Corporation Law Notes

By Atty. Josh Carol T. Ventura

I. GENERAL PROVISIONS
A. Section 1, CCP The code shall be known as The Corporation Code of the Philippines. The evolution
of private corporations can be described in three waves:
1. First wave during the Spanish regime up to April 1, 1906.
a.
These so-called corporations were termed as sociedad anonima and governed by
the Code of Commerce which was based on the Spanish Code of 1885. Examples
are names like De la Cruz Company Ltd.
b.
Sociedad anonima had features similar to the present corporations such as limited
liability of the members and centralized management.
2. Second wave from April 1, 1906 to May 1, 1980 when Act 1459 or the Corporation Law was
passed.
a.
The sociedad anonima was replaced by the American concept of corporation.
b.
Existing sociedad anonima may opt to reorganized under the Corporation law.
c.
Those that did not opt to reorganized continue to exist but its existence should not
be more than 50 years, subject to extension for another 50 years.
3. Third wave from May 1, 1980 to present when Act No. 1459 was amended by Batas Bilang
68 otherwise known as the Corporation Code of the Philippines was passed.
1.

Is the Corporation Code of the Philippines a General law or a special law? It is a general law
referred to in Article 14, Section 4, 1973 Constitution.

B. Section 2, CCP Definition of corporation.

corporation:
1.

The following are the attributes (stamp/earmark) of a

It is an artificial being. The legal consequences are:

a. It is a juridical person. Articles 44 to 45 of the New Civil Code.
a1. Article 44 Enumerates the kinds of juridical persons.
a2. Article 45 Juridical persons that are governed by the laws creating or
recognizing them. Private corporations are regulated by laws of general applications on
the subject.
b.
c.

d.

It is capable of obtaining rights and obligations.

It has a personality separate and distinct from the stockholders or members. As such:
c1. Stockholders/members are not liable for obligations of the corporation.
c2. Creditors of the corporation cannot attach the separate or personal
properties of the stockholders/members for obligations contracted by the
corporation.
Is a corporation, being artificial person, claim for damages?
d1. Art. 2216, NCC No proof of pecuniary loss is necessary in order that moral,
nominal, temperate, liquidated or exemplary damages may be adjudicated. The
assessment of such, except liquidated ones, is left to the discretion of the court
according to the prevailing circumstances.
d2. Moral damages includes physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. (Art. 2217, NCC)
d3. Nominal damages are adjudicated in order that a right of the plaintiff, which
has been violated or invaded by the defendant, may be vindicated or recognized,
and not for the purpose of indemnifying the plaintiff for any loss suffered by him.
(Art. 2221, NCC)
d4. The court may award nominal damages in every obligation arising from any
source enumerated in Art. 1157 (sources of obligation), or in every case where
any property right has been invaded. (Art. 2222)

d5. Temperate or moderate damages, which are more than nominal but less
than compensatory damages, may be recovered when the court finds that some
pecuniary loss has been suffered but its amount cannot, from the nature of the
case, be proved with certainty. (Art. 2224)
d6. Liquidated damages are those agreed upon by the parties to a contract, to
be paid in case of breach thereof. (Art. 2226)
d7. Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages. (Art. 2229)

e.

f.

g.

h.

2.

d8. Mambulao Lumber Case moral damages maybe recovered in the case of
besmirch reputation.
Is a corporation covered by the protection of the bill of rights in the Constitution?
e1. Yes, as the bill of rights also covered juridical persons (Stonehill vs. Diokno,
20 SCRA, 392, Bache & Co. (Phil) Inc. vs. Ruiz, 37 SCRA 823, Asian Surety &
Insurance Co., Inc. vs. Herrera, 54 SCRA 312)
Can a corporation commit a crime? YES
f1. A corporation is not liable for the criminal acts committed by its officers.
f2. However, under the new rule on criminal liability, the corporation is
subsidiarily liable in order to prevent injustice.
Can a corporation be formed for the purpose of practicing a profession? NO.
g1. Sec. 88 of CCP Non-stock corporations may be formed or organized for
charitable, religious, educational, professional,
g2. However, according to jurisprudence, a corporation cannot engage in the
practice of profession because it cannot comply with the personal qualification
required by law for the practice of profession.
Does a corporation have citizenship? NO
h1. One of the constitutional rights of a citizen is the right to vote and right to
vote is limited to citizens only. Can a corporation vote?
h2. Since the corporation cannot vote, it has no citizenship. What it has is
nationality only.

It is created by operation of law. As such:

a. What is the difference between the phrase created by operation of law and created
by law?
b. Created by operation of law means by compliance with the requirements of the law.
c. Created by law means by act of congress.
d. Mere consent to form a corporation is not sufficient, unlike a partnership.
e. To form a corporation, the State must give its consent either by a special law called
charters in the case of government owned or controlled corporations or a general
enabling law such as the Corporation Code of the Philippines.
f. Can Congress of the Philippines create a private corporation? NO, Congress cannot
create a private corporation, unlike in the case of a government owned and controlled
corporations. All private corporations are created by compliance of the Corporation
Code of the Philippines.

3. It has the right of succession. As such:

a. The corporation will remain to exist during the term of its existence as stated in the
articles of incorporation regardless of any change in the members or stockholders.
b. Its existence is neither affected by the transfer of shares by a stockholder to a third
person.
4. It possess the powers, attributes and properties expressly authorized by law or incident to its
existence. As such:
a. It possesses express powers stated as the primary purpose in the Articles of
incorporation during incorporation.
b. It possesses implied powers so that the primary purpose can be achieved.
c. Can a corporation be a partner in a general partnership? NO
c1. A partner can bind a partnership while stockholders or members cannot.
Only the BOD can bind a corporation.

c2. To allow it would violate the principle of mutuality of agency, in the case of
general partnership, where each partner is an agent of the partnership. In the
case of a corporation, stockholders or members are not agents of the
corporation.
C. Section 3, CCP Classes of corporations. The corporation code enumerates
only 2 classes of corporations. Corporations maybe formed either as stock or non-stock.
1. Stock corporations are those which:
a. have capital stock divided into shares.
b. are authorized to distribute to holders of such shares dividends or allotments of the
surplus profits on the basis of the number of shares held.
c. Can a corporation be organized as non-stock, non-profit corporations but with capital
divided into shares?
(i) YES, under the old corporation law (Collector vs. Club Filipino.
(ii) NO, under the new corporation code. The SEC will not approve such
application for registration.
d. What is then the classification of a corporation that was registered as a non-stock,
non-profit but is declaring dividends?
d1. Collector of Internal Revenue vs. Club Filipino Inc. de Cebu, 5 SCRA 321
The corporation was organized with capital stock divided into shares but its
primary purpose is not to engage in business but to provide recreation to its
members. The BIR imposed a percentage tax with surcharge and compromise
penalty from it as a keeper of a bar and restaurant. Club Filipino refused to pay
stating that the bar-restaurant was a necessary incident to the operation of its
club and golf course. Ruling: The SC held that the fact that the Club derived
profit from the operation of its bar-restaurant does not necessarily convert it into
a profit-making enterprise. Said facilities are necessary adjuncts of the Club to
foster its purpose and profits derived therefrom are purely incidental. What is
determinative of whether or not the Club is engaged in such business is its object
or purpose, as stated in its articles and by-laws. Nowhere in the its articles of
incorporation or by-laws could be found an authority for the distribution of its
dividends.
d2. May such power to declare dividends considered as implied for a
corporation organized as a non-stock corporation like in the case of Club
Filipino? NO, on the basis of the ruling in the above case.
d.

e.

This case was decided under the old Corporation Law. Will the same set of facts as
in the case of Collector vs. Club Filipino be decided in the same way under the
Corporation Code of the Philippines?
d1. NO, because of Section 43 that expressly grants a stock corporation the
power to declare dividends. This provision was not present in the old corporation
law. Hence the power to declare dividends is determined by what is stated in the
articles and by-laws.
What is then the determining factor to consider a corporation as stock or non-stock?
e1. It is not the fact that the purpose as stated in the articles is silent as to
declaration of dividends.
e2. Rather, if the purpose is to engage in profit with capitalization divided into
shares of stocks, said corporation is deemed a stock corporation whether or not
the articles and by-laws is silent as to the authority to distribute dividends
because of Sec. 43.

D. Sec. 5, CCP Corporators and incorporators, stockholders and members.

1. Corporators are those who compose a corporation whether as stockholders or members.
Corporators are of two kinds:
a. Stockholders those who compose a stock corporation.
b. Members those who compose a non-stock corporation.
2. Incorporators are those stockholders or members mentioned in the articles of incorporation.
3. Are all corporators considered as stockholders or members? YES.
4. Are all corporators considered as incorporators? NO.
5. Are all incorporators considered as stockholders or members? YES.

E. Sec. 6, CCP Classification of shares. Shares of stocks of a corporation may be divided into classes or
series of shares according to its rights, privileges or restrictions as the articles of incorporation may provide
subject to the following restrictions:
1. General rule is: shares shall not be deprived of voting rights, except:
a. preferred shares
b. redeemable shares
2. Exception to the exceptions: Non-voting shares may still be entitled to vote on the following
matters:
a. Amendment of the articles of incorporation.
b. Adoption and amendment of by-laws.
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of the corporate property.
d. Incurring, creating or increasing bonded indebtedness.
e. Increase or decrease of capital stock.
f. Merger or consolidation of the corporation with another corporation or other
corporations.
g. Investment of corporate funds in another corporation or business in accordance with
the Code.
h. Dissolution of the corporation.
3. Where non-voting shares are provided for, there must always be a class or series of shares with
complete voting rights. As such:
a. The corporation cannot provide that all shares are non-voting.
b. When the corporation provides for non-voting shares, it is mandatory that some of
the shares must be voting shares.
4. Banks, trust companies, insurance companies, public utilities and building and loan associations
shall not issue no-par value shares.
a. What is par value? A par value is a nominal amount assigned to each share of stock
as provided for in the articles.
5. Preferred shares are those shares of stocks that have preferences over other classes of shares
in the following aspects:
a. As to distribution of dividends.
b. As to distribution of assets upon liquidation of the corporation.
6. Terms and conditions of preferred shares or any series of shares may be fixed by the board of
directors only when the articles of incorporation authorizes it and the effectivity of such terms and
conditions shall take effect upon the filing with the SEC.
7. No par value shares shall be issued for a consideration less than P5.00 per share. The
consequences are:
a. All the proceeds from the issuance of the no-par shares shall be considered as legal
capital and should not be available for distribution of dividends.
8. What is the situs of shares of stocks?
Example: Mr. A is an American citizen and residing in Davao City. He owns shares
of stocks of XYZ Corp., a Philippine Corporation with principal office address at Makati,
Metro Manila. Mr. A is indebted with Bank of the Philippines, Davao Branch, with his shares
of stocks with XYZ Corp. made as collateral. At the same time, Mr. A received dividends
from XYZ Corp. Questions: (1) What is the situs of Mr. As shares of stocks? (2) Where
should the bank register the chattel mortgage of Mr. A? (3) Where should the bank file the
foreclosure case? (3) With respect to the tax consequence of the dividends, is it tax
exempt? If not, where should he file his return, Makati or Davao?
a. Gen. Rule the domicile of the owner of the shares.
b. Exceptions:
b1. For purposes of execution, attachment and garnishment the situs of the shares
is the domicile of the corporation, not that of the owner of the shares.
b2. For purposes of registering the chattel mortgage over the shares of stock the
situs of the shares is the province in which the corporation has its principal place
of business or office.
b3. For purposes of taxation, the situs of the share is the domicile of the
corporation, not the domicile of the owner of the share.
F. Sec. 7, CCP Founders shares. What are its characteristics?
1. Classified as such in the articles of incorporation.
6. May be given certain rights and privileges not enjoyed by owners of other forms of stocks.

7.
8.

If granted the exclusive right to vote and be voted for in the election of directors, such right
shall not exceed 5 years and subject to the approval of the SEC.
When will the five years commenced? from the date of approval by the SEC.

G. Sec. 8, CCP Redeemable shares. What are its characteristics?

1. Can be issued only when said shares are provided for in the articles of incorporation.
2. Redeemable upon the expiration of a fixed period regardless of existence of unrestricted
retained earnings.
3. Terms and conditions affecting the redeemable shares are required to be provided for in the
articles of incorporation and stated on the certificate of stock.
H. Sec. 9, CCP Treasury shares. What are its characteristics?
1. They are shares that have been issued and fully paid.
2. That they are subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through other lawful means.
3. Unlike other shares, they can be re-issued for a reasonable price fixed by the BOD.
3. They cannot be voted upon.
4. They are not entitled to dividends.
II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS
A. Sec. 10, CCP Number and qualifications of incorporators.
1. Number of incorporators not less than 5 nor more than 15 persons.
a.
Can 5 natural persons where 4 of them own 1 share each and the rest is owned by
a single person legally form a corporation? YES. The law does not prohibit it.
2. Qualifications of incorporators:
b.
Must be natural persons. Is there an exception that an incorporator can be a
juridical person?
a1. Except in rural banks where the law allows a cooperative or corporation to be
an incorporator (Sec. 4, R.A. 720 as amended by P.D. 122 (Rural Bank Act).
c.
All of legal age without suffering from any legal impediment to bind a valid contract.
d.
Majority of whom are residents of the Philippines.
c1. Can a foreigner be an incorporator? YES provided the corporation complies
with the requirements under the Constitution and special laws such as Foreign
Investment Act on the percentage of Filipino ownership in the corporation.
e.
Each incorporator must own at least 1 share.
4. Steps in organizing a corporation:
a.
Promotional stage getting the desired percentage of shares to be subscribed and
paid.
a1. Who does this? The promoter.
a2. Under the Securities Act, shares of stock cannot be sold publicly unless the
corporation is first registered with the SEC.
b.
Drafting articles of incorporation.
a1. The contents of the articles of incorporation are contained in Sec. 14, CCP.
a2. The purpose contained in the articles of incorporation confers and limits the
powers of the corporation.
a3. The primary purpose must be specific and only 1.
a4. The secondary purposes may be totally alien to the primary purpose and may
not be related to each other.
c.
organization
B. Sec. 11, CCP Corporate term.
1. Should exist for a period not exceeding 50 years from the date of incorporation unless sooner
dissolved or extended.
2. The original 50 years can be extended for another 50 years by amending the articles of
incorporation.
3. Any extension should be filed not earlier than 5 years from expiration of the 50-year period,
except for justifiable reason for an early extension as may be determined by the SEC.
a. Can a corporation file for extension of corporate life after its corporate life has
expired? NO, because there is no more term to extend. (Al Hambra Cigar Case).
C. Sec. 12, CCP Minimum capital stock required for stock corporations. The rules are:

1. No minimum capitalization for private corporations unless required by special law like insurance
companies (P5M), investment houses (P20M).
2. However, the paid up capital should not be less than P5,000 (Sec. 13).
3. What is meant by paid up capital?
4. There are 3 terminologies that are often encountered in corporation law:
1. Authorized capita stock
2. Subscribed capital stock
3. Paid up capital stock
D. Sec. 13, CCP Amount of capital stock to be subscribed and paid for purposes of incorporation. The
rules are:
1. At least 25% of the authorized capital stock as stated in the articles must be subscribed at the
time of incorporation.
2. At least 25% of the subscribed capital stock must be paid at the time of subscription.
3. How should the balance paid:
a. Must be paid on the date or dates fixed in the subscription contract without need of
call.
b. In the absence of the fixed date, upon call for payment by the BOD.
c. What is meant by call?
E. Sec. 14, CCP Contents of the articles of incorporation.
F. Sec. 15, CCP Form of articles of incorporation. Must substantially comply with the form prescribed in
the law.
G. Sec. 16, CCP Amendment of articles of incorporation. The rules are:
1. Any provision or matter stated in the articles may be amended by a majority vote of the BOD or
BOT; and
2. The vote or written assent of the stockholders representing at least 2/3 of the outstanding capital
stock or members.
3. Dissenting stockholders can exercise their appraisal right.
5. The amendment shall take effect upon approval by the SEC.
a. What if the SEC will not act on the amendments? It shall be considered approved
upon the date of filing if not acted by the SEC within 6 months from the date of filing or for
cause not attributed to the corporation.
5. How should the amendments be made on the articles?
a. The articles, as amended, shall be indicated by underscoring the change or changes
made.
b. The amended articles shall be duly certified under oath by the corporate secretary
and majority of the BOD or BOT.
c. The certification must state that said amendment or amendments have been duly
approved by the required vote of the stockholders or members.
d. The amended articles must be submitted to the SEC for approval.
e. When does an amendment take effect? Upon the approval by the SEC.
H. Sec. 17, CCP Grounds when articles or amendment may be rejected or disapproved.
1. Instances where favorable recommendation by appropriate government agencies such as the
monetary board of the BSP, insurance commissioner, Dept. of Education, is necessary for the approval of
the articles:
a. Banks
b. Banking and quasi-banking institutions
c. Building and loan associations
d. Trust companies & other financial intermediaries
e. Insurance companies
f. Public utilities
g. Educational institutions
h. Other institutions governed by special laws
I. Sec. 18, CCP Corporate name.
1. May a corporation choose to use a name already used by other registered corporation?

a. Universal Mills Corp vs. Universal Textile Mills Inc., 78 SCRA 62. The SC ruled that
although the names were not identical they are undisputably so similar that confusion
would arise in the mind of the public, specially since they were engaged in a similar
businesses.
b. The present procedure of the SEC will prevent this because before the registration
papers are submitted for processing, the corporate name has to be approved first.
c. When an amended name is approved, the SEC must issue an amended certificate of
incorporation indicating the amended name.
J. Sec. 19, CCP Commencement of corporate existence and juridical personality.
1. Juridical personality is deemed incorporated from the date the SEC issues a certificate of
incorporation under its official seal.
2. This is a de jure corporation.
K. Sec. 20, CCP De facto corporation. Elements:
1. There is a valid law under which it is incorporated.
a. What if the law under which the corporation is incorporated is subsequently declared
void?
(i) The prevailing view is that there can neither be a de facto corporation nor a de jure
corporation. It is a total nullity. The only exception with respect to obligations
contracted. It remain valid and the corporation is liable. For purposes of paying the
obligation, the corporation is deemed existing.
(ii) However, there has been an increasing tendency to recognize its existence where
the corporation in good faith did all that is required under the said statute to form a
corporation. The limited liability could still be possible under the doctrine of estoppel.
(iii) Municipality of Malabang, Lanao Del Sur, et.al vs.
Pangandapun Benito, etl. Al (27 SCRA 533)
Facts: Petitioner is the mayor of Malabang while respondents are the mayor and
councilors of Balabagan. Balabagan was created into a municipality through E.O. 386
issued by Pres. Garcia. Petitioner sought to nullify E.O. 386 in accordance with the
ruling in Pelaez v. Auditor-General and Municipality of San Joaquin v. Siva. In Pelaez
case, the supreme court ruled that the power to create barrios lies with the provincial
board, not the president. That Sec. 68 of the Administrative Code, though grants the
president the power to create municipalities, is unconstitutional because it is an
undue delegation of legislative power and the power to the president over local
governments pertains only to mere supervision. That the Sec. 68 of the Revised
Administrative Code is deemed repealed by the subsequent adoption of the 1935
Constitution. Respondents argued that the Municipality of Balabagan is at least a de
facto corporation, having been created by a color of a statute before the same was
declared unconstitutional, and its officers were duly elected. Ruling: While the
municipality of Balabagan was created under the statute before the same was
declared unconstitutional, there is still no de facto corporation because there is no
other valid statute to give color of authority to its creation.
2. Attempt to incorporate in good faith.
a. When is there substantial or colorable compliance?
(i) There is substantial compliance when the corporation is issued with a
certificate of incorporation. (Hall et al vs. Piccio et al, 86 Phil 603.
(ii) If the corporation is still in the process of formation, it is clear that there is no
substantial compliance, hence no de facto corporation.
(iii) Bergeron vs. Hobbs et.al (Supreme Court of Wisconsin) As a general rule,
where an attempt to organize a corporation fails, by omission of some substantial
step or proceeding required by the statute, its members or stockholders are liable
as partners for its acts and contracts.
(iv) Harill vs. Davis (US Circuit Court of Appeals) The defendants, before their
corporation was formed, ordered goods from the plaintiff. The Plaintiff sought to
recover the price of the goods. Ruling: The general rule is that when parties
engage in business under a common name, they are liable as partners. The
exception is when they duly form a corporation, their liabilities will be limited.
There is no de facto corporation at the time the obligations were incurred
because the papers for incorporation were not submitted yet.
3. Assumption of corporate powers e.g. transacting business as a corporation.
5. A certificate of incorporation was issued despite defect in its incorporation.

Question: What is the legal implication when a corporation is declared de facto? Its existence cannot
be collaterally attacked in any proceeding. The action should be direct in the form of a quo warranto action
by the State through the Solicitor General. Before such action, the corporation continues to enjoy juridical
personality.
L. Sec. 21, CCP Corporation by estoppel. General principles are:
1. All persons who assumes to act as a corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or arising as a result thereof.
2. When the ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.
3. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof
on the ground that there was in fact no corporation.
4. To whom will Sec. 21 apply?
a. Third party
b. Alleged (ostensible) corporation
5. Example: A entered into a contract with X Company who represented to be a duly organized corporation.
X Company failed to pay the purchase price of the goods delivered by A in accordance with the contract. A sued X
Company. Can X Company put up the defense that it is not duly incorporated, hence no capacity to be sued? NO.
Supposing it was X Company who entered into a contract with A. At the time of the contract, A knew that X
Company was not duly incorporated. X Company made deliveries and A defaulted in his payments. X Company filed
a suit against A. Can A put up a defense that X Company is not a duly organized corporation? NO, he is precluded
from denying its corporate existence on a suit brought by X Company.
Supposing A was ignorant of such defect in the incorporation of X Company, can he put up the defense that
X Company is not duly incorporated? NO.
Are there exceptions?
a. Harrill v. Davis (US case), Salvatierra v. Garlitos, 103 Phil 757 (1958)
Yes, when business associates fraudulently misrepresent the existence of the corporation,
they can be sued in their individual liability.
b. Where associates were ignorant of the defective incorporation, and a
likewise innocent third person dealt with the corporation as such, the latter cannot hold the associates
personally liable.
6. What are the distinctions between de facto doctrine and estoppel doctrine.
a. When all the requisites of a de facto corporation are present, then the defectively formed
corporation will have the status of a de jure corporation in all cases brought or against it.
b. When any of the requisites is absent, estoppel doctrine will apply only if under the
circumstances of the particular case then before the court, either the defendant association is
estopped from defending on the ground of its lack of capacity to be sued, or the defendant
third party had dealt with the plaintiff as a corporation and is deemed to have admitted its
existence.
7. Question: Can a corporation be organized by estoppel? NO. The parties in a corporation by estoppel
is liable as general partners, pro-rata with respect to their present and future properties.
8. Question: Suppose there was fraud by the parties in procuring the SEC certificate. What is the status of
the corporation?
Answer: Not a de jure corporation because it failed to comply with the law. Not a de facto
corporation because there is no bona fide attempt to incorporate. Hence, it is a non existing entity.
9. Question: What legal action is available to stop the non existing entity to operate as such? Any person
can file an action to cancel or revoke the SEC certificate under P.D. 902. Quo warranto is not the remedy.
M. Section 22, CCP. Effects of non-use of corporate charter and continuous in-operation of a corporation. (2-5 rule)
1. Requirements after the date of incorporation (from issuance of SEC certificate):
a. Must formally organize meaning adopt its by laws and elect the BOD and its officers in
accordance with the by-laws.
b. Must commence the transaction of its business.
c. All of these must be done within 2 years from date of incorporation.
2. What are the effects if it failed to comply with the foregoing requirements?
a. Its corporate powers will cease.
b. The corporation is deemed dissolved.
3. What if the corporation complied the foregoing requirements within 2 years from its incorporation but
during its life, it failed to continuously operate for a period of 5 years?
a. Such becomes a ground for suspension or revocation of its franchise or SEC certificate.
4. Is there an exception? Yes, when the cause is beyond the control of the corporation as maybe
determined by the SEC.

N. Section 46 of CCP. Adoption of by-laws.

1. Question: What is a by-laws it is a document pertaining to the provisions for the government of the
corporation.
2. Question: When should the corporation adopt its by-laws? Before incorporation or after incorporation?
Both, under Sec. 46 of the CCP.
a. If done before incorporation it must be filed together with the articles of incorporation. It must
be approved and signed by ALL incorporators. But the by-laws take effect only upon issuance
of the SEC certificate.
b. If done after incorporation must be filed within one month from notice of issuance of the SEC
certificate. It must be approved by the majority of the outstanding capital stock, excluding
treasury shares or majority vote of the members and filed with the SEC. The by-laws shall
take effect only upon approval of the SEC.
3. Question: What is the effect if the corporation failed to adopt its by-laws with the said period of 1
month? The SEC certificate may be revoked or the corporation may be fined by the SEC.
4. Question: What are the requisites of valid by-laws?
a. It must be consistent with law and the articles of incorporation.
b. It must be consistent with public policy.
c. It must general and uniform.
d. It must be reasonable
e. It must not impair vested rights.
5. Question Are the stockholders or members bound by the by-laws before its approval by the SEC?
There are two views.
a. First, it is not effective among the stockholders or members because of Sec. 46 that states that
the by-laws shall be effective only upon approval by the SEC.
b. Second, it is effective among stockholders or members because it is a contract between them.
6. Question: What is the effect of the by-laws to 3 rd persons? It is binding only to third persons only if the
latter has actual notice of the by-laws.
7. Question: Is the filing of the by-laws with the SEC serves as constructive notice? NO.
III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS
A. Section 23, CCP. The board of directors or trustees.
1. Preliminary BOD for stock corporation; BOT for non-stock corporation.
2. How is the control over the corporation allocated?
a. BOD/BOT responsible for corporate policies and business affairs.
b. Officers execute the policies
c. Stockholders/members exercises residual power over fundamental corporate changes e.g.
amendments, disposal of properties, removal of director.
3. What is the role of the BOD or BOT? (MECC)
a. They managed the affairs of the corporation.
b. They exercise the powers of the corporation.
c. They conduct the business of the corporation.
d. They control all properties of the corporation.
4. How are the BOD or BOT selected? By election from among the stockholders or members.
5. What is their term of office? 1 year and until their successors are elected and qualified.
6. What are the qualifications to be a BOD? Correlate it with Sec. 27.
a. Must be an owner of at least one share of stocks of the corporation.
b. The share of stock must be in his name in the stock and transfer book.
c. Majority of the board must be residents in the Philippines.
d. Not convicted by final judgment of an offense carrying an imprisonment exceeding 6 years
or offenses in violation of the Corporation Code.
NOTE: Violations of the PENAL CODE, SPECIAL LAW that is criminal in nature,
CORPORATION CODE.
7. Question Can an alien become a board of director? Yes, but only in proportion to their alien equity.
8. Question: Suppose A is a director, being a holder of 1 share. Before his term expires a director, he sold
his share and the sale was duly recorded in the stock and transfer book. Will A continue to be a director until
his 1 year term expires considering that at the time of his election he was an owner of at least 1 share? NO.
Any director who ceases to be the owner of at least one share in a corporation of which he is a director shall
cease to be a director.
9. Question: Can the by-laws provide that in order to qualify as a board, he/she must be a holder of at
least 5 shares? YES. Art. 23 speaks of at least 1 share.

10. Question: What in the case of BOT? How are they selected? By election from among the members of
the corporation.
11. Question: Is there an additional requirement in the case of BOT YES. Majority of them must be
residents of the Philippines.
12. Some general principles under this Section:
a. The stockholders do not have the general management and control of the affairs of the
corporation. They are deemed to have consented to the management and control of the
corporate affairs by the BOD or BOT.
b. The BOD or BOT may appoint an executive committee to conduct ordinary business of the
corporation, in the intervals between the sittings of the board. The executive committee
represents the board.
c. However, all members of the executive committee should be members of the BOD or BOT.
d. It is a cardinal principle that a director or officer of a corporation will not be permitted to make a
private or secret profit out of his official position. Any benefit or advantage received must be
given to the corporation. Correlate this with Sections 31, 32, and 33.
e. Question: Can a director liable for the acts or omissions of the co-directors or other officers?
NO, unless he connives or participates; he is negligent in not discovering or acting to
prevent it.
B. Section 24, CCP. Election of directors or trustees.
1. Questions: What is the required quorum for a valid election? Is an election by mere raising of hands
valid? Or is it necessary that the election must be in ballot in order to be legal? How many votes can a stockholder
casts for 1 director?
2. In the case of a stock corporation, the requirements for a valid election are:
a. There must be a QUOROM of the stockholders during the election, which means that there
must be present, in person or by proxy, the OWNERS of the MAJORITY of the
OUTSTANDING capital stock.
b. Election must be by BALLOT, if requested by any voting stockholder or member.
c. Only those stockholders whose shares of stocks are in their names in the stock and transfer
books can vote in person or proxy.
3. Question: How should a stockholder vote his shares of stocks? By the use of cumulative voting. What
does this mean?
a. Example: X, Y, W, and Z own 4,000 shares of stock and each of A, B, C, D, and E owns 200
shares or 1,000 shares in all and there are 5 directors to be voted. X, Y, W, and Z are majority
stockholders while A, B, C, D, and E are the minority stockholders. The highest vote that the
majority stockholders could give one director shall be 4,000 votes assuming that they vote for
all 5 directors. The minority stockholders can join forces and can also elect one director by
casting 5,000 (1,000 times 5 directors) to 1 director.
4. Question: Can the by-laws provide for a different manner of voting directors other than cumulative
voting? NO. According to SEC Opinion, cumulative voting is mandatory.
5. Question: Can delinquent stocks be voted? NO.
6. How is voting done in the case of a non stock corporation?
a. Each member is allowed to cast only 1 vote for 1 candidate.
b. The member who gets the highest number of votes is declared elected.
c. Majority of the members should be present in person or by proxy.
C. Section 25, CCP. Corporate Officers, quorum.
1. What should the corporation do after electing BOD or BOT? The BOD or BOT must elect the officers of
the corporation. It is the election of the officers that formally organize the corporation.
2. Who are the officers to be elected?
a. President - who must be a director.
b. Treasurer who may or may not be a director.
c. Secretary who shall be a resident and citizen of the Philippines.
d. Such other officers as the by-laws provide.
3. When may a treasurer be required to be a director? NO, unless the by-laws require it.
4. Is it required that the officers should be Filipino? No. There is no citizenship requirements in the code for
the officers, except in industries or business reserved only for Filipino citizens.
5. Can an officer holds 2 or more positions in a concurrent capacity?
a. General rule YES.
b. Exception: An officer cannot act both as president and secretary or president and treasurer at
the same time. These are incompatible positions.
6. What are the duties of the officers?

a. Those duties as the law provides.

b. Those duties as the by-laws provides.
6. What is the required quorum of the BOD or BOT to transact business?
a. General rule simple majority of the BOD or BOT?
b. Exception unless a greater majority is required by the articles of incorporation.
7. When is a corporate act of the BOD or BOT in transacting business considered valid?
a. General rule - when the decision is arrived at by a majority vote of the board or trustees who
are present during the meeting.
b. Exception during election of corporate officers when the required vote is majority of ALL
members of the board.
8. Can a board delegate the attendance and voting in a board meeting by proxy? NO because the board is
elected on the basis of personal choice.
9. Is it required that the participation of a member of the board be physical? NO. What is required is that
the member of the board, though physically absent, can deliberate and pros and cons of the resolution
in issue.
11. Is verbal notice of board meeting sufficient? YES unlike a stockholders meeting where the code
requires it to be in writing.
12. Can the board meeting be held in any other places? YES, provided it is not prohibited in the by-laws.
So the board can be held even outside the Philippines. NOTE that the rule is different from
stockholders meeting where the same can be held only in the principal place of business.
13. Supposing there is quorum at the start of a board meeting. During its deliberations, some of the board
went out for some reasons leaving the rest not in quorum and a resolution was passed. Is the resolution
valid? YES, because the quorum is considered continuing until the meeting is terminated.
14. EXCEPTION: Supposing some of the board walked out for a valid reason leaving the rest not in
quorum. Subsequently, a resolution was passed. Is the resolution valid?
a. NO because meeting ceased to have a valid quorum.
b. Supposing the issue of quorum was not raised when the resolution was adopted, will the
answer be the same? YES.
15. Salvador B. Lopez vs. Ericta
A quorum of 12 members of the Board of Regents voted on a resolution as follows: YES-5 votes;
NO 4 votes; ABSTAIN 3 votes. Is the resolution carried out? NO. An abstain vote is considered as
cast vote. Hence should not be counted together with the yes votes.
16. Can a board create corporate officers? NO. Corporate officers are created only by the by-laws and
the corporation code.
17. Can the board delegate the exercise of its powers? YES, by creating an executive committee but only
on specific matters of implementation, not for making policies.
18. Can a stockholder become an officer? YES.
19. Is an officer who is also a stockholder covered by the Labor Code? NO, because there is no employeremployee relationship.
20. What is the remedy in case there is a conflict between an officer who is at the same time a stockholder
and the corporation? The issue is deemed an intra-corporate controversy cognizable by the SEC and not
the labor arbiter.
D. Section 26, CCP. Report of election of directors, trustees and officers.
1. What should the corporation do after electing the directors, trustees and officers? It must submit to the
SEC the names, nationality, and residences of the directors, trustees and officer elected within 30 days from their
election.
2. Supposing an elected board die, resigns, or had ceased to hold office, what should the corporation do?
The heir, in case of death, or the secretary of the corporation in the other cases, must report such
fact to the SEC.
E. Section 27, CCP. Disqualification of directors, trustees or officers.
1. What the disqualification of directors, trustees or officers?
a.
Conviction by a final judgment of an offense punishable by imprisonment for a period
exceeding 6 years.
b.
Violation of the Corporation Code of the Philippines. Relate this to Section 144 of the code.
2. Question: Supposing X was elected as a board. However, his election was contested on the ground
that he was previously charge with estafa punishable by imprisonment of more than 6 years.
a. Will the disqualification prosper? NO because there is no conviction by final judgment yet.
b. Suppose X was finally convicted of estafa after his term expires, will the disqualification
prosper? No because the case becomes moot and academic.

c.

Suppose X was previously convicted by final judgment and was sentenced to more than 6
years imprisonment, will he be disqualified to run for the board?
It will depend. If X was convicted within 5 years from his election, he is disqualified.
Otherwise, No.