The Corporation Code classifies private corporations into stock and non-stock corporations, according

to whether their membership is represented by shares of stock or not.

1. A stock corporation is the ordinary business corporation created and operated for the purpose
of making a profit which may be distributed in the form of dividends to stockholders on the
basis of their invested capital.
2. Non-stock corporations do not issue stock and distribute dividends to their members; they are
created not for profit but for the public good and welfare.

As to State under or by whose laws they have been created:

(a) Domestic corporation or one incorporated under the laws of the Philippines; or

(b) Foreign corporation or one formed, organized, or existing under any laws other than those of the
Philippines. It includes multinational corporations created under the laws of another State, (see Sec.
123.) For tax purposes, a foreign corporation is further classified into resident or non-resident.

As to their legal right to corporate existence:

(a) Dejure corporation or a corporation existing in fact and in law; or

(b) De facto corporation or a corporation existing in fact but not in law. (see Sec. 21.)

As to their relation to another corporation:

(a) Parent or holding corporation or one which is so related to another corporation that it has the
power, either directly or indirectly, to elect the majority of the directors of such other corporation;16

(b) Subsidiary corporation or one which is so related to another corporation that the majority of its
directors can be elected either directly or indirectly by such other corporation. It is one in which another
corporation17 owns at least a majority of the shares and thus has control; or

(c) Affiliated corporation or one related to another by owning or being owned by common management
or by a longterm lease of its properties or other control device.

As to whether they are for public (government) or private purpose:

(a) Public corporations or those formed or organized for the government of a portion of the State for the
general good and welfare; or

(b) Private corporations or those formed for some private purpose, benefit, or end; it may be either a
stock or non-stock corporation, government-owned or -controlled corporation or quasi-public
corporation.

The true test is the purpose of the corporation.

Private corporations include:

1) Government-owned or -controlled corporations or those created or organized by the

government or of which the government is the majority stockholder.

2) Quasi-public corporations or private corporations which have accepted from the State the grant
of franchise or contract involving the performance of public duties (1 Fletcher, p. 216.) but
which are organized for profit. They have been denned also as corporations private in owner
ship but having an appropriate franchise from the State to provide for a necessity or
convenience of the general public, incapable of being furnished through the ordinary channels
of private competitive business and dependent for its exercise upon eminent domain or some
agency of the government. (Ibid., p. 217.) They are private corporations that perform public
service.

Under the present Constitution, only government-owned or -controlled corporations "with original
charter" (i.e., created by special law and not under the Corporation Code) are embraced within the Civil
Service.

DISTINCTIONS OF PRIVATE CORPORATION AND PUBLIC CORPORATION

(1) The most important distinction is with respect to governmental control. Public corporations, being
mere instrumentalities of the State, are subject to governmental visitation and control, whereas the
charter of a private corporation is a contract between the State and the corporation or incorporators,
which, under the provision of the Constitution prohibiting laws impairing the obligation of contracts,
renders such corporations not subject to visitation, control, or change by the State, except in the
exercise of the police power.

(2) Another distinction is that a public corporation may be created without the consent of the locality
to be affected, whereas the consent of the incorporators is necessary to the creation of a private
corporation.

(3) The distinction is also important with respect to taxation, to the question of liability for the torts or
negligence of officers and agents, and to various other questions.

Jurisdiction of SEC. — The Securities and Exchange Commission (SEC) has no jurisdiction over
corporations with original charter or created by special law. It follows that it has no power to
interpret the law creating it. However, the SEC can rule on the status of a corporation as to whether it
is a government-owned or -controlled corporation belonging to this type. It has jurisdiction to
determine this issue,
Components of a corporation.
The four classes of persons composing a corporation are the following:

(1) Corporators or those who compose the corporation, whether stockholders or members. Hence, the
term includes incorporators and stockholders or members who become as such after incorporation of
the corporation

(2) Incorporators or those corporators mentioned in the articles of incorporation as originally forming
and composing the corporation and who executed and signed the articles of incorporation and
acknowledged the same before a notary public, (see Sees. 14,15.) So, all incorporators are corporators
but a corporator is not necessarily an incorporator.

(3) Stockholders or the owners of shares of stock in a stock corporation. They are the owners of the
corporation. They are also called shareholders. They are the corporators in a stock corporation.
Stockholders may be natural or juridical persons but only natural persons can be incorporators.

(4) Members or corporators of a corporation which has no capital stocks. All incorporators in a stock
corporation must now own or at least be a subscriber to at least one (1) share of the capital stock of
such corporation

Under Section 3, a corporation, to be classified as a stock corporation, (a) must have capital stock divided
into shares, and (b) must be "authorized to distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the shares held

-doctrine of equality of shares. It means that in the absence of any provision in the articles of
incorporation and in the certificate of stock to the contrary, all stocks, regardless of their class
nomenclature, enjoy the same rights and privileges and subject to the same liabilities.

The capital stock is the money value assigned to a corporation's issued shares, constituting generally the
legal capital (infra.) of the corporation.

Capital is used broadly to indicate the entire property or assets of the corporation. It includes the
amount invested by the stockholders plus the undistributed earnings less losses and expenses. In the
strict sense, the term refers to that portion of the net assets paid by the stockholders as consideration
for the shares issued to them, which is utilized for the prosecution of the business of the corporation. It
includes all balances or installments due the corporation for shares of stock sold by it and all unpaid
subscription for shares.
Capital stock and capital distinguished.

(1) Capital is the actual corporate property. It is, therefore, a concrete thing. Capital stock is an amount.
It is, therefore, something abstract.

(2) Capital fluctuates or varies from day to day according as there are profits or losses or appreciation or
depreciation of corporate assets. Capital stock is an amount fixed in the articles of incorporation (where
shares are with par value) and is unaffected by profits and losses. Thus, capital may be greater or lesser
than the amount of the capital stock.

(3) It is said that capital belongs to the corporation and capital stock when issued belongs to the
stockholders, and that capital may be either real or personal property but capital stock is always
personal.

Stock or share of stock defined.

Stock or share of stock is one of the units into which the capital stock is divided. It represents the
interest or right which the owner has —

(1) in the management of the corporation in which he takes part through his right to vote29 (if voting
rights are permitted for that class of stock by the articles of incorporation);

(2) in a portion of the corporate earnings, if and when segregated in the form of dividends; and

(3) upon its dissolution and winding up, in the property and assets of the corporation remaining after
the payment of corporate debts and liabilities to creditors,

Certificate of stock is a written acknowledgment by the corporation of the interest, right, and
participation of a person in the management, profits, and assets of a corporation.

Classes of shares in general.

Shares of stock may be:

(1) Par value or no par value;

(2) Voting or non-voting;

(3) Common or preferred, and preferred shares may be voting, convertible, or redeemable, (infra.) They
may be:

(a) Preferred as to assets in case of liquidation or preferred as to dividends and the latter, in turn, may
be either:

1) Cumulative or non-cumulative; or
2) Participating or non-participating;

(4) Promotion share;

(5) Shares in escrow;

(6) Convertible share;

(7) Founders' share (see Sec. 7.);

(8) Redeemable share (see Sec. 8.); and

(9) Treasury share, (see Sec. 9.)

Par value share is one with a specific money value fixed in the articles of incorporation and appearing in
the certificate of stock.

(1) The primary purpose of par value is to fix the minimum subscription or issue price of the shares, thus
assuring creditors that the corporation would receive a minimum amount for its stock, (see Sec. 62.)

(2) A corporation may issue shares with different par values. Shares issued less than par value are
referred to as watered stock. (see Sec. 65.)

(3) The par value of a stock remains the same regardless of market value or book value (infra.) of the
stock, except when there is a stock split, (see annotation under Sec. 43.) It is not usually the price at
which investors buy or sell the stock.

No par value share is one without any stated value appearing on the face of the certificate of stock. In
other words, it is a stock which does not state how much money it represents.

(1) A no par value share has, therefore, no par value but it has always an "issued value," i.e., the
consideration fixed by the corporation for its issuance, (see Sec. 62, last par.)

(2) A no par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the issuing
corporation.

(3) A corporation may issue no par value only, or together with par value shares. No par value
stockholders have the same rights as holders of par value stock.

(4) The capital stock of a corporation issuing only no par shares is not set forth by a stated amount of
money, but instead is expressed to be divided into a stated number of shares, such as 1,000 shares.
Voting share is share with right to vote.

(1) It is generally customary to give the right to vote to the common stock and to withhold it from the
preferred.

Each common share shall be equal in all respects to every other common share. Corporations are hereby
prohibited from issuing multiple voting and non-voting common shares nor can they limit the maximum
number of votes per stockholder irrespective of the number of shares he holds. (SEC Memo. Cir. No. 4,
series of 2004.)

(2) Only shares classified and issued as "preferred" or "redeemable" may be deprived of voting rights.
Article 6 (par. 1.) expressly prohibits the depreciation of voting rights except only as to said shares.
(Castillo vs. Balinghasay, 440 SCRA 442 [2004].) But founders' shares may be given the exclusive right to
vote and be voted for in the election of directors for a limited period (Sec. 7.) in which case voting
common stocks will have no right to vote for directors.

(3) Under the Code, whenever a vote is necessary to approve a particular corporate act, such vote refers
only to stocks with voting rights except in certain cases when even non-voting shares may also vote.
(Sec. 6, par. 6 and last par.) The rule is not "one stockholder, one vote" but "one share, one vote"
because representation in a corporation is commensurate to extent of ownership.

Non-voting share. Non-voting share is share without right to vote.

(1) If stock is originally issued as voting stock, it may not thereafter be deprived of the right to vote
without the consent of the holder.

(2) Under the Code, no share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in the Code. (Sec. 6, par. 1.) The proviso
refers to fundamental matters enumerated in Section 6 (par. 6[l-8].) on which holders of non-voting
shares in stock corporations shall nevertheless be entitled to vote. Note that the enumeration in Section
6 does not include the election of directors or trustees (see Sec. 24.) as one of the matters on which
non-voting shares may vote. In non-stock corporations, Section 89 governs the right of the members to
vote on corporate matters.

(3) Where non-voting shares are provided for, the Code requires that there shall always be a class or
series of shares which have complete voting rights. (Sec. 6, par. 1.)

(4) Under Section 6 (par. 1.), only preferred or redeemable shares may be denied the right to vote. The
issuance of common stock with a feature that voting rights thereof shall be exercised by a trustee
violates the rule that common shares cannot be deprived of voting rights. The automatic assignment of
voting rights is an indirect violation of Section 6. (SEC Opinion, July 15, 1997.)

(5) In case any amendment of the articles of incorporation has the effect of changing or restricting the
rights of any stockholder, the latter shall have the right to dissent and demand payment of the fair value
of his shares.
Common share.

Common share of stock is one which entitles the holder thereof to a pro rata division of the profits, if
there are any, and in its assets upon dissolution, without any preference or advantage in that respect
over other stockholders or class of stockholders but equally with all other stockholders except preferred
stockholders.

Sec. 6 TITLE I. GENERAL PROVISIONS Definitions and Classifications

87

(1) It is so-called because it is the basic class of stock which private corporations generally issue (hence,
the name) or because its holders stand upon an equal footing, without extraordinary rights or privileges.

(2) Common shares have complete voting rights. They cannot be deprived of said rights except as
provided by law.

(3) Common stockholders are the residual owners of the corporation. They get only the assets left over
in case of liquidation after all other securities holders are paid.

(4) As a result of restrictions upon other classes of stock with respect to voting rights, the common
stock, normally, as to those classes, has preference in the matter of management, (see 18 Am. Jur. 2d
741.)

(5) The simplest corporate structure has only one kind of stock — all common. When only a single class
of stock is issued, then all shares are alike and all issues are common stock. A corporation may issue
more than one class of common stock, being designated "Class A," "Class B," etc.

Preferred share.

Preferred share of stock31 is one with a stated par value which entitles the holder thereof to certain
preferences over the holders of common stock.32

(1) Under the Code, preferred shares of stock may be issued only with a stated par value. (Sec. 5, par. 2.)
More than one class of preferred shares may be issued usually designated "first preferred," "second
preferred," etc.

(2) The preferences are designed to induce persons to subscribe for shares of a corporation.33 They may
consist in the payment of dividends or the distribution of the assets of

a corporation in case of its dissolution ahead of the common stockholders, or such other preferences as
may be stated in the articles of incorporation which are not violative of the provisions of the Code. (Sec.
6, par. 2.) But as already stated, each share shall be in all respects equal to every other share except as
otherwise provided in the articles of incorporation and stated in the certificate of stock. (Ibid., par. 5.)
Thus, unless otherwise so provided, preferred stocks are presumed to be voting although they are rarely
given voting privileges.

(3) The term guaranteed stock is sometimes used as synonymous with preferred stock on which the
payment of dividend is guaranteed34 and a distinction is sometimes drawn to the effect that
guaranteed stock is entitled to arrears in dividends, while ordinary preferred stock is not. (18 C.J.S. 650.)

(4) Interest bearing stock on which the corporation agrees absolutely to pay interest before dividends
are paid to common stockholders is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only.35 (see Sec. 43.) Such stock is, in effect, preferred stock,
except perhaps that the discretion of board of directors to use profits for other corporate purposes may
be more limited.

Common and preferred shares are the two main classes or forms of stock. Holders of preferred shares
do not lose the voting rights in all matters affecting the corporation. Section 6 (par. 6) provides for the
cases when non-voting shares like preferred shares are granted voting rights.

Promotion shares are such shares as are issued to promoters, or those in some way interested in the
company, for incorporating the company, or for services rendered in launching or promoting the welfare
of the company, such as advancing the fees for incorporating, advertising, attorney's fees, surveying,
etc.

Share in escrow is share subject to an agreement by virtue of which the share is deposited by the
grantor or his agent with a third person to be kept by the depository until the performance of a certain
condition (usually the payment of the full subscription price) or the happening of a certain event
contained in the agreement. (Cannon vs. Handley, 12 P. 315.)

(1) The escrow deposit makes the depository a trustee under an express trust, (see Arts. 1440,1441, Civil
Code.)

(2) The legal title to the subject matter to be conveyed remains in the grantor until the condition is
fulfilled. The issuance of the shares is thus made subject to a suspensive condition. (Lusk vs. Stevens, 64
Phil. 1054 [1937].)

(3) Before the fulfillment of the condition, the grantee or holder is not yet the owner of the shares and
consequently, he is not entitled to the rights belonging to a regular stockholder.

Convertible share is share which is convertible or changeable by the stockholder from one class to
another class (such as from preferred to common) at a certain price and within a certain period.
Nature of par value/book value/ market value.

(1) Par value. — The par value36 indicated in the certificate of

*"'Par" means equal, and "par value" means face value or value equal to the face of the stocks or bonds.
The par value of an interest-bearing bond on the day of its issuance is the principal and the accrued
interest. (31 Words and Phrases [1957 ed.] 559.) To say that a bond is valued at par means that its value
is equal to the face value of the bond. (Ibid., 63.)

(2) Book value. — Hence, the par value does not always reflect its book value or its actual or true value
which may be determined by dividing the total stockholders' equity or the net value of the total
corporate assets (capital and surplus, if any) by the number of shares issued or outstanding. Since
unpaid subscriptions (see Sec. 60.) are considered part of the asset of a corporation which the board of
directors (see Sec. 24.) may at any time declare due and payable (see Sec. 67.), they should be included
in the computation of book value. But book value does not attach to unissued or reacquired shares, (see
Sec. 9.)

(3) Market value. — Par value and book value may be more or less than market value which may be
defined as the price at which a willing seller would sell and a willing buyer would buy, assuming that
both have a reasonable knowledge of the facts, and neither being under abnormal pressure. Market
value is affected by the law of supply and demand.

Kinds of preferred shares as to dividends.

They may be cumulative, non-cumulative, participating, non-participating, and cumulative-participating.

(1) Cumulative preferred share is share which entitles the holder thereof not only to the payment
of current dividends but also to dividends in arrears. In other words, if the stipulated dividend is
not paid in a given year, it shall be added to the dividend which shall be due the following year
and the accumulated dividends must be paid to the holder of said preferred share before any
dividend may be paid to the holders of common stock.
(2) Non-cumulative preferred share is share which entitles the holder thereof to the payment of
current dividends only in preference to common stockholders. In other words, if dividends
(3) Participating preferred share is share which gives the holder thereof not only the right to receive
the stipulated dividends at the preferred rate but also to participate with the holders of
common shares in the remaining profits pro rata (or in the proportion stated in the articles of
incorporation) after the common shares have been paid the amount of the stipulated dividend
at the same preferred rate.
(4) (4) Non-participating preferred share is share which entitles the holder thereof to receive the
stipulated preferred dividends and no more. The balance, if any, is given entirely to the common
stocks.
In the absence of an agreement, express or implied, dividends should be deemed noncumulative
and non-participating in accordance with the presumption established in Section 6 (par. 5.) that
 shares are equal in all respects unless otherwise stated in the articles of incorporation and in the
certificate of stock.
(5) Cumulative-participating preferred share is share which is a combination of the cumulative
share and participating share. This means that the holder is entitled not only to dividends in
arrears but also, after receiving his preferred share of dividends, to participation with the
holders of common stock in the remaining profits.

Founders' shares have been defined as "shares issued to the organizers and promoters of a corporation
in consideration of some supposed right or property. Such shares usually share in profits only after a
certain percentage has been paid upon the common stock, but are often given special privileges over
other stock as to voting and as to division of profits in excess of a minimum dividend on the common
stock.

*The board of directors or trustees, therefore, is the governing body of the corporation chosen by the
stockholders or members. Thus, contracts or acts of a corporation must be made either by the board of
directors or trustees or by a corporate officer duly authorized by the board. The general rule is that in
the absence of authority or valid delegation from the board of directors or trustees, no person, not even
its officers, can validly bind a corporation.

*The stockholders or members elect a board of directors (or trustees) to oversee the management and
operation of the corporation. They are not the agents of the corporation and cannot bind it by their acts.
They have only indirect control of the corporation through their votes.

*The well-known "business judgment" rule5 is that courts cannot undertake to control the discretion of
the board of directors about administrative matters as to which they have the legitimate power of
action, and contracts intra vires entered into by the board of directors are binding upon the corporation
and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount
to a wanton destruction of the rights of the minority. As long as it acts in good faith, its orders are not
reviewable by the courts.

*the board of directors — the exclusive authority to manage and control the transaction of its business
and the use of its assets, the power of the stockholders being limited to a few specified matters
concerning its internal affairs.

*In a close corporation, however, the articles of incorporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation rather than by a board of directors.
*In other words, acts of management pertain to the board, and those of ownership to the stockholders
or members. In the latter case, the board cannot act alone, but must seek approval of the stockholders
or members

*The other view favors the delegation theory, which holds that the directors are the officers and agents
of the corporation, representing the interests of that abstract legal entity and of those who own shares
of stock (see Mead vs. McCullough, 21 Phil. 95 [1911]; Angeles vs. Santos, 64 Phil. 697 [1937].), and as
such, they can bind the corporation provided they act within the scope of their authority.

-----Broad as it is, the managerial authority of the board of directors or trustees is thus subject to
Sections 31-34 of the Corporation Code and to at least three (3) limitations. They are as follows:

(1) Limitations or restrictions imposed by the Constitution, statutes, articles of incorporation, or by-laws
of the corporation;

(2) It cannot perform constituent acts, that is, acts involving fundamental or major changes in the
corporation (such as amendment of the articles of incorporation under Sec. 16.), which require the
approval or ratification of the stockholders or members;7 and

(3) It cannot exercise powers not possessed by the corporation, (see Clark on Corporations, Sec. 192.

*It has been held that the power of the board of directors to control the corporation's property and
business does not empower them to provide themselves compensation. The law is well-settled that
directors of a corporation presumptively serve without compensation

* The general rule is that, in the absence of authority from the board of directors, no persons, not even
its officers, can validly bind a corporation.

The power to bind the corporation by contracts rests in its board of directors or trustees, but the power
may be delegated either expressly or impliedly to other officers or agents of the corporation appointed
by it.
Exceptions. — The rule recognizing the power of the board to delegate authority is not without
limitations. (a) It has been held that discretionary powers which, by provisions of law (e.g., to declare
dividends, Sec. 43.) or the by-laws or by the vote of the stockholders, are vested exclusively in the board
of directors or are especially delegated to them, cannot be delegated to subordinate officers and agents.
(Bliss vs. Kaweah Canal, etc., 65 Cal. 502; see Sec. 25, re other officers and agents.)

(b) There is a limit, even to the power of the directors or trustees to delegate authority. As their
authority to delegate is implied from the necessities in the management of the corporation and from
the usage, so also, it is limited by the same considerations. They cannot delegate entire supervision and
control of the corporation to others for this is not only unnecessary and contrary to usage, but it is
inconsistent with Section 23, which requires that "the corporate powers x x x shall be exercised, all
business conducted and all property of such corporation controlled and held by its board of directors or
trustees." (see 2 Fletcher, pp. 378-379.)

(c) Neither can the board delegate special powers especially conferred upon it by a resolution of the
stockholders or members of the corporation. Unquestionably, it may delegate purely ministerial duties.
(2 Fletcher, p. 537.) It is quite clear that the power of the board to delegate authority is subject to
restrictions as may be provided in the by-laws.

Number of directors or trustees to be elected.

(1) Under the Code, the number of directors in a stock corporation must "not be less than five (5) nor
more than fifteen (15)" (Sec. 14[6].), except as otherwise provided by the Code or by special law. Since
the members of the board are required to be stockholders of record of the corporation, it follows that
there must be at least five (5) stockholders in a corporation. (SEC Opinion, Jan. 28,1985.)

(2) In ordinary non-stock corporations, the boards of trustees, unless otherwise provided in the articles
of incorporation or the by-laws, "may be more than fifteen (15) in number," with the term of office of 1
/ 3 of their number expiring every year (see Sec. 92, par. 1.) but the number must not be less than five
(5).

(3) In a close corporation, the articles of incorporation may provide that the business of the corporation
shall be managed by its stockholders rather than by a board of directors in which case no meeting of
stockholders need be held to elect directors, (see Sec. 97, par. 2.) (4) Trustees of non-stock educational
corporation "shall not be less than five (5) nor more than fifteen (15)," provided that the number "shall
be in multiples of five (5)," with the term of office of 1/5 of their number expiring every year,

QUALIFICATION OF DIRECTOR OF STOCK CORPORATION

(a) Every director (including an incorporating director) must own at least one share of the capital stock
(see Detective & Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255 [1968].);

(b) The share of stock held by the director must be registered in his name on the books of the
corporation;"
(c) Every director must continuously own at least a share of stock during his term; otherwise, he shall
automatically cease to be a director; and

(d) A majority of the directors must be residents of the Philippines.

Non-stock corporations. — Trustees of non-stock corporations must be members in good standing

thereof and like in stock corporations, a majority of them must be residents of the Philippines. The
phrase "residents of the Philippines," as contemplated in Section 23 (and Section 25.), refers to "legal
residence (animus manendi) from which a person could or might depart or be absent temporarily for a
certain purpose and to which he always intended to return

METHODS OF VOTING

(1) Straight voting. — By this voting method, every stockholder "may vote such number of shares for as
many persons as there are directors" to be elected.

ILLUSTRATION:

A owns 100 shares of stock in a corporation. If there are five directors to be chosen, A is entitled to 500
votes obtained by multiplying 100 by 5. He may give to the five candidates he wants to be elected 100
votes each.

Under this method, the votes are distributed equally among the five candidates without preference.

(2) Cumulative voting for one candidate. — By this method, a stockholder is allowed to concentrate his
votes and "give one candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal." Needless to say, straight voting does not benefit minority
stockholders for they would not be able to elect any director over the objection of the stockholder or
stockholders who own at least 51% of the capital stock.

(3) Cumulative voting by distribution. — By this method, a stockholder may cumulate his shares by
multiplying also the number of his shares by the number of directors to be elected and distribute the
same among as many candidates as he shall see fit.

In electing directors by cumulative voting, "the total number of votes cast by a [stockholder] shall not
exceed the number of shares owned by him as shown in the books of the corporation multiplied by the
whole number of directors to be elected."

*Members of non-stock corporations may cast as many votes as there are trustees to be elected but
may not cast more than one vote for one candidate. This is the manner of voting in non-stock
corporations unless otherwise provided in the articles of incorporation or in the by-laws,

Quorum is such number of the membership of a collective body as is competent to transact its business
or do any other corporate act.
*A general information sheet shall be filed with the Commission within thirty (30) days following the
date of the annual stockholders' meeting. No extension of said period shall be allowed, except for very
justifiable reasons stated in writing by the president, secretary, treasurer or other officers, upon which
the Commission may grant an extension for not more than ten (10) days. The general information sheet
shall state, among others, the names of the elected directors and officers, together with their
corresponding position, title, and capital structure of the corporation, its line of business, business
address and telephone number, if any, and such other data as the Commission, in a form, may prescribe.
(3) Should a director, trustee or officer die, resign or in any manner, cease to hold office, the corporation
shall report such fact to the Commission within fifteen (15) days after such death, resignation or
cessation of office. (4) If for any justifiable reason the annual meeting has to be postponed, the
company should notify the Commission in writing of such postponement within ten (10) days from date
of such postponement. Corporations which have ceased to operate although still existing, are (likewise)
not required to comply with these rules provided that a signed resolution of the board of directors
stating the cessation of business has been previously filed with the Commission. If there be no board of
directors in office, a statement as to the cessation of business signed and swom to by the president,
manager, secretary, treasurer or duly authorized representative of the corporation shall be filed in lieu
of the resolution of the board of directors.

Doctrine of "corporate opportunity."

Under this doctrine, a director who, 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,
is guilty of disloyalty and should, therefore, account to the latter for all such profits by refunding the
same, notwithstanding that he risked his funds in the venture. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for
his own personal profit when the interest of the corporation justly calls for protection. (Paulman vs.
Kritzer, 291 N.E. 2d 541.) And, if, in such circumstances, the interests of the corporation are betrayed,
the corporation may elect to claim all of the benefits of the transaction for itself and the law will impress
a trust in favor of the corporation upon the property interest and profits acquired.

An "Executive Committee" is a "governing body" which functions as the board itself. Thus, membership
therein shall be governed by the same law/rules applicable to the board of directors as provided in
Section 35.

DIFFERENCE OF DE FACTO CORPORATION AND CORPORATION BY ESTOPPEL

A de facto corporation is one which actually exists for all practical purposes as a corporation but which
has no legal right to corporate existence as against the State. It is essential to the existence of a de facto
corporation that there be: 1. A valid law under which a corporation might be incorporated 2. A bona fide
attempt to organize as a corporation under such law, and 3. Actual use or exercise in good faith of
corporate powers conferred upon it by law

A corporation by estoppels exists when person assume to act as a corporation knowing it to be without
authority to do so. In this case, those persons will be liable as general partners for all debts, liabilities
and damages incurred or arising as a result of their actions

.* The elections of aliens as members of the board of directors or governing body of corporations or
associations, engaging in partially nationalized-activities, are allowed by law, in proportion to their
allowable participation or share in the capital of such entities, like mining or development of natural
resources, in which the foreigners may even own 40% of the capital.

*ABC Corporation may recover moral damages. A corporation may have a good reputation which, if
besmirched, is a ground for the award of moral damages.

*Under the doctrine of “piercing the veil of corporate entity”, the legal fiction that a corporation is an
entity with a juridical personality separate and distinct from its members or stockholders may be
disregarded and the corporation will be considered as a mere association of persons, such that liability
will attach directly to the officers and the stockholders. It is an equitable doctrine developed to address
situations where the separate corporate personality of a corporation is abused or used for wrongful
purposes.

*E Steel Corporation may be held liable for the financial obligation of the C Steel and Nail Co., Inc. to its
employees, under the rule of “piercing the veil of corporate fiction”. It is very obvious that E Steel
Corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and
should, be pierced as it was deliberately designed to evade the financial obligation of C steel and Nail
Co. Inc., to its employees. (Claparols v. Court of Industrial Relations, 65 SCCRA 613

* Yes. It is very obvious that Suceso Corporation seeks the protective shield of a corporate fiction whose
veil could and should be pierced (piercing the veil of corporate fiction), as it is deliberately and
maliciously designed to evade a financial obligation to employees; thus, when the notion of legal entity
is used to justify wrong or protect fraud, the law will merge the two corporations into one.
Piercing the veil of corporate entity” means that a corporation may not generally be made to answer for
acts or liabilities of its stockholders or members, or those of the legal entities to which it may be
connected, and vice versa; but if this corporation is used as an alter ego, dummy, business conduit or
shield to commit any act of illegality, fraud or wrong, or to confuse legitimate issues, then it would be
otherwise, and the corporate fiction will be disregarded.

The Supreme Court applied the doctrine of “piercing the veil of corporate entity” in the following cases:

1) Where the corporation is used as dummy to commit illegality, fraud, or wrong, or confuse
legitimate issues by the stockholders of said corporation;
2) 2) Where the corporation is an agency for a parent corporation to commit illegality, fraud, or
wrong, or confuse legitimate issues; and
3) 3) Where a person owned all, or controls, the stocks of a corporation, and the latter is used by
him to commit illegality, fraud, or wrong, or confuse legitimate issues.

*The plaintiff can avail himself of the doctrine of piercing the veil of corporate fiction which can be
invoked when a corporation is formed or used in avoiding a just obligation. While it is true that a family
corporation may be organized to pursue an estate tax planning, which is not per se illegal or unlawful,
the factual settings, however, indicate the existence of a lawsuit that could subject Mr. Pablo to a
substantial amount of damages. It would thus be difficult for Mr. Pablo to convincingly assert that the
incorporation of the family corporation was intended merely as a case of “estate tax planning”

*The veil of corporate fiction may be pierced by proving the court that the notion of legal entity is being
used to defeat public convenience, justify wrong, protect fraud, or defend a crime or the entity is just an
instrument or alter ego or adjunct of another entity or person

*The doctrine of “piercing the veil of corporate entity” will apply when the corporation’s separate
juridical personality is used:
a) To defeat public convenience;

b) To justify wrong, protect fraud, or defend crime;

c) As a shield to confuse the legitimate issues;

d) Where a corporation is the mere alter ego or business conduit of a person; or

e) Where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.

DIFFERENCE OF INCORPORATORS AND SUBCRIBERS

Some of the differences are as follows: first, all the incorporators are required to sign and acknowledge
the Articles of Incorporation while the subscribers, as such, are not subject to the same requirement;
second, the incorporators are all required to be natural persons while the subscribers could either be
natural or juridical persons; and third, the number of incorporators cannot exceed 15 while the number
of subscribers could be more than 15 (subject to compliance, in the appropriate cases, with the
requirements of the SRC).

*The articles of incorporation defins the charter of the corporation and the contractual relationship
between the State and the corporation, the State and the stockholders, and between the corporation
and the stockholders. Its contents are thus binding upon both the corporation and the stockholders,
conferring on Juancho a clear right to have his stockholding recorded.

(DEEP SEA FISHING BUSINESS TO CONSTRUCTION BUSINESS)*In order that M Corporation may validly
engage in the construction business and thereby invest its funds therein the following requisites must be
complied with, to wit:

There must be a meeting called for the purpose, notice of which shall be given to all of the stockholders
on record whether or not they shall be entitled to vote thereat. In said meeting the board of directors of
the corporation must be authorized to engage in such business in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise at least 2/3 of the voting
power on such a proposal at the said stockholder’s meeting.

*No, the Articles of Incorporation may not be amended to reduce the number of directors to two.
Section 14 of the Corporation Code requires that the Articles of Incorporation shall contain the number
of directors, which shall not be less than 5 nor more than 15. Hence, the reduction of the number of
directors to two, to reflect the real owners of the shares of stock, is not valid

*No. H’s suit will not prosper. Since the incorporation papers of XYZ, Inc. were still pending before the
SEC for approval, said XYZ Inc. has not yet been registered, and, therefore, it has yet no juridical
personality in order to have the power to sue or be sued in any court.

The documents to be submitted to the SEC to incorporate a new company to be called FSB Savings &
Mortgage Bank, Inc., to obtain the certificate of incorporation for said company, are:

1) Articles of Incorporation;

2) Treasurer’s affidavit;

3) Certificate of Authority from the Monetary Board of the BSP;

4) Verification slip from the records of the SEC whether or not the proposed name has already been
adopted by another corporation, partnership or association;

5) Letter undertaking to change the proposed name if already adopted by another corporation,
partnership or association;

6) Bank certificate of deposit concerning the paid-up capital;

7) Letter authorizing the SEC or Monetary Board or its duly authorized representative to examine the
bank records regarding the deposit of the paid-up capital; 8) Registration sheet.

*Yes, the SEC should accept the Articles of Incorporation. If the Articles of Incorporation substantially
comply with the statute and all other requirements are met, the SEC has no discretion, but may be
compelled by mandamus to file them. The discretion exercised by SEC does not extend to the merits of
an application for incorporation, although it may be exercised as to matters of form.

The proposed Amended By-laws of CXT Inc., a corporation listed in the Makati Stock Exchange, contain
the following provisions:
a) That the holders of a majority of the outstanding capital stock may elect all the members of the Board
of Directors;

b) That no officer of the corporation shall be required to be a stockholder;

c) That the directors’ bonuses shall be equivalent to 10% of gross revenues in any given year;

d) That a candidate for director must own at least 1,000 shares;

e) That meetings of the Board of Directors need not be held in the principal office and may even be held
outside the country.

As Corporate Secretary of CXT, you are asked to comment on the validity of the above proposed
amendments.

Answer: As Corporate Secretary of CXT, I would give the following comments on the question of validity
of the various proposed amendments to the By-laws, as follows:

a) The minority stockholders may not be deprived of their right to vote in electing the members of the
board of directors; hence, the proposed amendment would be invalid.

b) The President should be a director who should thus own at least one share of stock. Therefore, the
suggested amendment would be invalid unless the President is excluded from the proposed
amendment.

c) The director’s bonuses (total compensation) cannot exceed 10% of net income; accordingly, the
proposed amendment fixing the directors’ bonuses to 10% of gross venues in any given year would be
invalid.

d) While the By-laws may provide additional qualifications for directors such qualifications must not be
unreasonable. A qualification requiring a director to own at least 1,000 shares, in my view, would be
unreasonable and a denial of the right of representation by the minority shareholders in the Board of
Directors.

e) The meetings of the Board of Directors, unlike those of the stockholders, may be held outside the
Philippines; accordingly, the proposed amendment to the by-laws on the matter can be valid.
*The provision in the amended by-laws, disqualifying any stockholder who is also a director or
stockholder of a competing business from being elected to the Board of Directors of MS Corporation, is
valid. The corporation is empowered to adopt a code of by-laws for its government not inconsistent with
the Corporation Code. Such disqualifying provision is not inconsistent with the Corporation Code.

*Yes, the by-law provision is valid. It is the right of a corporation to protect itself against possible harm
and prejudice that may be caused by its competitors. The position of director is highly sensitive and
confidential. To say the least, to allow a person, who is a director in a corporation whose business is in
competition with or is antagonistic to “X” Corporation, to become also a director in “X” Corporation
would be harboring a conflict of interest which is harmful to the latter.

*Yes, a corporation may validly change its name under its general power to amend its articles of
incorporation in accordance with Section 18 of the Corporation Law. Since there is no restriction in said
section relating to change of name, there is no reason why a corporation cannot change its name as long
as it follows the procedure laid down by law.

The change in name does not result in its dissolution, since there is no change in its being. Just as a
natural person does not cease to exist due to change of name, so is the corporate existence not affected
by a change in corporate name.

*The Board of Directors may not do so. The corporate life may be extended so long as the proper steps
therefore (charter amendment) are done by the corporation before its expiry date.

a) Give two ways whereby said authorized capital stock may be increased to about P1.5 M. b) Give three
practical reasons for a corporation to increase its capital stock.

Answer: a) Two ways of increasing the Authorized Capital Stock of “X” Corporation to P1.5 M are:

1. Increase the number of shares from 100,000 to 150,000 shares with the same par value of P10 each.

2. Increase par value of the 1000,000 shares to P15 each.

b) Three practical reasons for a corporation to increase its capital stock are:

1. To generate more working capital;

 2. To have more shares with which to pay for the acquisition of more assets like acquisition of company
car, stocks, house, machinery or business; and

3. To have extra share with which to cover or meet the requirement for declaration of stock dividend.

The conditions under which a stock corporation can acquire its own share are as follows:

a. That it be for a legitimate and proper corporate purpose; and

b. That there shall be unrestricted retained earnings to purchase the same and its capital is not thereby
impaired

*No, it does not need the approval of the stockholders. Under the Corporation Code, a corporation may,
as a general rule, invest its funds in another business or in any purpose other than the primary purpose
for which it was organized, when approved by the Board of Directors and by 2/3 of the outstanding
capital stock in a meeting called for the purpose. Any dissenting stockholder shall have the appraisal
right. However, the same provision makes an exception: where the investment is reasonably necessary
to accomplish its primary purpose, the approval of the stockholders is not necessary. In the case at
hand, the manufacture of bottles is reasonably necessary for the corporation’s primary business of
manufacturing soft drinks and does not therefore need the approval of the stockholders. The action of
the board is sufficient.

*Unless the power plant and the concrete road project are reasonably necessary to the manufacture of
cement by STIKKI (and they do not appear to be so), then the approval of the said projects by a majority
of the Board of Directors and the ratification of such approval by the stockholders representing at least
2/3 of the outstanding capital stock would be necessary.

As for the quarry operations for limestone, the same is an indispensable ingredient in the manufacture
of cement and may, therefore, be considered reasonably necessary to accomplish the primary purpose
of STIKKI. In such case, only the approval of the Board of Directors would be necessary.

2. a) The procedure in securing the approval of the Board of Directors is as follows:

i) A notice of meeting of the Board should be sent to all the directors. The notice should state the
purpose of the meeting. ii) At the meeting, each of the project should be approved by a majority of the
Board (not merely a majority of those present at the meeting).

b) The procedure in securing the approval of the stockholders is as follows:

i) Written notice of the proposed investment and the time and place of the stockholders’ meeting
should be sent to each stockholder at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served personally.

ii) At the meeting, each of the projects should be approved by the stockholders representing at least 2/3
of the outstanding capital stock

*A corporation may invest its funds in another corporation or business or for any purpose other than
the primary purpose for which it was organized when the said investment is approved by a majority of
the Board of Directors and such approval is ratified by the stockholders representing at least 2/3 of the
outstanding capital. Written notice of the proposed investment and the date, time and place of the
stockholders’ meeting at which such proposal will be taken up must be sent to each stockholder.

*When is there an ultra vires act on the part of (b) the board of directors.

Answer: When the Board engages in an activity or enters into a contract without the ratificatory vote of
the stockholders in those instances where the Corporation Code so requires such ratificatory vote, such
as when the corporation is made to invest in another corporation or engage in a business which is not in
pursuit of its primary purpose, the board resolution not ratified by stockholders owning or representing
at least 2/3 of the outstanding capital stock would make the transaction void, as being ultra vires.