 2 of
the stockholders or members and singed by
those voting for the same.
By-laws are not condition precedent to the forming of a
corporation; rather, they are condition subsequent.
However, failure to file the by-laws does not result in
an automatic dissolution.
Sec. 15 Forms of Articles of Incorporation
Self-explanatory.

2 NOTE: For brevity, whenever this reviewer uses the word

majority it is understood to be referring either to
stockholders representing majority of the outstanding capital
stock (in case of a stock corporation) or majority of the
members (in case of a non-stock corporation) as the case may
be. The same applies whenever 2/3 is used. Also, when the
words board resolution is used, it means majority vote of the
board of directors/trustees.

Sec. 16 Amendment of Articles of Incorporation

Requisites for amendment:
1. Board Resolution and 2/3 Ratification;
2. The original and amended articles together
shall contain all provisions required by law to
be set out in the articles of incorporation;
3. Amendment must underscore/highlight the
changes made;
4. Certified under oath by the corporate secretary
and a majority of the directors or trustees
stating the fact that said amendment or
amendments have been duly approved by the
required vote of the stockholders or members;
5. Favorable endorsement of proper government
agencies;
6. Must be approved by the SEC.
Amendments shall take effect upon approval of the
SEC or from the date of filing if not acted within 6
months from the date of filing for a cause not
attributable to the corporation.
Take note that not all items in the Articles of
Incorporation may be amended. There are items which
are considered accomplished facts (i.e. name of
incorporators and incorporating directors), hence
cannot be amended.
Sec. 17 Grounds when articles of incorporation
or amendment may be rejected or disapproved
1. Articles of incorporation or any amendment
thereto not in accordance with the form
prescribed;
2. Purpose(s) of the corporation are patently
unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. The treasurers affidavit concerning the amount
of capital stock subscribed and/or paid is false;
4. Percentage of ownership of the capital stock to
be owned by citizens of the Philippines has not
been complied with as required by existing
laws or the Constitution;
5. No
favorable
recommendation
of
the
appropriate government agencies.
Sec. 18 Corporate name
Apply IPL trademark principles by analogy.
Sec. 19 Commencement of corporate existence
Like a natural person, a corporation has a date of
birth, and that is on the date where the SEC issues a
certificate of incorporation under its official seal.
Sec. 20 De facto corporations
De Jure Corporation
It is one which is created in strict or substantial
compliance with the statutory requirements for
incorporation and whose right to exist as a corporation
cannot be successfully attacked even in a direct
proceeding for that purpose by the state.
De Facto Corporation

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A corporation where there exists a flaw in its

incorporation.
Requisites of a de facto corporation
1. Organized under a valid law;
2. Attempt in good faith to form a corporation
according to the requirements of the law
(colorable compliance); and
While a de jure corporation requires
strict or substantial compliance, a de
facto corporation requires colorable
compliance.
This means that at the very least, there
must be a certificate of incorporation
issued. Otherwise, there can be no
claim of good faith.
3. Use of corporate powers.
Attacking existence of a de facto corporation
Cannot be collaterally attacked. Inquiry may be
made by the Solicitor General in a quo warranto
proceeding.
Sec. 21 Corporation by estoppel
Corporation by estoppel refers to a group of
persons who assume to act as a corporation knowing it
to be without authority to do so. They are estopped
from claiming lack of corporate life in order to avoid
liability. They are also liable as general partners.
Sec. 22 Effects on non-use of corporate charter
and continuous inoperation of a corporation
A. Two (2) years
The corporation does not formally organize and
commence transaction within 2 years from the
issuance
of
the
certificate
of
incorporation.
Consequence is dissolution.
A corporation is deemed to have formally
organized when it has complied with the following
requisites:
1. Adoption of By-Laws;
2. Election of Board of Directors; and
3. Election of Corporate Officers.
Nevertheless, substantial compliance may suffice.
Hence, where the corporation has elected its Board of
Directors, its treasurer and secretary but not has yet to
elect its president, it is deemed to have formally
organized (Perez v. Balmaceda).
B. Five (5) years
The corporation commenced operation but
becomes continuously inoperative for a period of 5
years. This shall be a ground for the suspension or
revocation of its corporate franchise or certificate of
incorporation.
No automatic dissolution
Despite the wording of this provision, there is no
automatic dissolution under this section. There must be
notice and hearing.
Sec. 23 The board of directors or trustees

Doctrine of Centralized Management

The board of directors/trustees is the governing
body of the corporation and all corporate powers are
exercised by them.
General Powers of the Board
1. Exercise all corporate powers;
2. Conducts all corporate business; and
3. Controls and holds corporate property
Classification of corporate powers based on who
exercises the same
1. Acts that may be performed by the Board of
Directors
alone
or
acts
of
ordinary
management
2. Acts that may not be performed by the Board
of Directors without the concurrence of the
stockholders
or
acts
not
of
ordinary
management
a. Power to extend or shorten corporate
term;
b. Power to increase or decrease capital
stock;
c. Power to incur, crease or increase
bonded indebtedness;
d. Power to deny pre-emptive right where
shares are issued in good faith in
exchange for property needed for
corporate purposes or in payment of a
previously contracted debt;
e. Sale of all or substantially all corporate
property and assets;
f. Power to invest corporate funds for a
purpose other than the corporations
primary purpose;
g. Power to declare stock dividends; and
h. Power to enter into management
contracts
3. Acts that may be performed by the
stockholders alone
a. Election of Board members;
b. Removal of Board members;
c. Delegation of power to amend the bylaws;
d. Fixing of the compensation of the
Board members.
What are acts of ordinary management?
If an act does not require concurrence of the
stockholders or is not exercised exclusively by
stockholders, it is an act of ordinary management.
Acts of ordinary management are delegable.
Three-fold duties of the Board
1. Duty of Obedience;
This duty is violated when a director or
trustee willfully and knowingly vote for
or assent to patently unlawful acts of
the corporation. (Sec. 31)
2. Duty of Diligence; and
This duty is violated when a director or
trustee is guilty of gross negligence or
bad faith in directing the affairs of the
corporation. (Sec. 31)
3. Duty of Loyalty

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This duty is violated in the following

cases:
i. The director or trustee acquires
any personal or pecuniary
interest in conflict with his or
her duty as such director or
trustee. (Sec. 31)
ii. A director, by virtue of his
office, acquires for himself a
business opportunity which
should
belong
to
the
corporation, thereby obtaining
profits to the prejudice of such
corporation.

Business Judgment Rule

Acts and contracts entered into by the Board are
binding upon the corporation beyond the interference
of the courts. The courts are barred from intruding into
business judgments of corporations when the same are
made in good faith.
The Board and the officers may not be held
personally liable for acts or contracts done in the
exercise of their business judgment.

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.
Qualifications of a director/trustee:
1. Must own at least 1 share of the capital stock
of the corporation of which he is a director;
2. Majority of the directors/trustees must be
Philippine residents;
3. Must not have been convicted by final
judgment of an offense punishable by more
than 6 years of imprisonment;
4. Must not have committed a violation of the
Corporation Code within 5 years prior to the
date of his election or appointment; and
5. Must possess the qualifications and none of the
disqualifications in the by-laws.
Ownership of share requirement
As far as the law is concerned, a person already
owns a share when he has subscribed thereto, whether
or not fully paid.

Exceptions to Business Judgment Rule, when

board members personally and solidarily liable:
1. Assent to patently unlawful acts;
2. Gross negligence/bad faith;
3. Acquires personal or pecuniary interest in
conflict with his duty;
4. Acquires business opportunity which should
belong to the corporation;
5. Consents to the issuance of watered stocks or
who, having knowledge thereof, did not
forthwith file with corporate secretary his
written objection thereto;
6. He agrees to hold himself personally and
solidarily liable; and
7. Specific provision of law

When a share is levied, its stockholder may be

removed from as president.

Doctrine of Apparent Authority

The doctrine of apparent authority provides that a
corporation will be estopped from denying the agents
authority if it knowingly permits one of its officers or
any other agent to act within the scope of an apparent
authority, and it holds him out to the public as
possessing the power to do those acts.

In the absence of a special provision in the by-laws,

quorum should be understood in its ordinary sense,
which is +1.

The doctrine of apparent authority does not apply if

the principal did not commit any acts or conduct which
a third party knew and relied upon in good faith as a
result of the exercise of reasonable prudence.
Moreover, the agents acts or conduct must have
produced a change of position to the third partys
detriment.
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, within or beyond the scope of his

When a person is removed as president (by reason

of losing all the shares), he cannot be president again
merely by buying new shares. He must be elected
again.
Quorum
In board meetings, quorum is determined on the
basis of the number of directors and not on their
shareholdings (unlike stockholder meeting). Also,
quorum is determined based on the presence of the
directors at the start of the meeting. So if any of them
leaves, there will still be a quorum.

Sec. 24 Election of directors or trustees

Two voting methods:
1. Straight Voting
Stockholder can cast one vote per
share for each director.
2. Cumulative Voting
Stockholder can cumulate all his votes
and give to one candidate all his votes
or he may divide the votes among two
or more candidates.
Cumulative voting is devised to give
sufficient opportunity to minority
shareholders to secure representation
in the board.
Cumulative voting is allowed in the election of
directors of stock corporations. It may be allowed in
non-stock corporations only if the same is provided for
in the articles of incorporation. But there are

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authorities that say that cumulative voting cannot be

done in non-stock corporations.

A director may be removed with or without case,

except in the case of a minority director who can only
be removed for a valid cause.

Sec. 25 Corporate officers, quorum

Corporate Officers
1. President;
Must also be a director;
Cannot act concurrently as treasurer
and/or secretary
2. Treasurer;
May or may not be a director
3. Secretary; and
Must be a resident and a citizen of the
Philippines.
4. Others
A corporation usually has a chairman
whose function is to preside in
meetings.
Incompatible offices prohibited.
A person may hold two or more positions for as
long as they are compatible. For example, an
accountant cannot be an auditor at the same time.
Proxy
Proxy may refer to two things: (1) written authority
or (2) the person himself. Proxies shall be in writing,
signed by the stockholder or member and filed before
the scheduled meeting with the corporate secretary.
Unless otherwise provided in the proxy (continuing
proxy), it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a
period longer than five (5) years at any one time.
Directors/trustees cannot attend or vote by proxy
at board meetings, unlike regular stockholders.
A proxy may be expressly or impliedly revoked,
except when it was issued pursuant to a contract.
Sec. 26 Report of election of directors, trustees
and officers
General Information Sheet to be filed within 30
days from appointment of officers. Appointment of
officers immediately done once the Board is
constituted.
Sec. 27 Disqualification of directors, trustee or
officers.
See discussion on Sec. 23.
Sec. 28 Removal of directors or trustees
Procedure to remove a director/trustee
1. Removal may be done in a regular or special
meeting. If special, a secretary or any
stockholder/member must call for a meeting.
Notice of time/place of such meeting, as well
as of the intention to propose such removal,
must be given by publication or by written
notice as prescribed in the Corporation Code;
2. 2/3 vote by the stockholders/members

Sec. 29 Vacancies in the office of director or

trustee
Possible reasons for a vacancy in the Board:
1. Removal;
2. Expiration of term;
3. Resignation;
4. Death;
5. Others
A vacancy in the board must be filled. Who may
fill the vacancy?
A. By the remaining board members:
If still constituting a quorum, at least a majority
of the members may fill any vacancy occurring
in the board for reasons other than removal or
expiration of term.
For example, one board member resigns. The
remaining stockholders, if still constituting a
quorum, may choose a replacement.
B. By the stockholders/members:
1. When the reason of vacancy is by expiration of
term or
2. Removal;
3. Grounds other than removal or expiration of
term but the remaining directors do not
constitute a quorum;
4. Vacancy may be filled by the remaining
directors/trustees but the board refers the
matter to the stockholders/members; and
5. Increase in the number of directors results in
vacancy.
Resignation of a director in a hold-over position
considered expiration of term
When a director/trustee in a hold-over position
resigns, it is tantamount to expiration of term and not
to resignation. Hence, the vacancy shall be filled by the
stockholders/members.
Sec. 30 Compensation of directors
GR: Directors not entitled to any compensation as such
directors, except for reasonable per diems.
What would be considered reasonable depends
on the resources of the corporation.
XPNs:
1. By-laws
provide
for
such
additional
compensation;
2. Majority vote of stockholders; and
3. When the director renders other services for
the corporation. (Operative phrase: as such
directors.)
In no case shall the total yearly compensation of
directors, as such directors, exceed 10% of the net
income of the corporation BEFORE income tax during
the preceding year.
Sec. 31 Liability of directors, trustees or
officers

Removal with or without cause, exception

Page | 8

Directors/trustees may be held solidarily liable

for damages resulting from the following:
1. Willfully and knowingly vote for or assent to
patently unlawful acts of the corporation;
2. Guilty of gross negligence or bad faith;
3. Acquired any personal or pecuniary interest in
conflict
with
their
duty
as
such
directors/trustees; and
4. Consents to the issuance of watered stocks or
who, having knowledge thereof, did not
forthwith file with corporate secretary his
written objection thereto;
Directors/trustees liable as trustee for profits
which otherwise would have accrued to the
corporation when
They attempt to acquire or acquire, in violation of
his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him
in confidence, as to which equity imposes a disability
upon him to deal in his own behalf.
Sec. 32 Dealings of directors, trustees or
officers with the corporation

A director, trustee or officer, by virtue of his office,

is prohibited from appropriating for himself a business
opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such
corporation.
Otherwise, he must account to the latter for all
such profits by refunding the same, unless his act has
been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director
risked his own funds in the venture.
A director shall refund to the corporation all the
profits he realizes on a business opportunity
which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with the corporations
business and is of practical advantage to it;
and
3. The corporation has an interest or a reasonable
expectancy.
Sec. 35 Executive Committee

Status of a contract of the corporation with a

director/trustee/officer is voidable, unless the
following requirements are complied with:
1. Presence of director/trustee not necessary to
constitute a quorum;
2. Vote of director/trustee not necessary to
constitute a majority vote;
3. Contract is fair and reasonable; and
4. In case of an officer, the contract has been
previously authorized by the Board.
When the aforesaid requisites are not complied
with, the subject contract may nevertheless be ratified
by a vote of 2/3. In all cases, the contract must be fair
and reasonable.
Sec. 33 Contracts between corporations with
interlocking directors
Interlocking Director
An interlocking director is a director in two or more
corporations. A corporation has an interlocking director
if one (or some or all) of its directors is also a director
in another corporation.
If the interest of the interlocking director in one
corporation is substantial (stockholdings more than
20% of the outstanding capital stock) and his interest
in the other corporation is merely nominal (20% or
less), apply Sec. 32.
A contract between two or more corporations
having
interlocking
directors
is
VALID.
Exceptions:
1. Fraud; and
2. When contract is not fair and not reasonable.

Purpose of an Executive Committee

In practice, it is unrealistic for all Board members
to meet often and regularly, making it difficult to
muster a quorum at a time when the corporation must
act on a vital matter. Hence, an Executive Committee
may be created to act swiftly in behalf of the Board.
They are considered as agents of the Board.
By-laws must authorize creation of an Executive
Committee
The board, by itself, cannot create an Executive
Committee if nothing is stated in the by-laws.
Must be composed of at least 3 Board members
But there may also be additional members who are
not directors.
Matters that cannot be acted upon by an
Executive Committee:
1. Approval of any action for which shareholders
approval is also required;
2. The filling of vacancies in the board;
3. The adoption, amendment or repeal of by-laws;
4. The amendment or repeal of any resolution of
the board which by its express terms is not so
amendable or repealable; and
5. A distribution of cash dividends to the
shareholders.
From the enumeration, it can be concluded that
only day-to-day business operations may be left to the
sole discretion of the Executive Committee

Sec. 34 Disloyalty of a director

Appeal not available, ratification

The decision of the Executive Committee is not
appealable to the board, but if it exceeds its authority,
the board may choose to ratify its acts.

Doctrine of Corporate Opportunity

Sec. 36 Corporate powers and capacity

Page | 9

Kinds of Powers of a Corporation

1. Express Those expressly authorized by the
Corporation Code and other laws, and its
Articles of Incorporation.
2. Implied Those that can be inferred from or
necessary for the exercise of the express
powers.
a. Acts in the usual course of business
b. Acts to protect debts owing to the
corporation
c. Acts which involve embarking in a
different business
d. Acts which are whole or in part
intended to protect or aid employees
e. Acts to increase the business
Guidelines to determine whether power is
implied:
a. Is it essential to the purpose of the
corporation?
b. Does
it
fall
under
the
five
classifications cited above?
3. Incidental Powers Those that are incidental to
the existence of the corporation.
General Powers of the Corporation
1. To sue and be sued;
2. Of succession;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation;
5. To adopt its by-laws;
6. For stock corporations, to issue and sell stocks
to subscribers and treasury stocks; for nonstock corporations, to admit members;
7. To purchase, sell or deal with real properties;
Note that a corporation cannot just
acquire any property it wants. The
property
must
be
essential
or
necessary to the accomplishment of its
corporate purpose.
Acquisition of property does not require
concurrence
of
the
stockholders,
provided that such acquisition is in
furtherance of or essential to the
accomplishment of its purpose.
8. To enter into merger or consolidation;
9. To make reasonable donations for public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes;
10. To establish pension, retirement and other
plans for the benefit of its directors, trustees,
officers and employee;
11. To exercise other powers essential or necessary
to carry out its purposes.
Specific Powers of the Corporation
1. Increase or decrease corporate stock;
2. Incur, create or increase bonded indebtedness;
3. Deny pre-emptive right;
4. Sell,
dispose,
lease,
encumber all
or
substantially all of corporate assets;
5. Purchase or acquire shares;
6. Invest corporate funds in another corporation
or business for other purposes other than its
primary purpose;
7. Declare dividends out of unrestricted retained
earnings;

8.
9.

Enter into management contracts with other

corporations;
Amend articles of incorporation.

Sec. 37 Power to extend of shorten corporate

term
General procedure
1. Board resolution, and
2. Ratification by 2/3 vote (with prior written
notice of the proposed action)
Extension fee
1/5 of 1% of the ACS
When intent of shortening corporate term is
obviously to dissolve the corporation
SEC will not accept the application without
presenting a BIR clearance.
Sec. 38 Power to increase or decrease capital
stock;
incur,
create
or
increase
bonded
indebtedness
General procedure
1. Board resolution,
2. Ratification by 2/3 vote (with prior written
notice of the proposed action), and
3. SEC approval
Furthermore, a Directors Certificatesigned by
a majority of the directors of the corporation and
countersigned by the chairman and secretary of the
stockholders meetingshall be submitted to the SEC.
The contents of a Directors Certificate are:
1. That the requirements of this section have
been complied with;
2. The amount of the increase or diminution of
the capital stock;
3. If an increase of the capital stock, the amount
of capital stock or number of shares of no-par
stock thereof actually subscribed, the names,
nationalities and residences of the persons
subscribing, the amount of capital stock or
number of no-par stock subscribed by each,
and the amount paid by each on his
subscription in cash or property, or the amount
of capital stock or number of shares of no-par
stock allotted to each stock-holder if such
increase is for the purpose of making effective
stock dividend therefor authorized;
4. Any bonded indebtedness to be incurred,
created or increased;
5. The actual indebtedness of the corporation on
the day of the meeting;
6. The amount of stock represented at the
meeting; and
7. The vote authorizing the increase or diminution
of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness.
No decrease of the capital stock shall be approved
by the SEC if its effect shall prejudice the right of
corporate creditors.

Page | 10

In case of increase of capital stock, another

treasurers affidavit is needed. The contents are similar
to the one filed in case of incorporation. The difference
is that this time, the basis of the 25% is the increased
amount.

Pre-emptive right
Right of shareholders to subscribe to all issues or
disposition of shares of any class in proportion to their
shareholdings.

Example: Corporation X has an ACS of P1 million.

Later on, it decided to increase the ACS to P5 million,
so now the treasurers affidavit must state that 25% of
the P4 million has been subscribed and 25% of the
newly subscribed amount must be paid.

The purpose is to maintain the relative and

proportionate voting strength and control of existing
shareholders. It is aimed to maintain the existing ratio
of the shareholders interest and voting power in the
corporation.

Documentary requirements for the approval of

the increase of the authorized capital stock (SEC
Rules as of June 13, 2013):
1. Certificate of Increase of Capital Stock;
2. Treasurers Affidavit;
3. List of stockholders as of the date of the
meeting approving the increase;
4. Amended articles of incorporation;
5. Notarized Directors Certificate3 certifying:
a. The amendment of the articles of
incorporation increasing the ACS;
b. The votes of the directors and the
stockholders; and
c. The date and place of the stockholders
meeting, which shall be signed by a
majority of the directors and the
corporate secretary;
6. Endorsement from the appropriate government
agencies; and
7. Secretarys Certificate stating that no action or
proceeding has been filed or is pending
involving an intra-corporate dispute or claim by
any person or group against the directors,
officers or stockholders of the corporation

Issues or disposition
The pre-emptive right covers all issues and
disposition. The prevailing opinion is that it includes
issuance of the unsubscribed shares that are part of
the original capital stock and the increase of capital
stock. It also covers selling of treasury shares. It is said
that the Benito v. SEC ruling is no longer controlling,
since the applicable law then was the Old Corporation
Code where pre-emptive right was not expressly
granted.

Documentary requirements for the approval of

the decrease of the authorized capital stock
1. Certificate of Decrease of Capital Stock;
2. Audited financial statements as of last fiscal
year, stamped received by the SEC and the
BIR;
3. If it involves a return of capital; Long form audit
report and list of creditors with the amount due
to each certified by the auditor or certified
under oath by company accountant and written
consent of each creditor;
4. List of stockholders before and after the
decrease, as certified by the corporate
secretary;
5. Amended articles of incorporation;
6. Notarized Directors Certificate; and
7. Publishers affidavit of the publication (once
only) of the decrease of capital in a newspaper
of general circulation.

When pre-emptive right is unavailable:

1. Right denied by articles of incorporation;
2. Shares are issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
3. When shares are issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock, in exchange
for property needed for corporate purposes or
in payment of a previously contracted debt;
and
4. Shares are issued pursuant to stock option
plans where employees become stockholders.

Bonded Indebtedness
A bond is a promissory note where the repayment
period exceeds 5 years.

General procedure for sale or other dispositions

of all or substantially all corporate property and
assets
1. Board Resolution, and
2. Ratification by 2/3 vote (with prior written
notice of the proposed action)

Sec. 39 Power to deny pre-emptive right

3The contents of the directors certificate here are different

Nevertheless, it is submitted that the principle laid

down in Benito v. SEC is more reasonable if we
consider the main purpose of pre-emptive right which
is to preserve the relative and proportionate voting
strength and control of existing shareholders. When a
corporation, at its first inception, offers its shares, it is
presumed to have offered all of those which it is
authorized to issue. An original stockholder is deemed
to have taken his shares knowing that they form a
definite proportionate part of the whole number of the
authorized shares. Hence, they cannot claim a dilution
of their interest when the shares left unsubscribed are
later on reoffered.

Pre-emptive right transferrable

A pre-emptive right, being in the nature of a
property right, is transferrable.
Sec. 40 Sale or other disposition of assets

from those provided under Sec. 38. Pero since mas madali
imemorize to, ito na lang ang tandaan.

Page | 11

How do we know if the sale or other disposition

involves all or substantially all corporate
property and assets?
If the corporation would be rendered incapable of
continuing the business or accomplishing the purpose
for which it was incorporated.
Example: A paper factory is not deemed to have
sold all/substantially all its property if it sold all its
stocks of papers, because it is pursuant to the ordinary
course of its business. But if it sold all its machinery
and equipment used to make paper, then it is deemed
to have sold all/substantially all its corporate property.
*Intent to replace sold property and assets
Even if a corporation sells or disposes of all or
substantially all its corporate property/assets, it is not
considered to be as such in the context Sec. 40 if the
intent
is
to
immediately
buy
replacement.
Consequently, ratification of the stockholders/members
is not necessary.
Limitations
1. The corporation may not use this power as a
devise to freeze out the minority, such as by
selling all of corporate properties with the
intent of forming a new corporation without the
minority stockholders.
2. The assets should be sold at a fair and
reasonable value.
3. The sale must be done in good faith and for a
legitimate purpose.
GR: The buyer does not assume the responsibilities of
the seller corporation.
XPNs:
1. If the buyer expressly or impliedly assumes
liability;
2. If there is merger and consolidation;
3. If there is fraud;
4. If the buyer is only a continuation of the seller
corporation; and
5. Bulk Sales Law
Sec. 41 Power to acquire own shares
Requirements for a corporation to acquire own
shares:
1. Must be for a legitimate corporate purpose(s);
and
2. Corporation has sufficient surplus profits (which
would be used to acquire its own shares).
Possible4 reasons why a corporation would
acquire its own shares:
1. To eliminate fractional shares arising out of
stock dividends;
2. To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and

4 Possible, because the law says but not limited to the

following cases.

3.

To pay dissenting or withdrawing stockholders

in the exercise of their entitled to payment for
their shares pursuant to their appraisal right.

Remedy of a corporation about to be insolvent

The corporation may convince creditors to convert
their credits into shares. In such case, the debt would
become a capital contribution.
Sec. 42 Power to invest corporate funds in
another corporation or business or for any other
purpose
General procedure
1. Board resolution, and
2. Ratification by 2/3 vote (with prior written
notice of the proposed action)
Note that Sec. 42 does not cover investment of
corporate funds if made pursuant to the corporations
primary purpose. For example, an investment
companys primary purpose is to invest in other
companies. Hence, there is no need for ratification in
such case.
Rules:
1. If the investment is for a primary purpose, no
need to be ratified by the stockholders.
2. If investment is for a secondary purpose,
ratification is needed.
3. If investment is neither for a primary nor
secondary purpose, there must be an
amendment of the Articles of Incorporation,
otherwise it is an ultra vires act.
Sec. 43 Power to declare dividends
Dividends
Dividends are portions of corporate profit set aside,
declared and ordered by the directors to be paid to
stockholders on demand or at a fixed time in
proportion to their shareholding.
When ratification is required/not required
Only a board resolution is necessary to declare
cash/property dividends.
But if a corporation plans to declare stock
dividends, the board resolution must also be ratified by
the stockholders, because it dilutes the investment of
stockholders.
Declaration of treasury shares as property
dividends
In case of declaration of treasury shares as
property dividends, the corporation can only do so if
the amount of the retained earnings previously used to
support their acquisition has not been subsequently
impaired by losses. Generally, a corporation can
reacquire its own shares for legitimate corporate
purpose/s provided it has sufficient amount of
unrestricted retained earnings to support the cost of
said shares.
Ratification is also required if a corporation
declares treasury shares as property dividends for the
same reason as stock dividends.

Page | 12

Property Dividends
Dividends that are paid in property instead of cash
where the surplus is in that form and it is practicable to
so distribute them among the shareholders.

2.

Stock Dividends
Surplus profits are distributed to the stockholders
in the form of shares of stock. It involves conversion of
surplus into capital.
Declaration of stock dividends is akin to a forced
purchase of stocks. Look at it this way: When a
corporation
distributes
cash
dividends,
the
stockholders are given cash from the surplus profits.
But when the corporation declares stock dividends,
instead of giving cash from the surplus profits, the
money is used to contribute to capital and the
stockholders are given additional shares.
By receiving stock dividends, the stockholders are
forced to exchange the monetary value of their
dividend for capital stock, and the monetary value they
forego is considered the actual payment for the original
issuance of the stocks given as dividends.
Stock dividends are not subscribed to. They are
merely issued.
Illustration of Stock Dividends
Capsule Corp. has a P1 million authorized capital
stock with a par value of P1 per share. Bulma
subscribed to 300,000 shares. Later on, Capsule Corp.
declared 20% stock dividends.
20% of 300,000 is 60,000. Hence, Bulma now
has 360,000 shares of Capsule Corp.
o Note that Bulmas subscribed shares
are still 300,000. Stock dividends are
not subscribed to.
Discretion of board
Declaration of dividends is discretionary upon the
board and cannot be compelled by the stockholders or
even the courts. However, stock corporations are
prohibited from retaining surplus profits in excess of
100% of their paid-in capital, subject to the following
exceptions:
1. If justified by definite corporate expansion
project/programs approved by the board;
or
2. The corporation is prohibited under any
loan
agreement
with
any
financial
institution or creditor, whether local or
foreign, from declaring dividends without
its/his consent, and such consent has not
yet been secured; or
3. It can be clearly shown that such retention
is necessary under special circumstances
obtaining in the corporation as for
example, when there is a need for special
reserve for probable contingencies.
Dividends are not civil fruits
Civil fruits accrue daily, whereas dividends do not.
Types of surplus
1. Earned surplus/surplus profit Includes (1) Net
operating profits and (2) Non-operating profits

3.

4.

arising from sale of fixed assets, investment

and other non-recurring profits transactions.
Paid in surplus Arises from the sale of par
value shares at a premium and the sale of no
par value shares above its stated or issued
value.
a. NB: Paid in surplus arising from sale of
par value shares at a premium may be
declared as stock dividends but not
paid in surplus arising from sale of no
par value shares above its issued
value.
Revaluation or appraisal surplus Surplus
arising from the marking up of the value of the
assets in the books of the corporation.
a. May not be declared as dividends,
because profits are yet to be realized.
Reduction Surplus Surplus arising from the
reduction of the legal or stated capital.
a. For example, Corporation X has an
authorized capital stock of P1 million,
P700,000 of which already paid. It then
reduced its authorized capital stock to
P500,000. The P200,000 would be the
reduction surplus.

Who is entitled to dividends?

The stockholder at the time the dividends were
declared.
Sec. 44 Power to enter into management
contract
General procedure
1. Board resolution, and
2. Ratification by majority vote
This procedure is required from both the managed
and managing corporation.
When ratification by 2/3 vote of the managed
corporation needed
1. Where
a
stockholder
or
stockholders
representing the same interest of both the
managing and the managed corporations own
or control more than 1/3 of the total
outstanding capital stock entitled to vote of the
managing corporation; or
2. Where a majority of the members of the board
of directors of the managing corporation also
constitute a majority of the members of the
board of directors of the managed corporation.
Sec. 45 Ultra vires acts of corporations
Ultra vires act
An act committed outside the purpose for which
the corporation is created as defined by the law and its
organization, and therefore beyond the powers
conferred upon it.
May be ratified, requisites:
1. All stockholders must consent;
2. The rights of the state are not involved;
3. The creditors are not prejudiced; and
4. The act or contract must be wholly executed.

Page | 13

Sec. 46 Adoption of by-laws

By-laws
By-laws are rules of action adopted by a
corporation for its internal government and for the
regulation of conduct, and prescribe the rights and
duties of its stockholders or members towards itself
and among themselves in reference to the
management of its affairs.
Requisites for validity of by-laws
1. Must be consistent with the Corporation Code,
law and other regulations;
2. Must be consistent with the articles of
incorporation;
3. Must not be contrary to morals or public policy;
and
4. It must not disturb vested rights, impair
contract or property rights of stockholders or
members or create obligations not sanctioned
by law.
There are two ways to file the by-laws:
A. Pre-Incorporation
The by-laws may be filed along with the articles of
incorporation and other pre-incorporation documents.
In such case, the by-laws shall be approved and signed
by all the incorporators.
B. Post-Incorporation
The by-laws must be filed within 1 month after
receipt of the certificate of incorporation. In such case,
the by-laws shall be approved by a majority vote of the
stockholders or members. It must be signed by the
stockholders/members
voting for them.
(Note:
According to Sir, sometimes its impractical to convene
all stockholders/members in that short span of time, so
the signature of all incorporators may still suffice. But
apply the general rule anyway.)

By-laws shall be effective only upon the issuance

by the SEC of a certification that they are not
inconsistent with the Corporation Code.
Sec. 47 Contents of by-laws
The enumeration in Sec. 47 refers to the minimum
and mandatory provisions that must appear in the bylaws.
Sec. 48 Amendments to by-laws
General procedure
1. Board Resolution;
2. 2/3 Ratification; and
3. SEC Approval
Delegation to the Board
The sole authority to amend the by-laws may be
delegated to the Board by a 2/3 vote. The delegation
may be revoked by majority vote.
As can be gleaned from this section, the law does
not favor the delegation of the authority to the Board,
hence the stringent requirement to delegate and the
lax requirement to revoke the delegation.
Certification
A copy of the amendment or new by-laws to be
filed with the SEC shall be attached to the original bylaws, and it must be duly certified under oath by the
corporate secretary and a majority of the directors or
trustees.
Sec. 49 Kinds of meetings
Meetings may either be regular or special.
Sec. 50 Regular and special
stockholders or members

meetings

of

Must be certified, countersigned

The copy of the by-laws to be filed with the SEC
must be duly certified to by a majority of the directors
or trustees and countersigned by the corporate
secretary.

Sec. 51 Place and time

stockholders or members

of

meetings

of

Additional requirement for special corporations

Take note that there are special corporations which
cannot directly file or amend its by-laws without a
favorable endorsement of appropriate government
agencies.

Sec. 53 Regular and special

directors or trustees

meetings

of

No automatic dissolution upon failure to submit

by-laws
The filing of by-laws is a condition subsequent, but
failure in which is not a ground for an automatic
dissolution of the corporation. There must still be a
hearing.
Binding effect
The by-laws bind the corporation, stockholders,
members and those having direction, management and
control of its affairs. But it does not bind third persons
who have no actual knowledge of its provisions.

Sec. 52 Quorum in meetings

Sec. 54 Who shall preside at meetings

Regular Meetings
1. Held annually (usually for the purpose of
electing directors and discussing yearly
financial performance of the corporation;
2. On a date fixed in the by-laws, or if not so
fixed, on any date in April of every year as
determined by the Board;
3. In the city or municipality where the
principal office of the corporation is
located, and if practicable in the principal
office of the corporation. This applies whether
the meeting is regular or special. For purposes
of this rule, Metro Manila shall be considered a
city; and

Page | 14

4.

Written notice shall be sent to all

stockholders/members at least 2 weeks prior to
the meeting, unless a different period is
required by the by-laws. Notice requirement
may be waived either expressly or impliedly.
The written notice shall contain the
time and place of the meeting.

Special Meetings
1. Held at any time deemed necessary or as
provided in the by-laws;
2. In the city or municipality where the
principal office of the corporation is
located, and if practicable in the principal
office of the corporation. This applies whether
the meeting is regular or special. For purposes
of this rule, Metro Manila shall be considered a
city; and
3. Written notice shall be sent to all
stockholders/members at least 1 week prior to
the meeting, unless a different period is
required by the by-laws. Notice requirement
may be waived either expressly or impliedly.
Board Meetings
1. Held monthly, unless the by-laws provide
otherwise (if regular) or at any time upon the
call of the president or as provided in the bylaws (if special);
2. May be held anywhere in the world;
3. Notice shall be sent to every director/trustee
at least 1 day prior to the meeting, unless
otherwise provided by the by-laws.
Who
is
authorized
to
call
a
stockholders/members meeting?
1. As a rule, such person must be stated in the
by-laws;
2. In the absence thereof, the Board;
3. Otherwise, any stockholder/member may file a
petition with the SEC asking for authority to
call a meeting.
Who shall preside at meetings?
As a rule, the President whether it is a
stockholders/members meeting or a Board meeting.
Otherwise, what the by-laws provide.
What is the effect if there is a defect in the
holding or calling of the meeting (e.g. wrong
place, defective notice, etc.)?
All proceedings had and any business transacted
shall
not
be
invalidated,
PROVIDED
all
stockholders/members are present or duly represented
at the meeting.
What constitutes a quorum?
A. Stock Corporation
Stockholders representing a majority of the
outstanding capital stock, unless otherwise
provided for in the Code or in the by-laws.
NB: Hence, it is possible for a single person to
constitute a quorum.
B. Non-Stock Corporation
Majority of the members, unless otherwise
provided for in the Code or in the by-laws.
C. Board Meetings

Majority of the directors/trustees,

otherwise provided for in the by-laws.

unless

Other notes on quorum

1. Unless otherwise provided for in this code
Note that there are matters that cannot be
acted upon by a mere majority, such as those
which requires 2/3 votes.
2. Quorum is determined at the start of the
meeting. So if pag may umalis while the
meeting is ongoing, problema na niya yun,
and theres still a quorum.
3. A provision in the by-laws stating that anyone
present in the meeting shall constitute a
quorum is valid, except those which specifically
requires majority or 2/3.
Sec. 55 Right to vote of pledgers, mortgagors
and administrators
GR: Pledgors and mortgagors of their shares of stock
shall retain the right to attend and vote at meetings.
XPN: Such right is expressly given to the pledgee or
mortgagee in writing and recorded on the corporate
books.
Executors, administrators, receivers and other legal
representatives of a stockholder do not need proxies to
attend meetings and vote.

Sec. 56 Voting in case of joint ownership of

stock.
Steve and Tony
Both Steve and Tony must attend and vote
together,
unless
they
have
a
proxy.
Furthermore, such proxy shall be signed by
both Steve and Tony.
Steve and/or Tony
Either Steve or Tony can attend and vote. And
either one of them alone can execute a proxy.
Sec. 57 Voting right for treasury shares
Self-explanatory.
Sec. 58 Proxies
Requisites for a valid proxy
1. Must be in writing;
2. Signed by the stockholder/member;
3. Must be filed before the scheduled meeting
with the corporate secretary (in practice, its
usually 5 days prior to the meeting); and
4. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is
intended. No proxy shall be valid and effective
for a period longer than 5 years at any one
time.
Continuing Proxy
One which is valid not only for one meeting but
until it is revoked, provided that its validity and
effectivity shall not exceed 5 years.

Page | 15

Revocation of proxy
Revocation may either be express or implied. It is
implied when, for instance, a proxy was executed for a
particular meeting, but the stockholder nevertheless
appeared in the same meeting.
GR: Proxy may be revoked at any time.
XPN: When it is coupled with an interest.
Sec. 59 Voting trusts
Requisites
1. It must be in writing and notarized;
2. It must specify the terms and conditions;
3. GR: It must not exceed the period of 5 years at
any time;
XPN: When voting trust specifically
required as a condition in a loan
agreement, it may exceed 5 years but
shall automatically expire upon full
payment of the loan.
Procedural requirements
1. Execution and notarization of the voting
trust agreement;
2. A certified copy of such agreement shall be
filed with the (a) corporation and (b) SEC,
otherwise the agreement is void;
3. Certificate
or
certificates
of
stock
surrendered and cancelled;
4. A new certificate shall be issued in the name
of the trustee stating that they are issued
pursuant to the voting trust agreement;
5. The transfer shall be noted in corporate
books;
6. The trustee or trustees shall execute and
deliver to the transferors Voting Trust
Certificates, which shall be transferable in the
same manner and with the same effect as
certificates of stock.
Possible purposes for entering into a voting trust
agreement
1. One of the ways to concentrate shareholder
control in one or few persons;
2. Used in corporate reorganization where it may
be used to give control to former creditors
reduced to stockholder status;
3. It may also be used by founders or
incorporators to retain control; and
4. It may be used to distribute voting power
disproportionately to share ownership.
Sec. 60 Subscription contract
Contents of a subscription contract
1. Number of shares to be subscribed;
2. Value per share; and
3. Terms of payment.
Must be in the stock and transfer book
As a rule, only persons whose ownership are
registered in the stock and transfer book are
considered stockholders of record. Mere inclusion in the
GIS is insufficient.

Trust Fund Doctrine is violated in the following

instances:
1. Corporation condones payment of unpaid
subscription;
2. Payment of dividends sans surplus profits;
3. Properties transferred in fraud of creditors;
4. Properties are disposed or undue preference is
given to some creditors while the corporation is
insolvent; and
5. Capital stock is decreased, having the effect of
relieving the stockholders of their obligation to
pay their respective subscription.
A stockholder has no right to demand for the return
of his investment until the liquidation of the
corporation.
Sec. 61 Pre-incorporation subscription
We know that there can only be 15 incorporators
at most. What if others want to be corporators?
They
would
sign
a
pre-incorporation
subscription agreement.
Revocation of pre-incorporation subscription
GR: A pre-incorporation subscription agreement shall
be irrevocable for a period of 6 months from the date
of subscription.
XPNs:
1. All other subscribers consent to the
revocation; and
2. Failure of the corporation to materialize.
No pre-incorporation subscription may be revoked
after the articles of incorporation have been submitted
to the SEC.
For example, more than 6 months have already
passed. Under such circumstance, revocation is
already allowed even without the consent of
the others. But if the articles of incorporation
have already been submitted, revocation is no
longer allowed.
Sec. 62 Consideration for stocks
Key points to remember
1. The most common consideration for stocks is
cash. Where the consideration is other than
actual cash or consists of intangible property,
the valuation thereof shall initially be
determined by the incorporators/Board, subject
to SEC approval.
2. Property (tangible or intangible) is allowed to
be used as a consideration, if the following
requisites are present:
a. Property actually received by the
corporation;
b. Property is necessary or convenient for
its use and lawful purposes;
c. Subject to fair valuation; and
d. Valuation initially determined by the
incorporators/board of directors and
approved by the SEC.
3. Shares of stock shall not be issued in exchange
for promissory notes or future services. But
labor performed or past services are allowed.

Page | 16

4.

One of the allowable considerations is

Amounts
transferred
from
unrestricted
retained earnings to stated capital. This refers
to the issuance of stock dividends.

1.

2.
How issued price of no-par value shares fixed
1. Articles of Incorporation;
2. Board resolution pursuant to authority granted
by the articles of incorporation or by-laws; or
3. Stockholders representing at least a majority of
the outstanding capital stock at a meeting duly
called for the purpose will fix the issued value.
With respect to par value shares, it should be noted
that the issued value may be higher than its par value,
because a share is also a property that may appreciate
in value.
Sec. 63 Certificate of stock and transfer of
shares
How transfer is made
A. When share is represented by a certificate
1. Indorsement;
2. Delivery; and
3. The transfer must be recorded in the corporate
books to be valid to the corporation and third
parties.
B. When share is not represented by a certificate
1. Deed of assignment; and
2. The transfer must be duly recorded in the
corporate books.
*Note: According to Sir, the first mode is proper
when the transfer is made through the stock
exchange, while the second mode is proper when
the shares are not listed or although listed but not
traded through the stock exchange.
Sec. 64 Issuance of stock certificates
Requisites
1. The certificate must be signed by the president
or vice president, countersigned by the
secretary or vice secretary;
2. The certificate must be sealed with the seal of
the corporation;
3. The certificate must be delivered;
4. The par value, as to par value share or full
subscription as to no par value shares must
first be fully paid; and
5. The original certificate must be surrendered
where the person requesting the issuance of a
certificate is a transferee from the stockholder.
No full payment? No certificate of stock!
This is an absolute rule. Unless the subscriber has
paid the full amount of his subscription together with
interest and expenses (in case of delinquent shares),
he cannot be issued a certificate of stock. But prior to
such full payment, he is considered a stockholder
enjoying all rights pertaining thereto, unless his shares
become delinquent.
Doctrine of Indivisibility of Subscription
A subscription agreement is an indivisible contract,
the consequences of which are:

If a stockholder has paid a portion of his

subscription, he cannot demand to be issued a
certificate of stock representing the portion of
shares he has paid.
Even though a stockholder has paid a portion
of his subscription, if he fails to pay in full when
required, ALL his shares will become
delinquent.

Registration only needed for absolute transfers

Hence, registration in the stock and transfer book
is not necessary if the conveyance is by way of chattel
mortgage. However, there must be due registration
with the Register of Deeds.
Remedies if corporate officers unduly bar the
registration of the transfer
1. Mandamus;
2. Specific performance;
3. Damages; and
4. Rescission.
Sec. 65 Liability of directors for watered stocks
Watered Stocks
Watered stocks are tgise that are issued for a
consideration less than the par or issued price thereof.
Not per se illegal
Issuance of watered stocks are not per se illegal.
But it has the consequence of making any director or
officer of a corporation consenting to the issuance of
watered stocks, or who, having knowledge thereof,
does not forthwith express his objection in writing and
file the same with the corporate secretary, shall be
solidarily, liable with the stockholder concerned to the
corporation and its creditors for the difference between
the fair value received at the time of issuance of the
stock and the par or issued value of the same.
Hence, for a director or officer to evade solidary
liability, it is not enough for him to maintain his silence.
He must file a written objection with the corporate
secretary.
Purchase of stocks
The prohibition on watered stocks does not cover
purchase of stocks from another stockholder.
Sec. 66 Interest on unpaid subscriptions
When are subscribers liable to pay interest on
their unpaid subscriptions from the date of
subscription?
When required by the by-laws.
At what interest rate?
That which is fixed by the by-laws. If the by-laws
did not fix the interest rate (but requires interest to be
paid), the rate shall be deemed to be the legal rate,
which at present is pegged at 6%.
Sections 67 to 72 Delinquency
When should payment of unpaid subscription
(plus interest if any) be collected?

Page | 17

1.
2.
3.

On or before the date provided in the

subscription agreement;
Date stated in the call made by the Board (if
date not specified, within 30 days from the
call); and
When the corporation becomes insolvent.

Failure to pay on such dates or 30 days after call

(where date of payment not specified) shall render the
stocks covered by said subscription shall thereupon
become delinquent and shall be subject to delinquency
sale, unless the board of directors orders otherwise.
Effects of delinquency
1. No voting rights (right to vote and be voted
for);
2. Not included in quorum (as a consequence of
losing voting rights);
3. No right of representation at any stockholders
meeting;
4. Loses all proprietary and remedial rights,
EXCEPT the right to dividends which he shall
enjoy until the eventual sale of the stock.
While the right to dividends is not lost,
they are applied to the stock holders
debt.
Stock dividends are withheld.
Remedies to enforce payment of delinquent
shares:
1. Delinquent Sale;
2. Judicial action/collection suit with the RTC;
3. Collection from cash dividends and withholding
of stock/property dividends.
Procedure for Delinquency Sale
1. Board Resolution ordering the sale of
delinquent shares stating the amount due on
each subscription plus all accrued interest, and
the date, time and place of the sale which shall
not be less than 30 days nor more than 60
days from the date the stocks become
delinquent;
2. Notice and a copy of the board resolution to
be sent to every delinquent stockholder either
personally or by registered mail;
3. Publication. The notice shall be published
once a week for 2 consecutive weeks in a
newspaper of general circulation;
4. Public auction. Delinquent stock shall be sold
to such bidder who shall offer to pay the full
amount of the balance of the subscription (plus
interest, costs of advertisement and expenses
of sale) for the smallest number of shares or
fraction of a share. Winning bidder shall be
issued a certificate of stock. Remaining shares,
if any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering such shares.
5. Treasury Shares. No bidder? Corporation
buys and the shares shall become treasury
shares.
Winning bidder is the one willing to pay the full
amount of the balance of the subscription plus
interest, advertisement costs and expenses of

sale for the smallest number of shares. How is

this justified?
Suppose that the balance to be paid is P100,000
and the number of shares is 100,000. Bidder A wants
100,000 shares; Bidder B wants 80,000 shares; and
Bidder C wants 60,000 shares. This would translate as
follows:
Bidder A would pay P1.00 (P100k/100k) per
share;
Bidder B would pay P1.25 (P100k/80k) per
share; and
Bidder C would pay P1.67 (P100k/60k) per
share.
Hence, the winning bidder is Bidder C, because he
is the one willing to pay the highest amount per share.
On what grounds can delinquency sale be
questioned?
1. Irregularity or defect in the notice of sale; and
2. Irregularity or defect in the sale itself.
A party seeking to question the delinquency sale
based on the two mentioned grounds must first pay or
tender to the party holding the stock the sum (plus
interest from the date of the sale at the legal rate) for
which the same was sold, and he must do so within 6
months from the date of sale, lest it be barred.
Sec. 73 Lost or destroyed certificates
Procedure
1. Affidavit of Loss;
2. Verification. The corporation to verify the
affidavit and other information and evidence
with the corporate books;
3. Publication once a week for three consecutive
weeks;
4. One-year waiting period from the date of
last publication;
a. If the stockholder does not wish to
wait, he may file a bond within the oneyear period.
5. Contest; and
6. Replacement
Sec. 74 Books to be kept; stock transfer agent
1. Book of all business transactions;
2. Book of minutes of all meetings of stockholders
or members;
3. Book of minutes of all meetings of all directors
or trustees; and
4. Stock and transfer book (STB) in case of stock
corporations.
Best evidence
The books and records of a corporation are
ordinarily the best evidence of corporate acts and
proceedings.
Requisites for the right to inspect corporate
books and records
1. Must be exercised at reasonable hours on
business days;
2. The stockholder has not improperly used any
information he secured through any previous
examination*; and

Page | 18

3.

Demand is made in good faith and for a

legitimate purpose.*

2.
3.

*The second and third items are lawful defenses

that may be invoked by an officer to deny a
stockholder or member his right to inspection. This is
important, because unlawful denial of the right to
inspection constitutes a crime under Sec. 144 of the
Corporation Code.

4.

Stock transfer agent must be registered with

SEC
A stock transfer agent is one engaged principally in
the business of registering transfers of stocks in behalf
of a corporation.
No stock transfer agent shall be allowed to operate
in the Philippines, unless:
1. He has a license from the SEC; and
2. Pays the fee prescribed by the SEC.
As a rule, corporate secretary signs the minutes
The non-signing of the minutes by all the members
of the board is not required, because it is the signature
of the corporate secretary which gives the minutes of
the meeting probable value and credibility.
Sec. 75 Right to financial statements
GR: Financial statements must be duly signed and
certified by an independent CPA.
XPN: If paid-up capital is less than P50,000 in which
case certification under oath by the treasurer or any
responsible officer of the corporation suffices.
Submission to SEC
The following are required to submit annual
audited financial statements:
1. Stock corporations with paid-up capital stock of
P50,000 or more;
2. Non-stock corporations with total assets each
of P500,000 or more or with gross annual
receipts of P100,000 or more.
Audited financial statements are filed annually. The
period within which to file them varies (ranging from
April 19 to May 14) depending on the last numerical
digit of the corporations SEC registration or license
number.
Sections 76 to 80 Merger and Consolidation
Merger
One where a corporation absorbs another
corporation and remains in existence while the other is
dissolved.
Example: Piccolo Corp. + Kami Corp. = Piccolo
Corp.
Consolidation
One where a new corporation is created, and the
consolidating corporations are extinguished.
Example: Goku Corp. + Vegeta Corp. = Vegeto
Corp.
Contents of plan of merger or consolidation
1. Names of the constituent corporations;

Terms of the merger or consolidation;

Statement of changes to be made in the AoI of
the surviving corporation (for merger) or
statements required to be set forth in the AoI of
the new corporation to be created (for
consolidation); and
Other necessary provisions.

Procedure
(this
applies
to
both/all
the
constituent corporations)
1. Board resolution approving a plan of
merger/consolidation;
2. Ratification by 2/3 vote of the stockholders or
members;
a) Voting shall be done in a meeting
called for such purpose with a twoweek prior written notice, either
personally or by registered mail. Notice
shall include a copy of the plan of
merger or consolidation.
b) Any
dissenting
stockholder
may
exercise his appraisal right.
3. Any amendment to the plan or merger or
consolidation may be made, provided it is
approved by majority vote of the respective
boards of all the constituent corporations and
ratified by 2/3 vote of the stockholders or
members of the constituent corporations.
4. Articles of merger or consolidation shall be
executed by
each
of
the constituent
corporations, signed by the president/vicepresident
and
certified
by
the
secretary/assistant
secretary
of
each
corporation setting forth:
a. The
plan
of
the
merger
or
consolidation;
b. As to stock corporations, the number of
shares outstanding, or in the case of
non-stock corporations, the number of
members; and
c. As to each corporation, the number of
shares or members voting for and
against such plan, respectively.
5. Submit to SEC the articles of merger or
consolidation.
In case of banks, banking institutions,
building and loan associations, trust
companies, public utilities, educational
institutions
and
other
special
corporations governed by special laws,
SEC cannot act on their articles of
merger or consolidation without the
favorable
endorsement
of
the
appropriate government agency.
6. SEC to issue certificate of merger or
consolidation if it is satisfied that the merger
or consolidation is not inconsistent with the
Corporation Code or special laws. Otherwise, it
would set a hearing with a two-week prior
notice.
Legal effects of merger and consolidation
1. Single
corporation.
The
constituent
corporations shall become a single corporation;
2. Cessation of separate existence. The
separate
existence
of
the
constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;

Page | 19

3.

4.

5.

Assumption of rights. The surviving or the

consolidated corporation shall possess all the
rights, privileges, immunities and powers and
shall be subject to all the duties and liabilities
of a corporation organized under this Code;
Acquisition of properties. The surviving or
the consolidated corporation shall thereupon
and thereafter possess all the rights, privileges,
immunities and franchises of each of the
constituent corporations; and all property, real
or personal, and all receivables due on
whatever account, including subscriptions to
shares and other choses in action, and all and
every other interest of, or belonging to, or due
to each constituent corporation, shall be
deemed transferred to and vested in such
surviving or consolidated corporation without
further act or deed; and
Assumption of liabilities. The surviving or
consolidated corporation shall be responsible
and liable for all the liabilities and obligations
of each of the constituent corporations in the
same manner as if such surviving or
consolidated corporation had itself incurred
such liabilities or obligations; and any pending
claim, action or proceeding brought by or
against any of such constituent corporations
may be prosecuted by or against the surviving
or consolidated corporation. The rights of
creditors or liens upon the property of any of
such constituent corporations shall not be
impaired by such merger or consolidation.

Important principles
1. The merger or consolidation shall only be
effective upon the issuance of a certificate of
merger or consolidation by the SEC. It does not
become effective upon the mere agreement of
the constituent corporations.
2. Non-assumption of liabilities
GR: When one corporation buys all the
shares, stocks or property of another
corporation, this will not operate to
dissolve the other corporation and as
the two corporations still maintain their
separate corporate entities, one will
not answer for the debts of the other.
XPNs: (FECCP)
a)
If the purchase as in fraud
of creditors;
b)
If there is an express
assumption of liabilities;
c)If there is a consolidation or
merger;
d)
If the purchaser is merely a
continuation of the seller; or
e)
When it is proper to pierce
the veil of corporate fiction.
3. Employees of the constituent corporations are
automatically absorbed by the surviving
corporation or the consolidated corporation.
However, the corporation may legally dismiss
some of its employees on the valid ground of
redundancy, but it must give them separation
pay.
According to sir, it is the supervisory
employees that are normally affected

in cace of mergers or consolidations,

because there are more work available
for rank-and-file employees.
Sections 81 to 86 Appraisal Right
Appraisal Right
The right of a stockholder to withdraw from the
corporation and demand payment of the fair value of
his shares following his dissent on certain corporate
acts. But not all corporate acts can be the subject of
appraisal right.
Instances where appraisal right may be availed
of:
1. Amendment of articles of incorporation which
has the effect of changing/restricting the rights
of any stockholder or class of shares or of
authorizing preferences in any respect superior
to those of outstanding shares of any class;
2. Extension or shortening of corporate term;
3. Sale or other disposition of all/substantially all
corporate property and assets;
4. Merger or consolidation; and
5. Investment
in
an
enterprise/another
corporation for any other purpose other than
its primary purpose.
Procedure
1. Written Demand. Dissenting stockholder
must make a written demand on the
corporation within 30 days from the voting in
which he dissented. Failure to make a written
demand within 30 days shall be deemed a
waiver of the appraisal right;
2. Notation. Within 10 days after demanding
payment for his shares, a dissenting
stockholder shall submit the certificates of
stock
representing
his
shares
to
the
corporation for notation thereon that such
shares are dissenting shares. His failure to do
so shall, at the option of the corporation,
terminate his appraisal right. If shares
represented by the certificates bearing such
notation are transferred, and the certificates
consequently cancelled, the rights of the
transferor as a dissenting stockholder shall
cease and the transferee shall have all the
rights of a regular stockholder; and all dividend
distributions which would have accrued on
such shares shall be paid to the transferee;
3. Pay upon surrender of certificate. If the
proposed corporate action is implemented or
effected, the corporation shall pay to such
stockholder, upon surrender of the certificate
or certificates of stock representing his shares,
the fair value thereof as of the day prior to the
date on which the vote was taken, excluding
any appreciation or depreciation in anticipation
of such corporate action.
4. Fair valuation of shares. If within a period of
sixty (60) days from the date the corporate
action was approved by the stockholders, the
withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it
shall be determined and appraised by three (3)

Page | 20

disinterested persons, one of whom shall be

named by the stockholder, another by the
corporation, and the third by the two thus
chosen. The findings of the majority of the
appraisers shall be final, and their award shall
be paid by the corporation within thirty (30)
days after such award is made: Provided, That
no payment shall be made to any dissenting
stockholder unless the corporation has
unrestricted retained earnings in its books to
cover such payment: and Provided, further,
That upon payment by the corporation of the
agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation.
What may be the basis of the fair value of
shares?
It may either be the par value (which remains
constant) or the book value/market value (which
fluctuates depending on the performance of the
corporation).
Book value is arrived at as follows:
Total Assets Total Liabilities = Net Worth
Net Worth/Number of Shares = Book Value
When right of appraisal extinguished
1. Stockholder withdraws his demand and the
corporation consents thereto;
The corporation needs to consent,
because once the stockholder decides
to make use of his appraisal right,
there is no going back.
2. The proposed corporate action is abandoned or
rescinded by the corporation;
3. The SEC disapproves or determines that the
stockholder is not entitled to the appraisal
right; and
4. No surplus profits.
Who bears the costs of appraisal?
GR: Corporation
XPN: Fair value ascertained by the appraisers is
approximately the same as the price which the
corporation may have offered to pay the stockholder,
in which case costs shall be borne by the latter.
In the case of an action to recover such fair value,
all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to
receive payment was unjustified.
Surplus profits needed
Note that the money that will be used to pay the
dissenting
stockholder
must
come
from
the
corporations surplus profits.
If a stockholders filed an action against the
corporation to demand payment of the fair value of his
shares is premature if at the time of demand for
payment, the corporation had no surplus profit. The
fact that the corporation subsequent to the demand for
payment and during the pendency of the collection
case posted surplus profit did not cure the prematurity
of the cause of action. (Turner v. Lorenzo Shipping
Corporation, 2010ds)

Sections 87 to 95 Non-stock corporations

Non-stock corporation
One where no part of its income is distributable as
dividends to its members, trustees, or officers.
Non-stock corporations may be formed or
organized for the following purposes:
1. Charitable;
2. Religious;
3. Educational;
4. Professional
5. Cultural;
6. Fraternal;
7. Literary;
8. Scientific;
9. Social; or
10. Civic service;
11. Similar purposes such as trade, industry,
agricultural and like chambers, or any
combination thereof.
Right to vote in non-stock corporations
1. Voting rights may be limited, broadened by the
articles of incorporation or the by-laws.
2. Each member is entitled to 1 vote, unless
otherwise provided
in
the
articles
of
incorporation.
3. As a rule, voting is by straight voting, unless
cumulative is prescribed by the articles of
incorporation or the by-laws. But according to
sir, theres no practical reason why a non-stock
corporation would resort to cumulative voting.
4. Right to vote by proxy may be denied. (Note
that in stock corporations, right to proxy
CANNOT be denied.)
5. Voting by mail may be authorized by the bylaws, provided it is with the approval and other
the conditions prescribed by the SEC.
Membership non-transferrable
Unless otherwise provided by the articles of
incorporation or the by-laws.
Termination of membership
Membership shall be terminated in the manner and
for the causes provided in the articles of incorporation
or the by-laws.
Election and term of trustees
1. The Board of Trustees may have more than 15
members.
2. Term of 3 years on a staggered basis of 1/3 of
the Board members.
3. No person shall be elected as trustee unless he
is a member of the corporation.
4. Officers may be directly elected by the
members. (Note that in stock corporations,
officers are elected by the directors.)
Place of meetings
May be outside the place where the principal office
of the corporation is located, as long as within the
Philippines.
Rules of distribution

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The assets shall be distributed as follows:

1. First, all taxes and creditors must be paid;
2. Assets held subject to return on dissolution
shall be conveyed back to the giver;
3. Assets received for charitable, religious,
benevolent, educational or similar purposes,
without a condition for return, shall be
transferred to one or more corporations,
societies or organizations engaged in similar
activities;
4. Other assets shall be distributed in accordance
with the articles of incorporation or the bylaws; and
5. In any other case, assets may be distributed to
such persons, societies, organizations or
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution adopted.
Plan of distribution is adopted via
Board Resolution + Ratification by 2/3
vote of the members having voting
rights.
Foundation
A foundation is a non-stock, non-profit corporation
established for the purpose of extending grants or
endowments to support its goals or raising funds to
accomplish charitable, religious, educational, athletic,
cultural, literary, scientific, social welfare or other
similar objectives.
The most important thing to remember is that a
foundation must have a capital of at least P1 million.
Basic
requirements
to
incorporate
as
a
foundation
1. Verification slip;
2. Articles of incorporation and by-laws;
3. Affidavit undertaking to change corporate
name;
4. List of members certified by the corporate
secretary;
5. List of contributors and amount contributed
certified by the treasurer;
6. Notarized Certification of Bank Deposit of the
amount of not less than One Million Pesos
(P1,000,000.00); and
7. Statement of willingness to allow the
Commission to conduct and audit.
Escheat to government
Donated properties which were tax-exempt to a
foundation shall, upon the foundations dissolution, be
escheated in favor of the government.
Sections 96 to 105 Close corporations
Close corporation
A close corporation is one whose articles of
incorporation provides that:
1. All the issued stock of all classes, exclusive of
treasury shares, shall be held of record by not
more than 20 persons;
2. The issued stock of all classes shall be subject
to one or more specified restrictions on
transfer; and

3.

It shall not list in any stock exchange or make

any public offering of any of its stock of any
class.

Even if the above enumerated provisions are

present, a corporation cannot be a close corporate if at
least 2/3 of its voting stock or voting rights are owned
or controlled by another corporation which is not a
close corporation.
The following cannot be close corporations:
(MOSBIPEC)
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utilities;
7. Educational institutions; and
8. Corporations declared to be vested with public
interest.
Restrictions on transferability must appear in 3
documents:
1. Articles of incorporation;
2. By-laws; and
3. Stock certificates
If the restrictions do not appear in any of those
documents, they will not prejudice the right of third
persons who are not aware of the same.
The restrictions shall not be more onerous than
granting the existing stockholders or the stockholders
the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or
period stated therein. If upon the expiration of said
period, no pre-emptive right was exercised, the
transferring stockholder may sell his shares to any
third person.
Conclusive presumptions in case of transfer of
stock in breach of qualifying conditions
1. A transferee is conclusively presumed to have
notice of the fact of his ineligibility to be a
stockholder, IF
a. A stock of a close corporation is issued
or transferred to any person who is not
eligible to be a stockholder under the
articles of incorporation; and
b. The certificate of stock conspicuously
shows the qualifications of the persons
entitled to be stockholders.
2. A transferee is conclusively presumed to have
notice of the fact that the transfer would
cause the number of stockholders to
exceed the limit stated in the Articles of
Incorporation or 20, IF
a. The articles of incorporation states
such number of persons (not exceeding
20); and
b. The
certificate
for
such
stock
conspicuously states such numbers.
3. A transferee is conclusively presumed to have
notice of the fact that he has acquired stock
in violation of a restriction on transfer, IF

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a.

The stock certificate

shows such restriction.

conspicuously

Effect of transfer of stock in breach of qualifying

conditions
The corporation may refuse to register the transfer
of stock, UNLESS
1. All stockholders consent;
2. The close corporation has amended its articles
of incorporation.
Amendment of articles of incorporation
Amendment needs to be approved by the
affirmative vote of at least 2/3, IF the amendment
has the following effects:
1. Deletes or removes any provision required of
close corporations to be contained in the
articles of incorporation; or
2. Reduces a quorum or voting requirement
stated in the articles of incorporation.
When
board
meeting
is
unnecessary
or
improperly held
Unless the by-laws provide otherwise, any action
by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors;
or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action
with
the
express
or
implied
acquiescence of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and none
of them makes prompt objection thereto in
writing.
If a directors meeting is held without proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection
with the secretary of the corporation after having
knowledge thereof.
Wider coverage of pre-emptive right
Pre-emptive right extends to all stocks to be
issued, including reissuance of treasury shares.
Characteristics of a close corporation
1. Stockholders
can
directly
manage
the
corporation and perform the functions of
directors without need of election.
2. Stockholders are liable as directors.
3. Pre-emptive right extends to all stocks.
4. Deadlocks are settled by the SEC (now the RTC)
upon a written petition by any stockholder.
5. Stockholder may withdraw and avail of his right
of appraisal for any reason, provided the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of
capital stock.
When stockholder
dissolution:

may

petition

to

compel

1.

2.

Whenever any of acts of the directors, officers

or those in control of the corporation is
a. Illegal;
b. Fraudulent;
c. Dishonest;
d. Oppressive;
e. Unfairly prejudicial to the corporation
or any stockholder; or
Whenever
corporate
assets
are
being
misapplied or wasted.

What to do in case of deadlock in a close

corporation
1. The proper recourse is to first exhaust
remedies
available
in
the
articles
of
incorporation or by-laws;
2. In the absence thereof or after exhaustion, file
a petition with the RTC which shall have the
power to arbitrate the dispute. In the exercise
of such power, the RTC shall have the authority
to issue the following orders:
a. Cancelling or altering any provision in
the articles of incorporation, by-laws, or
any stockholders agreement;
b. Cancelling, altering or enjoining any
resolution or act of the corporation or
its board of directors, stockholders or
officers;
c. Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons
party to the action;
d. Requiring the purchase at fair value of
shares of any stockholder, either by the
corporation
regardless
of
the
availability of surplus profits or by the
other stockholders;
e. Appointing a provisional director who
must be an impartial and disinterested
person;
f. Dissolving the corporation or granting
such other relief as the circumstances
may warrant.
Sections 106 to 108 Educational corporations
Key points to remember
1. Favorable recommendation of DepEd or CHEd,
as the case may be, is a prerequisite to
incorporation.
2. Educational corporations may incorporate as
either stock or non-stock (RA 7798 amending
BP 232).
3. Trustees shall not be less than 5 nor more than
15, provided that the number of trustees shall
be in multiples of 5. In short, 5, 10 or 15 lang
pwede!
4. Term of trustees is for 5 years on a staggered
basis of 1/5 of its members.
This is without prejudice to a different
term provided in the articles of
incorporation. (Petronilo v. AUP, 2011)
NB: The articles of incorporation may
provide for a different term, but it is not
sure whether it can also provide for a
different number of trustees.

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5.

For
institutions
organized
as
stock
corporations, the number and term of directors
shall be governed by the provisions on stock
corporations.

3.

Sections 109 to 116 Religious corporations

Key principles to remember
1. Religious corporations are classified into (a)
corporations
sole
and
(b)
religious
societies.
2. If the internal rules of a religious group prohibit
incorporation, it cannot incorporate as a
corporation sole or religious society. Hence, in
the articles of incorporation to be filed with the
SEC, there must be a statement that the
incorporation is not prohibited by the rules of
the religious group.
3. The
general
provisions
on
non-stock
corporations apply in a suppletory manner.
4. GR: For a corporation sole to sell or mortgage a
real property, it must obtain an order for that
purpose from the RTC of the province where
the property is located by filing a verified
petition.
XPN: The corporation soles own internal rules
regulate the method of acquiring, holding,
selling and mortgaging real and personal
property.
5. To fill a vacancy in a corporation sole, the
successor must file with the SEC a notarized
copy of his commission, certificate of election,
or letters of appointed.
6. For a religious group to incorporate as a
religious society, there must be a meeting and
at least 2/3 of the members must consent or
give an affirmative vote.
Sections 117 to 122 Dissolution
How are corporations dissolved?
1. Voluntarily;
2. Involuntarily;
3. By shortening corporate term; and
4. Expiration of the term.
Voluntary Dissolution (No creditors affected);
procedure
1. Meeting with a 30-day prior notice;
2. Notice of the meeting shall be published for 3
consecutive weeks;
3. Resolution to be approved by majority of the
board members and ratified by 2/3 vote;
4. Resolution must be certified by majority of the
board members,
countersigned by
the
corporate secretary; and
5. Resolution to be filed with the SEC which will
issue the certificate of dissolution.
Voluntary
Dissolution
(Creditors
affected);
procedure
1. Meeting where 2/3 must vote to dissolve the
corporation;
2. File with the RTC a petition to dissolve, signed
by majority of the board or other officers
having the management of its affairs, and

4.
5.
6.

verified by the president or secretary or

director, setting forth all claims and demands
against it;
RTC to fix by order a date on or before which
objections may be filed by any person, which
date shall not be less than 30 days nor more
than 60 days after the entry of the order;
Copy of the order to be published once a week
for 3 consecutive weeks and posted in 3 public
places for 3 consecutive weeks;
After expiration of the time to file objections,
the SEC shall fix a date of hearing with a fiveday prior notice;
RTC shall render judgment dissolving the
corporation and directing such disposition of its
assets as justice requires, and may appoint a
receiver to collect such assets and pay the
debts of the corporation.

Involuntary dissolution is effected by the SEC

upon filing of a verified complaint after notice
and hearing based on the following grounds:
1. Failure to organize and commence business
within 2 years from incorporation;
2. Continuous inoperatation for 5 years;
3. Failure to file the by-laws within 30 days from
issuance of certificate of incorporation;
4. Fraud
in
procuring
the
certificate
of
registration;
5. Failure to comply with reportorial requirements;
a. General Information Sheet
- Filed within 30 days from
appointment of officers.
b. Audited Financial Statements
- Filed annually (see notes on
Sec. 75).
6. Serious misrepresentation; and
7. Continuation of business is not feasible as
found by the rehabilitation receiver.
Shortening of corporate term
This involves an amendment of the articles of
incorporation which requires a board resolution and a
ratification by 2/3 vote.
If a corporation seeks to shorten its corporate term
and the manifest intent is to cause its dissolution, the
SEC will not act on the application without a BIR
clearance.
Liquidation
The process by which the assets of the corporation
are converted in to liquid assets or cash to facilitate
the payment of obligations to creditors, and the
remaining balance, if any, is to be distributed to the
stockholders.
Corporate life does not immediately cease upon
dissolution; 3-year period
The three-year period upon dissolution is for the
purpose of prosecuting or defending suits.
Actions filed beyond the three-year period are
deemed to have prescribed. Note that it does not
matter if the action continues beyond the period as
long as it is instituted within the period.

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Methods of liquidation
1. By the corporation itself through the board of
directors or trustees;
2. Through conveyance to a trustee within the
three-year period;
3. By management committee or rehabilitation
receiver;
4. If liquidation is not completed within the threeyear period, the Board is permitted to complete
liquidation by continuing as trustee and for the
purpose of settling and closing the affairs of
the corporation.
Sections 123 to 136 Foreign corporations
A foreign corporation is one which is organized
under the laws of a foreign country which allows
Filipinos and Philippine corporations to do business
therein.
Two elements of a foreign corporation
1. Organized under the laws of a foreign country;
and
2. Right of reciprocity.
Philippine
national
(under
the
Foreign
Investments Act)
1. Filipino citizen;
2. Domestic corporation;
3. Domestic corporation of which at least 60%
entitled to vote is owned and held by Filipino
citizens;
4. Foreign corporation doing business in the
Philippines of which 100% of the capital
outstanding stock and entitled to vote is wholly
owned by Filipinos; and
5. Trustee of funds, at least 60% of which will
accrue to the benefit of Filipinos.
From the enumeration above, a foreign corporation
may be considered a Philippine national.
Requisites for a foreign corporation to engage in
business in the Philippines
1. Register with the SEC as a foreign corporation
by giving a certified true copy of all
incorporation documents in the country of
origin. If not in English, the documents must be
accompanied by an official translation in
English;
2. Inward remittance at the amount of prescribed
capitalization; and
3. Appointment of a resident agent.
Principles governing a foreign corporations
right to sue:
1. If a foreign corporation is doing business in the
Philippines without a license, it cannot sue
before Philippine courts;
2. If a foreign corporation is not doing business in
the Philippines, it needs no license to sue
before Philippine courts on an isolated
transaction or on a cause of action entirely
independent of any business transaction; and
3. If a foreign corporation does business in the
Philippines with the required license, it can sue
before Philippine court on any transaction.

Contracts by foreign corporations sans license

are not void
Absence of license does not affect the validity or
enforceability of a contract entered into by a foreign
corporation doing business without a license. It merely
affects the remedy.
Estoppel
A party is estopped to challenge the personality of
a corporation after having acknowledged the same by
entering into a contract with it. The principle will be
applied to prevent a person contracting with a foreign
corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the
contract. (Merril Lynch Futures v. CA)
In pari delicto rule
No remedy can be afforded to the parties where
they have presumptive knowledge that the transaction
was tainted with illegality. (Top-Weld Manufacturing
Inc. v. ECED, SA)
Protection of intellectual property rights
Under Sec. 160 of the Intellectual Property Code,
any foreign national or juridical person not engaged in
business in the Philippines may bring a civil or
administrative action for opposition, cancellation,
infringement, unfair competition, or false designation
of origin and false description, whether or not it is
licensed to do business in the Philippines.
Grounds for revocation of license;
1. Failure to file its annual report or pay any fees
as required by this Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
3. Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such
change as required by this Title;
4. Failure to submit to the Securities and
Exchange Commission an authenticated copy
of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due
to the Philippine Government or any of its
agencies or political subdivisions;
7. Transacting business in the Philippines outside
of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines.

Page | 25

A foreign corporation licensed to transact

business in the Philippines cannot be allowed by
the SEC to withdraw from the country, unless all
the following requirements are met:
1. All claims which have accrued in the Philippines
have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties,
if any, lawfully due to the Philippine
Government or any of its agencies or political
subdivisions have been paid; and
3. The petition for withdrawal of license has been
published once a week for three (3)
consecutive weeks in a newspaper of general
circulation in the Philippines.

Page | 26

Securities and Regulation Code (Key Principles)

Purpose of SRC
To establish a socially conscious, free market that
regulates itself, encourages the widest participation of
ownership in enterprises, enhance the democratization
of wealth, promote the development of the capital
market, protect investors, ensure full and fair
disclosure about securities, and minimize if not totally
eliminate insider trading and other fraudulent or
manipulative devices and practices which create
distortions in the free market.
Definition of Terms
1. Securities Shares, participation or interest in
a corporation or in a commercial enterprise or
profit-making ventures and evidenced by a
certificate, contract, or instrument whether
written or electronic in character.
2. Tender Offer A publicly announced intention
by a person acting alone or in concert with
other persons to acquire equity securities of a
public company.
3. Public Company Any corporation (a) with a
class of equity securities listed on an
Exchange; or (b) with assets in excess of P50m
and having 200 or more holders, at least 200 of
which are holding at least 200 shares of a class
of its equity securities.
4. Insider Trading Trading of corporations stock
or other securities by individuals with potential

access to non-public information about the

company.
5. Short Sale A contract for sale of shares of
stock which the seller does not own, or
certificates which are not within his control, so
as to be available for delivery at the time when
delivery must be made.
6. Put An option that, in consideration of a
premium paid, gives the purchaser the right to
make the seller take from him a given number
of shares of a named stock between a given
time at a stipulated price which is usually
below the prevailing market price of the stock
at the time the put is purchased.
7. Call An option that, in consideration of a
premium paid, entitles the buyer the right to
compel the seller to deliver to him a certain
number of shares within a given time at a
stipulated price which is usually higher than
the prevailing market price at the time the call
is bought.
8. The double privilege of a put and a call, and
secures the holder the right to demand of the
seller at a certain price within a certain time a
certain number of shares of specified stock, or
to require him to take, at the price within the
same time, the same shares of stock.
9. Short Swing Transaction One where a person
buys securities and sells the same within a
period of 6 months.
10. Boiler Room Sales The use of high-pressure
sales tactics to promote purchases and sales of
securities.

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