Corporation Law Reviewer

CORPORATION LAW PREPARED BY:
PRIMARY REFERENCE: AQUINO SHANON GACA
PART I. CORPORATIONS Section 3. The registration shall be automatically cancelled if the registrant
INTRODUCTION TO BUSINESS ORGANIZATIONS fails to file an application for renewal within the next 90-calendar day grace
period from the time of the expiration of the period for regular filing.
• if a person wants to engage in business, he must resolve the threshold
x x x x x x x x
problem of choosing the form of business organization that he will use in
his undertaking
A person who does not register his/her business name as
TYPES OF BUSINESS ORGANIZATIONS required is subject to the following prohibitions:
1. Sole Proprietorship 1. He/she cannot use or sign the business name in connection with
2. Partnerships his/her business on any written or printed receipts or any evidence
3. Joint Accounts of agreement or other documents
4. Business Trusts 2. He/she cannot exhibit the business name or sign thereof in plain
5. Joint Venture view
6. Cooperative
7. Syndicate RULE IV OF DEPARTMENT ADMINISTRATIVE ORDER NO. 18-07,
8. Corporations SERIES OF 2018
REVISED RULES AND REGULATIONS IMPLEMENTING ACT NO. 3883
1) Sole Proprietorship
− form of business organization with only one proprietary owner Section 3. The following words/group of words shall NOT be registered
− a single individual conducts business under his own name or as Business Name (BN):
under a business name 1. Those that connote activities or norms that are unlawful, immoral,
scandalous, or contrary to propriety
a) Reportorial requirements do NOT apply to a sole proprietorship 2. Those names, words, terms or expressions used to designate or
b) It is an unorganized business owned by a person. The sole distinguish, or suggestive of quality, of any class of goods, articles,
proprietor manages and exercises complete control over the merchandise, products or services;
conduct of his business; 3. Those that are registered as trade names, trademarks, or business
Only his or her agent’s acts may bind the business; names by any government agency authorized to register names or
He is the only one to share in the profits; the only one who is trademarks;
personally liable for business debts 4. Those that are inimical to the security of the State;
c) No legal personality separate from its proprietor or owner of the 5. Those that are composed purely of generic word(s);
enterprise. The owner has unlimited personal liability for all the 6. Those that by law or regulation are restricted or cannot be
debts and obligations of the business, and it is against him or her appropriated;
that a judgment against the enterprise is to be enforced; 7. Those that are officially used by the government in its non-
Has no legal personality to file or defend an action in court proprietary functions;
separate from the proprietor; 8. Those names or abbreviations of any nation, inter-governmental or
The law does not vest a separate personality on the sole international organization unless authorized by competent
proprietorship or empower it to file or defend an action in court authority of that nation, inter-government or international
apart from the proprietor organization;
d) Normally, the only available methods of obtaining funds for a 9. Those ordered or declared by administrative agencies/bodies or
single proprietorship are personal contributions of the proprietor regular court not to be registered
and loans from financial institutions or private sources 10. Those names of other persons;
e) Totally dependent upon the life of the proprietor; 11. Those names which are deceptive, misleading, or which
He will have to rely on his heirs or other interested persons in misrepresents the nature of the business
order to ensure that his business will continue after his death.
However, if the goodwill of the business is inextricably linked to SEC MEMORANDUM CIRCULAR NO. 13, SERIES OF 2019
the proprietor, the business will wither and perish upon his death AMENDED GUIDELINES AND PROCEDURES ON THE USE OF
CORPORATE AND PARTNERSHIP NAMES
1.1) Business Name
− any name that is different from the true name of an A business or trade name which is different from the corporate or
individual which is used or signed in connection with her/his partnership name shall be indicated in the articles of incorporation or
business on any written or printed receipts including partnership.
receipts for business taxes, duties and fees and withdrawal
It is further provided therein that “a company may have more than one
or delivery receipts
business or trade name.”
• a single proprietor may do business under a business name;
• HOWEVER, doing business under another name does NOT If, however, a corporation has no business name, its corporate name is
create an entity distinct from the person operating the still protected under the law.
business
• when a proprietor uses another name, he/she is required to 1.2) Merchant
register his/her business/firm name with the Bureau of CODE OF COMMERCE
Trade Regulation and Consumer Protection of the DTI
pursuant to Act No. 3883 Art. 1. For purposes of this Code, merchants are:
1. Those who, having legal capacity to engage in commerce, habitually
ACT NO. 3883 devote themselves to it;
ACT NO. 3883 - AN ACT TO REGULATE THE USE IN BUSINESS 2. The commercial or industrial companies which may be created in
TRANSACTIONS OF NAMES OTHER THAN TRUE NAMES, PRESCRIBING accordance with [this Code] existing legislation.
THE DUTIES OF THE DIRECTOR OF THE BUREAU OF COMMERCE AND
INDUSTRY IN ITS ENFORCEMENT, PROVIDING PENALTIES FOR Art. 3. The legal presumption of habitually engaging in commerce shall exist
VIOLATIONS THEREOF, AND FOR OTHER PURPOSES from the moment the person who intends to engage therein announces
through circulars, newspapers, handbills, posters exhibited to the public, or in
Section 2. The Director of Commerce (now Secretary of Trade and Industry) any other manner whatsoever an establishment which has for its object some
shall collect a registration fee of ten pesos for each name registered, commercial operation.
renewable every five years, such renewal to be made during the first three
Art. 4. Persons who possess the following qualifications shall have legal
months following the expiration of the five-year period from the date of
capacity to habitually engage in commerce:
original registration. The fee for each renewal registration shall also be ten
1. Having completed the age of twenty-one (21) years;
pesos if renewed within the said three months, otherwise a surcharge of fifty
2. Not being subject to the authority of the father or of the mother nor to
per cent shall be added in case of delinquency.
marital authority;
3. Having the free disposition of their property.
RULE VIII OF DEPARTMENT ADMINISTRATIVE ORDER NO. 18-07,
SERIES OF 2018
Art. 13. The following may NOT engage in commerce nor hold office or have
REVISED RULES AND REGULATIONS IMPLEMENTING ACT NO. 3883
any direct administrative or financial intervention in commercial or industrial
companies:
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1. Those sentenced to the penalty of civil interdiction, while they have not • partnership exists even if the partners do not use the word
served their sentence or have not been amnestied or pardoned; “partnership” and “partners”
2. Those declared bankrupt, while they have not obtained their discharge
or have not been authorized, by virtue of an agreement accepted at a Elements
general meeting of creditors and approved by judicial authority, to 1. Two or more persons bound themselves to contribute money,
continue at the head of the establishment, the authority being property or industry to a common fund
understood in such case as limited to that expressed in the agreement; 2. They intend to divide the profits among themselves
3. Those who on account of special laws or provisions can not trade.
a) Registration with the Securities and Exchange Commission (SEC)
Art. 14. The following CANNOT engage in the mercantile profession, in person
or through another, nor hold office or have any direct administrative or
is necessary where the capital of the partnership is P3,000 or
financial intervention in commercial or industrial associations, within the limits more;
of the districts, provinces or towns in which they discharge their duties: HOWEVER, juridical personality still exists even if not registered
1. Justices, judges and officials of the fiscals’ office in active service. with the SEC as mere failure to register does not invalidate a
This provision shall NOT be applicable to the municipal mayors, judges contract that has all essential requisites of a partnership; it does
and prosecuting attorneys, nor to those who may temporarily discharge not affect the liability of the partnership and of the partners to
judicial or prosecution duties; third persons
2. Administrative, economic or military heads of districts, provinces, or b) Basic requirement for the registration of a partnership
posts; with the SEC are as follows: (1) Name Verification slip; (2)
3. Those employed in the collection and administration of funds of the Articles of Partnership; (3) Affidavit of a partner undertaking to
State, appointed by the Government. change the partnership name if the name already belongs to
Those who administer and collect under contract and their
another person or entity
representative are EXCEPTED;
The partnership shall bear the word “Company” or “Co.” and if it
4. Stock and commercial brokers of whatever class they may be;
is a limited partnership, the word “Limited” or “Ltd.”
5. Those who, under special laws and provisions, cannot trade in specified
territory.
c) Partnership Distinguished from a Corporation
3.1) Disqualifications under the Constitution. The Constitution PARTNERSHIP CORPORATION
prohibits certain government officers from engaging in business or AS TO MANNER OF CREATION
profession, from entering into certain contracts, ro from being Commences only from the
financially interested in specified transactions. issuance of a Certificate of
Created by mere agreement
Incorporation by the SEC, or a
Section 14, Art. VI. No Senator or Member of the House of
passage of law
Representatives may personally appear as counsel before any court of
AS TO THE NUMBER OF ORGANIZERS
justice or before the Electoral Tribunals, or quasi-judicial and other
administrative bodies. Neither shall he, directly or indirectly, be
A single person may form a
interested financially in any contract with, or in any franchise or special corporation (called a Oner
privilege granted by the Government, or any subdivision, agency, or Person Corporation)
Two or more persons may form
instrumentality thereof, including any government-owned or controlled NOTE: The requirement that
a partnership
corporation, or its subsidiary, during his term of office. He shall not there be at least five
intervene in any matter before any office of the Government for his incorporators was deleted under
pecuniary benefit or where he may be called upon to act on account of the RCCP
his office. AS TO POWERS
Subject only to such limitations
Section 13, Art. VII. The President, Vice-President, the Members of More restricted in its powers
as may be agreed upon by the
the Cabinet, and their deputies or assistants shall not, unless otherwise because of its limited personality
provided in this Constitution, hold any other office or employment
partners
during their tenure. They shall not, during said tenure, directly or AUTHORITY OF THOSE WHO COMPOSE IT
indirectly, practice any other profession, participate in any business, or There is mutual agency in
be financially interested in any contract with, or in any franchise, or partnership Stockholders are not agents of
special privilege granted by the Government or any subdivision, agency, Each general partner can the corporation in the absence of
or instrumentality thereof, including government-owned or controlled represent and bind the express authority
corporations or their subsidiaries. They shall strictly avoid conflict of partnership
interest in the conduct of their office. TRANSFER OF INTEREST
Interest in the partnership Corporate shares are freely
Section 2, Art. IX. No member of a Constitutional Commission shall,
during his tenure, hold any other office or employment. Neither shall he cannot be transferred without transferable without the consent
engage in the practice of any profession or in the active management the consent of the other of other stockholders (unless
or control of any business which, in any way, may be affected by the partners there is a stipulation)
functions of his office, nor shall he be financially interested, directly or AS TO LIABILITY OF THOSE WHO COMPOSE IT
indirectly, in any contract with, or in any franchise or privilege granted The liability of stockholders and
by the Government, any of its subdivisions, agencies, or Partners may be liable beyond members for corporate
instrumentalities, including government-owned or controlled their investment obligations is limited to their
corporations or their subsidiaries. investment
RIGHT OF SUCCESSION
Section 16, Art. XI. No loan, guaranty, or other form of financial
accommodation for any business purpose may be granted, directly or Unlike in corporation, there is
indirectly, by any government-owned or controlled bank or financial NO right of succession in
institution to the President, the Vice-President, the Members of the partnership
Cabinet, the Congress, the Supreme Court, and the Constitutional Death of a general partner
Commissions, the Ombudsman, or to any firm or entity in which they dissolves the partnership
have controlling interest, during their tenure. NOTE: General Partner (/Real
Partner) - one whose liability to
PROBLEMS: third persons extends to his
separate property; - he may
Q: A has three (3) cars. He sells one to B; mortgages the second to C; and
either be a capitalist or industrial
the third he delivers to D for sale to other persons. (1) Is A a merchant?
partner
A: No. The Code of Commerce requires habituality for a natural person to be AS TO CAPACITY TO BE PARTNER/STOCKHOLDER
considered a merchant. The same element does not appear in the problem. A partnership can be an A corporation can now also enter
Disposal of the three cars that A owned does no indicate a desire to habitually incorporator/stockholder of a into a partnership or joint
engage in the business. corporation venture
SIMILARITIES
2) Partnerships
− when two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the
intention of dividing the profits among themselves
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1. Both have juridical personality distinct from their components 5) Joint Venture
(stockholders/partners) − association of persons or companies jointly undertaking some
2. Both are group of persons (EXCEPTION: One Person Corporation) commercial enterprise; generally all contribute assets and
3. Capitals of both are derived from their components share risks
4. There is distribution of profits in stock corporations and in − it requires a community interest in the performance of the
partnerships subject, a right to direct and govern the policy connected
5. They both act only through their agents therewith, and duty, which may be altered by agreement to
6. They can be organized only where there is a law authorizing their share both in profit and losses
organization
Philex Mining Corporation v. Bureau of Internal Revenue
3) Joint Accounts
− when there is an arrangement whereby merchants may interest It is the substance, rather than the form of the agreement, that
themselves in the transaction of other merchants, contributing determines if the parties entered into a joint venture agreement.
thereto the amount of capital they may agree upon, and Hence, even if the parties called the agreement a Power of
participating in the favorable and unfavorable results thereof in Attorney, the agreement may also be considered a joint venture
the proportion they may determine agreement if the terms and conditions thereof indicate that it is a
− also called ACCIDENTAL PARTNERSHIP joint venture agreement.
6) Cooperative
Bourns v. D.M. Carman, et. al
− an autonomous and duly registered association of persons, with
A joint account is a partnership constituted in such a manner that “the a common bond of interest, who have voluntarily jointed
existence of which is only known to those who had an interest in the together to achieve their social, economic and cultural needs
same, there being no mutual agreements between the partners, and and aspirations by making equitable contributions to the capital
without a corporate name indicating to the public in some way that there required, patronizing their products and services, and
were other people besides the one who ostensibly managed and accepting a fair share of the risks and benefits of the
conducted the business” undertaking
a) Joint Accounts Distinguished from Partnerships a) Although NOT primarily governed by the Corporation Code, they
JOINT ACCOUNT PARTNERSHIPS are also treated as a corporate entity with their own acts and
AS TO JURIDICAL PERSONALITY liabilities
Has a personality separate and b) It is vested with powers and capacities, including the power to
No juridical personality the exclusive use of its registered name, to sue and be sued, and
distinct form the partners
AS TO BUSINESS NAME the right of succession
No commercial name common to
Can adopt a partnership name 7) Syndicate
all participants can be adopted
− group of people who come together to work for a common aim
AS TO MANAGEMENT
− unincorporated business often encountered among insurance
Only the ostensible partner
companies
manages and transacts business
in his own name and under his Homeowners’ Associations may acquire juridical personality and
individual liability corporate powers
The general partners are all
NOTE: Ostensible Partner - one
managers in partnership
who takes active part and known REPUBLIC ACT No. 9904
to the public as a partner in the AN ACT PROVIDING FOR A MAGNA CARTA FOR HOMEOWNERS AND
business, whether or not he has HOMEOWNERS’ ASSOCIATIONS, AND FOR OTHER PURPOSES
an actual interest in the firm
AS TO PARTIES IN CASES Section 3. -
Only the ostensible partner – the All general partners may be (b) "Association" refers to the homeowners’ association which is a nonstick,
person carrying on the joint liable even up to the extent of nonprofit corporation registered with the Housing and Land Use Regulatory
Board (HLURB), or one previously registered with the Home Insurance
business – can be sued by and is their personal properties and
Guarantee Corporation (now Home Guaranty Corporation) or the Securities
liable to persons transacting may therefore be sued by third
and Exchange Commission (SEC), organized by owners or purchasers of a
with the former persons
lot in a subdivision/village or other residential real property located within
the jurisdiction of the association; or awardees, usufructuaries, legal
occupants and/or lessees of a housing unit and/or lot in a government
CODE OF COMMERCE socialized or economic housing or relocation project and other urban
(JOINT ACCOUNTS PROVISIONS) estates; or underprivileged and homeless citizens as defined under existing
laws in the process of being accredited as usufructuaries or awardees of
Art. 243. The manager shall effect the liquidation, and after the ownership rights under the Community Mortgage Program (CMP), Land
transactions have been concluded, he shall render a proper account of Tenure Assistance Program (LTAP) and other similar programs in relation to
its results. a socialized housing project actually being Implemented by the national
b) If the manager failed to comply, the partners are entitled to file an government or the LGU.
action to compel an accounting, and the payment of their
respective shares of the capital invested, together with damages (j) "Homeowner" refers to any of the following:
(1) An owner or purchaser of a lot in a subdivision/village;
4) Business Trusts (2) An awardee, usufructuary, or legal occupant of a unit, house
− legal relation whereby one person, called the “trustor,” conveys and/or lot in a government socialized or economic housing or
a property to another for the benefit of a person called the relocation project and other urban estates; or
“beneficiary” (3) An informal settler in the process of being accredited as
− the person in whom confidence is reposed as regards the beneficiary or awardee of ownership rights under the CMP, LTAP, and
property is called the “trustee” other similar programs.
a) Trusts are either (1) express, created by the intention of the a) Registration of a homeowners’ association is with the House and
trustor or of the parties, or (2) implied, comes into being by Land Use Regulatory Board (HLURB)
operation of law b) HLURB has exclusive jurisdiction over controversies between the
b) Real Estate Investment Trust (REIT) is a stock corporation homeowners and its members
established in accordance with the Corporation Code and the rules and
regulations promulgated by the SEC principally for the purpose of 8) Corporations [[RECITATION]]
owning income-generating real estate assets − an artificial being created by operation of law, having the right
• NOT a real business trust of succession and the powers, attributes, and properties
• although, designated as a ‘trust,’ it does not have the same expressly authorized by law or incidental to its existence.
technical meaning as ‘trust’ under existing laws and regulations
8.1) Core Features/Characteristics [[RECITATION]]
Page 3
− its separate personality (Doctrine of Separate Personality) − that methods alternative to litigation can resolve
and the limited liability of its components (Limited Liability disputes in a more practical and efficient manner
Rule) − amendments on dissolution;
1. Legal personality − also provide expanded grounds for dissolution and a
2. Limited liability of shareholders more streamlined process for both voluntary and
3. Transferability of shares involuntary dissolution
4. Delegated management under a board structure − the alignment of SEC’s powers under the Corporation Code
5. Investor ownership with the Securities Regulation Code;
− seek to vest the same power in the SEC over ordinary
8.2) Advantages corporations
1. The capacity to act as a legal unit
− promote efficiency and encourage transparency in
2. Limitation of or exemption from, individual liability of shareholders
corporate dealings
3. Continuity of its existence
− make the country more investment-attractive
4. Transferability of shares
5. Centralized management of board of directors
In the House of Representatives, one of the sponsors of the Bill that
6. Professional management
eventually became the RCCP explained that:
7. Standardized method of organization, and finance 1. Enables corporations registered in the Philippines to compete
8. Easy capital generation globally by codifying international corporate best practices
2. Encourages entrepreneurship and the formation of small
8.3) Disadvantages
businesses by authorizing the establishment of one person
1. Prone to double taxation
corporations
2. They are subject to greater governmental regulation and control
3. Contributes to the ease of doing business by:
3. May be burdened with an inefficient management if stockholders
a) Mandating the SEC to develop and implement electronic
cannot organize to oppose management
filing and monitoring systems
4. Limited liability may at times translate into limited ability to raise
b) Permitting corporations to exist perpetually, unless their
creditor capital
Certificates of Incorporation specify otherwise
5. Complicated to maintain
4. Enhances the country’s competitiveness by favorably
6. The “owners” or stockholders do not participate in the day-to-day
impacting two ease-of-doing-business indicators,
management
particularly in starting a business and protecting minority
8.4) PURPOSE OF THE RCCP / FOUR (4) MAIN REFORM stockholders
5. Promote stockholders’ rights by:
CLUSTERS [[RECITATION]]
a) Expanding the right of a stockholder to inspect the books
1. Policies that would enhance the ease of doing business
of the corporation to include a stockholder’s
in the Philippines
representative who may be more knowledgeable in
− name verification simplified
corporate issues
− a shift in the “distinguishability” test will no doubt b) Affording stockholders and members of the Boards to
allow the full and seamless automation of name remotely participate in meetings and to vote in the same
registration 6. Deters corporate abuse by:
− under the law today, you cannot register “XYZ Dream a) Requiring the election of independent directors in entities
Network” because of a previously registered “XYZ vested with public interest
Dream Hospital” b) Providing for corporate criminal liability, holding not only
− under the proposed amendment, you can do so, the individuals responsible for their violations but the
because one of the key words is different corporation itself, subjecting the latter to hefty fines
− permit a single person to perform a “one-person- c) Streamlining cooperation between various regulatory
corporation” agencies and the SEC
d) Endowing the SEC with additional powers, including the
− stockholder voting may now be through remote
power to hold persons in contempt for failing to comply
communication, or in absentia
with any of the SEC’s orders or subpoenas
− stockholders and directors need not be physically
present in meetings
− remote communication can facilitate attendance in
meetings, allowing the stockholders to actively TITLE I: GENERAL PROVISIONS
participate in discussions and come up with more DEFINITIONS AND CLASSIFICATIONS
informed decisions
− resort to paper minutes is due to the fact that shareholders
are required to be present during meetings in person, or by SECTION 1. Title of the Code. – This Code shall be known as the
proxy “Revised Corporation Code of the Philippines.”
− electronic filing of requirements
2. Rules that prioritize corporate and stockholder
protection Applicability of the RCCP: applies to all corporations already in
a) Creation of emergency boards: would address the situation existence at the time the RCCP took effect
where a corporation’s board of directors or trustees goes on
a perpetual holdover because it cannot muster a quorum Effect of Repeal of the Corporation Code: A corporation lawfully
b) Revised rules on the right to inspect corporate books: that existing and doing business in the Philippines affected by the new
some stockholders may not be well versed to interpret the requirements of this Code shall be given a period of not more than two
contents of a corporate documents, hence, we propose to (2) years from the effectivity of this Act within which to comply.
allow a representative or counsel to exercise such right
Mandatory Provisions
c) Modified quorum requirements
− existing corporations are bound to comply
d) Expanded grounds for disqualification of directors
− existing corporations must comply with all the reportorial
3. Provisions that instill corporate and civic responsibility
requirements imposed under the RCCP
− effective vehicles for the accumulation of capital, production
of goods, and delivery of services Vested Rights
− prevent the use of the corporation as a vehicle for VESTED RIGHTS UNDER THE VESTED RIGHTS UNDER THE
committing crimes CORPORATION CODE RCCP
− impose criminal liability and penalties for graft and Section 145. Amendment or Section 184. Effect of Amendment
corruption repeal. – No right or remedy in or Repeal of This Code, or the
− corporation may also suffer revocation of its registration favor of or against any corporation, Dissolution of a Corporation. - No
− corporations vested with public interest are now required to its stockholders, members, right or remedy in favor of or
have independent directors as part of the board directors, trustees, or officers, nor against any corporation, its
4. Amendments that will strengthen the country’s policy any liability incurred by any such stockholders, members, directors,
and regulatory framework corporation, stockholders, trustees, or officers, nor any
members, directors, trustees, or liability incurred by any such
− arbitration of commercial disputes;
officers, shall be removed or corporation, stockholders,
Page 4
impaired either by the subsequent members, directors, trustees, or Summons

dissolution of said corporation or officers, shall be removed or • Separate Personality in Court Actions. Summons
by any subsequent amendment or impaired either by the subsequent served on the corporation does NOT bind the stockholders
repeal of this Code or of any part dissolution of said corporation or who must personally be served.
thereof. (n) by any subsequent amendment or
repeal of this Code or of any part Attribution to Knowledge
thereof. − notice to the Board of Directors should also be deemed
notice to the corporation
− it is part of the duty of care of a director to the corporation
New Civil Code Supplements Corporate Law: agency rules apply to
to inform the said corporation through the Board of the
certain acts of directors, officers or stockholders in the absence of any
existence of a certain proceeding affecting its property
applicable provision in the Corporate Code
Francisco v. Government Service Insurance System
Knowledge of facts acquired or possessed by an officer or agent

Section 2. Corporation Defined. - A corporation is an artificial
of the corporation in the course of his employment, and in
being created by operation of law, having the right of succession and
relation to matters within the scope of his authority, is notice
the powers, attributes, and properties expressly authorized by law
to the corporation, whether he communicates such knowledge
or incidental to its existence. [[RECITATION]] or not since a corporation cannot see, or know, anything except
through its officers.
Attributes of a Corporation Ellice Agro-Industrial Corp. v. Young

1. It is an artificial being
2. Created by operation of law Summons in civil cases may be served on a domestic
3. It has the right of succession corporation only through the president, general manager,
4. It has the powers, attributes and properties expressly authorized corporate secretary, treasurer or in-house counsel or their
by law or incident to its existence absence or unavailability, their secretaries.
ATTRIBUTES OF A CORPORATION [[RECITATION]] Metropolitan Bank and Trust Company v. Centro

1) It is an artificial being Development Corporation
• a corporation, as an artificial being, cannot by itself act and
acquire knowledge Even if knowledge of an act is properly attributed to the
• because its existence is only by fiction of law, it can only corporation, it does NOT follow that all the stockholders are
exercise its rights and powers through its directors, officers, deemed to have knowledge of the same fact or act.
and agents, who are natural persons
2) Created by operation of law • PROPERTIES
− under General Law (GOCC) Doctrine of Separate Personality
− under Special Law (Sports Association) − a corporation has a personality separate and distinct from
− NOT a GOCC IF no stockholder or member, but rather its members
instrumentality − it has a personality separate and distinct from the persons
composing it as well as from that of any other entity to
3) It has the right of succession
− continuous existence which enables a corporation to manage which it may be related
− corporations have separate properties, rights and
its affairs, and hold property without the necessity of perpetual
conveyances, for purposes of transmitting it obligations
− filing of a complaint against the stockholders is NOT ipso
− exists even if a corporation has a fixed term
− compared to the law on succession, which focus on dying, facto a complaint against the corporation
Corporation succession focuses more on living
− a corporation, being a mere creature of law, “possesses only a) Civil Code provides that the personality of juridical entities
those properties which the charter of its creation confers upon begins as soon as they have been constituted according to
it, either expressly or as incidental to its very existence.” law
− allowed individuality b) One Person Corporation (OPC). A corporation with a
single stockholder, who may be a natural person, a trust,
− all individual members that have existed from the foundation
or an estate.
to the present time, or that shall ever hereafter exist, are but
one person in law, a person that never dies The separateness of its personality is present.
c) There is only one juridical personality even if the
SME Bank, Inc. v. De Guzman corporation maintains different places of business. A branch
office does not have separate legal personality.
A shift in the composition of the shareholders of a corporation Consequently, a branch office has no legal capacity to
would not affect its existence and continuity. The juridical entity maintain a separate action in court.
remains and “the corporation continues to be the employer of its
Separate Properties
people and continues to be liable for the payment of their just
− properties of the corporation are not the properties of its
claims.”
shareholders, members or officers
4) It has the powers, attributes, and properties expressly − properties registered in the name of the corporation are
authorized by law or incident to its existence owned by it as an entity and distinct from those who
compose it
• POWER
Theory of Special or Limited Capacities Lim v. Court of Appeals
− has the powers, attributes and properties expressly
The properties of the corporation cannot be included in the
authorized by law or incident to its existence
inventory of the properties of the estate of a deceased shareholder
− law that gives the powers of the corporation and the
of the corporation. Real properties should be excluded from the
corporation cannot exercise powers that are not so given inventory of the estate of the deceased shareholder if they are in
the possession of and registered in the name of the corporation in
Theory of General Capacities. A corporation may exercise any
the absence of any cogency to shred the veil of corporate fiction.
and all powers that may be exercised by natural persons
a) The properties of the stockholders are not part of the
• ATTRIBUTES
properties of a judicially declared insolvent corporation.
Concession Theory
b) Properties belonging to a corporation cannot be attached to
− privilege granted by the State to get what the State allows
satisfy the debt of a stockholder.
you to
− a corporation is a creature without any existence until it has Nature of Stockholders’ Interest in Corporate Properties
received the imprimatur of the State according to law
Page 5
• the interest of the shareholder in the properties of the • Special or Secondary Franchise
corporation is indirect, contingent, and inchoate − certain rights and privileges conferred upon existing
• the interest of the shareholder on a particular property corporations, such as the right to use the streets of a
becomes actual, direct and existing only upon liquidation of municipality to lay pipes of tracks, erect poles, or string wires
the assets of the corporation and the same property is − vested in the corporation
assigned to the shareholder concerned − may ordinarily be conveyed or mortgaged under a general
power granted to a corporation to dispose of its property
Juanito Ang v. Sps. Ang
Recreation and Amusement Association of the Philippines v. The
Indeed, the stockholders of a corporation are not co-owners of its City of Manila
(corporation’s) assets. The shareholders do not own pro-indiviso
shares in the assets and therefore, they cannot mortgage or convey The right to be and to act as a corporation is not a natural or a civil right of
the same except in their capacity as directors, collectively with the any person; such right as well as the right to enjoy the immunities and
other directors, or as duly authorized officers of the corporation. privileges resulting from incorporation constitute a franchise and a
corporation, therefor, cannot be created except by or under a special
Separate Obligations authority from the State.
− obligations of the corporation are not the obligations of its
shareholders and members and officers and vice versa x x x x x x x x
A corporation is therefore created by operation of law when it is granted a

a) President of the corporation may NOT be held liable for the
franchise through a special law, which only GOCCs are the private
obligation arising from the tort committed by the employee
corporations, or under a general law.
of the corporation
GENERAL RULE is that the directors and officers are not PROBLEMS:
personally liable for the obligations of the corporation.
The obligations incurred by the corporate officers, or other Q: Petitioner J.R. Da Silva, is the President of J.R.S. Business Corporation
persons acting as corporate agents, are the direct (JRS), an establishment duly franchised by the Congress, to conduct a
accountabilities of the corporation they represent, and not messenger and delivery express service. On July 12, 1961, the respondent
theirs. Imperial Insurance, Inc. (Imperial), presented with the CFI of Manila a
b) Stockholders or officers are also not liable for the complaint for sum of money against JRS. After JRS submitted its answer,
contractual obligations of the corporation. Imperial and JRS entered into a compromise agreement whereby JRS
In contracts, consent by a corporation through its admitted its liability. However, the judgment obligation was not paid by JRS.
A writ of execution was issued by the CFI and the following properties were
representatives is not consent of the representatives,
sold at the execution sale: “whole capital stocks of the defendants J.R.S.
personally.
Business Corporation, the business (corporate) name, right of operation, the
c) A stockholder cannot condone an obligation of a third
whole assets, furniture, and equipment, the total liabilities, and Net Worth,
person to the corporation books of accounts, etc.” Was the sale of the (1) secondary franchise, (2)
corporate name, and (3) the shares of stock valid?
Limited Liability Rule
− a stockholder is personally liable for the financial obligations A: No. The sale was not valid. The right to operate a messenger and
of the corporation to the extent of his unpaid subscription express delivery service, by virtue of a legislative enactment is
− applies even if the corporation is the result of a joint venture admittedly a secondary franchise, and as such, under our corporation
agreement law, is subject to levy and sale on execution together and including all
the property necessary for the enjoyment thereof. The law, however,
Remedy. The stockholders who are sought to be made liable for
indicates that said franchise can be sold under execution, when such sale
their unpaid subscription should be impleaded; if not, a separate
is especially decreed and ordered in the judgment and it becomes
action should be filed against them to enforce any judgment
effective only when the sale is confirmed by the Court after due notice.
obligation.
The compromise agreement and the judgment based thereon do not
Limited Liability in One Person Corporation (OPC) contain any special decree or order making the franchise answerable for
− the RCCP imposes upon the sole shareholder claiming the judgment debt.
limited liability the burden of affirmatively showing that the
The same thing may be stated with respect to corporate name of JRS
corporation was adequately financed
and its capital stock. A corporate name and capital stock are necessarily
− if there is non-compliance, the sole shareholder shall be
included in the enjoyment of the franchise. Like that of a franchise, the
jointly and severally liable for the debts and other liabilities
law mandates that property necessary for the enjoyment of said
of the OPC
franchise can only be sold to satisfy a judgment debt if the decision
Separate Acts especially so provides. No such directive appears in the decision.
− the acts of the stockholders do not bind the corporation Moreover, a trade name or business name cannot be sold separately from
unless they are properly authorized the franchise, and the capital stock of JRS or any other corporation, for
− the acts of officers and directors in their personal capacity that matter, represents the interest and is the property of stockholders
cannot be imputed to the corporation in the corporation, who can only be deprived thereof in the manner
provided by law.
a) An individual cannot enter into a contract with himself BUT
It, therefore, results that the inclusion of the franchise, the trade name
a corporation has the same freedom of contracting with its
and/or business name and the capital stock of JRS in the execution sale
stockholders
has no justification.
b) The corporation is not the agent of the stockholders and
odes not act or hold property as agent for them x x x x x x x x
A non-stock corporation may file an action in the name of
its members ONLY IF it can prove that the members indeed Q: Idonah Slade Perkins, who died on March 27, 1960 in New York City, left
authorized the corporation to do so among other properties, two stock certificates covering 33,002 shares of
Benguet Consolidated, Inc., the certificates being in the possession of the
FRANCHISES County Trust Company of New York, which, is the domiciliary administrator of
− A corporation is granted by the State the right to exist by virtue of the estate of the deceased. On August 12, 1960, Prospero Sanidad instituted
a primary franchise ancillary administration proceedings in the CFI of Manila; Lazaro Marquez was
− a special privilege conferred by governmental authority appointed ancillary administrator but was later substituted by Renato Tayag.
− which does NOT belong to citizens of the country generally as a On January 27, 1964, the CFI of Manila order the domiciliary administrator,
Country Trust Company, to “produce and deposit” the stock certificates with
matter of common right
the ancillary administrator or with the Clerk of Court. The domiciliary
• Corporate or General Franchise (Primary)
administrator did not comply with the order, and so upon motion of the
− franchise to exist as a corporation
ancillary administrator, the Court (1) considered as lost for all purposes in
− vested in the individuals who compose the corporation and NOT
connection with the administration and liquidation of the Philippine estate of
in the corporation itself Idonah Slade Perkins the stock certificates covering the 33,002 shares of sotck
− CANNOT be conveyed in the absence of a legislative authority standing in her name in the books of Benguet Consolidated, Inc. (Benguet),
to do so (2) ordered said certificates cancelled, and (3) directed Benguet to issue new
Page 6
certificates in lieu of the ones deemed lost, the same to be delivered by a) Mere ownership by a single stockholder or by another corporation of all
Benguet to either the incumbent ancillary administrator or to the Probate or nearly all of the capital stock of a corporation is not in itself sufficient
Division of the Court. Benguet questioned the order invoking, among others, ground for disregarding the separate corporate personality
one of the provisions of its by-laws which would set forth the procedure to be Thus, mere ownership of 70% of the outstanding capital stock does not
followed in case of a lost, stolen or destroyed stock certificate which provides justify the disregard of the separate corporate personality
that in the event of a contest or the pendency of an action regarding ownership b) The similarity of business of two corporations does NOT warrant the
of such certificate or certificates of stock allegedly lost, stolen or destroyed, disregard of the corporate veil
the issuance of a new certificate(s) would await the “final decision by a court c) Even the overlapping of incorporators and stockholders of two or more
regarding the ownership thereof.” Did Benguet validly rely on the by-laws corporations will not necessarily justify the piercing of the veil of
provision? corporate fiction
A: No. Such reliance is misplaced. In the first place, there is no such CLASSIFICATIONS
occasion to apply such by-law. Assuming that a contrariety exists 1. Cases where public convenience may be defeated, as when the
between the above by-law and the command of a court decree, the latter corporate fiction is used as vehicle for the evasion of an existing
is to be followed. It is undeniable that, “a corporation is an artificial being obligation
created by operation of law.” “A corporation as known to Philippine 2. Fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime
jurisprudence is a creature without any existence until it has received
3. Alter Ego cases, where a corporation is merely a farce since it is a
the imprimatur of the state according to law. It is logically inconceivable
mere alter ego or business conduit of a person, or where the corporation
therefore that it will have rights and privileges of a higher priority than
is so organized and controlled and its affairs are so conducted as to
that of its creator. More than that, it cannot legitimately refuse to yield
make it merely an instrumentality, agency, conduit or adjunct
obedience to acts of its state organs, certainly not excluding the
judiciary, whenever called upon to do so.” KINDS
1. Traditional Veil-Piercing Action. A court disregards the
Contract Theory existence of the corporate entity so a claimant can reach the assets
a) Because of the contract between the State and the corporation, the of a corporate insider.
corporation is entitled to the right against impairment of contracts. 2. Reverse Piercing Action. Plaintiff seeks to reach the assets of a
The State cannot likewise take the lie of the corporation without corporation to satisfy claims against a corporate insider. It makes
due process. the corporation liable for the debt of the shareholders.
b) Incorporation is a contract among those who compose the 2.1. Outsider Reverse Piercing. A party with a claim against an
corporation and their contract is governed and evidenced by the individual or corporation attempts to be repaid with assets of a
Articles of Incorporation. corporation owned or substantially controlled by the defendant
c) There is also a contract between the corporation and its − stockholders may have incorporated the subject
stockholders or members. Therefore, stockholders and members corporation precisely to evade a legal obligation of the
cannot disregard the provisions of the Articles of Incorporation and stockholders, thus, the corporation can be made liable for
By-laws of the corporation. the obligations of the stockholders or corporate insider
The corporation, in turn, cannot disregard the rights of the 2.2. Insider Reverse Piercing. The controlling members will
shareholders or members provided for in the Articles of attempt to ignore the corporate fiction in order to take
Incorporation and By-laws. advantage of a benefit available to the corporation, such as an
interest in a lawsuit or protection of personal assets.
PROBLEMS: − a person who is part of the corporation, like a stockholder,
will be the one to ask for the court to pierce the corporate
Q: E Corporation is the registered owner of a parcel of land. F Corporation was
able to obtain possession of the parcel of land. Later, a case was filed by E veil
Corporation against F Corporation and a writ of possession was issued against
VARIANTS [[RECITATION]]
F Corporation ordering the latter to turn over the parcel of land to E
Corporation. Before the enforcement of the writ of possession, F Corporation
1. Instrumentality Doctrine/Rule or the Three-Pronged Control
acquired the substantial and controlling shares of stocks of E Corporation. F Test [[RECITATION]]
Corporation refused to turn over the parcel of land claiming that its acquisition a) Control, not mere majority or complete stock control, but
of the controlling shares is a supervening event that justifies the non- complete denomination, not only of finances but of policy and
enforcement of the writ of possession. Is the position of F Corporation tenable? business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
A: No. The acquisition by F Corporation of the controlling shares in E separate mind, will or existence of its own
Corporation does not create a substantial change in the rights or relations of b) Such control must have been used by the defendant to
the parties that would entitle F Corporation to possession of the property. F
commit fraud or wrong, to perpetuate the violation of a
Corporation as shareholder is not entitled to possession of the property
statutory or other positive legal duty, or dishonest and unjust act
because its right is only inchoate.
in contravention of plaintiff’s legal right
Q: RITCHIE Corporation owns a beach resort with several cottages. Ed, the − need NOT be present under the Alter Ego doctrine
President of RITCHIE, occupied one of the cottages for residential purposes. − it is NOT necessary in Alter Ego cases that the corporation
After Ed’s term expired, RITCHIE wanted to recover possession of the cottage. was organized or operated to commit fraud or wrong
Ed refused to surrender the cottage contending that as a stockholder and − there is NO need for allegation or a finding of specific fraud in
former president, he has a right to possess and enjoy the properties of the the organization or operation of the corporation
corporation. Is Ed’s contention correct? c) The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of
A: No. Ed is not the owner of the properties of the corporation. As shareholder,
2. Identity Doctrine
his interest over the properties of RITCHIE Corporation is merely inchoate.
− if the plaintiff can show that there was such a unity of interest
RITCHIE has a personality separate and distinct from its shareholders and the
and ownership that the independence of the corporations had
properties of the corporation are not the properties of the shareholders.
Hence, as the owner, only the corporation has the right to enjoy and possess in effect ceased or had never begun, and adherence to the
its properties. fiction of separate identity would serve only to defeat justice
and equity to escape liability
Doctrine of Piercing the Veil of Corporate Fiction 3. Alter Ego Doctrine
− the corporation’s separate juridical personality may be disregarded − if the acts are treated as those of the corporation alone, an
when there is an abuse of the corporate form inequitable result will follow
− whenever the doctrine applies, the principal and the conduit will be − where a corporation is a dummy, is unreal or a sham, and
treated as one; the controlled corporation will be deemed to have serves no business purpose, and is intended only as a blind,
no separate mind, will or existence of its own, and is but a conduit the corporate form may be ignored
for its principal − when the corporation is owned by one person whereby the
− the conduit corporation will then be solidarily liable with the corporation functions only for the benefit of such individual
principal owner, the corporation and the individual should be deemed to
− EXCEPTION to the GENERAL RULE of Separate Personality be the same
a) Cases when the doctrine of piercing the veil may be applied

include both (1) cases when fraud or other wrongful acts or
Page 7
omission are present, and (2) cases when there is no intent to its directors or officers, it is vulnerable to the piercing of its
commit a wrongful act in organizing the corporation or operation corporate veil
of the corporation but injustice and inequity may result if the
corporate veil is not pierced International Academy of Management Economics v. Litton and
Company, Inc.
Totality of Circumstances Test
1) Commingling of funds and other assets of the corporation with those of If the Doctrine of Piercing the Veil of Corporate Fiction is successfully
individual shareholders invoked, the conduit or the “principal” or alter ego who is not an original
2) Diversion of the corporation’s funds or assets to non-corporate (to the party can be deemed to have participated in the proceedings because of
personal uses of the corporation’s shareholders)
the complete dominance of the corporation. The separate personalities
3) Failure to maintain corporate minutes or adequate corporate records
are disregarded and what should be ordinarily considered separate
4) Identical equitable ownership in two entities
personalities are treated as one.
5) Identity of the directors and officers of two entities who are responsible
for supervision and management (a partnership or sole proprietorship
Hence, it is believed that there is no need to file another case just to
and a corporation owned and managed by the same parties)
invoke the doctrine. Due process is accorded because the only remaining
6) Absence of separately held corporate assets
issue – whether or not the separateness of the personality of the
7) Use of a corporation as a mere shell of conduit to operate a single
venture or some particular aspect of the business of an individual or
corporation and the stockholder or directors or officers should be
another corporation disregarded – can be threshed out in the same case during the hearing
8) Sole ownership of all the stock by one individual or members of a single on a proper motion.
family
9) Use of the same office or business location by the corporation and its Personality Not Abrogated [[RECITATION]]
individual shareholder(s) − when the veil of corporate fiction is pierced, the corporate character
10) Employment of the same employees or attorney by the corporation and is NOT necessarily abrogated
its shareholder(s) − it continues for legitimate objectives
11) Concealment or misrepresentation of the identity of the ownership, − in applying the Doctrine of Piercing the Veil of Corporate Fiction,
management or financial interests in the corporation, and concealment the court will not disregard the corporate personality for purposes
of personal business activities of the shareholders other than the granting of relief prayed for in the Complaint
Probative Factors (that will justify the application of the doctrine of Doctrine of Piercing the Veil of Corporate Fiction and Limited Liability
piercing the corporate veil) [[RECITATION]] Rule
1. Stock ownership by one or common ownership of both corporations Guillermo v. Uson
2. Identity of directors and officers
3. Manner of keeping corporate books and records The Limited Liability Rule and the Doctrine of Piercing the Veil of Corporate
4. Methods of conducting the business Fiction do not go hand in hand. The legal personality of the corporation is not
pierced if the Limited Liability rule is applied.
Subsidiary. A corporation more than 50% of the voting stock of which
is owned or controlled directly or indirectly through one or more If the Doctrine of Piercing the Veil of Corporate Fiction is applied then the
entire obligation of the corporation may be enforced against a stockholder
intermediaries by another corporation, which thereby become a parent
thereof even beyond the extent of the latter’s unpaid subscription to the
company.
corporation, while under the Limited Liability Rule only the unpaid subscription
a) If used for legitimate functions, a subsidiary’s separate existence price is due from the stockholder for application to the corporation’s
debts/obligations.
shall be respected, and the liability of the parent corporation as
well as the subsidiary will be confined to those arising in their Group of Companies
respective business − corporations that are financially related to one another as parent
corporations, subsidiaries and affiliates
MR Holdings, Inc. v. Bajar − no personality separate and distinct from each of the component
corporations
Circumstances which are useful in the determination of whether a subsidiary • the filing of a petition for insolvency of a member of the Group and a
is but a mere instrumentality or alter ego of the parent-corporation: Stay Order issued therein should NOT benefit the other members
1. The parent corporation owns all or most of the capital stock of the • the Group may jointly file a petition for rehabilitation when one or more
subsidiary of its constituent corporations foresee the impossibility of meeting debts
2. The parent and subsidiary corporations have common directors or when they respectively fall due
officers • no similar right IF it is the creditor who will initiate the rehabilitation
3. The parent corporation finances the subsidiary proceedings
4. The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation Associated Enterprises or Related Parties. Two or more enterprises
5. The subsidiary has grossly inadequate capital associated if one participates directly or indirectly in the management, control
6. The parent corporation pays the salaries and other expenses or losses or capital of the other; or if the same persons participate directly or indirectly
of the subsidiary in the management, control or capital of the enterprises.
7. The subsidiary has substantially no business except with the parent
corporation or not assets except those conveyed to or by the parent • Control refers to the ability to substantially influence or direct the
corporation actions of decisions of an entity, whether by contract, agency or
8. In the papers of the parent corporation or in the statement of its officers, otherwise
the subsidiary is described as a department or division of the parent • presumed to exist when the parent owns directly or indirectly, through
corporation, or its business or financial responsibility is referred to as subsidiaries, more than one half (1/2) of the voting power of an entity,
the parent corporation’s own UNLESS in exceptional circumstances, it can clearly be demonstrated
9. The parent corporation uses the property of the subsidiary as its own that such ownership does not constitute control
10. The directors or executives of the subsidiary do not act independently
in the interest of the subsidiary, but take their orders from the parent Control also exists even when an entity owns one half (1/2) or less of the
corporation voting power of another entity when:
11. The formal legal requirements of the subsidiary are not observed 1. There is power over more than one half (1/2) of the voting rights by
virtue of an agreement with investors
Corporate as Plaintiff Obligee 2. There is power to direct or govern the financial and operating policies of
− should NOT be allowed to disregard its own or another corporation’s the entity under a statute or agreement
corporate fiction in order to pursue a case or claim a right that 3. There is power to appoint or remove the majority of the members of the
properly pertains to other entities board of directors or equivalent governing body
4. There is power to cast the majority votes at meetings of the board of
Judicial Function. Only the courts can pierce the veil of corporate directors or equivalent governing body
function; sheriff, who has a ministerial duty, cannot. [[RECITATION]] 5. There exists ownership over or the right to use all or a significant part
of the assets of the entity
Jurisdiction Over the Alter Ego 6. There exists rights or contracts which confer decisive influence on the
− even if a corporation is not impleaded in the main case and yet was decisions of the entity
so named in a writ of execution to satisfy a court judgment against
PROBLEMS:
Page 8
Q: What is one-man corporation? Do such corporations enjoy the attributes of 1. Aggregate Test / Control Test. looking into the nationality,
corporations? What should be done to assure this? domicile, or residence of the individuals who control the
corporation.
A: A one-man corporation is a corporation where all the outstanding shares
2. Entity Test / Place of Incorporation Test. Looks to the nation
belong to one person. Although there may be other incorporators or directors,
where the corporation was incorporated
the same persons hold shares only as nominee of the person who actually
owns the shares.
Foreign Corporation. One formed, organized or existing under laws
Q: Ronald Sham doing business under the name of SHAMRON sold to TURTLE other than those of the Philippines’ and whose laws allow Filipino citizens
a diesel tractor. In payment, Turtle’s President and Manager Dick Seldon and corporations to do business in its own country or State.
issued a check for P50,000 in favor of SHAMRON. A week after, TURTLE sold [[RECITATION]]
the tractor to BRICCIO for P60,000. BRICCIO discovered that the engine of
the tractor was reconditioned so he refused to pay TURTLE. As a result, Dick Wartime Control Test [[RECITATION]]
Seldon ordered “stop payment” of the check issued to SHAMRON. SHAMRON − place of incorporation may be disregarded in times of war
sued TURTLE and Dick Seldon. SHAMRON obtained a favorable judgment − Courts will look into the nationality of the controlling stockholders
holding co-defendants TURTLE and Dick Seldon jointly and severally liable. in wartime
Comment on the decision of the RTC.
Investment Test: Voting Control Test and Beneficial Ownership
A: The decision of the RTC holding Dick Seldon liable is erroneous. The Test [[RECITATION]]
President and General Manager of TURTLE cannot as a rule be held jointly and − 60:40
severally liable with TURTLE. Seldon was merely acting in his capacity as − since the Constitutional requirement of at least 60% Filipino
corporate officer when he issued the check to SHAMRON and when he stopped ownership applies not only to voting control of the corporation but
payment thereof. The corporation has a personality separate and distinct from also to the beneficial ownership of the corporation, it is therefore
its officers, hence, the obligations of the corporation are not the obligations of
imperative that such requirement apply uniformly and across the
the officer even if the same officer represented the corporation in the
board to all classes of shares, regardless of nomenclature and
transaction.
category, comprising the capital of the corporation.
Q: Mr. Pablo, a rich merchant in his early forties, was a defendant in a lawsuit,
which could subject him to substantial damages. A year before the court Roy III v. Chairperson Teresita Herbosa
rendered judgment, Mr. Pablo sought his lawyer’s advice on how to plan his
estate to avoid taxes. His lawyer suggested that he should form a corporation, For purposes of determining compliance therewith, the required
with himself, his wife and his children (all students and still unemployed) as percentage of Filipino ownership shall be applied to BOTH (a) the total
stockholders, and then, transfer all his assets and liabilities to this corporation. number of outstanding shares of stock entitled to vote in the election of
Mr. Pablo followed the recommendation of his lawyer. One year later, the court directors; AND (b) the total number of outstanding shares of stock,
rendered judgment against Mr. Pablo and the plaintiff sought to enforce this whether or not entitled to vote in the election of directors.
judgment. The sheriff, however, could not locate any property in the name of
Mr. Pablo and therefore returned the writ of execution unsatisfied. What x x x x x x x x
remedy, if any, is available to the plaintiff?
With respect to the requirement of beneficial ownership, it is
A: The plaintiff can ask the court to pierce the veil of corporate fiction and imperative that beneficial ownership must ultimately be in the hands of
make the corporation liable for the judgment obligation. It is true that a family Filipinos. Any attempt to defeat the limitation on foreign ownership is
corporation may be organized to pursue an estate tax planning. However, the subject to sanctions under applicable laws and rules.
factual setting indicates 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 a) In cases where a corporation invests in the formation of a new
convincingly assert that the incorporation of the family corporation was corporation as a stockholder, when there is doubt as to the actual
intended merely as a case of “estate tax planning.” extent of Filipino equity in the investee corporation, the SEC is not
precluded from using the Grandfather Rule.
Q: Eva owns 90% of the shares of the capital stock of CK Corporation. On one
b) Doubt exists if the following indicators are present
occasion, CK Corporation, represented by Eva as the President and General
Manager, executed a contract to sell a subdivision lot in favor of Ed. For failure i. Foreign investors provide practically all the funds for the
of CK Corporation to develop the subdivision, Ed filed an action for rescission investment jointly undertaken with Filipinos
and damages against CK Corporation and Eva. Will the action prosper? ii. Foreign investors undertake to provide practically all the
technological support for the venture
A: Yes, the action may prosper against CK Corporation but not against Eva. iii. Foreign investors, while being minority stockholders, manage
The liabilities of CK Corporation are not the liabilities of its officers because the company and prepare all economic viability studies.
the corporation has a legal personality separate and distinct from that of its
officers and shareholders. The fact that Eva owns 90% of the capital stock of REPUBLIC ACT No. 7042
CK Corporation is not of itself sufficient justification to invoke the doctrine of FOREIGN INVESTMENTS ACT OF 1991
piercing the veil of corporate fiction. There must be a showing of fraud, malice
[[RECITATION]]
or bad faith.
Q: Plaintiffs filed a collection action against “X” Corporation. Upon execution Section 3. A corporation shall be considered a “Philippine National” if it
of the court’s decision, “X” Corporation was found to be without assets. is:
Thereafter, plaintiffs filed an action against its present and past stockholder 1. A corporation organized under Philippines laws of which 60% of the
“Y” Corporation, which owned substantially all of the stocks of “X” Corporation. capital stock outstanding and entitled to vote is owned and held by
The two corporations have the same board of directors and “Y” Corporation Filipino citizens
financed the operations of “X” Corporation. May “Y” Corporation be held liable 2. A corporation organized abroad and registered as doing business
for the debts pf “X” Corporation? Why? in the Philippines under the Corporation Code of which 100% of the
capital stock entitled to vote belongs to Filipinos
A: Yes. “Y” Corporation may be held liable for the debts of “X” Corporation. It
is submitted that the doctrine of piercing the veil of corporate fiction can be Grandfather Rule [[RECITATION]]
applied in the present case. Although mere interlocking directorship is not by − applies when there is LAYERING and LESS THAN 60% control test
itself sufficient to justify the application of the doctrine, there are
− see SEC Circular (Roy v. Gerbosa)
circumstances in the present case that support such application. Thus, the
− method of determining the nationality of a corporation, which in
following facts are present: (1) X Corporation is without assets; (2) The
turn is owned by another corporation by breaking down the equity
stockholders are the same; (3) the directors are identical; and (4) Y financed
structure of the shareholders of the corporation that owns the other
the activities of X Corporation. It is believed that the mentioned circumstances
are enough to allow the piercing of the corporate veil. − the percentage of Filipino equity in the corporation is computed by
attributing the nationality of the second or even subsequent tier of
Nationality and Citizenship. Corporation cannot be considered a ownership to determine the nationality of the corporate
citizen, as it is limited to natural persons only by virtue of allegiance to shareholder
the State. − the percentage of shares held by the second corporation in the first
• no nationality for Corporation Sole is multiplied by the latter’s own Filipino equity
− it traces the nationality of the stockholder
TWO (2) PRINCIPAL TESTS FOR DETERMINING IF A − EX: MV Corporation and AC Corporation have equal interest in XYZ
CORPORATION IS FOREIGN OR DOMESTIC [[RECITATION]] Company. MV Corporation is 60% owned by Filipinos, while AC
Corporation is 50% owned by Filipinos. By the grandfather rule, MV
Page 9
Corporation would have a 30% Filipino interest in XYZ Company acting as a body, or, generally, from the directors as the governing
(60% of 50%), while AC Corporation would have 25% Filipino body."
interest in XYZ Company (50% of 50%). Hence, the total Filipino
interest is only 55% (total of MV and AC’s Corporations interest??) a) The liability of corporations may either be vicarious (Article 2180)
or direct personal obligation (Article 2176) UNLESS the
PROBLEMS: diligence on the selection and supervision of the employees is
invoked, and may arise out of different sources of obligation
Q: Petitioner is a corporation sole organized and existing in accordance with [[RECITATION]]
Philippine laws, with Msgr. Trudeau, a Canadian citizen, as actual incumbent.
It presented for registration a deed of sale to the Register of Deeds of Cebu Doctrine of Corporate Responsibility / Corporate Negligence
who denied it for lack of proof that at least 60% of the capital property or Doctrine [[RECITATION]]
assets of the corporation sole is owned or controlled by Filipino citizens. Was − imposes several duties on a hospital:
the action of the Register of Deeds correct? 1) Use reasonable care in the maintenance of safe and adequate
facilities and equipment
A: No. The requirement of at least 60% Filipino ownership of the capital was
never intended to apply to a corporation sole, because the same corporation
2) Select and retain only competent physicians
is only the administrator of the properties of the corporation sole and it is well 3) Oversee as to patient care all persons who practice medicine
settled that it has no nationality. within its walls
4) Formulate, adopt, and enforce adequate rules and policies to
Q: GLOBAL, a 100% Malaysian-owned corporation, desires to build a hotel ensure quality care for its patients
beach resort in the Samal Island, Davao City, to take advantage of the
increased traffic of tourists and boost the tourism industry of the Philippines. Right to Moral Damages. Cannot be granted in favor of a corporation
because, being an artificial person which cannot experience physical
a. Assuming that GLOBAL has US100 Million to invest in a hotel beach resort suffering and mental anguish, and having existence only in legal
in the Philippines, may it be allowed to acquire the land on which to build the
contemplation, it has no feelings, no emotions, and no senses.
resort? If so, under what terms and conditions may GLOBAL acquire the land?
The ONLY EXCEPTION is when the corporation has a reputation that
b. May GLOBAL be allowed to manage the hotel beach resort? is debased, resulting in its humiliation in the business realm.
c. May GLOBAL be allowed to operate restaurants within the hotel beach PROBLEMS:
resort? A: No. As a rule, corporations are not entitled to recover moral damages. The
only EXCEPTION is with respect to moral damages arising from libel. In
A: No, GLOBAL may not be allowed to acquire the land on which to build the addition, even assuming for the sake of argument that a corporation can
resort. The Constitution limits land ownership to Filipinos and corporations recover moral damages, it cannot also recover damages in the present case
with Filipino ownership of not less than 60% of the outstanding capital. The because the President and not the corporation suffered the damages. A
equity participation of foreigners in a corporation that will own land is corporation is separate and distinct from the officers who compose it.
therefore limited to 40%. In this case, GLOBAL is 100% Malaysian-owned.
Constitutional Rights [[RECITATION]]
a. However, GLOBAL can lease a parcel of land. The 40% limit on foreign
− a corporation cannot be deprived of its life and property without
equity applies only to ownership of land and not to temporary use thereof like
due process of law
a contract of lease.
− a corporation is also a person under the equal protection clause;
b. Yes, GLOBAL can manage the hotel beach resort. Management of a resort − its properties cannot also be taken for public use without just
is not a nationalized activity; hence, the law does not prohibit a foreign compensation
corporation from managing a resort in the country. − also entitled to the right against unreasonable searches and seizure
− the rights pertains to the corporation as a separate entity, hence,
c. Yes, GLOBAL may be allowed to operate restaurants within the beach only the corporation, and NOT its officers in their personal capacity,
resort. While operation of a restaurant business is considered retail trade, a is the real party in interest to question an alleged unreasonable
corporation will not be considered engaged in retain business if the restaurant search and seizure
is a mere adjunct of the operation of the resort which is an activity that is not
− rights against self-incrimination has NO application to juridical
wholly or partly nationalized.
persons
Q: What is the nationality of a corporation organized and incorporated under
Criminal Liability [[RECITATION]]
the laws of a foreign country but owned 100% by Filipinos?
− corporations are now criminally liable under the RCCP
A: The corporation is a Philippine National under Section 3 of RA 7042 for − that if the offender is a corporation, the penalty may, at the
purposes of applying out investment laws provided that at least 60% of the discretion of the court, be imposed upon such corporation and/or
directors are Filipinos. In addition, applying the control test of corporate upon its directors, trustees, stockholders, members, officers, or
nationality, a corporation organized and incorporated under foreign laws but employees
entirely owned by Filipinos is a Philippine national. Note, however, that the
corporation is not a domestic corporation under the Incorporation Test a) Deliberations in the defunct BP reflected the opinion that “as a
because the corporation is one organized in another country. general proposition, offenses mala in se where intent is
indispensable cannot be committed by a corporation because the
Residence [[RECITATION]]
existence or presence of criminal intent assumes the existence of
− a foreign corporation can be considered a resident of the Philippines
a will which only a natural person may have. However, offenses
for tax purposes
mala prohibita, which may be committed simply by committing the
− domestic corporations may be a resident of a particular region, city
act prohibited, may be committed by a corporation
or municipality for purposes of applying the procedural rules on
venue Ching v. Secretary of Justice
− in relation to foreign corporations, they may have a resident (i.e.,
place where they operate and transact business) separate from A corporation cannot be arrested and imprisoned; hence, cannot be
their domicile (i.e., State of their formation or organization) penalized for a crime punishable by imprisonment.49 However, a
corporation may be charged and prosecuted for a crime if the imposable
Tort Liability [[RECITATION]]
penalty is fine. Even if the statute prescribes both fine and imprisonment
Philippine National Bank v. Court of Appeals as penalty, a corporation may be prosecuted and, if found guilty, may be
fined.
A corporation is civilly liable in the same manner as natural persons for
torts, because "generally speaking, the rules governing the liability of a x x x x x x x x
principal or master for a tort committed by an agent or servant are the
same whether the principal or master be a natural person or a The criminal liability of the corporation is likewise expressed in the following
corporation, and whether the servant or agent be a natural or artificial provisions of the RCCP:
person. All of the authorities agree that a principal or master is liable for 1) Failure to comply with the (i) cease and desist order of the SEC on the
every tort which he expressly directs or authorizes, and this is just as use of a corporate name that is not distinguishable, already protected
by law, or contrary to law, rules and regulations, and (ii) SEC order to
true of a corporation as of a natural person, A corporation is liable,
remove all signages, marks, advertisements, labels, prints and other
therefore, whenever a tortious act is committed by an officer or agent
effects bearing such corporate name
under express direction or authority from the stockholders or members
Page 10
2) The unjustified failure or refusal by the corporation, or by those municipalities) for the purpose of
responsible for keeping and maintaining corporate records to comply serving general good and welfare
with the rules and provisions of the RCCP on inspection and reproduction Created for the purpose of
of records government and management of
3) A corporation that conducts its business through fraud shall be punished public affairs founded by the State
with a fine and managed by it for
4) A corporation used for fraud, or for committing or concealing graft and governmental purposes
corrupt practices (e.g., Boy Scouts of the
5) A corporation that appoints an intermediary who engages in graft and Philippines, Veterans Federation of
corrupt practices for the corporation’s benefit or interest shall be the Philippines)
punished with a fine Formed for some private purpose,
benefit, aim or end
a) Corporations are still NOT criminally liable under the Revised Penal They may be stock or non-stock
PRIVATE CORPORATION
Code; corporations
Corporations cannot be made criminally liable for a felony because (e.g., GSIS, DBP, NPC, DBP,
intent is required in felonies Meralco, Petron)
b) For violation of special laws, in the absence of an express provision These are like railroad and canal
making the corporation criminally liable, corporations cannot also corporations
QUASI-PUBLIC CORPORATIONS
Engaged in private business
be held criminally liable because the present criminal law system
affected with public interest
requires the performance of overt acts
AS TO THE MANNER OF CREATION
Directly created by Congress
West Coast Life Insurance Co. v. Hurd
through a special law
CORPORATION CREATED BY Must be a government-owned or
Nevertheless, the officers of the corporation may still be held liable. It is
SPECIAL LAW controlled corporation
settled that an officer of a corporation can be held criminally liable for
(e.g., GSIS, Lung Center of the
acts or omissions done in behalf of the corporation only where the law
Philippines, BSP)
directly requires the corporation to do an act in a given manner and the Created under the RCCP,
same law makes the person who fails to perform the act in the prescribed CORPORATION CREATED Corporation Code of the
manner expressly liable criminally. UNDER A GENERAL LAW Philippines, or the old Corporation
Law
Contempt Cases
Not formally organized as such but
− corporations may be punished for contempt has been duly recognized by
− a corporation and those who are officially responsible for the CORPORATIONS BY
immemorial usage as a
conduct of its affairs may be punished for contempt when they PRESCRIPTION
corporation, with rights and duties
disobey judgments, decrees, or orders of a court made in a case enforceable under the law
within its jurisdiction AS TO LEGAL STATUS
Organized in accordance with the
DE JURE CORPORATION
requirements of law
Formed where there exists a flaw
Section 3. Classes of Corporations. - Corporations formed or in its incorporation but there is
DE FACTO CORPORATION
organized under this Code may be stock or nonstock corporations. colorable compliance with the
Stock corporations are those which have capital stock divided into requirements of law
shares and are authorized to distribute to the holders of such shares, Group of persons which holds itself
out as a corporation and enters
dividends, or allotments of the surplus profits on the basis of the
into a contract with a third person
shares held. All other corporations are nonstock corporations.
CORPORATION BY ESTOPPEL on the strength of such
[[RECITATION]] appearance
Does NOT have juridical
Section 4. Corporations Create by Special Laws or Charters. - personality
Corporations created by special laws or charters shall be governed AS TO EXISTENCE OF STOCKS
Corporation with capital stock that
primarily by the provisions of the special law or charter creating
is divided into shares and is
them or applicable to them, supplemented by the provisions of this
authorized to distribute to holders
Code, insofar as they are applicable. of such shares, dividends or
STOCK CORPORATION
allotments of the surplus profits on
the basis of the shares held
CLASSIFICATIONS (e.g., Ayala, Aboitiz, Megaworld,
AS TO THE NUMBER OF COMPONENTS JG Summit Holdings)
Corporation consisting of more No capital stock, does NOT issue
than one member stocks, does NOT distribute
An artificial body of men, NON-STOCK CORPORATION dividends to its members
composed of diverse individuals, (e.g., Philippine Red Cross, PSA,
AGGREGATE CORPORATION the ligaments of which body, the PGH)
franchises and liberties bestowed AS TO LAWS OF INCORPORATION
upon it, bind and unite all into one, Formed, organized or existing
and consists the whole frame and DOMESTIC CORPORATION under Philippine laws
essence of the corporation (e.g., Jolibee)
Corporation consisting of only one Formed, organized or existing
person or member under laws other than those of the
One formed by the chief Philippines and whose laws allow
FOREIGN CORPORATION
archbishop, bishop, priest, Filipino citizens and corporations to
minister, rabbi or other presiding do business in its own country or
CORPORATION SOLE elder of a religious denomination, State
sect or church for the purpose of SPECIAL TYPES OF CORPORATIONS UNDER THE RCCP
administering and managing, as Corporation whose articles of
trustee, the affairs, property and incorporation provides that:
temporalities of such religious a) all the corporation’s issued stock
denomination, sect or church of all classes, exclusive of treasury
Corporation with a single CLOSE CORPORATION shares, shall be held of record by
ONE PERSON CORPORATION not more than a specified number
stockholder
AS TO FUNCTIONS of persons not exceeding 20;
Organized for the government of a b) all the issued stock of all classes
PUBLIC CORPORATION shall be subject to one or more
portion of a State (like cities and
Page 11
specified restrictions on transfer Boy Scouts of the Philippines v. Commission on Audit

permitted by the RCCP;
c) the corporation shall not list in Not all corporations which are not GOCC, are ipso facto to be considered
any stock exchange or make any private corporations as there exists another distinct class of corporations or
public offering of its stock of any chartered institutions which are otherwise known as ‘public corporations.’
class
Include educational corporations These corporations are treated by law as agencies or instrumentalities of the
and religious corporations, which government which are not subject to the tests of ownership or control and
SPECIAL CORPORATIONS economic viability but to a different criteria relating to their public
include corporation sole and
religious societies purposes/interests or constitutional policies and objectives and their
ECCLESIASTICAL AND LAY CORPORATIONS administrative relationship to the government or any of its Departments or
Composing entirely of spiritual Offices.
persons like bishops, deacons, and
GOCC Distinguished from Government Instrumentalities
ECCLESIASTICAL the like
− when the law vests the government instrumentality with corporate
CORPORATIONS Established for the furtherance of
powers, the instrumentality does NOT become a corporation
religion and for perpetuating the
− e.g., Manila International Airport Authority, UP, Philippine Ports
rights of a church
Authority, BSP
All corporations other than
LAY CORPORATIONS − may have corporate powers
ecclesiastical
ELEEMOSYNARY AND CIVIL CORPORATION Government Financial Institutions (GFIs)
Created NOT for private gain BUT − Financial institutions or corporations in which the government directly
for charitable purposes for the or indirectly owns a majority of the capital stock and which are either
ELEEMOSYNARY / CHARITABLE
administration of charitable trust 1. registered with or directly supervised by the BSP
CORPORATION
NOT an ecclesiastical corporation 2. collecting or transacting funds or contributions from the public and
BUT a lay corporation places them in financial instruments or assets such as deposits, loans,
NOT for the purpose of charity BUT bonds and equity (e.g., GSIS, SSS)
CIVIL CORPORATION for the benefit, pecuniary or
otherwise, of its members Affiliates. Corporation 50% or less of the outstanding capital stock of which
AS TO RELATIONSHIP is owned or controlled, directly or indirectly, by the GOCC.
Corporation more than 50% of the
voting stock of which is owned or
controlled directly or indirectly
SUBSIDIARY through one or more Section 5. Corporators and Incorporators, Stockholders and
intermediaries by another Members. - Corporators are those who compose a corporation,
corporation, which thereby become whether as stockholders or shareholders in a stock corporation or as
a parent company
a members in a nonstock corporations. Incorporators are those
Corporation that directly or
stockholders or members mentioned in the articles of incorporation
indirectly, through one or more
intermediaries, is controlled by, or
as originally forming and composing the corporation and who are
AFFILIATE signatories thereof.
is under the control of another
corporation, which thereby
becomes its parent company
Corporation that has control over Components
another corporation directly or 1. Shareholders or members
indirectly through one or more
2. Directors or trustees
PARENT CORPORATION intermediaries
3. Officers
It is the corporation that owns all
or substantially all or the
Shareholders [[RECITATION]]
controlling shares in the subsidiary
− holders of shares in a corporation over the management
(control), income (dividends), and assets (share upon
Going Public and Going Private
liquidation) of the corporation
• Going Public. When it decides to list its shares in the stock exchange
− participate in controlling the affairs of the corporation by exercising
(this include corporations that will make initial public offering of its
shares)
their right to vote
• Going Private. When it would restrict the shareholders to a certain − they can elect the directors who will actually govern the corporation
group (this includes close or closely held corporations) and they can also vote in important matters that are still reserved
to them by the RCCP
Government-Owned or Controlled Corporations (GOCCs)
− may either be Two-Thirds (2/3) Requirement
− with original charter or created by special law; OR • concurrence of the stockholders representing 2/3 of the
− SEC has no jurisdiction over GOCCs created by special law because outstanding capital is necessary in the exercise of the following
their charters primarily govern them powers:
− Constitution expressly prohibits the creation or establishment of 1) To extend or shorten corporate term
private corporations through special laws EXCEPT GOCCs, provided 2) To increase/decrease capital stock
the following requirements are met: 3) To incur, create or increase bonded indebtedness
i. Private corporation must be government-owned or controlled;
4) To deny pre-emptive right after incorporation
ii. Creation of the corporation through special law must be in the
5) To sell, lease, exchange, mortgage, pledge or otherwise dispose of
interest of common good;
all or substantially all of corporate assets
iii. Creation must meet the test of economic viability, which applies
6) To invest in another corporation, business, or for any purpose other
only to GOCCs that perform economic or commercial activities,
and need to compete in the market place than the primary purpose for which it was organized, like the
− incorporated under a general law (RCCP) secondary purpose
− any agency organized as a stock or non-stock corporation vested with 7) To declare stock dividends
functions relating to public needs whether governmental or propriety in 8) To enter into management contract (2/3 vote of the total
nature, and owned by the Government directly or through its outstanding stock or of the members applies to the managed
instrumentalities either wholly or where applicable as in the case of corporation) IF:
stock corporations to the extent of at least 51% of its capital stock i. a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control
REQUISITES
more than 1/3 of the total outstanding capital entitled to vote of
1. There must be an agency organized as a stock or non-stock
the managing corporation
corporation
ii. a majority of the members of the board or directors of the
2. The corporation must be vested with functions relating to public needs
whether governmental or proprietary in nature managing corporation also constitute a majority of the members
3. The corporation must be owned directly by the government or through of the board of the managed corporation
its instrumentalities either wholly, or where applicable as in the case 9) To amend the Articles of Incorporation
of stock corporations, to the extent of at least 51% of its capital stock 10) To merge or consolidate with another corporation(s)
Page 12
11) To voluntarily dissolve the corporation where creditors are effected effective upon filing of a certificate thereof with the Securities and
Exchange Commission, hereinafter referred to as the "Commission".
Majority
− approval at a meeting duly called for the purpose by the
stockholders representing majority of the outstanding capital, or Shares of capital stock issued without par value shall be deemed
majority of the members, is necessary, together with Board fully paid and nonassessable and the holder of such shares shall not
approval, in the exercise of the following powers: be liable to the corporation or to its creditors in respect
1) To enter into a management contract under circumstances NOT thereto: Provided, That no-par value shares must be issued for a
covered by either of the two instances stated above (see No. 8(i) consideration of at least Five pesos (₱5.00) per share: Provided,
and (ii) further, That the entire consideration received by the corporation for
2) To adopt, amend, or repeal the By-laws its no-par value shares shall be treated as capital and shall not be
3) Voluntary dissolution where no creditor is affected available for distribution as dividends.
Without Prior Board Approval

• 2/3 of the Outstanding Capital Stock or of the Members A corporation may further classify its shares for the purpose of
1) Delegate to the Board the power to amend the By-laws ensuring compliance with constitutional or legal requirements.
2) Remove any director or trustee subject to the requirements under
Section 27
3) Ratification of contracts entered into by directors/trustees Concept of Shares. The unit into which the proprietary interests in a
• Majority of the Outstanding Capital Stock or of the Members corporation are divided. It is the intangible interest or right which an
1) Revoke the power of the Board to amend the By-Laws, which was owner has in the management, profit and assets of the corporation.
previously delegated [[RECITATION]]
2) Grant directors or trustees with compensation and approve the
amount thereof at a regular or special meeting Doctrine of Equality of Shares. All stocks issued by the corporation
3) Fixing the issued price of no-par value shares if not so fixed in are presumed to be equal with the same privileges and liabilities,
the Articles of Incorporation PROVIDED that the Articles of Incorporation is silent on such differences.
[[RECITATION]]
a) If the Articles of Incorporation, therefore, does not provide for any

[[RECITATION]] distinction of the shares of stocks of the corporation, all shares shall
Section 6. Classification of Shares. - The classification of shares, enjoy the same rights and privileges.
their corresponding rights, privileges, restrictions, and their stated b) The Board of Directors cannot provide preference or additional
par value, if any, must be indicated in the articles of incorporations. rights if nothing is provided for in the Articles of Incorporation
Each share shall be equal in all respects to every other share, except
KINDS OF SHARES [[RECITATION]]. Shares of stocks in a
as otherwise provided in the articles of incorporation and in the
corporation represent the interest of the shareholder in a stock
certificate of stock.
corporation.
1. Common/Preferred Shares
The share stock corporations may be divided into classes or series 2. Voting/Non-Voting Shares
of shares, or both. No share may be deprived of voting rights except 3. Par Value/No Par Value Shares
those classified and issued as "preferred" or "redeemable" shares, 4. Treasury Shares
unless otherwise provided in this Code: Provided, That there shall 5. Redeemable Shares
be a class or series of shares with complete voting rights. 6. Founder’s Shares
1. Common/Preferred Shares
Holders of nonvoting shares shall nevertheless be entitled to vote • COMMON Shares
on the following matters; − represent the residual ownership interest in the corporation
(a) Amendment of the articles of incorporation; − ordinarily and usually issued without extraordinary rights or
(b) Adoption and amendment of bylaws; privileges and entitles the shareholder to a pro rata division
(c) Sale, lease, exchange, mortgage, pledge, or other disposition of profits
of all or substantially all of the corporate property; • PREFERRED Shares
(d) Incurring, creating, or increasing bonded indebtedness; − entitles the holder thereof to certain preferences over the
(e) Increase or decrease of authorized capital stock; holders of common stock to induce persons to subscribe for
(f) Merger or consolidation of the corporation with another shares of a corporation
corporation or other corporations; − those that entitle the shareholder to some priority on
(g) Investment of corporate funds in another corporation or dividends and/or asset distribution
− NOT creditors of the corporation
business in accordance with this Code; and
− the holder obtains neither the enforceable claim to interest
(h) Dissolution of the corporation.
and repayment of principal that is provided by debt nor the
rights of residual owner that is provided by common shares
Except as provided in the immediately preceding paragraph, the • preferred shareholders are often excluded from any control,
vote required under this Code to approve a particular corporate act that is, deprived of the right to vote in the election of directors
shall be deemed to refer only to stocks with voting rights. and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for
income in the same manner as shareholders
The shares or series of shares may or may not have a par
• there is no guaranty, however, that the holder of preferred
value: Provided, That banks, trust, insurance, and preneed
shares will receive dividends every fiscal year
companies, public utilities, building and loan associations, and other
• CORPORATIONS ISSUE PREFERRED STOCK FOR THE
corporations authorized to obtain or access funds from the public
FOLLOWING REASONS
whether publicly listed or not, shall not be permitted to issue no-par i. Avoid the use of bonds that have fixed interest charges that
value shares of stock. must be paid regardless of the amount of net income
ii. Avoid issuing so many additional common shares that
Preferred shares of stock issued by a corporation may be given earnings per share will be less in the current year than in
preference in the distribution of dividends and in the distribution of prior years
corporate assets in case of liquidation, or such other iii. Avoid diluting the common shareholders’ control of the
preferences: Provided, That preferred shares of stock may be issued corporation since preferred shares usually have no voting
rights
only with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the terms and
• declaration of dividends is dependent upon the availability of
conditions of preferred shares of stock or any series
surplus profits or unrestricted retained earnings
thereof: Provided, further, That such terms and conditions shall be
Page 13
• preferences granted to preferred stockholders do NOT give −

All shareholders regardless of the classification, other than
them a lien upon the property of the corporation or make holders of preferred or redeemable shares, are entitled to vote
them creditors of the corporation, the right of the former 3. Non-Voting Shares
being always subordinate to the latter − not totally deprived of the right to vote
• as a GENERAL RULE, even if there are existing profits, the − shareholders who hold non-voting shares still retain some
board of directors has the discretion to determine whether or measure of effective control
not dividends are to be declared − may still vote on the following matters (matters that
• preferred shares that are referred to as interest bearing, on involves fundamental changes not only in the corporate
which the corporation agrees absolutely to pay interest before structure but also in the rights of the shareholders that are
dividends are paid to common stockholders, is legal only therefore the concern of all shareholders)
when construed as requiring payment of interest as dividends
from net earnings or surplus only The issuance of non-voting shares is subject to the following
• preferred shares are considered in the computation of the conditions
equity of foreigners and Filipinos in a corporation for purposes 1) Only preferred or redeemable shares may be deprived of voting
of determining compliance with nationalization law rights
• preferred shares may be subject to an express stipulation in 2) There must always be shares with full voting rights
the Articles of Incorporation that they are excluded from 3) The non-voting shares may still vote in the matters enumerated
dividend rates, which is not violative of any provision of the above
Corporation Code
4. Par Value or No Par Value Shares
Fixing Terms and Conditions of Preferred Shares. Rights, privileges • PAR VALUE. an arbitrary amount assigned to the share and is
or restrictions must be indicated in the Articles of Incorporation and in expressed in the certificate covering the share.
the certificate of stock. • PAR VALUE Shares. Those with fixed value stated in the Articles
EXCEPTION: The board of directors may fix the terms and conditions of Incorporation and the share certificate.
subject to the following requirements • NO PAR VALUE Shares. Shares without such arbitrary amount.
i. The articles of incorporation must provide for a class of shares that − the stated or issued value cannot be less than five pesos
are preferred shares (P5.00)
ii. The board of directors must be authorized in the articles of
incorporation to fix the terms and conditions of the preferred share Other values that are commonly associated with the shares of stocks are
iii. A certificate of the terms and conditions fixed by the Board shall be as follows
filed with the SEC 1) Market Value. Price at which shares of capital stock is bought and
sold by investors in the market.
KINDS OF PREFERRED SHARES [[RECITATION]] Directly affected by all the factors that influence general economic
a) Cumulative conditions, investor’s expectations concerning the corporation, and
− if every year there is declaration of dividends, every the corporation’s earnings.
year, you will get it 2) Book Value. Amount per share that each shareholder would receive
− IF last year did not declare but this year declared, if the corporation were liquidated without incurring any further
expenses and if assets were sold and liabilities at their recorded
entitled to BOTH
amounts.
− if a dividend is omitted in any year, it must be made up in
3) Liquidation Value. The amount a stockholder would receive upon
a later year before any dividend may be paid on the
the dissolution and liquidation of the corporation.
common in the later year 4) Redemption Value. Price per share at which the corporation may
− declaration of dividends is still generally subject to the redeem its share.
discretion of the board BUT once declared, the cumulative 5) Issued (Stated) Value. Selling price of the shares fixed by the
preferred shareholders are entitled to receive the dividends Board or in the Articles of Incorporation.
for the years when no declaration was made
− when dividends are declared, cumulative dividends must be • shares without par value may be converted to par value shares
paid regardless of the year in which they are earned and vice versa, by amending the Articles of Incorporation
b) Non-Cumulative • in the case of conversion of no par value shares to par value
− no need to make up for undeclared dividends shares, the conversion will be based on the latest book value of
− no right survives as to the undeclared dividends the no-par value shares
− the directors do NOT even have discretion to declare those
past dividends subsequently Reclassification. Shares that are originally common shares may be
c) Participating reclassified into preferred shares.
− entitled to participate with the common shares in excess Shareholders retain their right to dissent and demand payment of the
distribution fair value of their shares.
− entitled to a fixed cumulative dividend; the common is then
entitled to receive a fixed amount; and excess distribution Commissioner of Internal Revenue v. Court of Appeals
over those two amounts in any year is shared by common
Reclassification of shares does not always bring any substantial alteration
and preferred in some predetermined ratio
in the subscriber’s proportional interest. But the exchange of shares is
d) Non-Participating
different – there would be shifting of the balance of stock features like
e) Preferred as to Dividends
priority in dividend declarations or absence of voting rights.
− share the holder of which is entitled to receive dividends on
said share to the extent agreed upon before any dividends
Yet, neither the reclassification nor exchange of shares per se, yields
at all are paid to the holders of common stock
realized income for tax purposes.
f) Preferred as to Assets Upon Distribution
− share which gives the holder thereof preference in the PROBLEMS:
distribution of the assets of the corporation in case of Q: The proposed Articles of Incorporation of X Corporation contains the
liquidation following provisions: “The preferred shall be entitled to dividends in such a
rate as may be determined by the Board of Directors whenever there are
• preferred shares may be stipulated as convertible into unrestricted retained earnings. Is the provision valid?
common shares which must be stipulated in the Articles of A: The provision is not valid. A provision in the Articles of Incorporation that
Incorporation gives the Board of Directors blanket authority to fix the terms and conditions
• If the Articles of Incorporation do NOT reflect the of preferred shares might result in an abuse of such authority that might
convertibility feature, it is necessary that the Articles of adversely affect the rights of shares already issued.
Incorporation be amended before the conversion is
5. Treasury Shares [[RECITATION]]
formalized
Section 9. Treasury Shares. - Treasury shares are shares of stock
2. Voting
which have been issued and fully paid for, but subsequently
− In the absence of a provision in the Articles of Incorporation
reacquired by the issuing corporation through purchase,
and consistent with the Doctrine of Equality of Shares, the
redemption, donation, or some other lawful means. Such shares
shares in a stock corporation are considered voting shares
Page 14
may again be disposed of for a reasonable price fixed by the board and conditions stated in the articles of incorporation and the
of directors. certificate of stock representing the shares, subject to rules and
regulations issued by the Commission.
Treasury Shares. Issued shares but being in the treasury, they do not
have the status of outstanding shares, HOWEVER, they still represent Redeemable Shares. Usually preferred shares.
paid-for-interest in the property of the corporation • the issuance of redeemable shares may be likened to temporary
borrowings that enable a corporation to adjust its capital structure
a) Treasury shares are currently owned by the corporation and NOT to meet varying conditions
its shareholders. As an owner, the corporation may opt to retire,
sell, or distribute the treasury shares as property dividends
Rationale. Although the investment of a shareholder is usually locked-
b) Treasury shares are previously issued shares and they do NOT
revert to unissued shares once they become part of the properties in and cannot be returned to the shareholder until liquidation, the
of the corporation redemption feature of shares was envisaged to effectively eliminate the
market volatility risks on the side of the share owners.
STAGES IN THE LIFE OF TREASURY SHARES [[RECITATION]]
1) How Treasury Shares are Created. Treasury shares can be Unrestricted Retained Earnings Not Required. Redemption of
created not only through redemption but also through other modes redeemable shares can be made without the need of unrestricted
of acquisition, like purchase, donation, and the like. retained earnings, SUBJECT, HOWEVER, to the condition that the
2) The Rights Enjoyed by the Corporation as the Holder of corporation has, after such redemption, assets in its books to cover debts
Treasury Shares are Restricted. For instance, there is no voting and liabilities inclusive of capital stock. [[RECITATION]]
right and right to dividends with respect to treasury shares a) Unrestricted retained earnings mean the amount of
3) Disposition of Treasury Shares. The Board of Directors may accumulated profits and gain realized out of the normal and
provide for the reasonable price for the transfer of treasury shares. continuous operations of the company after deducting therefrom
distributions of shareholders and transfers to capital stock or other
Limitations [[RECITATION]]. Treasury shares, NOT having been
accounts, and which is:
retired by the corporation reacquiring it, are subject to the following
i. NOT appropriated by its Board of Directors for corporate
limitations
expansion projects or programs
1) They may be sold again as long as the corporation hold them as
ii. NOT covered by a restriction for dividend declaration under a
treasury shares
loan agreement
2) Treasury shares CANNOT participate in dividends because
iii. NOT required to be retained under special circumstances
dividends cannot be declared by the corporation to itself
obtaining in the corporation such as when there is a need for a
3) CANNOT be represented during stockholder’s meetings for
special reserve for probable contingencies
otherwise equal distribution of voting powers among stockholders
b) Redemption may NOT be made where the corporation is insolvent
will be effectively lost and the directors will be able to perpetuate
or if such redemption will cause insolvency or inability of the
their control of the corporation
corporation to meet its debts as they mature.
4) The amount of unrestricted retained earnings equivalent to the cost
c) All corporations, which have issued redeemable shares with
of treasury shares being held shall be restricted from being
mandatory redemption features, are required to set up and
declared and issued as dividends
maintain a “Sinking Fund”
The dividend restriction on retained earnings on account of treasury
− the fund shall be deposited with a trustee bank
shares being held shall be lifted only after the treasury shares
− NOT supposed to be invested in risky or speculative ventures
causing the restriction are reissued
− it is a fund set up by the corporation where cash is gradually
Nature and Effects set aside in order to accumulate the amount necessary to
• treasury share may be common or preferred share meet the redemption price of redeemable shares at specified
• may be held indefinitely, resold or retired dates in the future
• while held in the company’s treasury, the stock earns no dividends
and cannot vote in stockholders’ meetings Effect of Redemption [[RECITATION]]
a) When the redeemable shares are reacquired, the same shall be
a) Treasury shares do NOT reduce the number of issued shares or the considered retired and no longer issuable UNLESS otherwise
amount of stated capital and their “sale” does not increase the provided for in the Articles of Incorporation
number of issued shares or amount of stated capital The redeemed shares shall be considered deduction to equity if
b) The corporation has the option to retire the treasury shares there is no provision in the Articles of Incorporation that provides
Retirement treasury shares shall be effected by decreasing the that the same shares are not retired
capital stock of the corporation for the purpose of eliminating the b) On the other hand, the redeemed shares will NOT be considered
treasury shares retired and will become treasury shares if the Articles of
c) Treasury shares may be declared as property dividend to be issued Incorporation expressly provides that once redeemed, the
out of the retained earnings previously used to support their redeemable shares shall be classified as treasury shares
acquisition provided that the amount of the retained earnings has c) If the redeemable shares are considered retired, the authorized
not been subsequently impaired by losses capital stock of the corporation is in effect reduced by the
Any declaration and issuance of treasury shares as property corresponding number of shares because the redeemed shares
dividend shall be disclosed and properly designated as property can no longer be re-issued
dividend in the books of the corporation and its financial statements
d) Inasmuch as treasury shares are NOT considered as outstanding
PROBLEMS:
capital stock, the corporation is not entitled to any right or privilege
of a shareholder Q: On September 15, 2013, XYZ Corporation issued to Paterno 800 preferred
When a corporation reacquires its own shares, it does not become shares with the following terms: “The preferred shares shall have the following
a subscriber thereof rights, preferences, qualifications, and limitations, to wit: (1) the right to
e) The approval of the stockholders for the re-issuance of treasury receive a quarterly dividend of 1%, cumulative and participating; (2) these
shares is not necessary BUT the same is subject to the pre-emptive shares may be redeemed, by drawing of lots, at any time after two (2) years
rights of shareholders from date of issue, at the option of the Corporation”
Today, Paterno sues XYZ Corporation for specific performance for the payment
6. Redeemable Shares [[RECITATION]]
of dividends on, and to compel the redemption of, the preferred shares, under
the terms and conditions provided in the stock certificates. Will the suit
Section 8. Redeemable Shares. - Redeemable shares may be
prosper?
issued by the corporation when expressly provided in the articles of
incorporation. They are shares which may be purchased by the A: No. The suit will not prosper. The fact that Paterno holds preferred shares
corporation from the holders of such shares upon the expiration of does not give him the right to compel XYZ Corporation to pay dividends. It is
a fixed period, regardless of the existence of unrestricted retained still within the business judgment of the Board of Directors to declare
dividends and the judgment of the Board is always subject to the requirement
earnings in the books of the corporation, and upon such other terms
Page 15
that there must be unrestricted retained earnings. Holders of preferred shares iv. For corporations with applications with the PEZA, SBMA,
are not creditors and dividends are not interest that is due. Clark Development Corporation, Cagayan Economic Zone
Authority, or other economic zones: Certificate of Authority or
Paterno cannot likewise compel the corporation to redeem the shares because endorsement form said government agencies
the express terms of the stipulation is to the effect that the shares “may be v. Cash or such other additional requirements if paid up capital is not
redeemed” after two (2) years thereby indicating that the redemption is not cash
mandatory. Even if Paterno is holding mandatory redeemable shares, it is b) For Non-Stock Corporation
subject to the requirement that enough assets are left to cover debts and 1. Name Verification Slip
liabilities. In other words, there should be no effect on creditors. 2. Articles of Incorporation and By-Laws
3. List of members certified by the Corporate Secretary UNLESS the
7. Founder’s Shares [[RECITATION]] members are named in the Articles of Incorporation
4. List of names of contributors or donors and the amounts contributed
Section 7. Founders' Shares. - Founders' shares may be given or donated, as certified by the treasurer.
certain rights and privileges not enjoyed by the owners of other There shall be no fixed amount of contribution required by only such
stock. Where the exclusive right to vote and be voted for in the reasonable amount as the incorporators and trustees may deem
election of directors is granted, it must be for a limited period not to sufficient to enable the corporation to start operation, EXCEPT in case
exceed five (5) years from the date of incorporation: Provided, That of foundations which must have a minimum contribution of at least
One Million Pesos (P1,000,000.00)
such exclusive right shall not be allowed if its exercise will violate
5. Registration Data Sheet
Commonwealth Act No. 108, otherwise known as the "Anti-Dummy 6. Additional Requirements
Law"; Republic Act No. 7042, otherwise known as the "Foreign i. For Foundations: Notarized certificates of bank deposit of the
Investments Act of 1991"; and other pertinent laws. contribution of not less than P1,000,000.00 and statement of
willingness to allow the SEC to conduct an audit
ii. For Religious Corporations: Refer to Sections 109, 110, and 114,
and an affidavit of affirmation or verification by the chief priest,
Rationale. Shares that are given to those who helped organize the
rabbi, minister, or presiding elder
corporation.
iii. For Federations: Certified list of member-association by Corporate
• the special rights granted to founders’ shares are subject to the Secretary/President
approval of the SEC iv. For Condominium Corporation/Association: Master Deed with
primary entry of the Register of Deeds and certification that there
Nature of Five-Year Limit. refers only to the exclusive right to vote is no other existing similar condominium association within the
and be voted for in the election of directors, a right normally enjoyed by condominium project
holders of common shares, the class of shares which are supposed to
have complete voting rights. By-Laws
− contains the delegation and powers of officers
After the expiration of the five-year period, founders’ shares shall have − Articles of Incorporation and the By-Laws shall be submitted upon
equal rights with the holders of common shares. application for incorporation (Section 18)
− HOWEVER, By-Laws can also be filed with the SEC after
incorporation (Section 45)
TITLE II Organized Under Existing Laws [[RECITATION]]
INCORPORATION AND ORGANIZATION OF PRIVATE
• incorporation is oftentimes used interchangeably with the term
CORPORATIONS
organization, hence, domestic corporations are often referred to as
corporations organized and existing under Philippine laws
Incorporation
• until organized or incorporated as authorized by the charter, there
− performance of conditions, acts, deeds, and writings by
is no corporation, nor does it possess franchise or faculties for it or
incorporators, and the officials acts, certifications or records, which
others to exercise, until it acquires a complete existence
give the corporation its existence
• however, organization used under Section 21 is different from
− a mere grant of privilege from the State
incorporation, as it presupposes that the corporation is already
incorporated
Cagayan Fishing Development Co., Inc. v. Sandiko
Agreement to Incorporate
Corporations are creatures of law, and can only come into existence in the
− natural persons and/or corporations may validly enter into an
manner prescribed by law. General laws authorizing the formation of
corporations are general offers to any persons who may bring themselves
agreement to create a corporation
within their provisions; and if conditions precedent area prescribed in the − such agreement, which may be a joint venture agreement, may be
statute, or if certain acts are required to be done, they are terms of the offer, reciprocal in nature where each party is not obligated to comply if
and must be complied with substantially before legal corporate existence can the other is also not in a position to comply with his side of
be acquired. obligation
Effect if Not Incorporated

− it is only through incorporation and registration with Securities and
Exchange Commission (SEC) that private corporations can acquire Section 10. Number and Qualifications of Incorporators. - Any
juridical personality under the RCCP person, partnership, association or corporation, singly or jointly with
− the life of the corporation will not commence if the SEC will not others but not more than fifteen (15) in number, may organize a
issue a Certificate of Incorporation, even if the supposed corporation for any lawful purpose or purposes: Provided, That
incorporators already signed and filed the Articles of Incorporation natural persons who are licensed to practice a profession, and
a) HOWEVER, incorporation is NOT necessary for an association to partnerships or associations organized for the purpose of practicing
function as a group. a profession, shall not be allowed to organize as a corporation unless
Incorporation is NOT necessary for liability to attach under the rule otherwise provided under special laws. Incorporators who are
on corporation by estoppel. natural persons must be of legal age.
DOCUMENTARY REQUIREMENTS FOR INCORPORATION Each incorporator of a stock corporation must own or be a subscriber
a) For Stock Corporation to at least one (1) share of the capital stock.
1. Name Verification Slip
2. Articles of Incorporation and By-Laws A corporation with a single stockholder is considered a One Person
3. Additional Requirements
Corporation as described in Title XIII, Chapter III of this Code.
i. Endorsements/clearances from other government agencies, if
[[RECITATION]]
applicable
ii. For corporations with foreign equity: Proof of remittance by
non-resident aliens and foreign corporate subscribers, and of
Incorporators. Those stockholders or members mentioned in the
registration of their investment with the BSP or an affidavit that
Articles of Incorporation as originally forming and composing the
they will not register their investment with the BSP
corporation and who are signatories thereof.
iii. For corporations with more than 40% foreign equity:
Application form required by the FRIA
Page 16
Qualifications − an incorporator remains to be an incorporator even if he will later

1. The incorporator must be a natural or juridical entity on cease to be a corporator or shareholder
2. There must not be more than 15 incorporators − thus, one will still be an incorporator even if he/she/it already
3. If the incorporator is a natural person, he or she must be of legal transferred all his/her/its shares to another
age
4. Each incorporator of a stock corporation must own or be a
subscriber to at least one share of the capital stock
[[RECITATION]] Section 11. Corporate Term. - A corporation shall
Associations have perpetual existence unless its articles of incorporation provides
− entities that are different from corporations otherwise.
− non-profit organizations being organized
− already acquired legal personality [[Corporations with certificates of incorporation issued prior to the
− non-profit organizations which can be non-stock corporations
effectivity of this Code and which continue to exist shall have
incorporated under the RCCP
perpetual existence, unless the corporation, upon a vote of its
Nominees stockholders representing a majority of its outstanding capital stock,
• under the previous rule that disallowed juridical persons to be notifies the Commission that it elects to retain its specific corporate
incorporators, corporations resorted to nominees in order to comply term pursuant to its articles of incorporation: Provided, That any
with the requirement that there should be a minimum of 5 incorporators change in the corporate right of dissenting stockholders in
and 5 original directors of a corporation accordance with the provisions of this Code. = PERPETUAL TERM
• with the use of nominees, the problem of dealing with a corporation was
OF EXISTING CORPORATION]]
obviated because the personality of the corporation was transposed to
that (single) individuals who represent the interest of the corporation
[[A corporate term for a specific period may be extended or
• hence, corporations who wished to incorporate another entity were
shortened by amending the articles of incorporation: Provided, That
legally allowed to designate nominees who are natural persons to hold
share(s) for them (the trustor-corporations) to qualify the natural
no extension may be made earlier than three (3) years prior to the
persons as directors or incorporators original or subsequent expiry date(s) unless there are justifiable
• this arrangement involves both a trust agreement for the shares reasons for an earlier extension as may be determined by the
and agency Commission: Provided, further, That such extension of the
− under the RCCP, it is no longer necessary for a corporation to resort corporate term shall take effect only on the day following the original
to designating nominees to incorporate another corporation, or subsequent expiry date(s). = EXTENSION OF TERM]]
HOWEVER, there is nothing in the RCCP that prohibits the
appointment of nominees especially if the corporation wants the [[A corporation whose term has expired may apply for revival of its
Board of Directors to be a group of professionals who will manage corporate existence, together with all the rights and privileges under
the corporation its certificate of incorporation and subject to all of its duties, debts
− to lessen the number of persons who may be involved in the and liabilities existing prior to its revival. Upon approval by the
incorporation process, these persons who are the original directors Commission, the corporation shall be deemed revived and a
may also be the incorporators together with the corporation certificate of revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival provides
Approval to Act as Incorporator
− if an incorporator is a corporation and the investment is for otherwise.
any purpose other than the primary purpose, hence decision
No application for revival of certificate of incorporation of banks,
is subject to the approval of both the Board of Directors or Trustees
banking and quasi-banking institutions, preneed, insurance and
and the stockholders or members if the investment is for any
purpose other than the primary purpose trust companies, non-stock savings and loan associations (NSSLAs),
− if the investment is consistent with the primary purpose of pawnshops, corporations engaged in money service business, and
the corporation, the approval by the Board of Directors or other financial intermediaries shall be approved by the Commission
Trustees is all that is required unless accompanied by a favorable recommendation of the
appropriate government agency. = REVIVAL OF CORPORATE
Number of Incorporators and Shares. EXISTENCE]]
a) It is not correct to assume that the incorporators are always the only
original subscribers
While there can be only one incorporator under the new law, the RCCP Majority Stockholders of Ruby Industrial Corporation v. Lim
does not limit the number of original subscribers, hence, there can be
one incorporator but the rest of the shares may be subscribed originally The moment a corporation’s right to exist ceases, its corporate powers
by other persons.
are terminated just as powers of a natural person to take part in the
b) The intention of the legislature on the requirement of ownership of at
mundane affairs cease to exist upon his death. There is nothing left but
least one share was to indicate who really represents the corporation at
to conduct, as it were, the settlement of the estate of the deceased
its inception as the public was used to be misled under the old law as to
juridical person.
who had authority to act because there were incorporators who were
not stockholders
If the corporate life as stated in the Articles of Incorporation expired,
Capacity without a valid extension having been effected, the corporation is
− an incorporator must have capacity to act, which is the power to deemed dissolved by such expiration without need of further action on
do acts with legal effect the part of the corporation or the State.
− minority, insanity or imbecility, the state of being deaf-mute,
Doctrine of Relations
prodigality, and civil interdiction are restrictions on capacity to
• the filing and recording of a certificate of extension after the
act
expiration of the fixed corporate term cannot relate back to the
Philippine Residence Not Required date of the passage of the resolution of the stockholders to extend
− non-residents may be incorporators the life of the corporation
− unlike the Corporation Code, the RCCP no longer requires that the − HOWEVER, the doctrine applies IF the failure to file the application
majority of the incorporators be residents of the Philippines for extension within the term of the corporation is due to the
− a person is a resident under the Corporation Code if he is physically neglect of the SEC officer with whom the certificate is required to
present in the Philippines with an intention to remain present be filed or to a wrong refusal on his part to receive it
therein − the doctrine does NOT apply IF there was fault or negligence on the
part of the corporation
No Citizenship Requirement
− there is no requirement that the majority of the incorporators must PROBLEMS:
be citizens of the Philippines
Q: A corporation was organized for a term of 50 years, expiring in December
− the rules is, however, subject to the requirements of pertinent
2006. Outline the steps to be taken in order that it may extend its corporate
nationalization laws
life.
Accomplished Fact A:
Page 17
a. The articles of incorporation shall be amended stating the term extension (f) The number of directors, which shall not be more than fifteen
and the amendment must be approved by: (1) the majority vote of the board (15) or the number of trustees which may be more than fifteen
of directors or trustees and (2) the stockholders representing at least 2/3 of
(15);
the outstanding capital stock or by at least 2/3 of the members in case of a
(g) The names, nationalities, and residence addresses of persons
non-stock corporation.
who shall act as directors or trustees until the first regular directors
b. The approved amendment of the articles of incorporation shall be submitted or trustees are duly elected and qualified in accordance with this
to the SEC for approval NOT earlier than (5 year sunder the old Code) 3 years Code;
prior to the original or subsequent expiry date. (h) If it be a stock corporation, the amount of its authorized capital
stock, number of shares into which it is divided, the par value of
c. The amendment is deemed approved upon inaction of the SEC for 6 months
after submission due not the fault of the corporation or upon its approval. The each, names, nationalities, and residence address of the original
effectivity of the amendment relates back to the date of its filing with the SEC. subscribers, amount subscribed and paid by each on the
subscription, and a statement that some or all of the shares are
without par value, if applicable;
(i) If it be a nonstock corporation, the amount of its capital, the
Section 12. Minimum Capital Stock Not Required of Stock names, nationalities, and residence addresses of the contributors,
Corporations. - Stock corporations shall not be required to have and amount contributed by each; and
minimum capital stock, except as otherwise specially provided by (j) Such other matters consistent with law and which the
special law. incorporators may deem necessary and convenient.
An arbitration agreement may be provided in the articles of

Authorized Capital Stock. The amount fixed in the articles of incorporation pursuant to Section 181 of this Code.1âwphi1
incorporation to be subscribed and paid by the stockholders of the
corporation. The Articles of incorporation and applications for amendments
thereto may be filed with the Commission in the form of an electronic
Subscribed Capital. That portion of the authorized capital stock that is
document, in accordance with the Commission's rule and regulations
covered by subscription agreements whether fully paid or not.
on electronic filing.
Paid Up Capital. The portion of the authorized capital that is subscribed
and paid.
Section 14. Form of Articles of Incorporation. - Unless otherwise
Paid-in Capital. The amount of outstanding capital stock and additional prescribed by special law, the articles of incorporation of all domestic
paid-in capital (APIC) or premium paid over the par value of the shares. corporations shall comply substantially with the following form:
APIC. Any additional contribution by shareholders over the par value of

the shares. Articles of Incorporation
of
Outstanding Capital Stock. Total shares of stocks issued to _____________________
subscribers or stockholders, whether or not fully or partially paid EXCEPT
treasury shares so long as there is a binding subscription agreement.
(Name of Corporation)
Capital. Properties and assets of the corporation that are used for its
business or operation. The undersigned incorporators, all of legal age, have voluntarily
agreed to form a (stock) (nonstock) corporation under the laws of
Stated Capital. The sum of the par value of all issued par value shares,
the Republic of the Philippines and certify the following:
the entire amount received for no-par value shares and any amount
transferred by a stock dividend or other corporate action from surplus to
stated capital. First: That the name of said corporation shall be
"_________________", Inc. Corporation or OPC";
Initial Subscribed and Paid-Up Capital
− RCCP requires that a portion of the authorized capital is subscribed
Second: That the purpose or purposes for which such corporation
in a stock corporation, evident from the requirement that the
Articles of Incorporation must contain a list of subscribers is incorporated are: (If there is more than one purpose, indicate
− investment of the subscribers is the primary source of the capital primary and secondary purposes);
that the corporation will use for its operations
− it follows that at least a portion of the subscription must also be Third: That the principal office of the corporation is located in the
paid City/Municipality of _______________, Province of
______________________, Philippines;
Fourth: That the corporation shall have perpetual existence or a

Section 13. Contents of the Articles of Incorporation. - All term of ___________ years from the date of issuance of the
corporations shall file with the Commission articles of incorporation certificate of incorporation;
in any of the official languages, duly signed and acknowledged or
authenticated, in such form and manner as may be allowed by the
Fifth: That the names, nationalities, and residence addresses of
Commission, containing substantially the following matters, except
the incorporators of the corporation are as follows:
as otherwise prescribed by this Code or by special law:
(a) The name of corporation;
(b) The specific purpose or purposes for which the corporation is Name Nationality Residence
being formed. Where a corporation has more than one stated
_________________ ___________________ _________________
purpose, the articles of incorporation hsall indicate the primary
purpose and the secondary purpose or purposes: Provided, That a _________________ ___________________ _________________
nonstock corporation may not include a purpose which would _________________ ___________________ _________________
change or contradict its nature as such;
(c) The place where the principal office of the corporation is to be _________________ ___________________ _________________
located, which must be within the Philippines; _________________ ___________________ _________________
(d) The term for which the corporation is to exist, if the corporation
has not elected perpetual existence;
(e) The names, nationalities, and residence addresses of the Sixth: That the number if directors or trustees of the corporation
incorporators; shall be ___________________; and the names, nationalities,
Page 18
and residence addresses of the first directors or trustees of the IN WITNESS WHEREOF, we have hereunto signed these Articles of
corporation are as follows: Incorporation, this ______ day of _____, 20___ in the
City/Municipality of _________________, Province of
________________, Republic of the Philippines.
Name Nationality Residence
___________________ _________________ _______________ ______________________ ___________________________

_____________________________ ____________________________
___________________ _________________ _______________ _____________________________ ____________________________
_____________________________ ____________________________
___________________ _________________ _______________
_____________________________ ____________________________
___________________ _________________ _______________ (Names and signatures of the incorporators)
____________________________
___________________ _________________ _______________ (Name and signature of Treasurer)
Seventh: That the authorized capital stock of the corporation is

____________________ PESOS (₱______), dividend into ____
Articles of Incorporation as Charter and Contract
shares with the par value of ___________________ PESOS
• Articles of Incorporation. A document that defines the charter
(₱_____________) per share. (In case all the shares are without of the corporation stating its name, purpose(s), its capital stock, as
par value): That the capital stock of the corporation is well as the description of its governing board and other stipulations
__________________ shares without par value. under Arts. 13 and 14;
• it defines the contractual relationships between the State and the
(In case some shares have par value and some are without par corporation, the stockholders and the State, and between the
value): That the capital stock of said corporation consists of corporation and its stockholders
________________________________ shares, of which a) The Articles of Incorporation also binds the State.
_______________________ shares have a par value of b) It constitutes the constitution of a corporation
___________________________PESOS (₱_______) each, and of c) An entry in the Articles of Incorporation is evidence of the factual
which ____________________ shares are without par value. stipulations therein.
For instance, the recitals in the Articles of Incorporation that there are
unpaid subscriptions are proof against the stockholders.
Eight: That the number of shares of the authorized capital stock-
stated has been subscribed as follows:
Substantial Compliance
• the Articles of Incorporation must comply with the form prescribed in
Name of No. of Shares Amount Amount Articles 13 and 14
Nationality • HOWEVER, substantial compliance may not affect the de jure existence
Subscriber Subscribed Subscribed Paid
of the corporation
a) RCCP recognized that special laws and the Code itself may require
strict compliance with certain provisions.
(Modify No. 8 if shares are with no-par value. In case the
Thus, a corporate name, and a purpose clause in the Articles of
corporation is nonstock, Nos. 7 and 8 of the above articles may be
Incorporation are indispensable.
modified accordingly, and it is sufficient if the articles may be Special laws may likewise impose additional provisions for strict
modified accordingly, and it is sufficient if the articles state the compliance such as minimum capitalization requirements
amount of capital or money contributed or donated by specified
persons, stating the names, nationalities, and residence addresses
FIRST: NAME
of the contributors or donors and the respective amount given by
− necessary for identification purposes
each.)
− the very law of their creation and continued existence requires each
to adopt and certify a distinctive name
[[ Ninth: That _______________________ has been elected by − a corporation has the power of succession under its corporate name
the subscribers as Treasurer of the Corporation to act as such until
after the successor is duly elected and qualified in accordance with Western Equipment and Supply Co. v. Reyes
the bylaws, that as Treasurer, authority has been given to receive
in the name and for the benefit of the corporation, all A corporation’s right to use its corporate and trade name is a property
subscriptions, contributions or donations paid or given by the right, a right in rem, which it may assert and protect against the world
subscribers or members, who certifies the information set forth in in the same manner as it may protect its tangible property, real or
the seventh and eighth clauses above, and that the paid-up portion personal, against trespass or conversion. It is regarded, to a certain
of the subscription in cash and/or property for the benefit and extent, as a property right and one which cannot be impaired or
credit of the corporation has been duly received. TREASURER’S defeated by a subsequent appropriation by another corporation in the
CERTIFICATION ]] same field.
Its name is one of its attributes, an element of its existence, and

[[ Tenth: That the incorporators undertake to change the name of
essential to its identity. The general rule as to corporations is that each
the corporation immediately upon receipt of notice from the
corporation must have a name by which it is to sue and be sued and
Commission that another corporation, partnership or person has
do all legal acts; and the right to use its corporate name is as much a
acquired a prior right to the use of such name, that the name has
part of the corporate franchise as any other privilege granted.
been declared not distinguishable from a corporation, or that it is
contrary to law, public morals, good customs or public policy. =
a) The corporate name is necessarily included in the enjoyment of the
UNDERTAKING TO CHANGE CORPORATE NAME ]]
franchise, hence, a corporate name cannot be levied upon because
it is inseparable from the primary franchise.
Eleventh: (Corporations which will engage in any business or b) Before the Articles of Incorporation of the prospective corporation
activity reserved for Filipino citizens shall provide the following): is drafter, it is advisable to verify with the SEC if the proposed name
"No transfer of stock or interest which shall reduce the ownership of the corporation is still available for registration.
of Filipino citizens to less than the required percentage of capital HOWEVER, the reservation and notice of availability of the
stock as provided by existing laws shall be allowed or permitted corporate name shall NOT constitute an approval of the use of such
to be recorded in the proper books of the corporation, and this name.
restriction shall be indicated in all stock certificates issued by the c) The name of the corporation need not reflect the purpose of the
corporation." corporation as the purpose of the name is for identification and NOT
to give an indication of its purpose.
Page 19
SECOND: PURPOSE CLAUSE − filing that does not comply with this requirement is deemed non-
− important to assure that persons who invest in corporate entities compliant and is considered as not filed
would be aware of the business the corporation is designed to − they are required to amend their articles of incorporation or
engaged in articles of partnership to reflect specific address
− otherwise, a one-time penalty can be imposed
a) Primary Purpose. Must be only one.
Secondary Purpose. May be several.
SEC MEMORANDUM CIRCULAR
Other purposes not allied or incidental to the Primary Purpose
should be classified as Secondary Purposes.
HOWEVER, if the Corporation’s principal address is already complete
It is necessary to specify the two kinds of purposes in order to
and specific, but the corporation has moved to another location within
determine which investment of corporate funds would require the
the same city or municipality, the corporation is not required to file an
authority of both the Board and stockholders under Section 41
amended Articles of Incorporation.
b) As a general rule, the primary purpose determines the
classification of a corporation, HOWEVER, where the corporation
actually engages in one of its secondary purposes, it may also be Instead, it must declare its new or current specific address in the
classified in accordance with the secondary purpose(s). General Information Sheet (GIS) within fifteen (15) days from the
c) There should be a specification of the corporate purpose with transfer to its new location.
sufficient clearness to define with certainty the scope of the
business or undertaking prescribed and to enable one to see that HOWEVER, the corporation must submit an amended Articles of
the purpose specified is one provided for by the statute. Incorporation if the new address is in another city or municipality.
A statement that the object of the corporation is to carry on any
business that it may deem profitable or in other vague terms is a) The issue regarding the principal office was discussed in the Senate
NOT sufficient. One of the authors admitted it was one of the proposed amendments
d) NOT all the powers need to be described in the Articles of that they were reviewing “and which may be deleted at the appropriate
Incorporation, as other powers are either implied or incidental. time because requiring a specific address for purposes of determining
e) The purposes of a corporation as set forth in the Articles of the venue of the actions and jurisdiction over the corporation for tax
Incorporation are NOT to be limited by the words of a single clause, and other purposes, may NOT be consistent with ease of doing business
BUT are to be ascertained by the reading of the entire declaration. because it will not allow the corporation to move to other premises
All the clauses shall be considered together an in association with within the same city or municipality.
one another in determining what the corporation may do although
that part expressing the object of the corporation is first referred Importance of Principal Office. The principal office of the
to. corporation is considered its place of residence.
a) It may determine the venue of court cases involving corporations
Rationale of the Purpose Clause It may also determine if service of summons and notices was
1) The person who intends to invest his money in the business will properly made.
know where and in what kind of business or activity his money will Additionally, unless otherwise provided for, the meetings of
be invested stockholders or members shall be conducted in the city or
2) The directors and officers will be informed regarding the scope of municipality where the principal place of business is located, and if
business they are authorized to act practicable, in the principal office of the corporation.
3) A third person will be aware if the transaction he has with the b) It is NOT necessary that all businesses of the corporation be
corporation is within the authority of the corporation conducted in the principal place of business.
For instance, the principal place of business of a corporation
manufacturing goods may be different from the place of the
General Limitations. The purposes of a corporation must NOT be
factory.
unlawful.
c) When the defendant is a corporation, partnership or association,
1) It cannot be created or formed for a purpose or function of which
service may be made on the president, managing partner, general
a corporate body is incapable.
manager, corporate secretary, treasurer, or in-house counsel of the
For example, generally, a corporation cannot be incorporated for the
purpose of practicing a profession. Corporations cannot possess human
corporation wherever they may be found, or in their absence or
personal qualifications for the practice for profession. unavailability, on their secretaries
2) It cannot be created for a purpose that is contrary to law, morals,
or public policy. FOURTH: CORPORATE TERM
For example, the corporation cannot be organized for the purpose of − it has been explained that where the term of the corporation expires but
creating a municipal corporation. Obviously, a corporation cannot also instead of liquidating its affairs it continues the business in good faith,
be created for the purpose of engaging in prostitution business. not knowing that the term has expired, some courts hold that it may be
3) It cannot be organized for two or more incompatible purposes. deemed a corporation de facto;
There may be non-allied purposes but they must not be − it may also be regarded as corporation by estoppel under certain
incompatible. circumstances
For example, the General Banking Law expressly prohibits banks from
being engaged in insurance business. FIFTH: INCORPORATORS
4) The corporation may not be organized for a purpose that is contrary − the Articles of Incorporation contains the names, nationalities, and
to its nature. residence addresses of the incorporators
For example, a non-stock non-profit corporation cannot have as its − all incorporators must sign and acknowledge the Articles of
secondary purpose the manufacturing of goods to be sold on wholesale
Incorporation together with the treasurer
or retail.
− the Articles of Incorporation is defective if not all incorporators
acknowledged the same before the notary public
Questions Regarding the Purpose. The best proof of the purpose of − the names of incorporators specified must refer to their legal
a corporation is its Articles of Incorporation. names, NOT fictitious names or aliases, which they have no
a) Collateral attack on the legality of the purpose of the corporation is authority to use
NOT allowed in this jurisdiction.
Thus, a party in case for damages cannot impugn the legality of the
SIXTH: DIRECTORS
purpose of the corporation. A case should be filed to directly attack the
− for a stock corporation, the number of directors cannot exceed
purpose of the corporation.
fifteen (15) even after the incorporation
− for a non-stock corporation, the number of trustees may be
THIRD: PRINCIPAL OFFICE more than fifteen (15) should be indicated in the Articles of
− SEC Rules require the location of the principal office to be Incorporation
specifically identified, if feasible, street number, street name,
barangay, city or municipality and the specific address of the a) The Articles of Incorporation states the names, nationalities, and
incorporator, director or trustee residences of persons who shall act as directors or trustees until
− if possible the name of the building should also be designated the first regular directors or trustees are duly elected and qualified
− “Metro Manila” shall no longer be allowed as principal office in accordance with the RCCP, which means that the original
Page 20
directors originally appearing in the Articles of Incorporation need i. Cash

not necessarily be the regular directors elected after the issuance ii. Land, Building or Condominium Unit
of the certificate of incorporation iii. Untitled Unit
iv. Inventories, Furniture, and Personal Properties
SEVENTH: CAPITAL STOCK v. Heavy Equipment and Machinery
− it is mandatory to state the authorized capital stock, the number of vi. Shares of Stock
shares into which it is divided and the par value of the shares, in vii. Motor Vehicles
lawful money of the Philippines if the shares have par value viii. Sea Vessel and Aircraft
− if the shares have no par value, only the number of shares need ix. Intangibles (like intellectual property rights or mining rights)
be stated x. Net Assets by way of Conversion of Single
Proprietorship/Partnership into Corporation or by way of Spin-
a) unlike the Corporation Code, the RCCP does NOT provide for a minimum Off
subscribed capital and paid-up capital.
it is worth mentioning that the Corporation Code required a minimum NINTH: TREASURER’S CERTIFICATION
subscribed capital and paid-up capital for the following reasons: − must state the name of the Treasurer who has been elected by the
i. to serve as an assurance that there will be a successful prosecution subscribers to act as such until after the successor is duly elected
of the business of the corporation
and qualified in accordance with the By-Laws
ii. to assure the creditors that they have means of obtaining
− has been given the authority to receive in the name and for the
satisfaction of their claims to the extent of the subscription
benefit of the corporation, all subscription, contributions or
b) With respect to the shares comprising the capital stock, the
donations paid or given
same may be divided into classes or series of shares or both and
− responsible for the certification because the Treasurer also signs
any of such classes or series of shares may have rights, privileges
the Articles of Incorporation
or restrictions, as may be provided for in the Articles of
− may be made liable if the information stated in the Seventh and
Incorporation, subject to the limitation that no share may be
Eighth clauses are false
deprived of voting rights EXCEPT preferred or redeemable shares
and that there shall always be a class or series of shares which
have complete voting rights. Effect if Sole Proprietorship Organized
Any or all of the shares may have a par value or have no par value, − required that there is a Deed of Assignment that must specify the
as provided in the Articles of Incorporation. liabilities of the sole proprietorship that are being assumed by the
Shares of stock without par value may NOT be issued for a new corporation
consideration less than P5.00 per share − corporation would not be liable if there is no assumption of
c) The names, nationalities, and residence addresses of the original obligation
subscribers, and the respective amounts subscribed and paid by
each of them must also be stated in the Articles of Incorporation. a) Where an individual or sole trader organizes a corporation to take
The total amount on account of subscriptions shall be stated except over his business and all his assets, and it becomes in effect merely
where the capital stock consists of no par value shares, in which an alter ego of the incorporator, the corporation, either on the
case the subscriptions must be fully paid. grounds of implied assumption of the debts or on the grounds that
the business is the same and is merely being conducted under a
new guise, is liable for the incorporator’s pre-existing debts and
EIGHTH: PAID-UP CAPITAL. That portion of the authorized capital
liabilities
stock that has been subscribed and paid.
b) Where the corporation assumes or accepts the debts of its
To illustrate, the authorized capital stock of a corporation is worth P1 predecessors in business it is liable and if the transfer of assets is
Million and the total subscription amounts to P250,000 while the total in fraud of creditors it will be liable to the extent of the assets
amount paid for the subscription is P200,000. The latter amount, transferred.
P200,000 is the paid-up capital (stock). The corporation is not liable on an implied assumption of debts from
Thus, not all funds or assets received by the corporation can be the receipt of assets where the incorporator retains sufficient assets
considered paid-up capital; such must form part of the authorized to pay the indebtedness, or where none of his assets are
capital stock of the corporation, subscribed and then actually paid up. transferred to the corporation, or where, although all the assets of
the incorporator have been transferred, there is a change in the
a) The paid-up capital may be the subject to different minimum persons carrying on the business and the corporation is not merely
requirements under special laws. an alter ego of the person to whose business it succeeded.
It is necessary that there is a treasurer elected by the subscribers
authorized to received for an in the name of and for the benefit of Foreign Equity
the corporation all subscriptions paid or given by the subscribers. “No transfer of interest which will reduce the ownership of Filipino citizens
It should be noted that although the submission of a certificate of to less than the required percentage of the capital shall be allowed or
deposit is not presently required, it is still necessary that there is permitted to be recorded in the proper books. This restriction shall be
actual paid-up capital. printed in all the stock certificates of the corporation.”
b) If the paid-up capital consists of property, verification of its
ownership, physical existence, and reasonableness of the valuation a) Negative List
at which it is being transferred to the corporation is made by the − List A
SEC. − enumerate the areas of activities reserved to Philippine nationals
If any of the properties used as paid-up capital is mortgaged by mandate of the Constitution and specific laws
or otherwise encumbered, written consent of the mortgagee is − activities where the foreign equity is limited to 40% by the
necessary. Constitution like exploration, development and utilization of
If the transfer value of the property is higher than the cost natural resources, operation of public utilities, and educational
institutions
or assessed value, an appraisal report prepared by a licensed
− List B
appraiser is required.
− contains the areas of activities and enterprises regulated pursuant
to law
SEC MEMORANDUM CIRCULAR
Retail Business – limited to Filipinos depending on the capitalization
The non-submission of the certificate of ownership or proof of
REPUBLIC ACT NO. 8762
registration within the given period shall be sufficient ground for
AN ACT LIBERALIZING THE RETAIL TRADE BUSINESS, REPEALING
the revocation of the application approved by the SEC FOR THE PURPOSE REALING FOR THE PURPOSE REPUBLIC ACT NO.
1180, AS AMENDED, AND FOR OTHER PURPOSES
c) If a going concern like a single proprietorship or partnership is
being converted into a corporation, financial statements duly Section 3. Definition. - As used in this Act.
certified by an independent Certified Public Accountant (CPA), as (1) "Retail trade" shall mean any act, occupation or calling of habitually
selling direct to the general public merchandise, commodities or good for
well as the long form audit report of the certifying CPA is required.
consumption, but the restriction of this law shall not apply to the
Likewise, written consent of the creditors must be submitted.
following:
d) Payment of subscription may be made in the form of:
Page 21
(i) Sales by manufacturer, processor, laborer, or worker, to the general Other Provisions. May be inserted in the Articles of Incorporation as long as
public the products manufactured, processed or products by him if his they are not contrary to law, morals, good customs, public order and public
capital dose not exceed One hundred thousand pesos(100,000.00); policy (e.g., the right of first refusal to the shareholders; provisions that
(ii) Sales by a farmer or agriculturist selling the products of his farm; disallows any shareholder from engaging in a competing business)
(iii) Sales in restaurant operations by a hotel owner or inn-keeper
irrespective of the amount capital: provided, that the restaurant is
Summary of New Rules with Respect to the Contents of the
incidental to the hotel business;
Articles of Incorporation
(iv) Sales which are limited only to products manufactured, processed
PROVISION OF THE
or assembled by a manufactured, processed or assembled by a NEW REQUIREMENTS UNDER THE
ARTICLES OF
manufacturer though a single outlet, irrespective of capitalization; REVISED CORPORATION CODE
INCORPORATION
(v) Sales to industrial and commercial users who use the products
bought (1) to render service to the general public or (2) to manufacture The term OPC should be included in
goods sold by them; and CORPORATE NAME the corporate name if the corporation
(vi) Sales to government or its agencies and government-owned and is a One Person Corporation
controlled corporations a. Incorporators can be a natural
person, partnership, corporation or
association
a) To constitute a retail business the following requisites must be INCORPORATORS
b. One incorporator is sufficient
present c. There is no residency requirement
i. the person or entity must be selling merchandise, commodities, for incorporators
or goods The term can be perpetual or a fixed
ii. the sale must be direct to the general public TERM term. The default rule is that the
iii. the merchandise, commodities or goods are for consumption term is perpetual.
b) Sale of goods is not retail IF it is a mere incident to the primary A separate treasurer’s affidavit is no
purpose of the corporation as in the case of sale of food in a longer required
TREASURER’S
restaurant and sale of goods in a gift shop inside a hotel. BUT the certification of the treasurer
CERTIFICATION
c) The items must be sold to the final and end users of the product. is now incorporated in the Ninth
Consumer goods Clause of the Articles of Incorporation
It is no longer required to submit a
− goods that are used or bought for use primarily for personal,
separate undertaking
family or household purposes, NOT intended for resale or UNDERTAKING TO CHANGE
BUT the contents of the undertaking
further use in the production of other products CORPORATE NAME
are now included in the Tenth Clause
− goods, which by their very nature:
of the Articles of Incorporation
− are ready for consumption by the final end users of a The incorporators and the treasurer
product SIGNATORIES
sign the Articles of Incorporation
− directly satisfy human wants and desires a. There is no more minimum
− are needed for home and daily life number of directors and trustees.
− sale of vouchers or gift certificates that are intended for EXCEPTIONS are educational
the purchase of goods is NOT considered retail corporations and religious societies
DIRECTORS AND TRUSTEES
Producer Goods which still require a minimum number
− goods (as tools and raw materials) that are factors in the of five trustees
production of other goods and that satisfy wants only b. There is no more residency
indirectly requirement for directors
− also called auxiliary goods, instrumental goods, and a. Subscribed and paid-up capital are
intermediate goods now both in the Eighth Clause of the
new form under Section 14
− by their very nature, NOT sold to the public for consumption SUBSCRIBED AND PAID-UP
b. There is no longer any required
d) Auction of jewelry does not come within the purview of retail CAPITAL
minimum subscribed and paid-up
business since the goods are not sold directly or readily available
capital unless special laws provide
to the general public but only to those who are invited to participate
otherwise
in competitive bidding process
PROBLEMS:
Mass Media: Philippine Constitution reserves ownership of mass media
corporations to Filipinos Q: The articles of incorporation to be registered in the SEC contained the
PRESIDENTIAL DECREE No. 1018 September 22, 1976 following provisions: “First Article. The name of the corporation shall be Toho
LIMITING THE OWNERSHIP AND MANAGEMENT OF MASS MEDIA Marketing Company.” “Third Article. The principal office of the corporation
TO CITIZENS OF THE PHILIPPINES AND FOR OTHER PURPOSES shall be located in Region III, in such municipality therein as its Board of
Directors may designate.” “Seventh Article. The capital stock of the
Section 1. The term "mass media" refers to the print medium of corporation is One Million Pesos, Philippine Currency.”
communication, which includes all newspapers, periodicals, magazines, What are your comments and suggested changes to the proposed articles?
journals, and publications and all advertising therein, and billboards, neon
signs and the like, and the broadcast medium of communication, which A: The name of the corporation should be amended to include any of the
includes radio and television broadcasting in all their aspects and all other following words, “Inc.,” “Incorporated” “Corporation” or “Corp.” Section 1 of
cinematographic or radio promotions and advertising. SEC Memorandum Circular No. 14, Series of 2000 requires any one of those
words to be included in the name of the Corporation. The form of Articles of
Incorporation under Section 14 of the RCCP also calls for the use of the words
a) The dissemination of information need not be to the general public but “Inc.,” “Corporation,” or “OPC”
also to any portion thereof
b) Even if it is engaged solely in a specialized publication particularly in the The Third Article does not comply with the requirements of the law and SEC
publication and distribution of education books and magazines confined rules on the address of the corporation. The RCCP provides that the Articles
to primary and secondary students of Incorporation must state the place where the principal office of the
c) If it is engaged in the business of subleasing advertising space or corporation is to be established or located, which place must be within the
structure to others because it provides a medium to disseminate or Philippines. The RCCP also requires inclusion in the Articles of Incorporation
convey advertising message to the public of the City/Municipality and Province where the principal office of the
corporation is located. SEC Memorandum Circular No. 6, Series of 2016 further
requires a specific address. For purposes of complying with the RCCP and SEC
Real Estate Companies
requirements, it is not enough to state the Region where the principal office
• only corporations at least 60% of the outstanding capital stock of which
is located.
belongs to Filipinos can own land
a) With respect to non-stock corporation, its nationality in relation to
The Seventh Article is incomplete. Section 13(h) provides that if the
the provision on land acquisition is computed on the basis of nationality
corporation is a stock corporation, the Articles of Incorporation must contain
of its members and NOT based on the capital contribution of the
the amount of its authorized capital stock, the number of shares which it is
members
divided, and in case the shares are par value shares, the par value of each,
HOWEVER, the voting rights should likewise be considered
and if some or all of the shares are without par value, such fact must also be
stated. The names, nationalities, and residence addresses of the original
Page 22
subscribers and amount subscribed and paid by each must also be stated in Written Assent of Stockholders
the Articles. − silence or failure to object cannot be construed as approval by
stockholders, as the law requires the express approval through an
Q: The proposed Articles of Incorporation of X Corporation provides “That
affirmative vote or a written assent
none of the stockholders shall engage in a similar competing or antagonistic
− law does not require that the approval be made in a meeting duly
business or activity as that to which the corporation is primarily engaged in.
called for the purpose
The foregoing restriction must appear at the back of all certificates of
corporation.” Is the provision valid and binding? − EXCEPTIONS: in case of (1) amendment of the Articles of
Incorporation to extend or shorten the corporate term, (2)
A: Yes, the provision is valid. It constitutes a reasonable exercise of corporate amendment involving an increase or decrease of the capital stock
authority since a corporation under the principle of self-preservation, has the − require approval in a meeting of the shareholder
inherent right to preserve and protect itself by excluding competitors or hostile − amendment of the By-Laws
interest. The provision seeks to prevent a stockholder from creating an − requires a regular or special meeting of shareholders for its
opportunity to take advantage of the information which he may have acquired approval
as such to promote his individual interest to the prejudice of the corporation
and other stockholders. The provision is binding on the stockholders because
the Articles of Incorporation is a contract between the shareholder and the Who Can Question Amendments. Can be questioned only by a real
corporation as well as the State. Any person who intends to acquire a share party-in-interest like a shareholder or a member
in the corporation does so with knowledge that its affairs are governed by the
provisions of the Articles of Incorporation.
PROBLEMS:
Q: X Company is a stock corporation composed of the Reyes family engaged

in the real estate business. Because of the regional crisis, the stockholders
Section 15. Amendment of Articles of Incorporation. - Unless decided to convert their stock corporation into a charitable non-stock and non-
otherwise prescribed by this Code or by special law, and for profit association by amending the Articles of Incorporation.
legitimate purposes, any provision or matter stated in the articles of
a. Could this be legally done? Why?
incorporation may be amended by a majority vote of the board of
b. Would your answer be the same if at the inception, X Company is a non-
directors or trustees and the vote or written assent of the stock corporation? Why?
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of A:
dissenting stockholders in accordance with the provisions of this
a. Yes, the Articles of Incorporation of X Company can be legally amended to
Code. The articles of incorporation of a nonstock corporation may be convert it into a non-stock corporation. What this means is that the
amended by the vote or written assent of majority of the trustees stockholders are deemed to have waived their right to their respective shares
and at least two-thirds (2/3) of the members. in the profits of the corporation and that is a gain not a loss of the corporation.
HOWEVER, this should be without prejudice to the rights of creditors who may
The original and amended articles together shall contain all be affected.
provisions required by law to be set out in the articles of
incorporation. Amendments to the articles shall be indicated by b. No, my answer will not be the same. In a non-stock corporation, the
members do not have the right to the assets and profits of the corporation.
underscoring the change or changes made, and a copy thereof duly
The present and future profits of the corporation are devoted solely to
certified under oath by the corporate secretary and a majority of the charitable purposes and cannot be distributed to the members. If the non-
directors or trustees, with a statement that the amendments have stock corporation is converted to a stock corporation by a mere amendment
been duly approved by the required vote of the stockholders or of the Articles of Incorporation, the non-stock corporation is deemed to have
members, shall be submitted to the Commission. distributed an asset of the corporation among its members. The only way to
form a stock corporation is to dissolve the non-stock corporation and to re-
[[ The amendments shall take effect upon their approval by the incorporate as a stock corporation.
Commission or from the date of filing with the said Commission if
Q: Stockholders representing only 55% of the outstanding capital stock of A
not acted upon within six (6) months from the date of filing for a
Corporation attended the scheduled meeting. Hence, the required 2/3 vote of
cause not attributable to the corporation. = EXPRESS AND IMPLIED the stockholders to approve the amendments to the Articles of Incorporation,
APPROVAL ]] which was previously approved by the Board, cannot be obtained. The
directors propose two courses of action, namely: (1) to request the
stockholders present during the meeting to approve the proposed amendment
Documentary Requirements (for stock and non-stock corporation) and then adjourn the meeting and allow the board to convene another meeting
1) Amended Articles of Incorporation in order to get the required votes; and (2) to solicit the remaining balance of
2) Directors’ or Trustees’ Certification – a notarized document signed by a the required approval/votes by way or writing the absentee stockholders.
majority of the directors or trustees and the corporate secretary, Which of the two alternatives can be validly resorted to by A Corporation?
certifying
A: Both alternatives may be validly resorted to. The law provides that the
i. the amendment of the Articles of Incorporation and indicating the
stockholders may assent to the amendments so long as the assent is in writing
amended provisions
and the total written votes/approval should not less than 2/3 of the
ii. the vote of the directors or trustees and stockholders or members
outstanding capital stock of the corporation.
iii. the date and place of stockholders’ or members’ meeting
iv. the tax identification number of the signatories which shall be placed
below their names
3) Monitoring Clearance issued by the Compliance Monitoring Divisions
4) Secretary’s Certificate – notarized document signed by the corporate Section 16. Grounds When Articles of Incorporation or Amendment
secretary certifying that no action or proceeding has been filed or is May be Disapproved. The Commission may disapprove the articles
pending before any Court or tribunal involving an intra-corporate of incorporation or any amendment thereto if the same is not
dispute or claim by any person or group against the directors, officers compliant with the requirements of this Code: Provided, That the
or stockholders of the Corporation
Commission shall give the incorporators, directors, trustees, or
a) Indorsement/clearance from other government agencies is necessary in officers as reasonable time from receipt of the disapproval within
certain cases which to modify the objectionable portions of the articles or
For example, amendment of the Articles of Incorporation of a bank amendment. The following are ground for such disapproval:
requires indorsement from the BSP (a) The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
Effect of Amendment (b) The purpose or purposes of the corporation are patently
Section 184. Effect of Amendment or Repeal of This Code, or the Dissolution unconstitutional, illegal, immoral or contrary to government rules
of a Corporation. - No right or remedy in favor of or against any corporation,
and regulations;
its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors,
[[(c) The certification concerning the amount of capital stock
trustees, or officers, shall be removed or impaired either by the subsequent subscribed and/or paid is false; = FALSE CERTIFICATION]]
dissolution of said corporation or by any subsequent amendment or repeal
of this Code or of any part thereof.
Page 23
(d) The required percentage of Filipino ownership of the capital for the use of another corporation; (2) already protected by law; or
stock under existing laws or the Constitution has not been (3) contrary to law, rules and regulations, may summarily order the
complied with. corporation to immediately cease and desist from using such name
and require the corporation to register a new one. The Commission
[[No articles of incorporation or amendment to articles of shall also cause the removal of all visible signages, marks,
incorporation of banks, banking and quasi-banking institutions, advertisements, labels prints and other effects bearing such
preneed, insurance and trust companies, NSSLAs, pawnshops and corporate name. Upon the approval of the new corporate name, the
other financial intermediaries shall be approved by the Commission Commission shall issue a certificate of incorporation under the
unless accompanied by a favorable recommendation of the amended name.
appropriate government agency to the effect that such articles or
If the corporation fails to comply with the Commission's order, the
amendment is in accordance with law. = ENDORSEMENT BY
Commission may hold the corporation and its responsible directors
GOVERNMENT AGENCIES]]
or officers in contempt and/or hold them administratively, civilly
and/or criminally liable under this Code and other applicable laws
and/or revoke the registration of the corporation. = POWERS OF
Ministerial Duty. The duty of the SEC to approve an application for
THE SEC ]]
registration is ministerial provided that all the requirements of law are
complied with.
Prior Right
Illegal or Immoral Purposes
− priority of adoption
1) The declared purpose of the corporation is to promote and enhance the
− a corporation that is incorporated and adopts a corporate name
incorporation of the Philippines as an American State
earlier acquires a prior right over the use of the corporate name
2) The purpose is to practice certain professions except in certain cases
− with respect to the second requisite, the test is whether the name is
3) The corporation is organized to engage in illegal gambling
such as to mislead a person using ordinary care and discrimination and
4) The purpose is immoral such as to provide a “mail-order-bride” service
the Court must look to the record as well as the name themselves
5) The purpose of the corporation is to establish a local government unit
like a barangay a) Under the Dominancy Test that is incorporated in the Intellectual
Property Code, there will be infringement if the mark contains the
Endorsement by Government Agencies dominant feature of the mark of a trademark belonging to another
TYPE OF BUSINESS GOVERNMENT AGENCY
Air Transport Civil Aeronautics Authority Lyceum of the Philippines, Inc. v. Court of Appeals
Banks, Pawnshops or other
Financial Intermediaries with Bangko Sentral ng Pilipinas The purposes of the prohibitions are (1) the avoidance of fraud upon
Quasi-Banking Functions the public which would have occasion to deal with the entity concerned,
Charitable Institutions and Social Department of Social Welfare and (2) the evasion of legal obligations and duties, and (3) the reduction of
Welfare Organizations Development difficulties of administration and supervision over corporations.
Electric Power Plants/Trading of
Department of Energy
Petroleum Products
Doctrine of Secondary Meaning
Hospitals, Dental, Medical
Department of Health Lyceum of the Philippines, Inc. v. Court of Appeals
Clinics/Maintenance Organizations
Insurance/Mutual Benefit
Associations (also Pre-Need Insurance Commission Thus, if a corporate name, though descriptive, has been used for so long
Corporation) and exclusively by one corporation and has become associated with that
Governance Commission for corporation alone in the mind of the public, another corporation cannot
Non-Chartered Government Owned
Government-Owned or Controlled register said name as a corporate name.
and Controlled Corporations
Corporations
Professional Associations Professional Regulation Board Priority of Adoption Rule
Radio, TV, Telephone, Internet
National Telecommunications − the corporation that first adopts a corporation name has the right
Service Providers, Value-added
Commission thereto and a subsequent corporation cannot use the same name
Services
− the corporate name is a property right that cannot be impaired or
Recruitment for Overseas Philippine Overseas Employment
defeated if another corporation will appropriate the same
Employment Administration (POEA)
− it is in the nature of a right in rem that can be asserted against the
Security Agency/Anti-Crime Task
Philippine National Police whole world
Force/Gun Clubs
Tobacco Related Business National Tobacco Administration
Volunteer Fire Brigade Bureau of Fire Protection Red Line Transportation Company Co. v. Rural Transit Co.
Water Transport, Ship-building and
Maritime Industry Authority
Ship Repair A corporation can use a trademark or trade name that is separate from its
Local Waterworks Utilities corporate name. HOWEVER, the corporation cannot use the name of another
Administration/Manila Waterworks corporation even if the corporate name is an unregistered trade name or
Waterworks Corporation
and Sewerage System and mark.
National Water Resources Board
Name in Articles of Incorporation. A corporation cannot use any

corporate name other than what is reflected in the Articles of
Incorporation.
Section 17. Corporation Name. - No corporate name shall be a) A corporation may use a trade name or business name that is
allowed by the Commission if it is not distinguishable from that different from its corporate name.
already reserved or registered for the use of another corporation, or A company may have more than one business or trade name.
if such name is already protected by law, or when its use is contrary Under the Business Law, juridical persons need not register the
to existing law, rules and regulations. corporate or partnership name that they registered with the SEC.
These juridical persons are required to register only if they are
A name is not distinguishable even if it contains one or more of the using business names that are different from their corporate or
following: partnership names.
(a) The word "corporation", "company", incorporated", "limited",
"limited liability", or an abbreviation ofone if such words; and SEC RULES. [[ SEE SEPARATE PRINTED DOCUMENT OF SEC
(b) Punctuations, articles, conjunctions, contractions, MEMORANDUM CIRCULAR NO. 13 ]]
prepositions, abbreviations, different tenses, spacing, or number a) Corporation and Incorporated. The rules require the inclusion
of the same word or phrase. in the corporate name of the word “Corporation” or “Incorporated,”
or the abbreviations “Corp.” or “Inc.” to distinguish corporations
[[ The Commission upon determination that the corporate name is: from the other business organizations like partnerships, sole
(1) not distinguishable from a name already reserved or registered proprietorships and unregistered associations
Page 24
b) Revocation, Dissolution and Expiration of Term a) There is no corporation to speak of prior to an entity’s
− only expired corporations may apply for re-registration using incorporation.
the same corporate name And no contract entered into before incorporation can bind the
− if a new corporation is organized using the name of a dissolved corporation.
corporation, the newly formed corporation cannot be HOWEVER, the corporation may be bound if there is proof that the
considered as the legal successor of the dissolved corporation corporation adopted, ratified, or confirmed the contract after
[[RECITATION]] subject to provision on revival of incorporation.
corporate existence under Sec. 11 b) A certificate of incorporation from the SEC is NOT necessary if the
− the new corporation has a personality separate and distinct corporation is created through special law.
from the dissolved corporation If a corporation is created by special law without imposing a
− the new corporation cannot enjoy the rights and privileges condition precedent, corporate existence commences as soon as
of the dissolved corporation although the new corporation the law takes effect and is expressly or impliedly accepted.
has the same or similar name If the act requires organization or the performance of conditions,
precedent, corporate existence commences only when there has
been substantial performance.
SEC MEMORANDUM CIRCULAR NO. 13, SERIES OF 2019
AMENDED GIDELINES AND PROCEDURES ON THE USE OF
CORPORATE AND PARTNERSHIP NAMES Contract Law in Corporate Law
• RCCP makes irrevocable pre-incorporation subscription agreement for a
The name of a corporation or partnership that has been dissolved period of six (6) months
or whose registration has been revoked shall not be used by • a subscription agreement is a contract between the corporation and the
subscriber, hence, the law makes the pre-incorporation subscription
another corporation, within five (5) years from the approval of
agreement binding even if one of the parties – the corporation – is still
dissolution or five (5) years from the date of revocation.
legally non-existent
Change of Name
Promoters. Persons who, acting alone or with others, take initiative in
An authorized change in the name of a corporation has no more effect
founding and organizing the business or enterprise. [[RECITATION]]
upon its identity as a corporation than a change of name of a natural
• contracts entered into by the promoter may, in certain cases, bind
person has upon his identity. It does not affect the rights of the
a corporation
corporation or lessen or add to its obligations. After a corporation has
• the general rule, however, is that the acts of the promoter are
effected a change in its name it should sue and be sued in its new
not binding on the corporation that will be organized
name. The corporation, upon such change in its name, is in no sense a
• promoters could not act as agents for a projected corporation since
new corporation, nor the successor of the original one, but remains and
that which has no legal existence could have no agent
continues to be the original corporation.
a) Promotional activities include (1) discovery, (2) investigation, and

a) The corporation that changed its name was not required under the (3) assembly.
RCCP to formally notify its debtors; only discretionary. Discovery consists of finding the business opportunity to be developed.
b) The old name of the corporation shall be indicated in the Certificate Investigation entails an analysis of the proposed business to
of Filing of Amended Articles of Incorporation. determine whether or not it is economically feasible.
Another corporation cannot appropriate such old name. The former Assembly includes the bringing together of the necessary personnel,
corporate name of a corporation cannot likewise be registered by property and money to set the business in motion as well as the
other individuals with the SEC. secondary details of setting up the corporation itself.
c) It is not necessary to amend the By-Laws in order to reflect the b) The stockholders and the corporation cannot be held personally liable
new corporate name; the amendment of the Articles of for the compensation claimed by the promoter for the services
Incorporation to change the corporate name impliedly amends the performed by him in the organization of the corporation.
name appearing in the By-Laws. Even if the stockholders benefited from such services of the promoter,
there is no justification to hold them personally liable therefor.
c) NEVERTHELESS, any benefit derived by a promoter for the
Corporations with Same Name. The corporations do not have a single corporation should be given to the corporation, because in a sense,
legal personality; the two registration certificates show the separate promoters sustain a fiduciary relationship to the subscribers, the
nature of these juridical entities. corporation and the stockholders and cannot deal unfairly with
them or retain any secret profit. [[RECITATION]]
Underwriters. Person who guarantees on firm commitment and/or

Section 18. Registration, Incorporation and Commencement of declared best effort basis the distribution and sales of securities of any
Corporation Existence. - A person or group of persons desiring to kind by another company.
incorporate shall submit the intended corporate name to the
Commission for verification. If the Commission finds that the name
is distinguishable from a name already reserved or registered for the
use of another corporation, not protected by law and is not contrary Section 19. De facto Corporations. - The due incorporation of any
to law, rules and regulation, the name shall be reserved in favor of corporation claiming in good faith to be a corporation under this
the incorporators. The incorporators shall then submit their articles Code, and its right to exercise corporate powers, shall not be
of incorporation and bylaws to the Commission. inquired into collaterally in any private suit to which such corporation
may be a party. Such inquiry may be made by the Solicitor General
If the Commission finds that the submitted documents and
in a quo warranto proceeding.
information are fully compliant with the requirements of this Code,
other relevant laws, rules and regulations, the Commission shall
issue the certificate of incorporation.
Defective Corporations. Certain basic rules can be used in determining if
A private corporation organized under this Code commences its the corporation is a de jure or one that is defectively formed:
1) Non-compliance with directory provisions of law or regulations will NOT
corporate existence and juridical personality from the date the
AFFECT the de jure existence of a corporation.
Commission issues the certificate of incorporation under its official
2) Non-compliance with the mandatory provisions will AFFECT the de jure
seal thereupon the incorporators, stockholders/members and their existence.
successors shall constitute a body corporate under the name stated HOWEVER, only substantial compliance is required and mere colorable
in the articles of incorporation for the period of time mentioned compliance may result in a de facto corporation.
therein, unless said period is extended or the corporation is sooner 3) Non-compliance with conditions precedent to incorporation MAY AFFECT
dissolved in accordance with law. the de jure existence of the corporation.
For example, issuance of a Certificate of Incorporation is a condition
precedent and there can be no de jure corporation without it.
Certificate of Incorporation
Page 25
4) Non-compliance with conditions subsequent to incorporation may NOT

AFFECT the existence of a corporation BUT may be a ground for
revocation of the certificate of incorporation Section 20. Corporation by Estoppel. - All persons who assume to
act as a corporation knowing it to be without the authority to do so
REQUISITES OF DE FACTO CORPORATION shall be liable as general partners for all debts, liabilities and
1) A valid law under which the corporation is organized damages incurred or arising as a result thereof: Provided,
− no de facto corporation will result if there is no law under which however, That when any such ostensible corporation is sued on any
the corporation is organized even if the components thereof transaction entered by its as a corporation or on any tort committed
assume corporate powers by it as such, it shall not be allowed to use on any its lack of
− to be a de facto corporation, it must be possible to be a
corporate personality as a defense. Anyone who assumes an
corporation de jure
obligation to an ostensible corporation as such cannot resist
− Orthodox View: An unconstitutional law is not a law, confers
performance thereof on the ground that there was in fact no
no rights, imposes no duties, and affords no protection,
corporation. [[RECITATION]]
therefore, if the law under which the corporation is organized
is void, there is no resulting de facto corporation
− Operative Fact: that for a period of time, the law is actually
in existence, thus, an unconstitutional law does not bar the Liability as General Partner. They are liable even beyond their investment,
existence of a de facto corporation as to the extent of their personal properties.
2) An attempt in good faith to incorporate a) Those without knowledge of the non-existence of the corporation
− that there must be colorable compliance with the law are liable as if they are regular stockholders of a corporation.
− certification of incorporation indispensable They are NOT liable beyond their investments.
− there can be no claim of attempt in good faith to incorporate
if the SEC issues no Certificate of Incorporation Lim v. Philippine Fishing Gear Industries
− the filing of Articles of Incorporation and the issuance by
the SEC are essential for the existence of a de facto Even if the ostensible corporate entity is proven to be non-legally existent,
corporation a party may be estopped from denying its corporate existence, as an
− defects that DO NOT preclude the existence of a de facto unincorporated association has no personality and would be incompetent
corporation to act and appropriate for itself the power and attributes of a corporation
− the corporate name resembles that of a pre-existing as provided by law; it cannot create agents or confer authority on another
corporation to act in its behalf; thus, those who act or purport to act as its
− ineligibility of one or more incorporators representatives or agents do so without authority and at their own risk.
− one of the purposes is not authorized by law
3) An assumption of corporate powers On the other hand, a third party who, knowing an association to be
− a corporation must have exercised its franchise to be a unincorporated, nonetheless treated it as a corporation and received
corporation by doing business under it benefits from it, may be barred from denying its corporate existence in a
− there must be some corporate act(s) in attempted execution of suit brought against the alleged corporation. In such a case, all those who
the powers conferred by the Articles of Incorporation or by the benefited from the transaction made by the ostensible corporation,
despite knowledge of its legal defects, may be held liable for contracts
special charter granted by the legislature
they impliedly assented to or took advantage of.
Distinguished from De Jure Corporations [[RECITATION]]

Enterprise Liability
• a de jure corporation has a right to corporate existence even
1) The enterprise contracts with an outsider, who later brings actions
against the State against the enterprise as though it were a corporation
• in a case of de facto corporation, it has a right to corporate 2) The enterprise contracts with the outsider, and subsequently brings
existence even against the State, IF the attack is collateral BUT action in corporate form against the outsider
NOT if the attack is direct 3) The enterprise contracts with an outsider, and the outsider brings action
against the component individuals
Nature and Status of De Facto Corporations [[RECITATION]] 4) The enterprise contracts with an outsider, and the component
individuals seek to hold the outsider liable on his contract
− a de facto corporation enjoys the attributes of a corporation until the
State questions its existence a) The actions in the first two situations can prosper because there is, in
fact, a juridical person that can be sued and/or can sue/file an action in
a) The only difference between the powers, rights and liabilities
the case of a de facto corporation
of a de jure and a de facto corporation is that the latter may
The actions in the third situation cannot be maintained against the
have its existence inquired into and forfeited by the State.
components; and
b) Stockholders in a de facto corporation have the same rights The components cannot maintain an action in the fourth situation
possessed by the stockholders in a de jure corporation UNLESS because the personality of the components is separate and distinct from
otherwise provided by the statute that of the corporation even if a de facto corporation
c) A corporation de facto which, if regularly organized might have
been one de jure, may contract, hold property, and sue and be
Cannot Override Jurisdictional Requirements
sued in the same manner as if it were a corporation de jure, for no
− jurisdiction is fixed by law and is not subject to the agreement of the
one can object but the government, and that in a direct proceeding parties
− it cannot be acquired through or waived, enlarged or diminished by, any
Dissolved Corporation act or omission of the parties;
• a group of employees who continued the operations of a dissolved − neither can it be conferred by the acquiescence of the court
corporation or a corporation whose registration had been revoked
cannot acquire the status of a de facto corporation Rules of Court Provision
• if the charter of a corporation is forfeited and its legal existence Rule III, Section 15. Entity without juridical personality as defendant. –
terminated, it is no longer a corporation either de jure or de facto When two or more persons not organized as an entity with juridical
personality enter into a transaction, they may be sued under the name by
which they are generally or commonly known. In the answer of such
Effect of Non-Filing of By-Laws
defendant, the names and addresses of the persons composing said entity
− the filing of the by-laws is a condition subsequent which, the non- must all be revealed.
compliance may not affect the existence of a corporation but may
be a ground for revocation of the certificate of incorporation
PROBLEMS: [[ Section 21. Effects of Non-Use of Corporate Charter and

Q: A corporation was created by a special law. Later, the law was Continuous Inoperation. - If a corporation does not formally
declared invalid. May such corporation claim to be a de facto corporation? organize and commence its business within five (5) year from the
A: No. The corporation is NOT a de facto corporation. The requisites for
date of its incorporation, its certificate of incorporation shall be
its existence are absent because there is no valid law under which it was
organized. There would therefore be no continuity of good faith.
Page 26
deemed revoked as of the day following the end of the five (5)-year whether the corporation may be considered to have formally organized.
period. Resolve the question.
A: Yes, the corporation is considered to have formally organized. Organize or

However, if a corporation has commenced its business but
organization is the election of officers, providing for the subscription and
subsequently becomes inoperative for a period of at least five (5)
payment of the capital stock, the adoption of by-laws, and such other similar
consecutive years, the Commission may, after due notice and steps. In the present case, the corporation had a governing board, which
hearing, place the corporation under delinquent status. = directed its affairs, as well as a secretary-treasurer. The corporation actually
CONDITIONS SUBSEQUENT ]] functioned and engaged in the business for which it has been organized.
Consequently, the charter of the corporation cannot be forfeited on the ground
[[ A delinquent corporation shall have a period of two (2) years to alone of its failure to elect a president.
resume operations and comply with all requirements that the
Commission shall prescribed. Upon the compliance by the
corporation, the Commission shall issue an order lifting the
TITLE III
delinquent status. Failure to comply with the requirements and
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
resume operations within the period given by the Commission shall
cause the revocation of the corporation's certificate of incorporation.
= RESUMPTION OF OPERATIONS ]] Section 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term. - Unless otherwise provided in this Code, the
The Commission shall give reasonable notice to, and coordinate with
board of directors or trustees shall exercise the corporate powers,
the appropriate regulatory agency prior to the suspension or
conduct all business, and control all properties of the corporation.
revocation of the certificate of incorporation of companies under
their special regulatory jurisdiction. [[ Directors shall be elected for a term of one (1) year from among
the holders of stocks registered in the corporation's book while
trustees shall be elected for a term not exceeding three (3) years
CONDITIONS SUBSEQUENT [[RECITATION]] from among the members of the corporation. Each director and
1) Failure to organize within five (5) years form incorporation trustee shall hold office until the successor is elected and qualified.
= CERTIFICATION OF INCORPORATION DEEMED REVOKED = TERM ]] [[ A director who ceases to own at least one (1) share
• Meaning of Organization [[RECITATION]]
of stock or a trustee who ceases to be a member of the corporation
− the process of forming and arranging into suitable disposition
shall cease to be such. = DISQUALIFICATION ]]
the parties who are to act together in, and defining the objects
of, the compound body
The board of the following corporations vested with public interest
− include, under the SEC rules:
shall have independent directors constituting at least twenty percent
− adoption, filing by the corporation and approval by the
SEC of the corporate By-Laws after incorporation (20%) of such board:
− election of Directors or Trustees and of officers (a) Corporations covered by Section 17.2 of Republic Act No. 8799,
− establishment of the principal office otherwise known as "The Securities Regulation Code", namely
− providing for the subscription and payment of the those whose securities are registered with the Commission,
capital stock corporations listed with an exchange or with assets of at least Fifty
− taking such steps as are necessary to endow the legal million pesos (50,000,000.00) and having two hundred (200) or
entity with capacity to transact the legitimate business more holders of shares, each holding at least one hundred (100)
for which it was created shares of a class of its equity shares;
2) Failure to commence business within five (5) years from (b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
incorporation = CERTIFICATION OF INCORPORATION engaged in money service business, preneed, trust and insurance
DEEMED REVOKED companies and other financial intermediaries; and
• Meaning of Commencement of Business: when it has (c) Other corporations engaged in businesses vested with public
performed preparatory acts geared toward the fulfillment of the
interest similar to the above, as may be determined by the
purposes for which it was established [[RECITATION]]
Commission, after taking into account relevant factors which are
− entering into contracts or negotiation for lease or purchase
germane to the objective and purpose of requiring the election of
of properties to be used as business or factory site
− making plans for and the construction of the factory an independent director, such as the extent of minority ownership,
− taking steps to expedite the construction of the company’s type of financial products or securities issued or offered to
working equipment investors, public interest involved in the nature of business
3) Becoming continuously inoperative for a period of at least operations, and other analogous factors.
five (5) consecutive years (may commence thereafter or on
a date after the date of incorporation) = COMMISSION MAY An independent director is a person who, apart from shareholdings
PLACE THE CORPORATION UNDER DELINQUENT STATUS and fees received from the corporation, is independent of
management and free from any business or other relationship which
• substantial compliance with conditions subsequent would suffice to could, or could reasonably be perceived to materially interfere with
perfect corporate personality
the exercise of independent judgment in carrying out the
• organization and commencement of transaction of corporate
responsibilities as a director.
business are but conditions subsequent and NOT prerequisites
for acquisition of corporate personality Independent directors must be elected by the shareholders present
or entitled to vote in absentia during the election of directors.
Delinquency for Non-Operation
− there must be a positive action on the part of the government Independent directors shall be subject to rules and regulations
− justification for non-operation may be invoked and established by governing their qualifications, disqualifications, voting
the corporation requirements, duration of term and term limit, maximum number of
− Failure to Submit Reports board membership and other requirements that the Commission will
− a corporation may also be placed under delinquent status IF it prescribed to strengthen their independence and align with
fails to comply with the reportorial requirements three (3) international best practices.
times, consecutively or intermittently within a period of five (5)
years
Corporate Management
PROBLEMS:
• the directors or trustees are the executive representatives of the
Q: In the Articles of Incorporation of 3D Corporation, eleven members were corporation, charged with the administration of its internal affairs
names to constitute the board of directors. These eleven elected from among and management and use of its assets
themselves a secretary-treasurer but did not elect a President. The board used
a. An agreement entered into by a corporate officer without Board
to hold meetings to transact business, which was done through the secretary-
approval cannot bind the corporation
treasurer. In a proceeding to forfeit its charter, the question was posed as to
Page 27
b. The management of the business of a corporation is generally a. The Supreme Court subscribed to the Agency Theory of Board
vested in its Board of Directors, NOT its stockholders; authority
Stockholders are basically investors in a corporation Valle Verde Country Club, Inc. v. Africa
c. With the exception only of some powers expressly granted by law
to stockholders (or members, in case of non-stock corporations), The Board of directors is the directing and controlling body of the
the Board of Directors (or Trustees, in case of non-stock corporation. It is a creation of the stockholders and derives its powers
corporations), has the sole authority to determine policies, enter to control and direct the affairs of the corporation from them. It
into contracts, and conduct the ordinary business of the corporation occupies a position of trusteeship in relation to the stockholders, in
within the scope of its charter, i.e., Articles of Incorporation, By- the sense that the board should exercise not only care and diligence,
Laws but utmost good faith in the management of corporate affairs.
The authority of the Board is restricted to the management of the
regular business affairs of the corporation, unless more extensive Independence
power is expressly conferred • in the management of affairs of the corporation, the directors are
d. A corporation can act only through its directors and officers. dependent solely upon their own knowledge of its business and
The Board is the central power that authorizes the executive agents their own judgment as to what the corporation’s interests require
to enter into contracts and to embark on a business • the stockholders do not control the directors and the concurrence
of the stockholders is NOT necessary for their actions UNLESS the
Tan v. Sycip RCCP, the Articles of Incorporation, or the By-Laws provides
otherwise
Under the Corporation Code, stockholders or members periodically
a. The stockholders, as owners of the corporation, are not entirely
elect the board of directors or trustees, who are charged with the
helpless. If they want to make their power felt, they must unite.
management of the corporation. The board, in turn, periodically
NEVERTHELESS, the power to unite is limited to removal and
elects officers to carry out management functions on a day-to-day
election of directors and is NOT extended to contracts whereby
basis. As owners, though, the stockholders or members have residual
limitations are placed on the power of directors to manage the
power over fundamental and major corporate changes.
business of the corporation by the selection of agents
b. If the stockholders do not agree with the policies of the board, their
While stockholders and members are entitled to receive profits, the remedy is to wait for the election of the directors or to remove the
management and direction of the corporation are lodged with their directors if they have the required vote
representatives and agents – the board of directors or trustees. In
other words, acts of management pertain to the board; and those of
Business Judgment Rule
ownership, to the stockholders or members. In the latter case, the
Valle Verde Country Club, Inc. v. Africa
board cannot act alone, but must seek approval of the stockholders
or members.
The will of the majority of the Board members controls in corporate
affairs, and contracts intra vires entered into by the board of directors
Conformably with the foregoing principles, one of the most important are binding on the corporation and courts will not interfere UNLESS such
rights of a qualified shareholder or member is the right to vote -- contracts are so unconscionable and oppressive as to amount to a
either personally or by proxy -- for the directors or trustees who are wanton destruction of rights of the minority.
to manage the corporate affairs. Once the directors or trustees are
elected, the stockholders or members relinquish corporate powers to Judges are not business experts; they cannot replace their judgment for
the board in accordance with law. the judgment of the directors on business matters.
Philippine Association of Stock Transfer and Registry Agencies, Inc.

In the absence of an express charter or statutory provision to the
v. Court of Appeals
contrary, the general rule is that every member of a nonstock
corporation, and every legal owner of shares in a stock corporation, Questions of policy or management are left solely to the honest decision
has a right to be present and to vote in all corporate meetings. of officers and directors of a corporation and the courts are without
Conversely, those who are not stockholders or members have no authority to substitute their judgment for the judgment of the Board of
right to vote. Voting may be expressed personally, or through proxies Directors; the Board is the business manager of the corporation and so
who vote in their representative capacities. Generally, the right to be long as it acts in good faith, its orders are not reviewable by the courts
present and to vote in a meeting is determined by the time in which or the SEC.
the meeting is held.
Montelibano v. Bacolod-Murcia Milling, Co.
Reason for Concentration of Power
• convening numerous shareholders every time a decision should be The directors are also not liable to the stockholder in making decisions
made may be cumbersome and may entail great costs using their business judgments. Corporate officers and directors, absent
• the issue of desirability of concentration of powers is material only self-dealing or other personal interest, shall be shielded from liability for
− when there is separation of management and ownership; and any harm to the corporation resulting from their decisions if such
− if numerous shareholders hold ownership decisions lie within the powers of the corporation and the authority of
• concentration of power is a non-issue when shares are held only by a management and are reasonably made in good faith and with loyalty and
few and the owners-shareholders are the directors due care.
THEORIES ON SOURCE OF POWERS Filipinas Port Services, Inc. v. Go.

1) Agency Theory. All powers reside in the stockholders and are just
delegated to the directors as agents. Bad faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of a
2) Concession Theory. Power of the directors is derived from the
wrong, a breach of a known duty through some motive or interest or ill
State to which the State permits the directors to perform only such
will partaking of the nature of fraud.
functions as the State allows
3) Platonic Guardian Theory. Every corporation must have a board
Joy v. North
and the board is an aristocracy or group of Platonic guardians
created by legislative ordainment. Reasons for rarely imposing liability for bad judgment according to one
The board is NOT a mere caretaker but it exercises control over authority:
corporate affairs and considered an inviolable institution. (1) Shareholders to a very real degree voluntarily undertake the risk of bad
4) Sui Generis Theory. The directors are not agents of the business judgment;
stockholders who elect them; they are fiduciaries whose duties run (2) Courts recognize that after-the-fact litigation is a most imperfect device
primarily to the corporation. to evaluate corporate business decision
They are NOT trustees in the strict sense. Their powers are derived (3) Potential profit often corresponds to the potential risk
from the State through the statute under which the corporation is
organized, yet they do not qualify solely as Platonic guardians. Requirements (Business Judgment Rule)
Page 28
1) Presence of a business decision including decisions on policy, Proxy NOT Allowed. Section 52 provides that directors or trustees
management and administration cannot attend or vote by proxy at Board meetings; nor can a director
2) Decision must be intra vires and must comply with the procedural delegate his powers as director to another person.
and substantive requirements of law
3) Good faith Term
4) Due care in making the decision a. Term as the time during which the officer may claim to hold the
5) The director must not have personal interest or must not be self- office AS OF RIGHT, and fixes the interval after which the several
dealing or must not otherwise be in breach of the duty of loyalty incumbents shall succeed one another
Tenure represents the term during which the incumbent actually
Rationale for Business Judgment Rule holds office. It may be shorter or longer – in case of holdover, than
1) If management were liable, few capable individuals would be willing to the term
incur the financial and emotional risks of serving in such roles
2) Courts are generally ill-equipped to evaluate business judgments
Effect of Pending Cases
3) Management has the expertise to discharge the responsibility of making
such determinations − no director or officer of the corporation can claim his office in
perpetuity; he has to submit himself to a yearly election if he
wanted to continue in the service of the corporation
Business Judgment Rule Serves the Following Purposes
− an injunction issued against the directors whose election is being
1) Acts as a presumption in favor of corporate management’s actions
questioned is NOT a bar to the holding of annual election in
2) Provides a safe harbor that makes both directors and their actions
accordance with the provisions of the By-Laws
unassailable if certain prerequisites have been met
3) A means of conserving judicial resources thereby permitting courts to − same rule applied even if the directors were subsequently declared
avoid being mired down in rehashing judgments that are inherently to have been invalidly removed
subjective − a subsequent valid annual election prevents them from continuing
4) Rule is the law’s implementation of broad economic policy built upon or from being reinstated as directors
economic freedom and encouragement of informed risk taking − the directors have no right to continue as director of the corporation
5) A means by which Board of Directors adopt take-over defenses and by UNLESS re-elected by the stockholders in a meeting called for that
which the courts review the adoption of those defenses purpose every year
6) A means by which corporations and their lawyers evaluate and, based
upon that evaluation, recommend the dismissal of derivative suits
Qualifications for Directors or Trustees
1) He must own at least one share of the capital stock of the
Resolution corporation in his own name or if the corporation is a non-stock
• the Board must act, NOT individually or separately, but as a body corporation, he must be a member thereof
in a lawful meeting 2) He must not be disqualified under the RCCP or any applicable
• the actions of the Board are expressed in resolutions passed in its special law or rules
meetings 3) He must be of legal age
• the collective action of the directors is required in order that action 4) He must possess other qualifications as may be prescribed in
may be deliberately taken after opportunity for discussion and an special laws or regulations or in the by-laws of the corporation
interchange of views
• absent any valid delegation or authorization from the Board, the a. Natural Persons. A director or trustee must be a natural person.
declarations of an individuals director relating to the affairs of the The RCCP expressly allows corporations, partnerships and
corporation are not binding on the corporation associations to be incorporators.
b. Residence. No residence requirement under the RCCP.
a. Approval of Resolution
• UNLESS the Articles of Incorporation or the By-Laws provides
Shares or Membership
for a greater majority, a majority of the number of directors or
a. Nature of Title. What is material is the legal title to, NOT
trustees as fixed in the Articles of Incorporation shall constitute
beneficial ownership of, the stock as appearing in the books of
a quorum for the transaction of corporate business
the corporation
• every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid
SEC OPINION(S)
as a corporate act
• the basis for determining the presence of the required
1. While a corporation cannot be elected as a director, its duly
majority of directors or trustees is the number of Board
authorized officer, agent or trustee who has been designated
members as fixed in the Articles of Incorporation and NOT the
as “nominee” may be eligible to be elected as director.
actual present/available number of members of the Board
2. A shareholder corporation may have representation in the
b. Proof of Resolution
board by giving one of its officers or any representative one
• Secretary’s Certificate
qualifying share, which said person holds as nominee.
• the truthfulness of the certification is presumed
HOWEVER, the nominee is no longer qualified to be a director
• to overcome the presumption, there must be sufficient, clear
the moment his assignment as nominee is revoked by his
and convincing evidence as to exclude all reasonable
principal.
controversy as to the falsity of the certificate
3. The trustee in a voting trust agreement is also qualified to run
• the Secretary’s Certificate is NOT rendered invalid even if it is
as a director. The trustee has legal title over the shares.
alleged that the Corporate Secretary did not appear before the
4. Unless he is a stockholder (or member) in his own right, a proxy
notary public who notarized the same;
cannot be elected as a director (or a trustee). The right to be a
• the non-appearance merely exposes the notary public to
candidate cannot be delegated, as it is only peculiar to
administrative liability
members or stockholders of a corporation… Further, the power
c. Similarly, the Minutes of Meeting can also establish the existence of the proxy is merely to vote.
of a Resolution of the Board 5. A person who does not own any stock at the time of his election
Members of the Board need NOT sign the Minutes; the certification or appointment is NOT disqualified as director if he becomes a
of the Corporate Secretary is enough. shareholder before assuming the duties of his office.
It is the signature of the corporate secretary that gives the minutes 6. One cannot be a director if he is not a stockholder of record (in
of the meeting probative value and credibility. the books of corporation)
7. Holder of a non-voting share cannot be elected as a director.
Non-voting shares cannot participate in the management and
Ratification
the holders of such shares cannot be elected to a position that
Lopez Realty, Inc. v. Sps. Tanjanco
is purposely created to manage the corporation.
8. The one share requirement is only the minimum.
It is submitted though that if there is a separation of management (the
Board) and stockholders, the stockholders cannot ratify defective Board
actions on matters over which stockholders have no power. In those Citizenship. There is no citizenship requirement for directors and
cases, the stockholders are not, in a sense, principals of the directors trustees. Foreigners can be elected as directors or trustees subject to the
especially on matters covered by the business judgment rule. provisions of special laws.
Page 29
Qualifications under the By-Laws 3) whose equity securities are listed in an Exchange
• if a disqualified director is elected, the stockholders do NOT waive their 4) Grantees of secondary licenses from the SEC
right to question his election as a director; qualification cannot be
a. It adopts the “comply or explain” approach;
waived
• the remedy is to amend the By-Laws if the shareholders feel that the That companies do not have to comply with the Code, but they
qualifications prescribed in the By-Laws should no longer operate must state in their annual corporate governance reports whether
they comply with the provisions, identify any areas of non-
compliance, and explain the reasons for non-compliance
Gokongwei v. SEC
b. It is arranged into:
1) Principles. High level statements of corporate governance good
A provision in the By-Laws disqualifying stockholders who are already
practice, and are applicable to all companies
directors in competing corporations or the controlling stockholder
2) Recommendations. Objective criteria that are intended to
thereof is considered a valid provision.
identify the specific features of corporate governance good
practice that are recommended for companies operating
SEC OPINION(S) according to the Code
When a Recommendation is NOT complied with, the company
The directors or trustees should come from the stockholders or must disclose and describe this non-compliance, and explain how
members. Hence, a proposal that the directors or trustees shall come the over-all Principle is being achieved
from the officers is NOT in accordance with law. 3) Descriptions and Explanations should be written in plain
language and in a clear, objective and precise manner, so that
Ex Officio Member shareholders and other stakeholders can assess the company’s
− any individual who sits or acts as a member of the Board by virtue governance framework
of one’s title to another office, and without further warrant or The Explanations strive to provide companies with additional
appointment information on the recommended best practice
• a person who is not a stockholder in a corporation cannot be a
director BUT he can be an ex officio member without voting rights Alternative Theories on Corporate Governance
in the Board 1) Shareholder Primacy Theory (Shareholder-Wealth-
Maximization Theory)
Effect of Disqualification − conservative school of thought
− a disqualified stockholder can NOT run for election as director − the corporation should be run for the exclusive benefit of
− if the ground for disqualification was present at the time of election, shareholders
BUT the disqualified stockholder was nevertheless elected as a − in a free economy, there is allegedly “one and only one social
director, the subsequent disqualification of the director would not responsibility of business – to use its resources and engage in
render the Board incapable of transacting business for as long as activities designed to increase its profits so long as it stays
the remaining directors still constitute a quorum within the rules of the game – engages in open and free
− such situation merely gives rise to a vacancy in the Board competition, without deception or fraud
− Wealth Maximization Theory: shareholder’s interest is served if
the managers of a corporation will use as a criterion for
Re-Election. Unless there is a provision in the Articles of Incorporation
evaluating the performance of a corporation the maximization
or By-Laws that disqualifies an incumbent director or officer from seeking
of the long-term market value of the firm, which includes not
another term of office, the incumbent is NOT prevented from seeking re-
only the value of equity but all the sum of the values of all
election.
financial claims on the firm such as debt, warrants, preferred
stocks, as well as common shares
Hold-Over 2) Corporate Social Responsibility Theory / Stakeholder
− applies to a going concern where there is no break in the exercise Protection Theory
of the duties of the officers and directors − signifies an acceptance that corporate governance at a general
− HOWEVER, once an annual stockholders’ meeting takes place and level can be described as a problem involving the corporation
new directors are elected, the old directors cannot continue to and multiple constituencies
serve as directors − implicit and explicit relationships between the corporation and
− the hold-over principle can NOT be invoked as a shield to its employees, creditors, suppliers, customers, host
perpetuate oneself in office communities – and relationship among constituencies
themselves – fall within the ambit of a relevant definition of
Valle Verde Country Club, Inc. v. Africa
corporate governance also its purposes and its accountability
to each of the relevant constituencies
The term of office is NOT affected by the hold-over. The term of one
year is fixed by statute and it does not change simply because the Corporate Social Responsibility
office may have become vacant, nor because the incumbent holds over • 2009 Revised Code of Corporate Governance include other stakeholders
in office beyond the end of the term due to the fact that a successor in the definition of corporate governance and to expressly provide for
has not been elected and has failed to qualify. duties of the Board to other stakeholders
• 2016 expressly states the system is for the benefit of the stakeholders
and the society
The hold-over period – that time from the lapse of one year from a
member’s election to the Board and until his successor’s election and a. The sponsor of the Corporation Code explained that the Code
qualification – is NOT part of the director’s original term of office, nor demonstrate an awareness that corporations are NOT mere
is it a new term; it, however, constitutes part of his tenure. business organizations exclusively intended to serve the personal
interests of shareholders or managers but are social institutions in
which all sectors of society have an interest.
Corporate Governance
− system of stewardship and control to guide organizations in fulfilling While inanimate, they cannot be without moral values or ethical
their long-term economic, moral, legal and social obligations towards concerns; nor can they be bereft of social and civil responsibilities;
their stakeholders
− system of direction, feedback and control using regulations, Good Governance Principles under the RCCP
performance, standards, and ethical guidelines to hold the Board and a. Directors Composition
senior management accountable for ensuring ethical behavior – 1) Additional disqualifications of directors are imposed (Sec. 26)
reconciling long-term customer satisfaction with shareholder value – to 2) Independent directors are required for corporations vested with public
the benefit of all stakeholders and society interest (Sec. 22)
− applies to registered corporations and to branches and subsidiaries of 3) Provisions that are designed to prevent perpetual or long-term
foreign corporations operating in the Philippines that: holdover directors (Secs. 23 and 25)
1) sell equity and/or debt securities to the public that are required to be b. Increased Disclosure and Transparency
registered with the SEC 1) Requirement to submit to the stockholders and the SEC an annual
2) have assets in excess of P50M or such other amount as the report of salary of the total compensation of directors or trustees (Sec.
Commission shall prescribe, and having 200 or more shareholders 29)
each holding at least 100 shares of a class of its equity securities;
Page 30
2) Improved provisions and additional remedies for the exercise of the performance of its duties and responsibilities shall be subject to a one-
right to inspect and to secure copies of the records of the corporation year “cooling-off period” prior to his qualification as an independent
(Sec. 73) director.
3) Encourage whistleblowers by punishing retaliation against them (Sec.
169)
4) Additional reportorial requirements of the corporations (Sec. 177) SEC-OGC OPINION NO. 07-11
c. Management
1) Preventing a vacuum in management or preventing the absence of The policy behind the appointment of an independent director is that a non-
decision-making body by providing for an Emergency Board even executive director must not have a relationship with the corporation that
without quorum (Sec. 28) would materially interfere with his exercise of independent judgment in
2) Directors or trustees are not allowed to participate in the approval of carrying out his responsibilities as director in any covered company. Any
their own per diems or compensation (Sec. 29) relationship must not compromise said director’s objectivity and loyalty to
d. Ensuring Participation of Directors in Decision-making the shareholders.
1) Expressly allowing attendance in meetings through alternative modes
of communication (Sec. 52) It is during the annual stockholders/members’ meeting that the
e. Increased Participation of Stockholders “through seamless exercise independent directors are elected. It is the stockholders
of stockholder rights and remedies against oppressive acts of the
themselves who will elect the independent directors.
corporations”
1) Attendance of Meetings through Remote Communication and Voting
in Absentia (Sec. 49)
2) Strengthened right to inspect and to reproduce records (Sec. 73)
3) Remedy in case meetings are postponed or when there is unjust Section 23. Election of Directors or Trustees. - Except when the
refusal to call meetings (Sec. 49) exclusive right is reserved for holders of founders' shares under
4) Administrative and Penal sanctions are imposed for violation of rights
Section 7 of this Code, each stockholder or member shall have the
f. Fostering Corporate and Civic Responsibility
right to nominate any director or trustee who possesses all of the
1) Curbing corporate abuse and fraud
2) Imposing criminal liability on the corporation itself qualifications and none of the disqualifications and none of the
3) Specifying additional crimes disqualifications set forth in this Code.
g. Fortify or Strengthen the SEC as Regulator of Corporations
1) Additional express powers are provided for in the RCCP (Sec. 179) At all elections of directors or trustees, there must be present, either
2) Provision strengthening the visitorial powers of the SEC (Sec. 178) in person or through a representative authorized to act by written
3) Harmonization of powers of the SEC under the SRC and the RCCP proxy, the owners of majority of the outstanding capital stock, or if
(Secs. 154, 156, 158, 179) there be no capital stock, a majority of the members entitled to vote.
4) Power to order the removal of signages of disallowed or deregistered When so authorized in the bylaws or by a majority of the board of
names (Sec. 17)
directors, the stockholders or members may also vote through
5) Power to issue cease and desist order (Sec. 156)
6) Power to call meetings (Sec. 49)
remote communication or in absentia: Provided, That the right to
vote through such modes may be exercised in corporations vested
with public interest, notwithstanding the absence of a provision in
Special Rules Imposed
the bylaws of such corporations.
1) Requirement that there must be an independent director
2) Right of stockholders/member to vote in the election of A stockholder or member who participates through remote
directors/trustees through remote communication or in absentia,
communication or in absentia, shall be deemed present for purposes
notwithstanding the absence of a provision in the by-laws of such
of quorum.
corporations
3) Requirement that a compliance officer is elected by the Board The election must be by ballot if requested by any voting stockholder
4) Submit to the shareholders and to the SEC an annual report of the
or member.
total compensation of each of the directors/trustees
5) For self-dealing directors, material contracts shall be approved by In stock corporations, stockholders entitled to vote shall have the
at least two-thirds (2/3) of the entire membership of the board, right to vote the number of shares of stock standing in their own
with at least a majority of the independent directors voting to
names in the stock books of the corporation at the time fixed in the
approve the material contract
bylaws or where the bylaws are silent at the time of the election.
6) With respect to independent trustees of non-stock corporations
The said stockholder may: (a) vote such number of shares for as
vested with public interest, they need NOT be a member/s of the
many persons as there are directors to be elected; (b) cumulate said
corporation to be elected as a trustee
shares and give one (1) candidate as many votes as the number of
7) Cannot be incorporated as a close corporation
directors to be elected multiplied by the number of shares owned;
or (c) distribute them on the same principle among as many
Independent Directors
candidates as may be seen fit: Provided, That the total number of
Section 38, SRC. Independent Directors. – Any corporation with a class
of equity securities listed for trading on an Exchange or with assets in excess votes cast shall not exceed the number of shares owned by the
of Fifty million pesos (P50,000,000.00) and having two hundred (200) or stockholders as shown in the books of the corporation multiplied by
more holders, at least of two hundred (200) of which are holding at least the whole number of directors to be elected: Provided,
one hundred (100) shares of a class of its equity securities or which has sold however, That no delinquent stock shall be voted. Unless otherwise
a class of equity securities to the public pursuant to an effective registration provided in the articles of incorporation or in the bylaws, members
statement in compliance with Section 12 hereof shall have at least two (2)
of nonstock corporations may cast as many votes as there are
independent directors or such independent directors shall constitute at least
trustees to be elected by may not cast more than one (1) vote for
twenty percent (20%) of the members of such board whichever is the lesser.
For this purpose, an "independent director" shall mean a person other than one (1) candidate. Nominees for directors or trustees receiving the
an officer or employee of the corporation, its parent or subsidiaries, or any highest number of votes shall be declared elected.
other individual having a relationship with the corporation, which would
interfere with the exercise of independent judgement in carrying out the If no election is held, or the owners of majority of the outstanding
responsibilities of a director. capital stock or majority of the members entitled to vote are not
present in person, by proxy, or through remote communication or
Election and Qualifications not voting in absentia at the meeting, such meeting may be
SEC MEMORANDUM CIRCULAR NO. 9, SERIES OF 2009 adjourned and the corporation shall proceed in accordance with
Section 25 of this Code.
A regular director who resigns or whose term ends on the day of the
election shall only qualify for nomination and election as independent The directors or trustees elected shall perform their duties as
director ONLY after a two-year cooling off period. prescribed by law, rules of good corporate governance, and bylaws
of the corporation.
Persons appointed as Chairman “Emeritus,” “Ex-Officio”
Directors/Officers or Members of any Executive Advisory Board or
otherwise appointed in a capacity to assist the Board in the Government-Owned or Controlled Corporation (GOCC)
Page 31
• by way of EXCEPTION, there are Appointive Directors/Trustees in • suggested formula to determine the number of shares needed
GOCCs whom the State is entitled to nominate, to the extent of its to elect a desired number of directors:
percentage shareholdings in such GOCC that are created even S x (Desired Number of Directors) + 1
under the Corporation Code --------------------------------------------
D+1
Plurality of Votes
− majority vote is NOT necessary for the election of each director or • number of directors that can be elected by a shareholder
trustee holding a specific number of shares may be determined
− the candidate who will receive the highest number of votes shall be • N is the number of shares of shareholder
declared as duly elected • D is the number of directors to be elected
• S is the total number of shares to be voted by all shareholders
Quorum (N-1)(D+1)
− absence of which the election shall be considered invalid --------------------------
− stockholders representing a majority of the outstanding capital S
stock entitled to vote
− all stockholders at the time of election should be considered Election of Incomplete Directors
− the stockholders may elect less than the total number of directors
Presence of Candidate specified in the Articles of Incorporation
− it is NOT necessary that the candidate stockholder be present − an Incomplete Board may still function so long as the remaining
during the meeting before he can be elected as director directors constitute a quorum
− a director can be elected in absentia • in case the number of candidates does NOT exceed the number of
− HOWEVER, the By-Laws may require the physical presence of a seats in the board, said candidates, provided they received votes,
director who will be elected can be said to have received the highest number of votes, as the
law requires only plurality of the votes cast
Cumulative Voting
− Method of concentrating votes devised to give sufficient Failure to Hold an Election. If there is refusal, the stockholders may
opportunity to minority shareholders to secure representation in ask for the assistance of the SEC to compel the holding of such election.
the Board a. If a meeting was called but the directors were not elected, the
− allowed in stock corporations; and in non-stock corporations ONLY meeting can be adjourned but the adjournment must be not sine
IF the same is provided in the Articles of Incorporation die or indefinitely
− the basic effect is to increase the chances of the minority Section 25 expressly provides that the date for the election shall
stockholders to elect a director as it ensures minority not be later than sixty (60) days from the scheduled date, to
representation in the Board prevent the indefinite hold-over of the directors
a. It is NOT required that the total votes a shareholder is entitled to cast Election Contests
under the cumulative voting be evenly or proportionately distributed − any controversy or dispute involving title to or claim to any elective
among his candidates office in a stock or non-stock corporation, the validation of proxies,
He can give all his votes to one candidate or he can distribute his votes the manner and validity of elections, and the qualifications of
and give such number of votes to each of his candidates at his own candidates, including the proclamation of winners, to the office of
discretion without any limitation EXCEPT that the total votes cast by him
director, trustee or other officer directly elected by the stockholders
shall not exceed the number of shares owned by him multiplied by the
in a close corporation or by members of a non-stock corporation
number of directors to be elected
where the Articles of Incorporation or By-Laws so provide
Thus, if Mr. A has 10 shares and there are five directors to be elected,
− should be filed with the RTC
he can cast 50 votes (10 shares x 5 directors) which he can given to
one candidate or distribute to any number of candidates a. Questions regarding the validity of the election of the Board for a
given year may be rendered moot and academic by a valid election
Advantages of Cumulative Voting of a new set of Board for the next succeeding year
1) It is democratic as minority holdings would have a voice in the conduct
of the corporation
2) Desirable to have as many viewpoints as possible represented in the
Board
3) Presence of minority may discourage conflicts of interest Section 24. Corporate Officers. - Immediately after their election,
the directors of a corporation must formally organize an elect: (a) a
president, who must be a director; (b) a treasurer, who must be a
Grounds Used to Oppose Cumulative Voting
1) Introduction of a partisan on the Board is inconsistent with the notion resident of the Philippines; (c) a secretary, who must be a citizen
that the Board should represent all interests in the corporation and resident of the Philippines; and (d) such other officers as may
2) A partisan director may cause disharmony which reduces the efficiency be provided in the bylaws. If the corporation is vested with public
of the Board interest, the board shall also elect compliance officer. The same
3) Partisan director may criticize management unreasonably so as to make person may hold two (2) or more positions concurrently, except that
it less willing to take risky but desirable actions;
no one shall act as president and secretary or as president and
4) May leak confidential information
treasurer at the same time, unless otherwise allowed in this Code.
5) May be used to further narrow partisan goals
The officers shall manage the corporation and perform such duties
Distinguished from Straight Voting as may be provided in the bylaws and/or as resolved by the board
• under straight voting, a stockholder can cast one vote per share of directors.
for each candidate/director up to the number of positions to be
elected
• if a shareholder has 10 shares and five directors are supposed to
Corporate Officers
be elected, the said shareholder can give 10 votes to each of the
− officers who are designated or specified as such or given that
five candidates that he wants to elect
character in the law, the Articles of Incorporation and the By-Laws
of the corporation
Formula − elected by the majority of all the members of the Board of Directors
• with cumulative voting in place, the formula that is prescribed in or Trustees and NOT merely by the majority of those who are
order to determine the number of shares needed to elect a present during the meeting
single director: 1) President
S (number of shares voting) 2) Treasurer
------------------------------------------------ + 1 = 3) Secretary
D (number of directors to be elected) + 1 4) Compliance Officer, in case of a corporation vested with public interest
Page 32
5) Section 62 recognizes the existence of a Vice-President and an Assistant appointed, has the authority to act in his stead, or to perform any duty
Secretary of the office.
a. The Articles of Incorporation and By-Laws may create other corporate
Chairman
offices, such as Chairman of the Board, General Manager, Auditor,
Comptroller, etc.
− may be concurrently the president and may be designated as the
chief executive officer of the corporation
− in other corporations, there may be a president who shall be the
Officers Specified in By-Laws
chief executive officer and a chairman whose function relate to
− the corporate office must be specifically indicated in the roster of presiding at meetings of the Board and of committees of which he
corporate offices in the By-Laws;
is a member
− it is NOT enough that the By-Laws merely empowers the Board of
Directors to create additional offices
− Thus, these two requisites must concur 2016 CODE OF CORPORATE GOVERNANCE
1) The creation of the position is under the corporation’s charter ARTICLE 2, RECOMMENDATION 2.3
MEMORANDUM CIRCULAR NO. 19, SERIES OF 2016
or By-Laws
(DUTIES OF THE CHAIR IN RELATION TO THE BOARD)
2) The election of the officer is by the directors or stockholders
a. If the By-Laws does not specify the corporate office, the Board may 1) Makes certain that the meeting agenda focuses on strategic matters,
still create appointive positions since the Board is the corporation’s including the overall risk appetite of the corporation…
governing body with the power to exercise its prerogatives in 2) Guarantees that the Board receives accurate, timely, relevant,
managing the business affairs of the corporation insightful, concise, and clear information to enable it to make sound
decisions
HOWEVER, the officers who are appointed are NOT corporate
3) Facilitates discussions on key issues by fostering an environment
officers as they are not empowered to exercise functions of the
conducive for constructive debate and leveraging on the skills and
corporate officers EXCEPT those functions lawfully delegated to
expertise of individual directors
them
4) Ensures that the Board sufficiently challenges and inquires on reports
1) The determination of necessity for additional officers and/or submitted and representations made by Management
positions in a corporation is a management prerogative which 5) Assures the availability of proper orientation for first-time directors and
courts are NOT WONT to review in the absence of any proof that continuing training opportunities for all directors
such was exercise in bad faith or with malice 6) Makes sure that the performance of the Board is evaluated at least once
2) The intent to create additional office must be clear. a year and discussed/followed up on
Office and Employment Distinguished Secretary

• Office. Creation of the charter of a corporation. − must be a resident and citizen of the Philippines
• Officer. Person elected by the directors or stockholders. − it is NOT prohibited that the By-Laws provide for the position of
• Employee. Occupies no office and is generally employed NOT by action assistant corporate secretary
of the directors or stockholders BUT by the managing officer of the − need NOT be a lawyer
corporation, who also determines the compensation to be paid to such
− HOWEVER, if the corporation is covered by the Revised Code of
employee
Corporate Governance and the corporate secretary also acts as the
compliance officer, it is preferred that the corporate secretary is
a. If one is a corporate officer, jurisdiction over his election or
also a lawyer
appointment is vested with the RTC
− duty-bound to keep the corporate records and to make proper
b. If an officer is NOT a corporate officer, it is the labor arbiters that
entries thereto
are vested with jurisdiction to hear illegal dismissal cases involving
such officer 1) Maintains the stock and transfer book
The corporate secretary makes the entries and records transfer of
shares in the stock and transfer book
President. Must be a director (and consequently must be a stockholder)
2) Signs the certificates of stocks of a corporation
a. UNLESS there is a provision in the By-Laws to the contrary, a
3) Responsible for sending notices of he meeting/s of the directors
president who has reached the retirement age of 60 can continue
(trustees) and/or stockholders (members)
with his term as president, as he/she is not covered by the 4) Takes and prepares the written minutes of the Board/stockholders’
compulsory retirement age for employees meetings
b. Certain duties of the President provided for in the RCCP and 5) Certifies minutes of meetings of stockholders/members and
have been enumerated by the SEC: directors/trustees
(1) Order the calling by the Secretary of a special meeting of the 6) Issues certificates commonly known as “Secretary’s Certificate”
stockholders or members of a corporation for the purpose of regarding the passage, existence and binding effect of a Board
removal of directors and trustees resolution
(2) Call for a special meeting of the Board of Directors/Trustees at any 7) Calls meetings of stockholders for the removal of directors/trustees
time or as provided in the By-Laws upon order of the President or on written demand of the stockholders
(3) Preside at all meetings of the directors/trustees as well as of the representing or holding at least a majority of the outstanding capital
stockholder or members, in the absence of the Chairman, UNLESS stock
the By-Laws provide otherwise 8) Certifies under oath the following: (a) amendment/s to the Articles of
(4) Sign the certificate of stock representing shares issued by the Incorporation; (b) increase or decrease of authorized capital or
corporation increase of bonded indebtedness; (c) resolution of stockholders and
(5) Certify under oath the financial statements of the corporation…. members authorizing the delegation of the power to amend and/or
(6) Sign the Articles of Merger or Consolidation adopt new By-Laws; (d) the articles of merger or consolidation
(7) For a One-Person Corporation, Prepare and sign explanations or 9) Counter-signs (a) the By-Laws to be submitted to the SEC; (b) the
comments on every qualification, reservation, or adverse remark or resolution approving the dissolution of the corporation
disclaimer made by the auditor in the latter’s report 10) Verifies the Petition for Voluntary Dissolution of the corporation where
(8) Sign the verification of a petition for dissolution of the corporation creditors are affected
c. A corporate president is often given general supervision and control 11) Submits the report (GIS) on the election of directors, trustees, and
over corporate operations officers to the SEC, within 30 days after such election, which report
In the absence of a charter or By-Laws provision to the contrary, shall contain the names, nationalities, shareholdings, and residence
the president is presumed to have the authority to act within the addresses of the directors, trustees and officers so elected
domain of the general objectives of the corporation’s business and 12) Submits a report to the SEC on the non-holding of election
within the scope of his/her usual duties 13) Submits a report to the SEC should a director, trustee, officer die,
resign or in any manner cease to hold office, within 7 days from
d. Possesses the power to enter into a contract for the corporation,
knowledge thereof
when the “conduct on the part of both the president and the
14) Receives the written objection of a director or officer of a corporation
corporation shows that he had been in the habit of acting in similar
to the issuance of watered stocks
matters on behalf of the company and that the company had
15) Receives the written objection of a director to an action within the
authorized him so to act.” corporate powers taken at a meeting held without proper call or notice
in a close corporation
Vice-President. In the absence of the President or if the office of the
President becomes vacant, the vice-president, if one has been elected or
Page 33
a. With respect to the minutes of the meetings, UNLESS otherwise 2) Powers that may be implied form the powers intentionally
directed by the Board, the corporate secretary need NOT prepare conferred
a transcript of what transpired during the meeting; 3) Powers added by custom and usage, as usually pertaining to the
The minutes need NOT be a word-for-word record of what particular officer or agent
happened; it only contains a summary and the highlights of the 4) Apparent powers as the corporation has caused a person dealing
matters taken up during the meeting; with the officer or agent to believe that it has conferred
HOWEVER, the actual resolutions that were passed should be b. Corporate policies need NOT be in writing and may be established
stated in the minutes by sufficient evidence
c. Summons in civil cases may be served on a domestic corporation
only through the president, general manager, corporate secretary,
SECTION 3, SEC MEMORANDUM CIRCULAR NO. 8, SERIES OF 2013
treasurer or in-house counsel or their absence or unavailability,
Corporate Secretary has the responsibility of monitoring and observing their secretaries
compliance with the provisions of Filipino and foreign ownership
requirements. Implied Authority
• a corporate officer, who is entrusted with the general management
The corporate secretary cannot delegate the responsibility of and control of its business, has implied authority to make any
complying with the provisions of the Circular without the express contract or do any other act that is necessary or appropriate to the
authority from the Board of Directors or Trustees. conduct of the ordinary business
• when, in the usual course of business, an officer has been allowed
Treasurer in his official capacity to manage its affairs
− must be a resident of the Philippines
− normally takes care of the funds of the corporation Practice, Custom and Policy
− ordinarily the custodian of the funds of the corporation with − established by proof of the course of business, the usage and practice
authority to disburse them in proper cases of the company and by the knowledge that the Board of Directors has,
− authorized to receive funds, issue receipts, and keep the money of or must be presumed to have, of acts and doings of its subordinates in
the corporation and about the affairs of the corporation
1) Signs the Articles of Incorporation and certifies the information set

forth in the seventh clause (authorized capital stock) and the eighth Ratification
clause (number of shares of the authorized capital stock subscribed − the principal voluntarily adopts, confirms, and gives sanction to some
and paid) unauthorized act of its agent on its behalf
2) In case of increase of authorized capital stock, executes a sworn − confirmation after conduct, amounting to a substitute for a prior
statement showing that at least 25% of the increase capital stock has authority
been subscribed and that at least 25% of the amount subscribed has − Implied Ratification
been paid in actual cash to the corporation or that property − silence or acquiescence
3) Certifies under oath the financial statements, if total assets or − acts showing approval or adoption of the act
liabilities are less than P600k − acceptance and retention of benefits flowing therefrom
− for it to constitute an implied ratification, there must be NO
acceptable explanation for the act other than that there is an
Anti-Dummy Law intention to adopt the act as his or her own
• foreigners cannot be officers in wholly nationalized and partly − relates back to the time of the act or contract ratified as if the act or
nationalized corporations contract had been authorized at the time
• they cannot also be directors in wholly nationalized activities − cleanses the contract from all its defects from the moment it was
• HOWEVER, while no foreigner could be elected or appointed as constituted
officer in a corporation engaged in partly nationalized activities, a
foreigner can be elected as a director in a partly nationalized Apparent Authority
activity in proportion to the equity participation allowed to − may be derived from practice
foreigners − if a corporation knowingly permits its officers or any other agent,
a. Foreigners cannot intervene in the management, operation, to do acts within the scope of an apparent authority, and holds the
administration or control of the corporation, whether as an officer, officer or agent out to the public as possessing power to do those
employee or laborer therein, with or without remuneration EXCEPT acts, the corporation will, as against any one who has in good faith
technical personnel whose employment may be specifically dealt with the corporation through such agent, be estopped from
authorized by the President denying his authority
This applies only to corporations with businesses that are reserved − may be ascertained through
by the Constitution or law to Filipino citizens or where Filipinos own 1) the general manner in which the corporation holds out an officer
60% of the capital. or agent as having the power to act, with which it clothes him
There is NO prohibition for a foreign national to assume managerial 2) the acquiescence in his acts of a particular nature, with actual or
position in a corporation which is not engaged in a wholly or partly constructive knowledge thereof, with or beyond the scope of his
nationalized industry ordinary powers
b. A foreigner cannot be appointed as President in a corporation that
is engaged in partly nationalized activity allowing only 40% foreign De Facto Officers
equity; − if he acts as such, under color of authority, through election or
HOWEVER, a foreign national may assume the post of Chairman of appointment
the Board even in partly nationalized activities if the power of the − color of authority is meant authority derived from an election or
Chairman is limited to that of a presiding officer during Board appointment, although irregular or informal, so that the incumbent
meetings must be more than a volunteer
− limited to third persons who were originally not part of the
Authority of Officers corporation but became such by reason of voting certain shares
− President can also bind the corporation
− derived from the Compensation. The power to fix the remuneration of corporate officers
− law still rests with the Board.
− Articles of Incorporation
− Corporate By-Laws
− Authorization from the Board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business
− Those inherent in the office Section 25. Report of Election of Directors, Trustees and Officers,
Non-holding of Election and Cessation from Office. - Within thirty
a. A corporate officer or agent may represent and bind the corporation
in transactions with third persons to the extent that the authority (30) days after the election of the directors, trustees and officers of
to do so has been conferred upon him, including the corporation, the secretary, or any other officer of the
1) Powers that, in the usual course of the particular business, are corporation, shall submit to the Commission, the names,
incidental to those expressly provided;
Page 34
nationalities, shareholdings, and residence addresses of the The foregoing is without prejudice to qualifications or other
directors, trustees and officers elected. disqualifications, which the Commission, the primary regulatory
agency, or Philippine Competition Commission may impose in its
[[ The non-holding of elections and the reasons therefor shall be promotion of good corporate governance or as a sanction in its
reported to the Commission within thirty (30) days from the date of administrative proceedings.
the scheduled election. The report shall specify a new date for the
election, which shall not be later than sixty (60) days from the
scheduled date. = REPORT OF NON-HOLDING OF ELECTION ]]
Non-Exclusive
− additional grounds for disqualification are contemplated in other
[[ If no new date has been designated, or if the rescheduled election
provisions of the RCCP
is likewise not held, the Commission may, upon the application of a
1) A person who ceases to be a shareholder because he transferred
stockholder, member, director or trustee, and after verification of
all his shares to another person is disqualified to be a director
the unjustifiable non-holding of the election, summarily order that
2) Regulations issued by the SEC
an election be held. The Commission shall have the power to issue 3) Special laws applicable to specific corporations (General Banking
such orders as may be appropriate, including other directing the Law, Insurance Code)
issuance of a notice stating the time and place of the election, 4) Regulations issued by the Philippine Competition Commission
designated presiding officer, and the record date or dates for the 5) Decisions or orders in administrative proceedings and imposed as
determination of stockholders or members entitled to vote. = sanction
REMEDY IF NO ELECTION IS SET ]] 6) Provisions of the Articles of Incorporation or By-Laws
[[ Notwithstanding any provision of the articles of incorporation or

by laws to the contrary, the shares of stock or membership
represented at such meeting and entitled to vote shall constitute a
Section 27. Removal of Director or Trustees. - Any director or
quorum for purposes of conducting an election under this section. =
trustee of a corporation may be removed from office by vote of the
EMERGENCY QUORUM ]]
stockholders holding or representing at least two-thirds (2/3) of the
[[ Should a director, trustee or officer die, resign or in any manner outstanding capital stock, or in a nonstock corporation, by a vote of
case to hold office, the secretary or the director, trustee or officer of at least two-thirds (2/3) of the member entitled to
the corporation, shall, within seven (7) days form knowledge vote: Provided, That such removal shall take place either at a
thereof, report in writing such fact to the Commission. = REPORT regular meeting of the corporation or at a special meeting called for
IN CASE OF VACANCY ]] the purpose, and in either case, after previous notice to stockholders
or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or
members for the purpose of removing any director or trustee must
Report After Annual Election
− to keep stockholders and the public transacting business with be called by the secretary on order of the president, or upon written
domestic corporations properly informed of their organizational demand of stockholders representing or holding at least a majority
operational status of the outstanding capital stock, or a majority of the members
• SEC Rules provide that a GIS (which contains the names of the entitled to vote.
stockholders, directors and corporate officers) shall be filed with
the Commission within 30 days following the date of the annual If there is no secretary, or the secretary, despite demand, fails or
stockholders’ meeting refuses to call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand may
call for the meeting by directly addressing the stockholders or
GIS as Evidence
− indicates who and who is not a corporate officer or director or
members. Notice of the time and place of such meeting, as well as
stockholder of the intention to propose such removal, must be given by
− HOWEVER, the GIS is only a piece of evidence and is subject to publication or by written notice prescribed in this Code. Removal
stronger proof if entries therein are in question may be with or without cause: Provided, That removal without cause
may not be used to deprive minority stockholders or members of the
Report in Case of Vacancy. If a new director is elected because of a right representation to which they may be entitled under Section 23
vacancy in the Board, the Corporate Secretary must submit an Amended of this Code.
GIS indicating the change of director within 30 calendar days from the
The Commission shall, motu proprio or upon verified complaint, and
occurrence of such change.
after due notice and hearing, order the removal of a director or
trustee elected despite the disqualification, or whose disqualification
Emergency Quorum. Stockholders representing a majority of the
arose or is discovered subsequent to an election. The removal of a
outstanding capital shares, or a majority of the members is no longer
disqualified director shall be without prejudice to other sanctions
necessary for the existence of the quorum.
that the Commission may impose on the board of directors or
trustees who, with knowledge of the disqualification, failed to
remove such director or trustee.
Section 26. Disqualification of Directors, Trustees or Officers. - A

person shall be disqualified from being a director, trustee or officer
Right to Remove (“Amotion”)
of any corporation if, within five (5) years prior to the election or
− stockholders have the traditional inherent power to remove a
appointment as such, the person was:
director for a cause
(a) Convicted by final judgment: − the directors cannot indirectly usurp or disregard the said power of
(1) Of an offense punishable by imprisonment for a period the stockholders
exceeding six (6) years;
(2) For violating this Code; and
Requisites of Removal
(3) For violating Republic Act No. 8799, otherwise known as "The
1) It must take place either at a regular meeting or special meeting
Securities Regulation Code"; of the stockholders or members called for the purpose
(b) Found administratively liable for any offense involving 2) The call of the special meeting shall be made by the secretary on
fraudulent acts; and order of the President or on written demand of the stockholders
(c) By a foreign court or equivalent foreign regulatory authority for representing or holding at least a majority of the outstanding
acts, violations or misconduct similar to those enumerated in capital stock or of majority of the members entitled to vote
paragraphs (a) and (b) above. = GROUNDS FOR 3) There must be previous notice to the stockholders or members of
DISQUALIFICATION the intention to remove a director or trustee at the regular or
special meeting
Page 35
4) The removal must be by a vote of the stockholders representing a. The stockholders or members shall replace/elect the director if the
2/3 of the outstanding capital stock or 2/3 of the members entitled vacancy is due to:
to vote 1) Removal
5) A director/trustee who was elected by the minority must be 2) Expiration of term
removed only for cause 3) A ground other than removal or expiration of term (e.g., death,
resignation, abandonment) where the remaining directors do not
Disqualified Director constitute a quorum
• removal should be distinguished from ouster because of 4) Increase in the number of directors
disqualification b. If the vacancy is due to causes other than those specified, the
− there is NO need to follow the procedure of removal required IF the Board (without the concurrence of stockholders/members) can fill
director is disqualified; the vacancy
− by operation of law, such director is disqualified to act as director Allowing the remaining directors/trustees to fill up vacancies avoids
thereby creating vacancies in the Board the expenses and inconveniences attending the calling of
− Mere declaration of disqualifications as the cause of vacancy is stockholders’ or members’ meeting
sufficient Two requisites before the remaining directors/trustees can fill-up
the vacancies
1) The vacancy was occasioned by reasons other than removal by
Effect on the Shares the stockholder or expiration of the term
− the removal of the director does NOT result in the transfer of his 2) The remaining directors constitute a quorum
shares; c. Filling up of vacancies by the remaining Board members is NOT
− the removed director remains a shareholder mandatory; they can leave the matter to the stockholders
• a share is a personal property and the transfer of property should d. Vacancy may occur if the director abandoned his position such as
be only through the modes recognized under the NCC where a director accepts a position in which his duties are
• HOWEVER, the By-Laws may provide for a procedure for expulsion incompatible with and which will render him physically incapable of
of a stockholder and the sale of his shares performing his duties as director
Removal of Corporate Officers. Since the authority to elect corporate Hold-Over Directors
officers rest with the Board, there is a correlative authority to remove − if after the expiration of the term of the directors, and while the
the corporate officers. same directors continue to function in a holdover capacity, one of
them resigns, the position of the resigning director cannot be filled
by the remaining holdover directors
− the vacancy is, in legal effect, NOT due to resignation but to
Section 28. Vacancies in the Office of Director or Trustee; expiration of the term
Emergency Board. - Any vacancy occurring in the board of directors
a. The rule that the remaining holdover directors cannot replace a
or trustees other that by removal or expiration of term may be filled director who resigned after the expiration of their term rests on the
by the vote of at least a majority of the remaining directors or theory of delegated power of the Board of Directors
trustees, if still constituting a quorum; otherwise, said vacancies b. When a vacancy is created by the expiration of a term, logically,
must be filled by the stockholders or members in a regular or special there is no more unexpired term to speak of;
meeting called for that purpose. hence, it shall be the corporation’s stockholders who shall possess
the authority to fill in a vacancy caused by the expiration of a
When the vacancy is due to term expiration, the election shall be member’s term.
held no later that the day of such expiration at a meeting called for
that purpose. When the vacancy arises as a result of removal by the
Rules to Prevent Hold-Overs
stockholders or members, the election may be held on the same day
WHEN ELECTION OF
of the meeting authorizing the removal and this fact must be so CAUSE OF VACANCY REPLACEMENT SHOULD BE
stated in the agenda and notice of said meeting. In all other cases, MADE
the election must be held no later than forty-five (45) days from the No later than the day of such
time the vacancy arose. A director or trustee elected to fill vacancy TERM EXPIRATION expiration at a meeting called
shall be referred to as replacement director or trustee elected to fill for that purpose
a vacancy shall be referred to as replacement director or trustee and May be held on the same day of
shall serve only for the unexpired term of the predecessor in office. the meeting authorizing the
REMOVAL BY THE removal,
[[ However, when the vacancy prevents the remaining directors STOCKHOLDERS OR PROVIDED that the agenda and
from constituting a quorum and emergency action is required to MEMBERS notice of the meeting provide for
prevent grave, substantial, and irreparable loss or damage to the such election of a replacement
corporation, the vacancy may be temporarily filled from among the director/trustee
officers of the corporation by unanimous vote of the remaining At a regular or at a special
directors or trustees. The action by the designated director or meeting of stockholders or
trustee shall be limited to the emergency action necessary, and the members duly called for that
term shall cease within a reasonable time form the termination of INCREASE IN THE NUMBER purpose, or in the same meeting
the emergency or upon election of the replacement director or OF DIRECTORS/TRUSTEES authorizing the increase in the
trustee, whichever comes earlier. The corporation must notify the number of directors/trustees if
so stated in the notice of the
Commission within three (3) days from the creation of the
meeting
emergency board, stating therein the reason for its creation. =
No later than 45 days from the
EMERGENCY BOARD ]] ALL OTHER GROUNDS
time the vacancy arose
Any directorship or trusteeship to be filled by a reason of an increase
in the number of directors or trustees shall be filled only by an
election at a regular or at a special meeting of stockholders or
Section 29. Compensation of Directors or Trustees. - In the
members duly called for the purpose, or in the same meeting
absence of any provision in the bylaws fixing their compensation,
authorizing the increase of directors or trustees if so stated in the
the directors or trustees shall not received any compensation in their
notice of the meeting.
capacity as such, except for reasonable per diems: Provided,
In all elections to fill vacancies under this section, the procedure set however, That the stockholders representing at least a majority of
forth in Section 23 and 25 of this Code shall apply. the outstanding capital stock or majority of the members may grant
directors or trustees with compensation and approve the amount
thereof at a regular or special meeting.
Filling Up of Vacancies in the Board
Page 36
In no case shall the total yearly compensation of directors exceed − the requirement of presence of bad faith and gross negligence
ten percent (10%) of the net income before income tax of the indicates that the directors and officers are not liable for simple
corporation during the preceding year. mistakes or negligence;
− they are not insurers and are not liable for errors of judgment
Directors or trustees shall not participate in the determination of or mistakes while acting with reasonable diligence, care and
their own per diems or compensation. skill;
− NEVERTHELESS, honesty or good faith alone does not suffice if
Corporations vested with public interest shall submit to their there was gross negligence, as it removes the act or omission
shareholders and the Commission, an annual report of the total from the operation of the Business Judgment Rule
compensation of each of their directors or trustees.
Zahn v. Transamerica Corporation
No Salary There is a radical difference when a stockholder is voting strictly

• directors/trustees are NOT entitled to salary or other compensation as a shareholder and when voting as a director.
when they perform nothing more than the usual and ordinary
duties of their office He represents himself when he votes as a shareholder. The
• this rule is founded upon presumption that they render services stockholder exercises his legal right to vote with a view of his own
gratuitously, and that the return upon their shares adequately benefits as owner of the shares; he represents himself only when
furnishes the motive for service, without compensation he votes as a shareholder.
When a stockholder votes as a director, he represents all the

Per Diem. Limited to pay for a day’s services; they are allowances of stockholders in his capacity as trustee of the stockholders. He
money for expenses each day. cannot use his office as a director for his own personal benefit at
*compensation includes salaries, remunerations, bonuses, gifts, or any the expense of the stockholders.
incentive for services rendered for the corporation
a. In the absence of provisions in the By-Laws, the Board may fix the Anderson v. Akers
amount of their per diems, which may vary from year-to-year
provided the same is reasonable The standard of care to be applied in the exercise of diligence is
that of a reasonably prudent person. The same standard is also
sometimes referred to as the standard of an ordinarily prudent
Limitations. The 10% limit means that the compensation can be given
director under similar circumstances or an ordinarily prudent
only if there are profits
person under similar circumstances in one’s affairs.
• salaries of officers are NOT covered by the 10% limit
Litwin v. Allen
Compensation of Officers
− Board may fix their compensation by way of a resolution
Determination of exercise of due care entails examination of the
− prospective in application
facts and circumstances of a particular case. Courts should
a. A director is also entitled to receive a salary if he is performing
consider such circumstances such as the kind of corporation
functions as an officer, which is NOT subject to the restrictions on
involved, its size, and financial resources, the magnitude of the
the compensation of directors
transaction, and the immediacy of the problem presented.
3) Loyalty
− allegiance to the corporation, that is influenced by no
Section 30. Liability of Directors, Trustees or Officers. - Directors
consideration other than the welfare of the corporation
or trustees who willfully and knowingly vote for or assent to patently
− directors are bound by all those rules of conscientious, fairness,
unlawful acts of the corporation or who are guilty of gross negligence morality, and honesty in purpose that the law imposes as the
or bad faith in directing the affairs of the corporation or acquire any guides for those who are under the fiduciary obligations and
personal or pecuniary interest in conflict with their duty as such responsibilities
directors or trustees shall be liable jointly and severally for all • the importance of the duty of loyalty becomes even more
damages resulting therefrom suffered by the corporation, its apparent where there is separation of ownership from
stockholders or members and other persons. management
− the director, as a fiduciary, cannot serve himself first and
A director, trustee or officer shall not attempt to acquire, or acquire his cestuis second
any interest adverse to the corporation in respect of any matter − he cannot manipulate the affairs of his corporation to their
which has been reposed in them in confidence, and upon which, detriment and in disregard of the standards of common
equity imposes a disability upon themselves to deal in their own decency and honesty
behalf; otherwise, the said director, trustee or officer shall be liable − he cannot use his power to his personal advantage and to
as a trustee for the corporation and must account for the profits the detriment of the stockholders and creditors
which otherwise would have accrued to the corporation.
Duty of Loyalty is Breached IF
1) Corporate properties are diverted without authority for personal
DUTIES benefit of the directors or officers
1) Obedience 2) Directors and officers acquire compensation for more than the
− requires compliance with laws and rules fair value of their services
− directors, trustees, and officers have the duty to act intra vires 3) Directors or officers provide false or deceptive information on
and within authority which the stockholders rely to their damage and prejudice
− requires directors and officers to comply with the provisions of 4) Insider trading under the SRC
the corporation’s Articles of Incorporation and By-Laws 5) Acceptance of bribes to benefit others
− obey orders of courts; may be punished for contempt if they 6) Use of governance machinery to protect entrenchment in office
failed to comply
2) Diligence Development Bank of the Philippines v. Court of Appeals
− directors and officers are required to exercise due care in the
performance of their functions There must also be loyalty to other stakeholders like creditors.
− negligence on their part proximately causing damage to the When the corporation is insolvent, its directors who are its
corporation will make them liable if they directed the affairs of creditors cannot secure to themselves any advantage or
the corporation in bad faith or with gross negligence preference over other creditors. They cannot take advantage of
− Board should exercise not only care and diligence but also their fiduciary relation and deal directly with themselves, to the
utmost good faith in the management of corporate affairs injury of others in equal right.
Page 37
Criminal Liability. Corporate officers or employees, through whose act, Suldao v. Cimech System Construction, Inc.
default or omission the corporation commits a crime, may be individually
held answerable for the crime. Although an employee is an “insider” in the corporation, he may, in
Section 171. Liability of Directors, Trustees, Officers, or Other proper cases successfully use the Doctrine of Piercing the Veil of
Employees. - If the offender is a corporation, the penalty may, at the Corporate Fiction to make a corporate officer liable for illegal termination.
discretion of the court, be imposed upon such corporation and/or upon its
directors, trustees, stockholders. members, officers, or employees
Duties of Officers. Like directors, officers are similarly vested with the
responsible for the violation or indispensable to its commission.
Section 172. Liability of Aiders and Abettors and Other Secondary duties of obedience, loyalty, and diligence.
Liability. - Anyone who shall aid, abet, counsel, command, induce, or cause • Obedience. Requires the agent to act within the authority given
any violation of this Code, or any rule regulation or order of the Commission to him by the Board, the By-Laws or the Articles of Incorporation.
shall be punished with a fine not exceeding that imposed on the principal • Loyalty. Requires the agent to avoid conflict of interest situations.
offenders, at the discretion of the court, after taking into account their • Diligence. Makes an officer liable for damages that the principal
participation in the offense. may have suffered through his non-performance of his duty.
Personal and Solidary Liability

1) When directors and trustees of the corporation (and officers in
proper cases if they are joint tortfeasors): Section 31. Dealings of Directors, Trustees or Officers with the
i. Vote for or assent to patently unlawful acts of the corporation Corporation. - A contract of the corporation with one (1) or more of
ii. Act in bad faith or with gross negligence in directing the affairs of its directors, trustees, officers or their spouses and relatives within
the corporation the fourth civil degree of consanguinity or affinity is voidable, at the
iii. Are guilty of conflicts of interest to the prejudice of the
option of such corporation, unless all the following conditions are
corporation, its stockholders or members, and other persons
present:
2) When a director or has consented to the issuance of watered stocks
[[CONDITIONS TO MAKE THE CONTRACT VALID]]
or who, having knowledge thereof, does not forthwith file with the
(a) The presence of such director or trustee in the board meeting
corporate secretary his written objection thereto
3) When the director, trustee, or officer has contractually agreed or in which the contract was approved was not necessary to
stipulated to hold himself personally and solidarily liable with the constitute a quorum for such meeting;
corporation (b) The vote of such director or trustee was not necessary for the
4) When a director, trustee or officer is made, by specific provisions approval of the contract;
of law, personally liable for his corporate actions (c) The contract is fair and reasonable under the circumstances;
(d) In case of corporations vested with public interest, material
Piercing the Veil of Corporate Fiction contracts are approved by at least a majority of the independent
• HOWEVER, personal liability under Section 30 is NOT the same as the directors voting to approved the material contract; and
cases covered by the Doctrine of Piercing the Veil of Corporate Fiction (e) In case of an officer, the contract has been previously
• the cases covered by Section 30 are NOT part of the Fraud cases and authorized by the board of directors.
Alter Ego cases because the probative factors need not be established;
• it is not necessary to prove complete dominance of the corporation and [[ Where any of the first three (3) conditions set forth in the
other circumstances that are necessary for the application of the preceding paragraph is absent, in the case of a contract with a
doctrine
director or trustee, such contract may be ratified by the vote of the
Patently Unlawful Acts. One declared unlawful by law that imposes outstanding capital stock or of at least two-thirds (2/3) of the
penalties for commission of such unlawful acts. members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
Bad Faith and Fraud involved is made at such meeting and the contract is fair and
• bad faith does not connote bad judgment or negligence reasonable under the circumstances. = RATIFICATIION ]]
• bad faith imports a dishonest purpose
• bad faith means breach of a known through some ill motive or interest;
• it partakes of the nature of fraud;
• it must be established; it cannot be presumed Self-Dealing Directors, Trustees or Officers. Those who personally
• fraud refers to all kinds of deception that would lead an ordinarily contract with the corporation in which they are directors, trustees or
prudent person into error after taking the circumstances into account; officers.
• it must be established by clear and convincing evidence
• cases involving bad faith include cases where the corporate officers
Status of Contract: Generally Voidable
exceed their authority as well as when officers prevent the performance
− it is not required that there is intent to defraud to that the contract
of or unjustifiably refuse to honor an obligation
results in corporate losses
− actual damage is also not required to make the self-dealing
Gross Negligence contract voidable
− the negligence must be so gross that it could amount to bad faith
− simple negligence is NOT enough
− one that is characterized by the want of even slight care, acting or Fair and Reasonable. There is substantive or intrinsic fairness in the
omitting to act in a situation where there is a duty to act, not transaction.
inadvertently but willfully and intentionally with a conscious indifference 1) Objective Fairness. The self-dealing transaction must replicate
to consequences insofar as other persons may be affected an arm’s-length market transaction by falling into a range of
− want or absence of or failure to exercise slight care or diligence, or the reasonableness including the price or consideration.
entire absence of care 2) Value to the Corporation. The transaction must be of particular
− must be established by clear and convincing evidence value to the corporation, as judged by the corporation’s needs and
the scope of the business.
Watered Stocks. Stocks of a corporation issued for less than their par
a. Under this rule, even if the self-dealing director did not vote, the
or issued value or stocks issued for a consideration other than cash,
contract is still voidable if the director did not disclose the
valued in excess of the fair value of such consideration.
disastrous consequences of the contract
Section 64. Liability of Directors for Watered Stocks. - A director or
b. Disclosure is sine qua non
officer of a corporation who: (a) consents to the issuance of stocks for a
consideration less than its par or issued value: (b) consents to the issuance
of stocks for the consideration other than cash, valued in excess of its fair
value; or (c) having knowledge of the insufficient consideration, does not
file written objection with the corporate secretary, shall be liable to the Section 32. Contracts Between Corporations with Interlocking
corporation or its creditors, solidarily with the stockholder concerned for the
Directors. - Except in cases of fraud, and provided the contract is
difference between the value receive at the time of issuance of the stock
fair and reasonable under the circumstances a contract between two
and the par or issued value of the same.
(2) or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of
Page 38
the interlocking director in one (1) corporation is substantial and the − rests fundamentally on the unfairness of an officer or director
interest in the other corporation or corporations is merely nominal, taking advantage of an opportunity for his own personal profit when
the contract shall be subject to the provisions of the preceding the interest of the corporation justly calls for protection
section insofar as the latter corporation or corporations are a. Section 33 applies IF there is presented to a corporate director:
concerned. 1) A business opportunity which the corporation is financially able
to exploit
Stockholding exceeding twenty percent (20%) of the outstanding 2) From its nature, the business opportunity is in line with the
capital stock shall be considered substantial for purposes of corporation’s business
interlocking directors. 3) The corporation has an interest or a reasonable expectancy in the
business opportunity
4) By taking the business opportunity as his own, the director will
Effect of Interlocking Directorship thereby be placed in a position inimical to his duties to the
− NOT prohibited, HOWEVER, the By-Laws may contain provisions corporation
that disallow such b. prohibition NO longer applies if the action was made after the
− NEVERTHELESS, when directors of a corporation “are on both sides resignation of the director;
of transaction, they are required to demonstrate utmost good faith neither does it apply to cases when two related corporations are
and most scrupulous inherent fairness of bargain involved even if there is interlocking directorship
Interlocking Directorship. When one (or some or all) of the directors TESTS
in one corporation is (or are) also a director(s) in another corporation. 1) Interest or Expectancy Test. Precludes acquisition by corporate
officers of the property of a business opportunity in which the
corporation has a beachhead in the sense of a legal or equitable
Effect on Contracts
interest or expectancy growing out of pre-existing right or
− if the interest of the interlocking director in one of the corporations
relationship.
is nominal and substantial in the other, a contract between the two
2) Line of Business Test. An opportunity as corporate whenever a
corporations shall be VOIDABLE at the instance of the corporation
managing officer becomes involved in an activity intimately or
where the interlocking director has nominal interest, UNLESS the
closely associated with the existing or prospective activities of the
following conditions are present, in which case the contract will
corporation.
be considered VALID:
3) Fairness Test. Applying ethical standards of what is fair and
1) The presence of interlocking director in the Board meeting (of the
equitable under the circumstances.
corporation where his interest is merely nominal) in which the
4) Mixed Test. Apply two or all the tests; the threshold question to
contract was approved was not necessary to constitute a quorum
be answered is whether the business opportunity is of sufficient
for such meeting
importance and is so closely related to the existing or prospective
2) The vote of such director was not necessary for the approval of
activity of the corporation as to warrant judicial sanctions against
the contract
its personal acquisition by a managing officer or director of the
3) The contract is fair and reasonable under the circumstances
corporation.
− the contract is VALID if the interests of the interlocking director in
the corporations involved are both substantial (stockholdings
exceed 20% of outstanding capital stock), or are both nominal Burden of Proof. Rests upon the officer who appropriated the business
opportunity for his own advantage.
There is NO diversion of corporate opportunity, when a director’s
Ratification
wholly owned subsidiary acquired options on the corporation’s shares,
• contracts between corporations with interlocking directors must
where (1) the transaction is merely transfer of shares from one of his
always meet the third condition (fair and reasonable) in order to be
wholly owned subsidiaries to another, (2) the shares were not essential
capable of ratification
to the corporation’s business, and (3) the corporation had no policy for
a. In the absence of any of the first two requirements, the contract
buying its own shares.
can be ratified by the vote of the stockholders representing at least
2/3 of the outstanding capital stock (or at least 2/3 of the
members) in a meeting called for the purpose so long as the Financial Capability
following requisites are present • property or business opportunity ceases to be a corporate
1) There must be full disclosure of the adverse interest of the opportunity and is transformed into personal opportunity
directors/trustees involved at such meeting where the corporation is definitely no longer able to avail itself of
2) The contract must be fair and reasonable under the the opportunity, which may arise from financial insolvency or legal
circumstances restrictions or any other factor that prevents the corporation from
acting upon the opportunity for its own advantage
Effect of Prejudice to Third Party

− this rule does NOT apply if the corporation allegedly prejudiced is Trustees and Officers Not Covered
a third party, NOT one of the corporations with interlocking − they are nevertheless prevented from unduly taking corporate
directors opportunity
− the difference is that the ratification need not be by a vote of the
stockholders owning or representing at least 2/3 of the outstanding
capital stock; Board ratification is sufficient to cure any defect in
the transaction
Section 33. Disloyalty of a Director. – [[ Where a director, by virtue
of such office, acquires a business opportunity which should belong
to the corporation, thereby obtaining profits to the prejudice of such
corporation, the director must account for and refund to the latter
all such profits, = PROFITS ]] [[ unless the act has been ratified Section 34. Executive Management, and Other Special
Committees. - If the bylaws so provide, the board may create an
by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock. = RATIFICATION ]] executive committee composed of at least three (3) directors. Said
This provision shall be applicable, notwithstanding the fact that the committee may act, by majority of vote of all its members, on such
director risked one's own funds in the venture. specific matters within the competence of the board, as may be
delegated to it in the bylaws or by majority vote of the board, except
with respect to the: (a) approval of any action for which
shareholders' approval is also required; (b) filing of vacancies in the
Doctrine of Corporate Opportunity
board; (c) amendment or repeal of bylaws or the adoption of new
− the duty of loyalty mandates that directors should not give
preference to their own personal amelioration by taking the bylaws; (d) amendment or repeal of any resolution of the board
opportunity belonging to the corporation which by its express terms is not amendable or repealable; and (e)
− recognizes that the fiduciary standards could not be upheld where distribution of cash dividends to the shareholders.
the fiduciary was acting for two entities with competing interests
Page 39
The board of directors may create special committees of temporary Filled by the
or permanent nature and determine the members' term, stockholders or
NOT
composition, compensation, powers, and responsibilities. members in a
constituting a
regular or
quorum
special meeting
called
By-Laws. Executive committee can only be created by virtue of a
May be
provision in the By-Laws.
temporarily
Composition filed from
− must be composed of NOT less than three (3) members of the among the When vacancy
Board, to be appointed by the Board officers of prevents
− there can be members of the executive committee who are not the quorum;
EMERGENCY
directors PROVIDED that at least three members are directors corporation Emergency
BOARD
• a foreigner can be a member of the executive committee in by action is
(Section 28)
proportion to the foreign shareholdings in the corporation UNANIMOU required to
S VOTE of prevent loss or
Authority. the damage;
• the Board cannot delegate the entire supervision and control of the remaining
corporation to an executive committee for this is contrary to the directors or
charter and the law trustees
• decision of the executive committee is NOT subject to appeal to the At a regular or
Board; they are valid and unappealable; special
• HOWEVER, the Board may ratify the resolution if it is invalid INCREASE IN meeting duly
Filled only by
THE NUMBER called; OR
Quorum. The general rule for quorum requirements for the executive the
OF DIRECTORS Same meeting
committee is the same as that for directors. stockholders or
or TRUSTEES authorizing the
members
(Section 28) increase if
Required Vote. Majority of all the committee members, regardless of
stated in the
the classification of the membership into director/members or non-
notice
director/members
COMPENSATIO
De Facto Officers. If the executive committee was not validly N OF
constituted. DIRECTORS or
TRUSTEES Approve at a
(Section 29) regular or
MAJORITY
GR: NOT special
TITLE II: INCORPORATION AND ORGANIZATION OF PRIVATE Entitled meeting
CORPORATIONS EXCEPT
BOARD OF reasonable per
DIRECTORS STOCKHOLDER diems
ADDT’L NOTES
or S or MEMBERS RATIFICATION
TRUSTEES : SELF- In a meeting
RETENTION OF DEALING OF called;
THE CURRENT DIRECTORS, When any of
CORPORATE TRUSTEES or the conditions
Stockholders: Notifies the OFFICERS
TERM set forth is
MAJORITY SEC ----------- TWO-THIRDS
(Section 11) absent;
GR: Perpetual RATIFICATION (2/3)
Full disclosure
Existence :
INTERLOCKING of the adverse
Vote or written
DIRECTORS interest;
assent of the
(Sections 31 Contract is fair
stockholders Unless
and 32) and reasonable
representing at otherwise
AMENDMENT GR: Voidable
least TWO- prescribed by
OF ARTICLES MAJORITY Notwithstandin
THIRDS (2/3) RCCP or RATIFICATION Stockholder:
OF INCORP. vote g the fact that
of the special law; : DISLOYALTY TWO-THIRDS
(Section 15) the director
outstanding For legitimate OF A (2/3) of the
risked one’s
capital stock or purpose DIRECTOR outstanding
(Section 33)
own funds in
of the capital stock
the venture
members
TITLE IV: POWERS OF CORPORATIONS

TITLE III: BOARD OF DIRECTORS/TRUSTEES/OFFICERS
EXTEND OR Written notice;
Shall take Ratified at a
SHORTEN Served
place either at MAJORITY meeting: at
CORPORATE personally OR
a regular or vote least TWO-
TERM when allowed,
(special (Section 36)
THIRDS (2/3)
electronically
meeting – by
REMOVAL OF At a meeting
the president INCREASE OR Stockholders:
DIRECTORS or TWO-THIRDS MAJORITY duly called;
or by the DECREASE TWO-THIRDS
TRUSTEES (2/3) vote of the Served
secretary on CAPITAL (2/3) of the
(Section 27) Board of personally or
order of the STOCK outstanding
DIRECTORS when allowed,
president) (Section 37) capital stock
electronically
called;
INCUR, CREATE
After previous
or INCREASE
notice
BONDED MAJORITY TWO-THIRDS At a meeting
Filled by the INDEBTEDNES vote (2/3) duly called
Other than by
VACANCIES IN vote of at S
removal OR by
THE OFICE OF least a (Section 37)
expiration;
THE DIRECTOR MAJORITY DENY PRE-
If still TWO-THIRDS
or TRUSTEE of the EMPTIVE MAJORITY
constituting a (2/3) IN CASE
(Section 28) remaining RIGHT vote
quorum OF:
directors (Section 38)
Page 40
Good faith in members of

the issuance of the Board of
shares in Directors of
exchange for the managed
property corp.
needed for
corporate
purposes; OR
In payment of
a previously TITLE IV
contracted debt POWERS OF CORPORATIONS
at least TWO-
THIRDS (2/3)
Section. 35. Corporate Powers and Capacity. – Every corporation
EXCEPTION: incorporated under this Code has the power and capacity:
SALE OR If the same is (a) To sue and be sued in its corporate name;
OTHER (b) To have perpetual existence unless the certificate of
necessary in
DISPOSITION incorporation provides otherwise;
the usual and
OF ALL OR MAJORITY In a meeting
regular course (c) To adopt and use a corporate seal;
SUBSTANTIALL vote duly called
of business; OR (d) To amend its articles of incorporation in accordance with the
Y ALL OF ITS
ASSETS
If the proceeds provisions of this Code;
(Section 39) shall be (e) To adopt bylaws, not contrary to law, morals or public policy,
appropriated and to amend or repeal the same in accordance with this Code;
for the conduct (f) In case of stock corporations, to issue or sell stocks to
of its remaining subscribers and to sell treasury stocks in accordance with the
business
provisions of this Code; and to admit members to the
Ratified by at
corporation if it be a nonstock corporation;
least TWO-
(g) To purchase, receive, take or grant, hold, convey, sell, lease,
INVEST THIRDS (2/3)
pledge, mortgage, and otherwise deal with such real and
CORPORATE
EXCEPTION: At a meeting personal property, including securities and bonds of other
FUNDS IN
MAJORITY corporations, as the transaction of the lawful business of the
ANOTHER If investment is duly called;
vote corporation may reasonably and necessarily require, subject to
CORPORATION reasonably With notice
or BUSINESS necessary to the limitations prescribed by law and the Constitution;
(Section 41) accomplish (h) To enter into a partnership, joint venture, merger,
primary consolidation, or any other commercial agreement with natural
purpose and juridical persons;
FOR THE (i) To make reasonable donations, including those for the public
ISSUANCE OF welfare or for hospital, charitable, cultural, scientific, civic, or
STOCK similar purposes: Provided, That no foreign corporation shall
DIVIDEND: give donations in aid of any political party or candidate or for
Approval of the At a regular or purposes of partisan political activity;
DECLARE
MAJORITY stockholders special
DIVIDENDS (j) To establish pension, retirement, and other plans for the
vote representing at meeting duly
(Section 42) benefit of its directors, trustees, officers, and employees; and
least TWO- called
(k) To exercise such other powers as may be essential or
THIRDS (2/3)
necessary to carry out its purpose or purposes as stated in the
of the
outstanding articles of incorporation.
capital stock
BOTH the
Limited or Special Capacities
managing
ENTER INTO − a corporation is a juridical entity created by law, therefore,
Approval by cand the
MANAGEMENT At least a possesses no power or authority other than what is vested by law
the Board of managed
CONTRACT MAJORITY − a corporation can only do that which the law authorizes it to
DIRECTORS corporation;
(Section 43) perform
At a meeting
duly called KINDS OF POWERS
A stockholder a. Express Powers. Expressly provided in the RCCP, applicable
representing special laws, administrative regulations, and the Articles of
the same Incorporation of the corporation.
interest of b. Implied Powers. Those essential or necessary to carry out its
both the purpose(s) or proper for the execution of the powers.
managing and (1) A corporation that is engaged in mining has the power to establish a
the managed local post office, reasonable and proper adjunct to the conduct of the
own or control business of the company and vital to the improvement in the living
more than 1/3 condition of its employees and laborers
of the total (2) A corporation that is authorized to operate a cement factory has the
outstanding implied power to operate an electric power plant for such factory
at least TWO- capital stock (3) SEC opined that manufacturing is NOT implied from or incidental to
the business of selling – a seller, dealer, trader or importer of goods
THIRDS (2/3) entitled to vote
does not automatically classify one as a manufacturer because
of the
manufacturing is not fairly and reasonably necessary or incidental to
managing
the business of selling
corp.; OR (4) A corporation can NOT operate an online casino on the basis of its
Majority of the secondary purpose to operate amusement centers for various
members of computer games
the Board of (5) If the primary purpose of a corporation is international freight
Directors of forwarding, the said corporation can also perform other forwarding
the managing services such as trucking
also c. Incidental Powers. Deemed conferred on the corporation
constitutes a because they are incidental to the existence of the corporation and
majority of the as a consequence of the fact that they exist as juridical persons.
Page 41
(1) Right to succession Philippine Numismatic Ad Antiquarian Society v. Aquino

(2) Right to have corporate name
(3) Right to make by-laws for its government The rule on real party-in-interest ensures, therefore, that the party
(4) Right to sue and be sued with the legal right to sue brings the action, and this interest ends
(5) Right to acquire and hold properties for the purposes authorized when a judgment involving the nominal plaintiff will protect the
by the charter defendant from a subsequent identical action. Such a rule is
intended to bring before the court the party rightfully interested in
Test to Determine if Power is Implied the litigation so that only real controversies will be presented and
• powers merely convenient or useful are not implied if they are not the judgment, when entered, will be binding and conclusive and
essential, having in view the nature and object of the corporation the defendant will be saved from further harassment and vexation
at the hands of other claimants to the same demand.
Montelibano v. Bacolod Murcia Milling Co., Inc.
A corporation has no power, except those expressly conferred on it
It is a question, therefore, in each case of the logical relation of the act by the Corporation Code and those that are implied or incidental to
to the corporate purpose expressed in the charter. If that act is one which its existence. In turn, a corporation exercises said powers through
is lawful in itself, and not otherwise prohibited, is done for the purpose its board of directors and/or its duly-authorized officers and agents.
of serving corporate ends, in a substantial, and not in a remote and Thus, it has been observed that the power of a corporation to sue
fanciful sense, it may fairly be considered within charter powers. and be sued in any court is lodged with the board of directors that
exercises its corporate powers. In turn, physical acts of the
Fletcher Cyc. Corp.
corporation, like the signing of documents, can be performed only
by natural persons duly authorized for the purpose by corporate
Whether the act in question is in direct and immediate furtherance of the
by-laws or by a specific act of the board of directors. It necessarily
corporation’s business, fairly incident to the express powers and
follows that "an individual corporate officer cannot solely exercise
reasonably necessary to their exercise.
any corporate power pertaining to the corporation without authority
SEC Opinion
from the board of directors".
Section 23, in relation to Sec. 25 of the Corporation Code, clearly

It is a general rule that when the charter of a corporation confers certain
enunciates that all corporate powers are exercised, all business
enumerated powers, it is to be construed as including powers reasonably
conducted, and all properties controlled by the board of directors.
necessary for the proper exercise of the enumerated powers and
A corporation has a separate and distinct personality from its
excluding all other non-enumerated powers.
directors and officers and can only exercise its corporate powers
Stretching the Purpose Clause through the board of directors. Thus, it is clear that an individual
− it is legal to stretch the meaning of the purpose clause to cover corporate officer cannot solely exercise any corporate power
new and unexpected situations pertaining to the corporation without authority from the board of
• situations and circumstances may arise which could not have been directors. Absent the said board resolution, a petition may not be
foreseen at the time of incorporation that can be accommodated given due course. The application of the rules must be the general
by the “stretched” interpretation of the purpose clause rule, and the suspension or even mere relaxation of its application,
• no more need to amend the Articles of Incorporation is the exception. This Court may go beyond the strict application of
the rules only on exceptional cases when there is truly substantial
Specific Powers compliance with the rule.
1. To extend or shorten the corporate term
2. To amend the Articles of Incorporation Cosco Philippines Shipping, Inc. v. Kemper Insurance Company
3. To increase or decrease the capital stock
4. To incur, create or increase bonded indebtedness Generally, corporations are required to attach a copy of the Board
5. To deny pre-emptive right Resolution authorizing the filing of the complaint or petition.
6. To sell or dispose of all or substantially all of the assets of the
San Miguel Bukid Homeowners Association, Inc., et. al. v. The
corporation
City of Mandaluyong
7. To acquire its own shares
8. To invest corporate funds in another corporation, business or for
If no power of attorney, secretary’s certificate or Board resolution
any other purpose
is attached to the petition or complaint, the pleading is not properly
9. To declare dividends
verified and should be treated as an unsigned pleading.
10. To enter into a management contract
2) POWER OF SUCCESSION. A corporation has the power and
General Powers
capacity to have perpetual existence UNLESS the certificate of
− Approval of a resolution by the Board
incorporation provides otherwise.
− Every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a
3) POWER TO ADOPT AND USE A CORPORATE SEAL
corporate act, EXCEPT for the election of officers which shall require
− a seal is not indispensable for the transactions or contracts of the
the vote of a majority of all members of the board
corporation
1. Power to Sue and be Sued − a document may be considered valid and binding even in the
2. Power of Succession absence of a seal
3. Power to Adopt and Use a Corporate Seal − HOWEVER, a seal is necessary with respect to the certificate of
4. Power to Amend Articles of Incorporation stock
5. Power to Adopt By-Laws
6. Powers Regarding Shares and Membership 4) POWER TO AMEND ARTICLES OF INCORPORATION. The power
7. Power to Acquire, Sell, Lease or Otherwise Deal with Real or to amend the Articles of Incorporation must be in accordance with
Personal Property the provisions of the RCCP.
8. Power to Enter into Merger, Consolidation − majority vote of the board of directors or trustees; AND
9. Power to Enter into a Partnership, Joint Venture − vote or written assent of the stockholders representing at least
10. Power to Make Reasonable Donations 2/3 of the outstanding capital stock or the members thereof
11. Power to Establish Pension, Retirement, and Other Plans
12. Other Powers 5) POWER TO ADOPT BY-LAWS
12.1. Power to Borrow Funds − affirmative vote of the stockholders presenting at least a
12.2. Power to Act as Surety or Guarantor MAJORITY of the outstanding capital stock or members
12.3. Power to Mortgage − a corporation’s life may start even without the By-Laws as it may
be filed after incorporation
1) POWER TO SUE AND BE SUED − the existence of the power of the corporation to adopt By-Laws
− one of the INCIDENTAL powers does NOT make the exercise of such power essential to its
− exercised by the corporation through the Board and/or its duly corporate life or to the validity of its acts
authorized officers and agents
Page 42
− By-Laws are meant to regulate the manner of conducting the 8) TO ENTER INTO MERGER, CONSOLIDATION
internal affairs of the corporation, thus, must not be contrary to • Merger occurs when one corporation absorbs another
law, morals or public policy constituent corporations
• Consolidation occurs when two or more corporations form a
6) POWERS REGARDING SHARES AND MEMBERSHIP new single corporation
− the subscribers, NOT the stock corporation, are the owners of the
shares therein 9) TO ENTER INTO A PARTNERSHIP AND JOINT VENTURE
− HOWEVER, the corporation has certain powers relating to shares:
a) Power to issue previously unsubscribed shares SEC Opinion
b) Power to sell treasury stocks
− Treasury shares are shares of stock which have been issued However, as a general rule, a corporation cannot become a member of a
and fully paid for, but subsequently reacquired by the issuing partnership in the absence of express authorization by statute or charter.
corporation through purchase, redemption, donation, or
The limitation was based on public policy since in a partnership, the
some other lawful means. Such shares may again be disposed
corporation would be bound by the acts of persons who are not its duly
of for a reasonable price fixed by the board of directors
appointed and authorized agents and officers, which would be entirely
c) Power to sell delinquent shares
inconsistent with the policy of the law that the corporation shall manage
d) Power to acquire its own shares in proper cases
its own affairs separately and exclusively.
e) Power to redeem redeemable shares
− Redeemable shares may be issued by the corporation when
Mendiola v. Court of Appeals
expressly provided in the articles of incorporation. They are
shares which may be purchased by the corporation from the The prohibition is justified by the following: (1) that the mutual agency
holders of such shares upon the expiration of a fixed period, between the partners would be inconsistent with the policy of the law
regardless of the existence of unrestricted retained earnings that the corporation shall manage its own affairs separately and
in the books of the corporation, and upon such other terms exclusively; and (2) that such an arrangement would improperly allow
and conditions stated in the articles of incorporation and the corporate property to become subject to risks not contemplated by the
certificate of stock representing the shares, subject to rules stockholders when they originally invested in the corporation.
and regulations issued by the Commission
− NOT allowed if the corporation is insolvent or will become Aubach v. Sanitary Wares Manufacturing Corporation
insolvent
f) Power to increase or decrease the par value of shares Joint venture is an organization formed for some temporary purpose.
g) Power to resort to stock split There must be a community of interest in the business, sharing profits
− A share is divided or converted into two or more shares but and losses, and mutual right of control.
the amount of the outstanding capital remains the same
because the par value is also divided in as many shares 10) TO MAKE REASONABLE DONATIONS
− a non-stock corporation has the power to admit members to the − without an express grant of power, a stock corporation is
corporation generally not allowed to donate portions of its assets
− a corporation is likewise empowered to accept donations when it
7) TO ACQUIRE, SELL, LEASE OR OTHERWISE DEAL WITH REAL is necessary to carry out its express powers
OR PERSONAL PROPERTY
SEC Opinion
“(g) To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage, and otherwise deal with such real and personal
HOWEVER, consistent with Corporate Social Responsibility Theory,
property, including securities and bonds of other corporations, as
the RCCP now allows corporations to make donations so long as
the transaction of the lawful business of the corporation may
the following requirements are complied with: (1) the donation
reasonably and necessarily require, subject to the limitations
must be reasonable; (2) the donation must be for valid purpose
prescribed by law and the Constitution”
including public welfare or for hospital, charitable, cultural,
− such power is vested in the Board of Directors scientific, civic or similar purposes; and (3) if the corporation is a
− while a corporation may appoint agents to negotiate, the final say foreign corporation, the donation must not be in aid of any political
will have to be with the Board, whose approval will finalize the party or candidate or for purposes of partisan political activity. It
transaction must bear a reasonable relation to the corporation’s interest and
− if the power to sell land is conferred to an agent, there must be not be so remote and fanciful.
a written contract of agency for such purpose and the SPA,
11) TO ESTABLISH PENSION, RETIREMENT, AND OTHER PLANS.
including the Board Resolution, must expressly confer such
Stockholders’ approval is NOT necessary and such fund established
specific power to sell the specified parcel of land
by the corporation may gain tax exempt status under the NIRC.
− Board can exercise this power WTIHOUT CONCURRENCE of the
stockholders, as the latter’s approval is necessary only in cases
12) OTHER POWERS
covered by sale of all or substantially all of the assets
− hire employees
− Two (2) Basic Requirements
− engage the services of contractors
− It must be reasonably and necessarily required by the
− open bank accounts
transaction of the lawful business of the corporation
− other matters that are necessary for its operation
− It is subject to limitations prescribed by law and the
12.1) TO BORROW FUNDS
Constitution
− auxiliary to the primary purposes of the corporation
SEC Opinion
− Board Resolution is necessary because a special power of
attorney is necessary to confer such power
Temporary lease of corporate property is allowed even if a − it is only duly authorized representatives that must secure
corporation is not engaged in the business of leasing properties. loans in behalf of the corporation
The SEC imposed the following requirements for such temporary 12.2) TO ACT AS SURETY OR GUARANTOR
lease: (1) the property is not presently used by the corporation and − General Rule: a corporation may not ordinarily be bound by
leasing of the property is not made on a regular basis; (2) leasing a contract of guarantee or surety for the benefit of third
the property will make it productive instead of allowing them to persons in the absence of an express power in the Articles of
remain idle; (3) there is no express restrictions in the Articles of Incorporation
Incorporation and By-Laws; and (4) leasing the property is not − such power is not a necessary nor an incidental power,
used as a scheme to prejudice corporate creditors or result in the HOWEVER, such guaranty may be given in the
infringement of the trust fund doctrine. accomplishment of any object for which the corporation was
created, or when the particular transaction is reasonably
SEC Opinion necessary or proper in the conduct of its business
• a corporation cannot act as an accommodation party in a
A corporation can acquire usufruct over an immovable property, negotiable instrument
however, it cannot be constituted in favor of a corporation for more 12.3) TO MORTGAGE
than 50 years.
Page 43
− corporate assets may be mortgaged by authorized directors corporate term stated in the Articles of Incorporation, without the
or officers on behalf of the corporation as owner, as the need for the issuance by the SEC of a certificate of dissolution
transaction of the lawful business of the corporation may
reasonably and necessarily require
− the corporation can mortgage its properties to secure the
obligation of a subsidiary
Section 37. Power to Increase or Decrease Capital Stock; Incur,
SEC Opinion Create or Increase Bonded Indebtedness. – [[ No corporation shall
increase or decrease its capital stock or incur, create or increase any
EXCEPTIONALLY, the SEC opined that the corporation can bonded indebtedness unless approved by a majority vote of the
mortgage its properties for the obligations of another board of directors and by two-thirds (2/3) of the outstanding capital
corporation which is not its subsidiary provided the following stock at a stockholders’ meeting duly called for the purpose. Written
requirements are present: (1) there is no express restriction notice of the time and place of the stockholders’ meeting and the
in the Articles of Incorporation and By-Laws; (2) the purpose purpose for said meeting must be sent to the stockholders at their
of the mortgage is not illegal; (3) consent of all corporate
places of residence as shown in the books of the corporation and
creditors and stockholders must be secured; (4) the transaction
served on the stockholders personally, or through electronic means
is not used as a scheme to defraud or prejudice corporate
recognized in the corporation’s bylaws and/or the Commission’s
creditors or result in the infringement of the Trust Fund
rules as a valid mode for service of notices.
Doctrine; (5) the mortgage will not hamper the continuous
business operation of the corporation; and (6) the
A certificate must be signed by a majority of the directors of the
accommodated third party involved in the mortgage is
corporation and countersigned by the chairperson and secretary of
financially solvent and capable of paying its obligation.
the stockholders’ meeting, setting forth:
Practice of Profession. The 11th Foreign Investment Negative List (a) That the requirements of this section have been complied with;
enumerates the professions where corporate practice is allowed subject to the (b) The amount of the increase or decrease of the capital stock;
pertinent conditions and requirements imposed by the specific regulatory (c) In case of an increase of the capital stock, the amount of capital
statutes that apply to them stock or number of shares of no-par stock thereof actually
1. Aeronautical Engineering
subscribed, the names, nationalities and addresses of the
2. Agricultural and Biosystems Engineering
3. Architecture
persons subscribing, the amount of capital stock or number of
4. Chemistry no-par stock subscribed by each, and the amount paid by each
5. Electronics Engineering on the subscription in cash or property, or the amount of capital
6. Environmental Planning stock or number of shares of no-par stock allotted to each
7. Forestry stockholder if such increase is for the purpose of making
8. Guidance and Counseling effective stock dividend therefor authorized;
9. Interior Design
(d) Any bonded indebtedness to be incurred, created or increased;
10. Landscape Architecture
(e) The amount of stock represented at the meeting; and
11. Naval Architecture
12. Psychology (f) The vote authorizing the increase or decrease of the capital
13. Real Estate Service stock, or the incurring, creating or increasing of any bonded
14. Sanitary Engineering indebtedness.
15. Social Work
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require prior
approval of the Commission, and where appropriate, of the
Philippine Competition Commission. The application with the
Section 36. Power to Extend or Shorten Corporate Term. – [[ A
Commission shall be made within six (6) months from the date of
private corporation may extend or shorten its term as stated in the
approval of the board of directors and stockholders, which period
articles of incorporation when approved by a majority vote of the
may be extended for justifiable reasons. = REQUIREMENTS ]]
board of directors or trustees, and ratified at a meeting by the
stockholders or members representing at least two-thirds (2/3) of Copies of the certificate shall be kept on file in the office of the
the outstanding capital stock or of its members. Written notice of corporation and filed with the Commission and attached to the
the proposed action and the time and place of the meeting shall be original articles of incorporation. After approval by the Commission
sent to stockholders or members at their respective place of and the issuance by the Commission of its certificate of filing, the
residence as shown in the books of the corporation, and must either capital stock shall be deemed increased or decreased and the
be deposited to the addressee in the post office with postage incurring, creating or increasing of any bonded indebtedness
prepaid, served personally, or when allowed in the bylaws or done authorized, as the certificate of filing may declare: Provided, That [[
with the consent of the stockholder, sent electronically in accordance the Commission shall not accept for filing any certificate of increase
with the rules and regulations of the Commission on the use of of capital stock unless accompanied by a sworn statement of the
electronic data messages. = REQUIREMENTS ]]In case of treasurer of the corporation lawfully holding office at the time of the
extension of corporate term, a dissenting stockholder may exercise filing of the certificate, showing that at least twenty-five percent
the right of appraisal under the conditions provided in this Code. (25%) of the increase in capital stock has been subscribed and that
at least twenty-five percent (25%) of the amount subscribed has
Not Inherent Right. Since the life of the corporation is a concession of been paid in actual cash to the corporation or that property, the
the State, the power to extend the corporate term is not an inherent valuation of which is equal to twenty-five percent (25%) of the
right. subscription, has been transferred to the corporation: Provided,
further, That no decrease in capital stock shall be approved by the
Appraisal Right. Available even in the shortening of corporate term. Commission if its effect shall prejudice the rights of corporate
creditors. = REQUIREMENTS ]]
Dissolution
− the shortening of the corporate term may be designated to have Nonstock corporations may incur, create or increase bonded
the effect of dissolving the corporation indebtedness when approved by a majority of the board of trustees
− takes effect on the date of approval of the Amended Articles of
and of at least two-thirds (2/3) of the members in a meeting duly
Incorporation by the SEC
called for the purpose.
− same with the 3-year liquidation period
− upon the expiration of the shortened term, the corporation shall be Bonds issued by a corporation shall be registered with the
deemed dissolved without any further proceedings, subject to the
Commission, which shall have the authority to determine the
provisions on liquidation
sufficiency of the terms thereof.
− in the case of expiration of corporate term, dissolution shall
automatically take effect on the day following the last day of the
Increase or Decrease of Capital Stock
Page 44
− involved the amendment of the Articles of Incorporation (vi) Such other person as the Commission may rule by determine as
− this should be distinguished from mere increase of subscribed qualified buyers, on the basis of such factors as financial sophistication,
capital stock or paid-up capital that does NOT necessarily net worth, knowledge, and experience in financial and business matters,
require amendment of the Articles of Incorporation or amount of assets under management.
a. The capital stock may be increased/decreased by doing any of the 10.2. The Commission may exempt other transactions, if it finds that the
following: requirements of registration under this Code is not necessary in the public
i. increasing/decreasing the number of shares and retaining the par interest or for the protection of the investors such as by the reason of the
value small amount involved or the limited character of the public offering.
ii. increasing/decreasing the par value of existing shares without
a. A notice of or application for exemption of the registration is NOT
changing the number of shares required for the issuance covered by numbers (1) and (2) of the
iii. increasing/decreasing the number of shares and immediately preceding enumeration, hence, there is no need to file a
increasing/decreasing the par value notice of exemption IF the existing shareholders will acquire additional
shares from the corporation whether or not the same is covered by their
SEC Opinion pre-emptive right
b. A notice of exemption is required for the offerings covered by numbers
A decrease of the capital stock amends the underlying contractual (4) and (5), thus, notice of exemption is necessary IF persons other
relationship between the corporation and the shareholders. For this than existing shareholders will purchase shares from the corporation
reason, the consent of the contracting parties is required to give provided that the sale is to fewer than 20 persons in the Philippines
effect to such power of the corporation to decrease its capital stock. during any 12-month period
Stock Split. A share is divided or converted into two or more shares but Requirements
the amount of the outstanding capital remains the same because the par • the required 25% subscription shall be based on the additional
value is also divided in as many shares. amount by which the capital stock is increased and not on the
• increase or decrease of capital will NOT necessarily result if there capital stock as increased
is a stock split
Increase of Authorized Capital Decrease of Authorized Capital
a. Reverse stock split is the pro-rata combination of all the Stock; Documentary Stock; Documentary
outstanding shares of a specified class into smaller number of Requirements Requirements
shares of that class; Certificate of Increase of Capital Certificate of Decrease of Authorized
It may be required to increase the market value per share or it may Stock Capital Stock
be designed to eliminate minority stockholders Treasurer’s Affidavit certifying the
Audited financial statements as of last
increase of capital stock, the amount
fiscal year, stamped received by the
Increased of Subscribed Capital subscribed and the amount received
SEC and the BIR
as payment
− increase in the capital stock is necessary when additional funds are
List of stockholders as of the date of
required for its operation and the corporation opts to raise funds the meeting approving the increase,
If it involves a return of capital: Long
through additional investments, which may be infused initially by form audit report and list of creditors
indicating the nationalities of the
with the amount due to each certified
increasing the subscribed capital subscribers and their respective
by the auditor or certified under oath
− need NOT go trough the process provided for under Section 37; subscribed and paid-up capital on the
by company accountant and written
mere approval of the Board is sufficient existing authorized capital stock, as
consent of each creditor
certified by the corporate secretary
− increase in the authorized capital stock is required if the additional
List of stockholders before and after
subscription cannot be covered by the original authorized capital or
Amended Articles of Incorporation the decrease, as certified by the
if the original authorized capital is already exhausted corporate secretary
• Section 35: the power to issue shares of stock in a corporation is Notarized directors’ certifying: (a) the
lodge in the board of directors and no stockholders’ meeting is amendment of the Articles of
required to consider it because additional issuances of shares of Incorporation increasing the
stock do NOT need approval of the stockholders authorized capital stock, (b) the votes
of the directors and the stockholders, Amended Articles of Incorporation
Increase in Paid-Up Capital. Generally, no need to get the approval and (c) the date and place of the
stockholders’ meeting, which shall be
of the SEC, EXCEPT in cases where property is given in payment of
signed by a majority of the directors
subscription price.
and the corporate secretary
Notarized directors’ certifying: (a) the
EXEMPT FROM REGISTRATION REQUIREMENT amendment of the Articles of
(Section 10.1, Securities Regulation Code) Incorporation decreasing the
Endorsement/clearance from other authorized capital stock, (b) the votes
Section 10. Exempt Transactions. – 10.1. The requirement of registration government agencies or other SEC of the directors and the stockholders,
under Subsection 8.1 shall not apply to the sale of any security in any of the Departments, if applicable and (c) the date and place of the
following transactions: stockholders’ meeting, which shall be
(e) The sale of capital stock of a corporation to its own stockholders signed by a majority of the directors
exclusively, where no commission or other remuneration is paid or given and the corporate secretary
directly or indirectly in connection with the sale of such capital stock. Secretary’s Certificate that no action Publisher’s affidavit of the publication
(i) Subscriptions for shares of the capitals stocks of a corporation prior to or proceeding has been filed or is (once only) of the decrease of capital
the incorporation thereof or in pursuance of an increase in its authorized pending before any court in a newspaper of general circulation
capital stocks under the Corporation Code, when no expense is incurred, or
no commission, compensation or remuneration is paid or given in connection SEC Approval
with the sale or disposition of such securities, and only when the purpose − it is only from and after the approval and issuance by the SEC of a
for soliciting, giving or taking of such subscription is to comply with the certificate of filing that the capital stock shall stand increased or
requirements of such law as to the percentage of the capital stock of a decreased
corporation which should be subscribed before it can be registered and duly − there is NO increase in the authorized capital stock, even if the
incorporated, or its authorized, capital increase. stockholders already paid, IF there is no approval
(j) The exchange of securities by the issuer with the existing security holders − any payment by the shareholder of the subscription price before
exclusively, where no commission or other remuneration is paid or given the filing of the application with the SEC shall be considered as
directly or indirectly for soliciting such exchange. deposits only on future subscriptions and the corporation will hold
(k) The sale of securities by an issuer to fewer than twenty (20) persons in
the same in trust until it files a petition to increase its capitalization
the Philippines during any twelve-month period.
and a certificate of filing of the increase is approved and issued by
(l) The sale of securities to any number of the following qualified buyers:
the SEC
(i) Bank;
(ii) Registered investment house;
Bonded Indebtedness
(iii) Insurance company;
− requirements of Section 37 do NOT apply to decrease of bonded
(iv) Pension fund or retirement plan maintained by the Government of the
indebtedness
Philippines or any political subdivision thereof or manage by a bank or
other persons authorized by the Bangko Sentral to engage in trust
− Section 37 does NOT cover all kinds of indebtedness because a
functions; corporation has an implied power to borrow money when necessary
(v) Investment company or; to carry out the purposes of its organization
Page 45
a. Bonded Indebtedness refers to secured indebtedness or exchange for property needed for corporate purposes or in
indebtedness secured by real or personal property that are covered payment of a previously contracted debt
by certificates;
They refer to negotiable corporate bonds secured by mortgage on Denial and Restriction. An issue may still be objectionable IF the
property. directors acted in breach of trust and their primary purpose is to
perpetuate or shift control of the corporation, or to “free out” the minority
interest.
Not Against Public Policy. There is no equity, there is no unfairness

Section 38. Power to Deny Preemptive Right. – All stockholders of because a shareholder who feels that he does not desire to invest
a stock corporation shall enjoy preemptive right to subscribe to all because he does not have the right of pre-emption simply should not
issues or disposition of shares of any class, in proportion to their invest.
respective shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto: [[ Provided, That such
preemptive right shall not extend to shares issued in compliance
with laws requiring stock offerings or minimum stock ownership by Section 39. Sale or Other Disposition of Assets. – Subject to the
the public; or to shares issued in good faith with the approval of the provisions of Republic Act No. 10667, otherwise known as “Philippine
stockholders representing two-thirds (2/3) of the outstanding capital Competition Act”, and other related laws, a corporation may, by a
stock, in exchange for property needed for corporate purposes or in majority vote of its board of directors or trustees, sell, lease,
payment of a previously contracted debt. = WHEN NOT exchange, mortgage, pledge, or otherwise dispose of its property
AVAILABLE ]] and assets, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds, or other
instruments for the payment of money or other property or
Pre-emptive Right. The right granted to stockholders to have the first
consideration, as its board of directors or trustees may deem
option to subscribe to any issuance or disposition of shares from the
expedient.
capital stock in proportion to the stockholdings of the shareholders.
a. Rationale A sale of all or substantially all of the corporation’s properties and

assets, including its goodwill, must be authorized by the vote of the
SEC Opinion stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
To maintain the relative and proportionate voting strength and members, in a stockholders’ or members’ meeting duly called for the
control of existing shareholders. Aimed to maintain the existing ratio purpose.
of the shareholder’s interest and voting power in the corporation.
In nonstock corporations where there are no members with voting
SEC-OGC Opinion rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
All stockholders whose names appear in the stock and transfer book
transaction authorized by this section.
at the time of the meeting approving the issuance of shares are
entitled to pre-emptive right.
The determination of whether or not the sale involves all or
substantially all of the corporation’s properties and assets must be
Majority Stockholders of Ruby Industrial Corporation v. Lim
computed based on its net asset value, as shown in its latest
Stockholders must be given a reasonable time within which to financial statements. [[ A sale or other disposition shall be deemed
exercise their pre-emptive right. Upon the expiration of said period, to cover substantially all the corporate property and assets if thereby
any stockholder who has not exercised such right will be deemed to the corporation would be rendered incapable of continuing the
have waived it. business or accomplishing the purpose for which it was incorporated.
= MEANING OF ‘SUBSTANTIALLY ALL’ ]]
Issues or Disposition. This includes issuance of the unsubscribed
shares that are part of the original capital stock and the increase of Written notice of the proposed action and of the time and place for
capital stock. the meeting shall be addressed to stockholders or members at their
places of residence as shown in the books of the corporation and
a. The pre-emptive right is available in case the corporation decides
deposited to the addressee in the post office with postage prepaid,
to dispose of its treasury shares
b. Section 38 does NOT distinguish between newly issued shares and served personally, or when allowed by the bylaws or done with the
previously unsubscribed shares, hence, the pre-emptive right is consent of the stockholder, sent electronically: Provided, That any
available to existing shareholders with respect to unsubscribed but dissenting stockholder may exercise the right of appraisal under the
previously issued shares conditions provided in this Code.
c. The pre-emptive right is not available when shares are issued in
exchange for shares in another corporation IF the same is the result After such authorization or approval by the stockholders or
of a merger to which the corporations are parties members, [[ the board of directors or trustees may, nevertheless,
in its discretion, abandon such sale, lease, exchange, mortgage,
Waiver pledge, or other disposition of property and assets, subject to the
− a stockholder who neither desires nor intends to buy any of the rights of third parties under any contract relating thereto, without
stocks being offered may waive such right further action or approval by the stockholders or members. =
− in such event, the shares may be offered to any interested persons ABANDONMENT OF THE SALE OR DISPOSITION ]]
acceptable to the corporation
a. Right to waive is a personal right; hence, the stockholders Nothing in this section is intended to restrict the power of any
concerned should give such waiver individually or he can authorize corporation, without the authorization by the stockholders or
somebody to execute the same for and in his behalf by way of a members, to sell, lease, exchange, mortgage, pledge, or otherwise
special power of attorney dispose of any of its property and assets if the same is necessary in
the usual and regular course of business of the corporation or if the
Transfer. The right to subscribe to new issues and disposition may be proceeds of the sale or other disposition of such property and assets
transferred by the shareholder UNLESS there is an express restriction in shall be appropriated for the conduct of its remaining business.
the Articles of Incorporation.
When Not Available Directors/Board Approval Only

1. When the right is denied in the Articles of Incorporation − if the transaction does NOT cover all or substantially all of the assets
2. When shares are issued in compliance with laws requiring stock − transfer in the regular course of business
offerings or minimum stock ownership by the public
3. When shares are issued in good faith with the approval of the KINDS of Corporate Acquisitions
stockholders representing 2/3 of the outstanding capital stock, in
Page 46
1. Asset Sales. Corporate entity sells all or substantially all of its − thus, the requirements still apply if all the assets are sold to several
assets to another entity. buyers even if the buyers are not continuations of the seller
2. Stock Sales. The individual or corporate shareholders sell a corporation
controlling block of stock to new or existing shareholders.
ACT 3952
Effect on Creditors. The transferee-corporation will not be liable for the (BULK SALES LAW)
debts of said transferor-corporation.
Bulk Sales Law. The sale of all or substantially all of the assets of a
The Nell Doctrine corporation is likewise NOT binding on the creditors IF there is violation
Edward Nell Co. v. Pacific Farms, Inc. of the Bulk Sales Law.
HOWEVER, by way of EXCEPTION, the transferee-corporation is liable: Sec. 2. Sale and transfer in bulk. — Any sale, transfer, mortgage or
(1) if there is an express or implied assumption of liabilities. assignment of a (a) stock of goods, wares, merchandise, provisions, or
if the agreement is embodied in a written document. materials otherwise than in the ordinary course of trade and the regular
(2) the transaction amounts to a consolidation or merger. the prosecution of the business of the vendor, mortgagor, transferor, or
surviving corporation also automatically absorbs the obligation of the assignor, or (b) sale, transfer, mortgage or assignment of all, or
non-surviving corporation. substantially all, of the business or trade theretofore conducted by the
(3) if the transaction is entered into fraudulently in order to vendor, mortgagor, transferor, or assignor, or (c) of all, or substantially
escape liability from debtors or the purchase was in fraud of all, of the fixtures and equipment used in and about the business of
creditors. if the creditors did not consent, the only way the transfer the vendor, mortgagor, transferor, or assignor, shall be deemed to be
can proceed without prejudice to the creditors is to hold the assignee a sale and transfer in bulk, in contemplation of this Act: Provided,
liable for the obligations of the assignor. however, That if such vendor, mortgagor, transferor or assignor,
a. Badges of Fraud produces and delivers a written waiver of the provisions of this Act from
i.The fact that the consideration of the conveyance is fictitious or is his creditors as shown by verified statements, then, and in that case,
inadequate the provisions of this section shall not apply.
ii. A transfer made by a debtor after suit has been begun and while
it is pending against him Sec. 3. Statement of creditors. — It shall be the duty of every
iii. A sale upon credit by an insolvent debtor person who shall sell, mortgage, transfer, or assign any stock of goods,
iv. Evidence of large indebtedness or complete insolvency wares, merchandise, provisions or materials in bulk, for cash or on
v. The transfer of all or nearly all of his property by a debtor, credit, before receiving from the vendee, mortgagee, or his, or its
especially when he is insolvent or greatly embarrassed financially agent or representative any part of the purchase price thereof, or any
vi. The fact that the transfer is made between father and son, when promissory note, memorandum, or other evidence therefor, to deliver
there are present one or more of the above circumstances
to such vendee, mortgagee, or agent, or if the vendee, mortgagee, or
vii. The failure of the vendee to take exclusive possession of all the
agent be a corporation, then to the president, vice-president,
property
treasurer, secretary or manager of said corporation, or, if such vendee
ANTICIPATION OF INSOLVENCY or mortgagee be a partnership firm, then to a member thereof, a
(Section 10, Financial Rehabilitation and Insolvency Act of written statement, sworn to substantially as hereinafter provided, of
2010) the names and addresses of all creditors to whom said vendor or
mortgagor may be indebted, together with the amount of indebtedness
Section 10. Liability of Individual Debtor, Owner of a Sole due or owing, or to become due or owing by said vendor or mortgagor
Proprietorship, Partners in a Partnership, or Directors and Officers. - to each of said creditors
Individual debtor, owner of a sole proprietorship, partners in a
partnership, or directors and officers of a debtor shall be liable for • Any sale in violation of the Bulk Sales Law is considered fraudulent
double the value of the property sold, embezzled or disposed of or and VOID
double the amount of the transaction involved, whichever is higher to
be recovered for benefit of the debtor and the creditors, if they, having REPUBLIC ACT NO. 10667
notice of the commencement of the proceedings, or having reason to (PHILIPPINE COMPETITION ACT)
believe that proceedings are about to be commenced, or in
contemplation of the proceedings, willfully commit the following acts: Section 20. Prohibited. Mergers and Acquisitions. – Merger or
(a) Dispose or cause to be disposed of any property of the debtor acquisition agreements that substantially prevent, restrict or lessen
other than in the ordinary course of business or authorize or competition in the relevant market or in the market for goods or services
approve any transaction in fraud of creditors or in a manner grossly as may be determined by the Commission shall be prohibited.
disadvantageous to the debtor and/or creditors; or
(b) Conceal or authorize or approve the concealment, from the Effect on Employees of Corporate Acquisitions
creditors, or embezzles or misappropriates, any property of the SME Bank, Inc. et. al. v. De Guzman, et. al.
debtor.
In asset sales, the rule is that the seller in good faith is authorized to
The court shall determine the extent of the liability of an owner,
dismiss the affected employees, but is liable for the payment of
partner, director or officer under this section. In this connection, in
case of partnerships and corporations, the court shall consider the separation pay under the law. The buyer in good faith, on the other
amount of the shareholding or partnership or equity interest of such hand, is not obliged to absorb the employees affected by the sale, nor
partner, director or officer, the degree of control of such partner, is it liable for the payment of their claims. The most that it may do, for
director or officer over the debtor, and the extent of the involvement reasons of public policy and social justice, is to give preference to the
of such partner, director or debtor in the actual management of the qualified separated personnel of the selling firm.
operations of the debtor.
In contrast with asset sales, in which the assets of the selling
(4) if the purchase becomes a continuation of the seller. corporation are transferred to another entity, the transaction in stock
a. Business-Enterprise Transfer Rule sales takes place at the shareholder level. Because the corporation
Y-I Leisure Philippines, Inc. v. Yu possesses a personality separate and distinct from that of its
shareholders, a shift in the composition of its shareholders will not
Two requisites must concur: (1) the transferor corporation sells affect its existence and continuity. Thus, notwithstanding the stock
all or substantially all of its assets to another entity; and (2) the sale, the corporation continues to be the employer of its people and
transferee corporation continues the business of the transferor continues to be liable for the payment of their just claims. Furthermore,
corporation. the corporation or its new majority shareholders are not entitled to
lawfully dismiss corporate employees absent a just or authorized
Fraud is NOT necessary in a business-enterprise transfer before cause.
the buyer can be made liable; this rule is separate from the
doctrine of piercing the veil of corporate fiction.
Effect of Stoppage of Operation

− Section 39 still applies if there is a sale of all or substantially all of Section 40. Power to Acquire Own Shares. – Provided that the
the assets of the corporation BUT the corporation will just cease its corporation has unrestricted retained earnings in its books to cover
operation the shares to be purchased or acquired, a stock corporation shall
Page 47
have the power to purchase or acquire its own shares for a legitimate SEC OPINION
corporate purpose or purposes, including the following cases:
(a) To eliminate fractional shares arising out of stock dividends; Investment of funds includes not only investment of money but also
(b) To collect or compromise an indebtedness to the corporation, investment of property of the corporation. If the business of a
arising out of unpaid subscription, in a delinquency sale, and corporation is such as to render it necessary for it to own a certain kind
of property, and at times such property is not necessary to its business,
to purchase delinquent shares sold during said sale; and
it may employ the property in a business or for a purpose which is not
(c) To pay dissenting or withdrawing stockholders entitled to
strictly within the primary purpose in order to prevent the same from
payment for their shares under the provisions of this Code.
remaining idle and unprofitable.
For example, a corporation that is incorporated to engage in trading

Requirements: business may be allowed to lease its properties to interested parties. Lease
1. The capital is not impaired of the property is included in the term “investment of funds.” However, the
2. A legitimate and proper corporate purpose or objective is advanced SEC imposes the following requirements:
3. The corporate affairs warrant it 1. That the property is not presently used by the company and the
4. The transaction is designed and carried out in good faith leasing thereof is not made on a regular basis
5. There is no intention and there is no resulting undue advantage to 2. That by leasing the property, it will make it productive instead of
favored stockholders at the expense of the remainder allowing them to remain idle
6. The creditors are not prejudiced 3. That there are no express restrictions in the Articles of Incorporation
7. The corporation acts in good faith and without prejudice to the or By-Laws
rights of creditors and stockholders 4. That the leasing is not used as a scheme to prejudice corporate
8. There must be unrestricted retained earnings to purchase the creditors or result in the infringement of the Trust Fund Doctrine
5. That there must be compliance with the requirements of Section 41
shares
a. The power of the corporation to acquire its own shares is applicable Investment in Shares. RCCP does NOT cover passive investment, thus,
even if the mode of acquisition is through donation a corporation with idle funds may invest in shares for the purpose of
generating income.
Rationale. The general rule is that in the absence of statutory
authority, the corporation cannot acquire its own shares as the a. It is within the authority and business discretion of the Board of
investments of the shareholders are generally locked-in until the Directors or Trustees of a corporation to determine whether or not
liquidation. the investment by the corporation through acquisition of shares in
1. The corporation cannot increase or diminish its capital without the another corporation is reasonably necessary to accomplish its
sanction of the legislature primary purpose as stated in the Articles of Incorporation
2. The transaction is a fraud upon creditors
Investment in Notes
3. It is foreign to the purposes for which the corporation is created
− a corporation can invest its idle funds in bonds
a. There is also the view that purchase of shares can be considered a
− a corporation can also invest in corporate notes issued by private
violation of the Trust Fund Doctrine because the portion of the
corporations and government-owned or controlled corporations
capital is taken to the prejudice of the creditors
Section 42. Power to Declare Dividends. – The board of directors

Section 41. Power to Invest Corporate Funds in Another
of a stock corporation may declare dividends out of the unrestricted
Corporation or Business or for Any Other Purpose. – [[ Subject to
retained earnings which shall be payable in cash, property, or in
the provisions of this Code, a private corporation may invest its
stock to all stockholders on the basis of outstanding stock held by
funds in any other corporation, business, or for any purpose other
them: Provided, That any cash dividends due on delinquent stock
than the primary purpose for which it was organized, when approved
shall first be applied to the unpaid balance on the subscription plus
by a majority of the board of directors or trustees and ratified by the
costs and expenses, while stock dividends shall be withheld from the
delinquent stockholders until their unpaid subscription is fully paid:
outstanding capital stock, or by at least two thirds (2/3) of the
Provided, further, That no stock dividend shall be issued without the
members in the case of nonstock corporations, at a meeting duly
approval of stockholders representing at least two-thirds (2/3) of
called for the purpose. Notice of the proposed investment and the
the outstanding capital stock at a regular or special meeting duly
time and place of the meeting shall be addressed to each stockholder
called for the purpose.
or member at the place of residence as shown in the books of the
corporation and deposited to the addressee in the post office with [[ Stock corporations are prohibited from retaining surplus profits in
postage prepaid, served personally, or sent electronically in excess of one hundred percent (100%) of their paid-in capital stock,
accordance with the rules and regulations of the Commission on the = EXCEPTION ]] [[ except: (a) when justified by definite corporate
use of electronic data message, when allowed by the bylaws or done expansion projects or programs approved by the board of directors;
with the consent of the stockholders: = PURSUING SECONDARY or (b) when the corporation is prohibited under any loan agreement
PURPOSE ]] Provided, That any dissenting stockholder shall have with financial institutions or creditors, whether local or foreign, from
appraisal right as provided in this Code: [[ Provided, however, That declaring dividends without their consent, and such consent has not
where the investment by the corporation is reasonably necessary to yet been secured; or (c) when it can be clearly shown that such
accomplish its primary purpose as stated in the articles of retention is necessary under special circumstances obtaining in the
incorporation, the approval of the stockholders or members shall not corporation, such as when there is need for special reserve for
be necessary. = PURSUING PRIMARY PURPOSE ]] probable contingencies. = EXCEPTIONS TO THE EXCEPTION ]]
Pursuing Primary Purpose. Requires only the approval of the Board. Board Discretion. The Board has the discretion to declare dividends –
may it be cash, property or stock dividends.
Corporation as Incorporator. The implication is that even an
investment by a corporation as an incorporator would be subject to Board a. It is not necessary for the validity of dividend declaration to ask for
approval only – that is, NOT subject to stockholders’ or members’ approval or to seek for an advise from the SEC.
ratification – if the same is reasonably necessary to accomplish its HOWEVER, if declaration of stock dividend requires increase of the
primary purpose. authorized capital stock, approval by the SEC of the increase of the
authorized capital stock is necessary
Appraisal Right
− granted because the stockholder will be exposed to a line of business b. Dividends are payable only when there are profits earned by the
that is not being pursued when he invested in the company corporation
− his investment will be exposed to additional risks which was not c. General Rule: even if there are profits, the Board of Directors has
contemplated when he made the investment the discretion to determine whether or not dividends are declared
Meaning of Investment Requirements; Dividend Declaration
Page 48
1. Unrestricted Retained Earnings the shareholders. Consequently, the unrestricted retained

2. Resolution of the Board earnings of the corporation are diminished by the amount of
3. If stock dividends are declared, there must be a resolution of the the declared dividend while the stockholders’ equity is
Board with the concurrence of two-thirds (2/3) of the outstanding increased. Furthermore, the actual payment is the cash value
capital stock from the unrestricted retained earnings that each shareholder
foregoes for additional stocks/shares which he would otherwise
1.1. Property Dividends receive as required by the Corporation Code to be given to the
− those that are paid in property instead of cash where the stockholders subject to the availability and conditioned on a
surplus is in that form and it is practicable to so distribute certain level of retained earnings.15 Elsewise put, where the
them among the shareholders unrestricted retained earnings of a corporation are more than
− when a corporation has retained earnings arising out of its 100% of the paid-in capital stock, the corporate Board of
operations, properties that represent investments in the Directors is mandated to declare dividends which the
capital stock of the corporation may be declared as property shareholders will receive in cash unless otherwise declared as
dividends out of such retained earnings, PROVIDED said property or stock dividends, which in the latter case the
properties constitute assets in excess of other assets that are stockholders are forced to forego cash in lieu of property or
adequate to support the issued and outstanding capital stock stocks.
of the corporation
In essence, therefore, the stockholders by receiving stock
a. SEC rules provide that the property to be distributed as dividends are forced to exchange the monetary value of their
dividends shall constitute only of property which is no longer dividend for capital stock, and the monetary value they forego
intended to be used in the operation of the business of the is considered the actual payment for the original issuance of
corporation and which are practicable to be distributed as
the stocks given as dividends. Therefore, stock dividends
dividends acquired by shareholders for the monetary value they forego
b. The issuance of the property dividends shall NOT result in an
are under the coverage of the SRF and the basis for the latter
inequitable distribution of property to the stockholders in terms is such monetary value as declared by the board of directors.
of the book values and market values, if any, of the property
distributed MEMORANDUM CIRCULAR NO. 11, SERIES OF 2009
c. When the distribution of dividends is made where some (GUIDELINES ON THE DETERMINATION OF RETAINED EARNINGS
stockholders will receive cash and the others will receive AVAILABLE FOR DIVIDEND DECLARATION)
property, the prevailing market value of the property, as
agreed upon by the stockholders shall be considered in Pursuant to Sections 43 and 143 of the Corporation Code of the Philippines
determining the equitable distribution of the total dividends and Section 5 of the Securities Regulation Code, the following guidelines are
set forth below and adopted in determining the appropriate amount of
1.2. Stock Dividends Retained Earnings available for dividend distribution taking into consideration
− The earnings are distributed to the stockholders in the form the effective accounting standards and rules of the Commission.
of shares of stock
− it involves the conversion of surplus or undivided profits into SECTION 1. These guidelines shaft cover the determination of availability of
capital retained earnings for the following dividend declarations of stock corporations
− they may be declared for the following REASONS: órganized and existing under the Corporation Code of the Philippines, to wit:
i. The corporation simply desires a larger permanent capitalization a) Cash dividend,
ii. The market price may have increased above a desirable trading b) Property dividend; and
range and stock dividend will generally reduce the per share c) Stock dividend.
market value of the company’s stocks
SECTION 2. Definition of Terms.
iii. The corporation may wish to have more stockholders and
expects to eventually increase their number by increasing the Retained Earnings - the accumulated profits realized out of normal and
number of shares outstanding continuous operations of the business after deducting therefrom
iv. Stock dividends may be used to satisfy stockholders’ demands distributions to stockholders and transfers to capital stock or other accounts.
for cash dividends when the corporation may not be willing to The Retained Earnings shall be the amount as shown in the financial
pay cash dividends but have enough unrestricted retained statements audited by the company’s independent auditor. If applicable,
earnings such amount shall refer to the retained earnings of the parent company but
not the consolidated financial statements.
Philippine Long Distance Telephone Company (PLDT) v.
National Telecommunications Commission (NTC) Unrestricted Retained Earnings - the amount of accumulated profits and
gains realized out of the normal and continuous operations of the company
Dividends, regardless of the form these are declared, that is, after deducting therefrom distributions to stockholders and transfers to
cash, property or stocks, are valued at the amount of the capital stock or other accounts, and which is: (1) not appropriated by its
declared dividend taken from the unrestricted retained earnings Board of Directors for corporate expansion projects or programs; (2) not
of a corporation. Thus, the value of the declaration in the case covered by a restriction for dividend declaration under a loan agreement;
of a stock dividend is the actual value of the original issuance and (3) not required to be retained under special circumstances obtaining
in the corporation such as when there iS a need for a special reserve for
of said stocks. In G.R. No. 127937 we said that "in the case of
probable contingencies.
stock dividends, it is the amount that the corporation transfers
from its surplus profit account to its capital account" or "it is Outstanding capital stock - means the total shares of stock issued to
the amount that the corporation receives in consideration of the subscribers or stockholders, whether or not fully or partially pa id (as long
original issuance of the shares." It is "the distribution of current as there is a binding subscription agreement). except treasury shares.
or accumulated earnings to the shareholders of a corporation
pro rata based on the number of shares owned."14 Such Board — Board of Directors.
distribution in whatever form is valued at the declared amount
Dividend — refers to corporate profits allocated, lawfully declared and
or monetary equivalent.
ordered by the directors to be paid to the stockholders on demand or at a
fixed time.
Thus, it cannot be said that no consideration is involved in the
issuance of stock dividends. In fact, the declaration of stock Delinquent Subscription — refers to a subscription that has been declared
dividends is akin to a forced purchase of stocks. By declaring by the Board as such after the subscriber failed to settle the same after a
stock dividends, a corporation ploughs back a portion or its period of 30 days from the date the subscription became due as specified in
entire unrestricted retained earnings either to its working the contract of subscription or in the call made by the board of directors.
capital or for capital asset acquisition or investments. It is
simplistic to say that the corporation did not receive any actual Paid-in Capital - the amount of outstanding capital stock and additional paid-
payment for these. When the dividend is distributed, it ceases in capital or premium paid over the par value of shares.
to be a property of the corporation as the entire or portion of
SECTION 3. Items affecting the Unrestricted Retained Earnin gs Account from
its unrestricted retained earnings is distributed pro rata to
an accounting purvie›':
corporate shareholders. a. Nominal or temporary or income statement accounts closed to Income
and Expense Summary at the end of the period to determine actual results
When stock dividends are distributed, the amount declared
ceases to belong to the corporation but is distributed among
Page 49
of operations during the period and further closed to Retained Earnings shall be net of any qualification made by the auditor on the
Account; realizability of certain asset accounts that would later on possibly
b. Effects of changes in accounting policy; reduce the balance thereof
c. Foreign exchange gains and losses;
d. Actuarial gains or losses; b. What is Included in Retained Earnings
e. Share in the net income of associates/joint vcnture accountcd under i. Paid-in Surplus
equity method of accounting; − cannot be declared as dividends because they are part of
f. Dividend declarations during the period; capital
g. Appropriations of Retained Earnings during the period; − it is the difference between the par value and the issued value
h. Reversals of appropriations; or selling price of the shares and are not therefore considered
i. Effects of prior period adjustments; profits earned in the conduct of the business
j. Treasury shares. − also called “premium”
− Additional Paid-in Capital (APIC) involves the infusion of
SECTION 5. Retained earnings available for dividends. Dividends, whether
cash or property by a stockholder wherever no additional
cash, property or stock, shall be declared out of unrestricted retained earnings
shares are issued in consideration thereof
of the Corporation. Accordingly, a corporation cannot declare dividends when
it has zero or negative retained earnings otherwise known as Retained ii. Revaluation Surplus
Earnings deficit. For such purpose, the surplus profits or income must be a − if there is an increase in the value of assets
bona fide income founded upon actual earnings or profits. The existence, − generally, they cannot be declared as dividend because they
therefore, of surplus profits arising from the operation of corporate business cannot be considered earnings of the corporation, as they are
is a condition precedent to the declaration of dividend. by nature subject to fluctuations
− that may be surplus, but it is not yet earned; it is unrealized
For purposes of these Guidelines, the phrase “actual earnings or profits”. as value
mentioned above shall be the net income for the year based on the audited
financial statements, adjusted for unrealized items discussed below, which are 1) By way of exception, the SEC allowed the distribution of the
considered not available' for dividend declaration. portion of the increase in the value of fixed assets as a result
a. Share/equity in net income of the associate or joint venture accounted of revaluation thereof after the assets are depreciated and the
for equity method as the same is not yet actually earned or realized. It is depreciation is charged against the operation provided the
only after the investee company declares such income as dividend that said following conditions are complied with:
income is actually realized or the earnings becomes available for dividend a) The company has sufficient income from the operations
declaration. Due to the effect on the investment account, only cash or from which the depreciation on the appraisal increase is
property dividends declared by the investee-company shall be considered charged;
as earnings declarable as dividends by the investor company; b) The company has no deficit at the time the depreciation on
b. Unrealized foreign exchange gains, except those attributable to cash and
the reappraisal increase was charged to operations;
cash equivalents, for the time being that they are not yet actual income
c) Such depreciation on the appraisal increase previously
prior to realization of such foreign exchange gain;
charged to operations is not erased or impaired by
c. Unrealized actuarial gains which is the result when the company chooses
the option of recognizing actuarial gains or losses directly to profit or loss
subsequent losses, otherwise, only that portion not
statement; impaired by subsequent losses is available for dividend
d. Fair value adjustment or the gains arising only from marked-to-market iii. Gain from Sale of Real Property
valuation which are not yet realized; − available for dividend declaration because they are part of
e. The amount of recognized deferred tax asset that reduced the amount of retained earnings
income tax expense and increased the net income and retained earnings,
− retained earnings include not only earnings realized from the
until realized;
ordinary course of business of the corporation but also those
f. Adjustment due to deviation from PFRS/GAAP of the audited financial
arising from transactions not associated with but incidental to
statements which results to gain;
or necessary in keeping the business for which the corporation
g. Other unrealized gains or adjustments to the retained earnings brought
about by certain transactions accounted for under the PFRS such as was organized
accretion income under IAS 39, Day 1 gains on initial recognition of financial iv. Treasury Shares
instruments, reversal of revaluation increment lo retained earnings, and − cannot be declared as stock dividends or cash dividends
negative goodwill on investments in associate; because they are not considered part of earned or surplus
h. Other adjustments that the Commission may prescribe by amending the profits
Annex "A" of these Guidelines. − if allowed, the corporation would be converted into both a
debtor and creditor for the same amount at the same time
Additional Paid-In Capital Stock shall neither be declared as dividend nor shall
it be reclassified to absorb deficiency except through an organizational 1) A corporation may use treasury share as property dividend
restructuring duly approved by the Commission. ONLY IF the amount of the retained earnings previously used
to support their acquisition has not been subsequently impaired
SECTION 6. Reconciliation of Retained Earnings for Dividend Declaration. by losses – as it is not considered part of earned or surplus
profits that is distributable as dividends
a. For listed companies, corporations with registered securities under the
Securities Regulation Code, and public companies', the reconciliation of v. Interim Income
retained earnings under Annex "A" of these Guidelines shall be presented − the presence of unrestricted retained earnings can be
as one of the schedules in the audited financial statements and shall be determined only at the end of the fiscal year
covered by an auditor's report similar to that provided for Schedules A-I − corporation will not be able to know if there are earnings until
under SRC Rule 68.1. Said entities arc likewise required to provide in their the end of the year
financial statements a description of any appropriation or restriction on their − thus, as a general rule, there can be no dividend declaration
retained earnings.
for profits in a fiscal year that has not yet expired
Retained Earnings and Unrestricted Retained Earnings 1) By way of exception, the SEC allowed dividends to be declared
a. No Dividends from Capital out of interim profits so long as the following are present:
a) The amount of dividends involved would not be impaired by
− EXCEPTION is with respect to “wasting assets corporations”
losses during the remaining period of the year
which are corporations solely or principally engaged in the
b) The projected income for the remaining period shall be
exploitation of “wasting assets”
submitted to the SEC
i. The Trust Fund Doctrine will be violated if dividends are declared c) Should the company sustain losses during the remaining
out of capital EXCEPT only in two instances: (1) liquidating period, the dividends should be refunded
dividends and (2) dividends from investments in Wasting Assets
Corporation Who is Entitled
The Trust Fund Doctrine considers the subscribed capital as a − stockholders are entitled to dividends pro rate based on the total
trust fund for the payment of the debts of the corporation to number of shares and NOT on the amount paid for the shares
which the corporation may look for satisfaction − only the stockholders AT THE TIME of declaration are entitled
ii. In determining the existence of unrestricted retained − dividends declared before the transfer of shares belong to the
earnings for purposes of dividend declaration, the SEC primarily transferor, and dividends declared AFTER the transfer belong to the
relies on the audited financial statement of the corporation as of transferee
the last fiscal year immediately preceding the declaration, which
Page 50
− dividends belong to the person who owns the stock when the i. Certification, under oath, by the corporate secretary, on the Board
dividend is declared resolution declaring the property dividends
− HOWEVER, a record date may be provided, wherein a future ii. List of stockholders and the allocation of the property dividend, as
date is specified declaring that the dividend shall be payable to certified by the corporate secretary
those who are stockholders of record on such specified future iii. Audited financial statement as of the last fiscal year, stamped received
by the SEC and the BIR
date
iv. Detailed schedule of the property account appearing in the audited
a. Even unpaid subscribers are entitled to dividends, provided NOT financial statements
delinquent v. Certification by the president that the property is no longer needed in
HOWEVER, any cash dividends shall first be applied to the unpaid the operation of the company
balance on the subscription plus cost and expenses, while stock
dividends shall be withheld from the delinquent shareholder until
his unpaid subscription is fully paid
Vesting. The right of stockholders to be paid dividends accrues as soon Section 43. Power to Enter into Management Contract. – No
as the declaration is made. corporation shall conclude a management contract with another
corporation unless such contract is [[ approved by the board of
a. As soon as the dividend has been fully declared by the directors, directors and by stockholders owning at least the majority of the
and the corporation becomes their debtor for their respective outstanding capital stock, or by at least a majority of the members
shares in the dividends, it also necessarily follows that neither the in the case of a nonstock corporation, of both the managing and the
same Board nor its successor(s) can afterwards reconsider the
managed corporation, at a meeting duly called for the purpose:
Board’s action and revoke the declaration of a legally declared
Provided, That (a) where a stockholder or stockholders representing
dividend without the stockholders’ consent
the same interest of both the managing and the managed
b. HOWEVER, when it comes to stock dividends, the rule that the
corporations own or control more than one-third (1/3) of the total
declaration cannot be revoked does NOT apply as declaration of
stock dividends can be revoked before the issuance of the dividend outstanding capital stock entitled to vote of the managing
declaration. corporation; or (b) where a majority of the members of the board of
In case of cash dividend, the amount to be distributed is severed directors of the managing corporation also constitute a majority of
from the general fund and becomes the property of the the members of the board of directors of the managed corporation,
stockholders pro rata as soon as the dividend is voted, while in the then the management contract must be approved by the
case of a stock dividend, all formalities necessary to a valid increase stockholders of the managed corporation owning at least two-thirds
of stock must be complied with before the stockholders are entitled (2/3) of the total outstanding capital stock entitled to vote, or by at
to anything, and the mere declaration of the dividend does not, least two-thirds (2/3) of the members in the case of a nonstock
therefore, give them vested right corporation. = APPROVING AUTHORITY ]]
c. With respect to cash dividends, the funds are actually not set apart
from the general mass of the company’s funds and are not [[ These shall apply to any contract whereby a corporation
appropriated for the payment of dividend that has been declared; undertakes to manage or operate all or substantially all of the
hence, the stockholders are not entitled to any preference over the business of another corporation, whether such contracts are called
general creditors, they stand also as general creditors of the service contracts, operating agreements or otherwise: Provided,
corporation who can come in only together with such other general however, That such service contracts or operating agreements which
creditors looking to the general estate for liquidation of their relate to the exploration, development, exploitation or utilization of
dividend debt
natural resources may be entered into for such periods as may be
Amount. The amount to be declared as dividends depends upon the provided by the pertinent laws or regulations. = MANAGEMENT
amount of the unrestricted retained earnings which shall be declared pro CONTRACT ]]
rata UNLESS there are preferred shares that are entitled to a fixed
percentage. No management contract shall be entered into for a period longer
than five (5) years for any one (1) term.
a. When it comes to stock dividends, the corporation is not required
to pay dividend according to their par values;
Stock dividends can be declared at a premium (at value higher than Management Contract
par); a. The maximum term prescribed is five years, HOWEVER, it was
Considering that selling of shares of stock at a premium is not intended that this period may be subject to renewal;
prohibited, stock dividends indirectly take the nature of sales of BUT, if, on the basis of experience, there has been some abuse on
shares of stock at a premium the part of the managing corporation, the contract will not be
renewed for another term
Reportorial Requirement with SEC. The right to dividend accrues b. A management contract cannot be entered into with a foreign
even if there is no SEC approval, HOWEVER, a declaration of dividend corporation for partly or wholly nationalized activities that are
shall be reported to the SEC within 15 days from date of declaration. covered by the Anti-Dummy Law
a. Cash Dividend Declaration

i.Certification, under oath, by the corporate secretary, of the Board
resolution declaring the cash dividends
ii. Audited financial statements as of the last fiscal year, stamped Section 44. Ultra Vires Acts of Corporations. – No corporation shall
received by the SEC and the BIR possess or exercise corporate powers other than those conferred by
iii. Interim audited financial statements used as the basis for such this Code or by its articles of incorporation and except as necessary
declaration
or incidental to the exercise of the powers conferred.
iv. Project income statement for the remaining period certified by the
company accountant
v. Reconciliation of retained earnings available for dividend declaration
Ultra vires Acts; Concept
certified by an independent auditor
− those powers that are not conferred to the corporation by the RCCP
b. Stock Dividend Declaration
and special laws, by its Articles of Incorporation and those that are
i. Certification, under oath, by the corporate secretary, of the
declaration of stock dividends by majority of the directors and the
not implied or necessary or incidental to the exercise of the powers
stockholders representing at least 2/3 of the outstanding capital stock so conferred
ii. Audited financial statements as of the last fiscal year, stamped − one committed outside the object for which a corporation is created
received by the SEC and the BIR − an act outside or beyond express, implied and incidental corporate
iii. Interim audited financial statements used as the basis for such powers
declaration − can also include those acts that may ostensibly be within such
iv. Projected income statement for the remaining period powers but are, by general or special laws, either proscribed or
v. Reconciliation of retained earnings available for dividend declaration declared illegal
certified by an independent auditor − NOT necessarily “patently unlawful acts,” hence, the directors are
c. Property Dividend Declaration NOT personally liable
Page 51
Presumption of Validity b. If a corporation acted outside its authority in taking or holding

University of Mindanao, Inc. v. Bango Sentral ng Pilipinas title to property, the validity of Torrens Certificate of Title cannot
be questioned on the ground that the corporation was without
This court ruled that a contract executed by a corporation shall be authority or exceeded its authority in taking or holding the
presumed valid if on its face its execution was not beyond the powers property
of the corporation to do. Thus: c. When the contract is executory on one side and has been fully
When a contract is not on its face necessarily beyond the scope of performed on the other, the party who has received benefits from
the power of the corporation by which it was made, it will, in the the performance is estopped in claiming that the contract is ultra
absence of proof to the contrary, be presumed to be valid. vires
Corporations are presumed to contract within their powers. The d. When both contracts are wholly executory on both sides, neither
doctrine of ultra vires, when invoked for or against a corporation, party can maintain n action – since the only injustice that will be
should not be allowed to prevail where it would defeat the ends of caused is loss of prospective profits but the protection of the
justice or work a legal wrong. stockholders may be a sufficient ground to enjoin the
performance of the act
Distinguished from Other Acts
Voidable
Pirovano v. De la Rama Steamship Company, Inc. Pirovano v. De la Rama Steamship Company, Inc.
Corporate transactions, which are illegal because prohibited by statute Ratification must be knowingly and voluntarily done, hence, a
or against public policy, are ordinarily void and unenforceable corporation cannot be deemed to have ratified an ultra vires contract
regardless of performance, ratification, or estoppel. In other words, an if the corporation lacks of knowledge about the contract executed in its
act of the corporation which is either illegal or outside of express, name.
implied or incidental powers as so provided by the law or the charter
would be VOID under Article 1409 of the Civil Code, and the act is NOT a. The effect of ultra vires contracts for both partially executed and
susceptible to ratification. wholly executed contracts can still be maintained on the basis of
estoppel; HOWEVER, estoppel cannot be invoked against the State.
Generally, a transaction within corporate powers but executed in an
irregular or unauthorized manner is VOIDABLE only, and may become
enforceable by reason of ratification or express or implied assent by
the stockholders or by reason of estoppel of the corporation or the TITLE V
other party to the transaction to raise the objection, particularly where BYLAWS
the benefits are retained.
Rural Bank of Milaor (Camarines Sur) v. Ocfemia, et. al. SEC. 45. Adoption of Bylaws. – [[ For the adoption of bylaws by
the corporation, the affirmative vote of the stockholders
Where the act is within corporate powers but the board has acted representing at least a majority of the outstanding capital stock, or
without being competent to independently do so, the action is not of at least a majority of the members in case of nonstock
necessarily and totally devoid of effects, and it may generally be corporations, shall be necessary. = POST-INCORPORATION ]]
ratified expressly or impliedly. Thus, an acceptance of benefits derived The bylaws shall be signed by the stockholders or members voting
by the shareholders from an outside investment made by the board
for them and shall be kept in the principal office of the corporation,
without the required concurrence of the stockholders may,
subject to the inspection of the stockholders or members during
nonetheless, be so considered as an effective investment. It may be
office hours. A copy thereof, duly certified by a majority of the
said, however, that when the board resolution is yet executory, the act
directors or trustees and countersigned by the secretary of the
should aptly be deemed inoperative and specific performance cannot
be validly demanded but, if for any reason, the contemplated action is corporation, shall be filed with the Commission and attached to the
carried out, such principles as ratification or prescription when original articles of incorporation.
applicable, normally unknown in void contracts, can serve to negate a
[[ Notwithstanding the provisions of the preceding paragraph,
claim for the total nullity thereof.
bylaws may be adopted and filed prior to incorporation; in such case,
Corporate officers, in their case, may act on such matters as may be such bylaws shall be approved and signed by all the incorporators
authorized either expressly by the By-laws or Board Resolutions or and submitted to the Commission, together with the articles of
impliedly such as by general practice or policy or as are implied by incorporation. = PRE-INCORPORATION ]]
express powers. When officers are allowed to act in certain particular
cases, their acts conformably therewith can bind the company. Hence, In all cases, bylaws shall be effective only upon the issuance by the
a corporate officer entrusted with general management and control of Commission of a certification that the bylaws are in accordance with
the business has the implied authority to act or contract for the this Code.
corporation which may be necessary or appropriate to conduct the
ordinary business. 9 If the act of corporate officers comes within The Commission shall not accept for filing the bylaws or any
corporate powers but it is done without any express or implied amendment thereto of any bank, banking institution, building and
authority therefor from the by-laws, board resolutions or corporate loan association, trust company, insurance company, public utility,
practices, such an act does not bind the corporation. The Board, educational institution, or other special corporations governed by
however, acting within its competence, may ratify the unauthorized act special laws, unless accompanied by a certificate of the appropriate
of the corporate officer. So, too, a corporation may be held in estoppel government agency to the effect that such bylaws or amendments
from denying as against innocent third persons the authority of its are in accordance with law.
officers or agents who have been clothed by it with ostensible or
apparent authority.
SEC. 46. Contents of Bylaws. – A private corporation may provide
Effects of Ultra Vires Acts
the following in its bylaws:
− third persons dealing with corporations cannot assume that
a. The time, place and manner of calling and conducting regular
corporations have powers – it is up to those persons dealing with
or special meetings of the directors or trustees;
corporations to determine their competence as expressly defined
b. The time and manner of calling and conducting regular or
by law and their articles of incorporation
− HOWEVER, if the ultra vires act is not because it is illegal but special meetings and mode of notifying the stockholders or
because it is not an express, implied or incidental power, the same members thereof;
may be enforced c. The required quorum in meetings of stockholders or members
and the manner of voting therein;
• General prohibitions against exceeding corporate powers may not
d. The modes by which a stockholder, member, director, or
preclude enforcement of the transaction and an action may be had
trustee may attend meetings and cast their votes;
for the part unaffected by the illegality or for equitable restitution
e. The form for proxies of stockholders and members and the
a. A corporation that is engaged in ultra vires business is liable for
manner of voting them;
torts committed by its agents within their authority in the course
of that business
Page 52
f. The directors’ or trustees’ qualifications, duties and − Articles of Incorporation should be given more weight
responsibilities, the guidelines for setting the compensation of 3. It must not be contrary to morals or public policy
directors or trustees and officers, and the maximum number of − the provisions must be reasonable and must not be
other board representations that an independent director or discriminatory, arbitrary, or oppressive upon the shareholders
trustee may have which shall, in no case, be more than the − for example, while additional qualifications can be provided, the
same should be applicable to all and not merely to one or a group
number prescribed by the Commission;
of shareholders
g. The time for holding the annual election of directors or trustees
4. It must not disturb vested rights, impair contract or
and the mode or manner of giving notice thereof;
property rights of stockholders or members or create
h. The manner of election or appointment and the term of office
obligations not sanctioned by law
of all officers other than directors or trustees;
i. The penalties for violation of the bylaws; Binding Effect
j. In the case of stock corporations, the manner of issuing stock − binding not only upon the corporation but also on its stockholders,
certificates; and members, and those having direction and management and control
k. Such other matters as may be necessary for the proper or of its affairs
convenient transaction of its corporate affairs for the promotion − NOT binding on subordinate employees having no actual knowledge
of good governance and anti-graft and corruption measures. of the provisions thereof
− as to third persons, the By-Laws provisions are also NOT binding
An arbitration agreement may be provided in the bylaws pursuant UNLESS there is actual knowledge
to Section 181 of this Code.
Contents
• the corporate officers, other than the President, Treasurer or
By-Laws; Concept Corporate Secretary, may be specifically identified in the By-Laws
− rules and regulations or private laws enacted by the corporation to • the manner of election of directors may not be provided for because
regulate, govern, and control its own actions, affairs and concerns the provision on election of directors is mandatory
and of its stockholders or members and directors and officers in • for instance, the By-Laws of a stock corporation cannot dispense
relation thereto and among themselves in their relation to the with cumulative voting;
corporation • By-Laws can also not provide that certain shareholders shall have
− written into the charter and become part of the fundamental law of two votes per share
the corporation • if there is no penalty provided in the By-Laws, the corporation is
• By-Laws is a permanent rule of action and mode of conduct of not precluded from using any other remedy provided by law
corporate affairs, while a Board resolution ordinarily applies only to • in the case of stock corporations, the manner of issuing stock
a single act of a corporation certificates may likewise be provided for; HOWEVER, the same
• where the resolution of the directors is inconsistent with the By- cannot restrict or affect vested rights of stockholders – the right to
Laws, the By-Laws will prevail transfer their shares
Nature of Powers When By-Laws Prevail

− every corporation has the inherent power to adopt By-Laws for its − while directors may adopt internal rules, such internal rules must
internal government and to regulate the conduct and prescribe the be consistent with the provisions of the By-Laws
rights and duties of its members towards itself and among − agreements among shareholders must also be consistent with the
themselves in reference to the management of its affairs provisions of the By-Laws
− necessary and inseparable legal incidents
Effect of Non-Adoption
− corporation is NOT automatically dissolved if no By-Laws are
SEC. 47. Amendment to Bylaws. – A majority of the board of
adopted within the period of one (1) month from receipt of official
notice of issuance by the SEC of its certificate of incorporation directors or trustees, and the owners of at least a majority of the
− By-Laws can be filed after incorporation; outstanding capital stock, or at least a majority of the members of
− even without By-Laws, the corporation exists as a juridical entity a nonstock corporation, at a regular or special meeting duly called
and can exercise the powers of a corporation for the purpose, may amend or repeal the bylaws or adopt new
− with respect to OPC, the RCCP is explicit that the filing of the By- bylaws. [[ The owners of two-thirds (2/3) of the outstanding capital
Laws is NOT required stock or two-thirds (2/3) of the members in a nonstock corporation
may delegate to the board of directors or trustees the power to
SECTION 6, PRESIDENTIAL DECREE NO. 902-A amend or repeal the bylaws or adopt new bylaws: = DELEGATION
TO THE BOARD ]] [[ Provided, That any power delegated to the
SEC has the power to suspend or revoke, after proper notice and hearing,
board of directors or trustees to amend or repeal the bylaws or adopt
the franchise or certificate of registration of corporations for failure to file
new bylaws shall be considered as revoked whenever stockholders
the By-Laws within the required period
owning or representing a majority of the outstanding capital stock
Sawadjaan v. Court of Appeals or majority of the members shall so vote at a regular or special
meeting. = REVOCATION OF DELEGATED POWER ]]
A corporation that failed to submit the By-Laws “may be considered a de
facto corporation whose right to exercise corporate powers may not be [[ Whenever the bylaws are amended or new bylaws are adopted,
inquired into collaterally in any private suit to which such corporation the corporation shall file with the Commission such amended or new
may be a party. bylaws and, if applicable, the stockholders’ or members’ resolution
authorizing the delegation of the power to amend and/or adopt new
REQUISITES bylaws, duly certified under oath by the corporate secretary and a
1. It must be consistent with the Constitution, RCCP, and other majority of the directors or trustees. = FILING WITH SEC ]]
pertinent laws and regulations
• for example, a provision in the By-Laws creating a permanent The amended or new bylaws shall only be effective upon the
seat in the Board is contrary to the provisions of the RCCP issuance by the Commission of a certification that the same is in
• the fact that the provisions of the By-Laws, which are contrary to accordance with this Code and other relevant laws.
law, have not been questioned for several years cannot forestall
the challenge to their validity;
• neither can the By-Laws provisions attain validity through Two Ways to Amend By-Laws
acquiescence because it is beyond the power of the members to 1. Can be made by the stockholders/members together with the
waive their invalidity Board
• any action to have a provision of the By-Laws declared null and 2. By the Board only after due delegation by the
void for being contrary to law is imprescriptible; HOWEVER, stockholders/members
amendment is likewise an available remedy
2. It must be consistent with the Articles of Incorporation Amendment by the Board and the Stockholders
Page 53
• in the absence of an express provision denying the right to vote by Perfection of Subscription Contract. The contract is formed by an
proxy in Articles of Incorporation or By-Laws, proxies may validly offer by one of the parties, the corporation or the subscriber, as the case
amend the corporation’s By-Laws may be, and an acceptance of this offer by the other.
Stockholders Meeting Required. Necessary both for delegation of the Mode of Acquiring Ownership
power to amend the By-Laws and the revocation of the delegated power. − no formality is necessary for the protection, validity, or
enforceability of the subscription contract
Modification of Requirements in the By-Laws − subscriber becomes a shareholder when the contract takes effect
• the required vote of the stockholders and members must be (or when the corporation’s life commences in pre-incorporation
followed in order for the amendment to be valid subscription agreements)
• these minimum requirements cannot be lowered to a mere vote of
25% of 1/4 of the outstanding capital stock or members a. Tradition or delivery of the right as shareholder in effect occurs
• unanimous vote is never required when the contract takes effect thereby also making the contract
effective and enforceable
Filing with SEC. If the SEC approves the amended By-Laws, the The subscriber’s right is exercised the moment the contract takes
approval has the presumption of regularity. effect because the right of the subscriber as shareholder accrues
or is assumed the moment the subscription contract takes effect or
the moment the Certificate of Incorporation is issued
It is also for this reason that the subscription contract cannot be
TITLE VII deemed covered by the Statute of Frauds because the contract is
STOCKS AND STOCKHOLDERS always partially executed with the acquisition of ownership
Stock Options and Warrant

SEC. 59. Subscription Contract. – Any contract for the acquisition
of unissued stock in an existing corporation or a corporation still to a. Stock option is a privilege granted to a party to subscribe to a
certain portion of the unissued capital stock of a corporation within
be formed shall be deemed a subscription within the meaning of this
a specified period and under the terms and conditions of the grant,
Title, notwithstanding the fact that the parties refer to it as a
exercisable by the grantee at any time within the period granted
purchase or some other contract.
b. Warrant is a type of security which entitles the holder to the right
to subscribe to the unissued capital stock of a corporation or to
Acquisition of Share. A person may become a stockholder in a purchase issued shares in the future, evidenced by a warrant
corporation by voluntarily acquiring a share, which may be through (1) certificate, whether detachable or not, which may be sold or offered
purchase (from the corporation itself or from other shareholders) or (2) for sale to the public BUT DOES NOT apply to a right granted under
through subscription. an option plan duly approved by the SEC for the benefit of the
employees, officers and/or directors of the issuing corporation
a. Difference Between Subscription and Purchase The period to subscribe is not less than one (1) year but not
SUBSCRIPTION PURCHASE more than five (5) years
TIME WHEN THEY Can be made before c. Different Types of Warrants
Made only after
ARE ENTERED or after i. Subscription Warrants. Entitles the shareholder to the right to
incorporation
INTO incorporation subscribe to a pre-determined number of shares out of the
Reciprocal; unissued capital stock of the issuer.
Subscriber in a ii. Covered Warrant. Entitles the holder to the right to purchase
IF THERE IS NO Purchaser must fully
subscription from the Issuer a pre-determined number of shares that are
AGREEMENT AS TO pay the purchase
agreement need already issued.
THE TIME OF price at the time the
NOT pay unless iii. Warrant Certificate. Certificate representing the right to a
PAYMENT shares are
there is a call Warrant, which may be detachable or not, duly issued by the
transferred
Stockholder who Issuer to the Warrant holder.
Subscriber cannot be iv. Warrant Instrument. Written document or deed containing the
sells his shares can
released from his terms and conditions of the issue and exercise of a Warrant,
CONDONATION condone the
obligation to pay the which terms and conditions shall include: (a) the maximum
obligation of the
subscription price underlying shares that can be purchased upon exercise; (b) the
purchaser to pay
APPLICATION OF Does NOT apply to Applies to purchase exercise period; and (c) such other terms and conditions as the
STATUTE OF subscription IF the price is not SEC may require.
FRAUDS contracts less than P500.00 v. Detachable Warrant. Warrant that may be sold, transferred or
assigned to any person by the Warrant holder separate from, and
b. Only persons whose ownership are registered in the stock and independent of, the corresponding Beneficiary Securities.
transfer book are considered stockholders of record vi. Non-Detachable Warrant. Warrant that may NOT be sold,
The rights of shareholder accrue only upon entry of his name in the transfer or assigned to any person by the Warrant holder
books of corporation separate from, and independent of, the Beneficiary Securities.
A person cannot be recognized as a stockholder by mere vii. Beneficiary Securities. Shares of stock and other securities of
presentation of dividend coupons if his ownership is NOT recorded the Issuer which form the basis of the entitlement in a Warrant.
c. Mere inclusion in the General Information Sheet (GIS) submitted viii. Underlying Shares. The unissued shares of a corporation that
to the SEC is insufficient may be purchased by the Warrant holder upon the exercise of
As between the GIS and the corporate records, the latter should the right granted under the Warrant.
prevail
Parties
d. With respect to original subscribers, they become shareholders
− subscriber AND the corporation itself
from the time of the issuance of the Certificate of Incorporation by
− necessarily involves the corporation as one of the contracting
the SEC – even if the Corporate Secretary failed to reflect such fact
parties because the corporation owns the subject matter of the
in the Stock and Transfer Book
transaction – its shares of stock
e. One can likewise become the owner of shares through the other
− it is NOT a mere contract between the subscribers even if the other
modes of acquiring ownership under the New Civil Code –
subscribers entered into an agreement prior to incorporation
succession and donation
− subscribers are NOT REAL PARTIES-IN-INTEREST in a case for
Transfer can also be gratuitous;
rescission of the subscription contract of another subscriber
In assignment of shares, the transfer of ownership is through
because they are not parties thereto
tradition or delivery
a. Consequently, an original subscriber CANNOT withdraw from the
Subscription Contract. A contract by which the subscriber agrees to pre-incorporation subscription agreement without the consent of all
take a certain number of shares of the capital stock of a corporation, by shareholders
paying the consideration therefor or expressly or impliedly promising to
pay for the same. Trustees and Nominees
− shares may be issued in trust for another person
Page 54
− the shares may be registered in the name of one person but the paid-in capital or premium that forms part of the capital of the
beneficial ownership may belong to another corporation.
− trustee may even be a nominee who holds the shares for another
to qualify said nominee as director Velasco v. Poizat
− nominee is a person in whose name a stock certificate is
registered but who is NOT the actual owner thereof Trust Fund Doctrine is violated: (1) when the corporation releases
or condones payment of the unpaid subscription and the stockholder
Number of Shares Covered has no right to demand the refund of his investment; (2) when there
− may cover one or more shares is payment of dividends without unrestricted retained earnings; (3)
− BUT even if it covers two or more shares, the subscription when properties are transferred in fraud of creditors; (4) when
agreement is considered an indivisible contract properties are disposed or undue preference is given to some
− subscriber need NOT enter into only one subscription agreement if creditors even if the corporation is insolvent; (5) when the capital
he will take two or more shares stock is decreased which has the effect of relieving the stockholders
of the obligation to pay their respective subscription.
Form
− there is NO law or rule requiring a form of subscription to capital a. The Trust Fund Doctrine provides that subscriptions to the capital
stock as a requisite for its validity; hence, the same need NOT be stock of a corporation constitute a fund to which the creditors have
in writing a right to look for the satisfaction of their claims.
− agreement may arise out of mutual dealings between an i. Procedure for the distribution of capital assets, embodied in the
individual and the corporation RCCP, which allows the distribution of corporate capital only in
the following instances: (a) amendment of the Articles of
Kinds Incorporation to reduce the authorized capital stock, (b) purchase
a. Pre-Incorporation Subscription Contract. One entered into of redeemable shares by the corporation, regardless of the
before incorporation. existence of unrestricted/retained earnings, and (c) dissolution
b. Post-Incorporation Subscription Contract. Entered into after and eventual liquidation of the corporation
the issuance of the certificate of incorporation. ii. Power of the corporation to acquire its own shares
a) Subscription contract may pertain to shares that are part of the iii. Prohibition against the distribution of corporate assets and
Authorized Capital Stock appearing in the Articles of Incorporation property UNLESS the stringent requirements therefore are
or those that involve shares in the increase of capital stock complied with
b) Subscription contract may be conditional or unconditional. iv. Stockholder has no right to demand for the return of his
A subscription upon a condition precedent or a conditional investment – “locked-in” until the liquidation of the corporation
subscription is a subscription that does not take effect so as to
make the subscriber a stockholder, or confer rights until the Fraud Theory
− if shares are issued to shareholders who have not yet paid the
condition is satisfied
subscription price, the corporate creditors have the right to go after
Trust Fund Doctrine the shareholders in case of insolvency
− the subscribed capital stock of the corporation is a trust fund for − if said theory is applied, the liability of the shareholders is explained
the payment of debts of the corporation which the creditors have by submitted to the proposition that there is deemed to be
the right to look up to satisfy their credits representation to the creditor to the effect that the shares were
− the corporation may NOT dissipate this and the creditors may sue paid before their issuance
stockholders directly for their unpaid subscription
Treasury Shares. NOT subject to subscription contracts because
Donnina Halley v. Printwell, Inc. Section 59 covers only acquisition of unissued shares; HOWEVER, when
treasury shares are re-issued, the shareholders are entitled to exercise
Trust Fund Doctrine is NOT limited to reaching the stockholder’s their pre-emptive right.
unpaid subscriptions. The scope of the doctrine when the corporation
Escrow Shares
is insolvent encompasses not only the capital stock, but also other
− the corporation may impose the condition that the shares to be
property and assets generally regarded in equity as a trust fund for
issued shall be held in escrow until actual payment is received by
the payment of corporate debts. All assets and property belonging to
the corporation
the corporation held in trust for the benefit of creditors that were
− title does not pass to the subscriber until the performance of the
distributed or in the possession of the stockholders, regardless of full
condition
payment of their subscriptions, may be reached by the creditor in
− a holder of escrow shares does not become entitled to the rights
satisfaction of its claim.
pertaining to a stockholder until the conditions for the release of
Consequently, under the Trust Fund Doctrine, a corporation has no such shares are fully met
legal capacity to release an original subscriber to its capital stock − the subscriber is NOT yet the owner of the said shares and
from the obligation of paying for his shares, in whole or in part, consequently he cannot be accorded the rights belonging to a
without a valuable consideration, or fraudulently, to the prejudice of regular shareholder
the creditors.
Sources of Capital
HOWEVER, a release that is given pursuant to a bona fide • Capital – includes all properties and assets of the corporation that
compromise, or to set off a debt due from the corporation, a release are used for its business or operation
supported by consideration, will be effectual as against dissenting • Authorized Capital Stock – the amount fixed in the Articles of
stockholders and subsequent and existing creditors. Incorporation to be subscribed and paid by the stockholders of the
corporation
Central Textile Mills v. NWPC • Subscribed Capital – that portion of the authorized capital stock
that is covered by subscription agreement whether fully paid or not
Money received for subscription of increase of authorized capital is • Paid-Up Capital – that portion of the authorized capital stock that
NOT covered by the Trust Fund Doctrine prior to the approval of such has been subscribed and actually paid
increase by the SEC.
a. The capital of the corporation at its birth is in theory limited to the
HOWEVER, Additional Paid-In Capital is part of the trust fund under initial “Paid-Up Capital”, which may be increased by making the
the doctrine as it involves the infusion of cash or property by a subscriber make additional payments or fully pay their
stockholder whenever no additional shares are issued in subscription, which may be made voluntarily without need of call
consideration thereof. b. The corporation can increase its Subscribed Capital (1) by
issuing the remaining balance of the Authorized Capital Stock, or
APIC shall neither be declared as divided nor shall it be reclassified (2) by increasing the Authorized Capital Stock that necessarily
to absorb deficiency except through an organizational restructuring involves additional subscription
duly approved by the SEC. APIC falls within the purview of the Trust c. The issuance of shares out of the unsubscribed shares of the
Fund Doctrine because it forms part of the equity emanating from authorized capital stock does NOT need stockholder’s approval –
the original subscription agreement; it is considered an additional what is necessary is only a resolution of the Board approving the
same
Page 55
Debt as Source of Capital (e) Amounts transferred from unrestricted retained earnings to
− subscription is not the only source of corporate funds after stated capital;
incorporation (f) Outstanding shares exchanged for stocks in the event of
− corporation may get funds noy only from shareholders but also reclassification or conversion;
from creditors in the form of debts (g) Shares of stock in another corporation; and/or
− funds may also come from the income of the corporation as a result
(h) Other generally accepted form of consideration.
of its operation
(2) Where the consideration is other than actual cash, or consists of
DISADVANTAGES OF
intangible property such as patents or copyrights, the valuation
ADVANTAGES OF DEBTS OBTAINING FUNDS BY
thereof shall initially be determined by the stockholders or the board
BORROWING
of directors, subject to the approval of the Commission.
Current shareholders do not
have to dilute or surrender their
Borrower has a fixed interest (3) Shares of stock shall not be issued in exchange for promissory
control of the corporation when
payment that must be met each notes or future service. The same considerations provided in this
funds are obtained by borrowing
period to avoid default section, insofar as applicable, may be used for the issuance of bonds
rather than issuing more shares
by the corporation.
of stocks
May be less expensive to issue
[[ The issued price of no-par value shares may be fixed in the
debt rather than additional stock The use of debt may reduce a
articles of incorporation or by the board of directors pursuant to
if the interest payments made to company’s ability to withstand a
authority conferred by the articles of incorporation or the bylaws, or
bondholders are tax-deductible major loss
if not so fixed, by the stockholders representing at least a majority
while dividends are not
of the outstanding capital stock at a meeting duly called for the
Causes the company to
The issue of bonds may increase purpose. = ISSUED PRICE ]]
experience unfavorable financial
the earning of the corporation
leverage when income from
through favorable financial
operations falls below a certain
leverage Consideration
level
a. The concept of consideration under this Section is NOT the same
Loan agreement usually require
as the concept of consideration or cause under the New Civil Code,
maintenance of a certain amount
as the latter provides that it be the prestation or promise of the
of working capital and place
thing or service
limitations on dividends and
In Section 61, consideration is NOT the stipulated value BUT the
additional borrowings
property received or right or service to be actually exchanged or
received
Creditors b. With respect to cash payments, the SEC no longer requires the
a. Commercial Creditors. Normally short-term creditors including submission of a Bank Certificate of deposit of paid up capital,
banks and other institutional lenders who extend revolving lines of HOWEVER, a bank certificate in the form prescribed by the BSP to
short-term credit. prove existence of inward remittance is required but only to those
b. Investment Creditors. Those who acquire bonds or debentures with foreign subscribers
issued by the corporation c. As to tangible or intangible property, it is required that:
a. The considerations for bonds are also limited to the considerations i. The property is actually received by the corporation
that the RCCP allows for subscription agreements ii. The property is necessary or convenient for its use and lawful
purposes
iii. It must be subject to a fair valuation equal to the par or issued
value of the stock issued
iv. The valuation thereof shall initially be determined by the
SEC. 60. Pre-incorporation Subscription. – [[ A subscription of stockholders or the board of directors
shares in a corporation still to be formed shall be irrevocable for a v. The valuation is subject to approval by the SEC, to prevent
period of at least six (6) months from the date of subscription = watering of stocks
BINDING EFFECT ]], [[ unless all of the other subscribers consent d. If intellectual property, the corporation must submit to the SEC a
to the revocation [before the 6-month period], or the corporation copy of the Certificate of Registration of the intellectual property
fails to incorporate within the same period or within a longer period right together with an appraisal report not more than six months
stipulated in the contract of subscription. = REVOCATION ]] [[ No old and a Deed of Assignment
pre-incorporation subscription may be revoked after the articles of e. An undivided interest in real property of a co-owner is an
incorporation is submitted to the Commission = BINDING EFFECT acceptable consideration for the subscription of shares
]] i. The property must be something that the corporation may
acquire and hold in carrying out its purpose or reasonably
necessary or convenient in the pursuit of business
Nature ii. The interest in the co-ownership must have a pecuniary value
− requires that there is meeting of minds on the part of the parties capable of ascertainment
with respect to the object and cause or consideration of the iii. The right over the property must actually be transferred to the
contract. corporation and no creditors shall be prejudiced
− in a pre-incorporation subscription, not all the parties can give their iv. The transfer shall be subject to the New Civil Code – that there
consent because one of the parties – the corporation – is still non- must be waiver of rights signed by all possible co-owners
existent f. Previously incurred indebtedness of the corporation may also be
used, subject to the confirmation of the SEC regarding valuation
Generally Accepted Form of Consideration

• if the prestation is “to give,” what should be given is either cash
SEC. 61. Consideration for Stocks. – (1) Stocks shall not be or properties
issued for a consideration less than the par or issued price thereof. • if the obligation is to do or not to do, then it can fall under “labor”
Consideration for the issuance of stock may be: that must be already performed or rendered
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, actually received by the Conversion. The corporation may accept as consideration the
outstanding shares exchanged for stocks in the event of reclassification
corporation and necessary or convenient for its use and lawful
or conversion.
purposes at a fair valuation equal to the par or issued value of
the stock issued; a. Conversion also includes conversion of a single proprietorship or
(c) Labor performed for or services actually rendered to the partnership into a corporation or a spin-off of one or more division
corporation; of the company
(d) Previously incurred indebtedness of the corporation;
Page 56
b. The partnership that will be converted into a corporation must be − requisites do NOT apply to subscription contracts entered into
dissolved and a duly executed Articles of Dissolution of Partnership between the corporation and the subscriber
should be submitted − subscriber becomes a shareholder even if the corporation has not
c. The creditors must consent to the conversion; hence, SEC requires yet issued the stock certificate
a list of creditors, with the amount due to each creditor and their − full payment is not even required before a shareholder can exercise
written consent the rights of a shareholder
Watered Stocks. Stocks that are issued for a consideration less than Delivery
the par or issued price thereof. − delivery required is delivery from the transferor to the transferee
− it is NOT delivery to the corporation that is contemplated
Issued Price − it is delivery of the certificate, coupled with the endorsement by
− the “issued value” of shares may be higher than its par value the owner or his duly authorized representative that is the
− a share is a property that may also appreciate in value; hence, it operative act of transfer of shares
may happen that the fair market value or the book value may be
greater than the par value Who Will Transfer. The shareholder of record in the books of the
corporation has the right to transfer the shares.
a. The amount of the Authorized Capital Stock is present only if the
shares of a corporation have par value
Sime Darby Pilipinas, Inc. v. Jesus Mendoza
Deposit on Subscription. Amount of money received by the
HOWEVER, the shares may be held in trust for another person or entity.
corporation as a deposit with the possibility of applying the same as
payment for the future issuance of capital stock. The true owner (trustor) can dispose of the share in any manner he or
she sees fit without interference from the trustee who already lost his
a. The person making a deposit on stock subscription does NOT have right as such.
the standing of a stockholder and he is NOT entitled to dividends,
voting rights, or other prerogatives and attributes to a stockholder Fil-Estate Golf and Development, Inc. v. Vertex Sales and
Trading, Inc.
Although the transfer must be recorded in the books of the corporation,

the corporation whose shares are subject of a transfer transaction is
SEC. 62. Certificate of Stock and Transfer of Shares. – [[ The NOT a party to the transaction.
capital stock of corporations shall be divided into shares for which
certificates signed by the president or vice president, countersigned SEC OPINION
by the secretary or assistant secretary, and sealed with the seal of
the corporation shall be issued in accordance with the bylaws. = Transfer of shares between spouses is VOID if they are governed by
the system of absolute community property regime. The transfer shall
FORMALITIES OF THE CERTIFICATE ]] Shares of stock so issued
be recorded only if the share is part of the excluded properties or if
are personal property and may be [[ transferred by delivery of the
they are governed by the system of separation of property.
certificate or certificates indorsed by the owner, his attorney- in-
fact, or any other person legally authorized to make the transfer. No If There is No Certificate. The delivery and the indorsement
transfer, however, shall be valid, except as between the parties, requirement cannot be complied with.
until the transfer is recorded in the books of the corporation = HOW
TRANSFER IS MADE ]] showing the names of the parties to the Vicente Ponce v. Alsons Cement Corporation
transaction, the date of the transfer, the number of the certificate
If the corporation never issued certificates, the transferee cannot
or certificates, and the number of shares transferred. The
demand for the issuance of the certificates of stock in his name. A
Commission may require corporations whose securities are traded
transfer of shares of stock NOT recorded in the Stock and Transfer Book
in trading markets and which can reasonably demonstrate their
of the corporation is non-existent as far as the corporation is
capability to do so to issue their securities or shares of stocks in
concerned.
uncertificated or scripless form in accordance with the rules of the
Commission. Without such recording, the transferee may not be regarded by the
corporation as one of its stockholders and the corporation may legally
[[ No shares of stock against which the corporation holds any unpaid refuse the issuance of stock certificates.
claim shall be transferable in the books of the corporation. =
UNPAID CLAIM ]] Mandamus should not issue to compel the secretary of the corporation
to make a transfer of the stock on the books of the corporation unless
it affirmatively appears that he has failed or refused to do so upon
Quasi-Negotiable demand either of the person in whose name the stock is registered or
− stock certificates are non-negotiable instruments as the of some person holding a power of attorney for that purpose.
requirements of Section 1 of the NIL are not present because there
is no promise or order to pay money Consequently, if the shares are not presented by the certificate,
− because they can be transferred by indorsement coupled with transfer can be made by means of a deed of assignment but the same
delivery must be duly recorded in the books of the corporation.
a. Section 62 contemplates no restriction as to who the shares may

Lao v. Lao
be transferred to or sold
b. As owner of personal property, a shareholder is at liberty to dispose To be recognized as transferee, the latter must prove possession; he
of them in favor of whomsoever he pleases, without any other must prove the due delivery of the certificates of shares of the seller
limitation to him. If the alleged transferee is in possession, the burden is on the
corporation to prove that said transferee is not a shareholder.
Street Certificate
Santamariea v. Hongkong and Shanghai Banking Corp. Registration
− in order to be valid as to third persons and the corporation itself
When a stock certificate is endorsed in blank by the owner thereof, so − it is upon registration that the transferee may exercise all his rights
that upon its face, the holder is entitled to demand its transfer into his as a stockholder
name from the issuing corporation. Such certificate is deemed quasi- − recording of the transfer in the Stock and Transfer Book by the
negotiable, and as such, the transferee thereof is justified in believing Corporate Secretary
that it belongs to the holder and transferor. − without the registration of the transfer, the alleged transferee could
not be recognized as a stockholder who is entitled to be given a
By way of EXCEPTION, where stock certificates endorsed in blank
stock certificate
were stolen from the possession of the beneficial owners, the transfer
is VOID for lack of delivery and want of value. a. Rationale
i. Enable the transferee to exercise all the rights of a shareholder
How Transfer is Made
Page 57
ii. Afford to the corporation an opportunity to object or refuse its the corporation. Without registration, the heir is also not entitled to the
consent to the transfer in case it has any claim against the stock right to file a derivative action.
sought to be transferred or for any valid reasons
iii. It inform the corporation of any change in share ownership so a. Executors and administrators duly appointed by the court may
that it can ascertain the persons entitled to the rights and subject attend and vote in behalf of the stockholders or members without
to the liabilities of a stockholder – to enable the corporation to need of any written proxy
know at all times who its actual stockholders are, because mutual
Regulation of Transfer
rights and obligations exist between the corporation and its
a. The corporation may regulate the transfer of its stocks by providing
stockholders
certain formalities and procedure in the By-Laws.
iv. Avoid fictitious transfers
HOWEVER, it does NOT empower it to restrict the right of a
Right of Registered Owner. Right to receive notice and attend stockholder to transfer his shares, but merely authorizes the
meetings of stockholders. adoption of regulations as to the formalities and procedure to be
followed.
Surrender of the Certificate
Remedies
Teng v. Securities and Exchange Commission
− the right of a transferee or assignee to have the stocks transferred
The surrender of the original certificate of stock is necessary before the to his name is an inherent right flowing from his ownership thereof
issuance of a new one so that the old certificate may be cancelled. A − mandamus will lie against the corporate officers who unduly bar
corporation is not bound and cannot be required to issue a new the registration of the transfer
certificate unless the original certificate is produced and surrendered.
Andaya v. Rural Bank of Cabadbaran
Third Persons NOT Affected. The unregistered transfer does NOT
affect third persons. It is already a settled jurisprudence that the registration of a transfer
of shares of stock is a ministerial duty on the part of the corporation.
Registration of Transfers Only. Transfer means any act by which Aggrieved parties may then resort to the remedy of mandamus to
property of a person is vested in another and transfer of shares implied compel corporations that wrongfully or unjustifiably refuse to record
any means whereby one may be divested of and another acquire the transfer or to issue new certificate of stock. This remedy is available
ownership of stock. even upon the instance of a bona fide transferee who is able to
establish a clear legal right to the registration of the transfer. This legal
a. Registration in stock and transfer book is NOT necessary if the right inherently flows from the transferee’s established ownership of
conveyance is by way of chattel mortgage; the stocks.
b. as well as in the creation and perfection of security interest under
PPSA In transferring the stock, the secretary of a corporation acts in purely
c. Similarly, registration in the books of the corporation of attachment ministerial capacity, and does not try to decide the question of
of shares of stock is also not necessary for the validity thereof ownership. The duty of the corporation to transfer is a ministerial one
and if it refuses to make such transaction without good cause, it may
Unpaid Claim. Any unpaid claim arising from unpaid subscription and be compelled to do so by mandamus.
not to any indebtedness which a subscriber may owe the corporation
arising from any other transactions. Consequently, transferee of shares of stock are real party in interest
having a cause of action for mandamus to compel the registration of
Transfer of Subscription the transfer and the corresponding issuance of stock certificates.
• while no transfer of shares shall be recorded in the books of the
corporation until full payment of the subscription price, there is no a. Mandamus will not lie against the corporation where the shares of
prohibition for the transfer of the subscription agreement itself stock in question are not indorsed by the registered owner who is
• subscription agreements can be assigned to third persons, which is resisting registration thereof in the Stock and Transfer Book
a form of novation by substitution of a new debtor and which
requires the consent of or notice to the creditor Fontana Resort and Country Club, Inc v. Sps. Tan
Transfer Through Other Modes Transferee is given the right to rescind the transfer of shares if the
transferor failed to comply with his reciprocal obligations. HOWEVER,
Puno v. Puno Enterprises, Inc. rescission will NOT be permitted if there is merely slight or casual
breach, as well as if the transferee does not want to continue with the
Upon the death of a shareholder, the heirs do not automatically become sale.
the stockholders of the corporation and acquire the rights and
privileges of the deceased as shareholders of the corporation. The Prescription. Considering that the law does not prescribe a period
stocks must be distributed first to the heirs in estate proceedings, and within which the registration of the transfer of shares should be effected,
the transfer of the stocks must be recorded in the books of the the action to enforce the right does not accrue until there has been a
corporation. demand and a refusal concerning the transfer.
The transfer by succession shall NOT be recognized until the transfer Tax. Documentary Stamp Tax and the applicable capital gains tax should
is recorded in the books of the corporation. During the interim period be paid before the transfer of share is registered and before the issuance
from the time of the stockholders’ death, the heirs stand as the of a new certificate.
equitable owners of the stocks and the executor or administrator duly
appointed is vested with the legal title to the stocks. Right of First Refusal. The Articles of Incorporation or By-Laws may
provide a right of first refusal to stockholders as a limitation on transfer.
Reyes v. RTC of Makati
The transfer of title by means of succession though effective and valid

between the parties involved, does NOT bind the corporation and third
SEC. 63. Issuance of Stock Certificates. – No certificate of stock
parties. The transfer must be registered in the books of the corporation
shall be issued to a subscriber until the full amount of the
to make the transferee-heir a stockholder entitled to recognition as
such both by the corporation and by third parties. subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
Each of the subject heirs holds only an undivided interest in the shares.
Such interest, at that point, was still inchoate and subject to the
outcome of a settlement proceeding; the right of the heirs to specific, Stock Certificate
distributive shares of inheritance will not be determined until all the − Written instrument signed by the proper officer of a corporation
debts of the estate of the decedent are paid. stating or acknowledging that the person named in the document
is the owner of a designated number of shares of its stock
Consequently, an heir has no right to inspect the books of the − Paper representation or tangible evidence of the share but it is not
corporation until the transfer to the heirs is recorded in the books of the share itself
Page 58
− merely evidence of the holder’s interest and status in the Bonus Stocks. Stocks that are issued without any valuable
corporation consideration.
− expresses the contract between the corporation and the
stockholder, but it is NOT essential to the existence of a share or Rationale; Watered Stocks
the creation of the relation of shareholder to the corporation − consistent with the general rule that an agreement between the
− a prima facie evidence that the holder is a shareholder of a corporation and a particular subscriber by which the subscription is
corporation NOT to be payable or is to be payable in part only cannot be either
− an evidence that the shareholder named therein have fully paid the enforced by the subscriber or interposed as a defense in an action
subscription price considering that the certificate will not be issued on the subscription
until the same price is fully paid − rule applies whether the purpose of the agreement is to pretend
that the stock is really greater than it is, or for the purpose of
Requirements for Issuance preventing the predominance of certain stockholder, or for any
1. The certificate must be signed by the president or vice-president, other illegal or void purpose, or in fraud of other stockholders or
countersigned by the secretary or assistant secretary creditors
2. The certificate must be sealed with the seal of the corporation
3. The certificate must be delivered
4. The full amount of the subscription (together with interest and
expenses for delinquent shares) must first be fully paid
SEC. 65. Interest on Unpaid Subscriptions. – Subscribers to
5. The original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from a stocks shall be liable to the corporation for interest on all unpaid
stockholder subscriptions from the date of subscription, if so required by and at
the rate of interest fixed in the subscription contract. If no rate of
a. In connection with the first requirement, a mere typewritten
interest is fixed in the subscription contract, the prevailing legal rate
statement advising a stockholder of the extent of his ownership
shall apply.
without qualification and/or authentication CANNOT be considered
as a formal stock certificate
b. There is NO issuance of a stock certificate where it was never SEC. 66. Payment of Balance of Subscription. – Subject to the
detached from the stock books although blanks therein were
provisions of the subscription contract, [[ the board of directors
properly filled up if the person whose name is inserted therein has
may, at any time, declare due and payable to the corporation unpaid
no control over the books of the company
subscriptions and may collect the same or such percentage thereof,
The element that there must be delivery is absent
in either case, with accrued interest, if any, as it may deem
c. The stock certificate must be issued to a named subscriber. It
cannot be issued to “bearer” necessary. = CALL ]]
Authority to Issue. The corporation muse be authorized to issue the Payment of unpaid subscription or any percentage thereof, together
stocks; otherwise, void and confers no rights on the person to whom it with any interest accrued shall be made on the date specified in the
is issued and subjects him to no liabilities. subscription contract or on the date stated in the call made by the
board. Failure to pay on such date shall render the entire balance
Stockholder’s Right to Stock Certificate due and payable and shall make the stockholder liable for interest
− while the issuance is NOT a condition precedent to render one a at the legal rate on such balance, unless a different interest rate is
stockholder, every stockholder has a right to have a proper
provided in the subscription contract. The interest shall be computed
certificate issued to him, upon demand, as soon as he has complied
from the date specified, until full payment of the subscription. [[ If
with the conditions
no payment is made within thirty (30) days from the said date, all
− corporation is duty bound to issue as soon as their subscription
stocks covered by the subscription shall thereupon become
prices are fully paid
delinquent and shall be subject to sale as hereinafter provided,
Principle of Indivisibility of Subscription unless the board of directors orders otherwise. = WHEN THE
− subscription is one, entire, and indivisible whole contract SHARES ARE DELINQUENT ]]
− it cannot be divided into portions so that the stockholder shall not
be entitled to a certificate of stock until he has remitted the full
payment of his subscription together with any interests and Liability
expenses, if any is due − a stock subscription is a subsisting liability from the time the
− stockholder may NOT assign the balance of the subscription to third subscription is made
persons in such a manner that the stock certificates will be issued − the shareholder who has not fully paid the subscription price may
to the stockholder for the paid portion and the balance to the third be subject to garnishment or may be sued for the recovery of the
person who assumes the payment of the balance of the indebtedness to the corporation
subscription
Call
Remedies for Non-Issuance − the resolution or formal declaration of the Board that the unpaid
1. Action for specific performance subscriptions are due and payable
2. Action for damages if specific performance is not available − a corporation cannot file an action to recover the unpaid price if the
3. Petition for mandamus for the issuance action is not preceded by a call
4. Rescission of the subscription agreement with the consequent • a call cannot be made on only some of the subscribers
mutual restriction a. When NOT Necessary
i. When the date of payment is specified in the subscription
Forged or Spurious Certificates. VOID and not valid even if the
agreement
present holder is a holder in good faith and for value.
ii. When the corporation becomes insolvent – all unpaid stocks
become payable on demand and are at once recoverable in an
action instituted by the assignee or receiver appointed by the
court
SEC. 64. Liability of Directors for Watered Stocks. – A director iii. When it is payable in installments at specified times
or officer of a corporation who: (a) consents to the issuance of stocks b. No Set-Off
for a consideration less than its par or issued value; (b) consents to − a corporation cannot deduct from any amount due to an
the issuance of stocks for a consideration other than cash, valued in employee the latter’s unpaid subscription of shares
excess of its fair value; or (c) having knowledge of the insufficient − there can be no set-off if there is no notice or call for the payment
i. The corporation cannot withhold cash dividends from the
consideration, does not file a written objection with the corporate
subscribers who have not fully paid their subscription unless the
secretary, shall be liable to the corporation or its creditors, solidarily
subscribers are delinquent or if the stockholders give their
with the stockholder concerned for the difference between the value
consent thereto
received at the time of issuance of the stock and the par or issued ii. a stockholder’s indebtedness to a corporation for unpaid
value of the same. subscriptions cannot be compensated with the amount of his
Page 59
shares in the corporation, there being no relation of creditor and compensated with the amount of his shares in the same institution,
debtor with respect to the shares there being no relation of creditor and debtor with regard to such
shares
When the Shares are Delinquent. No further action is necessary as
the shares automatically become delinquent.
SEC. 70. Effect of Delinquency. – No delinquent stock shall be

voted for, be entitled to vote, or be represented at any stockholder’s
SEC. 67. Delinquency Sale. – [[ The board of directors may, by meeting, nor shall the holder thereof be entitled to any of the rights
resolution, order the sale of delinquent stock = 1. RESOLUTION ]] of a stockholder except the right to dividends in accordance with the
and [[ shall specifically state the amount due on each subscription provisions of this Code, until and unless payment is made by the
plus all accrued interest, and the date, time and place = CONTENTS holder of such delinquent stock for the amount due on the
OF RESOLUTION ]] of the [[ sale which shall not be less than thirty subscription with accrued interest, and the costs and expenses of
(30) days nor more than sixty (60) days from the date the stocks advertisement, if any.
become delinquent. = 4. SALE AT PUBLIC AUCTION ]]
[[ Notice of the sale, with a copy of the resolution, shall be sent to Unavailable Rights of Delinquents. They cannot be elected as a
every delinquent stockholder either personally, by registered mail, director and cannot continue serving as such and only upon full payment
or through other means provided in the bylaws. = 2. NOTICE ]] [[ that the stockholder will be restored to his full rights.
The same shall be published once a week for two (2) consecutive
weeks in a newspaper of general circulation in the province or city a. EXCEPTION is right to dividend;
where the principal office of the corporation is located. = 3. HOWEVER, if cash dividends are declared, dividends shall be
applied to the subscription price that is due to the corporation
PUBLICATION ]]
As to stock dividends, the same shall be withheld from the
[[ Unless the delinquent stockholder pays to the corporation, on or delinquent shareholder until his unpaid subscription is fully paid
before the date specified for the sale of the delinquent stock, the
NOT Included in Quorum. As the required quorum is the majority of
balance due on the former’s subscription, plus accrued interest,
those entitled to vote, stockholders who are not entitled to vote because
costs of advertisement and expenses of sale, = CANCELLATION of delinquency should not be included in the determination of the
OF SALE ]] or unless the board of directors otherwise orders, said quorum.
delinquent stock shall be sold at a public auction to [[ such bidder
who shall offer to pay the full amount of the balance on the Assignment of Rights NOT Allowed
subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction
of a share. = WINNING BIDDER ]] [[ The stock so purchased shall
be transferred to such purchaser in the books of the corporation and SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of
a certificate for such stock shall be issued in the purchaser’s favor. subscribed shares not fully paid which are not delinquent shall have
= 5. TRANSFER ]] [[ The remaining shares, if any, shall be credited all the rights of a stockholder.
in favor of the delinquent stockholder who shall likewise be entitled
to the issuance of a certificate of stock covering such shares. = 6.
CREDIT OF REMAINDER ]] Accrual of Rights of Shareholders
− a pre-incorporation subscriber becomes a shareholder from the
Should there be no bidder at the public auction who offers to pay moment the Certificate of Incorporation is issued
the full amount of the balance on the subscription together with − a post-incorporation subscriber becomes a shareholder from
accrued interest, costs of advertisement, and expenses of sale, for the perfection of the subscription contract, unless certain terms and
the smallest number of shares or fraction of a share, the corporation conditions are required
may, subject to the provisions of this Code, bid for the same, and a. One right which is NOT available if the shares are not fully paid, is
the total amount due shall be credited as fully paid in the books of the right to secure a stock certificate or to have any subsequent
the corporation. Title to all the shares of stock covered by the transfer in the books of the corporation
subscription shall be vested in the corporation as treasury shares
Basic Rights
and may be disposed of by said corporation in accordance with the
1. Voting rights
provisions of this Code.
2. Right to remove directors
3. Right to dividends
SEC. 68. When Sale May be Questioned. – No action to recover 4. Appraisal right
delinquent stock sold can be sustained upon the [[ ground of 5. Right to issuance of stock certificate for fully paid shares
6. Proportionate participation in the distribution of assets in
irregularity or defect in the notice of sale, or in the sale itself of the
liquidation
delinquent stock, unless the party seeking to maintain such action
7. Right to transfer stocks in corporate books
first pays or tenders to the party holding the stock the sum for which
8. Pre-emptive right
the same was sold, with interest from the date of sale at the legal 9. Right to inspect books and records
rate. No such action shall be maintained unless a complaint is filed 10. Right to be furnished of the most recent financial statement/report
within six (6) months from the date of sale. = ACTION TO RECOVER 11. Right to recover stocks unlawfully sold for delinquent payment of
]] subscription
12. Right to file individual suit, representative suit, and derivative suit
SEC. 69. Court Action to Recover Unpaid Subscription. – Obligations

Nothing in this Code shall prevent the corporation from collecting 1. Liability to the corporation for unpaid subscription
through court action, the amount due on any unpaid subscription, 2. Liability to the corporation for interest on unpaid subscription if so
with accrued interest, costs and expenses. required in the subscription contract
3. Liability to the creditors of the corporation for unpaid subscription
under Limited Liability Rule
Available Remedies 4. Liability for watered stocks
1. Put up the unpaid shares for sale and dispose of it in a delinquency 5. Liability for dividends unlawfully declared
sale for the account of the delinquent subscriber
2. Court action Derivative Actions. Suits brought by one or more
stockholders/members in the name and on behalf of the corporation to
a. The offsetting of debt of a stockholder against his shareholdings is
redress wrongs committed against it, or to protect or vindicate corporate
NOT permissible – while the corporation may be a creditor, a
rights whenever the officials of the corporation refuse to sue, or are the
stockholder’s indebtedness to a corporation cannot be
ones to be sued, or have control of the corporation.
Page 60
Yu v. Yukayguan Hence, a stockholder may sue for mismanagement, waste or

dissipation of corporate assets because of a special injury to him for
The general rule is that where a corporation is an injured party, its which he is otherwise without redress. In effect, the suit is an action
power to sue is lodged with the Board of Directors or Trustees. for specific performance of an obligation owed by the corporation to
Nonetheless, by way of exception, an individual stockholder is the stockholders to assist its rights of action when the corporation
permitted to institute derivative suit on behalf of the corporation has been put in default by the wrongful refusal of the directors or
wherein he holds stocks in order to protect or vindicate corporate management to make suitable measures for its protection.
rights, whenever the officials of the corporation refuse to sue, or are
the ones to be sued, or hold the control of the corporation. In such The basis of a stockholder's suit is always one in equity. However, it
actions, the suing stockholder is regarded as a nominal party, with the cannot prosper without first complying with the legal requisites for
corporation as the real party in interest. its institution. The most important of these is the bona fide ownership
by a stockholder of a stock in his own right at the time of the
A derivative action is a suit by a shareholder to enforce a corporate transaction complained of which invests him with standing to
cause of action. The corporation is a necessary party to the suit. And institute a derivative action for the benefit of the corporation. 41
the relief that is granted is a judgment against a third person in favor
of the corporation. Similarly, if a corporation has defense to an action Reasons Why Individual Suits are Improper
against it and is not asserting it, a stockholder may intervene and 1. considering that the cause of action pertains to the corporation
defend on behalf of the corporation. 2. a stockholder in a corporation has no title legal or equitable right
to the corporate property; that both of these are in the corporation
x x x x x x x x itself for the benefit of the stockholders
3. that the prior rights of the creditor may be prejudiced
A stockholder may sue for mismanagement, misrepresentation, fraud, 4. Filing of such suits would conflict with the duty of the management
bad faith, waste or dissipation of corporate assets because of a special to sue for the protection of all concerned
injury to him for which he is otherwise without redress. In effect, the 5. It would prejudice wasteful multiplicity of suits
suit is an action for specific performance of an obligation owed by the 6. It would involve confusion in ascertaining the effect of partial
corporation to the stockholders to assist its rights of action when the recovery by an individual on the damages recovered by the
corporation has been put in default by the wrongful refusal of the corporation for the same act
directors or management to make suitable measures for its protection.
Distinguished from Liquidation. They are neither part of each other
Requisites under the Rules nor the necessary consequence of the other and there is totally no
1. He was a stockholder or member at the time the acts or justification in behalf of a corporation to a proceeding for the liquidation
transactions subject of the action occurred and the time the of the same corporation.
action was filed;
2. He exerted all reasonable efforts, and alleges the same with Exhaustion of Intra-Corporate Remedies. Typically deemed futile
particularity in the complaint, to exhaust all remedies available when a majority of the directors have participated or approved the
under the Articles of Incorporation, By-Laws, laws or rules alleged wrongdoing or are otherwise financially interested in the
governing the corporation or partnership to obtain the relief he challenged transaction.
desires
3. No appraisal rights are available for the acts complained of Individual Action. Actions brought by the shareholder in his own name
4. The suit is not a nuisance or harassment suit against the corporation when a wrong is directly inflicted against him
5. The action is filed in the name of the corporation personally and to determine his individual right.
Cua, Jr. v. Ocampo Tan Cua, Jr. v. Ocampo Tan
The stockholder is a nominal party in a derivative suit. The real party As the Supreme Court has explained: "A shareholder's derivative suit
in interest is the corporation. Any ruling in one of the derivative suits seeks to recover for the benefit of the corporation and its whole body
should already bind the corporation as res judicata in the other. of shareholders when injury is caused to the corporation that may not
otherwise be redressed because of failure of the corporation to act.
Ching v. Subic Bay Golf and Country Club, Inc. Thus, 'the action is derivative, i.e., in the corporate right, if the
gravamen of the complaint is injury to the corporation, or to the whole
There is no requirement regarding the number of shares that is being body of its stock and property without any severance or distribution
held by the stockholders who will file the case. For example, two among individual holders, or it seeks to recover assets for the
minority shareholders who own one share each can file the derivative corporation or to prevent the dissipation of its assets.' [Citations.]" In
action. contrast, "a direct action [is one] filed by the shareholder individually
(or on behalf of a class of shareholders to which he or she belongs) for
Pascual v. Orozco injury to his or her interest as a shareholder. ... ['] ... [T]he two actions
are mutually exclusive: i.e., the right of action and recovery belongs
A stockholder can initiate a derivative action only if he is a to either the shareholders (direct action) *651 or the corporation
stockholder at the time of the transaction in question and at the time (derivative action)."
of the filing of the action. A transferee who was not yet a stockholder
at the time of the transaction cannot initiate the action. Thus, in Nelson v. Anderson, the minority shareholder alleged that the
other shareholder of the corporation negligently managed the
EXCEPTION is a situation where the transactions continue and are business, resulting in its total failure. The appellate court concluded
injurious to the stockholder or affect him especially and specifically that the plaintiff could not maintain the suit as a direct action: "Because
in some other way. the gravamen of the complaint is injury to the whole body of its
stockholders, it was for the corporation to institute and maintain a
Rationale remedial action. A derivative action would have been appropriate if its
Nora Bitong v. Court of Appeals responsible officials had refused or failed to act.” The court went on to
note that the damages shown at trial were the loss of corporate profits.
It is well settled in this jurisdiction that where corporate directors are Since "[s]hareholders own neither the property nor the earnings of the
guilty of a breach of trust, not of mere error of judgment or abuse of corporation," any damages that the plaintiff alleged that resulted from
discretion, and intracorporate remedy is futile or useless, a such loss of corporate profits "were incidental to the injury to the
stockholder may institute a suit in behalf of himself and other corporation."
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and Representative Actions. Actions brought by the stockholder in behalf
indirectly upon the stockholders. 38 The stockholder's right to of himself and all other stockholders similarly situated when a wrong is
institute a derivative suit is not based on any express provision of committed against a group of stockholders.
The Corporation Code but is impliedly recognized when the law
makes corporate directors or officers liable for damages suffered by Cua, Jr. v. Ocampo Tan
the corporation and its stockholders for violation of their fiduciary
duties. Suits by stockholders or members of a corporation based on wrongful
or fraudulent acts of directors or other persons may be classified into
Page 61
individual suits, class suits, and derivative suits. Where a stockholder court regarding the ownership of the certificate of stock which
or member is denied the right of inspection, his suit would be individual has been lost, stolen or destroyed, the issuance of the new
because the wrong is done to him personally and not to the other certificate of stock in lieu thereof shall be suspended until the
stockholders or the corporation. Where the wrong is done to a group court renders a final decision regarding the ownership of the
of stockholders, as where preferred stockholders' rights are violated, a certificate of stock which has been lost, stolen or destroyed. =
class or representative suit will be proper for the protection of all
5. CONTEST ]]
stockholders belonging to the same group. But where the acts
complained of constitute a wrong to the corporation itself, the cause of Except in case of fraud, bad faith, or negligence on the part of the
action belongs to the corporation and not to the individual stockholder corporation and its officers, no action may be brought against any
or member. Although in most every case of wrong to the corporation, corporation which shall have issued certificate of stock in lieu of
each stockholder is necessarily affected because the value of his
those lost, stolen or destroyed pursuant to the procedure above-
interest therein would be impaired, this fact of itself is not sufficient to
described.
give him an individual cause of action since the corporation is a person
distinct and separate from him, and can and should itself sue the
wrongdoer. Otherwise, not only would the theory of separate entity be Rationale. Designed to protect not only the real owner but the
violated, but there would be multiplicity of suits as well as a violation corporation as well as to the improvident issuance of another certificate.
of the priority rights of creditors. Furthermore, there is the difficulty of
determining the amount of damages that should be paid to each When Applicable
individual stockholder. − only if the certificates are
− lost
However, in cases of mismanagement where the wrongful acts are − stolen
committed by the directors or trustees themselves, a stockholder or − destroyed
member may find that he has no redress because the former are vested
by law with the right to decide whether or not the corporation should When NOT Applicable
sue, and they will never be willing to sue themselves. The corporation − if the certificates are available but are just worn out (it is up to the
would thus be helpless to seek remedy. Because of the frequent corporation to decide if it will replace the certificates)
occurrence of such a situation, the common law gradually recognized − if the certificates was never issued to the shareholder because it
the right of a stockholder to sue on behalf of a corporation in what was not delivered by the corporation
eventually became known as a "derivative suit." It has been proven to − if it is the corporation itself that loses the certificates before
be an effective remedy of the minority against the abuses of delivery
management. Thus, an individual stockholder is permitted to institute
a derivative suit on behalf of the corporation wherein he holds stock in
order to protect or vindicate corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded
as the nominal party, with the corporation as the party in interest.66
SEC. 72. Lost or Destroyed Certificates. [[OUTLINE OF

PROCEDURE]] – The following procedure shall be followed by a
corporation in issuing new certificates of stock in lieu of those which
have been lost, stolen or destroyed:
(a) [[ The registered owner of a certificate of stock in a corporation

or such person’s legal representative shall file with the
corporation an affidavit in triplicate setting forth, if possible,
the circumstances as to how the certificate was lost, stolen or
destroyed, the number of shares represented by such
certificate, the serial number of the certificate and the name of
the corporation which issued the same. The owner of such
certificate of stock shall also submit such other information and
evidence as may be deemed necessary; = 1. AFFIDAVIT ]]
(b) [[ After verifying the affidavit and other information and
evidence with the books of the corporation, = 2.
VERIFICATION ]] [[ the corporation shall publish a notice in
a newspaper of general circulation in the place where the
corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of
the certificate of stock which has been lost, stolen or destroyed.
= 3. PUBLICATION ]] [[ The notice shall state the name of
the corporation, the name of the registered owner, the serial
number of the certificate, the number of shares represented by
such certificate, and [[ shall state that after the expiration of
one (1) year from the date of the last publication = 4. ONE-
YEAR WAITING PERIOD ]], [[ if no contest has been
presented to the corporation regarding the certificate of stock,
the right to make such contest shall be barred and the
corporation shall cancel the lost, destroyed or stolen certificate
of stock in its books. In lieu thereof, the corporation shall issue
a new certificate of stock, = CONTENTS OF NOTICE ]] unless
the registered owner files a bond or other security as may be
required, effective for a period of one (1) year, for such amount
and in such form and with such sureties as may be satisfactory
to the board of directors, in which case a new certificate may
be issued even before the expiration of the one (1) year period
= 6. REPLACEMENT ]] provided herein. [[ If a contest has
been presented to the corporation or if an action is pending in
Page 62

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CORPORATION LAW PREPARED BY:

PRIMARY REFERENCE: AQUINO SHANON GACA

impaired either by the subsequent members, directors, trustees, or Summons

Francisco v. Government Service Insurance System

Knowledge of facts acquired or possessed by an officer or agent

Attributes of a Corporation Ellice Agro-Industrial Corp. v. Young

ATTRIBUTES OF A CORPORATION [[RECITATION]] Metropolitan Bank and Trust Company v. Centro

A corporation is therefore created by operation of law when it is granted a

a) Cases when the doctrine of piercing the veil may be applied

specified restrictions on transfer Boy Scouts of the Philippines v. Commission on Audit

Without Prior Board Approval

a) If the Articles of Incorporation, therefore, does not provide for any

• preferences granted to preferred stockholders do NOT give −

Effect if Not Incorporated

Qualifications − an incorporator remains to be an incorporator even if he will later

An arbitration agreement may be provided in the articles of

APIC. Any additional contribution by shareholders over the par value of

Fourth: That the corporation shall have perpetual existence or a

___________________ _________________ _______________ ______________________ ___________________________

Seventh: That the authorized capital stock of the corporation is

Its name is one of its attributes, an element of its existence, and

directors originally appearing in the Articles of Incorporation need i. Cash

Q: X Company is a stock corporation composed of the Reyes family engaged

Name in Articles of Incorporation. A corporation cannot use any

a) Promotional activities include (1) discovery, (2) investigation, and

Underwriters. Person who guarantees on firm commitment and/or

4) Non-compliance with conditions subsequent to incorporation may NOT

Distinguished from De Jure Corporations [[RECITATION]]

PROBLEMS: [[ Section 21. Effects of Non-Use of Corporate Charter and

A: Yes, the corporation is considered to have formally organized. Organize or

Philippine Association of Stock Transfer and Registry Agencies, Inc.

THEORIES ON SOURCE OF POWERS Filipinas Port Services, Inc. v. Go.

Office and Employment Distinguished Secretary

1) Signs the Articles of Incorporation and certifies the information set

[[ Notwithstanding any provision of the articles of incorporation or

Section 26. Disqualification of Directors, Trustees or Officers. - A

No Salary There is a radical difference when a stockholder is voting strictly

When a stockholder votes as a director, he represents all the

Personal and Solidary Liability

Effect of Prejudice to Third Party

TITLE IV: POWERS OF CORPORATIONS

Good faith in members of

(1) Right to succession Philippine Numismatic Ad Antiquarian Society v. Aquino

Section 23, in relation to Sec. 25 of the Corporation Code, clearly

Not Against Public Policy. There is no equity, there is no unfairness

a. Rationale A sale of all or substantially all of the corporation’s properties and

When Not Available Directors/Board Approval Only

Effect of Stoppage of Operation

For example, a corporation that is incorporated to engage in trading

Section 42. Power to Declare Dividends. – The board of directors

Meaning of Investment Requirements; Dividend Declaration

1. Unrestricted Retained Earnings the shareholders. Consequently, the unrestricted retained

a. Cash Dividend Declaration

Presumption of Validity b. If a corporation acted outside its authority in taking or holding

Nature of Powers When By-Laws Prevail

Stock Options and Warrant

Generally Accepted Form of Consideration

Although the transfer must be recorded in the books of the corporation,

a. Section 62 contemplates no restriction as to who the shares may

The transfer of title by means of succession though effective and valid

___________ _ _ ___________